-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tz5ItRgQWO9SMuoJnGpqtYNgQnfM3v1FdePt+SdlWD2TQB7iZWrbmBwQgtgpsF8Q SKWAQ3spCE3TPu4CuUapJA== 0000950109-00-004773.txt : 20001206 0000950109-00-004773.hdr.sgml : 20001206 ACCESSION NUMBER: 0000950109-00-004773 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20001205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALIX PHARMACEUTICALS LTD CENTRAL INDEX KEY: 0001009356 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943267443 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-51270 FILM NUMBER: 783681 BUSINESS ADDRESS: STREET 1: 3600 W BAYSHORE RD STREET 2: STE 205 CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6508495900 MAIL ADDRESS: STREET 1: 3600 W BAYSHORE BLVD STREET 2: SUITE 205 CITY: PALO ALTO STATE: CA ZIP: 94303 FORMER COMPANY: FORMER CONFORMED NAME: SALIX HOLDINGS LTD DATE OF NAME CHANGE: 19970807 S-3 1 0001.txt FORM S-3 As filed with the Securities and Exchange Commission on December 5, 2000 Registration Statement No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- SALIX PHARMACEUTICALS, LTD. (Exact name of registrant as specified in its charter) -------------- British Virgin Islands 94-3267443 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
3801 Wake Forest Road Suite 205 Raleigh, North Carolina 27609 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------- ROBERT P. RUSCHER President Salix Pharmaceuticals, Ltd. 3801 Wake Forest Road, Suite 205 Raleigh, North Carolina 27609 (919) 788-8550 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: DONALD R. REYNOLDS Wyrick Robbins Yates & Ponton LLP 4101 Lake Boone Trail, Suite 300 Raleigh, North Carolina 27607 (919) 781-4000 Fax (919) 781-4865 -------------- Approximate date of proposed sale to the public: From time to time after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Title of Each Class of Proposed Maximum Aggregate Securities Amount to be Offering Price Offering Amount of to be Registered Registered (1) Per Share(2) Price(1) Registration Fee - ----------------------------------------------------------------------------------------------- Common Stock, no par value per share....... 2,644,200 shares $6.34375 $16,774,143.75 $4,428.37
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) This registration statement also shall cover any additional shares of common stock which become issuable in connection with the shares registered for resale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the outstanding shares of our common stock (2) Estimated solely for the purpose of calculating the registration fee, based upon the average of the high and low prices of the common stock on the Nasdaq SmallCap Market on November 30, 2000 in accordance with Rule 457. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete. It might change. We + +cannot sell these securities until the registration statement that we have + +filed with the SEC is effective. This prospectus is not an offer to sell, nor + +does it solicit offer to buy, these securities in any state where the offer + +or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 5, 2000 PROSPECTUS - ---------- 2,644,200 Shares SALIX PHARMACEUTICALS, LTD. Common Stock ------------ This is a resale prospectus for the resale of up to 2,644,200 shares of common stock of Salix Pharmaceuticals, Ltd. by the selling shareholders listed herein. Our common stock is traded on the Nasdaq SmallCap Market under the symbol "SLXP". On December 1, 2000, the last sale price of our common stock on the Nasdaq SmallCap Market was $7.375 per share. The selling shareholders may offer the shares through public or private transactions, on or off the Nasdaq SmallCap Market, at prevailing market prices or at privately negotiated prices. See "Plan of Distribution". Our principal executive offices are located at 3801 Wake Forest Road, Suite 205, Raleigh, North Carolina 27609, Attention: Investor Relations. Our telephone number at that location is (919) 788-8550. Investing in our common stock involves risks. See "Risk Factors" beginning on page 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved our securities or determined that this prospectus is truthful or complete. It is illegal for anyone to tell you otherwise. The date of this prospectus is , 2000. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. You should call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public the SEC's web site at "http:/www.sec.gov." The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"): 1. Annual Report on Form 10-K405/A for the year ended December 31, 1999; 2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000, June 30, 2000 and September 30, 2000; 3. definitive proxy solicitation materials dated May 1, 2000; and 4. the description of our stock contained in our registration statements filed pursuant to Section 12 of the Exchange Act, as amended from time to time. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Salix Pharmaceuticals, Ltd. Investor Relations 3801 Wake Forest Road Suite 205 Raleigh, North Carolina 27609 (919) 788-8550 This prospectus is part of a registration statement we filed with the SEC. You should rely only on the information or representations provided in this prospectus. We have authorized no one to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document. 2 THE COMPANY General Salix Pharmaceuticals, Ltd. is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing brand name, prescription pharmaceutical products used in the treatment of a variety of gastrointestinal diseases. We do not do any basic research--instead we engage in product "search and development" efforts. Our strategy is to identify and acquire late-stage proprietary pharmaceutical products having an existing base of safety and efficacy data in humans for the treatment of gastrointestinal disease, and to apply our regulatory, product development, and sales and marketing expertise to commercialize these products. We select products that we believe have potential for rapid regulatory approval, and are marketable to U.S. gastroenterologists through our specialized sales force. Once approval is received for an initial indication, we might perform clinical studies for other broader indications to expand the approved use of the drug. This strategy is designed to reduce the expense, time and risk typically associated with pharmaceutical research and development, and to expedite the commercialization of higher potential products. COLAZAL(TM) (balsalazide disodium) and rifaximin are our first two in- licensed products, demonstrate management's ability to execute this strategy successfully. We in-licensed COLAZAL and completed the development work, which resulted in U.S. Food and Drug Administration (FDA) approval in July 2000. We also in-licensed rifaximin and have completed Phase III clinical trials on the product. We currently intend to strategically market these and future products to U.S. gastroenterologists through our own direct sales force, and enter into distribution relationships outside the United States and in markets where a larger sales organization is necessary. COLAZAL(TM) Our lead product, COLAZAL, is a new chemical entity that was approved by the U.S. Food and Drug Administration in July 2000 for the treatment of mildly to moderately active ulcerative colitis. COLAZAL is the first new chemical entity approved in ten years and the first new therapy in seven years approved by the FDA for this indication. We currently expect to launch COLAZAL in the United States in early 2001 using our own specialty sales force. Based on clinical trials, COLAZAL has shown an efficacy and safety profile that has certain significant advantages over currently available treatments. COLAZAL's formulation allows 99% of the drug to reach the colon without absorption from the stomach or small intestine resulting in significantly less side effects than sulfasalazine, one current treatment, and a faster onset of action than Asacol(R), the market-leading drug in this therapeutic category with sales of $200 million in 1999. Current therapies either have (1) significant side effects causing up to 30-40% of patients to discontinue treatment or (2) do not efficiently deliver maximal doses of the active therapeutic agent to the colon, resulting in a variable and sometimes inadequate response. COLAZAL consists of two molecular structures. The first molecule, 5-ASA, is the active agent and is responsible for the actual therapeutic effect in the treatment of ulcerative colitis. The second molecule, 4-ABA, is a non-toxic carrier molecule that enables the 5-ASA molecule to travel to the colon without being absorbed in the bloodstream. The molecules are joined by an azo-bond that is cleaved in the colon by bacteria that exist only in the colon, allowing for the release of the 5-ASA active ingredient targeted at the disease site. This unique delivery mechanism provides COLAZAL with more reliable and consistent delivery of 5-ASA to the colon than pH delivery products such as Asacol. Asacol consists of 5-ASA with a pH sensitive coating designed to release 5-ASA at a certain range of pH levels. The problem with such a delivery mechanism is that the pH levels within gastrointestinal tracts can vary substantially from patient to patient, and even within a given patient depending on such factors as diet and disease state. Thus, Asacol frequently releases the 5-ASA too early (before reaching the colon), or too late (after passing through the colon), thus reducing the amount of 5-ASA available in the colon to treat the disease. The improved 5-ASA delivery of COLAZAL over Asacol has 3 been established in Phase III studies in peer-reviewed data, where COLAZAL provided a significant improvement over Asacol in time to relief of symptoms in ulcerative colitis patients with active disease. Ulcerative colitis is a form of inflammatory bowel disease, or IBD, characterized by inflammation of the lining of the colon. Symptoms of active ulcerative colitis include rectal bleeding, abdominal pain, increased stool frequency, loss of appetite, fever and weight loss. The cause of ulcerative colitis is unknown, and there is no known cure except for removal of the colon. This chronic disease affects roughly 500,000 people in the United States, typically under the age of 40. In 1999, U.S. sales of prescription products indicated to treat ulcerative colitis totaled approximately $350 million. This market in terms of prescription dollar sales has been growing at an annual compound rate exceeding 25% for the last 10 years. Rifaximin Our second drug, rifaximin, is a broad-spectrum, gastrointestinal specific antibiotic that we intend to establish as the drug of choice for the treatment of gastrointestinal infections. We have recently completed a Phase III clinical study comparing rifaximin to placebo for the treatment of bacterial infectious diarrhea, or BID. Analysis of the results has started and a New Drug Application, or NDA, submission is expected in the second half of 2001. Over eight million patient visits to physicians occur annually in the United States due to diarrhea caused by a wide variety of organisms that could potentially be treated with rifaximin. Each year between 20% and 50% of international travelers, an estimated 10 million persons, develop diarrhea, with approximately 80% of the cases caused by bacteria. We believe the advantages of rifaximin are two-fold: (1) site-targeted antibiotic delivery; and (2) superior tolerability. The lack of systemic absorption of the drug (less than 0.1% is absorbed) when taken orally allows high concentrations of this broad-spectrum antibiotic to treat bacterial infections throughout the gastrointestinal tract. The drug causes fewer side effects or discomforts such as nausea, headache or dizziness observed with currently available, highly-absorbed antibiotics and is less likely to induce systemic resistance and/or drug-to-drug interaction. To date, peer reviewed data from Phase III BID studies have not been published, but they are expected to show that rifaximin has comparable efficacy to the market leader, ciprofloxacin. Additional unpublished Phase III study results comparing rifaximin to placebo for BID are expected to show statistically significant improvement in the use of rifaximin in resolving BID in travelers. Rifaximin also received Orphan Drug status for a second indication, the treatment of hepatic encephalopathy. Hepatic encephalopathy is a rare neuropsychiatric syndrome caused by a build-up of toxic products (such as ammonia) due to advanced liver disease. Symptoms include intellectual deterioration, an altered state of consciousness, personality and behavior changes, and neurologic abnormalities. There are approximately 140,000 cases of hepatic encephalopathy per year in the United States. Current antibiotic treatments are considered inadequate due to their limited antibacterial spectrum and broad side effects, including gastrointestinal and renal toxicity. Lactulose, the only FDA approved therapy for hepatic encephalopathy, reduces the amount of toxic products accumulated in the intestine by increasing the number of bowel movements per day to an amount considered intolerable by patients. We expect to commence Phase III clinical trials for rifaximin for this indication early next year, followed by an NDA submission with the FDA in 2002. Additionally, we intend to investigate the use of rifaximin in other indications such as antibiotic-associated colitis, prophylaxis prior to bowel surgery, diverticulitis, bacterial overgrowth of the small intestine, and pseudomembraneous colitis. Sales and Marketing We are establishing a direct sales force to promote our products to the fastest adopting, highest prescribing physicians in the United States responsible for treating gastrointestinal disease. In 1999, there were 4 approximately 26 million patient visits to U.S. gastroenterologists, and these physicians wrote approximately 35 million prescriptions valued at $2.4 billion. Because there are only approximately 9,000 active prescribing gastroenterologists in the United States (compared to over 300,000 U.S. based general practitioners), we can effectively and efficiently market our products directly to gastroenterologists through a relatively small specialty sales force. This strategy allows us to attain the higher profit margins and benefits of direct control over distribution obtained in selling products directly, while also avoiding the significant costs, risks and infrastructure inherent in assembling a large sales force. We intend to have the sales force ready to begin marketing COLAZAL in January 2001. Pipeline Strategy We currently intend to leverage our expertise in developing and marketing products by continuing to expand indications for approved products; in- licensing or acquiring new pharmaceutical products for the treatment of gastrointestinal disease; and seeking co-promotion relationships for marketed pharmaceutical products that are not adequately promoted to gastroenterologists. Large pharmaceutical companies dominate the U.S. pharmaceutical marketplace, but these companies are increasingly divesting products that, due to mergers or change in strategic fit, do not meet the threshold level of sales required by such companies. Accordingly, we believe there will be a significant pool of potential gastroenterology products that we can acquire, in-license, develop and market through our specialty sales force. 5 THE OFFERING Shares of common stock offered by us.. None Shares of common stock which may be sold by the selling shareholders..... 2,644,200(1) Use of proceeds....................... We will not receive any proceeds from the resale of shares offered hereby, all of which proceeds will be paid to the selling shareholders Risk factors.......................... The purchase of our common stock involves a high degree of risk. You should carefully review and consider "Risk Factors" beginning on page 8. Nasdaq SmallCap Market Trading Symbol............................... SLXP
- -------- (1) Includes 384,200 shares of common stock issuable upon exercise of warrants. 6 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this prospectus discuss our plans and strategies for our business and are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions are meant to identify these statements as forward-looking statements, but they are not the exclusive means of identifying them. The forward-looking statements in this prospectus reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed or implied by these statements, including: . The success or failure of our efforts to implement our business strategy; . Our limited sales and marketing experience; . The high cost and uncertainties relating to clinical trials and regulatory reviews for pharmaceutical products; . The need for additional funds; . The unpredictability of the duration and results of regulatory review of new drug applications and investigational new drug applications; . Our dependence on our two pharmaceutical products, balsalazide and rifaximin, and the uncertainty of market acceptance of those products; and . The other factors discussed in the "Risk Factors" section and elsewhere in this prospectus In evaluating these statements, you should specifically consider the risks described above and in other parts of this prospectus, including the "Risk Factors" section. These factors may cause our actual results to differ materially from any forward-looking statement. 7 RISK FACTORS You should be aware that there are various risks to an investment in our common stock, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide to invest in shares of our common stock. If any of the following risks or other risks not known to us now or that we currently believe to not be significant develop into actual events then our business, financial condition, results of operations or prospects could be negatively affected. If that happens, the market price of our common stock could decline and you may lose all or part of your investment. Lack of Sales and Marketing Experience We have no experience in marketing and selling our products either directly or through our relationships with licensees. We are in the process of establishing our own direct sales force for the purpose of achieving direct sales of balsalazide, rifaximin and other future products in the United States. There can be no assurance that our marketing and direct sales efforts will be successful. Our sales and marketing strategy for balsalazide outside of the United States relies on our third-party licensees, to whom we have granted, or foresee granting, exclusive marketing rights. There can be no assurance that either Menarini International or Shire Pharmaceuticals or new licensees will market balsalazide successfully in any country in which they have exclusive rights. Dependence on Currently Licensed Products; Uncertainty of Regulatory Approval of Our Products Our future success will depend, among other factors, on our ability to in- license, develop and commercialize new pharmaceutical products. We currently license two pharmaceutical products, balsalazide and rifaximin, and our prospects over the next three to five years are substantially dependent on regulatory approval and successful commercialization of these products. We have in-licensed rights to balsalazide and rifaximin from Biorex and Alfa Wassermann, respectively. In addition, we have entered into agreements relating to the development, commercialization, manufacture and marketing of balsalazide with Menarini for Italy, Spain, Portugal and Greece, and with Shire Pharmaceuticals for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, the Netherlands, Switzerland, Sweden and the United Kingdom. Development, manufacture and marketing of both balsalazide and rifaximin are subject to extensive regulation by governmental authorities in the United States and other countries. The FDA only recently approved balsalazide and has not approved rifaximin for use in the United States. If regulatory approval of rifaximin 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, as with balsalazide, 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. We received in May 1998 notification of approval of balsalazide as a treatment for acute ulcerative colitis in Austria, Belgium, Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of the European Union. Our then partners 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. Resubmission in these countries will primarily be the responsibility of our licensees, Shire Pharmaceuticals and Menarini, and there can be no assurance that they will pursue such applications or that 8 they will be successful. There can be no assurance that balsalazide 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 for the approved indications, or that our marketing partners will launch balsalazide in the countries where the marketing application has been approved. With respect to rifaximin, Alfa Wassermann recently completed a clinical trial in Spain relating to the drug as a therapy for hepatic encephalopathy. We determined through discussions with the FDA that this study is not sufficient support for the filing of an NDA with the FDA. We recently completed a Phase III clinical study comparing rifaximin to placebo for the treatment of bacterial infectious diarrhea. We are analyzing the results of the study, and if the results are promising, expect to file a new drug application. There can be no assurance that this study for rifaximin will demonstrate that the drug is safe and effective for the indication tested, that such study will support the filing of an NDA for rifaximin as a therapy for infectious diarrhea, that in the event an NDA is filed with the FDA, we will be successful in obtaining regulatory approval in the United States or Canada. We expect that a significant portion of our 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 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 our business, financial condition, and results of operations. History of Operating Losses; Expectation of Future Losses Our operations have consisted primarily of development of our products and sponsorship with third parties of research and clinical trials. We have had net losses in all but one quarter and have not realized any material operating revenues from product sales, either directly by us or indirectly through our development and distribution partners. Substantially all of our revenues to date have been derived from milestone payments from our collaborative partners related to the development of balsalazide and limited product sales of balsalazide in the United Kingdom. As of September 30, 2000, we had incurred cumulative losses since inception of approximately $23.8 million. We currently expect operating losses to continue until product revenues reach a sufficient level to support ongoing operations. Our future operating performance will depend on the timing of regulatory approvals of balsalazide in various principal European countries and rifaximin in the United States and Canada, particularly the timing of FDA approval, and, if such approvals can be obtained, will also depend on market acceptance, and our ability to secure manufacture of those products at an acceptable cost. Dependence On Collaborative Partners/New Collaborative Partner The commercialization of balsalazide outside of the United States is entirely dependent on Menarini and Shire in their respective territories. We currently intend also to seek a new partner or partners for other countries. There can be no assurance that we will be able to find a new distribution partner for these countries, or that approvals in those countries will be granted. Although Menarini 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 Menarini to maintain its exclusivity. Our agreement with Menarini provides for a term of not less than 10 years from first launch. Although Menarini has advised us that it intends to seek approval in the countries for which marketing applications were withdrawn, the responsibility to complete the approval process lies with Menarini and not us. There can be no assurance that Menarini will seek such approvals, or it does, that approval will be granted. Although Shire has the right to develop, distribute and market balsalazide, there are no specific financial thresholds that must be achieved by Shire to maintain its exclusivity. Our agreement with Shire has no term and neither we nor Shire can terminate the agreement unless by mutual agreement or because of a breach of the agreement. Although Shire has agreed to use all reasonable commercial endeavors to obtain regulatory approvals for balsalazide in France, Germany and the Netherlands as soon as reasonably practicable, the responsibility to do so is Shire's and not ours. There can be no assurance that Shire will succeed in obtaining approvals in those countries or any other countries. 9 There can be no assurance that we will be able to negotiate acceptable collaborative arrangements in the future, or that our current or future collaborative arrangements, including the agreements with Menarini and Shire, will be successful or will not be terminated by the other party. Although we believe 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 our control. Failure by us and our collaborative partners to develop, commercialize, manufacture or market products, including balsalazide, would have a material adverse effect on our business, financial condition, and results of operations. Dependence On Third Parties For Manufacturing We currently do not manufacture our potential pharmaceutical products, including balsalazide and rifaximin, and, therefore, are dependent on contract manufacturers for the production of such products for development and commercial purposes. We have experienced supply problems due to our dependence upon a limited number of contract manufacturers which have manifested in shortages of finished product in the market place. In the event that we are unsuccessful in obtaining or retaining third-party manufacturing or if our manufacturers experience production difficulties, delays or disruptions or fail to comply with regulatory requirements, we may not be able to obtain adequate supplies of products in a timely fashion or at acceptable quality, and price, or to commercialize our potential products as planned. No assurances can be given that we, or our manufacturing partners, will be able to manufacture future developed products in commercial quantities sufficient to meet our business objectives. Under the terms of our agreement with Menarini, the obligations of Menarini to purchase product will terminate under certain circumstances in which we are unable or unwilling to adequately supply them with product. In such circumstances Menarini is granted a temporary license to manufacture balsalazide. Under certain situations, such manufacturing license may become permanent, in which case our revenues from the arrangements could be, depending on the circumstances, severely reduced or eliminated. In our agreement with Shire, if the price at which Shire actually manufactures balsalazide, by itself or through third parties, exceeds the price ceiling set in the agreement for specified periods and quantities, we must pay Shire the excess cost, which would reduce our revenues. We anticipate that future agreements with new distribution partners will contain clauses similar to those in the Menarini and Shire agreements. Moreover, contract manufacturers that we might 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 rifaximin will be adversely affected. 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 our products might be manufactured. In addition, if the facilities cannot pass regular post-approval inspections, manufacturing and distribution might 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 our proposed products would have a material adverse effect on our business, financial condition and results of operations. Dependence On In-Licensing And Acquisition Of New Products For Future Growth Whether or not balsalazide or rifaximin receives regulatory approvals and is successfully marketed, our ability to grow in the future will depend on our success in in-licensing or acquiring additional pharmaceutical products. We currently intend to seek 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 us. Uncertainty Of Market Acceptance Our future success will depend in part on our ability to develop and commercialize products, including balsalazide and rifaximin. Assuming we can successfully develop such products and obtain regulatory 10 approvals, their future success will depend upon their acceptance by the medical community and third-party payers as useful and cost-effective. Market acceptance will depend upon several factors, including the establishment of the safety, effectiveness, patient tolerance, and cost of our products relative to those of our competitors. We and our collaborative partners may be required to engage in extensive advertising, educational programs or other means to market our products. Failure of any of our products to achieve market acceptance would have a material adverse effect on our business, financial condition and results of operations. Dependence On Exclusive Licenses Our rights to balsalazide and rifaximin are derived from its license agreements with Biorex and Alfa Wassermann, respectively. Our rights under these licenses are subject to early termination under certain circumstances, including material breach by us, the bankruptcy or insolvency of the company or our failure to satisfy our manufacturing obligations under our agreements with distribution partners. In the event that Biorex or Alfa Wassermann terminates their respective license agreements, we 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. Our licenses for balsalazide and rifaximin provide that our royalty obligations may extend beyond the expiration date of the underlying patents, which could have a material adverse effect on our 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, our license agreement with Alfa Wassermann also provides that we 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 our 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 our 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 balsalazide composition of matter and method of treating ulcerative colitis with balsalazide expire in July 2001 in the United States, July 2006 in the United Kingdom, May 2002 in France, July 2006 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. We have been successful in obtaining patent extensions of five years in both Italy and the United Kingdom, and we believe it may be granted additional 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. However, there can be no assurance that any extensions will be granted. We have 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 of such generic versions could have an adverse effect on our business, financial condition, and results of operations. Our success will depend in part on our ability to obtain United States and foreign patent protection for our products and processes, preserve our 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, our present or future technology. 11 There can be no assurance that any other patents will be issued on any of our 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 our technology or that the patents will provide protection against competitive products or otherwise be commercially valuable. Furthermore, our patent and other proprietary rights are subject to uncertainty. Our patent or other proprietary rights related to our products might conflict with current or future rights of others. For instance, there is no assurance that the use of our technology will not infringe the patent rights of others. For the same reasons, the products of others could infringe our patent or other proprietary rights. Litigation or patent interference proceedings, either of which could result in substantial cost to us, may be necessary to enforce any patents issued to us and our other proprietary rights 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 us. Any adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease selling our products. In addition to patent protection, we also rely on trade secrets, proprietary know-how and technological advances which we seek to protect, in part, through confidentiality agreements with our collaborative partners, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently developed by others. There can be no assurance that we will be able to obtain a license to any third-party technology that we may require to conduct our business or that, if obtainable, such technology can be licensed at a reasonable cost. Failure by us to obtain a license to any technology that we might require to commercialize our technologies or products will have a material adverse effect on our operations. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information or obtain access to our know-how, or that others will not be issued patents which prevent the manufacture or sale of our products or require licensing and the payment of significant fees or royalties by us in order for us to be able to carry on our business. Litigation, which could result in substantial cost to us, may be necessary to enforce or defend our patents or proprietary rights. Intense Competition Competition in the pharmaceutical industry is intense and characterized by extensive research efforts and rapid technological progress. We believe 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 our current and potential products. In particular, we are aware of products in research or development by competitors that address the diseases being targeted by our products. There can be no assurance that developments by others will not render our 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 us. Many of our competitors have substantially greater financial, marketing and personnel resources and development capabilities than we do. For example, many large, well capitalized companies already offer products in the United States and Europe that target the proposed indications for balsalazide, including mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay S.A., The Procter & Gamble Company and Shire Pharmaceuticals), 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 our products, including balsalazide, and could have a material adverse effect on our business, financial condition and results of operations. In addition, manufacturers of 12 generic drugs may seek to compete directly with our products in the absence of effective patent protection or non-patent exclusivity protection. Currency Fluctuations A significant portion of our 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 we conduct our business relative to the United States dollar have caused and will continue to cause currency transaction gains and losses. Although translation into our reporting currency has not historically had a material impact on our financial position, due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurance that we will not experience currency losses in the future. We have not previously undertaken hedging transactions to cover our currency exposure but may hedge a portion of our currency exposure in the future we deem appropriate. Management Of Growth And Expansion We expect to experience significant growth in the number of our employees and the scope of our operations. We have recently established corporate headquarters in Raleigh, North Carolina, and have begun to assemble our direct sales force. This growth and expansion is expected to place a significant strain on our management and operations. Our ability to manage such growth effectively will depend upon our ability to broaden our management team and our ability to attract, hire, and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our employee base. Our inability to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations. Dependence On Key Personnel; Ability To Recruit Personnel We are dependent upon a number of key management and technical personnel, including Randy Hamilton, Chairman, Robert Ruscher, President and Chief Executive Officer, Lorin Johnson, Senior Vice President, Research and Development, Carolyn Logan, Senior Vice President Sales and Marketing, Adam Derbyshire, Chief Financial Officer, Lise Riopel, PhD., Vice President, Clinical Affairs, and Alvaro Carvajal, Vice President, Information Systems. Because the loss of the services of one or more of these key employees could have a material adverse effect on our operations, we have entered into employment agreements with several of these key personnel to provide for an extended transition period in the event of resignation. Our success will also depend on our ability to attract and retain additional highly qualified management and technical personnel. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers. With the recent regulatory approval for balsalazide in the United States, we have begun hiring and training a small direct sales force to market balsalazide in the United States. New employees, particularly new sales and marketing employees, will require substantial training and education concerning balsalazide and any future products. There can be no assurance that we will be successful in attracting and retaining qualified personnel as necessary, and the failure to do so could have a material adverse effect on our business, operating results and financial condition. Price Volatility; Limited Trading Volume 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 us or our competitors, developments or disputes concerning proprietary rights, publicity regarding 13 actual or potential medical results relating to products under development by us or our 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 our financial results, might have a significant impact on the market price of our common stock. Our common stock was traded on The Toronto Stock Exchange from May 1996 to November 24, 2000. Our common stock began trading on the Nasdaq SmallCap Market on November 20, 2000. Prior to listing on the Nasdaq SmallCap Market, trading volume in our common stock on The Toronto Stock Exchange had been low, and there can be no assurances that an active trading market will develop or be sustained on the Nasdaq SmallCap Market, or any other exchange or dealer quotation system. 14 USE OF PROCEEDS We will not receive any of the proceeds from the sale of shares of the common stock offered by the selling shareholders. We are registering the shares for sale to provide the holders thereof with freely tradable securities, but the registration of such shares does not necessarily mean that any of such shares will be offered or sold by the holders thereof. 15 SELLING SHAREHOLDERS The shares offered under this prospectus may be sold from time to time for the account of the selling shareholders named in the following table. The table also contains information regarding the selling shareholders' beneficial ownership of shares of our common stock as of November 27, 2000. Except as otherwise disclosed in the footnotes, 10% of the shares listed with respect to each selling shareholder represents shares of common stock issuable upon exercise of warrants. Percentages are based on 11,302,771 shares outstanding as of November 27, 2000, plus in each case the shares issuable upon exercise of the related warrants, all of which are currently exercisable.
Beneficial Ownership Prior to Offering ----------------------- Percentage Number of Number of Shares to Name of Shares(1) Class(2) be Sold ---- ------------ ---------- --------- Leonard J. Adams............................ 13,200 * 13,200 ANO LLC..................................... 4,400 * 4,400 Robert Apple................................ 5,720 * 5,720 Aries Domestic Fund II, L.P................. 14,058.4 * 14,058.4 Aries Domestic Fund, L.P.................... 41,298 * 41,298 Aries Master Fund II........................ 85,443.6 * 85,443.6 Don A. Backlund............................. 4,400 * 4,400 Baker Street Capital Partners, L.P.......... 66,000 * 66,000 Baker Street Technology Partners, L.P....... 66,000 * 66,000 John Bannon................................. 4,400 * 4,400 Kevin & Deborah Barbary..................... 5,500 * 5,500 Bear Stearns Security Corp Trustee for William S. Ellsworth, Jr................... 4,400 * 4,400 The Blinn Family Trust...................... 4,400 * 4,400 William R. Brown............................ 4,400 * 4,400 Allen Chao and Lee Hua Chao Family Trust.... 35,200 * 35,200 Andrew and Lydia Chesnick................... 4,400 * 4,400 Janet Childs................................ 5,500 * 5,500 John F. Combs............................... 7,040 * 7,040 John J. Connor.............................. 5,280 * 5,280 Mark Cooper................................. 4,400 * 4,400 Alan R. Curtis.............................. 4,400 * 4,400 DCF Life Sciences Fund Limited.............. 88,000 * 88,000 Deerfield International Limited............. 104,544 * 104,544 Deerfield Partners, L.P..................... 282,656 2.5% 282,656 Franklin Strategic Series--Franklin Global Health Care Fund........................... 176,000 1.6% 176,000 Paul & Laurie Frasier....................... 5,500 * 5,500 William A. Galvin........................... 8,800 * 8,800 William H. Gaudreau Trust................... 4,400 * 4,400 David Goldberg.............................. 4,400 * 4,400 Peter Grabler............................... 13,200 * 13,200 Donald D. Graham............................ 8,800 * 8,800 Peter Greco................................. 8,800 * 8,800 Martin M. Hale.............................. 11,000 * 11,000 Charles J. Hammarstrom, Jr.................. 8,800 * 8,800 William R. Haney, Sr........................ 8,800 * 8,800 Leonard S. Jacob & Sandra Jacob............. 5,500 * 5,500 Judy G. Johnson Living Trust Dated 10/6/99.. 4,400 * 4,400 Darlene L. Jordan........................... 6,600 * 6,600 Gerald R. Jordan Foundation................. 16,500 * 16,500 Gerald R. Jordan, Jr........................ 93,500 * 93,500 Jordan Family 1984 Trust.................... 16,500 * 16,500 Yi H. Kao, M.D. & Marianne Kao.............. 4,400 * 4,400 Jeffrey M. Lavin............................ 4,400 * 4,400
16
Beneficial Ownership Prior to Offering ------------------------- Percentage Number of Number of Shares to Name of Shares(1) Class(2) be Sold ---- ------------ ---------- --------- Leerink Swann & Company................ 158,200(1) 1.4% 158,200(1) Lighthouse Management L.P.............. 49,500 * 49,500 Wayne Lipson........................... 4,400 * 4,400 Steven K. Luminais..................... 4,400 * 4,400 Norman A. Marowitz..................... 4,400 * 4,400 Joe Mayer.............................. 4,400 * 4,400 Timothy W. McGibney.................... 4,400 * 4,400 MLPF&S Custodian FPO Bankruptcy Affiliates Basic...................... 4,400 * 4,400 Octavio and Diana Morales Living Trust Dated March 19, 1999.................. 4,400 * 4,400 mRNA Fund L.P.......................... 5,022.6 * 5,022.6 Mark & Lynda E. Mscisz................. 4,400 * 4,400 Steven Mscisz.......................... 4,400 * 4,400 Charles F. Norton, Jr.................. 6,160 * 6,160 Eric & Dierdre K. Okamoto, Joint Tenants............................... 4,400 * 4,400 Oxford Bioscience Partners (Adjunct) III, L.P.............................. 39,600 * 39,600 Oxford Bioscience Partners (Bermuda) III Limited Partnership............... 60,297.6 * 60,297.6 Oxford Bioscience Partners III, L.P.... 423,079.8 3.7% 423,079.8 Pipes Corporate Strategies Ltd. Investment Manager UBS O'Connor LLC... 246,400 2.2% 246,400 Harry T. Poteat, MD, ScD............... 22,000 * 22,000 ProMed Partners, L.P................... 140,800 1.2% 140,800 Rainbow Trading Corporation............ 17,600 * 17,600 Andrew Randall......................... 4,400 * 4,400 Steven M. Ratner 1999 Irrevocable Trust................................. 4,400 * 4,400 Michael A. Russell..................... 4,400 * 4,400 Wayne Saker............................ 13,200 * 13,200 Jonathan P. Schwartz................... 4,400 * 4,400 Ira Sherman and Darlene Bryant, As Joint Tenants......................... 8,800 * 8,800 Shuman & Ross Profit Sharing Trust F/B/O Howard S. Ross.................. 4,400 * 4,400 Walter G. Steinkrauss & Deborah A. Slocum................................ 4,400 * 4,400 Samuel & Shirley Straface.............. 4,400 * 4,400 Willoughby Stuart...................... 17,600 * 17,600 Bertram C. Tackeff & Sterra S. Tackeff, JTWROS................................ 17,600 * 17,600 Todd Taplin............................ 4,400 * 4,400 Jiri Tichy & Dagmar Tichy.............. 8,800 * 8,800 Toledano Capital LLC................... 8,800 * 8,800 Tribophysics Corporation............... 13,200 * 13,200 Tryphon Fund, Inc...................... 17,600 * 17,600 Charles B. Wells....................... 4,400 * 4,400 Scott Wilfong.......................... 6,600 * 6,600 John W. Wilkinson...................... 4,400 * 4,400 --------- --- --------- Totals:................................ 2,644,200 2,644,200 ========= === =========
- -------- * Less than 1% (1) Consists of a warrant to purchase 158,200 shares of our common stock. We issued an aggregate of 2,260,000 shares of our common stock to the selling shareholders in connection with our $14.1 million private placement in November 2000. We also issued to the selling shareholders warrants to purchase a total of 226,000 shares of common stock in connection with this private placement and warrants to purchase a total of 158,200 shares of common stock to the placement agent who assisted in the private placement. We agreed to register all of these shares, including those issuable upon exercise of the warrants, and to pay substantially all of the expenses of offering them under this prospectus. 17 PLAN OF DISTRIBUTION The selling shareholders may offer the shares at various times in one or more of the following transactions: . on the Nasdaq SmallCap Market; . in the over-the-counter market; . in transactions other than market transactions; . in connection with short sales of shares of our common stock; . by pledge to secure debts or other obligations; . in connection with the writing of non-traded and exchange-traded call options, in hedge transactions and in settlement of other transactions in standardized or over-the-counter options; or . in a combination of any of the above. The selling shareholders may sell shares at market prices then prevailing, at prices related to prevailing market prices, at negotiated prices or at fixed prices. In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. The selling shareholders may use broker-dealers to sell shares. If this happens, broker-dealers will either receive discounts or commissions from the selling shareholders, or they will receive commissions from purchasers of shares for whom they have acted as agents. The selling shareholders and any broker-dealers who act in connection with the sale of the shares hereunder may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions they receive and proceeds of any sale of the shares may be deemed to be underwriting discounts and commissions under the Securities Act. Neither we nor the selling shareholders can presently estimate the amount of such compensation. We know of no existing arrangements between any selling shareholders, any other shareholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares. We will pay all of the expenses incident to the registration, offering and sale of the shares to the public other than commissions or discounts of underwriters, broker-dealers or agents. We also agreed to indemnify the selling shareholders and certain related persons against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable. We have advised the selling shareholders that during such time as they may be engaged in a distribution of the shares included in this prospectus they are required to comply with Regulation M promulgated under the Securities Exchange Act of 1934, as amended. With certain exceptions, Regulation M precludes the selling shareholders, any affiliated purchasers, and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the shares offered hereby. This offering will terminate on the earlier of (a) the date on which all of the shares are eligible for resale in a three-month period pursuant to Rule 144 under the Securities Act, or (b) the date on which all shares 18 offered by this prospectus have been sold by the selling shareholders, except that this offering will terminate as to the 158,2000 shares offered by Leerink Swann & Company on the earlier of the above or November 8, 2005. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements included in our Annual Report on Form 10-K405/A for the year ended December 31, 1999 as set forth in their report, which is incorporated by reference in the registration statement. Our consolidated financial statements are incorporated by reference in this prospectus in reliance upon Ernst & Young LLP's report given on their authority as experts in accounting and auditing. LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina. 19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No one (including any salesman or broker) is authorized to provide oral or written information about this offering that is not included in this prospectus. ---------------- TABLE OF CONTENTS
Page ---- Where You Can Find More Information........................................ 2 The Company................................................................ 3 The Offering............................................................... 6 Special Note Regarding Forward-Looking Statements.......................... 7 Risk Factors............................................................... 8 Use of Proceeds............................................................ 15 Selling Shareholders....................................................... 16 Plan of Distribution....................................................... 18 Experts.................................................................... 19 Legal Matters.............................................................. 19
---------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,644,200 Shares SALIX PHARMACEUTICALS, INC. Common Stock ---------------- PROSPECTUS ---------------- , 2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses payable by the registrant in connection with the filing of this Form S-3 Registration Statement: SEC registration.................................................... $ 4,428.37 Nasdaq SmallCap Market listing fee.................................. 10,000.00 Printing costs...................................................... 5,000.00 Legal fees.......................................................... 25,000.00 Accounting fees and expenses........................................ 5,000.00 Miscellaneous expenses.............................................. 5,571.63 ---------- Total............................................................. $55,000.00 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrants'Articles of Association provide that the Registrant may indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings of any person who is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal or administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of the Registrant; or is or was, at the request of the Registrant, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise. The Registrant may only indemnify a person if the person acted honestly and in good faith and with a view to the best interests of the Registrant and, in the case of criminal proceedings, the person had no reasonable cause to believe that his or her conduct was unlawful. The Registrant maintains liability insurance insuring its officers and directors against liabilities that they may incur in such capacities. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
Exhibit No. Description ------- ----------- 3.1(a) Memorandum of Association of Salix Pharmaceuticals, Ltd., as amended 3.2(a) Articles of Association of Salix Pharmaceuticals, Ltd., as amended 4.1(a) Form of Common Share Certificate. 4.2(a) Form of Warrant to purchase Common Shares. 4.3(a) Form of Warrant to purchase Common Shares. 5.1 Opinion of Wyrick Robbins Yates & Ponton LLP. 10.1(a) Form of Indemnification Agreement between the Registrant and each of its officers and directors. 10.2(a) Form of 1994 Stock Plan for Salix Pharmaceuticals, Ltd. and form of Stock Option and Restricted Stock Purchase Agreements thereunder.
II-1
Exhibit No. Description ------- ----------- 10.3(k) Form of 1996 Stock Plan for Salix Pharmaceuticals, Ltd. and form of Notice of Stock Option Grant and Stock Option Agreement thereunder, as amended September 14, 2000. 10.4(b) Amendment Agreement effective as of September 17, 1992 by and among Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex Laboratories, Ltd. 10.5(b) License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. and letter agreement amendments thereto. 10.6(b) Research and Development Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto. 10.7(b) Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra. 10.8(b) Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc. and Biorex Laboratories, Limited, dated April 16, 1993. 10.9(b) Co-Participation Agreement, dated April 30, 1993 between Salix Pharmaceuticals, Inc. and AB Astra as amended by Amendment No. 1 thereto effective September 30, 1993. 10.9.1(c) Letter Agreement dated October 16, 1998 to Co-Participation Agreement dated April 30, 1993 by and between Salix Pharmaceuticals, Inc. and AB Astra. 10.10(b) Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals Limited and Glycyx Pharmaceuticals, Ltd. 10.11(b) Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals, Ltd. and Menarini International Operations Luxembourg SA and amendments thereto. 10.12(b) License Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd. 10.13(b) Supply Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd. 10.14(a) Lease dated January 1, 1992 by and between Kontrabecki Mason Developers and Salix Pharmaceuticals, Inc., as amended. 10.15(d) Consulting Agreement dated July 31, 1998 between Salix Pharmaceuticals, Ltd. and James Shook. 10.16(e) Severance Agreement and Mutual Release dated January 6, 1999 between Salix Pharmaceuticals, Ltd. and David Boyle. 10.17(e) Letter of Intent dated March 5, 1999 between Glycyx Pharmaceuticals, Ltd. and Fujirebio. 10.18(f) Employment Agreement effective May 6, 1999 between Salix Pharmaceuticals, Ltd. and Randy W. Hamilton. 10.19(f) Employment Agreement effective May 6, 1999 between Salix Pharmaceuticals, Ltd. and Dr. Lorin K. Johnson. 10.20(j) Employment Agreement effective May 15, 2000 between Salix Pharmaceuticals, Ltd. and Robert P. Ruscher. 10.21(f) Employment Agreement effective May 6, 1999 between Salix Pharmaceuticals, Ltd. and John Brough. 10.22(g) Termination and Settlement Agreement dated as of December 22, 1999, by and between Astra AB and Salix Pharmaceuticals Inc. (a wholly owned subsidiary of Salix Pharmaceuticals, Ltd.). 10.23(g) Agreement dated December 22, 1999, between Glycyx Pharmaceuticals, Ltd. (a wholly owned subsidiary of Salix Pharmaceuticals, Ltd.) and Astra AB. 10.24(h) Shareholder Protection Rights Agreement, dated as of January 13, 2000 between Salix Pharmaceuticals, Ltd. and Montreal Trust Company of Canada.
II-2
Exhibit No. Description ------- ----------- 10.25(j)* Agreement between Glycyx Pharmaceuticals, Ltd. and Shire Pharmaceuticals Group, PLC 10.26(j)* Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. 10.27 Form of Subscription Agreement and Warrant for November 2000 private placement. 21.1(a) Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Wyrick Robbins Yates & Ponton LLP (contained in Exhibit 5.1) 24.1 Power of Attorney (see page II-5) 27.1(k) Financial Data Schedule.
- -------- * Confidential treatment granted. (a) Incorporated by reference to the exhibit bearing the same number filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333- 33781), which the United States Securities and Exchange Commission declared effective on October 16, 1997. (b) Incorporated by reference to the exhibit bearing the same number filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333- 33781), which the United States Securities and Exchange Commission declared effective on October 16, 1997. The Registrant has received confidential treatment with respect to certain portions of this exhibit. Such portions have been omitted from this exhibit and have been filed separately with the United States Securities and Exchange Commission. (c) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 1998. (d) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1998. (e) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. (f) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1999. (g) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K dated December 28, 1999. (h) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K dated January 13, 2000. (i) Incorporated by reference to the exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. (j) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 2000. (k) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 2000. II-3 ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes as follows: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement related to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person or the registrant in the successful defense of any action, suite or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certified that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on this 4th day of December 2000. SALIX PHARMACEUTICALS, LTD. /s/ Robert P. Ruscher By: _________________________________ Robert P. Ruscher President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert P. Ruscher and Adam C. Derbyshire, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any related Registration Statements filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in- fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ Robert P. Ruscher Director, President and December 4, ____________________________________ Chief Executive Officer 2000 Robert P. Ruscher (Principal Executive Officer) /s/ Adam C. Derbyshire Chief Financial Officer December 4, ____________________________________ (Principal Financial and 2000 Adam C. Derbyshire Accounting Officer) /s/ John F. Chappell Director December 4, ____________________________________ 2000 John F. Chappell /s/ Thomas A. D'Alonzo Director December 4, ____________________________________ 2000 Thomas A. D'Alonzo /s/ Richard A. Franco Director December 4, ____________________________________ 2000 Richard A. Franco /s/ Randy W. Hamilton Director and Chairman December 4, ____________________________________ 2000 Randy W. Hamilton
II-5 EX-5.1 2 0002.txt OPINION OF WYRICK ROBBINS YATES & PONTON LLP EXHIBIT 5.1 December 4, 2000 Salix Pharmaceuticals, Ltd. 3801 Wake Forest Road Suite 205 Raleigh, North Carolina 27609 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 filed on the date hereof by Salix Pharmaceuticals, Ltd., a British Virgin Islands corporation (the "Company"), with the Securities and Exchange Commission (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 2,644,200 shares of the Company's Common Stock, no par value per share (the "Shares"). The Shares are to be resold as described in the Registration Statement. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original of all documents submitted to us as copies thereof. As our legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, in connection with the sale of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the sale of the Shares, including the proceedings being taken in order to permit such transactions to be carried out in accordance with applicable state securities laws, the Shares when sold in the manner referred to in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, /s/ WYRICK ROBBINS YATES & PONTON LLP EX-10.27 3 0003.txt SUBSCRIPTION AGREEMENT & WARRANT EXHIBIT 10.27 SUBSCRIPTION AGREEMENT SUBSCRIPTION AGREEMENT (this "Agreement") made as of the date set forth on the signature page hereof between Salix Pharmaceuticals, Ltd., a British Virgin Islands corporation (the "Company"), and the undersigned (the "Subscriber"). WITNESSETH: WHEREAS, the Company is offering in a private placement to accredited investors (the "Offering") up to 2,250,000 shares of its common stock, no par value per share (the "Common Stock"), at a price equal to $6.25, and warrants to purchase shares of Common Stock equal to ten percent (10%) of the total number of shares sold to the Subscriber in the Offering at an exercise price per share equal to $9.72 (the "Warrants"). The Warrants are issued for a five (5) year period and are subject to be called if the last price of the Company's Common Stock is at a level twice the closing price for any ten (10) consecutive trading day period during the term of the Warrant. The shares of Common Stock and Warrants offered hereby are sometimes referred to as the "Securities;" WHEREAS, the Subscriber desires to purchase that number of Securities set forth on the signature page hereof on the terms and conditions hereinafter set forth; WHEREAS, the Company has engaged Leerink Swann & Company (the "Placement Agent") as placement agent for the Offering on a "best-efforts" basis; and NOW, THEREFORE, in consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows: I. SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS BY SUBSCRIBER ------------------------------------------------------------- 1.1 Subject to the terms and conditions hereinafter set forth, the Subscriber hereby irrevocably subscribes for and agrees to purchase from the Company such Securities as is set forth upon the signature page hereof and the Company agrees to sell such Securities to the Subscriber for said purchase price. The purchase price is payable by personal or business check, wire transfer of immediately available funds or money order made payable to Leerink Swann & Company, Escrow Agent for Salix Pharmaceuticals, Ltd. contemporaneously with the execution and delivery of this Agreement by the Subscriber. All wires should be sent to: BBK: Citizens Bank 1 Citizens Drive Riverside, RI 02915 ABA: 011500120 Beneficiary: Leerink Swann & Company, Escrow Agent for Salix Pharmaceuticals, Ltd. Beneficiary Account: 110953 558 6 Certificates for the shares of Common Stock and the Warrants will be delivered by the Company to the Subscriber promptly following the Closing (as herein defined). 1.2 The Subscriber recognizes that the purchase of Securities involves a high degree of risk in that (i) the Company remains an early stage business with a limited operating history and may require funds in addition to the proceeds of the Offering; (ii) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company; (iii) the Subscriber may not be able to liquidate its investment; (iv) transferability of the Securities is extremely limited; and (v) in the event of a disposition, the Subscriber could sustain the loss of its entire investment. 1.3 The Subscriber represents that the Subscriber is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Act"), as indicated by the responses to the questions contained in Section VII hereof, and that the Subscriber is able to bear the economic risk and illiquidity of an investment in the Securities. 1.4 The Subscriber hereby acknowledges and represents that (i) the Subscriber has prior investment experience, including investment in non-listed and unregistered securities, or that the Subscriber has employed the services of an investment advisor, attorney and/or accountant to read all of the documents furnished or made available by the Company both to the Subscriber and to all other prospective investors to evaluate the merits and risks of such an investment on the Subscriber's behalf; (ii) the Subscriber recognizes the highly speculative nature of an investment in the Securities; and (iii) the Subscriber is able to bear the economic risk and illiquidity which the Subscriber assumes by investing in the Securities. 1.5 The Subscriber (i) hereby acknowledges receipt and careful review of the Memorandum dated October 30, 2000 (the "Memorandum"), and to the extent that specific filings of the Company with the SEC (as herein defined) under the Act or the Exchange Act (as herein defined) and exhibits thereto have not been specifically included in such package, the Subscriber hereby acknowledges that it has had a reasonable opportunity to review such filings on the SEC's EDGAR database or otherwise (the Memorandum and all of the foregoing filings and exhibits of the Company are referred to herein as the "Offering Package"); (ii) hereby represents that the Subscriber has been furnished by the Company during the course of this transaction with all information regarding the Company which the Subscriber has requested or desired to know; (iii) has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the terms and conditions of the Offering; and (iv) has received any additional information which the Subscriber has requested. 1.6 (a) In making the decision to invest in the Securities, the Subscriber has relied solely upon the information provided by the Company in the Offering Package. To the extent necessary, the Subscriber has retained, at its own expense, and relied upon the advice of appropriate professionals regarding the investment, tax and legal merits and consequences of this 2 Agreement and its purchase of the Securities hereunder. The Subscriber acknowledges and agrees that the Placement Agent has not supplied any information for inclusion in the Offering Package other than information furnished in writing to the Company by the Placement Agent specifically for inclusion in the Offering Package relating to the Placement Agent, that the Placement Agent has no responsibility for the accuracy or completeness of the Offering Package and that the Subscriber has not relied upon the independent investigation or verification, if any, which may have been undertaken by the Placement Agent. (b) The Subscriber covenants that (i) the Subscriber was contacted regarding the sale of the Securities by the Placement Agent (or an authorized agent or representative thereof) with whom the Subscriber had a prior substantial pre-existing relationship and (ii) no Securities were offered or sold to it by means of any form of general solicitation or general advertising, and in connection therewith the Subscriber did not (A) receive or review any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast over television or radio, whether closed circuit or generally available; or (B) attend any seminar, meeting or industry investor conference whose attendees were invited by any general solicitation or general advertising. 1.7 The Subscriber hereby acknowledges that the Offering has not been reviewed by the United States Securities and Exchange Commission (the "SEC") because of the Company's representations that this Offering is intended to be exempt from the registration requirements of Section 5 of the Act pursuant to Sections 3(b), 4(2) and 4(6) thereof and Regulation D promulgated under the Act. The Subscriber agrees that the Subscriber will not sell or otherwise transfer the Securities unless they are registered under the Act or unless an exemption from such registration is available. 1.8 The Subscriber understands that none of the Securities have been registered under the Act by reason of a claimed exemption under the provisions of the Act which depends, in part, upon the Subscriber's investment intention. In this connection, the Subscriber hereby represents that the Subscriber is purchasing the Securities for the Subscriber's own account for investment and not with a view toward the resale or distribution thereof to others. The Subscriber, if an entity, was not formed for the purpose of purchasing the Securities. The Subscriber understands that Rule 144 promulgated under the Act requires, among other conditions, a one-year holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the Act. 1.9 The Subscriber understands and hereby acknowledges that the Company is under no obligation to register the Securities under the Act or any state securities or "blue sky" laws other than as set forth in Section V. The Subscriber consents that the Company may, if it desires, permit the transfer of the Securities out of the Subscriber's name only when the Subscriber's request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that neither the sale nor the proposed transfer results in a violation of the Act or any applicable state "blue sky" laws (collectively, "Securities Laws"). 3 1.10 The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Securities indicating that such Securities have not been registered under the Act or any state securities or "blue sky" laws and setting forth or referring to the restrictions on transferability and sale thereof contained in this Agreement. The Subscriber is aware that the Company will make a notation in its appropriate records and issue "stop transfer" instructions to its transfer agent with respect to the restrictions on the transferability of such Securities. 1.11 The Subscriber understands that the Company will review this Agreement and, if such Subscriber is an individual, hereby gives authority to the Company to call Subscriber's bank or place of employment (in a call in which the Placement Agent participates) or otherwise review the financial standing of the Subscriber; and it is further agreed that the Company reserves the unrestricted right, without further documentation or agreement on the part of the Subscriber, to reject or limit any subscription, to accept subscriptions for Securities and to close the Offering to the Subscriber at any time. 1.12 The Subscriber hereby represents that the address of the Subscriber furnished by the Subscriber on the signature page hereof is the Subscriber's principal residence if the Subscriber is an individual or its principal business address if it is a corporation or other entity. 1.13 The Subscriber represents that the Subscriber has full power and authority (corporate, statutory and otherwise) to execute and deliver this Agreement and to purchase the Securities subscribed for hereby. This Agreement constitutes the legal, valid and binding obligation of the Subscriber, enforceable against the Subscriber in accordance with its terms. 1.14 If the Subscriber is a corporation, partnership, limited liability company, trust, employee benefit plan, individual retirement account, Keogh Plan, or other entity, then (a) it is authorized and qualified to become an investor in the Company and the person signing this Agreement on behalf of such entity has been duly authorized by such entity to do so, and (b) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. 1.15 The Subscriber acknowledges that if he or she is a registered representative of a National Association of Securities Dealers, Inc. ("NASD") member firm, he or she must give such firm the notice required by the NASD's Rules of Fair Practice, receipt of which must be acknowledged by such firm in Section 7.4 below. 1.16 The Subscriber represents and warrants that it has not engaged, consented to nor authorized any broker, finder or intermediary to act on its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. The Subscriber shall indemnify and hold harmless the Company from and against all fees, commissions or other payments owing to any such person or firm acting on behalf of such Subscriber hereunder. 4 1.17 The Subscriber acknowledges that (a) the Company has engaged, consented to and authorized the Placement Agent in connection with the transactions contemplated by this Agreement, (b) the Company shall pay the Placement Agent a commission and reimburse the Placement Agent's expenses in accordance with the Placement Agency Agreement (as defined in Section 5.1(c) below), and the Company shall indemnify and hold harmless the Subscriber from and against all fees, commissions or other payments owing by the Company to the Placement Agent or any other person or firm acting on behalf of the Company hereunder and (c) registered representatives of the Placement Agent and/or its designees (including, without limitation, registered representatives of the Placement Agent and/or its designees who participate in the Offering and sale of the securities sold in the Offering) will be paid a portion of the commissions paid to the Placement Agent including a portion of the Placement Warrants (as defined in Section 5.1(c) below). 1.18 The Subscriber, whose name appears on the signature line below, shall be the beneficial owner of the Securities for which such Subscriber subscribes. 1.19 The Subscriber agrees that from the time the Subscriber first received the Offering Package until a point in time equal to the earlier of (i) the date that the Registration Statement (as defined in Section 5.2(a)) is declared effective by the SEC or (ii) four months from the date of the Offering Package, the Subscriber has not and shall not, directly or indirectly, through related parties, affiliates or otherwise, (A) sell "short" or "short against the box" (as those terms are generally understood) any equity security of the Company or (B) otherwise engage in any transaction that involves hedging of the Subscriber's position in any equity security of the Company. II. REPRESENTATIONS BY THE COMPANY ------------------------------ The Company hereby represents and warrants to the Subscriber that: 2.1 Organization, Good Standing and Qualification. The Company is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the British Virgin Islands and has full corporate power and lawful authority to conduct its business as described in the Offering Package. The Company is duly qualified to do business as a foreign corporation and is in good standing in the State of North Carolina and in each jurisdiction in which the nature of the business conducted, or as proposed to be conducted in the Offering Package, by it or the properties owned, leased or operated by it, makes such qualification or licensing necessary and where the failure to be so qualified or licensed would have a material adverse effect upon the business, prospects or financial condition of the Company other than North Carolina, where the Company will be so qualified prior to the Closing (as defined in Section 3.2). 2.2 Capitalization and Voting Rights. The authorized, issued and -------------------------------- outstanding capital stock of the Company is as set forth in the Offering Package; all issued and outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable. Except as set forth in the Offering Package, there are no outstanding options, warrants, agreements, commitments, convertible securities, preemptive rights or other rights to subscribe for or to 5 purchase any shares of capital stock of the Company nor are there any agreements, promises or commitments to issue any of the foregoing, or discussions concerning same. Except as set forth in the Offering Package, in this Agreement and as otherwise required by law, there are no restrictions upon the voting or transfer of the Securities pursuant to the Company's Memorandum of Association and Articles of Association or other governing documents or any agreement or other instruments to which the Company is a party or by which the Company is bound. 2.3 Authorization; Enforceability. The Company has all corporate ----------------------------- right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. The Securities have been duly and validly authorized and, upon the issuance and delivery thereof and payment therefor as contemplated by this Agreement, will be free and clear of liens, duly and validly authorized and issued, fully paid and nonassessable. The issuance and sale of the Securities contemplated hereby will not give rise to any preemptive rights or rights of first refusal on behalf of any person. 2.4 No Conflict; Governmental Consents. ---------------------------------- (a) The execution and delivery by the Company of this Agreement, the consummation of the transactions contemplated hereby and the offer and sale of the Securities will not result in the violation of any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority to or by which the Company is bound, or of any provision of the Memorandum of Association and Articles of Association of the Company, and will not conflict with, or result in a breach or violation of, any of the terms or provisions of, or constitute (with due notice or lapse of time or both) a default under, any lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Company is a party or by which it is bound or to which any of its properties or assets is subject, nor result in the creation or imposition of any lien upon any of the properties or assets of the Company. (b) No consent, waiver, approval, authorization or other order of any governmental authority or other third-party is required to be obtained by the Company in connection with the authorization, execution and delivery of this Agreement or with the authorization, issuance and sale of the Securities, except such filings as may be required to be made, and which shall have been made at or prior to the required time, with the SEC, the NASD and the Toronto Stock Exchange and/or the National Association of Securities Dealers Automated Quotation System SmallCap Market ("Nasdaq"), and with any state or foreign blue sky or securities regulatory authority. 6 2.5 Licenses. Except as may be set forth in the Offering Package, -------- the Company has all licenses, permits and other governmental authorizations currently required for the conduct of its business or ownership of properties and is in all material respects complying therewith, except for any licenses, permits or other governmental authorizations which would not materially adversely affect the business, property, financial condition, results of operations or prospects of the Company. 2.6 Litigation. The Company knows of no pending or threatened legal ---------- or governmental proceedings against the Company which could materially adversely affect the business, property, financial condition, results of operations or prospects of the Company. 2.7 Accuracy of Reports. All reports required to be filed by the ------------------- Company within the three years prior to the date of this Agreement under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), have been duly and timely filed with the SEC, complied at the time of filing in all material respects with the requirements of their respective forms and, were complete and correct in all material respects as of the dates at which the information was furnished, and contained (as of such dates) no untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 2.8 Accuracy of Offering Package. No information set forth in the ---------------------------- Offering Package contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 2.9 Investment Company. The Company is not an "investment company" ------------------ within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder. 2.10 Listing. The Company has filed an application for listing with ------- the Nasdaq SmallCap Market and the American Stock Exchange and hereby represents and warrants to the Placement Agent and the Subscriber that it will take any other necessary action in accordance with the rules of the Nasdaq SmallCap Market or the American Stock Exchange to enable the Common Stock (and the Common Stock issuable upon exercise of the Warrants, including the Warrants as defined in Section 5.1 (c)) to trade on either of such exchanges. 2.11 No Material Adverse Change. Since the filing of the Company's -------------------------- most recent Quarterly Report on Form 10-Q, (i) there has not been any material adverse change (financial or otherwise) in the assets, properties, financial condition, operating results or business of the Company, and (ii) there has been no event or condition of any character that might have a material adverse effect (financial or otherwise) in the assets, properties, financial condition, operating results or business of the Company. 2.12 Financial Statements. The financial statements included in the -------------------- Company's most recent Annual Report on Form 10-K405/A for the fiscal year ended December 31, 1999 and all other reports filed by the Company pursuant to the Exchange Act since the filing of such 7 Annual Report on Form 10-K405/A and prior to the date hereof (collectively, the "SEC Filings") present fairly and accurately in all material respects the financial position of the Company as of the dates shown and its results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. Except as set forth in the financial statements of the Company included in the SEC Filings filed prior to the date hereof, to the Company's knowledge, the Company has no liabilities, contingent or otherwise, except those which individually or in the aggregate are not material to the financial condition or operating results of the Company. 2.13 Compliance with Laws. Neither the Company nor, to the Company's -------------------- knowledge, any Person acting on its behalf has conducted any general solicitation or general advertising (as those terms are used in Regulation D of the Act) in connection with the offer or sale of the Securities. Neither the Company nor any of its Affiliates, nor, to the Company's knowledge, any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would adversely affect reliance by the Company on Section 4(2) of the Act for the exemption from registration for the transactions contemplated hereby or would require registration of the Securities under the Act. III. TERMS OF SUBSCRIPTION --------------------- 3.1 The Offering is for up to 2,250,000 shares of Common Stock and Warrants. The Securities are offered on a "best efforts" basis. 3.2 Upon the mutual consent of the Company and the Placement Agent, this Offering may close (the "Closing") prior to the sale of all 2,250,000 shares of Common Stock and there is no assurance that all 2,250,000 shares of Common Stock will be sold. The Closing shall occur no later than January 31, 2001, subject to change at the discretion of the Company and the Placement Agent (the "Closing Date"). The purchase price is payable by personal or business check, wire transfer of immediately available funds or money order made payable as provided in Section 1.1. 3.3 The Subscriber hereby authorizes and directs the Company to deliver the Securities to be issued to the Subscriber pursuant to this Agreement directly to the Subscriber's account maintained by the Placement Agent or, if no such account exists, to the residential or business address indicated on the signature page hereto. 3.4 The Subscriber hereby authorizes and directs the Company to return any funds related to unaccepted subscriptions to the same account from which the funds were drawn, including any customer account maintained with the Placement Agent. IV. CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBERS AND THE COMPANY ------------------------------------------------------------ 8 4.1 The Subscribers' obligation to purchase the Securities at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, which conditions may be waived at the option of each Subscriber to the extent permitted by law: (a) Representations and Warranties. The representations and ------------------------------ warranties made by the Company in Section II hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date. (b) Covenants. All covenants, agreements and conditions contained in --------- this Agreement to be performed by the Company on or prior to such purchase shall have been performed or complied with in all material respects. (c) No Legal Order Pending. There shall not then be in effect any ---------------------- legal or other order enjoining or restraining the transactions contemplated by this Agreement. (d) No Law Prohibiting or Restricting Such Sale. There shall not be ------------------------------------------- in effect any law, rule or regulation prohibiting or restricting such sale or requiring any consent or approval of any person to issue the Securities which consent or approval shall not have been obtained (except as may otherwise be provided in this Agreement). (e) Legal Opinion. Upon the Closing, counsel to the Company shall ------------- have delivered to the Placement Agent for the benefit of the Subscribers a legal opinion with respect to such legal matters relating to this Agreement and the Offering Package as the Placement Agent may reasonably require. 4.2 The Company's obligation to sell the Securities at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, which conditions may be waived at the option of the Company to the extent permitted by law: (a) Acknowledgements, Representations and Warranties. The ------------------------------------------------ acknowledgements, representations and warranties made by the Subscriber in Section I hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date. If any such representations, warranties or acknowledgements shall not be true and accurate in any respect prior to the Closing, the undersigned shall give immediate written notice of such fact to the Company, to the Placement Agent, and to his representatives, if any, specifying which representations, warranties or acknowledgements are not true and accurate and the reason therefor. (b) Covenants. All covenants, agreements and conditions contained in --------- this Agreement to be performed by the Subscriber on or prior to such purchase shall have been performed or complied with in all material respects. (c) No Legal Order Pending. There shall not then be in effect any ---------------------- legal or other order enjoining or restraining the transactions contemplated by this Agreement. 9 (d) No Law Prohibiting or Restricting Such Sale. There shall not be ------------------------------------------- in effect any law, rule or regulation prohibiting or restricting such sale or requiring any consent or approval of any person to issue the Securities which consent or approval shall not have been obtained (except as may otherwise be provided in this Agreement). V. REGISTRATION RIGHTS ------------------- 5.1 As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" shall mean, with respect to any Person (as --------- defined below), any other Person controlling, controlled by, or under direct or indirect common control with, such Person (for the purposes of this definition "control," when used with respect to any specified Person, shall mean the power to direct the management and policies of such person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing). (b) "Business Day" shall mean a day, Monday through Friday, on ------------ which banks are generally open for business in each of New York, New York; Boston, Massachusetts; and Raleigh, North Carolina. (c) "Holders" shall mean the Subscriber and any person holding ------- Registrable Securities as defined below (including the Registrable Securities underlying the warrants to be issued to the Placement Agent (the "Placement Warrants") to be granted to the Placement Agent and/or their designees pursuant to the engagement letter between the Company and the Placement Agent (the "Placement Agency Agreement")), a holder of the Placement Warrants, or any person to whom the rights under Section V have been transferred in accordance with Section 5.10 hereof, and who, if known by the Company, shall be specifically named by the Company as selling stockholders in the Registration Statement (as defined below). (d) "Person" shall mean any person, individual, corporation, ------ limited liability company, partnership, trust or other nongovernmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise). (e) The terms "register," "registered" and "registration" refer -------- ---------- ------------ to the registration effected by preparing and filing with the SEC a registration statement in compliance with the Act, and the declaration or ordering by the SEC of the effectiveness of such registration statement. (f) "Registrable Securities" shall mean (i) the Common Stock ---------------------- (ii) the shares of Common Stock issuable upon the exercise of the Warrants, and (iii) shares of Common Stock issuable upon the exercise of the Placement Warrants; provided, however, that securities shall only be treated as Registrable Securities if and only for so long as they (A) have not been 10 disposed of pursuant to a registration statement declared effective by the SEC, (B) and all other otherwise Registrable Securities held by one person have not been, or are not all eligible to be immediately, sold in a transaction exempt from the registration and prospectus delivery requirements of the Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale, and (C) are held by a Holder or a permitted transferee pursuant to Section 5.10. (g) "Registration Expenses" shall mean all expenses incurred by --------------------- the Company in complying with Section 5.2 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and expenses of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to, or required by, any such registration (but excluding the aggregate fees of legal counsel for all Holders). (h) "Registration Statement" shall have the meaning ascribed to ---------------------- such term in Section 5.2 (a). (i) "Registration Period" shall have the meaning ascribed to ------------------- such term in Section 5.4 (a). (j) "Selling Expenses" shall mean all underwriting discounts and ---------------- selling commissions applicable to the sale of Registrable Securities and the aggregate fees and expenses of legal counsel for all Holders. 5.2 (a) The Company shall, as soon as practicable, but not later than thirty (30) business days after the Closing Date (the "Filing Date"), (i) use its best efforts to file with the SEC a registration statement (the "Registration Statement") with respect to the resale of the Registerable Securities and use its best efforts to have such Registration Statement declared effective by the SEC as soon thereafter as is practical and (ii) cause such Registration Statement to remain effective for the Registration Period. (b) If, within 30 days from the Closing, the Company has not filed a Registration Statement for the Shares with the SEC, or, within 120 days from Closing, the Shares are not freely trading on a U.S. stock market or exchange, then the Company shall pay to each Subscriber, in cash, as liquidated damages and not as a penalty, equal to 1% of the aggregate purchase price previously paid by such Subscriber for Securities for the first 30 day period thereafter, and 2% for each successive 30 day period thereafter during which both of the above-stated conditions are not met; provided, however, such -------- ------- Subscriber shall not be entitled to such cash payment if and to the extent that such delays are the result of the failure of such Subscriber to provide the Company with written information necessary to complete the Registration Statement by the Filing Date. 5.3 All Registration Expenses incurred in connection with any registration, qualification, exemption or compliance pursuant to Section 5.2 shall be borne by the Company. All Selling Expenses relating to the sale of securities registered by or on behalf of Holders shall be borne by such Holders pro rata on the basis of the number of securities so registered. 11 5.4 In the case of the registration, qualification, exemption or compliance effected by the Company pursuant to this Agreement, the Company shall, upon reasonable request, inform each Holder as to the status of such registration, qualification, exemption and compliance. At its expense the Company shall: (a) use its best efforts to keep such registration, and any qualification, exemption or compliance under state securities laws which the Holders reasonably request the Company to obtain, continuously effective as to all Registrable Securities until the Holders have completed the distribution described in the registration statement relating thereto. The period of time during which the Company is required hereunder to keep the Registration Statement effective is referred to herein as "the Registration Period." Notwithstanding the foregoing, at the Company's election, the Company may cease to keep such registration, qualification, exemption or compliance effective with respect to any Registrable Securities, and the registration rights of a Holder with respect to such Registrable Securities shall expire, at such time as the Holder may sell all Registrable Securities then held by such Holder under Rule 144 under the Act in a three-month period, but this sentence shall not relieve the Company of any obligation to comply with this Section V as to any shares of Common Stock issuable upon exercise of the Placement Warrants; (b) advise the Holders (or in the case of (ii) below, to advise the Placement Agent): (i) when the Registration Statement or any amendment thereto has been filed with the SEC and when the Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the SEC for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for such purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) subject to the limitations set forth in Section 5.7(b)(ii) hereof, of the happening of any event that requires the making of any changes in the Registration Statement or the prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in the light of the circumstances under which they were made) not misleading; 12 (c) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time; (d) furnish to each Holder, without charge, at least one copy of such Registration Statement and any post-effective amendment or supplement thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (excluding those incorporated by reference) in the form filed with the SEC; (e) during the Registration Period, deliver to each Holder, without charge, a reasonable number of copies of the prospectus included in such Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use, consistent with the provisions hereof, of the prospectus and any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the prospectus and any amendment or supplement thereto; (f) during the Registration Period, deliver to each Holder, without charge, (i) as soon as practicable (but in the case of the annual report of the Company to its stockholders, within 120 days after the end of each fiscal year of the Company) one copy of: (A) its annual report to its stockholders, if any (which annual report shall contain financial statements audited in accordance with generally accepted accounting principles in the United States of America by a firm of certified public accountants of recognized standing); (B) if not included in substance in its annual report to stockholders, its annual report on Form 10-K (or similar form); (C) a copy of the full Registration Statement (excluding exhibits); (ii) upon reasonable request, all exhibits excluded by the parenthetical to the immediately preceding clause (C); and (iii) such other documents as may be reasonably requested. (g) prior to any public offering of Registrable Securities pursuant to any Registration Statement, register or qualify or obtain an exemption for the offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing, provided that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction, and do any and all other acts or things reasonably necessary or advisable to enable the offer and sale in such jurisdictions of the Registrable Securities covered by such Registration Statement; (h) cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to any Registration Statement free of any restrictive legends to the extent not required at such time and in such denominations and registered in such names as Holders may request at least five (5) business days prior to sales of Registrable Securities pursuant to such Registration Statement; (i) upon the occurrence of any event contemplated by Section 5.4(b)(v) above, the Company shall promptly prepare a post-effective amendment to the Registration Statement or a supplement to the related prospectus, or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities included 13 therein, the prospectus will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (j) use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to the Holders not later than 45 days (or 90 days if the fiscal quarter is the fourth fiscal quarter) after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement satisfying the provisions of Section 11(a) of the Act. 5.5 The Holders shall have no right to take any action to restrain, enjoin or otherwise delay any registration pursuant to Section 5.2 hereof as a result of any controversy that may arise with respect to the interpretation or implementation of this Agreement. 5.6 (a) To the extent permitted by law, the Company shall indemnify each Holder, each underwriter of the Registrable Securities and each person controlling such Holder and each such underwriter within the meaning of Section 15 of the Act, with respect to which any registration, qualification or compliance has been sought pursuant to this Agreement, against all claims, losses, expenses, costs, damages and liabilities (or action in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, or (ii) any violation or alleged violation by the Company of the Act, the Exchange Act, or any rule or regulation promulgated under the Act or the Exchange Act, and shall reimburse each Holder, each underwriter of the Registrable Securities and each person controlling such Holder and each such underwriter, for reasonable legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred; provided that the Company shall not be liable in any such case to the extent that any untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder or underwriter and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided that the Company shall not be liable in any such case where the claim, loss, damage or liability arises out of or is related to the failure of the Holder to comply with the covenants and agreements contained in Section 5.7 hereof, and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement or alleged untrue statement or omission or alleged omission made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or in the amended prospectus filed with the SEC pursuant to Rule 424(b) of the Act or in the prospectus subject to completion under Rule 434 of the Act, which together meet the requirements of Section 10(a) of the Act (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any such Holder, any such underwriter or any such controlling person, if a copy of the Final Prospectus furnished by the Company to the Holder for delivery was not furnished to the 14 person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Act and the Final Prospectus would have cured the defect giving rise to such loss, liability, claim or damage. Notwithstanding any provision herein to the contrary, the Company shall reimburse each Holder, upon such Holder's demand, for all reasonably necessary expenses and costs which are incurred by such Holder as a result of the indemnification claims described in this Section 5.6(a). Such demand may be made from time to time prior to resolution of the claim. In no event shall the Company be liable for the expenses and costs of more than one attorney on behalf of the Holders unless in the reasonable judgement of a Holder, based upon written advice of its counsel, a conflict of interest exists between the Holders with respect to such claims, in which case the Company shall reimburse the Holders for additional attorneys. (b) Each Holder will severally, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter of the Registrable Securities and each person who controls the Company and each underwriter of the Registrable Securities within the meaning of Section 15 of the Act, against all claims, losses, expenses, costs, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, and will reimburse the Company, such directors and officers, each underwriter of the Registrable Securities and each person controlling the Company and each underwriter of the Registrable Securities for reasonable legal and any other expenses or costs reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred, in each case to the extent, but only to the extent, that such untrue statement or omission or allegation thereof is made in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Holder and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided that the indemnity shall not apply to the extent that such claim, loss, damage or liability results from the fact that a current copy of the prospectus or offering circular was not made available to the Holder and such current copy of the prospectus or offering circular would have cured the defect giving rise to such loss, claim, expense, costs, damage or liability. Notwithstanding the foregoing, in no event shall a Holder be liable for any such claims, losses, expenses, costs, damages or liabilities in excess of the proceeds received by such Holder in that offering, except in the event of fraud by such Holder. (c) Each party entitled to indemnification under this Section 5.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved 15 by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense with its own counsel at such Indemnified Party's expense unless the named parties to any proceeding covered hereby (including any impleaded parties) include both the Company or any others the Company may designate and one or more Indemnified Persons, and representation of the Indemnified Persons and such other parties by the same counsel would be inappropriate due to actual or potential differing interests between them, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is materially prejudicial to the Indemnifying Party in defending such claim or litigation. An Indemnifying Party shall not be liable for any settlement of an action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) If the indemnification provided for in this Section 5.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, cost or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, cost or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage, cost or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied or which should have been supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 5.7 (a) Subject to the limitations set forth in Section 5.7(b)(ii) below, upon receipt of any notice from the Company of the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to the Holders, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, each Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement contemplated by Section 5.2 until its receipt of copies of the supplemented or amended prospectus from the Company and, if so directed by the Company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (b) Any Holder which owns five percent (5%) or more (and with respect to 5.7(b)(ii), "any Holder") of the Company's outstanding Common Stock shall suspend, upon request of the Company, any disposition of Registrable Securities pursuant to the Registration Statement and prospectus contemplated by Section 5.2 during (i) any period not to exceed one 120-day period within any one 12- month period the Company requires in connection with a primary underwritten offering of equity securities and (ii) any period, not to exceed two 45-day periods within any twelve month period, when the Company determines in good faith 16 that offers and sales pursuant thereto should not be made by reason of the presence of material undisclosed circumstances or developments with respect to which the disclosure that would be required in such a prospectus is premature, would have an adverse effect on the Company or is otherwise inadvisable. (c) As a condition to the inclusion of its Registrable Securities, each Holder shall furnish to the Company such information regarding such Holder, the securities of the Company owned beneficially or of record by such Holder and the distribution proposed by such Holder as the Company may request in writing because it is required in connection with any registration, qualification or compliance referred to in this Section V. (d) With respect to any sale of Registrable Securities pursuant to a Registration Statement filed pursuant to this Section V, each Holder hereby covenants with the Company not to make any sale of the Registrable Securities without effectively causing the prospectus delivery requirements under the Act to be satisfied. (e) Each Holder acknowledges and agrees that the Registrable Securities sold pursuant to the Registration Statement described in this Section are not transferable on the books of the Company unless the stock certificate submitted to the transfer agent evidencing such Registrable Securities is accompanied by a certificate reasonably satisfactory to the Company to the effect that (i) the Registrable Securities have been sold in accordance with such Registration Statement and (ii) the requirement of delivering a current prospectus has been satisfied. (f) Each Holder shall not take any action with respect to any distribution deemed to be made pursuant to such registration statement, which would constitute a violation of Regulation M under the Exchange Act or any other applicable rule, regulation or law. (g) At the end of the Registration Period, the Holders of Registrable Securities included in the Registration Statement and the shares underlying the Placement Warrants shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold. 5.8 With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which at any time permit the sale of the Registrable Securities to the public without registration, the Company shall use its reasonable best efforts: (a) to make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times; (b) to file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and 17 (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder upon any reasonable request a written statement by the Company as to its compliance with Rule 144 under the Act, and of the Exchange Act, and a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as such Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration. 5.9 With the written consent of the Company and the Holders holding at a majority of the Registerable Securities that are then outstanding, any provision of this Section V may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) or amended. Upon the effectuation of each such waiver or amendment, the Company shall promptly give written notice thereof to the Holders, if any, who have not previously received notice thereof or consented thereto in writing. 5.10 The rights and obligations of the Holders under this Section V may not be assigned or transferred to or assumed by any transferee or assignee except (i) to a transferee that acquires at least 20% of such Holder's Registerable Securities or (ii) to an Affiliate or limited or general partner of a Holder; provided that such transfer was not in violation of this Agreement or the Securities Laws. VI. MISCELLANEOUS ------------- 6.1 Any notice or other communication given hereunder shall be deemed sufficient in writing and sent by (a) telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received); or (b) registered or certified mail, return receipt requested, or delivered by hand against written receipt therefor, addressed to Salix Pharmaceuticals, Ltd., 3801 Wake Forest Road, Suite 205, Raleigh, NC 27609, Facsimile: (919) 788-8611, Attention: Robert P. Ruscher, with a copy to Leerink Swann & Company, 60 State Street, 15th Floor, Boston, MA 02019, Facsimile (617) 918-4724, Attention: Stuart R. Barich. Notices shall be deemed to have been given or delivered on the date of mailing, except notices of change of address, which shall be deemed to have been given or delivered when received. 6.2 Except as set forth in Section 5.9, this Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 6.3 Upon the execution and delivery of this Agreement by the Subscriber, this Agreement shall become a binding obligation of the Subscriber with respect to the purchase of Securities as herein provided, subject to acceptance by the Company and the Placement Agent; subject, however, to the right hereby reserved to the Company to enter into the same agreements with other subscribers and to add and/or delete other persons as subscribers. 6.4 Notwithstanding the place where this Agreement may be executed by any of the parties hereto, the parties expressly agree that all the terms and provisions hereof shall be 18 construed in accordance with and governed by the laws of the State of Delaware without regard to principles of conflicts of law. 6.5 The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. If any provision of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced in whole or in part, such provision shall be interpreted so as to remain enforceable to the maximum extent permissible consistent with applicable law and the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and effect and enforceable to the extent they are valid, legal and enforceable, and no provisions shall be deemed dependent upon any other covenant or provision unless so expressed herein. 6.6 It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 6.7 The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 6.8 This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 6.9 The Subscriber agrees not to issue any public statement with respect to the Subscriber's investment or proposed investment in the Company or the terms of any agreement or covenant between them and the Company without the Company's prior written consent, except such disclosures as may be required under applicable law or under any applicable order, rule or regulation. 6.10 Nothing in this Agreement shall create or be deemed to create any rights in any person or entity not a party to this Agreement, except for the holders of Registrable Securities. 6.11 Any pronoun herein shall include all genders and/or the plural or singular as appropriate from the context. 19 VII. CONFIDENTIAL INVESTOR QUESTIONNAIRE ----------------------------------- 7.1 The Subscriber represents and warrants that he, she or it comes within one category marked below, and that for any category marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS SECTION VII WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish any additional information which the Company deems necessary in order to verify the answers set forth below. Category A__ The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000. Explanation. In calculating net worth you may include equity in personal property and real estate, including your principal residence, cash, short-term investments, stock and securities. Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property. Category B__ The undersigned is an individual (not a partnership, corporation, etc.) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year. Category C__ The undersigned is a director or executive officer of the Company. Category D__ The undersigned is a bank; a savings and loan association; insurance company; registered investment company; registered business development company; licensed small business investment company or "SBIC"; or employee benefit plan within the meaning of Title 1 of Employee Retirement Income Security Act or "ERISA" and (a) the investment decision is made by a plan fiduciary which is either a bank, savings and loan association, insurance company or registered investment advisor, or (b) the plan has total assets in excess of $5,000,000 or is a self-directed plan with investment decisions made solely by persons that are accredited investors. __________________________________________________ __________________________________________________ (describe entity) 20 Category E__ The undersigned is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940. __________________________________________________ __________________________________________________ (describe entity) Category F__ The undersigned is either a corporation, partnership, Massachusetts business trust, or nonprofit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Securities and with total assets in excess of $5,000,000. __________________________________________________ __________________________________________________ (describe entity) Category G__ The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities where the purchase is directed by a "sophisticated person" as defined in Regulation 506(b)(2)(ii) under the Act. Category H__ The undersigned hereby certifies that it is an accredited investor because all of its equity owners are accredited investors. The Company, in its sole discretion, may request information regarding the basis on which such equity owners are accredited. Category I__ The undersigned hereby certifies that it is an accredited investor because it has total assets in excess of $5,000,000 and was not formed for the specific purpose of acquiring the Securities. Category J__ The undersigned is not within any of the categories above and is therefore not an accredited investor. The Company will notify a prospective Subscriber whether such Subscriber is eligible to purchase Securities pursuant to this Agreement (and the Company, in its sole discretion, retains the right to accept or reject all such purchases). The undersigned agrees that it will notify the Company at any time on or prior to the Closing Date in the event that the representations and warranties in this Investor Questionnaire shall cease to be true, accurate and complete. 21 7.2 SUITABILITY (please answer each question) ----------- (a) For an individual Subscriber, please describe your current employment, including the company by which you are employed and its principal business: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (b) For an individual Subscriber, please describe any college or graduate degrees held by you: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (c) For all Subscribers, please list types of prior investments: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (d) For all Subscribers, please state whether you have participated in other private placements before: YES_______ NO_______ (e) If your answer to question (d) above was "YES", please indicate frequency of such prior participation in private placements of: ------------------ Biotechnology, Pharmaceutical and Public Private Other Life Science Companies Companies Companies * --------- --------- ----------- Frequently _________ _________ _________ Occasionally _________ _________ _________ Never _________ _________ _________ *indicate how many companies, whether public or private, are in the biotechnology, pharmaceutical or other life sciences sectors. 22 (f) For an individual Subscriber, do you expect your current level of income to significantly decrease in the foreseeable future? YES_______ NO_______ (g) For trust, corporate, partnership and other institutional Subscribers, do you expect your total assets to significantly decrease in the foreseeable future? YES_______ NO_______ (h) For all Subscribers, do you have any other investments or contingent liabilities which you reasonably anticipate could cause you to need sudden cash requirements in excess of cash readily available to you? YES_______ NO_______ (i) For all Subscribers, are you familiar with the risk aspects and the non- liquidity of investments such as the securities for which you seek to subscribe? YES_______ NO_______ (j) For all Subscribers, do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment? YES_______ NO_______ 7.3 MANNER IN WHICH TITLE IS TO BE HELD. (circle one) ----------------------------------- (a) Individual Ownership (b) Community Property (c) Joint Tenant with Right of Survivorship (both parties must sign) (d) Partnership* (e) Tenants in Common (f) Company* (g) Trust* (h) Other *If Securities are being subscribed for by an entity, the attached Certificate of Signatory must also be completed. 23 7.4 NASD AFFILIATION. ---------------- Are you affiliated or associated with an NASD member firm (please check one)? YES _________ NO __________ If Yes, please describe:** _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ **If Subscriber is a Registered Representative with an NASD member firm, have the following acknowledgment signed by the appropriate party: The undersigned NASD member firm acknowledges receipt of the notice required by Article 3, Sections 28(a) and (b) of the Rules of Fair Practice. _____________________________________ Name of NASD Member Firm By: _________________________________ Authorized Officer - Signature _________________________________ Authorized Officer - Printed Name Date: ____________________________ , 2000 7.5 COMPANY RELIANCE ON THIS QUESTIONNAIRE -------------------------------------- The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in this Section VII and such answers have been provided under the assumption that the Company and its counsel will rely on them. 24 SIGNATURE PAGE Date Signed: __________ , 2000 - -------------- Number of shares: _______________________ Multiplied by Offering Price per share: x $_______________________ Equals subscription amount: = $_______________________ Warrants (multiply the number of shares by 10%): _______________________ ____________________________ ______________________________ Signature Second Signature (if purchasing jointly) ____________________________ ______________________________ Printed Name Printed Second Name ____________________________ ______________________________ Entity Name Entity Name ____________________________ ______________________________ Address Address ____________________________ ______________________________ City, State and Zip Code City, State and Zip Code ____________________________ ______________________________ Telephone-Business Telephone--Business ____________________________ ______________________________ Facsimile-Business Facsimile--Business ____________________________ ______________________________ Tax ID # or Social Security # Tax ID # or Social Security # Name in which securities should be issued: _________________________________ Check "YES" if you would like the securities to be delivered to your account with Leerink Swann & Company or "NO" if you would like the securities to be delivered to your address as set forth above. YES _____ NO _____ 25 This Subscription Agreement is agreed to and accepted as of ____________, 2000. SALIX PHARMACEUTICALS, LTD. By: __________________________ Name: Robert P. Ruscher Title: President and Chief Executive Officer 26 CERTIFICATE OF SIGNATORY (To be completed if Securities are being subscribed for by an entity) I,______________________________, am the____________________________ of _____________________________________________ (the "Entity"). I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Subscription Agreement and to purchase and hold the Securities, and certify further that the Subscription Agreement has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity. IN WITNESS WHEREOF, I have set my hand this___ day of ____, 2000. _______________________________________ (Signature) 27 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. SALIX PHARMACEUTICALS, LTD. WARRANT ------- Warrant No.[_] Dated: November 9, 2000 Salix Pharmaceuticals, Ltd., a British Virgin Islands corporation (the "Company"), hereby certifies that, for value received, [__________________] or ------- its registered assigns ("Holder"), is entitled, subject to the terms set forth ------ below, to purchase from the Company up to a total of ___________ shares of common stock, no par value per share (the "Common Stock"), of the Company (each ------------ such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an ------------- -------------- exercise price equal to $9.72 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including November 8, 2005 (the "Expiration Date"), and subject to the following terms and conditions. --------------- 1. Registration of Warrant. The Company shall register this ----------------------- Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. ---------------- The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. --------------------------------------- (a) Subject to compliance with applicable securities laws, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 10. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), ----------- evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 10, for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. --------------------------------- (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 10 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than five (5) business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall -------------- have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. A "Date of Exercise" means the date on which the Company shall ---------------- have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares, such portion to be not less than 100 Warrant Shares and any amount in excess of 100 Warrant Shares shall be in 100 share increments. If less 2 than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Payment of Taxes. The Company will pay all documentary stamp ---------------- taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, ---------------------- stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will ----------------------------- at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 7). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant ------------------- Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. Upon each such adjustment of the Exercise Price pursuant to this Section 7, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the 3 number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 7(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) In case of any (1) merger or consolidation of the Company with or into another Person where the Company is not the surviving entity, or (2) sale by the Company of all or substantially all of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sale would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly issued warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing 4 date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (e) For the purposes of this Section 7, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a ------------ record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common --------------- Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) Whenever the Exercise Price is adjusted pursuant to Section 7(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (h) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or 5 (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any -------- ------- defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8. Payment of Exercise Price. The Holder shall pay the Exercise ------------------------- Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available ------------- funds; or (b) Cashless Exercise. The Holder may surrender this Warrant ----------------- to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. 6 A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 9. Fractional Shares. The Company shall not be required to issue or ----------------- cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Notices. Any and all notices or other communications or ------- deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (New York City time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 3801 Wake Forest Road, Suite 205, Raleigh, North Carolina 27609, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 11. Warrant Agent. The Company shall serve as warrant agent under ------------- this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 12. Optional Redemption. ------------------- (a) This Warrant may be redeemed in whole during the Effectiveness 7 Period at the option of the Company, upon 45 days written notice to the Holder, at a price equal to $0.01 per Warrant Share (the "Redemption Price") if, and ------- only if, at the time notice of such redemption is given by the Company to the - ------- Holder as provided in Section 10 hereof, (i) the average Closing Price for the Common Stock for the ten (10) consecutive trading days immediately preceding the date that the redemption notice is given exceeds $16.90, and (ii) a registration statement covering the re-sale of the Warrant Shares filed under the Securities Act is effective or the Holder may sell all of the Warrant Shares in the public market in a three month period pursuant to Rule 144 under the Securities Act. For the purpose of the foregoing sentence, the term "Closing Price" shall mean, for any relevant day, the last sale price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. On the redemption date the holders of record of redeemed Warrants shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrants to the Warrant Agent at the principal office of the Warrant Agent. (b) From and after the redemption date, all rights of the Holder (except the right to receive the Redemption Price) shall terminate, but only if (i) on or before the redemption date the Company shall have irrevocably deposited with the Warrant Agent as paying agent a sufficient amount to pay on the redemption date the Redemption Price for all Warrants called for redemption, and (ii) the notice of redemption shall have stated the name and address of the Warrant Agent and the intention of the Company to deposit such amount with the Warrant Agent no later than one day prior to the redemption date. (c) If the Company fails to make a sufficient deposit with the Warrant Agent as provided above, the holder of any Warrants called for redemption may at the option of the Holder (a) by notice to the Company declare the notice of redemption a nullity as to such holder, or (b) maintain an action against the Company for the Redemption Price. If the Holder brings such an action, the Company will pay reasonable attorneys' fees of the Holder. If the Holder fails to bring an action against the Company for the Redemption Price within 60 days after the redemption date, the Holder shall be deemed to have elected to declare the notice of redemption to be a nullity and such notice shall be without any force or effect. Except as otherwise specifically provided in this provision, a notice of redemption, once mailed by the Company as provided herein, shall be irrevocable. 13. Miscellaneous. ------------- (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning 8 the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware , without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the City of Wilmington, Delaware, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [SIGNATURE PAGE FOLLOWS] 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. SALIX PHARMACEUTICALS, LTD. By: _________________________________ Name: Adam C. Derbyshire Title: Chief Financial Officer FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To _________________: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of common stock, no par value per share, of Salix Pharmaceuticals, Ltd. (the "Common Stock") and , if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER _________________________________ _______________________________________________________________________________ (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: _______________________________________________________________________________ (Please print name and address) _______________________________________________________________________________ _______________________________________________________________________________ Dated: ___________, _________ Name of Holder: (Print)____________________________ (By:)______________________________ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Salix Pharmaceuticals, Ltd. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Salix Pharmaceuticals, Ltd. with full power of substitution in the premises. Dated: __________,__________ ___________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ___________________________________ Address of Transferee ___________________________________ ___________________________________ In the presence of: ________________________________ EX-23.1 4 0004.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 333-00000) and related Prospectus of Salix Pharmaceuticals, Ltd. for the registration of 2,644,200 shares of its common stock and to the incorporation by reference therein of our report dated March 9, 2000, (except Note 12, as to which the date is May 17, 2000) with respect to the consolidated financial statements of Salix Pharmaceuticals, Ltd. (formerly, Salix Holdings, Ltd.) included in its Annual Report (Form 10-K405/A) for the year ended December 31, 1999, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Raleigh, North Carolina December 4, 2000 -----END PRIVACY-ENHANCED MESSAGE-----