<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 000-23265
--------------------------
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the Registrant's Common Stock outstanding as of
August 12, 1998 was 10,192,838.
================================================================================
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 ................................................ 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997 ............................. 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 .................................. 3
Notes to Condensed Consolidated Financial Statements .................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 6
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds .................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ........................ 16
Item 6. Exhibits and Reports on Form 8-K ........................................... 16
Signatures ............................................................................. 17
</TABLE>
<PAGE> 3
18
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 10,087 $ 15,173
Other current assets................................................... 1,290 460
-------- --------
Total current assets............................................ 11,377 15,633
Property and equipment, net................................................ 242 194
Other assets............................................................... 51 51
-------- --------
$ 11,670 $ 15,878
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities......................... $ 1,950 $ 1,749
-------- --------
Total current liabilities....................................... 1,950 1,749
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding...................... -- --
Common stock, no par value; 20,000,000 shares authorized;
10,192,838 shares and 10,120,573 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively....................................................... 27,592 27,520
Accumulated deficit.................................................... (17,872) (13,391)
-------- --------
Shareholders' equity............................................... 9,720 14,129
-------- --------
$ 11,670 $ 15,878
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product revenue............................................... $ 146 $ -- $ 146 $ --
Revenue from collaborative agreements and other............... 501 -- 501 21
------- ------- ------- -------
Total revenues............................................. 647 -- 647 21
------- ------- ------- -------
Expenses:
Cost of products sold......................................... 242 -- 288 --
License fees.................................................. 325 50 325 50
Research and development...................................... 1,787 731 3,367 1,315
General and administrative.................................... 722 670 1,488 1,231
------- ------- ------- -------
Total expenses............................................. 3,076 1,451 5,468 2,596
------- ------- ------- -------
Loss from operations.................................................. (2,429) (1,451) (4,821) (2,575)
------- ------- ------- -------
Interest and other income (expense)................................... 170 69 340 100
------- ------- ------- -------
Net loss................................................... $(2,259) $(1,382) $(4,481) $(2,475)
======= ======= ======= =======
Net loss per share, basic and diluted................................. $ (0.22) $ (0.19) $ (0.44) $ (0.35)
======= ======= ======= =======
Shares used in computing net loss per share, basic and diluted........ 10,193 7,274 10,182 6,975
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Six months ended
June 30,
------- -------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................... $(4,481) $(2,475)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. 42 32
Changes in assets and liabilities:
Accounts receivable and other current assets................... (830) (352)
Accounts payable and other current liabilities................. 201 (196)
------- -------
Net cash used in operating activities...................... (5,068) (2,991)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................ (90) (39)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................ 72 1,063
------- -------
Net cash provided by financing activities....................... 72 1,063
Net decrease in cash and cash equivalents.................................. (5,086) (1,967)
Cash and cash equivalents at beginning of period........................... 15,173 5,624
------- -------
Cash and cash equivalents at end of period................................. $10,087 $ 3,657
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. Organization and Basis of Presentation
Salix Pharmaceuticals, Ltd. (the "Company") was incorporated in the
British Virgin Islands in December 1993 for the purpose of acquiring all
of the outstanding capital stock of Salix Pharmaceuticals, Inc., a
California corporation ("Salix California"), and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation ("Glycyx"). Salix California was incorporated
in California in 1989 and Glycyx was incorporated in Bermuda in 1992. The
Company is developing new pharmaceuticals, primarily focused in the area
of gastrointestinal disease. The Company conducts its business within one
industry segment.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These
statements are stated in United States dollars.
The accompanying unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. These financial
statements should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included
elsewhere in this Report and with the audited financial statements for the
fiscal year ended December 31, 1997 included on the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 1998. The results of operations for interim periods are not
necessarily indicative of results to be expected for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings Per Share" ("FAS 128"). Basic and
diluted net loss per common share have been computed using the
weighted-average number of common shares outstanding during each period.
Common equivalent shares are excluded from the computation as their effect
is anti-dilutive in all periods.
3. Commitments
At June 30, 1998, the Company had a binding purchase order commitment
for inventory purchases aggregating approximately $1.7 million to be
delivered in 1998.
4
<PAGE> 7
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
4. Shareholders' Equity
In May 1996, the Company closed the initial public offering of its
common shares in Canada, at which time the shares listed on The Toronto
Stock Exchange. In connection with that offering, the Company issued to
the underwriters common share purchase warrants, exercisable into 200,000
common shares at a price of Cdn. $7.00 (U.S. $5.25). All such purchase
warrants were exercised in 1997, raising additional proceeds to the
Company of approximately Cdn. $1,400,000 (U.S. $1,003,000).
In October 1997, the Company completed a public offering, issuing
3,000,000 common shares at a price of Cdn. $7.00 (U.S. $4.98). The Company
received approximately U.S. $14 million in cash, net of underwriting
discounts, commissions and other offering costs.
In addition, options to purchase an aggregate of 72,265 common shares
were exercised between January 1, 1998 and June 30, 1998. The exercise
price of these shares was U.S. $1.00 per share.
5
<PAGE> 8
SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" refer to
United States dollars. The Company's Common Shares trade on The Toronto Stock
Exchange and are quoted in Canadian dollars.
OVERVIEW
The Company's principal focus is to identify and acquire
gastrointestinal products that have near-term commercial potential and to apply
its product development expertise to commercialize these products. The Company
selects products that it believes serve a gastrointestinal disease in need of
new treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. The Company believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
balsalazide disodium, presently marketed in the United Kingdom under the brand
name Colazide, and rifaximin, will demonstrate the Company's ability to execute
this strategy.
The Company has generated limited revenues to date from the sales of
products, and it has been unprofitable since inception. The Company expects to
continue to incur substantial and increasing losses and expects its operating
expenses to increase as the Company continues its balsalazide disodium
commercialization efforts in the United Kingdom and, subject to regulatory
approval, elsewhere in Europe and continues its product development and clinical
programs for other products. The Company does not expect to achieve substantial
profitability on an annual basis before 2001 at the earliest. As of June 30,
1998, the Company had accumulated losses of approximately $17.9 million. Since
1992, the Company has financed its operations principally through reimbursement
payments, license fees and milestone revenues, totaling approximately $16.3
million under collaborative research and licensing agreements, and sales of
equity and convertible debt securities totaling approximately $27.6 million.
Over the same period, the Company has recorded expenses totaling $25.0 million,
of which $15.1 million were in research and development expenses and $1.5
million in license fees to licensors. The Company's alliances with Astra AB
("Astra") and a division of Menarini Pharmaceutical Industries s.r.l.
("Menarini") have allowed it to fund the development of balsalazide disodium, to
in-license other gastrointestinal products, and to help establish itself with a
relatively small amount of outside capital.
The Company's collaborative research and licensing agreements provide
for payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according to
contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received that are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell balsalazide disodium, the disodium salt of
balsalazide, which is manufactured by third parties under contract with the
Company, to its distribution partners, Astra and Menarini, at a formula price.
The Company received approval in July 1997 to market balsalazide disodium in the
United Kingdom for the treatment of acute ulcerative colitis. Astra began the
commercial launch of balsalazide disodium under the brand name Colazide in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for balsalazide disodium in Austria,
Belgium, Denmark,
6
<PAGE> 9
Italy, Luxembourg, and Sweden, through the mutual recognition process of the
European Union ("EU"). The Company expects Astra and Menarini to undertake
commercial launches of balsalazide disodium in these EU countries beginning in
1998. Astra and Menarini withdrew marketing applications from other EU countries
that had questions that could not be addressed within the time constraints of
the review period required by the mutual recognition process. These countries
are Finland, France, Germany, Greece, Ireland, Netherlands, Portugal, and Spain.
Moreover, the application process is the responsibility of Astra and Menarini
and there can be no assurance that they will pursue such applications or, if
they do, that they will be successful. The Company recognized its initial
product revenues from Astra's sales of balsalazide disodium in the United
Kingdom in 1997 and expects to recognize product revenues from sales of
balsalazide disodium by Menarini and Astra outside the United Kingdom in late
1998. The selling price of balsalazide disodium to Astra outside the United
Kingdom has not been determined, and the Company will be obligated to pay to
Biorex, the original licensor of the product, a portion of any gross profit on
balsalazide disodium sales to Astra and Menarini outside the United States. In
addition, the Company anticipates high initial product launch costs due to the
cost of scaling up manufacturing processes for commercial distribution.
In June 1997, the Company submitted a New Drug Application ("NDA") to
the United States Food and Drug Administration (the "FDA") for balsalazide
disodium as a therapy for acute ulcerative colitis. In June 1998, the FDA issued
an "approvable" letter for the Company's balsalazide disodium NDA. The FDA's
letter indicated that the application may be approved upon the satisfaction of
specific issues relating to the manufacturing process and other technical
issues, as well as product labeling. To the extent necessary, the Company has
re-focused part of its management's efforts to concentrate fully on the
resolution of the remaining issues, as outlined in the approvable letter, as it
seeks to fulfill the FDA requirements and obtain final approval. The Company
anticipates that it will not be able to produce and provide the requested
information until 1999. While the Company believes that it can successfully
fulfill the FDA requirements and obtain marketing approval, there can be no
assurance that its efforts in this regard, in whole or in part, will be
successful. Failure to obtain marketing approval for balsalazide disodium from
the FDA could have a material adverse impact on the Company's financial
condition and future results of operations. Moreover, the Company and its United
States marketing partner have yet to determine the brand name under which
balsalazide disodium will be marketed in the United States, nor has the Company
obtained final approval from the FDA of its name submission.
The Company's second product, rifaximin, is currently under development.
The Company obtained the rights to develop, make, use and sell rifaximin in
Canada and the United States from Alfa Wassermann S.p.A. ("Alfa Wassermann") in
exchange for future royalties and milestone payments. Alfa Wassermann has also
agreed to supply Salix with bulk active ingredient rifaximin at a fixed price.
If regulatory approvals are obtained, the Company intends to establish its own
direct sales force to market rifaximin. This strategy for rifaximin represents
the business model that the Company intends to adopt for future product
development and commercialization. Although the creation of an independent sales
organization will require a substantial investment by the Company, the Company
anticipates that the financial results from rifaximin and future products will
be more favorable to the Company than those anticipated from the sale of
balsalazide disodium by Astra and Menarini since the Company has retained the
distribution rights to rifaximin, whereas Astra and Menarini have the
distribution rights for balsalazide. In the case of balsalazide disodium, the
Company granted exclusive distribution rights in certain territories in exchange
for funding needed to complete late-stage development of balsalazide disodium,
to in-license other gastrointestinal products and to help establish the Company
as a viable gastrointestinal pharmaceutical company. The Company is currently
unable to provide a meaningful estimate of the investment required to create an
independent sales organization because such investment is dependent on a number
of contingencies, including receipt of necessary regulatory approvals for
specific indications.
The Company intends to pursue development of rifaximin for two initial
indications: hepatic encephalopathy and bacterial infections of the lower
gastrointestinal tract. The Company will conduct and fund clinical trials in
connection with such regulatory approvals. The Company plans to investigate
further development of rifaximin for several other possible indications. In
February 1998, the Company received Orphan Drug Designation from the FDA for
rifaximin to treat hepatic encephalopathy. Orphan Drug Designation can entail
certain possible advantages in the testing and approval process for the drug.
See "Factors That May Affect Future Results".
7
<PAGE> 10
RESULTS OF OPERATIONS
Three and Six Month Periods Ended June 30, 1998 and 1997
For the three and six month periods ended June 30, 1998, the Company
recognized $146,000 in product revenue and $501,000 in revenue from
collaborative agreements in connection with the approval of balsalazide disodium
for sale in certain European countries (see "Overview"). Due to a short-term
manufacturing delay during the first quarter of 1998, balsalazide disodium
product shipments were delayed and no revenues were recognized. Product
shipments recommenced in April 1998. For the six months ended June 30, 1997, the
Company recognized $21,000 in revenue from collaborative agreements.
Operating expenses for the three months ended June 30, 1998 and 1997
were $3.1 million and $1.5 million, respectively. Operating expenses for the six
months ended June 30, 1998 and 1997 were $5.5 million and $2.6 million,
respectively. The increase in operating expenses is the result of increases in
all expense categories as noted below.
Cost of products sold for the three and six months ended June 30, 1998
were $242,000 and $288,000, respectively. Although no product was shipped during
the three months ended March 31, 1998, the Company incurred ongoing
manufacturing related overhead costs of $46,000. Prior to 1997, the Company had
no product revenues. Initial costs of products are expected to remain high due
to the cost of scaling up manufacturing processes for commercial distribution.
License fees payable totaled $325,000 and $50,000 for both the three and
six month periods ended June 30, 1998 and 1997, respectively. Current license
fees payables were due in connection with the Company's recognition of revenue
from collaborative agreements resulting from the approval of balsalazide
disodium for sale in certain European countries.
Research and development expense was $1.8 million and $736,000 for the
three months ended June 30, 1998 and 1997, respectively, and $3.4 million and
$1.3 million for the six months ended June 30, 1998 and 1997, respectively. The
increase in research and development expenses in 1998 is due primarily to
increased spending for an ongoing balsalazide disodium clinical trial initiated
in late 1997 and continued spending in regulatory affairs activities related to
the balsalazide disodium NDA approval process in the United States. Management
expects research and development spending will continue to increase due to
additional planned clinical trial activities.
General and administrative expenses were $722,000 and $670,000 for the
three months ended June 30, 1998 and 1997, respectively, and $1.5 million and
$1.2 million for the six months ended June 30, 1998 and 1997. The increases are
due mainly to additions of key personnel and the increased administrative costs
related to becoming a public reporting company in the United States in October
1997.
Interest income increased to $170,000 in the three months ended June 30,
1998 from $69,000 in the three months ended June 30, 1997 due to larger average
cash reserves in the 1998 period after completion of the public offering in
October 1997. Interest income increased to $340,000 in six months ended June 30,
1998 from $100,000 in the six months ended June 30, 1997. See "Liquidity and
Capital Resources".
The Company has experienced net losses of $2.3 million and $1.4 million
for the three months ended June 30, 1998 and 1997, respectively. Net losses for
the six months ended June 30, 1998 and 1997 were $4.5 million and $2.5 million,
respectively.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $8.8 million for United States income tax
purposes. These carryforwards will expire in varying amounts through 2012. As
the Company adds new investors, utilization of the current loss carryforwards
may be substantially limited if, under United States Internal Revenue Code
Section 382, a change in ownership is deemed to have occurred within the three
most recent fiscal years.
8
<PAGE> 11
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company's internal
operating systems rely exclusively on software products of third party vendors,
who have provided assurance to the Company that such products are year 2000
compliant. As a result, the Company does not believe that issues relating to
year 2000 compliance will result in a material adverse effect on its financial
condition or results of operations. If the information provided by such software
vendors were to prove incorrect, however, there can be no assurance that the
costs and disruption associated with implementing new or corrected software
would not have an adverse effect on the Company's business, financial condition
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since 1992, the Company has financed its operations principally through
reimbursement payments, license fees and milestone revenues, totaling
approximately $16.3 million under collaborative research and licensing
agreements, and sales of equity and convertible debt securities totaling
approximately $27.6 million.
At June 30, 1998, the Company had approximately $10.1 million in cash
and cash equivalents as compared to $15.2 million at December 31, 1997. The
decrease of $5.1 million from December 31, 1997 was due to cash used in
operating activities.
In October 1997, the Company offered and sold 3,000,000 Common Shares in
an underwritten public offering of securities in Canada and the United States at
a price of Cdn. $7.00 (U.S. $ 4.98), raising Cdn. $19,635,000 (U.S. $13,973,000)
net of underwriting discounts and commissions. The offering in the United States
was made pursuant to a Registration Statement on Form S-1 that was declared
effective by the Securities and Exchange Commission on October 16, 1997.
As of June 30, 1998, the Company had no long term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $1.7 million. The Company anticipates total capital expenditures
of approximately $0.3 million in 1998.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British Pounds Sterling.
Translation into the Company's reporting currency, the United States dollar, has
not historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to
incur substantial and increasing losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the net proceeds from the recently completed offering of
Common Shares, together with the Company's cash reserves at June 30, 1998 and
the cash flow from operations, should be sufficient to satisfy the cash
requirements of the Company's product development programs through at least
1998. The Company's actual cash requirements may vary materially from those now
planned because of a number of factors, including the results of research and
development activities, FDA and foreign regulatory processes, establishment of
and changes in relationships with strategic partners, technological advances by
the Company and other pharmaceutical companies, the terms of the Company's
collaboration arrangements with strategic partners, and the status of
competitive products. The Company's ability to execute its business plan, fund
future development efforts, secure future licensing arrangements, as well as
fund the commercialization of rifaximin and other new potential products will
require the Company to raise additional funds in the form of debt or equity
financing in 1999. The Company may also enter into collaborative arrangements
with corporate partners that could provide the Company with additional funding
in the form of equity, debt, licensing, milestone and/or royalty payments. There
can be no assurance that the Company will be able to enter into such
arrangements or raise any additional funds on terms favorable to the Company.
9
<PAGE> 12
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements and other prospective information relating to future events. These
forward-looking statements and other information are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including the following:
Dependence on Currently Licensed Products; Uncertainty of Regulatory
Approval of Company's Products. The Company's future success will depend, among
other factors, on its ability to in-license, develop, and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of balsalazide disodium with Astra and Menarini.
Development, manufacture, and marketing of both balsalazide and
rifaximin are subject to extensive regulation by governmental authorities in the
United States and other countries. Neither balsalazide nor rifaximin has been
approved by the FDA for use in the United States. In June 1997, the Company
submitted an NDA to the FDA for balsalazide disodium as a therapy for acute
ulcerative colitis. In June 1998, the FDA issued an "approvable" letter to the
Company for the balsalazide disodium NDA. The FDA's letter indicated that the
application may be approved upon the satisfaction of specific issues relating to
the manufacturing process and other technical issues, as well as product
labeling. To the extent necessary, the Company has re-focused part of its
management's efforts to concentrate fully on the resolution of the remaining
issues, as outlined in the approvable letter, as it seeks to fulfill the FDA
requirements and obtain final approval. While the Company believes that it can
successfully comply with the issues raised by the approvable letter and obtain
FDA approval for balsalazide disodium, there can be no assurance that its
efforts in this regard, in whole or in part, will be successful. In addition,
certain of the issues raised in the FDA letter require the cooperation of the
Company's third-party contract manufacturers to meet the conditions of the
approvable letter. There can be no assurance that the Company's third-party
contract manufacturers will be able to fully comply with the conditions of the
approvable letter. If any issue contained in the approvable letter is not
resolved to the satisfaction of the FDA, there can be no assurance that approval
will be granted. If regulatory approval of balsalazide disodium or any other
product is granted, such approval will be limited to those disease states and
conditions for which the product has been shown to be safe and effective, as
demonstrated to the FDA's satisfaction through well controlled clinical studies.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product,
promotional activities for the product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials and changes in labeling of the product.
In July 1997, the Medicines Control Agency in the United Kingdom
approved balsalazide disodium under the brand name Colazide as a treatment for
acute ulcerative colitis in the United Kingdom. The Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as at treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of
the EU. Astra and Menarini withdrew marketing applications from certain other EU
countries that had questions that could not be addressed within the time
constraints of the review period required by the mutual recognition process.
These countries are Finland, France, Germany, Greece, Ireland, Netherlands,
Portugal, and Spain. The application procedure is the responsibility of Astra
and Menarini and there can be no assurance that they will pursue such
applications, or if they do, that they will be successful. There can be no
assurance that balsalazide disodium will receive approval from regulatory
agencies in any member country of the European Union where the marketing
application was withdrawn. Even if such approvals are ultimately received, there
can be no assurance as to the timing of such approvals or market acceptance of
balsalazide disodium for the approved indications, or that the Company's
marketing partners will launch balsalazide disodium in the countries where the
marketing application has been approved.
10
<PAGE> 13
With respect to rifaximin, Alfa Wassermann has recently completed
patient enrollment in a clinical trial in Spain relating to the drug as a
therapy for hepatic encephalopathy. The Company determined through discussions
with the FDA that this study is not sufficient support for the filing of an NDA
with the FDA. Therefore, the Company intends to initiate a Company-sponsored
trial in the United States. There can be no assurance that this new clinical
trial for rifaximin will demonstrate that the drug is safe and effective for the
indication tested, that such clinical trial will support the filing of an NDA
for rifaximin as a therapy for hepatic encephalopathy, that in the event an NDA
is filed with the FDA, the Company will be successful in obtaining regulatory
approval in the United States, or that the Company will obtain regulatory
approval for rifaximin from authorities in any other foreign jurisdiction.
The Company expects that a significant portion of its potential revenues
for the next few years will depend on regulatory approval and sales of these
products. Failure to obtain regulatory approvals, delays in obtaining regulatory
approvals, obtaining regulatory approvals for balsalazide disodium or rifaximin
in only limited markets or for limited uses, or lack of market acceptance for
either product, to the extent regulatory approvals are obtained, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Limited Operating History; History of Operating Losses; Expectation of
Future Losses. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of balsalazide disodium. As of June 30, 1998, the Company had
incurred cumulative losses since inception of approximately $17.9 million.
Furthermore, the Company currently expects operating losses to continue at least
through 2000 and to increase from current levels prior to 2000 as the Company
continues to develop balsalazide disodium and rifaximin. The Company's future
operating performance will depend on the timing of regulatory approvals of
balsalazide disodium and rifaximin, particularly the timing of FDA approval,
and, if such approvals can be obtained, will also depend on market acceptance.
Dependence on Collaborative Partners. The initial commercialization of
balsalazide disodium in the United Kingdom and, to the extent regulatory
approval is obtained, in other countries in which the Company has commercial
rights to balsalazide disodium is entirely dependent on Astra and Menarini, in
their respective territories. Under its agreements with Astra, the Company has
granted Astra exclusive rights to distribute and sell balsalazide disodium on a
worldwide basis with the exception of Italy, Spain, Portugal, and Greece, where
the Company has granted exclusive distribution rights to Menarini, and with the
exception of Japan, Taiwan, and Korea, where the Company does not have rights to
balsalazide disodium. Although Astra has agreed to use its best endeavors to
promote, market, and sell balsalazide disodium in its exclusive markets, there
are no specified financial thresholds that must be achieved for Astra to
maintain its exclusivity. The Company's agreements with Astra provide for, with
respect to Europe, a term of 15 years and, with respect to the United States, a
term ending on the later to occur of the expiration date of the last expiring
patent and the date nine years from the first commercial launch date of
balsalazide disodium but, in either event, the agreements may be terminated
earlier by either party upon the occurrence of specified events, including a
material breach.
The Company's agreements with Astra require Astra to accomplish the
commercial launch of balsalazide disodium in any jurisdiction within 90 days of
receipt of regulatory approval in that jurisdiction, subject to a 90 day cure
period during which period Astra has the opportunity to accomplish the
commercial launch without triggering Salix's rights to terminate the agreement
or amend it to make Astra's right non-exclusive. The Company received marketing
approval for balsalazide disodium in the United Kingdom from the Medicine
Controls Agency in July 1997 and Astra launched balsalazide disodium
commercially in the United Kingdom in October 1997, based on a selling price set
by Astra. Following regulatory approval of balsalazide disodium in each country
in Europe where Astra has exclusive distribution rights, the Company and Astra
must agree on the balsalazide disodium sales price for such country, which may
be less than the selling price in the United Kingdom. The agreed sales price for
balsalazide disodium will directly affect the Company's revenues because the
parties' agreement obligates Astra to purchase balsalazide disodium from the
Company, and the Company to supply balsalazide disodium to Astra, at a transfer
price equal to a percentage of Astra's selling price. The Company does not
anticipate significant margins from balsalazide disodium sales to Astra in the
United Kingdom or in other European Union countries, where
11
<PAGE> 14
pricing has not yet been determined. In addition, while the Company and its
partners, Astra and Menarini, received in May 1998 notification of approval of
balsalazide disodium as a treatment for acute ulcerative colitis in Austria,
Belgium, Denmark, Italy, Luxembourg and Sweden, Astra and Menarini withdrew
marketing applications from countries that had questions that could not be
addressed within the time constraints of the review period. Although the Company
has been advised by both Astra and Menarini that they intend to seek approval in
those countries for which marketing applications were withdrawn, including
Finland, France, Germany, Greece, Ireland, Netherlands, Portugal and Spain, the
decision as to which additional approvals to seek, the order in which to seek
them and the responsibility to complete the approval process lies with Astra and
Menarini and not the Company. There can be no assurance that Astra and Menarini
will seek such approvals, or if they do, that the approvals will be granted.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop, commercialize,
manufacture or market products, including balsalazide disodium, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on Third Parties for Manufacturing. The Company currently
does not manufacture its potential pharmaceutical products, including
balsalazide disodium and rifaximin, and, therefore, is dependent on contract
manufacturers for the production of such products for development and commercial
purposes. In the event that the Company is unsuccessful in obtaining or
retaining third-party manufacturing or if the Company's manufacturers experience
production difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. The Company's
initial product, balsalazide disodium, has never been manufactured in commercial
quantities. No assurances can be given that the Company, or its contract
manufacturers, will be able to manufacture balsalazide disodium (or other future
developed products) in commercial quantities that would enable the Company to
meet its business objectives. Under the terms of the Company's distribution
agreements with Astra and Menarini, the obligations of such companies to
purchase product will terminate under certain circumstances in which the Company
is unable or unwilling to adequately supply them with product. In such
circumstances, Astra or Menarini, as the case may be, is granted a temporary
license to manufacture balsalazide disodium. Under certain situations, such
manufacturing licenses may become permanent, in which case the Company's
revenues from the arrangements could be, depending on the circumstances,
severely reduced or eliminated. Moreover, the contract manufacturers that the
Company may use must adhere to current Good Manufacturing Practices, which are
regulations strictly enforced by the FDA through its facilities inspection
program. If these facilities cannot pass a pre-approval plant inspection, the
likelihood of the FDA's pre-market approval of balsalazide disodium would be
adversely affected. In its "approvable" letter relating to the NDA for
balsalazide disodium, the FDA identified certain manufacturing deficiencies that
need to be addressed by the Company and its manufacturers if the NDA is to be
approved. There can be no assurance that the Company or its manufacturers will
be able to the address the FDA's concerns. Certain material manufacturing
changes that may occur after approval are also subject to FDA review and
approval. There can be no assurance that the FDA or other regulatory agencies
will approve the processes or the facilities by which any of the Company's
products may be manufactured. In addition, if the facilities cannot pass regular
post-approval inspections, manufacturing and distribution may be disrupted,
recalls of distributed products may be necessary, and other sanctions could be
applied. Any disruption in the supply in manufacturing and marketing of the
Company's proposed products would have a material adverse effect on the
Company's business, financial condition, and results of operations.
Dependence on In-Licensing and Acquisition of New Products for Future
Growth. Whether or not balsalazide disodium or rifaximin receives regulatory
approvals and is successfully marketed, the Company's ability to grow in the
future will depend on its success in in-licensing or acquiring additional
pharmaceutical products. The Company seeks to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available. There
can be no assurance that such pharmaceutical products will be available on
attractive terms for in-licensing or acquisition by the Company.
12
<PAGE> 15
Uncertainty of Market Acceptance. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including balsalazide disodium and rifaximin, or new formulations of or
indications for current products. Assuming the Company can successfully develop
such products and obtain regulatory approvals, their future success will depend
upon their acceptance by the medical community and third-party payors as useful
and cost-effective. Market acceptance will depend upon several factors,
including the establishment of the safety, effectiveness, patient tolerance, and
cost of the Company's products relative to those of competitors. The Company and
its collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for balsalazide disodium relies on its
third-party distributors, Astra and Menarini, to whom the Company has granted
exclusive marketing rights. There can be no assurance that either Astra or
Menarini will market balsalazide disodium successfully in any country in which
they have exclusive rights. The Company intends to establish its own direct
sales force for the purpose of achieving direct sales of rifaximin and other
future products. There can be no assurance that the Company's marketing and
direct sales efforts will be successful.
Dependence on Exclusive Licenses. The Company's rights to balsalazide
and rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination by Biorex or Alfa Wassermann, as the case may be, under
certain circumstances, including material breach by the Company, the bankruptcy
or insolvency of the Company, or the Company's failure to satisfy its
manufacturing obligations under its agreements with distribution partners. In
the event that Biorex or Alfa Wassermann terminate their respective license
agreements, the Company would have no further rights to utilize their respective
patents or trade secrets to manufacture and market products based on balsalazide
or rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the basalazide disodium composition of matter
and method of treating ulcerative colitis with balsalazide expire in July 2001
in the United States, February 2002 in the United Kingdom, May 2002 in France,
July 2001 in Italy, and April 2002 in Germany. The patents for the method of
treating colon cancer using balsalazide expire in January 2014 in the United
States and, assuming patents issue from pending applications, in January 2015 in
various countries in Europe, Asia, and North America. The patents for the
rifaximin composition of matter (also covering a process of making rifaximin and
using rifaximin to treat gastrointestinal infectious diseases) expire in May
2001 in the United States and Canada. The patents for another process of making
rifaximin expire in April 2005 in both the United States and Canada. Patents for
the use of rifaximin for H. pylori infections expire in June 2013 in the United
States and February 2014 in Canada. Although the Company believes it may be
granted extensions of up to five years in certain circumstances, based on patent
term restoration procedures established in Europe and in the United States under
the Waxman-Hatch Act for products that have received regulatory approval, there
is no assurance that such extensions will be granted. The Company has filed
applications for use patents for additional indications using balsalazide and
related chemical substances. There can be no assurance that any patents will be
issued. There can be no assurance that competitors will not develop products
based on the same active ingredients for marketing as soon as the applicable
patents expire or at any time thereafter or that competitors will not design
around existing patents. Sales
13
<PAGE> 16
of such generic versions could have an adverse effect on the Company's business,
financial condition, and results of operations. The Company's success will
depend in part on its ability to obtain United States and foreign patent
protection for its products and processes, preserve its trade secrets, and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that patents will issue with respect to, or that the claims
allowed will provide sufficient protection to, the Company's present or future
technology.
There can be no assurance that any other patents will be issued on any
of the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that claims allowed in the
patents or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent
and other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current or
future rights of others. For instance, there is no assurance that the use of the
Company's technology will not infringe the patent rights of others. For the same
reasons, the products of others could infringe the patent or other proprietary
rights of the Company. Litigation or patent interference proceedings, either of
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued to and other proprietary rights of the Company or to
determine the scope and validity of other parties' proprietary rights. The
defense and prosecution of patent and intellectual property claims are both
costly and time-consuming, even if the outcome is favorable to the Company. Any
adverse outcome could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties, or require
the Company to cease selling its products.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which it seeks to
protect, in part, through confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require to commercialize its technologies or products will have a material
adverse effect on the Company. In addition, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will not
be issued patents which prevent the manufacture or sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company in order for it to be able to carry on its business. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce or
defend the Company's patents or proprietary rights.
Intense Competition. Competition in the pharmaceutical industry is
intense and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world engaged in research and development efforts with respect to pharmaceutical
products targeted at gastrointestinal diseases and conditions addressed by the
Company's current and potential products. In particular, the Company is aware of
products in research or development by competitors that address the diseases
being targeted by the Company's products. There can be no assurance that
developments by others will not render the Company's current and potential
products obsolete or non-competitive. Competitors may be able to complete the
development and regulatory approval process sooner and, therefore, market their
products earlier than the Company. Many of the Company's competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than the Company. For example, many large, well
capitalized companies already offer products in the United States and Europe
that target the proposed indications for basalazide disodium, including
mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn,
Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel,
Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia &
Upjohn, Inc.). Technological developments by competitors, earlier regulatory
approval for marketing competitive products, or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of the
Company's products, including balsalazide disodium, and could have a material
adverse effect on the Company's business, financial condition, and results of
operations. In
14
<PAGE> 17
addition, manufacturers of generic drugs may seek to compete directly with the
Company's products in the absence of effective patent protection or non-patent
exclusivity protection.
Currency Fluctuations. A significant portion of the company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
Management of Growth. The Company expects to experience significant
growth in the number of its employees and the scope of its operations. This
growth is expected to place a significant strain on the Company's management and
operations. The Company's ability to manage such growth effectively will depend
upon its ability to broaden its management team and its ability to attract,
hire, and retain skilled employees. The Company's success will also depend on
the ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control systems
and to expand, train and manage its employee base. The Company's inability to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company
is dependent upon a number of key management and technical personnel, none of
whom is bound by an employment agreement with the Company, including Randy
Hamilton, Chairman, President and Chief Executive Officer, and Lorin Johnson,
Ph.D.,Vice President, Research (Salix Pharmaceuticals, Inc.) The loss of the
services of one or more key employees could have a material adverse effect on
the Company. The Company's success will also depend on its ability to attract
and retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, many of whom are
often subject to competing employment offers. In the event the Company obtains
regulatory approvals for rifaximin, it intends to sell rifaximin through a small
direct sales force. New employees, particularly new sales and marketing
employees, will require substantial training and education concerning the
Company's products. There can be no assurance that the Company will be
successful in attracting and retaining qualified personnel as necessary, and the
failure to do so could have a material adverse effect on the Company's business,
operating results, and financial condition.
Price Volatility; Limited Trading Volume; Foreign Exchange Risk. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have in the past and
can in the future be expected to be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning proprietary rights, publicity regarding
actual or potential medical results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and other countries, public concern as to the safety of pharmaceutical
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Company's Common Shares. The Company's Common Shares
have been traded on The Toronto Stock Exchange since May 1996 and no public
trading market exists for the Common Shares in the United States. In addition,
trading volume in the Common Shares on The Toronto Stock Exchange has been low,
and there can be no assurances that an active trading market will develop or be
sustained on The Toronto Stock Exchange, or any other exchange or dealer
quotation system.
The Common Shares trade on The Toronto Stock Exchange in Canadian
dollars. In addition to the general market risks associated with ownership of
equity securities and the more specific risks of ownership of the Common Shares
of the Company, U.S. holders of the Common Shares also bear exchange rate risks
resulting from fluctuations in the relative values of the Canadian dollar and
the U.S. dollar. The value of the Canadian dollar has fluctuated substantially
in the past relative to the United States dollar and other currencies and may
continue to do so
15
<PAGE> 18
in the future. As a result, for U.S. investors and other non-Canadian investors,
the value of the Common Shares in United States dollars or other currencies may
vary independently of changes in the trading price of the Common Shares on The
Toronto Stock Exchange and for reasons unrelated to the Company or its business,
results of operations, or financial condition.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1997, the Company completed the sale of 3,000,000 Common Shares
at a per share price of Cdn. $7.00 (U.S. $4.98) in a firm commitment
underwritten public offering. The offering was effected in Canada pursuant to
final receipts issued by each of the provincial securities commissions and in
the United States pursuant to a Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange Commission
declared effective on October 14, 1997. The offering was underwritten by
Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire
Securities Inc., and Midland Walwyn Capital Inc. In the United States, the
offering was made by the United States broker-dealer affiliates of the
underwriters, NBC Levesque International Ltd., Yorkton Capital Inc., Marleau
Lemire (USA), Inc., and Midland Walwyn Capital Corporation, respectively. On
October 16, 1997, the date of the effectiveness of the Registration Statement
covering the public offering, the Bank of Canada noon rate of exchange for
United States dollars into Canadian dollars was Cdn. $1.3866 per U.S. $1.00.
Of the Cdn. $21,000,000 in aggregate proceeds raised in connection with
the October 1997 offering, (i) approximately Cdn. $1,365,000 was paid to the
underwriters in connection with underwriting discounts, and (ii) approximately
Cdn. $1,403,000 was paid by the Company in connection with offering expenses,
including legal, printing, and filing fees. There were no direct or indirect
payments to directors or officers of the Company or any other person or entity.
None of the offering proceeds have been used for the construction of plant,
building or facilities or the purchase or installation of machinery or equipment
or for purchases of real estate or the acquisition of other businesses. The
Company is currently investing the net offering proceeds for future use as
additional working capital. Such remaining net proceeds have been invested in
short-term, interest-bearing, investment grade securities. A portion of the net
proceeds may be used for the acquisition of technologies, businesses or products
that are complementary to those of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Shareholders was held on May 12,
1998. The following is a brief description of each matter voted upon at the
meeting and a statement of the number of votes cast for, against or withheld and
the number of abstentions with respect to each matter.
(a) The shareholders elected the following directors to serve for the
ensuing year and until their successors are elected:
<TABLE>
<CAPTION>
Name FOR WITHHELD
---------------------- --------- -------
<S> <C> <C>
Randy W. Hamilton 5,675,657 198,141
Lily Baxendale 5,675,657 198,141
Lawrance A. Brown, Jr. 5,675,657 198,141
John F. Chappell 5,675,657 198,141
Nicholas M. Ediger 5,675,657 198,141
Lorin K. Johnson 5,675,657 198,141
David E. Lauck, Sr. 5,675,657 198,141
</TABLE>
(b) The shareholders approved an amendment and restatement of the 1996 Stock
Option Plan, including to increase the number of Common Shares reserved
for issuance thereunder by 600,000.
16
<PAGE> 19
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--------- ------- -------
5,035,782 834,941 3,075
</TABLE>
(c) The shareholders ratified the appointment of Ernst & Young LLP as
independent accountants of the Company for the fiscal year ending
December 31, 1998.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--------- ------- -------
5,872,623 500 675
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.3(a) Form of Amendment and Restated 1996 Stock Option Plan for
Salix Pharmaceuticals, Ltd. and form of Notice of Stock
Option Grant and Stock Option Agreement thereunder.
10.15 Consulting Agreement dated July 31, 1998 between Salix
Pharmaceuticals, Inc. and James Shook.
27.1 Financial Data Schedule
</TABLE>
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALIX PHARMACEUTICALS, LTD.
Date: August 14, 1998 By: /s/ Randy Hamilton
--------------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: August 14, 1998 By: /s/ David Boyle
--------------------------------------
David Boyle, Executive Vice President,
and Chief Financial Officer
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.3(a) Form of Amendment and Restated 1996 Stock Option Plan for Salix
Pharmaceuticals, Ltd. and form of Notice of Stock Option Grant and
Stock Option Agreement thereunder.
10.15 Consulting Agreement dated July 31, 1998 between Salix
Pharmaceuticals, Inc. and James Shook.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.3(a)
SALIX PHARMACEUTICALS, LTD.
1996 STOCK OPTION PLAN
(AS AMENDED, MARCH 1998)
1. Purposes of the Plan. The purposes of this 1996 Stock Option Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or Nonstatutory
Stock Options, at the discretion of the Board and as reflected in the terms of
the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" shall mean the Board or any of its
Committees appointed pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under the corporate laws and securities
regulations of applicable Canadian provincial securities laws, U.S. state
corporate laws, U.S. federal and state securities laws, the Code, any stock
exchange or quotation system on which the Common Stock is listed or quoted and
the applicable laws of any foreign country or jurisdiction where Options are, or
will be, granted under the Plan.
(c) "Associate" shall mean (i) any company of which such
person or company beneficially owns, directly or indirectly, voting securities
carrying more than 10 per cent of the voting rights attached to all voting
securities of the company for the time being outstanding, (ii) any partner of
that person or company, (iii) any trust or estate in which such person or
company has a substantial beneficial interest or as to which such person or
company serves as trustee or in a similar capacity, (iv) any relative of that
person who resides in the same home as that person, (v) any person of the
opposite sex who resides in the same home as that person and to whom that person
is married or with whom that person is living in a conjugal relationship outside
marriage, or (vi) any relative of a person mentioned in clause (v) who has the
same home as that person.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended, or any successor thereto.
(f) "Committee" shall mean any Committee appointed by the
Board of Directors in accordance with Section 4(a) of the Plan, if one is
appointed.
(g) "Common Stock" shall mean the Common Stock of the Company.
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(h) "Company" shall mean Salix Pharmaceuticals, Ltd., a
British Virgin Islands International Business Company.
(i) "Consultant" shall mean any person, including an advisor,
engaged by the Company or any Parent or Subsidiary to render services to such
entity, and any director of the Company whether compensated for such services or
not.
(j) "Continuous Status as an Employee or Consultant" shall
mean the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from Employee to Consultant or from Consultant to Employee will not
constitute a termination of employment.
(k) "Director" shall mean a member of the Board.
(l) "Employee" shall mean any person, including officers and
Named Executives (including officers and Named Executives who are also
directors), employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) Subject to clauses (ii) and (iii) hereof, if the
Common Stock is listed on The Toronto Stock Exchange, its Fair Market Value per
Share shall be not less than the closing price of the Common Stock on The
Toronto Stock Exchange on the last business day preceding the date of grant;
(ii) If the Common Stock is listed principally on any
established stock exchange or national market system in the United States,
including without limitation the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported, as quoted on such exchange or system for
the last market trading day prior to the time of determination) as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(iii) If the Common Stock is quoted principally on the
NASDAQ System (but not on The National Market System thereof) or regularly
quoted by a recognized securities dealer but selling prices are not reported,
its Fair Market Value shall be the mean between the high bid and low asked
prices for the Common Stock; or
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(iv) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
In the event the Fair Market Value is determined in accordance with
clause (i) above, such Fair Market Value shall be priced in United States
dollars converted at the then prevailing exchange rate between Canada and the
United States.
(o) "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(p) "Named Executive" shall mean any individual who, on the
last day of the Company's fiscal year, is the chief executive officer of the
Company (or is acting in such capacity) or among the four highest compensated
officers of the Company (other than the chief executive officer). Such officer
status shall be determined pursuant to the executive compensation disclosure
rules under the Exchange Act.
(q) "Nonstatutory Stock Option" shall mean an Option not
intended to qualify as an Incentive Stock Option.
(r) "Officer" shall mean a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder, or any successor thereto and (a) every
director or senior officer of the Company, (b) every director or senior officer
of a company that is itself an insider or subsidiary of the Company, (c) any
person or company who beneficially owns, directly or indirectly, voting
securities of the Company or who exercises control or direction over voting
securities of the Company or a combination of both carrying more than 10% of the
voting rights attached to all voting securities of the Company for the time
being outstanding other than voting securities held by the person or company as
underwriter in the course of a distribution, and (d) the Company where it has
purchased, redeemed or otherwise acquired any of its securities, for so long as
it holds any of its securities;
(s) "Option" shall mean a stock option granted pursuant to the
Plan.
(t) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(u) "Optionee" shall mean an Employee or Consultant who
receives an Option.
(v) "Outstanding Issue" shall mean the number of Shares that
are outstanding immediately prior to the share issuance in question, excluding
Shares issued pursuant to share compensation arrangements over the preceeding
one-year period.
(w) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "Plan" shall mean this 1996 Stock Option Plan, as amended.
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(y) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
(z) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 14 of the Plan.
(aa) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 1,750,000 Shares; provided that in no event shall the
number of shares that may be optioned and sold under the Plan exceed the sum of
(i) 1,311,175 shares of Common Stock plus (ii) such number of shares as are
subject to outstanding and unexercised stock options under the Company's 1994
Stock Plan, as of the date of adoption of this Plan by the stockholders, which
options are thereafter canceled or otherwise terminated without exercise. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares that were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant or sale under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of
Employees and Consultants.
(ii) Section 162(m). To the extent that the
Administrator determines it to be desirable to qualify Options granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided
above, the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
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(b) Powers of the Administrator. Subject to compliance with
Applicable Laws, and further subject to the provisions of the Plan and in the
case of a Committee, the specific duties delegated by the Board to such
Committee, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(n) of the Plan;
(ii) to select the Employees and Consultants to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option and/or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator shall determine, in its sole
discretion);
(vii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount, if any, of any
deemed earnings on any deferred amount during any deferral period);
(viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan; and
(ix) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(x) to institute an option exchange program;
(c) Effect of Administrator's Decision. All decisions,
determinations and inter pretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
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5. Eligibility.
(a) Nonstatutory Stock Options may be granted only to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option may, if he
or she is otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Options that are exercisable for the first time by an
Optionee during any calendar year (under all plans of the Company or any Parent
or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
(e) The terms of any Option shall comply with Applicable Laws.
(f) Not more than 50% of the total number of shares reserved
under the Plan shall be allocated to any one participant under the Plan within
any twelve calendar month period.
(g) The maximum number of shares that may be allocated to any
one participant upon the grant of stock Options may not exceed 5% of the issued
and outstanding Common Stock at the time of grant.
(h) The following limitations shall apply to grants of
Options:
(i) No Employee or Consultant shall be granted, in any
fiscal year of the Company, Options to purchase more than 250,000 Shares.
(ii) In connection with his or her initial service, an
Employee or Consultant may be granted Options to purchase up to an additional
500,000 Shares which shall not count against the limit set forth in subsection
(i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
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(iv) If an Option is canceled in the same fiscal year of
the Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the limits
set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years, unless sooner terminated under Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Incentive Stock Option granted to an Optionee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Officers. Subject to adjustment as provided
in this Plan and subject to the other limitations set forth herein:
(a) The maximum number of Shares which may be reserved for issuance
to all Officers under the Plan may not exceed 10% of the Outstanding Issue.
(b) The maximum number of Shares which may be issued to Officers
under the Plan in any 12 month period shall be 10% of the Outstanding Issue.
(c) The maximum number of Shares which may be issued to any one
Officer and such Officer's Associates under the Plan in any 12 month period
shall be 5% of the Outstanding Issue.
9. Option Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant;
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(B) granted to any Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
granted to a person who, at
the time of the grant of such Option, is a Named Executive of the Company, the
per share Exercise Price shall be no less than 100% of the Fair Market Value on
the date of grant;
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) other Shares that (x) in the case of Shares acquired upon exercise of
an Option either have been owned by the Optionee for more than six months on the
date of surrender or were not acquired, directly or indirectly, from the
Company, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised, (4) authorization from the Company to retain from the total number of
Shares as to which the Option is exercised that number of Shares having a Fair
Market Value on the date of exercise equal to the exercise price for the total
number of Shares as to which the Option is exercised, (5) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the exercise price, (6) any combination of the foregoing methods of payment,
or (7) such other consideration and method of payment for the issuance of Shares
to the extent permitted under Applicable Laws. No Optionee shall receive
financial assistance from the Company in connection with the exercise of any
Option and the purchase price of the Common Stock issuable pursuant to any
Option shall be paid in full prior to the issuance of such Common Stock. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section 9(b)
of the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned
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Stock, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly upon exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within thirty (30) days (or such other
period of time, not exceeding three (3) months in the case of an Incentive Stock
Option or six (6) months in the case of a Nonstatutory Stock Option, as is
determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the optionee does not
exercise such Option (which he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 10(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of his or her disability, he or
she may, but only within twelve (12) months (or such other period of time not
exceeding twelve (12) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) from the date of such termination (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent he or she was
entitled to exercise it at the date of such termination. To the extent that he
or she was not entitled to exercise the Option at the date of termination, or if
he does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee:
(i) during the term of the Option who is at the time of
his death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding six (6) months, as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) following the date of death (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance but only to
the extent of the right to exercise that would have accrued had the Optionee
continued living and remained in Continuous Status as an Employee or Consultant
three (3) months
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(or such other period of time as is determined by the Administrator as provided
above) after the date of death, subject to the limitation set forth in Section
5(b); or
(ii) within thirty (30) days (or such other period of
time not exceeding three (3) months as is determined by the Administrator, with
such determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the termination of Continuous Status as an
Employee or Consultant, the Option may be exercised, at any time within twelve
(12) months following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
11. Withholding Taxes. As a condition to the exercise of Options
granted hereunder, the Optionee shall make such arrangements as the
Administrator may require for the satisfaction of any federal, state, local or
foreign withholding tax obligations that may arise in connection with the
exercise, receipt or vesting of such Option. The Company shall not be required
to issue any Shares under the Plan until such obligations are satisfied.
12. Satisfaction of Withholding Tax Obligations. At the discretion of
the Administrator, Optionees may satisfy withholding obligations as provided in
this paragraph. When an Optionee incurs tax liability in connection with an
Option which tax liability is subject to tax withholding under applicable tax
laws, and the Optionee is obligated to pay the Company an amount required to be
withheld under applicable tax laws, the Optionee may satisfy the withholding tax
obligation by one or some combination of the following methods: (a) by cash
payment, or (b) out of Optionee's current compensation, (c) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Optionee for more than six months on the date of surrender, and (ii) have a
fair market value on the date of surrender equal to or less than Optionee's
marginal tax rate times the ordinary income recognized, or (d) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a fair market value equal to the amount
required to be withheld. For this purpose, the fair market value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "TAX DATE").
All elections by an Optionee to have Shares withheld to
satisfy tax withholding obligations shall be made in writing in a form
acceptable to the Administrator.
13. Non-Transferability of Options. Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
14. Adjustments Upon Changes in Capitalization or Merger.
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(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, the maximum number of shares of Common Stock for which Options may
be granted to any employee under Section 8 of the Plan, and the price per share
of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
as soon as practicable prior to the effective date of such proposed action. To
the extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the Company
with or into another corporation where the successor corporation issues its
securities to the Company's shareholders, each outstanding Option shall be
assumed or an equivalent option or right shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
successor corporation does not agree to assume the Option or to substitute an
equivalent option or right, in which case such Option shall vest in its entirety
and become exercisable as follows prior to the consummation of the merger or
sale of assets. If the Option becomes fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets as provided in the
preceding sentence, the Administrator shall notify the Optionee and the Option
shall be fully exercisable for a period of ten (10) days from the date of such
notice, and will terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of
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the successor corporation or its Parent equal in fair market value to the per
share consideration received by holders of Common Stock in the merger or sale of
assets.
(d) Certain Distributions. In the event of any distribution to
the Company's shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
15. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
16. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable.
(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
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<PAGE> 13
SALIX PHARMACEUTICALS, LTD.
1996 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
__________________
__________________
__________________
You have been granted an option to purchase Common Stock of Salix
Pharmaceuticals, Ltd. (the "COMPANY") as follows:
Date of Grant _____________________
Vesting Commencement Date _____________________
Exercise Price per Share US$ _________________
Total Number of Shares Granted _____________________
Total Exercise Price US$ _________________
Type of Option: ___ Incentive Stock Option ("ISO")
___ Nonstatutory Stock Option
("NSO")
Term/ Expiration Date: _____________________
Vesting Schedule: This Option may be exercised, in whole or in
part, in accordance with the following
schedule: ___________________________________
___________________________________
___________________________________
Termination Period: Option may be exercised, to the
extent vested as of the date of such
termination, for 90 days after termination
of Continuous Status as an Employee or
Consultant except as set forth in
Sections 7 and 8 of the Stock Option
Agreement (but in no event later than the
Expiration Date).
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and governed
by the terms and conditions of the 1996 Stock Option Plan and the Stock Option
Agreement, all of which are attached and made a part of this document.
OPTIONEE: SALIX PHARMACEUTICALS, LTD.
_____________ By:______________________________
_____________ Title: ___________________________
Print Name
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<PAGE> 14
SALIX PHARMACEUTICALS, LTD.
1996 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
1. Grant of Option. Salix Pharmaceuticals, Ltd. a British Virgin
Islands International Business Company (the "COMPANY"), hereby grants to the
Optionee named in the Notice of Grant (the "OPTIONEE"), an option (the "OPTION")
to purchase a total number of shares of Common Stock (the "SHARES") set forth in
the Notice of Grant, at the exercise price per share set forth in the Notice of
Grant (the "EXERCISE PRICE") subject to the terms, definitions and provisions of
the Salix Pharmaceuticals, Ltd. 1996 Stock Option Plan (the "PLAN") adopted by
the Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option.
If designated an Incentive Stock Option, this Option is
intended to qualify as an Incentive Stock Option as defined in Section 422 of
the Code.
2. Exercise of Option. This Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the provisions of Section 10 of the Plan as follows:
(i) Right to Exercise.
(a) This Option may not be exercised for a
fraction of a share.
(b) In the event of Optionee's death, disability or
other termination of employment or consulting relationship, the exercisability
of the Option is governed by Sections 5, 6 and 7 below, subject to the
limitation contained in subsection 2(i)(c).
(c) In no event may this Option be exercised after
the date of expiration of the term of this Option as set forth in the Notice of
Grant.
(ii) Method of Exercise. This Option shall be exercisable by
written notice (in the form attached as EXHIBIT A) which shall state the
election to exercise the Option, the number of Shares in respect of which the
Option is being exercised, and such other representations and agreements as to
the holder's investment intent with respect to such shares of Common Stock as
may be required by the Company pursuant to the provisions of the Plan. Such
written notice shall be signed by the Optionee and shall be delivered in person
or by certified mail to the Chief Financial Officer of the Company. The written
notice shall be accompanied by payment of the Exercise Price. This Option shall
be deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax
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<PAGE> 15
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. Method of Payment. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
i. cash; or
ii. check; or
iii. surrender of other shares of Common Stock of the Company
which (A) in the case of Shares acquired pursuant to the exercise of a Company
option, either have been owned by the Optionee for more than six (6) months on
the date of surrender or were not acquired, directly or indirectly, from the
Company, and (B) have a fair market value on the date of surrender equal to the
Exercise Price of the Shares as to which the Option is being exercised; or
iv. authorization from the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised; or
v. delivery of a properly executed exercise notice together
with irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, or
vi. any combination of the foregoing methods of payment.
4. Restrictions on Exercise. This Option may not be exercised until
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("REGULATION G")as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
5. Termination of Relationship. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "TERMINATION
DATE"), exercise this Option during the Termination Period set out in the Notice
of Grant. To the extent that Optionee was not entitled to exercise this Option
at the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
6. Disability of Optionee. Notwithstanding the provisions of Section 5
above, in the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of his
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<PAGE> 16
or her disability, Optionee may, but only within twelve (12) months from the
date of termination of employment (but in no event later than the date of
expiration of the term of this Option as set forth in Section 9 below), exercise
this Option to the extent he or she was entitled to exercise it at the date of
such termination. To the extent that Optionee was not entitled to exercise the
Option at the date of termination, or if Optionee does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option
shall terminate.
7. Death of Optionee. In the event of the death of Optionee:
(i) during the term of this Option and while an
Employee or Consultant of the Company and having been in Continuous Status as an
Employee or Consultant since the date of grant of the Option, the Option may be
exercised at any time within six (6) months following the date of death (but in
no event later than the date of expiration of the term of this Option as set
forth in Section 9 below), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that would have accrued had the Optionee continued
living and remained in Continuous Status as an Employee or Consultant three (3)
months after the date of death; or
(ii) within thirty (30) days after the termination of
Optionee's Continuous
Status as an Employee or Consultant, the Option may be exercised, at any time
within twelve (12) months following the date of death (but in no event later
than the date of expiration of the term of this Option as set forth in Section 9
below), by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
8. Non-Transferability of Option. This option may not be transferred in
any manner and may be exercised during the lifetime of Optionee only by
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
9. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 8 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
10. Taxation Upon Exercise of Option. Optionee understands that, upon
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then fair market value of the
Shares over the exercise price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). If the
Optionee is an employee, the Company will be required to withhold from
Optionee's compensation, or collect from Optionee and pay to the applicable
taxing authorities, an amount equal to a percentage of this compensation income.
Additionally, the Optionee may at some point be required to satisfy tax
withholding obligations with respect to the disqualifying disposition of an
Incentive Stock Option. The Optionee shall satisfy his or her tax withholding
obligation arising upon the exercise of this
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<PAGE> 17
Option by one or some combination of the following methods: (i) by cash payment,
or (ii) out of Optionee's current compensation, or (iii) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares which
(a) in the case of Shares previously acquired from the Company, have been owned
by the Optionee for more than six months on the date of surrender, and (b) have
a fair market value on the date of surrender equal to or greater than Optionee's
marginal tax rate times the ordinary income recognized, or (iv) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a fair market value equal to the amount
required to be withheld. For this purpose, the fair market value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "TAX DATE").
If the Optionee is subject to Section 16 of the Exchange Act (an
"INSIDER"), any surrender of previously owned Shares to satisfy tax withholding
obligations arising upon exercise of this Option must comply with the applicable
provisions of Rule 16b-3 promulgated under the Exchange Act ("RULE 16B-3") and
shall be subject to such additional conditions or restrictions as may be
required thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(1) the election must be made on or prior to the applicable
Tax Date;
(2) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(3) all elections shall be subject to the consent or
disapproval of the Administrator;
(4) if the Optionee is an Insider, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. Tax Consequences. Set forth below is a brief summary as of the date
of this Option of some of the U.S. federal and California tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(i) Exercise of ISO. If this Option qualifies as an ISO,
there will be no regular U.S. federal income tax liability or California income
tax liability upon the exercise of the Option, although the excess, if any, of
the fair market value of the Shares on the date of exercise over
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<PAGE> 18
the Exercise Price will be treated as an adjustment to the alternative minimum
tax for federal tax purposes and may subject the Optionee to the alternative
minimum tax in the year of exercise.
(ii) Exercise of Nonstatutory Stock Option. If this Option
does not qualify as an ISO, there may be a regular U.S. federal income tax
liability and a California income tax liability upon the exercise of the Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the fair market value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
employee, the Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income at the time of exercise.
(iii) Disposition of Shares. In the case of an NSO, if Shares
are held for at least one year, any gain realized on disposition of the Shares
will be treated as long-term capital gain for U.S. federal and California income
tax purposes. In the case of an ISO, if Shares transferred pursuant to the
Option are held for at least one year after exercise and are disposed of at
least two years after the Date of Grant, any gain realized on disposition of the
Shares will also be treated as long-term capital gain for U.S. federal and
California income tax purposes. If Shares purchased under an ISO are disposed of
within such one-year period or within two years after the Date of Grant, any
gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (1) the fair market value of the Shares on the
date of exercise, or (2) the sale price of the Shares.
(iv) Notice of Disqualifying Disposition of ISO Shares. If
the Option granted to Optionee herein is an ISO, and if Optionee sells or
otherwise disposes of any of the Shares acquired pursuant to the ISO on or
before the later of (1) the date two years after the Date of Grant, or (2) the
date one year after the date of exercise, the Optionee shall immediately notify
the Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee from the early disposition by payment in cash or out
of the current earnings paid to the Optionee.
Salix Pharmaceuticals, Ltd.
a British Virgin Islands International Business
company
By:___________________________________________
Title:________________________________________
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
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<PAGE> 19
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated: ________________________
____________________________________
Signature of Optionee
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<PAGE> 20
EXHIBIT A
SALIX PHARMACEUTICALS, LTD.
1996 STOCK OPTION PLAN
EXERCISE NOTICE
Salix Pharmaceuticals, Ltd.
3600 W. Bayshore Road, Suite 205
Palo Alto, CA 94303
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, , 19 , the undersigned
("Optionee") hereby elects to exercise Optionee's option to purchase shares of
the Common Stock (the "Shares") of Salix Pharmaceuticals, Ltd. (the "Company")
under and pursuant to the Company's 1996 Stock Option Plan, as amended (the
"Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated (the
"Option Agreement").
2. Representations of Optionees. Optionee acknowledges that Optionee
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions. Optionee represents that
Optionee is purchasing the Shares for Optionee's own account for investment and
not with a view to, or for sale in connection with, a distribution of any of
such Shares.
3. Compliance with Securities Laws. Optionee understands and
acknowledges that the Shares may not have been registered under the Securities
Act of 1933, as amended (the "1933 Act"), and, notwithstanding any other
provision of the Option Agreement to the contrary, the exercise of any rights to
purchase any Shares is expressly conditioned upon compliance with the 1933 Act,
all applicable state securities laws and all applicable requirements of any
stock exchange or over the counter market on which the Company's Common Stock
may be listed or traded at the time of exercise and transfer. Optionee agrees to
cooperate with the Company to ensure compliance with such laws.
4. Federal Restrictions on Transfer. Optionee understands that if the
Shares have not been registered under the 1933 Act, they cannot be resold and
must be held indefinitely unless they are registered under the 1933 Act or
unless an exemption from such registration is available and that the
certificate(s) representing the Shares may bear a legend to that effect.
Optionee understands that the Company is under no obligation to register the
Shares and that an exemption may not be available or may not permit Optionee to
transfer Shares in the amounts or at the times proposed by Optionee.
Specifically, Optionee has been advised that Rule 144 promulgated under the 1933
Act, which permits certain resales of unregistered securities, is not presently
available with respect to the Shares and, in any event requires that the Shares
be paid for and then be held for at a specified period before they may be resold
under Rule 144.
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<PAGE> 21
5. Rights as Shareholder. Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in the Plan.
6. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company
shall cause the legends set forth below, or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the Shares
together with any other legends that may be required by state or federal
securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN
THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO
THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
(b) Stop-Transfer Notices. Optionee agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Agreement or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. Market Standoff Agreement. In connection with an underwritten public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than
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<PAGE> 22
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters; provided, however, that
the Optionee need not so agree unless a majority of the Company's officers and
directors and a majority of the holders of at least 5% of the Company's
outstanding securities also agree to be similarly bound.
9. Successors and Assigns. The Company may assign any of its rights
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
10. Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
11. Governing Law; Severability. This Agreement shall be governed by
and construed in accordance with the laws of the State of California excluding
that body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
12. Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
13. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
14. Delivery of Payment. Optionee herewith delivers to the Company the
full Exercise Price for the Shares.
15. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Notice of
Grant/Option Agreement constitute
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<PAGE> 23
the entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and is governed by California law except for that body of
law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: SALIX PHARMACEUTICALS, LTD.
___________________ By:_______________________________
Signature
Its:______________________________
Name:_______________________
Address: 3600 W. Bayshore Rd, Suite 205
Address:____________________ Palo Alto, CA 94303
Attn: Chief Financial Officer
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<PAGE> 1
Exhibit 10.15
CONSULTING AGREEMENT
July 31, 1998
James G, Shook, Ph.D.
2237 Hopkins Avenue
Redwood City, CA 94062
Dear Jim,
1 Salix Pharmaceuticals, Inc., a California corporation (the "Company")
wishes to obtain your services as a consultant on projects agreed by you
and the Company in writing. The initial project on which you are to work
is described on Exhibit A attached hereto. This letter shall constitute
an agreement between you and the Company and contains all the terms and
conditions relating to the services you are to provide.
2. Either you or the Company may terminate this Agreement at any time by at
least thirty (30) days prior written notice. Upon notice of termination
by the Company, you will only perform those services specifically
requested by the Company during such thirty day period. This Agreement
will terminate automatically on the date six (6) months from the date
hereof.
3. As consideration for your services and other obligations you will be
paid as set forth on Exhibit A attached hereto for work on the initial
project. Fees for future projects will be set forth in the agreements
concerning such projects.
4. As additional consideration for your services hereunder, the Company
will provide you with such support facilities and space as may be
required in the Company's judgment to enable you to properly perform
your services hereunder.
5. You shall be reimbursed for reasonable travel and other out-of-pocket
expenses incurred by you in connection with your services under this
Agreement, provided that you provide receipts and obtain prior approval
of the Executive Vice President of the Company for any significant
expenses.
6. Your relationship with the Company shall be that of an independent
contractor and not that of an employee. You will not be eligible for any
employee benefits, nor will the Company make deductions from payments
made to you for taxes, which shall be your responsibility. You shall
have no authority to enter into contracts, which bind the Company or
create obligations on the part of the Company without the express prior
authorization of the Company.
Page 1
<PAGE> 2
7. All services to be performed by you will be as agreed between you and
the Executive Vice President of the Company. You shall be required to
report to the Executive Vice President of the Company concerning your
services performed under this Agreement. The nature and frequency of
these reports will be left to the discretion of the Executive Vice
President.
8. You shall keep in confidence and shall not disclose or make available to
third parties or make any use of any information or documents relating
to your services under this Agreement or to the products, methods of
manufacture, trade secrets, processes, business affairs or confidential
or proprietary information of the Company (other than information in the
public domain through no fault of your own, except with the prior
written consent of the Company or to the extent necessary in performing
tasks assigned to you by the Company. Upon termination of this Agreement
you will return to the Company all documents, and other materials
related to the services provided hereunder or furnished to you by the
Company. Your obligations under this Paragraph 8 shall survive
termination of this Agreement.
9. You shall promptly disclose and hereby transfer and assign to the
Company all right, title and interest to all techniques, methods,
processes, formulae, improvements, inventions and discoveries made or
conceived or reduced to practice by you, solely or jointly with others,
in the course of providing services hereunder or with the use of
materials or facilities of the Company during the period of this
Agreement or which relate to the Company's business or its actual or
demonstrably anticipated research or development (except as otherwise
provided below). When requested by the Company you will make available
to the Company all notes, drawings, data and other information relating
to the above. You will promptly sign any documents (including U.S. and
foreign patent assignments) requested by the Company related to the
above assignment of rights and inventions and will cooperate with the
prosecution of any U.S. or foreign patent applications related to such
rights and inventions. Your obligations under this Paragraph 9 shall
survive termination of this Agreement. This Agreement does not apply to
inventions covered by Section 2870 of the California Labor Code, a copy
of which is attached hereto as Exhibit C, or to inventions which were
made prior to the date of this Agreement and which are listed on Exhibit
B attached hereto (if any).
10. Any amendment to this Agreement must in writing signed by you and the
Company.
11. All notices, requests and other communications called for by this
Agreement shall be deemed to have been given if made in writing and
mailed, postage prepaid, if to you at the address set forth above and if
to the Company at 3600 W. Bayshore Drive, Suite 205, Palo Alto,
California 94303, or to such other addresses as either party shall
specify to the other.
Page 2
<PAGE> 3
12. The validity, performance and construction of this Agreement shall be
governed by the laws of the State of California.
13. This Agreement supersedes any prior consulting or other agreements
between you and the Company.
IF THIS AGREEMENT IS SATISFACTORY, YOU SHOULD EXECUTE AND RETURN THE ORIGINAL
AND RETAIN THE SECOND COPY FOR YOUR FILE.
Dated as of: July 27, 1998
Very truly yours,
SALIX PHARMACEUTICALS, INC.
By: /s/ David Boyle
-------------------------------
David Boyle
Title: Executive Vice President
AGREED AND ACCEPTED:
/s/ JAMES G. SHOOK
- -------------------------------
James G. Shook, Ph.D.
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<PAGE> 4
EXHIBIT A
DESCRIPTION OF INITIAL CONSULTING PROJECT AND COMPENSATION
Salix Pharmaceuticals, Inc. (the "Company") wishes to enlist the
consulting services of James G. Shook. Ph.D. Initial work will consist of the
following description:
1) Provide strategic, operational and regulatory advice on the Colazide
project. Attend project review meetings at Salix, participate in FDA
conference calls and visits to the FDA as requested.
2) Review written documents and answer questions from the Colazide project
team. Respond to requests by phone, FAX and email.
3) Respond to questions, provide advice, review documents and development
plans for rifaximin as requested. If needed, attend project team
meetings at Salix.
Compensation for consulting services rendered under this Agreement will be:
$175.00/hour (Retainer of 8 hours per week)
$175.00/hour (Additional hours beyond 8 hours/week)
Payment will be made upon receipt of invoice for consulting services.
Invoices for travel and other expenses will be submitted with original
receipts.
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EXHIBIT B
INVENTIONS MADE PRIOR TO THIS AGREEMENT AND EXCLUDED FROM PARAGRAPH 9 (IF NONE,
SO STATE):
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<PAGE> 6
EXHIBIT C
Section 2870 of the California Labor Code is as follows:
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that
the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against
the public policy of this state and is unenforceable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
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0
0
<COMMON> 27,592,000
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