-----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, GmCdnmxsVmzP/QJpztsnLH5nUUxRXhcH5d9ssPb9aEwToSeLc9Or6hoqS4MPBcqz rfTU8hkvcglkB3RxtAvBXg== 0000950168-02-000130.txt : 20020414 0000950168-02-000130.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950168-02-000130 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020212 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: 1933 Act SEC FILE NUMBER: 333-82558 FILM NUMBER: 02535635 BUSINESS ADDRESS: STREET 1: 8540 COLONNADE CENTER DR STREET 2: SUITE 501 CITY: RALEIGH STATE: NC ZIP: 27615 BUSINESS PHONE: 9198621000 MAIL ADDRESS: STREET 1: 8540 COLONNADE CENTER DR STREET 2: SUITE 501 CITY: RALEIGH STATE: NC ZIP: 27615 FORMER COMPANY: FORMER CONFORMED NAME: SALIX HOLDINGS LTD DATE OF NAME CHANGE: 19970807 S-3 1 ds3.txt FORM S-3 As filed with the Securities and Exchange Commission on February 12, 2002 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)
Delaware 94-3267443 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
8540 Colonnade Center Drive, Suite 501 Raleigh, North Carolina 27615 (919) 862-1000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------- ROBERT P. RUSCHER President and Chief Executive Officer Salix Pharmaceuticals, Ltd. 8540 Colonnade Center Drive, Suite 501 Raleigh, North Carolina 27615 (919) 862-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- Copies to: DONALD R. REYNOLDS FREDERICK W. KANNER ALEXANDER M. DONALDSON GLENN R. POLLNER Wyrick Robbins Yates & Dewey Ballantine LLP Ponton LLP 1301 Avenue of the 4101 Lake Boone Trail, Americas Suite 300 New York, New York Raleigh, North Carolina 10019-6092 27607 (212)259-8000 (919) 781-4000 Fax (212) 259-6333 Fax (919) 781-4865 ----------------- Approximate date of proposed sale to the public: As soon as practicable 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. [_] 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 Proposed Maximum Title of Each Class of Securities Amount to be Offering Price Aggregate Amount of to be Registered Registered (1) Per Share(2) Offering Price(1) Registration Fee - ---------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value per share..................... 4,600,000 $17.10 $78,660,000 $7,236.72 - ----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) This registration statement includes shares that may be issued upon exercise of the underwriters' over-allotment option. (2) Estimated in accordance with Rule 457 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 National Market on February 7, 2002. ----------------- 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 and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS February 12, 2002 Subject to completion - -------------------------------------------------------------------------------- 4,000,000 Shares [LOGO] Salix Pharmaceuticals, Ltd. Common Stock - -------------------------------------------------------------------------------- We are selling all of the 4,000,000 shares of common stock offered by this prospectus. Our common stock is quoted on the Nasdaq National Market under the symbol "SLXP". On February 11, 2002, the last reported sale price of our common stock on the Nasdaq National Market was $17.26 per share. Investing in our common stock involves a high degree of risk. Before buying any shares you should read the discussion of material risks of investing in our common stock in "Risk Factors" beginning on page 8 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per share Total ----------------------------------------------------- Public offering price $ $ ----------------------------------------------------- Underwriting discount and commissions $ $ ----------------------------------------------------- Proceeds, before expenses, to us $ $ -----------------------------------------------------
The underwriters may also purchase from us up to an additional 600,000 shares of our common stock at the public offering price less the underwriting discount, to cover over-allotments, if any, within 30 days of the date of this prospectus. The underwriters are offering the shares of our common stock as described in "Underwriting". Delivery of the shares will be made on or about , 2002. Joint Book-Running Managers UBS Warburg Wachovia Securities ----------------- Thomas Weisel Partners LLC Leerink Swann & Company SunTrust Robinson Humphrey - -------------------------------------------------------------------------------- No person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained or incorporated by reference herein is correct as of any time subsequent to the date of such information. TABLE OF CONTENTS - -------------------------------------------------------------------------------- Prospectus summary..................... 3 Risk factors........................... 8 Special note regarding forward-looking statements........................... 18 Use of proceeds........................ 19 Market price of common stock........... 20 Capitalization......................... 21 Dilution............................... 22 Selected consolidated financial data... 23 Management's discussion and analysis of financial condition and results of operations........................ 24
Management................................ 29 Underwriting.............................. 32 Where can you find more information....... 35 Incorporation of certain documents by reference............................... 35 Legal matters............................. 36 Experts................................... 36 Index to consolidated financial statements F-1
- -------------------------------------------------------------------------------- "Salix", "Colazal" and "Lumenax" are trademarks of Salix Pharmaceuticals, Ltd. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. As used in this prospectus, the terms "we," "us," "our," the "Company" and "Salix" mean Salix Pharmaceuticals, Ltd. and its subsidiaries (unless the context indicates a different meaning), and the term "common stock" means our common stock, $0.001 par value per share. - -------------------------------------------------------------------------------- Prospectus summary The following summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus, including "Risk factors" and the financial statements, and the information incorporated by reference in this prospectus, before making an investment decision. ABOUT OUR COMPANY We are a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. Our strategy is to: . identify and acquire rights to products that we believe have potential for near-term regulatory approval or are already approved; . apply our regulatory, product development, and sales and marketing expertise to commercialize these products; and . use our 60-person sales force focused on high-prescribing U.S. gastroenterologists, who are doctors who specialize in gastrointestinal diseases, to sell our products. Our first two products demonstrate our ability to execute this strategy. These products are: . balsalazide disodium, which we sell in the United States under the brand name Colazal(TM); and . rifaximin, which, if approved by the U.S. Food and Drug Administration, or FDA, we intend to sell in the United States under the brand name Lumenax/TM. / We licensed balsalazide from Biorex Laboratories Limited in 1992 and completed the development work, which resulted in FDA approval in July 2000. We licensed rifaximin from Alfa Wassermann S.p.A. in 1996. In December 2001, we submitted a New Drug Application, or NDA, to the FDA for rifaximin as a treatment for travelers' diarrhea. Following receipt of regulatory approval to market a drug for an initial disease or condition, known as an indication, we might perform clinical studies for other indications to expand the approved use of the drug. We currently market Colazal and intend, if approved by the FDA, to market 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 appropriate. In connection with our commercial launch of Colazal, we hired approximately 30 sales representatives in late 2000. To more effectively cover the gastroenterology market, we expanded our sales force to over 60 people during 2001. We believe our sales force should also position us to sell additional products. Colazal(TM) (balsalazide disodium) Our first marketed product, Colazal, was the first new molecular entity approved in 10 years by the FDA for the treatment of mildly to moderately active ulcerative colitis and the first new oral therapy approved by the FDA for this indication in seven years. Ulcerative colitis is a chronic form of inflammatory bowel disease 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. This disease affects roughly 500,000 people in the United States, typically with onset under the age of 40. The cause of ulcerative colitis is unknown and no known cure exists except for the removal of the colon. Oral branded prescription products containing the active therapeutic agent 5-ASA are the first line of 3 treatment and most frequently prescribed class of drugs for ulcerative colitis, with 2001 U.S. retail sales of approximately $390 million. In terms of prescription dollar sales, the market for 5-ASA products has been growing at an annual compound rate exceeding 25% for the last 10 years. Colazal contains 5-ASA, as does Asacol(R), the market-leading drug with retail sales of approximately $280 million in 2001. In clinical trials, Colazal demonstrated at least comparable efficacy and had an improved safety profile as compared to some other oral 5-ASA products. Other 5-ASA products often do not deliver optimal doses of the active therapeutic agent to the colon. However, because Colazal's proprietary formulation allows 99% of the drug to reach the colon, it can work more quickly and effectively than comparable doses of other 5-ASA products that deliver less drug to the diseased area. In addition, some other 5-ASA products have historically been associated with side effects that cause up to 30-40% of patients to discontinue treatment. We launched Colazal in the United States in January 2001 using our own sales force. We sold $14.1 million worth of Colazal in the United States in the year ended December 31, 2001. Lumenax(TM) (rifaximin) Our second drug, Lumenax, is an antibiotic that, if approved by the FDA, we intend to establish as the drug of choice for the treatment of travelers' diarrhea and a broad range of other gastrointestinal bacterial infections. According to the National Ambulatory Medical Care and National Hospital Ambulatory Medical Care surveys, between 1992 and 1996 (the most recent period for which we are aware there is publicly available information) patients visited physicians on average over 15 million times annually in the United States due to diarrhea, vomiting or gastrointestinal infections. According to the Centers for Disease Control, each year between 20% and 50% of international travelers, an estimated 10 million people, develop diarrhea, with approximately 80% of the cases caused by bacteria. Based upon recent data, between 4 million and 5 million people sought treatment in the United States for diarrhea in 2001 and approximately 3.3 million of those patients were prescribed a drug. We believe the advantages of Lumenax to treat these infections are two-fold: (1) site-targeted antibiotic delivery; and (2) improved tolerability compared to other treatments. Less than 0.1% of the drug is absorbed into the bloodstream when it is taken orally, which means that substantially all of the drug is available to destroy bacteria at the site of the infection. In addition, the drug might also cause fewer side effects or discomforts such as nausea, headache or dizziness than observed with currently available, more highly-absorbed antibiotics. Furthermore, we believe Lumenax is also less likely to cause systemic resistance, in which the body blocks the effectiveness of the drug, or harmful interaction with other drugs a patient is taking. We have completed two Phase III clinical studies of Lumenax for the treatment of travelers' diarrhea. Data from these Phase III studies indicated that Lumenax is statistically more effective than placebo and that it had comparable efficacy and tolerability to ciprofloxacin, the market leader for the treatment of travelers' diarrhea. We submitted an NDA for the treatment of travelers' diarrhea to the FDA in December 2001. Based on a pre-submission review of portions of the NDA, the FDA has indicated that additional clinical data might be necessary to gain approval for Lumenax. Accordingly, we intend to commence an additional clinical study to supplement the NDA. The protocol for this study is under review by the FDA. 4 We also intend to investigate the use of Lumenax in other indications, including bacterial overgrowth of the small intestine, antibiotic-associated and other forms of colitis, pouchitis, Crohn's disease, diverticular disease and hepatic encephalopathy. The FDA has granted Lumenax Orphan Drug status for the treatment of hepatic encephalopathy, which might allow for priority review and, if approved by the FDA, would provide for seven years of market exclusivity for this indication. Hepatic encephalopathy is a rare syndrome caused by a build-up of toxic products, such as ammonia, due to advanced liver disease. ----------------- Our principal executive offices are located at 8540 Colonnade Center Drive, Suite 501, Raleigh, North Carolina 27615 and our telephone number at that location is (919) 862-1000. Information contained on our website, www.salixpharm.com, is not part of this prospectus. 5 The offering Common stock offered..................... 4,000,000 shares Common stock to be outstanding after this offering............................... 20,713,544 shares Use of proceeds.......................... Potential acquisition of additional new products; marketing and, if necessary, development of these products; development and commercialization of Lumenax as a treatment for travelers' diarrhea; development and commercialization of additional indications for both Colazal and Lumenax; general corporate purposes; and working capital. See "Use of Proceeds". Nasdaq National Market Symbol............ SLXP
The number of shares of our common stock to be outstanding after this offering in the table above is based on the number of shares outstanding as of February 8, 2002, and does not include, as of that date: . 16,667 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $3.00 per share; . 2,160,603 shares of our common stock issuable upon exercise of outstanding options issued under our stock option plans at a weighted average exercise price of $8.41 per share; and . an additional 987,823 shares of common stock available for future issuance under our stock option plans. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option we granted to the underwriters. 6 Summary consolidated financial data
Year Ended December 31, ---------------------------------- Consolidated Statement of Operations Data 1999 2000 2001 - ------------------------------------------------------------------------------------------------- (U.S. dollars, in thousands, excep per share data) Revenues: Product revenue............................................ $ 491 $ 6,307 $ 14,129 Revenues from collaborative agreements..................... 2,602 8,235 8,221 ------- ------- -------- Total revenues......................................... 3,093 14,542 22,350 Expenses: Cost of products sold...................................... 878 2,287 3,495 License fees and costs related to collaborative agreements. 297 4,173 5,583 Research and development................................... 4,787 3,844 6,629 Selling, general and administrative........................ 1,932 7,412 24,688 ------- ------- -------- Total expenses......................................... 7,894 17,716 40,395 ------- ------- -------- Loss from operations.......................................... (4,801) (3,174) (18,045) Interest, other income (expense), net......................... 190 208 547 Income taxes.................................................. -- (9) -- ------- ------- -------- Net loss...................................................... $(4,611) $(2,975) $(17,498) ======= ======= ======== Net loss per share, basic and diluted /(1)/................... $ (0.45) $ (0.26) $ (1.13) ======= ======= ======== Shares used in computing net loss per share /(1)/............. 10,209 11,356 15,456
As of December 31, 2001 ------------------------ Consolidated Balance Sheet Data Actual As Adjusted/(2)/ ------------------------------- -------- --------------- Cash and cash equivalents... $ 27,868 $ 92,842 Working capital............. 26,308 91,282 Total assets................ 38,590 103,564 Accumulated deficit......... (45,884) (45,884) Stockholders' equity........ 27,594 92,568
------ (1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of shares used in computing net loss per share. (2) Assumes the issuance and sale of 4,000,000 shares of common stock in this offering at an assumed price of $17.40 per share, after deducting the underwriting discount and estimated offering expenses payable by us. 7 - -------------------------------------------------------------------------------- Risk factors You should be aware that there are various risks to an investment in our common stock, including the material ones described below. Other risks we are not aware of or that we currently believe immaterial could affect your investment. You should carefully consider these risk factors, together with all of the other information included and incorporated by reference in this prospectus. If any of the following risks or other risks not known to us now or that we currently believe immaterial 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 might lose all or part of your investment. RISKS RELATING TO OUR BUSINESS We have a history of operating losses and negative cash flow from operations and expect future losses and negative cash flow from operations, which could have an adverse impact on your investment. We have had net losses in all but one quarter since our inception in 1992 and until December 2000 we had not realized any material operating revenues from product sales. We have also experienced negative cash flows from operations in each year since we became a public company. We have spent and will continue to be required to spend substantial funds to continue development and marketing activities. To the extent we acquire rights to additional products, our costs associated with these activities can be expected to increase further. We currently expect operating losses and negative cash flow from operations to continue for the forseeable future, and our losses could be greater than those realized by us historically. We might never be profitable or generate positive cash flow from operations on a consistent or predictable basis. As of December 31, 2001, we had incurred cumulative losses since inception of approximately $45.9 million. Regulatory approval of our products is time-consuming, expensive and uncertain, and could result in unexpectedly high expenses and delay our ability to sell our products. Development, manufacture and marketing of our products are subject to extensive regulation by governmental authorities in the United States and other countries. This regulation could require us to incur significant unexpected expenses or delay or limit our ability to sell our products. We submitted an NDA for Lumenax to the FDA in December 2001. Based on a pre-submission review of portions of the NDA, the FDA has indicated that additional clinical data might be necessary to gain approval for Lumenax. Accordingly, we intend to commence an additional clinical study to supplement the NDA. The protocol for this study is under review by the FDA. The study results might not be positive and we might not be able to provide the FDA with results in time to be considered by the FDA within the review period. Even if the study results are positive, our NDA might not be approved. Our clinical studies for Lumenax or any other product might be delayed or halted for various reasons, including: . the drug is not effective; . patients experience severe side effects during treatment; . patients do not enroll in the studies at the rate we expect; - -------------------------------------------------------------------------------- 8 Risk factors - -------------------------------------------------------------------------------- . drug supplies are not sufficient to treat the patients in the studies; . we decide to modify the drug during testing; or . we do not have adequate funds to continue the testing. If regulatory approval of Lumenax or any other product is granted, it will be limited to those indications for which the product has been shown to be safe and effective, as demonstrated to the FDA's satisfaction through clinical studies. Approval might entail ongoing requirements for post-marketing studies. Even if regulatory approval is obtained, such as with Colazal, labeling and promotional activities are subject to continual scrutiny by the FDA and state regulatory agencies and, in some circumstances, the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved products for unapproved, or off-label, uses. Marketing an approved product for a new use requires a separate approval by the FDA. These regulations and the FDA's interpretation of them might impair our ability to effectively market our products. We and our third-party manufacturers are also required to comply with the applicable FDA current Good Manufacturing Practices, or cGMP, regulations which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Further, manufacturing facilities must be approved by the FDA before they can be used to manufacture our products, and they are subject to additional FDA inspection. If we fail to comply with any of the FDA's continuing regulations, we could be subject to sanctions, including: . delays, warning letters and fines; . product recalls or seizures and injunctions on sales; . refusal of the FDA to review pending applications; . total or partial suspension of production; . withdrawals of previously approved marketing applications; and . civil penalties and criminal prosecutions. In addition, identification of 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 testing or changes in labeling of the product. Balsalazide is approved as a treatment for acute ulcerative colitis in Austria, Belgium, Denmark, Italy, Luxembourg and Sweden through the mutual recognition process of the European Union. In 1998, our then licensee withdrew marketing applications from other European Union countries because of a failure to meet time constraints of the review period required by the mutual recognition process. These countries are Finland, France, Germany, Greece, Ireland, The Netherlands, Portugal and Spain. Resubmission in these countries will primarily be the responsibility of our current licensees for these countries, Shire Pharmaceuticals and Menarini, and they might not pursue these applications. Balsalazide might not receive approval from regulatory agencies in any member country of the European Union where the marketing application was withdrawn. - -------------------------------------------------------------------------------- 9 Risk factors - -------------------------------------------------------------------------------- We began a Phase III clinical trial for rifaximin as a treatment for hepatic encephalopathy in Europe during the first quarter of 2001 and in the United States during the second quarter of 2001. The European arm of the trial was terminated in the summer of 2001 due to low enrollment. We are seeking to increase enrollment in the U.S. arm of the trial, but we might not be successful in reaching the needed patient enrollment, which might negatively impact the trial. Our success and revenue currently depend on two compounds; if we do not continue to successfully market Colazal, if we do not receive FDA approval and successfully commercialize Lumenax or if we do not acquire new products to market, our revenue might not grow, which could negatively affect our stock price. We currently have rights to only two pharmaceutical compounds, balsalazide, which we market in the United States under the brand name Colazal, and rifaximin, which, if approved by the FDA, we intend to market in the United States under the brand name Lumenax. Our prospects over the next three to five years are substantially dependent on the successful commercialization of these compounds. We expect to engage in expensive advertising, educational programs and other means to market our future products. The degree of market acceptance of our products among physicians, patients, healthcare payors and the medical community will depend upon a number of factors including: . demonstration of their clinical efficacy and safety; . their cost effectiveness; . their potential advantages over alternative treatment methods; . the marketing and distribution support they receive; and . reimbursement policies of government and third-party payors. Virtually all of our product sales revenue to date has come from balsalazide. We expect that a significant portion of our potential revenue for the next few years will depend on regulatory approval of rifaximin and sales of both balsalazide and rifaximin. Even if balsalazide and rifaximin generate revenue and profits, our ability to increase revenue in the future will depend in part on our success in in-licensing or acquiring additional pharmaceutical products. Our license agreement with Alfa Wassermann provides that we may not promote, distribute or sell any antibiotic product that competes with rifaximin in the United States and Canada for a period of five years after the first commercial sale of rifaximin, thereby limiting our ability to acquire, develop or market other antibiotic products. We currently intend 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 or that have already received regulatory approval. These kinds of pharmaceutical products might not be available to us on attractive terms or at all. To the extent we acquire rights to additional products, we might incur significant additional expense in connection with the development and, if approved by the FDA, marketing of these products. Our intellectual property rights might not afford us with meaningful protection. We cannot assure you that our intellectual property rights with respect to balsalazide and rifaximin will afford us with meaningful protection from competition. In addition, because our strategy is to in-license or acquire pharmaceutical products which typically have been discovered and initially researched by others, future products might 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 expired in July 2001 in the United States. We have obtained patent extensions for the composition of balsalazide in Italy and the United Kingdom until July 2006. The - -------------------------------------------------------------------------------- 10 Risk factors - -------------------------------------------------------------------------------- patents for the rifaximin composition of matter (also covering a process of making rifaximin and using rifaximin to treat gastrointestinal infectious diseases) expired in May 2001 in the United States and Canada. We believe we may be eligible for additional extensions of our patents relating to balsalazide and rifaximin of up to five years (including extensions of our expired patents 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, these extensions might not be granted. We have filed applications for patents for additional indications using balsalazide and related chemical substances, but we might not be issued any new patents. Competitors could also design around any of our intellectual property or otherwise design competitive products that do not infringe our intellectual property. In 2000, the FDA granted us five years of new chemical entity data exclusivity for balsalazide. This means that during the period of exclusivity other companies cannot use our data to support approval of a competitive version of balsalazide and must conduct new clinical trials to support any application seeking approval of a competing drug. This may have the effect of excluding others from marketing balsalazide in the United States until July 2005. We intend to request similar exclusivity for rifaximin, although the FDA might not grant our request. We acquired our rights to balsalazide and rifaximin under license agreements with Biorex and Alfa Wassermann, respectively. If either Biorex or Alfa Wassermann terminates its license agreement with us, we would have no further rights to use their intellectual property to manufacture and market balsalazide or rifaximin, as the case may be, which would have a material adverse effect on our future prospects. Our rights under these licenses are subject to early termination by Biorex or Alfa Wassermann, as the case may be, upon material breach by us or our bankruptcy or insolvency. Our licenses for balsalazide and rifaximin provide that our royalty obligations extend beyond the expiration date of the underlying patents, which could limit our ability to profitably sell those products if a generic version were introduced. In addition, the patent rights licensed under the license will not provide us with exclusivity as to the treatment of any particular illness. It may be the case that another branded or generic manufacturer may be able to lawfully compete with us. Under existing United States patent law, in some cases a license arrangement providing for payment of royalties beyond the expiration date of the underlying patents could render portions of the license arrangement or the underlying patents unenforceable. We cannot assure you that these provisions in our license agreements would not render portions of the agreements or the underlying patents unenforceable. 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. These agreements might be breached and we might not have adequate remedies for any breach. In addition, our trade secrets and proprietary know-how might otherwise become known or be independently developed by others. Any litigation that we may become involved in order to enforce intellectual property rights could result in substantial cost to us. In addition, our intellectual property rights might not provide us with any meaningful competitive protection. Claims by others that we infringe their intellectual property could be costly to us. Our patent or other proprietary rights related to our products might conflict with the current or future intellectual property rights of others. Because we have launched our first product in the United States, and are developing one other compound, intellectual property claims could be particularly damaging to our business. Litigation or patent interference proceedings, either of which could result in substantial cost - -------------------------------------------------------------------------------- 11 Risk factors - -------------------------------------------------------------------------------- to us, might be necessary to defend any patents to which we have rights and our other proprietary rights or to determine the scope and validity of other parties' proprietary rights. The defense 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 product. We might not be able to obtain a license to any third-party technology that we require to conduct our business, or, if obtainable, that technology might not be available at a reasonable cost. We could be exposed to significant product liability claims that could prevent or interfere with our product commercialization efforts. We might be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of our products. These claims could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Although we currently maintain liability coverage for both clinical trials and the commercialization of our products, it is possible that this coverage will be insufficient to satisfy any liabilities that may arise. In the future we might not be able to obtain adequate coverage at an acceptable cost or we might be unable to obtain adequate coverage at all. Intense competition might render our products noncompetitive or obsolete. Competition in our business is intense and characterized by extensive research efforts and rapid technological progress. 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 and could have a material adverse effect on our revenue and results of operations. We believe that there are numerous pharmaceutical and biotechnology companies, 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. Developments by others might render our current and potential products obsolete or non-competitive. Competitors might 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 indications for balsalazide, including mesalamine (GlaxoSmithKline plc, Dr. Falk Pharma GmbH, Axcan Pharma, Inc., Solvay S.A., The Procter & Gamble Company and Shire Pharmaceuticals Group plc), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia & Upjohn, Inc.). Asacol, marketed by Proctor & Gamble, is currently the most prescribed product for the treatment of ulcerative colitis in the United States. The most frequently prescribed product for treatment of travelers' diarrhea in the United States currently is ciprofloxacin, commonly known as "cipro." If third-party payors do not provide coverage or reimburse patients for our products, our ability to derive revenues will suffer. Our success will depend in part on the extent to which government and health administration authorities, private health insurers and other third-party payors will pay for our products. Reimbursement for newly approved healthcare products is uncertain. In the United States and elsewhere, third-party payors, such as Medicare, are increasingly challenging the prices charged for medical products and services. Government and other third-party payors are increasingly attempting to contain - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products. In the United States, a number of legislative and regulatory proposals aimed at changing the healthcare system have been proposed in recent years. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on pharmaceutical pricing. While we cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts, including those relating to Medicare payments, might have on our business, the announcement and/or adoption of such proposals or efforts could increase our costs and reduce or eliminate profit margins. Third party insurance coverage might not be available to patients for our products. If government and other third party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products might be reduced. Our limited sales and marketing experience could limit our revenue. We have limited experience in marketing and selling our products either directly or through our relationships with licensees, which could materially and adversely impact our ability to generate significant revenue. We hired our first 30 sales representatives in late 2000 and hired approximately 30 more during 2001 for the purpose of achieving direct sales of Colazal, rifaximin and other future products in the United States. Many of our competitors have considerably more experience marketing to gastroenterologists than we do, and longer physician relationships than ours. Our marketing and direct sales efforts might not be successful. We do not receive product royalties from sales of balsalazide outside the United States under our current distribution relationships; and other distribution relationships for products outside the United States might not be available to us or, if entered into, might not be successful. Our strategy for the sale of our products outside the United States is to enter into distribution relationships. As a result, we expect that any revenue relating to foreign sales of our products will depend on relationships with third parties. We do not expect significant future revenue from our existing distribution relationships for balsalazide with Menarini and Shire. Our license agreements with Shire and Menarini entitle us to milestone payments, but not royalties from sales of balsalazide by Shire and Menarini. The remaining milestone payments relate to approvals of balsalazide for marketing in certain European countries where balsalazide currently is not approved. The additional milestones might not be obtained and the decision to seek approval in these countries is not within our control. While we are entitled to additional royalties on the sale of bulk product to Menarini, we do not expect any additional bulk sales for at least two years because of Menarini's current supply surplus. There are no specific financial thresholds that Shire must achieve to maintain its exclusivity. In addition, although Menarini has agreed to use its best endeavors to promote, market and sell balsalazide in its exclusive markets, there are no specified financial thresholds that Menarini must achieve to maintain its exclusivity. The Shire agreement and the Menarini agreement currently have no set expiration dates. Upon the expiration or termination of these agreements, we might not be able to negotiate new distribution arrangements for balsalazide and any new arrangements might not be successful. We might not be able to negotiate acceptable distribution arrangements for Lumenax or any other future product outside the United States. Any future distribution arrangements might not be successful or might be terminated by the other party. The amount and timing of resources to be devoted to distribution of our products outside the United States in most instances will not be within our control. - -------------------------------------------------------------------------------- 13 Risk factors - -------------------------------------------------------------------------------- We are dependent on third parties to manufacture our products. We have limited experience and capabilities in manufacturing of pharmaceutical products. We do not generally expect to engage directly in the manufacturing of products, but instead contract with others for these services. Our manufacturing strategy presents the following risks: . the manufacture of our products might be difficult to scale-up when large scale production is required and subject to delays, inefficiencies and poor or low yields of quality products; . some of our contracts contain purchase commitments that require us to make minimum purchases that might exceed our needs or limit our ability to negotiate with other manufacturers, which might increase our costs; . the cost of manufacturing certain of our products might make them prohibitively expensive; . delays in scale-up to commercial quantities and any change in manufacturers could delay clinical studies, regulatory submissions and commercialization of our products; . manufacturers of our products are subject to the FDA's cGMP regulations and similar foreign standards, and we do not have control over compliance with these regulations by the third-party manufacturers; and . if we need to change manufacturers, FDA and comparable foreign regulators would require new testing and compliance inspections and the new manufacturers would have to be educated in the processes necessary for the production of our products. We contract with Diosynth Limited and OmniChem s.a. for the manufacture of balsalazide. If our supply of balsalazide were interrupted, we could be materially adversely affected until we could make alternative arrangements for supply. While we believe alternative suppliers could be identified, it could take significant time for any alternate supplier to scale-up its manufacturing of balsalazide. In addition, balsalazide might not be available from an alternate supplier at a favorable price. If we make any acquisitions, we will incur a variety of costs and might never successfully integrate the acquired product or business into ours. We might attempt to acquire products or businesses that we believe are a strategic complement to our business model. We might encounter operating difficulties and expenditures relating to integrating an acquired product or business. These acquisitions might require significant management attention that would otherwise be available for ongoing development of our business. In addition, we might never realize the anticipated benefits of any acquisition. We might also make dilutive issuances of equity securities, incur debt or experience a decrease in cash available for our operations, or incur contingent liabilities and/or amortization expenses relating to goodwill and other intangible assets, in connection with any future acquisitions. Failure to manage our growth could increase our expenses faster than our revenue. We have experienced significant growth in the number of our employees and the scope of our operations. In support of the January 2001 launch of Colazal in the United States, our number of employees has increased from approximately 15 on September 30, 2000 to approximately 110 on December 31, 2001. This growth and expansion placed a significant strain on our management and operations. For example, in mid-2001 we reorganized and doubled the size of our sales force, which contributed to a temporary slowdown in the growth of our sales. Our continued growth might place further strains on our management and operations. Our ability to manage 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 - -------------------------------------------------------------------------------- 14 Risk factors - -------------------------------------------------------------------------------- our operational, management information and financial control systems and to expand, train and manage our employee base. Our results of operations have fluctuated significantly from period to period, and a failure to meet the expectations of investors or the financial community at large could result in a decline in our stock price. Our results of operations might fluctuate significantly on a quarterly and annual basis due to, among other factors: . the timing of any up-front payments that we might be required to pay in connection with any future acquisition of product rights; . the timing of milestone payments that we might be required to pay to our current or future licensors; . fluctuations in our research and development and other costs in connection with ongoing product development programs; . the timing of regulatory approvals and product launches; . the level of marketing and other expenses required in connection with product launches and ongoing product growth; . the level of revenue generated by commercialized products; . the timing of the acquisition and integration of businesses, assets, products and technologies; and . general and industry-specific business and economic conditions. Any adverse fluctuations in our results of operations, or failure to meet analyst or investor expectations, could cause our stock price to decline. Our actual financial results might vary from those anticipated by us. Our actual financial results might vary from those anticipated by us, and these variations could be material. Our 2001 earnings release, which is incorporated by reference in this prospectus, contained our forecasted revenues for 2002. This forecast reflects numerous assumptions concerning our anticipated future performance and with respect to the prevailing market and economic conditions which are beyond our control and which might not turn out to have been correct. Although we believe that the assumptions underlying the projections are reasonable, actual results could be materially different. Our revenues and expenses are subject to numerous risks and uncertainties, including those identified throughout these "Risk factors" and elsewhere in this prospectus and the documents incorporated by reference. RISKS RELATED TO OWNING OUR STOCK Our stock price is volatile, which makes investing in our common stock risky. Our stock price has been extremely volatile and might continue to be, making an investment in our company risky. Between February 26, 2001, when our common stock started trading on the Nasdaq National Market, and February 11, 2002, the price of a share of our common stock varied from $9.15 to $25.23. Between November 20, 2000, when our common stock started trading on the Nasdaq SmallCap Market, and February 23, 2001, the price of a share of our common stock varied from $5.75 to $15.50. In the last 12 months that our common stock was traded on the Toronto Stock Exchange, ending November 24, 2000, the price per share dropped as low as $0.18 Canadian. Trading volume in our common stock has been low. - -------------------------------------------------------------------------------- 15 Risk factors - -------------------------------------------------------------------------------- The securities markets have experienced significant price and volume fluctuations unrelated to the 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 prescription trends, technological innovations or new products by us or our competitors, developments or disputes concerning proprietary rights, publicity regarding 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. Investors in this offering will experience immediate and substantial dilution. The public offering price of our common stock is expected to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the pro forma net tangible book value per share of common stock from the price per share that you pay for the common stock. For more details, see "Dilution." If the holders of outstanding options or warrants exercise those options or warrants at prices below the public offering price, you will incur further dilution. We will have broad discretion concerning the use of the proceeds of this offering and our results of operations might suffer if the proceeds are not applied effectively. We will retain broad discretion over the use of proceeds from this offering. You might not agree with how we spend the proceeds, and our use of the proceeds might not yield a significant return or any return at all. See "Use of Proceeds" for a description of our current plans for using the proceeds from this offering. Because of the number and variability of factors that determine our use of proceeds from this offering, our ultimate use of the proceeds might vary substantially from our currently planned uses. If we do not apply the proceeds effectively, our results of operations could suffer. A substantial number of our shares are eligible for future sale and the sale of our shares into the market might negatively affect our stock price. Our stock price may be depressed by future sales of our shares or the perception that such sales may occur. We had 16,713,544 shares outstanding as of February 8, 2002. Of these shares, 3,440,971 shares were owned by our officers and directors, or their affiliates, and are considered restricted shares. In addition, we sold a total of 4,220,000 shares of our common stock in private placements in November 2000 and May 2001. Because we sold these shares in private placements they also are considered restricted shares. However, we registered all of these shares with the SEC for resale, and, as a result, they may be sold at any time, subject to some limitations. Sales of substantial amounts of our common stock in the public market by these holders might lower our common stock's market price. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Antitakeover provisions could discourage a takeover that you consider to be in your best interest or prevent the removal of our current directors and management. We have adopted a number of provisions that could have antitakeover effects or prevent the removal of our current directors and management. We have adopted a stockholder protection rights plan, commonly referred to as a poison pill. The rights plan is intended to deter an attempt to acquire Salix in a manner or on terms not approved by the Board of Directors. The rights plan will not prevent an acquisition that is approved by the Board of Directors. Our charter authorizes the Board of Directors to determine the terms of up to 5,000,000 shares of undesignated preferred stock and issue them without stockholder - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- approval. The issuance of preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, voting control of Salix in order to remove our current directors and management. Our bylaws also eliminate the ability of the stockholders to act by written consent without a meeting, which could hinder the ability of stockholders to quickly take action that might be opposed by management. These provisions could make more difficult the removal of our current directors and management or a takeover of Salix, even if these events could be beneficial to our stockholders. These provisions could also limit the price that investors might be willing to pay for our common stock. The September 11, 2001 terrorist attacks on the United States might have unpredictable adverse effects on global economic conditions, the financial markets and our business and results of operations. The September 11, 2001 terrorist attacks on the World Trade Center in New York and the Pentagon in Washington, D.C., have caused uncertainty and volatility in the U.S. and international economies and financial markets, and coincided with an overall weakening of economic conditions. In addition, there might be further terrorist attacks against the United States or U.S. businesses operating abroad. We cannot predict what effect these events, including the retaliatory measures that have been taken, and those that might be taken in the future, might have on global economic conditions, the financial markets, or on our business and results of operations. - -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- Special note regarding forward-looking statements Some of the statements contained in this prospectus and in documents we incorporate by reference 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," "might," "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 and in documents we incorporate by reference 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 ability to manage rapid growth; . Our limited sales and marketing experience; . The high cost and uncertainties relating to clinical trials; . The unpredictability of the duration and results of regulatory review; . Our dependence on 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 and the documents incorporated by reference. In evaluating these forward-looking statements, you should specifically consider the risks described above and in other parts of this prospectus, including the "Risk Factors" section, and in the documents we incorporate by reference. These factors might cause our actual results to differ materially from those discussed in this prospectus and in documents we incorporate by reference. - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- Use of proceeds We estimate that the net proceeds from the sale of 4,000,000 shares of common stock in this offering will be approximately $65.0 million, assuming a public offering price of $17.40 per share, and after deduction of the underwriting discount and our other estimated expenses in connection with the offering. If the underwriters fully exercise their over-allotment option, we estimate that the net proceeds from the sale of the shares in this offering will be approximately $75.0 million. We intend to use the net proceeds of this offering for the potential acquisition of additional products; marketing and, if necessary, development of these products; the development and commercialization of our second product, Lumenax, as a treatment for travelers' diarrhea; the development and commercialization of new indications for both Colazal and Lumenax; general corporate purposes; and working capital. The timing and amount of our actual expenditures are subject to change and will be based on many factors, including: . our ability to identify and negotiate arrangements to in-license or otherwise acquire rights to new drugs; . the time and cost necessary to obtain regulatory approvals; . the time and cost necessary to respond to technological and market developments; and . any changes made or new developments in our existing collaborative, licensing and other commercial relationships or any new collaborative, licensing and other commercial relationships that we might establish. We have discussions from time to time regarding potential acquisitions and licensing opportunities. We might use a portion of the net proceeds for this purpose although we currently have no material agreements or commitments of this kind. We reserve the right, at the sole discretion of our Board of Directors, to reallocate our use of proceeds in response to these and other factors. Until we use the net proceeds of this offering, we intend to invest the funds in interest-bearing securities. - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- Market price of common stock Prior to November 20, 2000, our common stock traded solely on The Toronto Stock Exchange under the symbol "SLX". On November 20, 2000, our common stock began trading on the Nasdaq SmallCap Market under the symbol "SLXP" quoted in United Sates dollars. On November 24, 2000, we de-listed our common stock from The Toronto Stock Exchange and began trading our common stock on the Nasdaq SmallCap Market exclusively. On February 26, 2001, we began trading on the Nasdaq National Market. The following table sets forth the high and low sales prices of our common stock, as reported on The Toronto Stock Exchange, the Nasdaq SmallCap Market, and the Nasdaq National Market.
Shares Traded Shares Traded Under Symbol Under Symbol "SLX" "SLXP" ------------------ -------------- High Low High Low --------------------------------------------------------------------------- (Canadian dollars) (U.S. dollars) Fiscal year ended December 31, 2000 First quarter............................ $ 3.60 $0.60 Second quarter........................... 2.60 1.00 Third quarter............................ 11.00 2.30 Fourth quarter........................... 17.75 8.40 $12.00 $ 5.75 Fiscal year ended December 31, 2001 First quarter............................ $15.50 $ 8.50 Second quarter........................... 25.23 13.75 Third quarter............................ 24.95 9.15 Fourth quarter........................... 22.50 12.36 Fiscal year ending December 31, 2002 First quarter (through February 11, 2002) $20.35 $16.15
On February 11, 2002, the last reported sale price of our common stock on the Nasdaq National Market was $17.26 per share. As of February 8, 2002, there were approximately 3,500 stockholders of record of our common stock. We have never paid a cash dividend on our common stock, and do not expect to do so in the foreseeable future. - -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- Capitalization The following table sets forth our capitalization at December 31, 2001 on an actual basis and on an as adjusted basis, after giving effect to the issuance and sale of 4,000,000 shares of common stock in this offering at an assumed public offering price of $17.40 per share, less the underwriting discount and estimated offering expenses payable by us.
At December 31, 2001 -------------------- As Actual Adjusted - ------------------------------------------------------------------------------------------------------ (in thousands) Cash and cash equivalents........................................................ $ 27,868 $ 92,842 ======== ======== Stockholders' equity: Preferred stock, par value $0.001; 5,000,000 shares authorized, no shares issued or outstanding................................................................ -- -- Common stock, par value $0.001; 40,000,000 shares authorized; 16,708,681 shares issued and outstanding, actual, and 20,708,681 shares issued and outstanding, as adjusted....................................................... 17 21 Additional paid in capital....................................................... 73,461 138,431 Accumulated deficit.............................................................. (45,884) (45,884) -------- -------- Total stockholders' equity.................................................... 27,594 92,568 -------- -------- Total liabilities and stockholders' equity.................................. $ 38,590 $103,564 ======== ========
The number of shares of our common stock in the actual and as adjusted columns in the table above excludes: . 16,667 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $3.00 per share; . 2,165,466 shares of our common stock issuable upon exercise of outstanding options issued under our stock option plans at a weighted average exercise price of $8.41 per share at December 31, 2001; and . an additional 987,823 shares of common stock available for future issuance under our stock option plans at December 31, 2001. - -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- Dilution Our net tangible book value on December 31, 2001 was $27.6 million, or approximately $1.65 per share. "Net tangible book value" is total assets minus the sum of liabilities and intangible assets. "Net tangible book value per share" is net tangible book value divided by the total number of shares of common stock outstanding. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of our common stock immediately after completion of this offering. After giving effect to the sale of 4,000,000 shares of our common stock in this offering at an assumed public offering price of $17.40 per share and after deducting the underwriting discount and our estimated offering expenses, our net tangible book value as of December 31, 2001 would have been $5.53 per share. This amount represents an immediate increase in net tangible book value of $3.88 per share to existing stockholders and an immediate dilution in net tangible book value of $11.87 per share to purchasers of common stock in this offering, as illustrated in the following table: Assumed public offering price per share......................................... $17.40 Net tangible book value per share as of December 31, 2001.................... $1.65 Increase in net tangible book value per share attributable to this offering.. 3.88 ----- Pro forma net tangible book value per share as of December 31, 2001 after giving effect to this offering....................................................... 5.53 ------ Dilution per share to new investors in this offering............................ $11.87 ======
This table: . assumes no exercise of an outstanding warrant to purchase 16,667 shares of common stock at an exercise price of $3.00 per share; . assumes no exercise of options to purchase 2,165,466 shares of common stock at a weighted average exercise price of $8.41 per share outstanding as of December 31, 2001. To the extent that these options and warrants are exercised there will be further dilution to new investors. - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- Selected consolidated financial data This section presents our selected consolidated financial data. You should carefully read the financial statements included in this prospectus, including the notes to these financial statements. The selected data in this section is not intended to replace the financial statements. We derived the statement of operations data for the years ended December 31, 1997, 1998, 1999, 2000 and 2001 and balance sheet data as of December 31, 1997, 1998, 1999, 2000 and 2001 from audited financial statements. Historical results are not necessarily indicative of results that we may expect in the future.
Year Ended December 31, -------------------------------------------------- Consolidated Statements of Operations: 1997 1998 1999 2000 2001 - ------------------------------------------------------------------------------------------------------ (U.S. dollars, in thousands, except per share data) Revenues: Product revenue................................... $ 245 $ 559 $ 491 $ 6,307 $ 14,129 Revenues from collaborative agreements............ 1,821 1,000 2,602 8,235 8,221 -------- -------- -------- -------- -------- Total revenues................................. 2,066 1,559 3,093 14,542 22,350 Expenses: Cost of products sold............................. 827 926 878 2,287 3,495 License fees and costs related to collaborative agreements....................................... 461 78 297 4,173 5,583 Research and development.......................... 3,516 5,967 4,787 3,844 6,629 Selling, general and administrative............... 2,430 2,569 1,932 7,412 24,688 -------- -------- -------- -------- -------- Total expenses................................. 7,234 9,540 7,894 17,716 40,395 -------- -------- -------- -------- -------- Loss from operations.............................. (5,168) (7,981) (4,801) (3,174) (18,045) Interest, other income (expense), net............. 378 572 190 208 547 Income taxes...................................... -- -- -- (9) -- -------- -------- -------- -------- -------- Net loss.......................................... $ (4,790) $ (7,409) $ (4,611) $ (2,975) $(17,498) ======== ======== ======== ======== ======== Net loss per share, basic and diluted/(1)/........ $ (0.63) $ (0.73) $ (0.45) $ (0.26) $ (1.13) ======== ======== ======== ======== ======== Shares used in computing net loss per share/(1)/....................................... 7,613 10,208 10,209 11,356 15,456 ======== ======== ======== ======== ======== At December 31, -------------------------------------------------- Consolidated Balance Sheet Data: 1997 1998 1999 2000 2001 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents............................. $ 15,173 $ 2,763 $ 2,402 $ 13,244 $ 27,868 Short-term investments................................ -- 4,500 -- -- -- Working capital....................................... 13,884 6,553 2,013 12,408 26,308 Total assets.......................................... 15,878 8,256 3,659 25,761 38,590 Accumulated deficit................................... (13,391) (20,800) (25,411) (28,386) (45,884) Stockholders' equity.................................. 14,129 6,826 2,215 12,742 27,594
- -------- (1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of shares used in computing net loss per share. - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations Overview We are a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. Our strategy is to identify and acquire rights to products that we believe have potential for near-term regulatory approval or are already approved; apply our regulatory, product development, and sales and marketing expertise to commercialize these products; and use our 60-person sales force focused on high-prescribing U.S. gastroenterologists to sell our products. We rely on distribution relationships with third parties to sell our products outside the United States. We in-licensed rights to balsalazide disodium from Biorex Laboratories Limited in 1992. In 1993, we granted Astra AB an exclusive license to balsalazide disodium throughout the world, excluding Japan, Taiwan, Korea, Italy, Spain, Portugal and Greece. In 1999, Astra merged with Zeneca PLC, a British pharmaceutical company, to create AstraZeneca PLC. In December 1999, we signed an agreement with AstraZeneca under which the marketing and distribution rights for balsalazide disodium previously licensed by us to Astra would return to us. AstraZeneca returned all rights, intellectual property and information relating to balsalazide to us and future milestone payments from AstraZeneca were terminated. In May 2000, we signed an agreement with Shire Pharmaceuticals Group plc under which Shire purchased from us the exclusive rights to balsalazide disodium for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, The Netherlands, Switzerland, Sweden and the United Kingdom. Under the agreement, Shire agreed to pay us up to a total of approximately $24 million in cash and Shire stock, including approximately $12.1 million in up-front fees and up to $12 million upon the achievement of milestones. In accordance with our license agreement with Biorex, we shared and will continue to share a portion of the cash payments with Biorex. In addition, we delivered all of the Shire stock we received to Biorex. In May 2000, Shire paid us $9.6 million of cash and $2.5 million by way of the issuance of 160,546 Shire shares. In August 2000, Shire paid us $4.4 million in connection with the transfer to Shire of the United Kingdom product license for balsalazide. In July 2000, the FDA approved Colazal for marketing in the United States for the treatment of mildly to moderately active ulcerative colitis. In December 2000, we established our own 30-member, direct sales force to market Colazal in the United States. This sales force has been increased to over 60 members as of December 31, 2001. Although the creation of an independent sales organization involved substantial costs, we believe that the financial returns from balsalazide and rifaximin and other future products, if acquired and approved, will be more favorable to us than those from the indirect sale of product through marketing partners. In 1996, we in-licensed rights to our second drug, rifaximin, in the United States and Canada from Alfa Wassermann. In December 2001, we submitted an NDA to the FDA for rifaximin, which we intend to market in the United States under the trade name Lumenax, as a treatment for travelers' diarrhea. We believe there are opportunities to develop Lumenax for other indications, including bacterial overgrowth in the small intestine, antibiotic-associated and other forms of colitis, pouchitis, Crohn's disease, diverticular disease and hepatic encephalopathy, and we intend to pursue these opportunities as we - -------------------------------------------------------------------------------- 24 Management's discussion and analysis of financial conditions and results of operations - -------------------------------------------------------------------------------- deem appropriate. If FDA approval is obtained, we intend to market Lumenax in the United States through our own direct sales force. In November 2000, we raised approximately $13.1 million, net of offering expenses, through a private placement of 2.26 million shares of common stock. Also in November 2000, we listed and initiated trading of our securities on the Nasdaq SmallCap Market and subsequently ceased trading our securities on the Toronto Stock Exchange. In February 2001, we began trading our common stock on the Nasdaq National Market. In May 2001, we raised approximately $28.1 million, net of offering expenses, through a private placement of 1.96 million shares of common stock. On December 31, 2001, we changed our place of incorporation from the British Virgin Islands to the state of Delaware. Revenue Recognition Product sales are recorded upon shipment of order and transfer of title. In December 2000, we made our first U.S. sales of Colazal to wholesalers. Product sales in 1999 were limited to sales made to one of our licensees. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," that, among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 requires companies to recognize up-front non-refundable fees over the term of the related agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. In fourth quarter 2000, we implemented SAB 101, which had no impact on prior years but did affect 2000. Accordingly, there was no cumulative effect of the adoption of SAB 101 as of January 1, 2000. However, as a result of the adoption of SAB 101, $8.7 million of the $11.7 million initial payment received from Shire and previously recognized as revenue during the second quarter of 2000 was deferred and was recognized as revenue ratably through the end of 2001. The other $3.0 million received from Shire was initially deferred and will continue to be recognized according to contract terms, for any future clinical studies for balsalazide conducted in order to gain approval in France, The Netherlands and Germany. Due to the uniqueness of each of our licensing arrangements, we analyze each element of each contract, including milestone payments, to determine the appropriate revenue recognition. In accordance with SAB 101, we recognize revenue upon achievement of contractual milestones only when and to the extent we conclude that a separate earnings process has been culminated or the milestone is representative of the level of effort and progress toward completion of a long-term contract. Valuation and Qualifying Accounts Allowance for Uncollectible Accounts To date, we have not experienced any material accounts receivable collection issues. However, based on a review of specific customer balances, industry experience and the current economic environment, we currently reserve 1% of our outstanding accounts receivable balance as an allowance for uncollectable accounts. Allowance for Rebates and Coupons Based on current contracts that allow for rebates and our estimate of revenue associated with those contracts, we currently reserve 4% of gross product revenues as an allowance for rebate charges, which at December 31, 2001 was $0.7 million. Based on the number of available coupons, the estimate of 25 - -------------------------------------------------------------------------------- Management's discussion and analysis of financial conditions and results of operations - -------------------------------------------------------------------------------- redemption of available coupons and industry experience, we currently have reserved approximately $0.5 million as an allowance for coupon redemption. RESULTS OF OPERATIONS Years Ended December 31, 2001, 2000 and 1999 Revenues totaled $22.4 million, $14.5 million and $3.1 million for 2001, 2000 and 1999, respectively. Revenues for the year ended December 31, 2001 included product revenues of $14.1 million and revenues from collaborative agreements of $8.3 million, of which $5.5 million related to the agreement with Shire. Revenues for the year ended December 31, 2000 included product revenues of $6.3 million and revenues from collaborative agreements of $8.2 million, of which $7.6 million related to the agreement with Shire. Revenues for the year ended December 31, 1999 included product revenues of $0.5 million and revenues from collaborative agreements with Astra of $2.6 million, of which $2.0 million related to the completion of a clinical trial and the termination of our collaborative agreements with Astra and $0.5 million related to the launch of balsalazide in Sweden. Product revenues during 2001 were higher than in 2000 due to the U.S. launch of Colazal in January 2001. Product revenues during 2000 were higher than in 1999 due to our initial U.S. sales of Colazal to distributors in December 2000 in advance of the launch of Colazal in January 2001. Product revenues in 1999 and 2000 were recorded net of credits to AstraZeneca for past research and development funding equal to 20% of invoiced sales. Total costs and expenses were $40.4 million, $17.7 million and $7.9 million for 2001, 2000 and 1999, respectively. The substantial increase in 2001 was the result of the U.S. launch of Colazal in January 2001 and increased expenditures associated with expanding our commercialization infrastructure. The increase in total costs and expenses in 2000 from 1999 was primarily a result of higher licensing fees payable to Biorex as a result of our agreement with Shire and costs associated with the building of our sales and marketing infrastructure for the launch of Colazal in the United States. We recognized cost of products sold of $3.5 million, $2.3 million and $0.9 million for 2001, 2000 and 1999, respectively. The increase in cost of products sold in 2001 was due to the U.S. launch of Colazal in January 2001. The significant increase in cost of products sold in 2000 relates to our preparation, beginning in December 2000, to launch Colazal in the United States. License fees and costs related to collaborative agreements of $5.6 million, $4.2 million and $0.3 million in 2001, 2000 and 1999, respectively, related primarily to payments made to Biorex and Alfa Wassermann under the terms of the respective license agreements. The increase in license fees and costs related to collaborative agreements in 2001 from 2000 was due to payments to Biorex, the licensor of balsalazide disodium, as a result of the Shire agreement and expenses related to supplying balsalazide to Menarini and Shire. The increase in license fees in 2000 from 1999 was due to payments to Biorex, as a result of the Shire agreement. Research and development expense was $6.6 million, $3.8 million and $4.8 million for 2001, 2000 and 1999, respectively. The increase in research and development expenses in 2001 from 2000 was primarily due to costs associated with the preparation of the NDA for rifaximin as a treatment for travelers' diarrhea and the ongoing multi-center study for rifaximin as a treatment for hepatic encephalopathy. The decrease in research and development expenses in 2000 from 1999 was due primarily to reduced expenditures for balsalazide and the completion of the rifaximin clinical trial for infectious diarrhea. - -------------------------------------------------------------------------------- 26 Management's discussion and analysis of financial conditions and results of operations - -------------------------------------------------------------------------------- We expect research and development costs to increase as we pursue additional indications for balsalazide and rifaximin and if and when we acquire new products. Selling, general and administrative expenses were $24.7 million, $7.4 million and $1.9 million, for 2001, 2000 and 1999, respectively. The substantial increase in 2001 compared to 2000 was the result of the U.S. launch of Colazal in January 2001 and increased expenditures associated with expanding our commercialization infrastructure. The increase in 2000 compared to 1999 was primarily the result of expenditures associated with the building of our sales and marketing infrastructure for the U.S. launch of Colazal in January 2001. Interest and other income (expenses), net was $0.5 million in 2001, $0.2 million in 2000 and $0.2 million in 1999. Interest income was significantly higher in 2001 than 2000 due to higher average cash balances resulting from the completion of private placements in November 2000 and May 2001. We experienced net losses of $17.5 million in 2001, $3.0 million in 2000 and $4.6 million in 1999. At December 31, 2001, we had a U.S. federal net operating loss carryforward of approximately $36.0 million related to our subsidiary, Salix Pharmaceuticals, Inc. This carryforward will expire on various dates beginning in 2004 through 2020 if not utilized. Utilization of the federal net operating loss and credit carryforwards might be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 9 to our financial statements included in this prospectus for a presentation of our quarterly results of operations for the years ended December 31, 2001 and 2000. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed product development, operations and capital expenditures primarily from funding arrangements with collaborative partners and from public and private sales of equity securities. Cash used in our operations was $16.4 million in 2001, $2.5 million in 2000 and $4.8 million in 1999. Negative operating cash flows during 2001, 2000 and 1999 were caused primarily by operating losses. Our capital expenditures were $1.3 million in 2001, $0.2 million in 2000 and $17,000 in 1999, with the expenditures primarily attributable to the purchase of office furniture and equipment. The increase in 2001 from 2000 was primarily the result of the relocation of our corporate headquarters in April 2001, where we occupy approximately 26,000 square feet of office space under a lease extending to August 31, 2011. As of December 31, 2001, we had approximately $27.9 million in cash and cash equivalents. As of December 31, 2000, we had approximately $13.2 million in cash and cash equivalents. The increase of $14.7 million was due to the completion of a private placement of 1.96 million shares of our common stock in May 2001 with net proceeds of approximately $28.1 million, the issuance of common stock upon the exercise of stock options and warrants in 2001 with net proceeds of approximately $4.2 million, offset by operating losses. During the first quarter of 2001, we entered into a $7.0 million revolving working capital line of credit, with borrowing capacity of up to 85% of our eligible accounts receivable under 90 days old from the date of invoice. We had no outstanding balance under this line as of December 31, 2001. As of December 31, 2001, we had no long-term debt outstanding. - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- As of December 31, 2001, we had non-cancelable purchase order commitments for inventory purchases of approximately $7.0 million. We anticipate significant expenditures in 2002 related to our continued sales, marketing, product launch and development efforts associated with Colazal and Lumenax. To the extent we acquire rights to additional products, we will incur additional expenditures. We have sustained continuing operating losses and had an accumulated deficit of $45.9 million as of December 31, 2001. We expect to incur operating losses until product revenues reach a sufficient level to support ongoing operations. In addition, in the year ended December 31, 2001, we had negative cash flows from operations of approximately $16.4 million. We believe our cash and cash equivalent balances at December 31, 2001, plus the proceeds of this offering, should be sufficient to satisfy our cash requirements for the foreseeable future. However, our actual cash needs might vary materially from those now planned because of a number of factors, including our success selling products, the results of research and development activities, FDA and foreign regulatory processes, establishment of and change in relationships with strategic partners, technological advances by us and other pharmaceutical companies, the terms of our collaborative arrangements with strategic corporate partners, the status of competitive products and whether we acquire rights to additional products. We might seek additional debt or equity financing or both to fund our operations. If we increased our debt levels, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issued additional equity, our stockholders could suffer dilution. We might also enter into additional collaborative arrangements with corporate partners that could provide us with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. We might not be able to enter into such arrangements or raise any additional funds on terms favorable to us or at all. - -------------------------------------------------------------------------------- 28 - -------------------------------------------------------------------------------- Management The following table sets forth certain information concerning our directors and executive officers as of January 31, 2002:
Name Age Position -------------------------------------------------------------------- Robert P. Ruscher............ 41 President, Chief Executive Officer and Director Adam C. Derbyshire........... 36 Vice President, Finance and Administration and Chief Financial Officer Randy W. Hamilton............ 47 Executive Chairman of the Board Lorin K. Johnson, Ph.D....... 48 Senior Vice President and Chief Scientific Officer Carolyn J. Logan............. 52 Senior Vice President, Sales and Marketing Allen W. Mangel, M.D., Ph.D.. 49 Vice President, Research & Development R. Scott Sykes, M.D.......... 44 Vice President, Medical Affairs and Chief Medical Officer Joseph E. Tyler.............. 51 Vice President, Operations John F. Chappell /(1)/....... 65 Director Thomas W. D'Alonzo /(1)/..... 58 Director Richard A. Franco, R.Ph./(1)/ 60 Director
- -------- (1) Member of Audit Committee and Compensation Committee. Robert P. Ruscher joined Salix in April 1995 and has served as the President and Chief Executive Officer and as a member of the Board of Directors since November 1999. Prior to assuming his current position, Mr. Ruscher held various positions of increasing responsibilities within Salix, including Executive Vice President, Vice President of Business Development, Chief Financial Officer and Corporate Secretary. Before joining Salix, Mr. Ruscher practiced law, advising emerging growth pharmaceutical companies in licensing, corporate partnering, financing and general corporate matters with Wyrick Robbins Yates & Ponton from May 1994 to April 1995; with Venture Law Group, which he co-founded, from March 1993 to April 1994; and with Wilson Sonsini Goodrich & Rosati from June 1988 to February 1993. From July 1983 to July 1986, Mr. Ruscher was a Senior Accountant with Price Waterhouse in San Francisco, California, working with emerging growth technology companies. Mr. Ruscher is a Certified Public Accountant and received his J.D. with distinction from the Stanford University School of Law and his B.S. in Commerce (Business Administration) with distinction from the University of Virginia. Adam C. Derbyshire has served as Chief Financial Officer and Vice President, Finance and Administration since June 2000. Prior to joining Salix, Mr. Derbyshire was Vice President, Corporate Controller and Secretary of Medco Research, Inc. from June 1999 to June 2000, Corporate Controller and Secretary of Medco from September 1995 to June 1999 and Assistant Controller of Medco from October 1993 to September 1995. Randy W. Hamilton is one of the co-founders of Salix and has been its Chairman of the Board since inception. From inception through November 1999 he was also President and Chief Executive Officer. In 1998, Mr. Hamilton was named "Man of the Year" by the Crohn's and Colitis Foundation of America, - -------------------------------------------------------------------------------- 29 Management - -------------------------------------------------------------------------------- Bay Area chapter. Prior to founding Salix, Mr. Hamilton was Business Development Manager for California Biotechnology, Inc., now Scios, Inc., responsible for licensing products to the Japanese pharmaceutical industry and for the commercial aspects of several of the company's development projects, including human lung surfactant, nasal drug delivery systems, genetic market diagnosis, and growth factors. Before joining California Biotechnology, Inc., Mr. Hamilton was Director of Strategic Planning and Business Development for SmithKline Diagnostics, then a division of SmithKline Beecham, where he also held positions in market research and marketing information services. Mr. Hamilton received his B.A. in Sociology from California State University, Long Beach. Lorin K. Johnson, Ph.D. is one of the co-founders of Salix and has served as Chief Science Officer since 1993. Prior to co-founding Salix, Dr. Johnson served as Director of Scientific Operations at California Biotechnology, Inc., now Scios, Inc. Prior to joining California Biotechnology, Dr. Johnson was assistant Professor of Pathology at Stanford University Medical Center. Carolyn J. Logan has served as Senior Vice President, Sales and Marketing since June 2000. Prior to joining Salix, Ms. Logan served as Vice President, Sales and Marketing of the Oclassen Dermatologics division of Watson Pharmaceuticals, Inc. from May 1997 to June 2000, and as Vice President, Sales from February 1997 to May 1997. Prior to that date, she served as Director, Sales of Oclassen Pharmaceuticals, Inc. from January 1993 to February 1997. Prior to joining Oclassen, Ms. Logan held various sales and marketing positions with Galderma Laboratories, Ulmer Pharmacal and Westwood Pharmaceuticals. Allen W. Mangel, M.D., Ph.D. joined Salix in November 2001 with responsibility for the planning and execution of our product development efforts, including the evaluation of new product opportunities and the clinical development and regulatory approval of product candidates. Prior to joining Salix, Dr. Mangel was Worldwide Head of Gastroenterology Clinical Development for GlaxoSmithKline. He also held an Assistant Professor in Medicine position at Duke University Medical Center. Dr. Mangel holds an M.D. from the Georgetown University School of Medicine and a Ph.D. in physiology from the University of Illinois. R. Scott Sykes, M.D. joined Salix in October 2001 with 18 years of industry experience. He is responsible for all medical affairs, including drug information services, product safety, and post-marketing surveillance. Dr. Sykes was previously employed by GlaxoSmithKline, where he served most recently as Vice President, North American Product Surveillance. Dr. Sykes holds an M.D. from the University of North Carolina School of Medicine. Joseph E. Tyler joined Salix in April 2001 with over 25 years of manufacturing, process development and product development experience. Prior to joining Salix, Mr. Tyler was Vice President of Manufacturing for GelTex Pharmaceuticals. He also served as Director of Operations and European Operations with Stryker Biotech and in other roles with Abbott Biotech (formerly Damon Biotech) and Lederle Laboratories. Mr. Tyler received a B.S. in Chemical Engineering from Carnegie-Mellon University and a M.S. in Biochemical Engineering from Cornell University. John F. Chappell has served as a member of the Board of Directors of Salix since December 1993 and as a member of its Audit and Compensation Committees since December 1994. From 1990 to 2000, he served as founder and Chairman of Plexus Ventures, which specializes in business development and strategic transactions for clients in the biotechnology, pharmaceutical and drug delivery industries. Prior to founding Plexus Ventures, Mr. Chappell served as Chairman, Worldwide Pharmaceuticals for SmithKline Beecham plc, where he was responsible for the multi-billion dollar ethical pharmaceutical business with 30,000 employees worldwide. During his 28 years at SmithKline Beecham, Mr. Chappell also headed the International Consumer Products (OTC) operations and the Corporate Development Center. He has served as a Director of SmithKline Beecham, the Pharmaceutical Manufacturers - -------------------------------------------------------------------------------- 30 Management - -------------------------------------------------------------------------------- Association, now PhRMA, and the Industrial Biotechnology Association, now BIO. Additionally, Mr. Chappell has served as a director of a number of biotechnology companies including Aronex Pharmaceuticals, Neurex Corporation (now part of Elan) and Ribi ImmunoChem Research. Mr. Chappell holds a B.A. from Harvard University and attended the Wharton School of the University of Pennsylvania. Thomas W. D'Alonzo joined the Board of Directors of Salix in May 2000 with over 17 years of pharmaceutical executive experience. From 1996 to 1999, Mr. D'Alonzo served as President and Chief Operating Officer of Pharmaceutical Product Development, Inc. ("PPD"), a publicly traded provider of research, development and consulting services in life and discovery sciences with over 3,000 employees worldwide. Before joining PPD, he served as President and Chief Executive Officer of GENVEC, Inc., a gene therapy biotechnology company, from 1993 to 1996. From 1983 to 1993, Mr. D'Alonzo held positions of increasing responsibility within Glaxo Inc., including President of Glaxo, Inc. Mr. D'Alonzo has served as a director of Goodmark Foods, PPD and Amarillo Biosciences, Inc., all publicly traded companies. Mr. D'Alonzo received his B.S. in Business Administration from the University of Delaware, and his law degree from the University of Denver College of Law. Richard A. Franco, R.Ph. joined the Board of Directors of Salix in May 2000 with over 32 years of pharmaceutical executive and sales and marketing experience. Mr. Franco has served as Chairman, Chief Executive Officer and a founder of LipoMed, Inc., a provider of spectroscopic analysis for clinical diagnostics, since November 1997. From April 1996 to October 1997, he was President of the Richards Group, Ltd., a healthcare consulting firm. From April 1994 to April 1996, Mr. Franco served as President and Chief Executive Officer of Trimeris, Inc., a publicly traded biopharmaceutical company. Previously, Mr. Franco served as a corporate officer of Glaxo, Inc., first as Vice President and General Manager of Glaxo Dermatology and then as Vice President and General Manager of the Cerenex Division. Mr. Franco's other positions with Glaxo included Vice President of Commercial Development and Vice President of Marketing. Prior to joining Glaxo, Mr. Franco was with Eli Lilly and Company for 16 years. Mr. Franco is a director of Amarillo Biosciences. He received his pharmacy degree from St. John's University and attended Long Island University for his graduate work in pharmaceutical marketing and management. - -------------------------------------------------------------------------------- 31 - -------------------------------------------------------------------------------- Underwriting We and the underwriters for this offering named below have entered into an underwriting agreement concerning the shares being offered. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. UBS Warburg LLC, Wachovia Securities, Thomas Weisel Partners LLC, Leerink Swann & Company and SunTrust Capital Markets, Inc. are the representatives of the underwriters. UBS Warburg LLC and Wachovia Securities are joint book-running managers of this offering.
Number Underwriters of shares ---------------------------------------- UBS Warburg LLC............... First Union Securities, Inc... Thomas Weisel Partners LLC.... Leerink Swann & Company....... SunTrust Capital Markets, Inc. --------- Total............... 4,000,000 =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy up to 600,000 shares from us at the public offering price less the underwriting discounts and commissions to cover these sales. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table provides information regarding the amount of the discount to be paid to the underwriters by us. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional 600,000 shares.
No Exercise of Full Exercise of Over Allotment Over Allotment Option Option ----------------------------------------- Per share $ $ Total... $ $
We estimate that the total expenses of this offering payable by us, excluding underwriting discounts and commissions, will be about $450,000. Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the public offering price. If all the shares are not sold at the public offering price, the representatives may change the offering price and the other selling terms. We and each of our directors and executive officers have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, any of our common stock or securities convertible into or exercisable or exchangeable for shares of common stock during the period - -------------------------------------------------------------------------------- 32 Underwriting - -------------------------------------------------------------------------------- from the date of this prospectus continuing through the date 90 days after the date of this prospectus, subject to certain permitted exceptions, without the prior written consent of UBS Warburg LLC. In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions might include stabilizing transactions, short sales and purchases to cover positions created by short sales. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Short sales can be either "covered short sales" or "naked short sales." Covered short sales are sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they can purchase shares through the over-allotment option. Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned there might be downward pressure on the price of shares in the open market after pricing that could adversely affect investors who purchase in this offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters might stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock might be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market or otherwise. In addition, in connection with this offering certain of the underwriters and selling group members may engage in passive market making transactions in the common stock on the Nasdaq National Market prior to the pricing and completion of the offering. Passive market making consists of displaying bids on the Nasdaq National Market no higher than the bid prices of independent market makers and making purchases at prices no higher than these independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the common stock during a specified period and must be discontinued when such limit is reached. Passive market making might cause the price of the common stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions. If passive market making is commenced, it may be discontinued at any time. We have agreed to indemnify the several underwriters against some liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments that the underwriters are required to make in respect thereof. Leerink Swann & Company has in the past engaged in investment banking transactions with us, for which we have paid them customary compensation. Prior to this offering, we have not engaged in any transactions with the other underwriters. In the ordinary course of their respective businesses, the - -------------------------------------------------------------------------------- 33 Underwriting - -------------------------------------------------------------------------------- underwriters and certain of their affiliates may in the future engage in investment and commercial banking or other transactions with us, including the provision of certain advisory services and making loans to us. First Union Securities, Inc., acting under the trade name of Wachovia Securities, is an indirect, wholly-owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts its investment banking, institutional, and capital markets businesses through its various bank, broker-dealer and nonbank subsidiaries, including First Union Securities, Inc., under the trade name of Wachovia Securities. Any references to Wachovia Securities in this prospectus, however, do not include Wachovia Securities, Inc., member NASD/SIPC and a separate broker-dealer subsidiary of Wachovia Corporation and an affiliate of First Union Securities, Inc., which may or may not be participating as a seller dealer in the distribution of the securities offered by this prospectus. - -------------------------------------------------------------------------------- 34 - -------------------------------------------------------------------------------- Where you can find more information We file annual, quarterly and current reports, proxy statements, and other information with the SEC. You may read and copy this information at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. You can also inspect reports, proxy and information statements, and other information about us at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. We filed a registration statement with the SEC under the Securities Act of 1933 relating to this offering. The registration statement contains additional information about the offering, us and the common stock. The SEC allows us to omit certain information included in the registration statement from this prospectus. The registration statement may be inspected and copied at the SEC's public reference facilities described above. For further information about us and the common stock we propose to sell in this offering, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance reference is made to the copy of the contract, agreement or other document filed as an exhibit to the registration statement or any incorporated document, each statement being qualified by this reference. Incorporation of certain documents by reference 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 (other than portions thereof not deemed "filed") and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to termination of this offering: 1. Annual Report on Form 10-K for the year ended December 31, 2000; 2. Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2001; 3. Current Reports on Form 8-K filed on February 27, April 9, May 2, May 16, May 24, May 30, June 15, June 27, July 31, August 1, August 30, October 25, October 30, November 1, December 27, 2001, and January 2, January 30, February 5 and February 12, 2002; 4. definitive proxy solicitation materials dated April 30, 2001; and 5. 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. We will provide without charge to each person, including any beneficial owner, to whom a prospectus is delivered, upon written or oral request of that person, a copy of any and all information that has been - -------------------------------------------------------------------------------- 35 - -------------------------------------------------------------------------------- incorporated by reference in this prospectus (excluding exhibits unless specifically incorporated by reference in those documents). Please direct inquiries to us at the following address: Salix Pharmaceuticals, Ltd. Investor Relations 8540 Colonnade Center Drive Suite 501 Raleigh, North Carolina 27615 (919) 862-1000 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. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed modified, superceded or replaced for purposes of this prospectus to the extent that a statement contained in this prospectus, or in any subsequently filed document that also is deemed to be incorporated by reference in this prospectus, modifies, supercedes or replaces such statement. Any statement so modified, superceded or replaced shall not be deemed, except as so modified, superceded or replaced, to constitute a part of this prospectus. Subject to the foregoing, all information appearing in this prospectus is qualified in its entirety by the information appearing in the documents incorporated by reference. Legal matters The legality of the shares of common stock to be issued in this offering will be passed upon for Salix by Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina. Donald R. Reynolds, a partner at Wyrick Robbins, is married to an employee of ours who holds options to purchase 21,500 shares of Salix common stock. Dewey Ballantine LLP, New York, New York, is counsel for the underwriters in connection with this offering. Experts Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule included in our Annual Report on Form 10-K for the year ended December 31, 2000 as set forth in their report, which is incorporated by reference in this registration statement, and have also audited our consolidated financial statements and schedule for the year ended December 31, 2001, as set forth in their report, which is included in this prospectus. Our consolidated financial statements and schedules are incorporated by reference and included in this prospectus in reliance upon Ernst & Young LLP's reports, given on their authority as experts in accounting and auditing. - -------------------------------------------------------------------------------- 36 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Index to consolidated financial statements and schedule
PAGE ----------------------------------------------------- AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.................. F-2 Consolidated Balance Sheets..................... F-3 Consolidated Statements of Operations........... F-4 Consolidated Statements of Stockholders' Equity. F-5 Consolidated Statements of Cash Flows........... F-6 Notes to Consolidated Financial Statements...... F-7 CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Schedule II--Valuation and Qualifying Accounts.. F-17
- -------------------------------------------------------------------------------- F-1 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS The Board of Directors Salix Pharmaceuticals, Ltd. We have audited the accompanying consolidated balance sheets of Salix Pharmaceuticals, Ltd. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule, Schedule II - Valuation and Qualifying Accounts. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salix Pharmaceuticals, Ltd. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Raleigh, North Carolina February 5, 2002 - -------------------------------------------------------------------------------- F-2 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 2001 2000 - -------------------------------------------------------------------------------------------------------------- (U.S. Dollars in Thousands Except Share Amounts) ASSETS Current assets: Cash and cash equivalents....................................................... $ 27,868 $ 13,244 Accounts receivable............................................................. 2,378 6,156 Inventory....................................................................... 6,274 2,819 Prepaid and other current assets................................................ 784 3,208 -------- -------- Total current assets........................................................ 37,304 25,427 Property and equipment, net........................................................ 1,067 208 Other assets....................................................................... 219 126 -------- -------- Total assets....................................................................... $ 38,590 $ 25,761 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........................................ $ 8,094 $ 4,532 Deferred revenue................................................................ 2,902 8,487 -------- -------- Total current liabilities................................................... 10,996 13,019 Commitments........................................................................ -- -- Stockholders' equity:.............................................................. Preferred stock, no par value; 5,000,000 shares authorized, issuable in series, none outstanding.............................................................. -- -- Common stock, $0.001 par value; 40,000,000 shares authorized; 16,708,681 and 13,562,771 shares issued and outstanding at December 31, 2001 and 2000, respectively............................................................ 17 14 Additional paid-in-capital...................................................... 73,461 41,114 Accumulated deficit............................................................. (45,884) (28,386) -------- -------- Total stockholders' equity.................................................. 27,594 12,742 -------- -------- Total liabilities and stockholders' equity......................................... $ 38,590 $ 25,761 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-3 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------ (U.S. Dollars in Thousands, Except Per Share Data) Revenues: Product revenue............................................ $ 14,129 $ 6,307 $ 491 Revenue from collaborative agreements...................... 8,221 8,235 2,602 -------- ------- ------- Total revenues......................................... 22,350 14,542 3,093 Costs and expenses:........................................... Cost of products sold...................................... 3,495 2,287 878 License fees and costs related to collaborative agreements. 5,583 4,173 297 Research and development................................... 6,629 3,844 4,787 Selling, general and administrative........................ 24,688 7,412 1,932 -------- ------- ------- Total costs and expenses............................... 40,395 17,716 7,894 -------- ------- ------- Loss from operations.......................................... (18,045) (3,174) (4,801) Interest, and other income (expense), net..................... 547 208 190 Income taxes.................................................. -- (9) -- -------- ------- ------- Net loss............................................... $(17,498) $(2,975) $(4,611) ======== ======= ======= Net loss per share, basic and diluted......................... $ (1.13) $ (0.26) $ (0.45) ======== ======= ======= Shares used in computing net loss per share, basic and diluted 15,456 11,356 10,209 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-4 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock -------------------- Additional Accumulated Stockholders' Shares Amount Paid-in-capital Deficit Equity ---------- --------- --------------- ----------- ------------- - ----------------------------------------------------- (U.S. Dollars in Thousands, Except Share Amounts) Balance at December 31, 1998........................ 10,208,838 $ 10 $ 27,616 $(20,800) $ 6,826 Net loss............................................ -- -- -- (4,611) (4,611) ---------- --------- --------- -------- -------- Balance at December 31, 1999........................ 10,208,838 10 27,616 (25,411) 2,215 Issuance of common stock upon exercise of stock options......................................... 593,933 1 290 -- 291 Issuance of common stock in connection with the Company's private placement, net of issuance costs of $1,014................................. 2,760,000 3 13,208 -- 13,211 Net loss............................................ -- -- -- (2,975) (2,975) ---------- --------- --------- -------- -------- Balance at December 31, 2000........................ 13,562,771 14 41,114 (28,386) 12,742 Issuance of common stock upon exercise of stock options and warrants............................ 1,185,910 1 4,229 -- 4,230 Issuance of common stock in connection with the Company's private placement, net of issuance costs of $1,281................................. 1,960,000 2 28,118 -- 28,120 Net loss............................................ -- -- -- (17,498) (17,498) ---------- --------- --------- -------- -------- Balance at December 31, 2001........................ 16,708,681 $ 17 $ 73,461 $(45,884) $ 27,594 ========== ========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-5 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------- 2001 2000 1999 - --------------------------------------------------------------------------------------------- (U.S. Dollars in Thousands) Cash Flows from Operating Activities Net loss...................................................... $(17,498) $(2,975) $(4,611) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization............................. 223 120 88 Loss on disposal of fixed asset........................... 21 13 -- Changes in assets and liabilities: Accounts receivable....................................... 3,778 (5,869) (287) Inventory and other assets................................ (905) (5,334) (48) Accounts payable and accrued liabilities.................. 3,562 3,088 14 Deferred revenue.......................................... (5,585) 8,487 -- -------- -------- -------- Net cash used in operating activities.......................... (16,404) (2,470) (4,844) Cash Flows from Investing Activities Sale and maturity of short-term investments................. -- -- 4,500 Purchases of property and equipment......................... (1,107) (190) (17) Proceeds from the disposal of property and equipment........ 4 -- -- Purchase of other assets.................................... (219) -- -- -------- -------- -------- Net cash (used in) provided by investing activities............ (1,322) (190) 4,483 Cash Flows from Financing Activities Proceeds from issuance of common stock...................... 32,350 13,502 -- -------- -------- -------- Net cash provided by financing activities...................... 32,350 13,502 -- -------- -------- -------- Net increase (decrease) in cash and cash equivalents........... 14,624 10,842 (361) Cash and cash equivalents at beginning of year................. 13,244 2,402 2,763 -------- -------- -------- Cash and cash equivalents at end of year....................... $ 27,868 $13,244 $ 2,402 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-6 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BASIS OF PRESENTATION Salix Pharmaceuticals, Ltd., formerly Salix Holdings, Ltd. ("Salix" or the "Company"), became a Delaware corporation on December 31, 2001 pursuant to a reorganization and continuation of the Company as a domestic entity (the "Reorganization"). The Company was originally incorporated in the British Virgin Islands in December 1993 for the purpose of acquiring all of the outstanding capital stock of Salix Pharmaceuticals, Inc., a California corporation ("Salix Inc."), and Glycyx Pharmaceuticals, Ltd., a Bermuda corporation ("Glycyx"). Salix Inc. was incorporated in California in 1989 and Glycyx was incorporated in Bermuda in 1992. Salix and Glycyx had identical stockholder ownership interests in the period from the inception of Glycyx through March 1994. In March 1994, Salix Pharmaceuticals, Ltd. entered into an agreement with the stockholders of Salix Inc. and Glycyx, whereby it issued shares in exchange for the stockholders' interests in Salix Inc. and Glycyx. As a result of the exchange, Salix Inc. and Glycyx became wholly owned subsidiaries of the Company. Glycyx was reorganized and continued as a Delaware corporation effective December 19, 2001 in connection with the Reorganization. These statements are stated in United States dollars and are prepared under accounting principles generally accepted in the United States. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company has sustained continuing operating losses and had an accumulated deficit of $45.9 million as of December 31, 2001. The Company expects to incur operating losses until product revenues reach a sufficient level to support ongoing operations. In addition, in the year ended December 31, 2001, the Company had negative cash flows from operations of approximately $16.4 million and its remaining cash balances were approximately $27.9 million. The Company believes that its cash and cash equivalent balances at December 31, 2001, plus the proceeds of its proposed public offering announced in the first quarter of 2002, should be sufficient to satisfy the cash requirements for the foreseeable future. However, the Company's actual cash requirements might vary materially from those now planned because of a number of factors, including its success selling products, the results of research and development activities, FDA and foreign regulatory processes, establishment of and change in relationships with strategic partners, technological advances by the Company and other pharmaceutical companies, the terms of the Company's collaborative arrangements with strategic partners, the status of competitive products, and whether it acquires rights to additional products. The Company might seek additional debt or equity financing or both to fund it operations. The Company might also enter into additional collaborative arrangements with corporate partners that could provide the Company with additional funding in the form of equity, debt, licensing, milestone and/or royalty payments. The Company might not be able to enter into such arrangements or raise any additional funds on terms favorable to the Company. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Product sales are recorded upon shipment of order and transfer of title. In December 2000, the Company made its first U.S. sales of Colazal(TM) to wholesalers. F-7 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which among other guidance clarifies certain conditions to be met in order to recognize revenue. SAB 101 requires companies to recognize certain up-front non-refundable fees over the term of the related agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. In the fourth quarter of 2000, Salix implemented SAB 101. As a result of the adoption of SAB 101, $8.7 million of the $11.7 million initial payment received and recognized in full during the second quarter of 2000 from Shire Pharmaceuticals Group plc was deferred and recognized as revenue ratably through the end of 2001. The adoption of SAB 101 had no effect on revenues recognized in prior years and, therefore, there is no cumulative effect adjustment as of the beginning of 2000. Due to the uniqueness of each of its licensing arrangements, Salix analyzes each element of each contract, including milestone payments, to determine the appropriate revenue recognition. In accordance with SAB 101, Salix recognizes revenue upon achievement of contractual milestones only when and to the extent Salix concludes that a separate earnings process has been culminated or the milestone is representative of the level of effort and progress toward completion of a long-term contract. Research and Development Research and development costs, both internal and externally contracted, are expensed as incurred. These costs include direct expenditures for goods and services, as well as indirect expenditures such as salaries, administrative expenses and various allocated costs. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in several different instruments with various banks and brokerage houses. This diversification of risk is consistent with Company policy to maintain liquidity and ensure the safety of principal. Property and Equipment Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets, generally three to five years, using the straight-line method. Property and equipment consisted of the following at December 31 (in thousands):
2001 2000 ------------------------------------------- Cost: Furniture and equipment... $ 925 $193 Computer equipment........ 720 377 Laboratory equipment...... 105 105 ------ ---- 1,750 675 Accumulated depreciation: Furniture and equipment... 243 143 Computer equipment........ 335 219 Laboratory equipment...... 105 105 ------ ---- 683 467 ------ ---- Net property and equipment..... $1,067 $208 ====== ====
F-8 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Inventories Raw materials, work-in-process and finished goods inventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out cost method) or market value. At December 31, 2001, inventories were comprised of $3.6 million of raw material and $2.7 million of finished goods. At December 31, 2000, inventories were comprised of $2.8 million of raw material and $0.02 million of finished goods. Asset Impairment The Company periodically reviews the value of its long-lived assets to determine if an impairment has occurred. In accordance with Financial Accounting Standards Board Statement of Financial Standards No. 121, "Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed Of", if this review indicates that the assets will not be recoverable, as determined based on an analysis of undiscounted cash flows over the remaining amortization period, the Company would reduce the carrying value of its long-lived assets accordingly. Advertising Costs Advertising costs are charged to expense as incurred. Advertising expenses were approximately $200,000 and $90,000 for 2001 and 2000, respectively. The Company incurred no advertising costs in 1999. Foreign Currency Translation The functional currency for the Company is the United States dollar. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. The gains and losses resulting from the changes in exchange rates from year to year have been immaterial. The effect on the consolidated statements of operations of transaction gains and losses is insignificant for all years presented. Stock-Based Compensation The Company accounts for stock-based awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Net Loss Per Common Share In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," basic and diluted net loss per common share have been computed using the weighted-average number of common shares outstanding during each year. Common equivalent shares related to outstanding options and warrants are excluded from the computation as their effect is anti-dilutive in all periods. - -------------------------------------------------------------------------------- F-9 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Derivative Instruments Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS No. 133 for its fiscal year ended December 31, 2001. The adoption of this pronouncement did not have a material impact on the Company's results of operations or financial position. Recently Issued Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The Company does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material impact on the Company's results of operations or financial position. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an entity to record a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. The standard is effective for the Company beginning January 1, 2003. The Company does not expect the adoption of SFAS No. 143 to have a material impact on the Company's results of operations or financial position. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The new provisions supersede SFAS No. 121, which addressed asset impairment and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under SFAS No. 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of SFAS No. 144 became effective for the Company on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Company's results of operations or financial position. - -------------------------------------------------------------------------------- F-10 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) LICENSE REVENUE AND REVENUE FROM COLLABORATIVE AGREEMENTS In May 2000, the Company signed an agreement with Shire Pharmaceuticals Group under which Shire purchased from Salix the exclusive rights to balsalazide, for use as a treatment for ulcerative colitis for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, The Netherlands, Switzerland, Sweden and the United Kingdom. Under the agreement, Shire agreed to pay Salix up to a total of approximately $24.0 million, including approximately $12.1 million in up-front fees and up to $12.0 million upon the achievement of certain milestones. In accordance with the Company's license arrangement with Biorex Laboratories Limited, its licensor, Salix will share a portion of these payments, including all of the new Shire ordinary shares, with Biorex. In May 2000, Shire paid the Company $9.6 million of cash and $2.5 million by way of the issue of 160,546 new Shire ordinary shares. In August 2000 Shire paid the Company $4.4 million in connection with the transfer to Shire of the United Kingdom product license for balsalazide. During the years ended December 31, 2001 and 2000, the Company recognized $8.3 million and $8.2 million, respectively, of license fee income primarily related to the agreement with Shire. The Company recognized license fee income from Astra of $2.6 million in 1999 of which $2.1 million related to a balsalazide clinical trial in the United States and the termination of the Company's collaborative agreements with Astra, and $0.5 million related to the launch of balsalazide in Sweden. In December 1999, the Company and Astra signed an agreement whereby all rights to balsalazide previously licensed to Astra under the aforementioned agreements were returned to the Company. All future milestone payments that would have been due from Astra were cancelled. (4) COMMITMENTS The Company leases certain office facilities under various non-cancelable operating leases, the last of which expires on August 31, 2011. Rent expense was approximately $800,000, $328,000, and $228,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition to the office space, the Company leases automobiles, for use by its direct sales force, under a three-year operating lease. Future payments for operating leases at December 31, 2001 are as follows (in thousands):
OPERATING Years ending December 31, LEASES ----------------------------------------- 2002........................... $1,352 2003........................... 1,305 2004........................... 814 2005........................... 617 2006........................... 631 Thereafter..................... 3,145 ------ Total minimum payments required $7,864 ======
At December 31, 2001, the Company had binding purchase order commitments for inventory purchases aggregating approximately $7.0 million throughout 2002. - -------------------------------------------------------------------------------- F-11 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In March 2001, the Company obtained a $7.0 million line of credit with a two-year term, plus three optional one-year renewals. The line of credit has a variable interest rate based on the 30-day dealer placed commercial paper rate plus 4%. The Company may borrow up to 85% of all eligible accounts receivable under 90 days old from the date of invoice. The line of credit requires the Company to meet certain restrictive covenants related to working capital. At December 31, 2001, the line of credit had no outstanding balance. (5) STOCKHOLDERS' EQUITY On December 12, 2001, the Board of Directors of the Company approved the Reorganization of the Company as a Delaware corporation. As a result of the Reorganization, each share of no par value common stock was converted into one share of $0.001 par value common stock. All common stock amounts for all periods presented in the accompanying consolidated financial statements have been restated to reflect the establishment of the $0.001 par value. Preferred Stock A total of 5,000,000 shares of preferred stock are authorized and issuable in series. No shares of preferred stock were issued or outstanding as of December 31, 2001 or 2000. Common Shares As of December 31, 2001 the Company was authorized to issue up to 40,000,000 shares of $0.001 par value common stock. As of December 31, 2001 and 2000, there were 16,708,681 and 13,562,771 shares of common stock issued and outstanding, respectively. In January 2000, the Company completed a private placement under Section 4(2) of the Securities Act of 1933 of 500,000 shares of common stock to the President and Chief Executive Officer of the Company, for net proceeds of approximately $100,000 in cash. No underwriters were involved in this transaction. In November 2000, the Company completed a private placement of its common stock to a limited number of accredited and sophisticated investors. The Company raised approximately $13.1 million, net of offering costs, through the issuance of 2,260,000 shares of common stock, along with warrants to purchase 226,000 additional shares at an exercise price of $9.72 per share. The Company also issued a similar warrant to purchase 158,200 shares to Leerink Swann & Company, the placement agent. During 2001, all of these warrants were exercised. In May 2001, the Company completed a private placement of its common stock to a limited number of accredited and sophisticated investors. The Company raised approximately $28.1 million, net of offering costs, through the issuance of 1,960,000 shares of common stock. Warrants At December 31, 2001, 16,667 shares of common stock were reserved for issuance upon the exercise of warrants. These warrants were issued in connection with the Company's initial public offering in May 1996, at an exercise price of $3.00 per share and expire in 2003. - -------------------------------------------------------------------------------- F-12 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Stock Option Plans The Company's 1994 Stock Plan (the "1994 Plan") was adopted by the board of directors in March 1994 and approved by the stockholders in March 1995. The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the board of directors and approved by the Company's stockholders in February 1996. The options granted under the 1994 Plan and the 1996 Plan may be either incentive stock options or non-statutory stock options. Options granted expire no later than ten years from the date of grant. For incentive stock options, the option price shall be at least 100% of the fair market value on the date of grant, and no less than 85% of the fair market value for nonqualified stock options. If, at the time the Company grants an option, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair market value and shall not be exercisable more than five years after the date of grant. The options generally become exercisable in increments of 1/48th per month over a period of 48 months from the date of grant. Options may be granted with different vesting terms as determined by the board of directors. Aggregate option activity is as follows:
Outstanding Options -------------------------------- Weighted- Shares Average Available Number Exercise For Grant Of Shares Price -------------------------------------------------------------------- Balance at December 31, 1998....... 514,365 993,680 $ 3.20 Options granted................ (593,000) 593,000 $ 0.34 Options exercised.............. -- -- -- Options canceled............... 371,750 (371,750) $ 3.81 ---------- --------- Balance at December 31, 1999....... 293,115 1,214,930 $ 1.62 Additional shares authorized... 927,207 -- -- Options granted................ (1,071,500) 1,071,500 $ 4.85 Options exercised.............. -- (593,933) $ 0.49 Options canceled............... 10,000 (10,000) $ 7.38 ---------- --------- Balance at December 31, 2000....... 158,822 1,682,497 $ 4.04 Additional shares authorized... 1,822,793 -- -- Options granted................ (1,083,500) 1,083,500 $12.15 Options exercised.............. -- (510,823) $ 2.99 Options canceled............... 89,708 (89,708) $ 4.03 ---------- --------- Balance at December 31, 2001....... 987,823 2,165,466 $ 8.41 ========== =========
- -------------------------------------------------------------------------------- F-13 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Exercise prices for options outstanding as of December 31, 2001 ranged from $0.47 to $17.35 per share.
Options Currently Options Outstanding Exercisable ------------------------------------------- -------------------------- Weighted Average Remaining Weighted Weighted Number Contractual Life Average Number Average Exercise Price Outstanding (Yrs) Exercise Price Exercisable Exercise Price - ------------------------------------------------------------------------------------- $ 0.47 - 2.24 434,133 7.70 $1.72 190,716 $1.50 $ 4.98 - 7.38 657,833 8.35 6.74 257,323 6.25 $10.62 - 10.62 612,500 9.73 10.62 -- -- $12.80 - 17.35 461,000 9.44 14.17 32,292 14.19 ----- ----- 2,165,466 8.84 $8.41 480,331 $4.90 ========= =======
The weighted-average fair value of options granted in 2001, 2000 and 1999 was $12.15, $4.39 and $0.19, respectively. Stock-Based Compensation The fair value of the Company stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
2001 2000 1999 ---- ---- ---- ----------------------------------------- Expected life (years) 5 5 5 Expected volatility 1.26 1.44 0.6 Risk-free interest rate 4.19% 6.00% 6.00%
Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below for the years ended December 31, 2001, 2000 and 1999, respectively.
2001 2000 1999 --------------------------------------------------------------- Pro forma net loss (in thousands) $(19,698) $(3,266) $(5,056) Pro forma net loss per common share -- basic and diluted $ (1.27) $ (0.29) $ (0.50)
- -------------------------------------------------------------------------------- F-14 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Future pro forma net income (loss) and earnings (loss) per share results may be materially different from actual amounts reported. At December 31, 2001, the Company had reserved a total of 2,182,133 shares of common stock, 2,165,466 for issuance to eligible participants under the two option plans and 16,667 for outstanding warrants. (6) INCOME TAXES As of December 31, 2001, the Company has a U.S. federal net operating loss carryforward of approximately $36.0 million related to its U.S. subsidiary, Salix Inc. This will expire on various dates beginning in 2004 through 2020, if not utilized. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows at December 31 (in thousands):
2001 2000 ---------------------------------------------------------------- Net operating loss carryforwards............. $ 12,970 $ 6,250 Capitalized research and development expenses 700 700 Other........................................ 460 50 Research and development credits............. 950 -- -------- ------- Total deferred tax assets.................... 15,080 7,000 Valuation allowance.......................... (15,080) (7,000) -------- ------- Net deferred taxes........................... $ -- $ -- ======== =======
Because of the Company's lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by approximately $8.0 million and $1.3 million during the year ended December 31, 2001 and 2000, respectively. Utilization of the federal net operating loss and credit carryforwards might be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company effected its Reorganization from the British Virgin Islands (BVI) to Delaware in 2001. To date the Company has not recognized any tax assets related to the losses incurred in BVI. In the future, losses will generate U.S. tax losses. The Company's subsidiary, Glycyx, had a cumulative net operating loss of approximately $3.1 million at December 31, 2001. Because Glycyx originally was domiciled in Bermuda where the effective tax rate is zero, the Company expects to receive no future tax benefit from these net operating losses. (7) SIGNIFICANT CONCENTRATIONS The Company operates in a single industry and is engaged in acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract. The Company's principal financial instruments subject to potential concentration of credit risk are accounts receivable, which are unsecured. - -------------------------------------------------------------------------------- F-15 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) During 2000, the Company made its first sales of Colazal to U.S. wholesalers. This significantly diversified the Company's customer base and reduced the risks associated with serving a limited number of significant customers. All revenue is associated with the Company's single product, Colazal. Net revenues from customers representing 10% or more of total net revenues for the respective years, are summarized as follows:
Years ended December 31 ----------------------- 2001 2000 1999 ---- ---- ---- Customer 1 27% 24% -- Customer 2 27% 10% -- Customer 3 14% 15% -- Customer 4 10% 23% -- Customer 5 -- -- 100%
Additionally, 34% and 68% of the Company's accounts receivable balances were due from these customers at December 31, 2001 and 2000, respectively. Currently, the Company is using active pharmaceutical ingredient balsalazide manufactured for the Company by Diosynth Limited, a subsidiary of Akzo Nobel, in Scotland, and Omnichem, a subsidiary of Ajinomoto, in Belgium. The Company's balsalazide is being encapsulated by Anabolic Laboratories, Inc. in Irvine, California. In addition, the Company is in negotiations to secure additional sources of commercial quantities of the active pharmaceutical ingredient balsalazide and an additional encapsulator. Under its supply agreement with the Company, Alfa Wassermann is obligated to supply the Company with active pharmaceutical ingredient rifaximin. Currently, Alfa Wassermann manufactures rifaximin for the Italian and other European markets. (8) 401(K) PLAN In 1996, the Company adopted the Salix Pharmaceuticals, Inc. 401(k) Retirement Plan. Eligible participants may elect to defer a percentage of their compensation. The Company matches up to 50% of such participant deferrals, provided that such deferrals do not exceed 6% of the participant's compensation. The Company's total matching contributions for all participants were approximately $150,000, $14,000 and $13,000 in 2001, 2000 and 1999, respectively. Additional discretionary employer contributions may be made on an annual basis. - -------------------------------------------------------------------------------- F-16 SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES - -------------------------------------------------------------------------------- (9) QUARTERLY RESULTS OF OPERATIONS The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2001 and 2000.
Mar. 31 Jun. 30 Sep. 30 Dec. 31 ---------------------------------------------------------------------------- (in thousands, except per share amounts) (unaudited) 2001 Product revenue....................... $ 3,290 $ 4,163 $ 2,834 $ 3,842 Other revenue......................... 1,375 1,824 2,589 2,433 Cost of products sold................. 786 1,080 676 953 Net income (loss)..................... $(3,897) $(3,309) $(5,055) (5,237) Net income (loss) per common share: Basic............................... $ (0.28) $ (0.22) $ (0.30) $ (0.31) Diluted............................. $ (0.28) $ (0.22) $ (0.30) $ (0.31) 2000 Product revenue....................... $ 380 $ 173 $ 299 $ 5,455 Other revenue......................... 467 653 5,740 1,375 Cost of products sold................. 313 222 284 1,468 Net income (loss)..................... $ (682) $(1,374) $ 220 $(1,139) Net income (loss) per common share: Basic............................... $ (0.06) $ (0.12) $ 0.02 $ (0.09) Diluted............................. $ (0.06) $ (0.12) $ 0.02 $ (0.09)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Allowance for Rebates and Coupons
Additions Deductions ------------------- ----------- Rebates and Coupons Charged to Charged Honored Beginning Costs and to Other During Ending Year ended December 31, Balance Expenses Accounts Period Balance ------------------------------------------------------------------------- (in thousands)......... 2001 $ 310 $1,219 $ -- $ 342 $1,187 2000 $ -- $ 310 $ -- $ -- $ 310 1999 $ -- $ -- $ -- $ -- $ --
Allowance for Uncollectable Accounts
Additions Deductions ------------------- ----------- Accounts Charged to Charged Written Off Beginning Costs and to Other During Ending Year ended December 31, Balance Expenses Accounts Period Balance ------------------------------------------------------------------------- (in thousands)......... 2001 $ -- $ 14 $ -- $ -- $ 14 2000 $ -- $ -- $ -- $ -- $ -- 1999 $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------- F-17 - -------------------------------------------------------------------------------- [LOGO] Salix Pharmaceuticals, Ltd. - -------------------------------------------------------------------------------- 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:
Amount to Be Paid --------- SEC registration fee.............. $ 8,000 Nasdaq National Market listing fee 20,000 Printing costs.................... 150,000 Legal fees........................ 150,000 Accounting fees and expenses...... 100,000 Blue sky fees..................... 5,000 Transfer agent fees............... 5,000 Miscellaneous expenses............ 12,000 -------- Total.......................... $450,000
Item 15. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in effect, that any person made a party to any action by reason of the fact that he is or was a director, officer, employee or agent of Salix may and, in certain cases, must be indemnified by Salix against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorneys' fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Salix. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to Salix, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expenses, and, in a non-derivative action, to any criminal proceeding in which such person had reasonable cause to believe his conduct was unlawful. Salix's certificate of incorporation, as amended, provides that no director of Salix shall be liable to Salix or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the DGCL. Salix's certificate of incorporation, as amended, also provides that Salix shall indemnify to the fullest extent permitted by Delaware law any and all of its directors and officers, or former directors and officers, or any person who may have served at Salix's request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. Item 16. Exhibits (a) Exhibits.
Number Description ------- ------------------------------- 1.1 * Form of Underwriting Agreement. 2.1 Certificate of Domestication. 3.1 Certificate of Incorporation. 3.2 (k) Bylaws.
- -------------------------------------------------------------------------------- II-1 - --------------------------------------------------------------------------------
Number Description - ---------- -------------------------------------------------- 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 Holdings, Ltd. and form of Stock Option and Restricted Stock Purchase Agreements thereunder. 10.3(g) Form of 1996 Stock Plan for Salix Holdings, Ltd., as amended September 2000 and form of Notice of Stock Option Grant and Stock Option Agreement thereunder, as amended March 12, 2001. 10.4(a)** Amendment Agreement effective as of September 17, 1992 by and among Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex. 10.5(a)** License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. and letter agreement amendments thereto. 10.6(a)** Research and Development Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto. 10.7(a)** Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra. 10.8(a)** Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc. and Biorex Laboratories, Limited, dated April 16, 1993. 10.9(a)** 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(b) 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(a)** Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals Limited and Glycyx Pharmaceuticals, Ltd. 10.11(a)** Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals, Ltd. and Menarini International Operations Luxembourg SA and amendments thereto. 10.12(a)** License Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd. 10.13(a)** 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(c) Severance Agreement and Mutual Release dated January 6, 1999 between Salix Pharmaceuticals, Ltd. and David Boyle. 10.16(d) 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.). 10.17(d) Agreement dated December 22, 1999, between Glycyx Pharmaceuticals, Ltd. and Astra AB. 10.18(e) Stockholder Protection Rights Agreement, dated as of January 13, 2000 between Salix Pharmaceuticals, Ltd. and Montreal Trust Company of Canada. 10.19(f)** Agreement between Glycyx Pharmaceuticals, Ltd. and Shire Pharmaceuticals Group plc. 10.20(f)** Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. 10.21(h) Form of Common Stock Purchase Agreement for May 2001 private placement. 10.22(i) Lease Agreement dated June 30, 2000 by and between Colonnade Development, LLC and Salix Pharmaceuticals, Inc. 10.23(j)** License Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. dated August 22, 2001.
- -------------------------------------------------------------------------------- II-2 - --------------------------------------------------------------------------------
Number Description - -------- -------------------------------------------------------- 10.24(j) Form of Employment Agreement for executive officers. 10.25 Loan and Security Agreement dated March 30, 2001, First Amendment to Loan and Security Agreement dated October 4, 2001 and First Waiver to Loan and Security Agreement dated November 12, 2001, between General Electric Capital Corporation and Salix Pharmaceuticals, Inc. 21.1(k) Subsidiaries of the Registrant. 23.1 Consent of 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).
- -------- * To be filed in amendment. ** 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. (a) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333-33781). (b) Incorporated by reference to exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 1998. (c) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K405 for the twelve months ended December 31, 1998. (d) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K dated December 28, 1999. (e) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K dated January 13, 2000. (f) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2000. (g) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-8 (Registration No. 333-63604), filed June 22, 2001. (h) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K dated May 30, 2001. (i) Incorporated by reference to exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (j) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. (k) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-4 (File No. 333-74302). - -------------------------------------------------------------------------------- II-3 Part II - -------------------------------------------------------------------------------- Item 17. Undertakings 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. 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. The undersigned Registrant undertakes that: (1) for the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of the registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of the registration statement as of the time it was declared effective; and (2) for the purpose of determining any liability under the Securities Act of 1933, each post effective amendment that contains a form of prospectus 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. - -------------------------------------------------------------------------------- II-4 Part II - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies 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 11th day of February 2002. 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 true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 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 might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his 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 Chief February 11, 2002 ----------------------- Executive Officer (Principal Robert P. Ruscher Executive Officer) /S/ ADAM C. DERBYSHIRE Chief Financial Offier (Principal February 11, 2002 ----------------------- Financial and Accounting Officer) Adam C. Derbyshire /S/ JOHN F. CHAPPELL Director February 11, 2002 ----------------------- John F. Chappell /S/ THOMAS W. D'ALONZO Director February 11, 2002 ----------------------- Thomas W. D'Alonzo /S/ RICHARD A. FRANCO Director February 11, 2002 ----------------------- Richard A. Franco /S/ RANDY W. HAMILTON Director and Chairman February 11, 2002 ----------------------- Randy W. Hamilton - -------------------------------------------------------------------------------- II-5 - -------------------------------------------------------------------------------- EXHIBIT INDEX
Exhibit No. Description - ---------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 2.1 Certificate of Domestication. 3.1 Certificate of Incorporation. 3.2 (k) Bylaws. 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 Holdings, Ltd. and form of Stock Option and Restricted Stock Purchase Agreements thereunder. 10.3 (g) Form of 1996 Stock Plan for Salix Holdings, Ltd., as amended September 2000 and form of Notice of Stock Option Grant and Stock Option Agreement thereunder, as amended March 12, 2001. 10.4 (a)** Amendment Agreement effective as of September 17, 1992 by and among Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex. 10.5 (a)** License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. and letter agreement amendments thereto. 10.6 (a)** Research and Development Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto. 10.7 (a)** Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd. and AB Astra. 10.8 (a)** Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc. and Biorex Laboratories, Limited, dated April 16, 1993. 10.9 (a)** 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 (b) 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 (a)** Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals Limited and Glycyx Pharmaceuticals, Ltd. 10.11 (a)** Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals, Ltd. and Menarini International Operations Luxembourg SA and amendments thereto. 10.12 (a)** License Agreement, dated June 24, 1996, between Alfa Wassermann S.p.A. and Salix Pharmaceuticals, Ltd. 10.13 (a)** 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 (c) Severance Agreement and Mutual Release dated January 6, 1999 between Salix Pharmaceuticals, Ltd. and David Boyle. 10.16 (d) 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.). 10.17 (d) Agreement dated December 22, 1999, between Glycyx Pharmaceuticals, Ltd. and Astra AB. 10.18 (e) Stockholder Protection Rights Agreement, dated as of January 13, 2000 between Salix Pharmaceuticals, Ltd. and Montreal Trust Company of Canada. 10.19 (f)** Agreement between Glycyx Pharmaceuticals, Ltd. and Shire Pharmaceuticals Group plc.
10.20 (f)** Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd.
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Exhibit No. Description - -------------------------------------------------------------------------------------------------- 10.21 (h) Form of Common Stock Purchase Agreement for May 2001 private placement. 10.22 (i) Lease Agreement dated June 30, 2000 by and between Colonnade Development, LLC and Salix Pharmaceuticals, Inc. 10.23 (j)** License Agreement between Biorex Laboratories Limited and Glycyx Pharmaceuticals, Ltd. dated August 22, 2001. 10.24 (j) Form of Employment Agreement for executive officers. 10.25 Loan and Security Agreement dated March 30, 2001, First Amendment to Loan and Security Agreement dated October 4, 2001 and First Waiver to Loan and Security Agreement dated November 12, 2001, between General Electric Capital Corporation and Salix Pharmaceuticals, Inc. 21.1 (k) Subsidiaries of the Registrant. 23.1 Consent of 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).
- -------- * To be filed in amendment. ** 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. (a) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333-33781). (b) Incorporated by reference to exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 1998. (c) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K405 for the twelve months ended December 31, 1998. (d) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K dated December 28, 1999. (e) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K dated January 13, 2000. (f) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2000. (g) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-8 (Registration No. 333-63604), filed June 22, 2001. (h) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K dated May 30, 2001. (i) Incorporated by reference to exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (j) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. (k) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-4 (File No. 333-74302). - -------------------------------------------------------------------------------- EX-2.1 3 dex21.txt CERTIFICATE OF DOMESTICATION EXHIBIT 2.1 CERTIFICATE OF DOMESTICATION OF SALIX PHARMACEUTICALS, LTD. Pursuant to Section 388 of the General Corporation Law of Delaware, the undersigned corporation hereby submits the following for the purpose of domesticating in Delaware, and does hereby certify as follows. 1. The name of the corporation is Salix Pharmaceuticals, Ltd. (the "Corporation"). 2. The Corporation's original Memorandum of Association was filed on December 24, 1993, under the name Salix Holdings, Ltd., in the British Virgin Islands. 3. The post-domestication name of the Corporation as set forth in its Certificate of Incorporation shall be Salix Pharmaceuticals, Ltd. 4. The Corporation's principal place of business is 8540 Colonnade Center Drive Suite 501, Raleigh, North Carolina 27615. 5. This Certificate of Domestication will become effective at 11:59 p.m. on December 31, 2001. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Domestication to be executed on its behalf by Robert P. Ruscher, its Chief Executive Officer, this 27/th/ day of December, 2001, hereby declaring and certifying that this is the act and deed of the Corporation and that the facts stated herein are true. SALIX PHARMACEUTICALS, LTD. By: /s/ Robert P. Ruscher ------------------------------------------ Robert P. Ruscher, Chief Executive Officer EX-3.1 4 dex31.txt CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF SALIX PHARMACEUTICALS, LTD. The undersigned, for the purposes of incorporating a corporation in Delaware under the General Corporation Law of Delaware, hereby certifies as follows: ARTICLE I The name of the corporation is Salix Pharmaceuticals, Ltd. (the "Corporation"). ARTICLE II The street and mailing address and county of the registered office of the Corporation is 15 East North Street, in the City of Dover, County of Kent, zip code 19901. The name of the registered agent is Incorporating Services, Ltd. ARTICLE III The name of the incorporator is Robert P. Ruscher and the incorporator's address is 8540 Colonnade Center Drive, Suite 501, Raleigh, North Carolina 27615. The incorporator's mailing address is the same as the foregoing. ARTICLE IV The purpose of the Corporation is to engage in any lawful actor activity for which a corporation may be organized under the General Corporation Law of Delaware. ARTICLE V The Corporation shall be authorized to issue an aggregate of forty-five million (45,000,000) shares of capital stock. The authorized capital stock shall be divided into Common Stock and Preferred Stock. The Common Stock of the Corporation shall consist of forty million (40,000,000) shares having $0.001 par value per share. The Preferred Stock of the Corporation shall consist of five million (5,000,000) shares having $0.001 par value per share. The Common Stock and Preferred Stock shall each have the powers, preferences, rights, qualifications, limitations and restrictions set forth below. (a) Common Stock. ------------ 1. Voting Rights. The holders of shares of Common Stock ------------- shall be entitled to one vote for each share so held with respect to all matters voted on by the stockholders of the Corporation. 2. Liquidation Rights. Subject to the prior and superior ------------------ right of the Preferred Stock, upon any voluntary or involuntary liquidation, dissolution or winding up of affairs of the Corporation, the holders of Common Stock shall be entitled to receive of the funds to be distributed such amount as remains after distribution of all amounts, if any, required to be distributed to holders of any Preferred Stock. Such funds shall be paid to the holders of Common Stock on the basis of the number of shares of Common Stock held by each of them. 3. Dividends. Dividends may be paid on the Common Stock --------- as and when declared by the Board of Directors. 4. Reserve Powers. The holders of shares of Common Stock -------------- shall have all other powers, preferences and rights conferred upon owners of shares of capital stock under the laws of the State of Delaware, except insofar as such powers, preferences and rights are expressly restricted by the provisions of Paragraph (b) of this Article V. (b) Preferred Stock. --------------- Any Preferred Stock not designated may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the designation of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law or this Certificate of Incorporation. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to designate the Preferred Stock in one or more series, and in connection with the designation of any such series, by resolution providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, the resolutions providing for designation of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law and this Certificate of Incorporation. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of the shares of Preferred Stock or the shares of Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of shares of the capital stock of the Corporation ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, alter, amend, rescind or repeal the Bylaws of the Corporation. ARTICLE VII The Board of Directors shall have that number of directors set out in the Bylaws of the Corporation as adopted or as set from time to time by a duly adopted amendment thereto by the directors or stockholders of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. Vacancies in the Board of Directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of a majority of the directors then in office, whether or not a quorum. ARTICLE VIII All action by the stockholders shall be taken at a duly called special or annual meeting of the stockholders of the Corporation at which a quorum is present and the stockholders of the Corporation shall not have the right to act by written consent as provided by Section 228 of the General Corporation Law of Delaware. The business transacted at any special meeting of the stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of such meeting. ARTICLE IX To the fullest extent permitted by the General Corporation Law of the State of Delaware, the Corporation shall indemnify and advance indemnification expenses on behalf of all directors and officers of the Corporation. The Corporation shall indemnify such other persons as may be required by statute or by the Bylaws of the Corporation. The Corporation may, to the full extent permitted by Delaware law, purchase and maintain insurance on behalf of any director or officer, or such other person as may be permitted by statute or the Bylaws of the Corporation, against any liability which may be asserted against any director, officer or such other person and may enter into contracts providing for the indemnification of any director, officer or such other person to the full extent permitted by Delaware law. The liability of directors of the Corporation (for actions or inactions taken by them as directors) for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. If the General Corporation Law of the State of Delaware is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of the director to the Corporation shall be limited or eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. Any repeal or modification of this Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. ARTICLE X The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XI This Certificate of Incorporation will become effective at 11:59 p.m. on December 31, 2001. IN WITNESS WHEREOF, I have executed this Certificate of Incorporation this the 27/th/ day of December, 2001, hereby declaring and certifying that this is my act and deed and that the facts stated herein are true. /s/ Robert P. Ruscher ------------------------------------ Robert P. Ruscher, Incorporator EX-5.1 5 dex51.txt OPINION OF WYRICK ROBBINS YATES AND PONTON LLP - -------------------------------------------------------------------------------- Exhibit 5.1 February 11, 2002 Salix Pharmaceuticals, Ltd. 8540 Colonnade Center Drive Suite 501 Raleigh, North Carolina 27615 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 to be filed on or about the date hereof by Salix Pharmaceuticals Ltd., a Delaware 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 4,600,000 shares of the Company's common stock, $0.001 par value per share (the "Shares"). The shares are to be sold 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 your 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 issuance 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 issued 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 express no opinion with respect to the applicability or effect of the laws of any jurisdiction other than the Delaware General Corporation Law, as in effect on the date hereof. 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, WYRICK ROBBINS YATES & PONTON LLP - -------------------------------------------------------------------------------- EX-10.25 6 dex1025.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.25 LOAN AND SECURITY AGREEMENT DATED AS OF MARCH 30, 2001 BETWEEN GENERAL ELECTRIC CAPITAL CORPORATION AS LENDER AND SALIX PHARMACEUTICALS, INC. AS BORROWER INDEX OF EXHIBITS AND SCHEDULES ------------------------------- Schedule A - Definitions Schedule B - Lender's and Borrower's Addresses for Notices Schedule C - Letters of Credit (Not Used) Schedule D - Cash Management System Schedule E - Fees and Expenses Schedule F - Schedule of Documents Schedule G - Financial Covenants Disclosure Schedule (3.2) - Places of Business; Corporate Names Disclosure Schedule (3.6) - Real Estate Disclosure Schedule (3.7) - Stock; Affiliates Disclosure Schedule (3.9) - Taxes Disclosure Schedule (3.11) - ERISA Disclosure Schedule (3.12) - Litigation Disclosure Schedule (3.13) - Intellectual Property Disclosure Schedule (3.15) - Environmental Matters Disclosure Schedule (3.16) - Insurance Disclosure Schedule (3.18) - Contracts (Offset Risk) Disclosure Schedule (5(b)) - Indebtedness Disclosure Schedule (5(e)) - Liens Disclosure Schedule (6.1) - Actions to Perfect Liens Exhibit A - Form of Notice of Revolving Credit Advance Exhibit B - Other Reports and Information Exhibit C - Form of Borrowing Base Certificate Exhibit C-1 - Inventory Rollforward and Reconciliation Exhibit D - Form of Accounts Payable Analysis Exhibit E - Form of Accounts Receivable Rollforward Analysis Exhibit F - Form of Revolving Credit Note Exhibit G - [Intentionally Left Blank] Exhibit H - Form of Secretarial Certificate Exhibit I - Form of Power of Attorney Exhibit J - Form of Certificate of Compliance Exhibit K - Form of Lockbox Agreement Exhibit L - Form of Landlord's Waiver and Consent Exhibit M - [Intentionally Left Blank] Exhibit N - Form of Guarantee Exhibit O - Form of Opinion of Counsel to Borrower Exhibit P - Intercreditor and Subordination Agreement Exhibit Q - [Intentionally Left Blank] Exhibit R - Form of U.C.C. Schedule Exhibit S - Form of Payment of Proceeds Letter Exhibit T - Form of Borrower Authorized Representative Letter Exhibit U - Form of Post-Closing Letter GE Capital TRANSACTION SUMMARY AS OF THE DATE OF THIS AGREEMENT - -------------------------------------------------------------------------------- REVOLVING CREDIT LOAN Maximum Amount: $7,000,000 -------------- Term: 2 years plus three optional one-year ---- renewals Revolving Credit Rate: Index Rate plus 4% --------------------- Letter of Credit Subfacility: n/a ---------------------------- Borrowing Base: The sum of (a) 85% of the value (as determined by -------------- Lender) of Borrower's Eligible Accounts arising on and after February 1, 2001 that remain unpaid for less than ninety (90) days after invoice date plus (b) the lesser ---- of (i) $6,000,000 or (ii) 70% of the value (as determined by Lender) of Borrower's Eligible Accounts arising in December 2000 and January 2001 that remain unpaid for less than one hundred twenty (120) days after invoice date; provided that, Lender shall reduce the foregoing percentages by one percentage point for each percentage point that the dilution of Borrower's Accounts (calculated by Lender as the average dilution over the most recent 3 months) exceeds 5%. FEES Closing Fee: $17,500 ----------- Collateral Monitoring Fee: $12,000 per annum. ------------------------- Letter of Credit Fee: n/a -------------------- Prepayment Fee: 3% in year one and 2% in year two -------------- The Loans described generally here are established and governed by the terms and conditions set forth below in this Agreement and the other Loan Documents, and if there is any conflict between this general description and the express terms and conditions below or elsewhere in the Loan Documents, such other express terms and conditions shall control. - -------------------------------------------------------------------------------- This LOAN AND SECURITY AGREEMENT is dated as of March 30, 2001, and agreed to by and between SALIX PHARMACEUTICALS, INC., a California corporation ("Borrower"), any other Credit Party executing this Agreement, and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"). RECITALS A. Borrower desires to obtain the Loans and other financial accommodations from Lender and Lender is willing to provide the Loans and accommodations all in accordance with the terms of this Agreement. B. Capitalized terms used herein shall have the meanings assigned to them in Schedule A and, for purposes of this Agreement and the other Loan Documents, the rules of construction set forth in Schedule A shall govern. All schedules, attachments, addenda and exhibits hereto, or expressly identified to this Agreement, are incorporated herein by reference, and taken together with this Agreement, constitute but a single agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.1 Loans. (a) Subject to the terms and conditions of this Agreement, from the ----- Closing Date and until the Commitment Termination Date (i) Lender agrees (A) to make available advances (each, a "Revolving Credit Advance") and (B) to incur Letter of Credit Obligations, in an aggregate outstanding amount not to exceed the Borrowing Availability, and (ii) Borrower may at its request from time to time borrow, repay and reborrow, and may cause Lender to incur Letter of Credit Obligations, under this Section 1.1. (b) Borrower shall request each Revolving Credit Advance by written notice to Lender substantially in the form of Exhibit A (each a "Notice of ---------- Revolving Credit Advance") given no later than 11:00 A.M. (New York City time) on-the Business Day of the proposed advance. Lender shall be fully protected under this Agreement in relying upon, and shall be entitled to rely upon, (i) any Notice of Revolving Credit Advance believed by Lender to be genuine, and (ii) the assumption that the Persons making electronic requests or executing and delivering a Notice of Revolving Credit Advance were duly authorized, unless the responsible individual acting thereon for Lender shall have actual knowledge to the contrary. As an accommodation to Borrower, Lender may permit telephonic, electronic or facsimile requests for a Revolving Credit Advance and electronic or facsimile transmittal of instructions, authorizations, agreements or reports to Lender by Borrower. Unless Borrower specifically directs Lender in writing not to accept or act upon telephonic, facsimile or electronic communications from Borrower, Lender shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically, by facsimile or electronically and purporting to have been sent to Lender by Borrower and Lender shall have no duty to verify the origin of any such communication or the identity or authority of the Person sending it. The Revolving Credit Loan shall be evidenced by, and be repayable in accordance with the terms of, the Revolving Credit Note and this Agreement. (c) In making any Loan hereunder Lender shall be entitled to rely upon the most recent Borrowing Base Certificate delivered to Lender by Borrower and other information available to Lender. Lender shall be under no obligation to make any further Revolving Credit Advance or incur any other Obligation if Borrower shall have failed to deliver a Borrowing Base Certificate to Lender by the time specified in Section 4.1(b). (d) Letters of Credit Notwithstanding anything to the contrary contained in this Agreement, including Schedule C, Lender shall have no obligations to ---------- incur Letter of Credit Obligations for the account of Borrower. 1.2 Term and Prepayment. (a) Upon the Commitment Termination Date the obligation ------------------ of Lender to make Revolving Credit Advances and extend other credit hereunder shall immediately terminate and Borrower shall pay to Lender in full, in cash: (i) all outstanding Revolving Credit Advances and all accrued but unpaid interest thereon; 1 (ii) an amount sufficient to enable Lender to hold cash collateral as specified in Schedule C; and (iii) all other non-contingent Obligations due to or incurred by Lender. (b) If the Revolving Credit Loan shall at any time exceed the Borrowing Availability, then Borrower shall immediately repay the Revolving Credit Loan in the amount of such excess. (c) Borrower shall have the right, at any time upon 30 days prior written notice to Lender to (i) terminate voluntarily Borrower's right to receive or benefit from, and Lender's obligation to make and to incur, Revolving Credit Advances and Letter of Credit Obligations, and (ii) prepay all of the Obligations. The effective date of termination of the Revolving Credit Loan specified in such notice shall be the Commitment Termination Date. If Borrower exercises its right of termination and prepayment, or if Lender's obligation to make Loans is terminated for any reason prior to the Stated Expiry Date then in effect (including as a result of the occurrence of a Default), Borrower shall pay to Lender the applicable Prepayment Fee. 1.3 Use of Proceeds. Borrower shall use the proceeds of the Loans for working ---------------- capital and other general corporate purposes. 1.4 Single Loan. The Loans and all of the other Obligations of Borrower to ------------ Lender shall constitute one general obligation of Borrower secured by all of the Collateral. 1.5 Interest. (a) Borrower shall pay interest to Lender on the aggregate -------- outstanding Revolving Credit Advances at a floating rate equal to the Index Rate plus four percent (4%) per annum, (the "Revolving Credit Rate"). All computations of interest, and all calculations of the Letter of Credit Fee, shall be made by Lender on the basis of a three hundred sixty (360) day year, in each case for the actual number of days occurring in the period for which such interest or fee is payable. Each determination by Lender of an interest rate hereunder shall ` be conclusive and binding for all purposes, absent manifest error. In no event will Lender charge interest at a rate that exceeds the highest rate of interest permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. (b) Interest shall be payable on the outstanding Revolving Credit Advances (i) in arrears for the preceding calendar month on the first day of each calendar month, (ii) on the Commitment Termination Date, and (iii) if any interest accrues or remains payable after the Commitment Termination Date, upon demand by Lender. (c) Effective upon the occurrence of any Event of Default and for so long as any Event of Default shall be continuing, the Revolving Credit Rate and the Letter of Credit Fee shall automatically be increased by two percentage points (2%) per annum (such increased rate, the "Default Rate"). (d) If any interest or any other payment (including Collateral Monitoring Fees) to Lender under this Agreement becomes due and payable on a day other than a Business Day, such payment date shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. (e) If, at any time after the conditions to the initial Loan contained in Section 2.1 of this Agreement are met or waived by Lender in writing, the aggregate outstanding Revolving Credit Advances at any one time are less than $1,575,000, Borrower shall pay interest to Lender in accordance with the terms of this Agreement as if such Revolving Credit Advances were $1,575,000. 1.6 Cash Management System. On or prior to the Closing Date and until the ------------------------ Termination Date, Borrower will establish and maintain the cash management system described in Schedule D. All payments in respect of the Collateral shall ---------- be made to or deposited in the blocked or lockbox accounts described in Schedule D in accordance with the terms thereof. 1.7 Fees. Borrower agrees to pay to Lender the Fees set forth in Schedule E. ---- 1.8 Receipt of Payments. Borrower shall make each payment under this Agreement ------------------- (not otherwise made pursuant to Section 1.9) without set-off, counterclaim or deduction and free and clear of all Taxes not later than 2 11:00 A.M. (New York City time) on the day when due in lawful money of the United States of America in immediately available funds to the Collection Account. If Borrower shall be required by law to deduct any Taxes from any payment to Lender under any Loan Document, then the amount payable to Lender shall be increased so that, after making all required deductions, Lender received an amount equal to that which it would have received had no such deductions been made. For purposes of computing interest and Fees, all payments shall be deemed received by Lender two (2) Business Days following receipt of immediately available funds in the Collection Account. For purposes of determining the Borrowing Availability, payments shall be deemed received by Lender upon receipt of immediately available funds in the Collection Account. 1.9 Application and Allocation of Payments. Borrower irrevocably agrees that --------------------------------------- Lender shall have the continuing and exclusive right to apply any and all payments against the then due and payable Obligations in such order as Lender may deem advisable. Lender is authorized to, and at its option may (without prior notice or precondition and at any time or times), but shall not be obligated to, make or cause to be made Revolving Credit Advances on behalf of Borrower for: (a) payment of all Fees, expenses, indemnities, charges, costs, principal, interest, or other Obligations owing by Borrower under this Agreement or any of the other Loan Documents, (b) the payment, performance or satisfaction of any of Borrower's obligations with respect to preservation of the Collateral, or (c) any premium in whole or in part required in respect of any of the policies of insurance required by this Agreement, even if the making of any such Revolving Credit Advance causes the outstanding balance of the Revolving Credit Loan to exceed the Borrowing Availability, and Borrower agrees to repay immediately, in cash, any amount by which the Revolving Credit Loan exceeds the Borrowing Availability. 1.10 Accounting. Lender is authorized to record on its books and records the ---------- date and amount of each Loan and each payment of principal thereof and such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. Lender shall provide Borrower on a monthly basis a statement and accounting of such recordations but any failure on the part of the Lender to keep any such recordation (or any errors therein) or to send a statement thereof to Borrower shall not in any manner affect the obligation of Borrower to repay any of the Obligations. Except to the extent that Borrower shall, within 30 days after such statement and accounting is sent, notify Lender in writing of any objection Borrower may have thereto (stating with particularity the basis for such objection), such statement and accounting shall be deemed final, binding and conclusive upon Borrower, absent manifest error. 1.11 Indemnity. Borrower and each other Credit Party executing this Agreement --------- jointly and severally agree to indemnify and hold Lender and its Affiliates, and their respective employees, attorneys and agents (each, an "Indemnified Person"), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents or with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, this Agreement and the other Loan Documents or any other documents or transactions contemplated by or referred to herein or therein and any actions or failures to act with respect to any of the foregoing, including any and all product liabilities, Environmental Liabilities, Taxes and legal costs and expenses arising out of or incurred in connection with disputes between or among any parties to any of the Loan Documents (collectively, "Indemnified Liabilities"), except to the extent that any such Indemnified Liability is finally determined by a court of competent jurisdiction to have resulted solely from such Indemnified Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY CREDIT PARTY, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. 1.12 Borrowing Base; Reserves. The Borrowing Base shall be determined by Lender ------------------------ (including the eligibility of Accounts and Inventory) based on the most recent Borrowing Base Certificate delivered to Lender in accordance with Section 4.1(b) and such other information available to Lender. The Revolving Credit Loan shall be subject to 3 Lender's continuing right to withhold from Borrowing Availability reserves, and to increase and decrease such reserves from time to time, if and to the extent that in Lender's good faith credit judgment such reserves are necessary, including to protect Lender's interest in the Collateral or to protect Lender against possible non-payment of Accounts for any reason by Account Debtors or possible diminution of the value of any Collateral or possible non-payment of any of the Obligations or for any Taxes or in respect of any state of facts which could constitute a Default. Lender may, at its option, implement reserves by designating as ineligible a sufficient amount of Accounts which would otherwise be Eligible Accounts so as to reduce the Borrowing Base by the amount of the intended reserves. Without in any way limiting Lender's rights to establish reserves as described in this Section 1. 12, Lender shall withhold a reserve of $2,000,000 from Borrowing Availability until such time as Salix Ltd., Borrower and the other Subsidiaries of Salix Ltd. have achieved a net profit on a consolidated basis in five (5) consecutive months, as evidenced by Borrower's financial statements delivered to Lender in accordance with Section 4.1(d). 2. CONDITIONS PRECEDENT 2.1 Conditions to the Initial Loans. Lender shall not be obligated to make any -------------------------------- of the Loans or to perform any other action hereunder, until the following conditions have been satisfied in a manner satisfactory to Lender in its sole discretion, or waived in writing by Lender: (a) the Loan Documents to be delivered on or before the Closing Date shall have been duly executed and delivered by the appropriate parties, all as set forth in the Schedule of Documents (Schedule F); ------------ (b) the insurance policies provided for in Section 3.16 are in full force and effect, together with appropriate evidence showing loss payable or additional insured clauses or endorsements in favor of Lender as required under such Section; (c) as of the Closing Date Net Borrowing Availability shall be not less than $5,000,000 after giving effect to the initial Revolving Credit Advance and Letter of Credit Obligations (on a pro forma basis, with trade payables being paid currently, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales); (d) Lender shall have received an opinion of counsel to the Borrower with respect to the Loan Documents in form and substance satisfactory to Lender; (e) no event or circumstance has occurred since the date of the Agreement which has had or reasonably could be expected to have a Material Adverse Effect; and (f) Lender shall have received satisfactory results of Lender's pre-funding field examination of Borrower and the Collateral. 2.2 Further Conditions to the Loans. Lender shall not be obligated to fund any -------------------------------- Loan (including the initial Loans), if, as of the date thereof: (a) any representation or warranty by any Credit Party contained herein or in any of the other Loan Documents shall be untrue or incorrect as of such date, except to the extent that any such representation or warranty is expressly stated to relate to a specific earlier date, in which case, such representation and warranty shall be true and correct as of such earlier date; or (b) any event or circumstance which has had or reasonably could be expected to have a Material Adverse Effect shall have occurred since the Closing Date; or (c) any Default shall have occurred and be continuing or would result after giving effect to such Loan; or (d) after giving effect to such Loan, the Revolving Credit Loan would exceed the Borrowing Availability. The request and acceptance by Borrower of the proceeds of any Loan shall be deemed to constitute, as of the date of such request and the date of such acceptance, (i) a representation and warranty by Borrower that the conditions in this Section 2.2 have been satisfied and (ii) a restatement by Borrower of each of the representations and warranties made by it in any Loan Document and a reaffirmation by Borrower of the granting and continuance of Lender's Liens pursuant to the Loan Documents. 3. REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS To induce Lender to enter into this Agreement and to make the Loans, Borrower and each other Credit Party executing this Agreement represent and warrant to Lender (each of which representations and warranties shall 4 survive the execution and delivery of this Agreement), and promise to and agree with Lender until the Termination Date as follows: 3.1 Corporate Existence; Compliance with Law. Each Corporate Credit Party: (a) ------------------------------------------ is, as of the Closing Date, and will continue to be (i) a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, (ii) duly qualified to do business and in good standing in each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (iii) in compliance with all Requirements of Law and Contractual Obligations, except to the extent failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (b) has and will continue to have (i) the requisite corporate power and authority and the legal fight to execute, deliver and perform its obligations under the Loan Documents, and to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease, and to conduct its business as now, heretofore or proposed to be conducted, and (ii) all licenses, permits, franchises, rights, powers, consents or approvals from or by all Persons or Governmental Authorities having jurisdiction over such Corporate Credit Party which are necessary or appropriate for the conduct of its business. 3.2 Executive Offices; Corporate or Other Names. The location of each Corporate -------------------------------------------- Credit Party's chief executive office, corporate offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are kept (including in each case the county of such locations) are as set forth in Disclosure Schedule (3.2) and, except as set forth in such Disclosure --------------------------- Schedule, such locations have not changed during the preceding twelve months. As of the Closing Date, during the prior Five years, except as set forth in Disclosure Schedule (3.2), no Corporate Credit Party has been known as or - --------------------------- conducted business in any other name (including trade names). 3.3 Corporate Power; Authorization Enforceable Obligations. The execution, ---------------------------------------------------------- delivery and performance by each Credit Party of the Loan Documents to which it is a party, and the creation of all Liens provided for herein and therein: (a) are and will continue to be within such Credit Party's power and authority; (b) have been and will continue to be duly authorized by all necessary or proper action; (c) are not and will not be in violation of any Requirement of Law or Contractual Obligation of such Credit Party except to the extent the failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (d) do not and will not result in the creation or imposition of any Lien (other than Permitted Encumbrances) upon any of the Collateral; and (e) do not and will not require the consent or approval of any Governmental Authority or any other Person except to the extent the failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. As of the Closing Date, each Loan Document shall have been duly executed and delivered on behalf of each Credit Party party thereto, and each such Loan Document upon such execution and delivery shall be and will continue to be a legal, valid and binding obligation of such Credit Party, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency and other similar laws affecting creditors' rights generally. 3.4 Financial Statements and Projections, Books and Records. (a) The Financial --------------------------------------------------------- Statements delivered by Borrower to Lender for its most recently ended Fiscal Year and Fiscal Month, are true, correct and complete and reflect fairly and accurately the financial condition of Salix, Ltd., Borrower and Glycyx as of the date of each such Financial Statement in accordance with GAAP. The Projections most recently delivered by Borrower to Lender have been prepared in good faith, with care and diligence and use assumptions that are reasonable under the circumstances at the time such Projections were prepared and as of the date delivered to Lender and all such assumptions are disclosed in the Projections. (b) Borrower and each other Corporate Credit Party shall keep adequate Books and Records with respect to the Collateral and its business activities in which proper entries, reflecting all consolidated and consolidating financial transactions, and payments and credits received on, and all other dealings with, the Collateral, will be made in accordance with GAAP and all Requirements of Law and on a basis consistent with the Financial Statements except to the extent the failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5 3.5 Material Adverse Change. Between the date of the most recently audited ------------------------- Financial Statements delivered by Borrower to Lender and the Closing Date: (a) no Corporate Credit Party has incurred any obligations, contingent or non-contingent liabilities, or liabilities for Charges, long-term leases or unusual forward or long-term commitments which are not reflected in the Projections delivered on the Closing Date and which could, alone or in the aggregate, reasonably be expected to have a Material Adverse Effect; (b) there has been no material deviation from such Projections; and (c) no events have occurred which alone or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. No Requirement of Law or Contractual Obligation of any Credit Party has or have had or could reasonably be expected to have a Material Adverse Effect. No Credit Party is in default, and to such Credit Party's knowledge no third party is in default, under or with respect to any of its Contractual Obligations, which alone or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. 3.6 Real Estate; Property. The real estate listed in Disclosure Schedule (3.6) ---------------------- ------------------------- constitutes all of the real property owned, leased, or used by each Corporate Credit Party in its business, and such Credit Party will not execute any material agreement or contract in respect of such real estate after the date of this Agreement without giving Lender prompt written notice thereof. Each Corporate Credit Party holds and will continue to hold good and marketable fee simple title to all of its owned real estate, and good and marketable title to all of its other properties and assets, and valid and insurable leasehold interests in all of its leases (both as lessor and lessee, sublessee or assignee), and none of the properties and assets of any Corporate Credit Party are or will be subject to any Liens, except Permitted Encumbrances. With respect to each of the premises identified in Disclosure Schedule (3.2)on or prior to --------------------------- the Closing Date a bailee, landlord or mortgagee agreement acceptable to Lender has been obtained. 3.7 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness. ---------------------------------------------------------------------------- Except as set forth in Disclosure Schedule (3.7), as of the Closing Date no --------------------------- Corporate Credit Party has any Subsidiaries, is engaged in any joint venture or partnership with any other Person, or is an Affiliate of any other Person. All of the issued and outstanding Stock of each Corporate Credit Party (including all fights to purchase, options, warrants or similar rights or agreements pursuant to which any Corporate Credit Party may be required to issue, sell, repurchase or redeem any of its Stock) as of the Closing Date is owned by each of the Stockholders (and in the amounts) set forth on Disclosure Schedule (3.7). -------------------------- All outstanding Indebtedness of each Corporate Credit Party as of the Closing Date is described in Disclosure Schedule (5(b)). --------------------------- 3.8 Government Regulation; Margin Regulations. No Corporate Credit Party is --------------------------------------------- subject to or regulated under any Federal or state statute, rule or regulation that restricts or limits such Person's ability to incur Indebtedness, pledge its assets, or to perform its obligations under the Loan Documents. The making of the Loans, the application of the proceeds and repayment thereof, and the consummation of the transactions contemplated by the Loan Documents do not and will not violate any Requirement of Law. No Corporate Credit Party is engaged, nor will it engage, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin security" as such terms are defined in Regulation U of the Federal Reserve Board as now and hereafter in effect (such securities being referred to herein as "Margin Stock"). No Corporate Credit Party owns any Margin Stock, and none of the proceeds of the Loans or other extensions of credit under this Agreement will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock or reducing or retiring any Indebtedness which was originally incurred to purchase or carry any Margin Stock. No Corporate Credit Party will take or permit to be taken any action which might cause any Loan Document to violate any regulation of the Federal Reserve Board. 3.9 Taxes; Charges. Except as disclosed on Disclosure Schedule (3.9) all tax --------------- --------------------------- returns, reports and statements required by any Governmental Authority to be filed by Borrower or any other Credit Party have, as of the Closing Date, been filed and will, until the Termination Date, be filed with the appropriate Governmental Authority and no tax Lien has been filed against any Credit Party or any Credit Party's property. Proper and accurate amounts have been and will be withheld by Borrower and each other Credit Party from their respective employees for all periods in complete compliance with all Requirements of. Law and such withholdings have and will be timely paid to the appropriate Governmental Authorities. Disclosure Schedule (3.9) sets forth as of the Closing ------------------------- Date those taxable years for which any Credit Party's tax returns are currently being audited by the IRS or any other applicable Governmental Authority and any assessments or threatened assessments in connection with such audit, or otherwise currently outstanding. Except as described on Disclosure Schedule (3.9), none of the Credit Parties and their respective predecessors are liable for any Charges: (a) under any agreement (including any tax sharing agreements or agreement extending the period of assessment of any Charges) or (b) to each Credit Party's knowledge, as a 6 transferee. As of the Closing Date, no Credit Party has agreed or been requested to make any adjustment under IRC Section 481 (a), by reason of a change in accounting method or otherwise, which could reasonably be expected to have a Material Adverse Effect. 3.10 Payment of Obligations. Each Credit Party will pay, discharge or otherwise ---------------------- satisfy at or before maturity or before they become delinquent, as the case may be, all of its Charges and other obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of such Credit Party and none of the Collateral is or could reasonably be expected to become subject to any Lien or forfeiture or loss as a result of such contest. 3.11 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, ----- when taken together with all other existing ERISA Events, could reasonably be expected to result in a liability of any Credit Party of more than the Minimum Actionable Amount. The present value of all accumulated benefit obligations of the Credit Parties under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent Financial Statements reflecting such amounts, exceed the fair market value of the assets of such Plan by more than the Minimum Actionable Amount, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Account Standards No. 87) did not, as of the date of the most recent Financial Statements reflecting such amounts, exceed the fair market value of the assets of such underfunded Plans by more than the Minimum Actionable Amount. No Credit Party or ERISA Affiliate has incurred or reasonably expects to incur any Withdrawal Liability in excess of the Minimum Actionable Amount. 3.12 Litigation. No Litigation is pending or, to the knowledge of any Credit ---------- Party, threatened by or against any Credit Party or against any Credit Party's properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Disclosure ---------- Schedule (3.12), as of the Closing Date there is no Litigation pending or - --------------- threatened against any Credit Party which seeks damages in excess of $50,000 or injunctive relief or alleges criminal misconduct of any Credit Party. Each Credit Party shall notify Lender promptly in writing upon learning of the existence, threat or commencement of any Litigation against any Credit Party, any ERISA Affiliate or any Plan or any allegation of criminal misconduct against any Credit Party. 3.13 Intellectual Property. Each Corporate Credit Party owns, or is licensed to --------------------- use, all Intellectual Property necessary to conduct its business as currently conducted except for such Intellectual Property the failure of which to own or license could not reasonably be expected to have a Material Adverse Effect. Each Corporate Credit Party will maintain the patenting and registration of all Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office, or other appropriate Governmental Authority and each Corporate Credit Party will promptly patent or register, as the case may be, all of its new Intellectual Property. 3.14 Full Disclosure. No information contained in any Loan Document, the ---------------- Financial Statements or any written statement furnished by or on behalf of any Credit Party under any Loan Document, or to induce Lender to execute the Loan Documents, when taken together, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 3.15 Hazardous Materials. Except as set forth on Disclosure Schedule (3.15), as ------------------- -------------------------- of the Closing Date, (a) each real property location owned, leased or occupied by each Corporate Credit Party (the "Real Property") is maintained free of contamination from any Hazardous Material, (b) no Corporate Credit Party is subject to any Environmental Liabilities or, to any Credit Party's knowledge, potential Environmental Liabilities, in excess of $50,000 in the aggregate, (c) no notice has been received by any Corporate Credit Party identifying it as a "potentially responsible party" or requesting information under CERCLA or analogous state statutes, and to the knowledge of any Credit Party, there are no facts, circumstances or conditions that may result in any Corporate Credit Party being identified as a "potentially responsible party" under CERCLA or analogous state statutes; and (d) each Corporate Credit Party has provided to Lender copies of all existing environmental reports, reviews and audits and all written information pertaining to actual or potential Environmental Liabilities, in each case relating to any Corporate Credit Party. Each Corporate Credit Party: (i) shall comply in all material respects with all applicable Environmental Laws and 7 environmental permits; (ii) shall notify Lender in writing within seven days if and when it becomes aware of any Release, on, at, in, under, above, to, from or about any of its Real Property; and (iii) shall promptly forward to Lender a copy of any order, notice, permit, application, or any communication or report received by it or any other Credit Party in connection with any such Release. 3.16 Insurance. As of the Closing Date, Disclosure Schedule (3.16) lists all --------- --------------------------- insurance of any nature maintained for current occurrences by Borrower and each other Corporate Credit Party, as well as a summary of the terms of such insurance. Each Corporate Credit Party shall deliver to Lender certified copies and endorsements to all of its and those of its Subsidiaries (a) "All Risk" and business interruption insurance policies naming Lender loss payee, and (b) general liability and other liability policies naming Lender as an additional insured. All policies of insurance on real and personal property will contain an endorsement, in form and substance acceptable to Lender, showing loss payable to Lender (Form 438 BFU or equivalent) and extra expense and business interruption endorsements. Such endorsement, or an independent instrument furnished to Lender, will provide that the insurance companies will give Lender at least 30 days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of Borrower or any other Person shall affect the right of Lender to recover under such policy or policies of insurance in case of loss or damage. Each Corporate Credit Party shall direct all present and future insurers under its "All Risk" policies of insurance to pay all proceeds payable thereunder directly to Lender. If any insurance proceeds are paid by check, draft or other instrument payable to any Credit Party and Lender jointly, Lender may endorse such Credit Party's name thereon and do such other things as Lender may deem advisable to reduce the same to cash. Lender reserves the right at any time, upon review of each Credit Party's risk profile, to require additional forms and limits of insurance. Each Corporate Credit Party shall, on each anniversary of the Closing Date and from time to time at Lender's request, deliver to Lender a report by a reputable insurance broker, satisfactory to Lender, with respect to such Person's insurance policies. 3.17 Deposit and Disbursement Accounts. Attachment I to Schedule D lists all ----------------------------------- ---------- banks and other financial institutions at which Borrower or any other Corporate Credit Party, maintains deposits and/or other accounts, including the Disbursement Account, and such Attachment correctly identifies the name, address and telephone number of each such depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. 3.18 Accounts. As of the date of each Borrowing Base Certificate delivered to -------- Lender, each Account listed thereon as an Eligible Account shall be an Eligible Account. Borrower has not made, and will not make, any agreement with any Account Debtor for any extension of time for the payment of any Account, any compromise or settlement for less than the full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom except a discount or allowance for prompt or early payment allowed by Borrower in the ordinary course of its business consistent with historical practice and as previously disclosed to Lender in writing. Disclosure Schedule (3.18) sets forth each Contract of the Borrower with any Account Debtor which gives such Account Debtor the right (under such Contract, under common law or otherwise) to offset any Accounts for Borrower's failure to perform under such Contract and Borrower has obtained an offset waiver for each such Contract in form and substance satisfactory to Lender. With respect to the Accounts pledged as collateral pursuant to any Loan Document (a) the amounts shown on all invoices, statements and reports which may be delivered to the Lender with respect thereto are actually and absolutely owing to the relevant Credit Party as indicated thereon and are not in any way contingent; (b) no payments have been or shall be made thereon except payments immediately delivered to the applicable accounts described in paragraph 1 to Schedule D or the Lender as required hereunder; and (c) to Borrower's knowledge all Account Debtors have the capacity to contract. Borrower shall notify Lender promptly of any event or circumstance which to Borrower's knowledge would cause Lender to consider any then existing Account as no longer constituting an Eligible Account. 3.19 Conduct of Business. Each Corporate Credit Party (a) shall conduct its ------------------- business substantially as now conducted or as otherwise permitted hereunder, and (b) shall at all times maintain, preserve and protect all of the Collateral and such Credit Party's other property, used or useful in the conduct of its business and keep the same in good repair, working order and condition, ordinary wear and tear excepted, and make, or cause to be made, all necessary or appropriate repairs, replacements and improvements thereto consistent with industry practices. 3.20 CORD Internet Access. At such time as access by Borrower may become ---------------------- available to CORD's computer system via the internet, Borrower shall use its best efforts to cause CORD to provide Lender, at Borrower's sole cost 8 and expense, access to such system for the purpose of Lender accessing CORD's records regarding Borrower's Accounts and Inventory. 3.21 Further Assurances. At any time and from time to time, upon the written ------------------- request of Lender and at the sole expense of Borrower, Borrower and each other Credit Party shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Lender may reasonably deem desirable (a) to obtain the full benefits of this Agreement and the other Loan Documents, (b) to protect, preserve and maintain Lender's rights in any Collateral, or (c) to enable Lender to exercise all or any of the rights and powers herein granted. 4. FINANCIAL MATTERS; REPORTS 4.1 Reports and Notices. From the Closing Date until the Termination Date, -------------------- Borrower shall deliver to Lender: (a) within 15 days following the end of each Fiscal Month, an aged trial balance by Account Debtor and as soon as available but in no event later than 30 days following the end of each Fiscal Month, a reconciliation of the aged trial balance to the Borrower's general ledger and from the general ledger to the Financial Statements for such Fiscal Month accompanied by supporting detail and documentation as Lender may request; (b) as frequently as Lender may request and in any event no later than 15 days following the end of each Fiscal Month, a Borrowing Base Certificate in the form of Exhibit C as of the last day of the previous Fiscal Month detailing ineligible Accounts for adjustment to the Borrowing Base, certified as true and correct by the Chief Financial Officer of Borrower or such other officer as is acceptable to Lender; (c) within 15 days following the end of each Fiscal Month, an Accounts Payable Analysis in the Form of Exhibit D (together with an accounts payable --------- aging) and an Accounts Receivable Roll Forward Analysis in the Form of Exhibit ------- E, each certified as true and correct by the Chief Financial Officer of Borrower - - or such other officer as is acceptable to Lender; (d) within 30 days following the end of each Fiscal Month, the Financial Statements for such Fiscal Month, which shall provide comparisons to budget and actual results for the corresponding period during the prior Fiscal Year, both on a monthly and year-to-date basis, and accompanied by a certification in the form of Exhibit J by the Chief Executive Officer or Chief Financial Officer of Borrower that such Financial Statements are complete and correct, that there was no Default (or specifying those Defaults of which he or she was aware), and showing in reasonable detail the calculations used in determining compliance with the financial covenants hereunder; (e) within 90 days following the close of each Fiscal Year, the Financial Statements for such Fiscal Year certified without qualification by an independent certified accounting firm acceptable to Lender, which shall provide comparisons to the prior Fiscal Year, and shall be accompanied by (i) a statement in reasonable detail showing the calculations used in determining compliance with the financial covenants hereunder, (ii) a report from Borrower's accountants to the effect that in connection with their audit examination nothing has come to their attention to cause them to believe that a Default has occurred or specifying those Defaults of which they are aware, and (iii) any management letter that may be issued; (f) not less than 30 days prior to the close of each Fiscal Year, the Projections, which will be prepared by Borrower in good faith, with care and diligence, and using assumptions which are reasonable under the circumstances at the time such Projections are delivered to Lender and disclosed therein when delivered; and (g) all the reports and other information set forth on Exhibit B in the time frames set forth therein. 4.2 Financial Covenants. Borrower shall not breach any of the financial -------------------- covenants set forth in Schedule G. ---------- 4.3 Other Reports and Information. Borrower shall advise Lender promptly, in ------------------------------ reasonable detail, of: (a) any Lien, other than Permitted Encumbrances, attaching to or asserted against any of the Collateral or any occurrence causing a material loss or decline in value of any Collateral and the estimated (or actual, if available) amount of such loss or decline; (b) any material change in the composition of the Collateral; and (c) the occurrence of any Default or 9 other event which has had or could reasonably be expected to have a Material Adverse Effect. Borrower shall, upon request of Lender, furnish to Lender such other reports and information in connection with the affairs, business, financial condition, operations, prospects or management of Borrower or any other Credit Party or the Collateral as Lender may request, all in reasonable detail. 5. NEGATIVE COVENANTS Borrower and each Credit Party executing this Agreement covenants and agrees (for itself and each other Credit Party) that, without Lender's prior written consent, from the Closing Date until the Termination Date, neither Borrower nor any other Corporate Credit Party shall, directly or indirectly, by operation of law or otherwise: (a) form any Subsidiary or merge with, consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise combine with or make any investment in or, except as provided in clause 5(c) below, loan or advance to, any Person, except that Salix Ltd. and Glycyx may be domesticated in Delaware; (b) cancel any debt owing to it or create, incur, assume or permit to exist any Indebtedness, except: (i) the Obligations, (ii) Indebtedness existing as of the Closing Date set forth on Disclosure Schedule 5(b), (iii) deferred taxes, (iv) by endorsement of instruments or items of payment for deposit to the general account of such Credit Party, (v) for Guaranteed Indebtedness incurred for the benefit of Borrower if the primary obligation is permitted by this Agreement, (vi) the Salix Ltd. Subordinated Debt provided the repayment thereof is subject to the Salix Ltd. Subordination Agreement, and (vii) additional Indebtedness (including Purchase Money Indebtedness) incurred after the Closing Date in an aggregate outstanding amount for all such Corporate Credit Parties combined not exceeding $50,000. (c) enter into any lending, borrowing or other commercial transaction with any of its employees, directors, Affiliates or any other Credit Party (including upstreaming and downstreaming of cash and intercompany advances and payments by a Credit Party on behalf of another Credit Party which are not otherwise permitted hereunder) other than loans or advances to employees in the ordinary course of business in an aggregate outstanding amount not exceeding $50,000; (d) make any changes in any of its business objectives, purposes, or operations which could reasonably be expected to adversely affect repayment of the Obligations or could reasonably be expected to have a Material Adverse Effect or engage in any business other than that presently engaged in or proposed to be engaged in the Projections delivered to Lender on the Closing Date; (e) create or permit any Lien on any of its properties or assets, except for Permitted Encumbrances; (f) sell, transfer, issue, convey, assign or otherwise dispose of any of its assets or properties, including its Accounts or any shares of its Stock or engage in any sale-leaseback, synthetic lease or similar transaction (provided, that the foregoing shall not prohibit the sale of Inventory or obsolete or unnecessary Equipment in the ordinary course of its business); (g) change its name, chief executive office, corporate offices, warehouses or other Collateral locations, or location of its records concerning the Collateral, or acquire, lease or use any real estate after the Closing Date without such Person, in each instance, giving twenty (20) days prior written notice thereof to Lender and taking all actions deemed necessary or appropriate by Lender to continuously protect and perfect Lender's Liens upon the Collateral; (h) establish any depository or other bank account of any kind with any financial institution (other than the accounts set forth on Attachment I to Schedule D); or (i) make or permit any Restricted Payment. 6. SECURITY INTEREST 10 6.1 Grant of Security Interest. (a) As collateral security for the prompt and --------------------------- complete payment and performance of the Obligations, each of the Borrower and any other Credit Party executing this Agreement hereby grants to the Lender a security interest in and Lien upon all of the following property and assets of the Borrower, whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest: all Accounts; all bank and deposit accounts and all funds on deposit therein; all Inventory; all Books and Records related any of the foregoing; and to the extent not otherwise included, all Proceeds and products of all and any of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing, but excluding in all events Hazardous Waste (all of the foregoing, together with any other collateral pledged to the Lender pursuant to any other Loan Document, collectively, the "Collateral"). (b) Borrower, Lender and each other Credit Party executing this Agreement agree that this Agreement creates, and is intended to create, valid and continuing Liens upon the Collateral in favor of Lender. Borrower and each other Credit Party executing this Agreement represents, warrants and promises to Lender that: (i) Borrower and each other Credit Party granting a Lien in Collateral is the sole owner of each item of the Collateral upon which it purports to grant a Lien pursuant to the Loan Documents, and has good and marketable title thereto free and clear of any and all Liens or claims of others, other than Permitted Encumbrances; (ii) the security interests granted pursuant to this Agreement, upon completion of the filings and other actions listed on Disclosure Schedule (6.1) (which, in the case of all filings and other ------------------------- documents referred to in said Schedule, have been delivered to the Lender in duly executed form) will constitute valid perfected security interests in all of the Collateral in favor of the Lender as security for the prompt and complete payment and performance of the Obligations, enforceable in accordance with the terms hereof against any and all creditors of and purchasers from any Credit Party (other than purchasers of Inventory in the ordinary course of business) and such security interests are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Encumbrances which have priority by operation of law; and (iii) no effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is or will be on file or of record in any public office, except those relating to Permitted Encumbrances. Borrower and each other Credit Party executing this Agreement promise to defend the right, title and interest of Lender in and to the Collateral against the claims and demands of all Persons whomsoever, and each shall take such actions, including (x) the prompt delivery of all original Instruments, Chattel Paper and certificated Stock owned by Borrower and each other Credit Party granting a Lien on Collateral to Lender, (y) notification of Lender's interest in Collateral at Lender's request, and (z) the institution of litigation against third parties as shall be prudent in order to protect and preserve each Credit Party's and Lender's respective and several interests in the Collateral. Borrower (and any other Credit Party granting a Lien in Collateral) shall mark its Books and Records pertaining to the Collateral to evidence the Loan Documents and the Liens granted under the Loan Documents. All Chattel Paper shall be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of General Electric Capital Corporation." 6.2 Lender's Rights. (a) Lender may, (i) at any time in Lender's own name or in --------------- the name of Borrower, communicate with Account Debtors, parties to Contracts, and obligors in respect of Instruments, Chattel Paper or other Collateral to verify to Lender's satisfaction, the existence, amount and terms of any such Accounts, Contracts, Instruments or Chattel Paper or other Collateral, and (ii) at any time and without prior notice to Borrower or any other Credit Party, notify Account Debtors, parties to Contracts, and obligors in respect of Chattel Paper, Instruments, or other Collateral that the Collateral has been assigned to Lender and that payments shall be made directly to Lender. Upon the request of Lender, Borrower shall so notify such Account Debtors, parties to Contracts, and obligors in respect of Instruments, Chattel Paper or other Collateral. Borrower hereby constitutes Lender or Lender's designee as Borrower's attorney with power to endorse Borrower's name upon any notes, acceptance drafts, money orders or other evidences of payment or Collateral. (b) Borrower shall remain liable under each Contract, Instrument and License to observe and perform all the conditions and obligations to be observed and performed by it thereunder, and Lender shall have no obligation or liability whatsoever to any Person under any Contract, Instrument or License (between Borrower or any other Credit Party and any Person other than Lender) by reason of or arising out of the execution, delivery or performance of this Agreement, and Lender shall not be required or obligated in any manner (i) to perform or fulfill any of the obligations of Borrower, (ii) to make any payment or inquiry, or (iii) to take any action of any kind to collect, compromise or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times under or pursuant to any Contract, Instrument or License. 11 (c) Borrower and each other Credit Party shall, with respect to each owned, leased, or controlled property, during normal business hours and upon reasonable advance notice (unless a Default shall have occurred and be continuing, in which event no notice shall be required and Lender shall have access at any and all times): (i) provide access to such property to Lender and any of its officers, employees and agents, as frequently as Lender determines to be appropriate; (ii) permit Lender and any of its officers, employees and agents to inspect, audit and make extracts and copies (or take originals if reasonably necessary) from all of Borrower's and such Credit Party's Books and Records; and (iii) permit Lender to inspect, review, evaluate and make physical verifications and appraisals of the Inventory and other Collateral in any manner and through any medium that Lender considers advisable, and Borrower and such Credit Party agree to render to Lender, at Borrower's and such Credit Party's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. (d) After the occurrence and during the continuance of a Default, Borrower, at its own expense, shall cause the certified public accountant then engaged by Borrower to prepare and deliver to Lender at any time and from time to time, promptly upon Lender's request, the following reports: (i) a reconciliation of all Accounts; (ii) an aging of all Accounts-, (iii) trial balances; and (iv) test verifications of such Accounts as Lender may request. Borrower, at its own expense, shall cause its certified independent public accountants to deliver to Lender the results of any physical verifications of all or any portion of the Inventory made or observed by such accountants when and if such verification is conducted. Lender shall be permitted to observe and consult with Borrower's accountants in the performance of these tasks. 6.3 Lender's Appointment as Attorney-in-fact. On the Closing Date, Borrower and ---------------------------------------- each other Credit Party executing this Agreement shall execute and deliver a Power of Attorney in the form attached as Exhibit 1. The power of attorney granted pursuant to the Power of Attorney and all powers granted under any Loan Document are powers coupled with an interest and shall be irrevocable until the Termination Date. The powers conferred on Lender under the Power of Attorney are solely to protect Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Lender agrees not to exercise any power or authority granted under the Power of Attorney unless an Event of Default has occurred and is continuing. Borrower and each other Credit Party executing this Agreement authorizes Lender to file any financing or continuation statement without the signature of Borrower or such Credit Party to the extent permitted by applicable law. 6.4 Grant of License to Use Intellectual Property Collateral. Borrower and each -------------------------------------------------------- other Credit Party executing this Agreement hereby grants to Lender an irrevocable, non-exclusive license (exercisable upon the occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to Borrower or such Credit Party) to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by Borrower or such Credit Party, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof, and represents, promises and agrees that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights of any third Person; provided, that such license will terminate on the Termination Date. 7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES 7.1 Events of Default. The occurrence of any one or more of the following events ----------------- (regardless of the reason therefor) shall constitute an "Event of Default" hereunder which shall be deemed to be continuing until waived in writing by Lender in accordance with Section 9.3: (a) Borrower shall fail to make any payment in respect of any Obligations when due and payable or declared due and payable; or (b) Borrower or any other Credit Party (whether or not such Credit Party has signed this Agreement) shall fail or neglect to perform, keep or observe any of the covenants, promises, agreements, requirements, conditions or other terms or provisions contained in this Agreement or any of the other Loan Documents; or (c) an event of default shall occur under any Contractual Obligation of the Borrower or any other Credit Party (other than this Agreement and the other Loan Documents), and such event of default (i) involves the failure to make any payment (whether or not such payment is blocked pursuant to the terms of an intercreditor agreement or otherwise), whether of principal, interest or otherwise, and whether due by scheduled maturity, required prepayment, acceleration, demand or otherwise, in respect of any Indebtedness (other than the Obligations) of such Person in an 12 aggregate amount exceeding the Minimum Actionable Amount, or (ii) causes (or permits any holder of such Indebtedness or a trustee to cause) such Indebtedness, or a portion thereof, in an aggregate amount exceeding the Minimum Actionable Amount to become due prior to its stated maturity or prior to its regularly scheduled date of payment; or (d) any representation or warranty in this Agreement or any other Loan Document, or in any written statement pursuant hereto or thereto, or in any report, financial statement or certificate made or delivered to Lender by Borrower or any other Credit Party shall be untrue or incorrect as of the date when made or deemed made, regardless of whether such breach involves a representation or warranty with respect to a Credit Party that has not signed this Agreement; or (e) there shall be commenced against the Borrower or any other Credit Party any Litigation seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which remains unstayed or undismissed for sixty (60) consecutive days; or Borrower or any other Credit Party shall have concealed, removed or permitted to be concealed or removed, any part of its property with intent to hinder, delay or defraud any of its creditors or made or suffered a transfer of any of its property or the incurring of an obligation which may be fraudulent under any bankruptcy, fraudulent transfer or other similar law; or (f) a case or proceeding shall have been commenced involuntarily against Borrower or any other Credit Party in a court having competent jurisdiction seeking a decree or order: (i) under the United States Bankruptcy Code or any other applicable Federal, state or foreign bankruptcy or other similar law, and seeking either (x) the appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Person or of any substantial part of its properties, or (y) the reorganization or winding up or liquidation of the affairs of any such Person, and such case or proceeding shall remain undismissed or unstayed for sixty (60) consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding; or (ii) invalidating or denying any Person's right, power, or competence to enter into or perform any of its obligations under any Loan Document or invalidating or denying the validity or enforceability of this Agreement or any other Loan Document or any action taken hereunder or thereunder; or (g) Borrower or any other Credit Party shall (i) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it or seeking appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for it or any substantial part of its properties, (ii) make a general assignment for the benefit of creditors, (iii) consent to or take any action in furtherance of, or, indicating its consent to, approval of, or acquiescence in, any of the acts set forth in paragraphs (e) or (f) of this Section 7.1 or clauses (i) and (ii) of this paragraph (g), or (iv) shall admit in writing its inability to, or shall be generally unable to, pay its debts as such debts become due; or (h) a final judgment or judgments for the payment of money in excess of the Minimum Actionable Amount in the aggregate shall be rendered against Borrower or any other Credit Party, unless the same shall be (i) fully covered by insurance and the issuer(s) of the applicable policies shall have acknowledged full coverage in writing within fifteen (15) days of judgment, or (ii) vacated, stayed, bonded, paid or discharged within a period of fifteen (15) days from the date of such judgment; or (i) any other event shall have occurred which has had or could reasonably be expected to have a Material Adverse Effect; or (j) any provision of any Loan Document shall for any reason cease to be valid, binding and enforceable in accordance with its terms, or any Lien granted, or intended by the Loan Documents to be granted, to Lender shall cease to be a valid and perfected Lien having the first priority (or a lesser priority if expressly permitted in the Loan Documents) in any of the Collateral (or any Credit Party shall so assert any of the foregoing); or (k) a Change of Control shall have occurred with respect to any Corporate Credit Party; or (1) an ERISA Event shall have occurred that, in the opinion of the Lender, when taken together with all other ERISA Events that have occurred and are then continuing, could reasonably be expected to result in liability of any Credit Party in an aggregate amount exceeding the Minimum Actionable Amount. 7.2 Remedies. (a) If any Default shall have occurred and be continuing, then -------- Lender may terminate or suspend its obligation to make further Revolving Credit Advances and to incur additional Letter of Credit Obligations. In addition, if any Event of Default shall have occurred and be continuing, Lender may, without notice, take any one or more of the following actions: (i) declare all or any portion of the Obligations to be forthwith due and payable, including contingent liabilities with respect to Letter of Credit Obligations, whereupon such Obligations shall become and be due and payable; (ii) require that all Letter of Credit Obligations be fully cash collateralized pursuant 13 to Schedule C; or (iii) exercise any rights and remedies provided to Lender ---------- under the Loan Documents or at law or equity, including all remedies provided under the Code; provided, that upon the occurrence of any Event of Default specified in Sections 7.1 (e), (f) or (g), the Obligations shall become immediately due and payable (and any obligation of Lender to make further Loans, if not previously terminated, shall immediately be terminated) without declaration, notice or demand by Lender. (b) Without limiting the generality of the foregoing, Borrower and each other Credit Party executing this Agreement expressly agrees that upon the occurrence of any Event of Default that is continuing, Lender may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, assign, give an option or options to purchase or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale, to the extent permitted by law, to purchase for the benefit of Lender the whole or any part of said Collateral so sold, free of any right of equity of redemption, which equity of redemption Borrower and each other Credit Party executing this Agreement hereby releases. Such sales may be adjourned or continued from time to time with or without notice. Lender shall have the right to conduct such sales on any Credit Party's premises or elsewhere and shall have the right to use any Credit Party's premises without rent or other charge for such sales or other action with respect to the Collateral for such time as Lender deems necessary or advisable. (c) Upon the occurrence and during the continuance of an Event of Default and at Lender's request, Borrower and each other Credit Party executing this Agreement agrees to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at its premises or elsewhere. Until Lender is able to effect a sale, lease, or other disposition of the Collateral, Lender shall have the right to complete, assemble, use or operate the Collateral or any part thereof, to the extent that Lender deems appropriate, for the purpose of preserving such Collateral or its value. Lender shall have no obligation to any Credit Party to maintain or preserve the rights of any Credit Party as against third parties with respect to any Collateral while such Collateral is in the possession of Lender. Lender may, if it so elects, seek the appointment of a receiver or keeper to take possession of any Collateral and to enforce any of Lender's remedies with respect thereto without prior notice or hearing. To the maximum extent permitted by applicable law, Borrower and each other Credit Party executing this Agreement waives all claims, damages, and demands against Lender, its Affiliates, agents, and the officers and employees of any of them arising out of the repossession, retention or sale of any Collateral except such as are determined in a final judgment by a court of competent jurisdiction to have arisen solely out of the gross negligence or willful misconduct of such Person. Borrower and each other Credit Party executing this Agreement agrees that ten (10) days prior notice by Lender to such Credit Party of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. Borrower and each other Credit Party shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled. (d) Lender's rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which Lender may have under any Loan Document or at law or in equity. Recourse to the Collateral shall not be required. All provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited, to the extent necessary, so that they do not render this Agreement invalid or unenforceable, in whole or in part. 7.3 Waivers by Credit Parties. Except as otherwise provided for in this ---------------------------- Agreement and to the fullest extent permitted by applicable law, Borrower and each other Credit Party executing this Agreement waives: (a) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Loan Documents, the Notes or any other notes, commercial paper, Accounts, Contracts, Documents, Instruments, Chattel Paper and guaranties at any time held by Lender on which such Credit Party may in any way be liable, and hereby ratifies and confirms whatever Lender may do in this regard; (b) all rights to notice and a hearing prior to Lender's taking possession or control of, or to Lender's replevy, attachment or levy upon, any Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of its remedies; and (c) the benefit of all valuation, appraisal and exemption laws. Borrower and each other Credit Party executing this Agreement acknowledges that it has been advised by counsel of its choices and decisions with respect to this Agreement, the other Loan Documents and the transactions evidenced hereby and thereby. 14 7.4 Proceeds. The Proceeds of any sale, disposition or other realization upon -------- any Collateral shall be applied by Lender upon receipt to the Obligations in such order as Lender may deem advisable in its sole discretion (including the cash collateralization of any Letter of Credit Obligations), and after the indefeasible payment and satisfaction in full in cash of all of the Obligations, and after the payment by Lender of any other amount required by any provision of law, including Section 9-504(l)(c) of the Code (but only after Lender has received what Lender considers reasonable proof of a subordinate party's security interest), the surplus, if any, shall be paid to Borrower or its representatives or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. 8. SUCCESSORS AND ASSIGNS Each Loan Document shall be binding on and shall inure to the benefit of Borrower and each other Credit Party executing such Loan Document, Lender, and their respective successors and assigns, except as otherwise provided herein or therein. Neither Borrower nor any other Credit Party may assign, transfer, hypothecate, delegate or otherwise convey its rights, benefits, obligations or duties under any Loan Document without the prior express written consent of Lender, except for the domestication of Salix Ltd. and Glycyx in Delaware. Any such purported conveyance by Borrower or such Credit Party without the prior express written consent of Lender shall be void. There shall be no third party beneficiaries of any of the terms and provisions of any of the Loan Documents. Lender reserves the-right at any time to create and sell participations in the Loans and the Loan Documents and to sell, transfer or assign any or all of its rights in the Loans and under the Loan Documents. 9. MISCELLANEOUS 9.1 Complete Agreement, Modification of Agreement. This Agreement and the other ---------------------------------------------- Loan Documents constitute the complete agreement between the parties with respect to the subject matter hereof and thereof, supersede all prior agreements, commitments, understandings or inducements (oral or written, expressed or implied). No Loan Document may be modified, altered or amended except by a written agreement signed by Lender, and each other Credit Party a party to such Loan Document. Borrower and each other Credit Party executing this Agreement or any other Loan Document shall have all duties and obligations under this Agreement and such other Loan Documents from the date of its execution and delivery, regardless of whether the initial Loan has been funded at that time. 9.2 Expenses. Borrower agrees to pay or reimburse Lender for all costs and -------- expenses (including the fees and expenses of all counsel, `advisors, consultants (including environmental and management consultants) and auditors retained in connection therewith) incurred in connection with: (a) the preparation, negotiation, execution, delivery, performance and enforcement of the Loan Documents and the preservation of any rights thereunder; (b) collection, including deficiency collections; (c) the forwarding to Borrower or any other Person on behalf of Borrower by Lender of the proceeds of any Loan (including a wire transfer fee of $25 per wire transfer); (d) any amendment, waiver or other modification with respect to any Loan Document or advice in connection with the administration of the Loans or the rights thereunder; (e) any litigation, dispute, suit, proceeding or action (whether instituted by or between any combination of Lender, Borrower or any other Person), and an appeal or review thereof, in any way relating to the Collateral, any Loan Document, or any action taken or any other agreements to be executed or delivered in connection therewith, whether as a party, witness or otherwise; and (f) any effort (i) to monitor the Loans, (ii) to evaluate, observe or assess Borrower or any other Credit Party or the affairs of such Person, and (iii) to verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of the Collateral. 9.3 No Waiver. Neither Lender's failure, at any time, to require strict ---------- performance by Borrower or any other Credit Party of any provision of any Loan Document, nor Lender's failure to exercise, nor any delay in exercising, any right, power or privilege hereunder, shall operate as a waiver thereof or waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or future exercise thereof or the exercise of any other right, power or privilege. Any suspension or waiver of a Default or other provision under the Loan Documents shall not suspend, waive or affect any other Default or other provision under any Loan Document, and shall not be construedas a bar to any right or remedy which Lender would otherwise have had on any future occasion. None of the undertakings, indemnities, agreements, warranties, covenants and representations of Borrower or any other Credit 15 Party to Lender contained in any Loan Document and no Default by Borrower or any other Credit Party under any Loan Document shall be deemed to have been suspended or waived by Lender, unless such waiver or suspension is by an instrument in writing signed by an officer or other authorized employee of Lender and directed to Borrower specifying such suspension or waiver (and then such waiver shall be effective only to the extent therein expressly set forth), and Lender shall not, by any act (other than execution of a formal written waiver), delay, omission or otherwise, be deemed to have waived any of its rights or remedies hereunder. 9.4 Severability; Section Titles. Wherever possible, each provision of the Loan ----------------------------- Documents shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of any Loan Document shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of such Loan Document. Except as otherwise expressly provided for in the Loan Documents, no termination or cancellation (regardless of cause or procedure) of any financing arrangement under the Loan Documents shall in any way affect or impair the Obligations, duties, covenants, representations and warranties, indemnities, and liabilities of Borrower or any other Credit Party or the rights of Lender relating to any unpaid Obligation, (due or not due, liquidated, contingent or unliquidated), or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is not required until after the Commitment Termination Date, all of which shall not terminate or expire, but rather shall survive such termination or cancellation and shall continue in full force and effect until the Termination Date; provided, that all indemnity obligations of the Credit Parties under the Loan Documents shall survive the Termination Date. The Section titles contained in any Loan Document are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 9.5 Authorized Signature. Until Lender shall be notified in writing by Borrower -------------------- or any other Credit Party to the contrary, the signature upon any document or instrument delivered pursuant hereto and believed by Lender or any of Lender's officers, agents, or employees to be that of an officer of Borrower or such other Credit Party shall bind Borrower and such other Credit Party and be deemed to be the act of Borrower or such other Credit Party affixed pursuant to and in accordance with resolutions duly adopted by Borrower's or such other Credit Party's Board of Directors, and Lender shall be entitled to assume the authority of each signature and authority of the person whose signature it is or appears to be unless the person acting in reliance thereon shall have actual knowledge to the contrary. 9.6 Notices. Except as otherwise provided herein, whenever any notice, demand, ------- request or other communication shall or may be given to or served upon any party by any other party, or whenever any party desires to give or serve upon any other party any communication with respect to this Agreement, each such communication shall be in writing and shall be deemed to have been validly served, given or delivered (a) upon the earlier of actual receipt and three (3) days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid, (b) upon transmission, when sent by telecopy or other similar facsimile transmission (with such telecopy or facsimile promptly confirmed by delivery of a copy by personal delivery or United States Mail as otherwise provided in this Section 9.6), (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid or (d) when hand-delivered, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated in Schedule B or to such other address (or facsimile number) as may be substituted by notice given as herein provided. Failure or delay in delivering copies of any such communication to any Person (other than Borrower or Lender) designated in Schedule B to receive copies shall in no way adversely affect the ---------- effectiveness of such communication. 9.7 Counterparts. Any Loan Document may be executed in any number of separate ------------ counterparts by any one or more of the parties thereto, and all of said counterparts taken together shall constitute one and the same instrument. 9.8 Time of the Essence. Time is of the essence for performance of the ---------------------- Obligations under the Loan Documents. 9.9 GOVERNING LAW. THE LOAN DOCUMENTS AND THE OBLIGATIONS ARISING UNDER THE LOAN ------------- DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS. 16 9.10 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (A) BORROWER AND EACH -------------------------------------------------- OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY CONSENT AND AGREE THAT THE STATE OR FEDERAL COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND SUCH CREDIT PARTY AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT LENDER, BORROWER AND SUCH CREDIT PARTY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER AND SUCH CREDIT PARTY HEREBY WAIVE ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER OR SUCH CREDIT PARTY AT THE ADDRESS SET FORTH IN SCHEDULE B OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S OR SUCH CREDIT PARTY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. (B) THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LENDER, BORROWER AND ANY CREDIT PARTY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. 9.11 Press Releases. Neither any Credit Party nor any of its Affiliates will in -------------- the future issue any press release or other public disclosure using the name of General Electric Capital Corporation or its affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days' prior notice to Lender and without the prior written consent of Lender unless (and only to the extent that) such Credit Party or Affiliate is required to do so under law and then, in any event, such Credit Party or Affiliate will consult with Lender before issuing such press release or other public disclosure. 9.12 Reinstatement. This Agreement shall continue to be effective, or be ------------- reinstated, as the case may be, if at any time payment of all or any part of the Obligations is rescinded or must otherwise be returned or restored by Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Borrower or any other Credit Party, or otherwise, all as though such payments had not been made. 9.13 Confidentiality. Lender agrees to use its best efforts to maintain the --------------- confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process; (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies this Agreement or any suit, action or proceeding relating to the Loan Agreement or the enforcement of rights thereunder; (f) with the consent of the Borrower; (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section 9.13; or (i) to the National Association of Insurance Commissioners or any other similar organization or any nationally recognized rating 17 agency that requires access to information about Lender's or its affiliates' investment portfolio in connection with ratings issued with respect to Lender or its affiliates. For the purposes of this Section 9.13, "Information" means all information received from Borrower relating to Borrower or its business, other than any such information that is available to Lender on a nonconfidential basis prior to disclosure by Borrower. IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as of the date first written above. SALIX PHARMACEUTICALS, INC. By: /s/ Adam C. Derbyshire --------------------------------- Name: Adam C. Derbyshire Title: Secretary GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Keri A. Wass --------------------------------- Name: Keri A. Wass Title: Duly Authorized Signatory 18 SCHEDULE A - DEFINITIONS Capitalized terms used in this Agreement and the other Loan Documents shall have (unless otherwise provided elsewhere in this Agreement or in the other Loan Documents) the following respective meanings: "Account Debtor" shall mean any Person who is or may become obligated with respect to, or on account of, an Account. "Accounts" shall mean all "accounts," as such term is defined in the Code, now owned or hereafter acquired by any Person, including: (i) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments), whether arising out of goods sold or services rendered or from any other transaction (including any such obligations which may be characterized as an account or contract right under the Code); (ii) all of such Person's rights in, to and under all purchase orders or receipts for goods or services; (iii) all of such Person's rights to any goods represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (iv) all moneys due or to become due to such Person under all purchase orders and contracts for the sale of goods or the performance of services or both by such Person or in connection with any other transaction (whether or not yet earned by performance on the part of such Person), including the right to receive the proceeds of said purchase orders and contracts; and (v) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. "Accounts Payable Analysis" shall mean a certificate in the form of Exhibit D "Accounts Receivable Roll Forward Analysis" shall mean a certificate in the form of Exhibit E. "Affiliate" shall mean, with respect to any Person: (i) each other Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, five percent (5%) or more of the Stock having ordinary voting power for the election of directors of such Person; (ii) each other Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person; or (iii) each of such Person's officers, directors, joint venturers and partners. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Agreement including all appendices, exhibits or schedules attached or otherwise identified thereto, restatements and modifications and supplements thereto, and any appendices, exhibits or schedules to any of the foregoing, each as in effect at the time such reference becomes operative; provided, that except as specifically set forth in this Agreement, any reference to the Disclosure Schedules to this Agreement shall be deemed a reference to the Disclosure Schedules as in effect on the Closing Date or in a written amendment thereto executed by Borrower and Lender. "Books and Records" shall mean all books, records, board minutes, contracts, licenses, insurance policies, environmental audits, business plans, files, computer files, computer discs and other data and software storage and media devices, accounting books and records, financial statements (actual and pro forma), filings with Governmental Authorities and any and all records and instruments relating to the Collateral or Borrower's business. "Borrower" shall mean the Person identified as such in the preamble of this Agreement. "Borrowing Availability" shall mean, at any time, the lesser of (i) the Maximum Amount or (ii) the Borrowing Base, in each case less reserves established by Lender from time to time. "Borrowing Base" shall mean at any time an amount equal to the sum at such time of (a) eighty five percent (85%) of the value (as determined by Lender) of Borrower's Eligible Accounts arising on and after February 1, 2001 that remain unpaid for less than ninety (90) days after invoice date plus (b) the lesser of (i) $6,000,000 or (ii) seventy percent (70%) of the value (as determined by Lender) of Borrower's Eligible Accounts arising in December 2000 and January 2001 that remain unpaid for less than one hundred twenty (120) days after invoice date plus; provided that Lender shall reduce the foregoing percentages by one percentage point for each percentage point that the Schedule A: Page 1 dilution of Borrower's Accounts (calculated by Lender as the average dilution over the most recent 3 months) exceeds 5%. "Borrowing Base Certificate" shall mean a certificate in the form of Exhibit C. "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Capital Expenditures" shall mean all payments or accruals (including Capital Lease Obligations) for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and that are required to be capitalized under GAAP. "Capital Lease" shall mean, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, either would be required to be classified and accounted for as a capital lease on a balance sheet of such Person or otherwise would be disclosed as such in a note to such balance sheet, other than, in the case of Borrower, any such lease under which Borrower is the lessor. "Capital Lease Obligation" shall mean, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease or otherwise be disclosed in a note to such balance sheet. "Cash Collateral Account" shall have the meaning assigned to it in Schedule C. "Change of Control" shall mean, with respect to any Person on ` or after the Closing Date, that any change in the composition of its stockholders as of the Closing Date shall occur which would result in any stockholder or group acquiring 49.9% or more of any class of Stock of such Person, or that any Person (or group of Persons acting in concert) shall otherwise acquire, directly or indirectly (including through Affiliates), the power to elect a majority of the Board of Directors of such Person or otherwise direct the management or affairs of such Person by obtaining proxies, entering into voting agreements or trusts, acquiring securities or otherwise. "Charges" shall mean all Federal, state, county, city, municipal, local, foreign or other governmental taxes (including taxes owed to PBGC at the time due and payable), levies, customs or other duties, assessments, charges, liens, and all additional charges, interest, penalties, expenses, claims or encumbrances upon or relating to (i) the Collateral, (ii) the Obligations, (iii) the employees, payroll, income or gross receipts of any Credit Party, (iv) the ownership or use of any assets by any Credit Party, or (v) any other aspect of any Credit Party's business. "Chattel Paper" shall mean all "chattel paper," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located. "Closing Date" shall mean the Business Day on which the conditions precedent set forth in Section 2 have been satisfied or specifically waived in writing by Lender, and the initial Loan has been made. "Closing Fee" shall have the meaning assigned to it in Schedule E. "Code" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Lender's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. "Collateral" shall have the meaning assigned to it in Section 6.1. "Collection Account" shall mean that certain account of Lender, account number 50-232-854 in the name of GECC CAF Depository at Bankers Trust Company, I Bankers Trust Plaza, New York, New York, ABA number 021-001-033. Schedule A: Page 2 "Commitment Termination Date" shall mean the earliest of (i) the Stated Expiry Date, (ii) the date Lender's obligation to advance funds is terminated pursuant to Section 7.2, and (iii) the date of indefeasible prepayment in full by Borrower of the Obligations in accordance with the provisions of Section 1.2(c). "Contracts" shall mean all the contracts, undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which any Person may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. "Contractual Obligation" shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument, or other undertaking to which such Person is a party or by which it or any of its property is bound. "Copyright License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting the right to use any Copyright or Copyright registration. "Copyrights" shall mean all of the following now owned or hereafter acquired by any Person: (i) all copyrights in any original work of authorship fixed in any tangible medium of expression, now known or later developed, all registrations and applications for registration of any such copyrights in the United States or any other country, including registrations, recordings and applications, and supplemental registrations, recordings, and applications in the United States Copyright Office; and (ii) all Proceeds of the foregoing, including license royalties and proceeds of infringement suits, the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all renewals and extensions thereof. "CORD" shall mean CORD Logistics, Inc., an Ohio corporation. "Corporate Credit Party" shall mean any Credit Party that is a corporation, partnership or limited liability company. "Credit Party" shall mean Borrower, and each other Person (other than Lender) that is or may become a party to this Agreement [or any other Loan Document). "Default" shall mean any Event of Default or any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Default Rate" shall have the meaning assigned to it in Section 1.5(c). "Documents" shall mean all "documents," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including all bills of lading, dock warrants, dock receipts, warehouse receipts, and other documents of title, whether negotiable or non-negotiable. "Eligible Accounts" shall mean as at the date of determination, all Accounts of the Borrower except any Account: (a) that does not arise from the sale of goods or the performance of services by Borrower in the ordinary course of Borrower's business; (b) upon which (i) Borrower's right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) Borrower is not able to bring suit or otherwise enforce its remedies against the Account Debtor through judicial process; (c) against which any defense, counterclaim or setoff, whether well-founded or otherwise, is asserted or which is a "contra" Account; (d) that is not a true and correct statement of a bona fide indebtedness incurred in the amount of the Account for merchandise sold or services performed and accepted by the Account Debtor obligated upon such Account; (e) with respect to which an invoice, acceptable to Lender in form and substance, has not been sent; (f) that is not owned by Borrower or is subject to any right, claim, or interest of another Person, other than the Lien in favor of Lender; Schedule A: Page 3 (g) that arises from a sale to or performance of services for an employee, Affiliate, Subsidiary or Stockholder of Borrower or any other Credit Party, or an entity which has common officers or directors with Borrower or any other Credit Party; (h) that is the obligation of an Account Debtor that is the Federal (or local) government or a political subdivision thereof, unless Lender has agreed to the contrary in writing and Borrower has complied with the Federal Assignment of Claims Act of 1940 (or the state equivalent thereof, if any) with respect to such obligation; (i) that is the obligation of an Account Debtor located in a foreign country unless such Account is supported by a letter of credit in which Lender has a first priority perfected security interest by possession or credit insurance acceptable to Lender (and naming Lender as loss payee); (j) that is the obligation of an Account Debtor to whom Borrower is or may become liable for goods sold or services rendered by the Account Debtor to Borrower, to the extent of Borrower's liability to such Account Debtor; (k) that arises with respect to goods which are delivered on a cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the Account Debtor may be conditional; (1) that is an obligation for which the total unpaid Accounts of the Account Debtor exceed 20% of the aggregate of all Accounts, to the extent of such excess; (m) that is not paid within 60 days from its due date or that are Accounts of an Account Debtor if 50% or more of the Accounts owing from such Account Debtor remain unpaid within such time periods; (n) is an obligation of an Account Debtor that has suspended business, made a general assignment for the benefit of creditors, is unable to pay its debts as they become due or as to which a petition has been filed (voluntary or involuntary) under any law relating to bankruptcy, insolvency, reorganization or relief of debtors; (o) that arises from any bill-and-hold or other sale of goods which remain in Borrower's possession or under Borrower's control; (p) as to which Lender's interest therein is not a first priority perfected security interest; (q) to the extent that such Account exceeds any credit limit established by Lender in Lender's good faith credit judgment; (r) as to which any of Borrower's representations or warranties pertaining to Accounts are untrue; (s) that represents interest payments, late or finance charges, or service charges owing to Borrower; or (t) that is not otherwise acceptable in the good faith discretion of Lender, provided, that Lender shall have the right to create and adjust eligibility standards and related reserves from time to time in its good faith credit judgment. "Environmental Laws" shall mean all Federal, state and local laws, statutes, ordinances and regulations, now or hereafter in effect, and in each case as amended or supplemented from time to time, and any applicable judicial or administrative interpretation thereof relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). "Environmental Liabilities" shall mean all liabilities, obligations, responsibilities, remedial actions, removal costs, losses, damages of whatever nature, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim, suit, action or demand of whatever nature by any Person and which relate to any health or safety condition regulated under any Environmental Law, environmental permits or in connection with any Release, threatened Release, or the presence of a Hazardous Material. "Equipment" shall mean all "equipment" as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including any and all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal property (other than Inventory) of every kind and description which may be now or hereafter used in such Person's operations or which are owned by such Person or in which such Person may have an interest, and all parts, accessories and accessions thereto and substitutions and replacements therefor. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time, and any regulations promulgated thereunder. Schedule A: Page 4 "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with any Credit Party, is treated as a single employer under Section 414(b), (c), (in) or (o) of the IRC, or, solely for the purposes of Section 302 of ERISA and Section 412 of the IRC, is treated as a single employer under Section 414 of the IRC. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the IRC or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(b) of the IRC or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Credit Party or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by any Credit Party or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or to appoint a trustee to administer any Plan; (f) the incurrence by any Credit Party or any ERISA Affiliate of any liability with respect to any withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by any Credit Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Credit Party or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Event of Default" shall have the meaning assigned to it in Section 7.1. "Fees" shall mean the fees due to Lender as set forth in Schedule E. "Financial Statements" shall mean the consolidated and consolidating income statement, balance sheet and statement of cash flows of Salix Ltd., Borrower and the other Subsidiaries of Salix Ltd., internally prepared for each Fiscal Month, and audited for each Fiscal Year, prepared in accordance with GAAP. "Fiscal Month" shall mean any of the monthly accounting periods of Salix Ltd. and Borrower. "Fiscal Quarter" shall mean any of the quarterly accounting periods of Salix Ltd. and Borrower. "Fiscal Year" shall mean the 12 month period of Salix Ltd. and Borrower ending December 31 of each year. Subsequent changes of the fiscal year of Salix Ltd. or Borrower shall not change the term "Fiscal Year" unless Lender shall consent in writing to such change. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied. "General Intangibles" shall mean all "general intangibles," as such term is defined in the Code, now owned or hereafter acquired by any Person, including all fight, title and interest which such Person may now or hereafter have in or under any Contract, Intellectual Property, interests in partnerships, joint ventures and other business associations, permits, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill associated with any Intellectual Property), all fights and claims in or under insurance policies (including insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible fights or intangible fights, all liability, life, key-person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit accounts, fights to receive tax refunds and other payments and fights of indemnification. "Glycyx" shall mean Glycyx Pharmaceuticals, Ltd., a company organized and existing under the laws of Bermuda. "Goods" shall mean all "goods," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including movables, fixtures, equipment, inventory, or other tangible personal property. Schedule A: Page 5 "Goodwill" shall mean all goodwill, trade secrets, proprietary or confidential information, technical information, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, and distribution agreements now owned or hereafter acquired by any Person. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such Person guaranteeing any indebtedness, lease, dividend, or other obligation ("primary obligations") of any other Person (the "primary obligor") in any manner, including any obligation or arrangement of such guaranteeing Person (whether or not contingent): (i) to purchase or repurchase any such primary obligation; (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition of the primary obligor; (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation; or (iv) to indemnify the owner of such primary obligation against loss in respect thereof. "Guarantor" shall mean Glycyx, Salix. Ltd. and each other Person which executes a guaranty or a support, put or other similar agreement in favor of Lender in connection with the transactions contemplated by this Agreement. "Guaranty" shall mean any agreement to perform all or any portion of the Obligations on behalf of Borrower or any other Credit Party, in favor of, and in form and substance satisfactory to, Lender, together with all amendments, modifications and supplements thereto, and shall refer to such Guaranty as the same may be in effect at the time such reference becomes operative. "Hazardous Material" shall mean any substance, material or waste which is regulated by or forms the basis of liability now or hereafter under, any Environmental Laws, including any material or substance which is (a) defined as a "solid waste," "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste," "pollutant," "contaminant," "hazardous constituent," "special waste," "toxic substance" or other similar term or phrase under any Environmental Laws, (b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), or any radioactive substance. "Hazardous Waste" shall have the meaning ascribed to such term in the Resource Conservation and Recovery Act (42 U.S.C.ss.ss.6901 et. seq.). "Indebtedness" of any Person shall mean: (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, but not including obligations to trade creditors incurred in the ordinary course of business and not more than 45 days past due); (ii) all obligations evidenced by notes, bonds, debentures or similar instruments; (iii) all indebtedness created or arising under any conditional sale or other title retention agreements with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are "limited to repossession or sale of such property); (iv) all Capital Lease Obligations; (v) all Guaranteed Indebtedness; (vi) all Indebtedness referred to in clauses (i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; (vii) the Obligations; and (viii) all liabilities under Title IV of ERISA. "Indemnified Liabilities" and "Indemnified Person" shall have the meaning assigned to such terms in Section 1.11. "Index Rate" shall mean the latest rate for 30-day dealer placed commercial paper (which for purposes hereof shall mean high grade unsecured notes sold through dealers by major corporations in multiples of $1,000), which normally is published in the "Money Rates" section of The Wall Street Journal (or if such rate ceases to be so published, as quoted from such other generally available and recognizable source as Lender may select). The Index Schedule A: Page 6 Rate shall be determined (i) on the first Business Day immediately prior to the Closing Date and (ii) thereafter, on the last Business Day of each calendar month for calculation of interest for the following month. "Instruments" shall mean all "instruments," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including all certificated securities and all notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Intellectual Property" shall mean any and all Licenses, Patents, Copyrights, Trademarks, trade secrets and customer lists. "Inventory" shall mean all "inventory," as such term is defined in the Code, now or hereafter owned or acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal property which are held by or on behalf of such Person for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in such Person's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "Investment Property" shall mean all "investment property," as such term is defined in the Code, now or hereafter acquired by any Person, wherever located. "IRC" and "IRS" shall mean respectively, the Internal Revenue Code of 1986 and the Internal Revenue Service, and any successors thereto. "Lender" shall mean General Electric Capital Corporation and, if at any time Lender shall decide to assign or syndicate all or any of the Obligations, such term shall include such assignee or such other members of the syndicate. "Letters of Credit" shall mean any and all commercial or standby letters of credit issued at the request and for the account of Borrower for which Lender has incurred Letter of Credit Obligations. "Letter of Credit Fee" shall have the meaning assigned to it in Schedule E. "Letter of Credit Obligations" shall mean all outstanding obligations (including all duty, freight, taxes, costs, insurance and any other charges and expenses) incurred by Lender, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee, by Lender or another, of Letters of Credit, all as further set forth in Schedule C. "License" shall mean any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by any Person. "Lien" shall mean any mortgage, security deed or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Litigation" shall mean any claim, lawsuit, litigation, investigation or proceeding of or before any arbitrator or Governmental Authority. "Loan Documents" shall mean this Agreement, the Notes, the Financial Statements, each Guaranty, the Power of Attorney, the Lock Box Account Agreements, and the other documents and instruments listed in Schedule F, and all security agreements, mortgages and all other documents, instruments, certificates, and notices at any time delivered by any Person (other than Lender) in connection with any of the foregoing. "Loans" shall mean the Revolving Credit Loan including the Letter of Credit Obligations. Schedule A: Page 7 "Lock Box Account" and "Lock Box Account Agreement" shall have the meaning assigned to such terms in Schedule D. "Material Adverse Effect" shall mean: a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of Borrower or any other Credit Party or the industry within which Borrower or any other Credit Party operates, (b) Borrower's or any other Credit Party's ability to pay or perform the Obligations under the Loan Documents to which such Credit Party is a party in accordance with the terms thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority of any such Lien, or (d) Lender's rights and remedies under this Agreement and the other Loan Documents. "Maximum Amount" shall mean $7,000,000. "Minimum Actionable Amount" shall mean $50,000. "Multiemployer Plan" shall mean a "multiemployer plan," as defined in Section 4001 (a) (3) of ERISA, to which Borrower, any other Credit Party or any ERISA Affiliate is making, is obligated to make, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Borrowing Availability" shall mean at any time the Borrowing Availability less the Revolving Credit Loan. "Notes" shall mean the Revolving Credit Note. "Notice of Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1 (b). "Obligations" shall mean all loans, advances, debts, expense reimbursement, fees, liabilities, and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or amounts are liquidated or determinable) owing by Borrower and any other Credit Party to Lender, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under any of the Loan Documents, and all covenants and duties regarding such amounts. This term includes all principal, interest (including interest accruing at the then applicable rate provided in this Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), Fees, Charges, expenses, attorneys' fees and any other sum chargeable to Borrower under any of the Loan Documents, and all principal and interest due in respect of the Loans and all obligations and liabilities of any Guarantor under any Guaranty. "Patent License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting any right with respect to any invention on which a Patent is in existence. "Patents" shall mean all of the following in which any Person now holds or hereafter acquires any interest: (i) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State or Territory thereof, or any other country; and (ii) all reissues, continuations, continuations-in-part or extensions thereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Permitted Encumbrances" shall mean the following encumbrances: (i) Liens for taxes or assessments or other governmental Charges or levies, either not yet due and payable or to the extent that nonpayment thereof is permitted by the terms of Section 3.10; (ii) pledges or deposits securing obligations under worker's compensation, unemployment insurance, social security or public liability laws or similar legislation; (iii) pledges or deposits securing bids, tenders, contracts (other than contracts for the payment of money) or leases to which any Credit Party is a party as lessee made in the ordinary course of business; (iv) deposits securing public or statutory obligations of Schedule A: Page 8 any Credit Party; (v) inchoate and unperfected workers', mechanics', or similar liens arising in the ordinary course of business so long as such Liens attach only to Equipment, fixtures or real estate; (vi) carriers', warehousemen's, suppliers' or other similar possessory liens arising in the ordinary course of business and securing indebtedness not yet due and payable in an outstanding aggregate amount not in excess of $25,000 at any time so long as such Liens attach only to Inventory; (vii) deposits of money securing, or in lieu of, surety, appeal or customs bonds in proceedings to which any Credit Party is a party; (viii) zoning restrictions, easements, licenses, or other restrictions on the use of real property or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such real estate; (ix) Purchase Money Liens securing Purchase Money Indebtedness (or rent) to the extent permitted under Section 5(b)(vii); (x) Liens in existence on the Closing Date as disclosed on Disclosure Schedule 5(e) provided that no such Lien is spread to cover additional property after the Closing Date and the amount of Indebtedness secured thereby is not increased.; and (xi) Liens in favor of Lender securing the Obligations. "Person" shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person's successors and assigns. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the IRC or Section 302 of ERISA, and in respect of which any Credit Party or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Post-Closing Letter" shall mean the letter agreement executed by Lender and Borrower on the date of this Agreement in the form of Exhibit U to this Agreement. "Prepayment Fee" shall mean the prepayment fee specified in Schedule E. "Proceeds" shall mean "proceeds," as such term is defined in the Code and, in any event, shall include: (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Borrower or any other Credit Party from time to time with respect to any Collateral; (ii) any and all payments (in any form whatsoever) made or due and payable to Borrower or any other Credit Party from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority); (iii) any recoveries by Borrower or any other Credit Party against third parties with respect to any litigation or dispute concerning any Collateral; and (iv) any and all other amounts from time to time paid or payable under or in connection with any Collateral, upon disposition or otherwise. "Projections" shall mean as of any date the consolidated and consolidating balance sheet, statements of income and cash flow for Salix Ltd., Borrower and the other Subsidiaries of Salix Ltd. (including forecasted Capital Expenditures and Net Borrowing Availability) (i) by month for the next Fiscal Year, and (ii) by year for the following three Fiscal Years, in each case prepared in a manner consistent with GAAP and accompanied by senior management's discussion and analysis of such plan. "Purchase Money Indebtedness" shall mean (i) any Indebtedness incurred for the payment of all or any part of the purchase price of any fixed asset, (ii) any Indebtedness incurred for the sole purpose of financing or refinancing all or any part of the purchase price of any fixed asset, and (iii) any renewals, extensions or refinancings thereof (but not any increases in the principal amounts thereof outstanding at that time). "Purchase Money Lien" shall mean any Lien upon any fixed assets which secures the Purchase Money Indebtedness related thereto but only if such Lien shall at all times be confined solely to the- asset the purchase price of which was financed or refinanced through the incurrence of the Purchase Money Indebtedness secured by such Lien and only if such Lien secures only such Purchase Money Indebtedness. "Real Property" shall have the meaning assigned to it in Section 3.15. Schedule A: Page 9 "Release" shall mean, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials in the indoor or outdoor environment by such Person, including the movement of Hazardous Materials through or in the air, soil, surface water, ground water or property. "Requirement of Law" shall mean as to any Person, the Certificate or Articles of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Payment" shall mean: (i) the declaration or payment of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets on or in respect of Borrower's or any other Credit Party's Stock; (ii) any payment or distribution made in respect of any subordinated Indebtedness of Borrower or any other Credit Party in violation of any subordination or other agreement made in favor of Lender; (iii) any payment on account of the purchase, redemption, defeasance or other retirement of Borrower's or any other Credit Party's Stock or Indebtedness or any other payment or distribution made in respect of any thereof, either directly or indirectly; other than (a) that arising under this Agreement or (b) interest and principal, when due without acceleration or modification of the amortization as in effect on the Closing Date, under Indebtedness (not including subordinated Indebtedness, payments of which shall be permitted only in accordance with the terms of the relevant subordination agreement made in favor of Lender) described in Disclosure Schedule (5(b)) or otherwise permitted under Section 5(b)(vi); or (iv) any payment, loan, contribution, or other transfer of funds or other property to any Stockholder of such Person which is not expressly and specifically permitted in this Agreement; provided, that no payment to Lender shall constitute a Restricted Payment. "Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1 (a). "Revolving Credit Loan" shall mean at any time the sum of (i) the aggregate amount of Revolving Credit Advances then outstanding, plus (ii) the total Letter of Credit Obligations incurred by Lender and outstanding at such time, plus (iii) the amount of accrued but unpaid interest thereon and Letter of Credit Fees with respect thereto. "Revolving Credit Note" shall mean the promissory note of Borrower dated the Closing Date, substantially in the form of Exhibit F. "Revolving Credit Rate" shall have the meaning assigned to it in Section 1.5(a). "Salix Ltd." shall mean Salix Pharmaceuticals, Ltd., a company organized and existing under the laws of the British Virgin Islands. "Salix Ltd. Subordinated Debt" shall mean the Indebtedness owing by Borrower to Salix Ltd. "Salix Subordination Agreement" shall mean the intercreditor and subordination agreement substantially in the form of Exhibit P hereto, to be executed on or before the Closing Date between Salix Ltd. and Lender, and to be acknowledged by Borrower, subordinating the payment of the Salix Ltd. Subordinated Debt to the payment of the Obligations. "Stated Expiry Date" shall mean March 30, 2003; provided that the Stated Expiry -------- ---- Date shall automatically be extended for three (3) consecutive one (1) year periods, the first of which shall commence on the third (P) anniversary of the date of this Agreement and, if so extended for such first one year period, the second of which shall commence on the fourth (4th) anniversary of the date of this Agreement and, if so extended for such second one year period, the third of which shall commence on the fifth (5th) anniversary of the date of this Agreement, unless, in each case, prior to the then-current Stated Expiry Date (a) Borrower provides written notice to Lender not less than ninety (90) days prior to the then current Stated Expiry Date that Borrower has elected not to extend the then current Stated Expiry Date, or (b) Lender provides written notice to Borrower not less than ninety (90) days prior to the then current Stated Expiry Date that Lender has elected not to extend the then current Stated Expiry Date. The foregoing notwithstanding, the Stated Expiry Date shall not be extended if, as of the then current Stated Expiry Date, a Default Schedule A: Page 10 shall have occurred and is continuing. Nothing contained herein shall be deemed to be a commitment by Lender to extend the Stated Expiry Date at any time in effect. The Stated Expiry Date shall in no event be later than the sixth (6th) anniversary of the date of this Agreement. "Stock" shall mean all certificated and uncertificated shares, options, warrants, membership interests, general or limited partnership interests, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3all-I of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). "Stockholder" shall mean each holder of Stock of Borrower or any other Credit Party. "Subsidiary" shall mean, with respect to any Person, (i) any corporation of which an aggregate of more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of 50% or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (ii) any partnership or limited liability company in which such Person or one or more Subsidiaries of such Person has an equity interest (whether in the form of voting or participation in profits or capital contribution) of more than 50% or of which any such Person is a general partner or manager or may exercise the powers of a general partner or manager. "Taxes" shall mean taxes, levies, imposts, deductions, Charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of Lender. "Termination Date" shall mean the date on which all Obligations under this Agreement are indefeasibly paid in full, in cash (other than amounts in respect of Letter of Credit Obligations if any, then outstanding, provided that Borrower shall have funded such amounts in cash in full into the Cash Collateral Account), and Borrower shall have no further right to borrow any moneys or obtain ~other credit extensions or financial accommodations under this Agreement. "Trademark License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting any right to use any Trademark or Trademark registration. "Trademarks" shall mean all of the following now owned or hereafter acquired by any Person: (i) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State or Territory thereof, or any other country or any political subdivision thereof, and (ii) all reissues, extensions or renewals thereof. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Any accounting term used in this Agreement or the other Loan Documents shall have, unless otherwise specifically provided therein, the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, that all financial covenants and calculations in the Loan Documents shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower and Lender shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. All other undefined terms contained in this Agreement or the other Loan Documents shall, unless the context indicates otherwise, have the meanings provided for by the Code. The words "herein," "hereof' and "hereunder" or other words of similar import refer to this Schedule A: Page 11 Agreement as a whole, including the exhibits and schedules thereto, as the same may from time to time be amended, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement. For purposes of this Agreement and the other Loan Documents, the following additional rules of construction shall apply, unless specifically indicated to the contrary: (a) wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural,; (b) the term "or" is not exclusive; (c) the term "including" (or any form thereof) shall not be limiting or exclusive; (d) all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations; and (e) all references to any instruments or agreements, including references to any of the Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. Schedule A: Page 12 Schedule B LENDER'S AND BORROWER'S ADDRESS FOR NOTICES Lender's Address Name: General Electric Capital Corporation Address: 6100 Fairview Road, Suite 350 Charlotte, NC 28210 Attn: SALIX PHARMACEUTICALS, INC. Account Manager Telephone: 704-553-4155 Facsimile: 704-553-4150 Borrower's Address Name: SALIX PHARMACEUTICALS, INC. Address: (through April 30, 2001) 3801 Wake Forest Road, Suite 205 Raleigh, NC 27607 (after April 30, 2001) 8501 Colonnade Drive, Suite 500 Raleigh, NC 27615 Attn: Robert P. Ruscher, President Telephone: 919-862-1000 Facsimile: 919-862-1095 Schedule B: Page 1 SCHEDULE C - LETTERS OF CREDIT 1. Lender agrees, subject to the terms and conditions hereinafter set forth, to incur Letter of Credit Obligations in respect of the issuance of Letters of Credit issued on terms acceptable to Lender and supporting obligations of Borrower incurred in the ordinary course of Borrower's business, in order to support the payment of Borrower's inventory purchase obligations, insurance premiums, or utility or other operating expenses and obligations, as Borrower shall request by written notice to Lender that is received by Lender not less than five Business Days prior to the requested date of issuance of any such Letter of Credit; provided, that: (a) that the aggregate amount of all Letter of Credit Obligations at any one time outstanding (whether or not then due and payable) shall not exceed $ [n/a]; (b) no Letter of Credit shall have an expiry date which is later than the Stated Expiry Date or one year following the date of issuance thereof-, and (c) Lender shall be under no obligation to incur any Letter of Credit Obligation if after giving effect to the incurrence of such Letter of Credit Obligation, the Net Borrowing Availability would be less than zero. The maximum amount payable in respect of each Letter of Credit requested by Borrower will be guaranteed by Lender in favor of the issuing bank under terms of a separate agreement between Lender and the issuing bank. Borrower will enter into an application and agreement for such Letter of Credit with the issuing bank selected by Lender (which may be an Affiliate of Lender). The bank that issues any Letter of Credit pursuant to this Agreement shall be determined by Lender in its sole discretion. 2. The notice to be provided to Lender requesting that Lender incur Letter of Credit Obligations shall be in the form of a Letter of Credit application in the form customarily employed by the issuing bank, together with a written request by Borrower and the bank that Lender approve Borrower's application. Upon receipt of such notice Lender shall establish a reserve against the Borrowing Availability in the amount of 100% of the face amount of the Letter of Credit Obligation to be incurred. Approval by Lender in the written form agreed upon between Lender and the issuing bank (a) will authorize the bank to issue the requested Letter of Credit, and (b) will conclusively establish the existence of the Letter of Credit Obligation as of the date of such approval. 3. In the event that Lender shall make any payment on or pursuant to any Letter of Credit Obligation, Borrower shall be unconditionally obligated to reimburse Lender therefor, and such payment shall then be deemed to constitute a Revolving Credit Advance. For purposes of computing interest under Section 1.5, a Revolving Credit Advance made in satisfaction of a Letter of Credit Obligation shall be deemed to have been made as of the date on which the issuer or endorser makes the related payment under the underlying Letter of Credit. 4. In the event that any Letter of Credit Obligations, whether or not then due or payable, shall for any reason be outstanding on the Commitment Termination Date, Borrower will either (a) cause the underlying Letter of Credit to be returned and canceled and each corresponding Letter of Credit Obligation to be terminated, or (b) pay to Lender, in immediately available funds, an amount equal to 105% of the maximum amount then available to be drawn under all Letters of Credit not so returned and canceled to be held by Lender as cash collateral in an account under the exclusive dominion and control of Lender (the "Cash Collateral Account"). 5. In the event that Lender shall incur any Letter of Credit Obligations, Borrower agrees to pay the Letter of Credit Fee to Lender as compensation to Lender for incurring such Letter of Credit Obligations. In addition, Borrower shall reimburse Lender for all fees and charges paid by Lender on account of any such Letters of Credit or Letter of Credit Obligations to the issuing bank. 6. Borrower's Obligations to Lender with respect to any Letter of Credit or Letter of Credit Obligation shall be evidenced by Lender's records and shall be absolute, unconditional and irrevocable and shall not be affected, modified or impaired by (a) any lack of validity or enforceability of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (b) any amendment or waiver of or consent to depart from all or any of the terms of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (c) the existence of any claim, set-off, defense or other right which Borrower or any other Credit Party may have against Lender, the issuer or beneficiary of such Letter of Credit, or any other Person, whether in connection with this Agreement, any other Loan Document or such Letter of Credit or the transactions contemplated thereby or any unrelated transactions; or (d) the fact that any draft, affidavit, letter, certificate, invoice, bill of lading or other document presented under or delivered in connection with such Letter of Credit or any other Letter of Credit proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or incorrect in any respect. Schedule C: Page 1 7. In addition to any other indemnity obligations which Borrower may have to Lender under this Agreement and without limiting such other indemnification provisions, Borrower hereby agrees to indemnify Lender from and to hold Lender harmless against any and all claims, liabilities, losses, costs and expenses (including, attorneys' fees and expenses) which Lender may (other than as a result of its own gross negligence or willful misconduct) incur or be subject to as a consequence, directly or indirectly, of (a) the issuance of or payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation or (b) any suit, investigation or proceeding as to which Lender is or may become a party as a consequence, directly or indirectly, of the issuance of any Letter of Credit, the incurring of any Letter of Credit Obligation or any payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation. The obligations of Borrower under this paragraph shall survive any termination of this Agreement and the payment in full of the Obligations. 8. Borrower hereby assumes all risks of the acts, omissions or misuse of each Letter of Credit by the beneficiary or issuer thereof and, in connection therewith, Lender shall not be responsible (a) for the validity, sufficiency, genuineness or legal effect of any document submitted in connection with any drawing under any Letter of Credit even if it should in fact prove in any respect to be invalid, insufficient, inaccurate, untrue, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or any fights or benefits thereunder or any proceeds thereof, in whole or in part, even if it should prove to be invalid or ineffective for any reason; (c) for the failure of any issuer or beneficiary of any Letter of Credit to comply fully with the terms thereof, including the conditions required in order to effect or pay a drawing thereunder; (d) for any errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopy, telex or otherwise; (e) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a drawing under any Letter of Credit; or (f) for any consequences arising from causes beyond the direct control of Lender. Schedule C: Page 2 SCHEDULE D - CASH MANAGEMENT Borrower agrees to establish, and to maintain, until the Termination Date, the cash management system described below: 1. No Corporate Credit Party: (i) shall (nor shall it permit any of its Subsidiaries to) open or maintain any deposit, checking, operating or other bank account, or similar money handling account, with any bank or other financial institution except for those accounts identified in Attachment I hereto (to include a petty cash account not to exceed $5,000 during any Fiscal Month, and a payroll account not to exceed an amount equal to one regular payroll at any time); and (ii) shall close or permit to be closed any of the accounts listed in Attachment I hereto, in each case without Lender's prior written consent, and - ------------------- then only after such Credit Party has implemented agreements with such bank or financial institution and Lender acceptable to Lender. 2. Commencing on the Closing Date and until the Termination Date, each Corporate Credit Party shall cause to be deposited directly all cash, checks, notes, drafts or other similar items relating to or constituting proceeds of or payments made in respect of any and all Collateral into lock boxes or lock box accounts in such Credit Party's or Lender's name (collectively, the "Lock Box -------- Accounts") set forth in paragraph 1 of Attachment I hereto. - --------- ------------------- 3. On or before the Closing Date, each bank at which the Lock Box Accounts are held shall have entered into tri-party lock box agreements (the "Lock Box -------- Account Agreements") with Lender and the applicable Credit Party, in form and - -------------------- substance substantially similar to Exhibit K to this Agreement or as otherwise acceptable to Lender. Each such Lock Box Account Agreement shall provide, among other things, that (a) such bank executing such agreement has no rights of setoff or recoupment or any other claim against such Lock Box Account, other than for payment of its service fees and other charges directly related to the administration of such account, and (b) such bank agrees to sweep on a daily basis all amounts in the Lock Box Account to the Collection Account. 4. On the Closing Date, (a) the lock box and blocked account arrangements shall immediately become operative at the banks at which the Lock Box Accounts are maintained, and (b) amounts outstanding under the Revolving Credit Loan for purposes of the Borrowing Availability) shall be reduced through daily sweeps, by wire transfer, of the Lock Box Accounts into the Collection Account. Borrower acknowledges that it shall have no right to gain access to any of the moneys in the Lock Box Accounts until after the Termination Date. 5. Borrower may maintain, in its name, accounts (the "Disbursement Accounts") at ---------------------- a bank or banks acceptable to Lender into which Lender shall, from time to time, deposit proceeds of Revolving Credit Advances made pursuant to Section 1.1 for use solely in accordance with the provisions of Section 1.3. All of the Disbursement Accounts as of the Closing Date are listed in paragraph 2 of Attachment I hereto. - ------------ 6. Upon the request of Lender, each Corporate Credit Party shall forward to Lender, on a daily basis, evidence of the deposit of all items of payment received by such Credit Party into the Lock Box Accounts and copies of all such checks and other items, together with a statement showing the application of those items relating to payments on Accounts to outstanding Accounts and a collection report with regard thereto in form and substance satisfactory to Lender. Schedule D: Page 1 ATTACHMENT I TO SCHEDULE D -------------------------- LIST OF BANK ACCOUNTS 1. Lock Box Accounts. Centura Bank Account No. 0700147687 2. Disbursement Accounts. Centura Bank Account No. 0700147492 3. Petty Cash Account (not to exceed $5,000). None ------------------ 4. Payroll Account (not to exceed one regular payroll). None --------------- Schedule D: Page 2 SCHEDULE E - FEES 1. RESERVED 2. LETTER OF CREDIT FEE: For each day for which Lender maintains Letter of Credit Obligations outstanding, an amount equal to the amount of the Letter of Credit Obligations outstanding on such day, multiplied by [n/a] %, the product of which is then divided by 360. `Me Letter of Credit Fee incurred for each month is payable on the first day of each calendar month following the Closing Date; the final monthly installment of the Letter of Credit Fee is payable on the Termination Date Notwithstanding the foregoing, any unpaid Letter of Credit Fee is immediately due and payable on the Commitment Termination Date. 3. CLOSING FEE; COLLATERAL MONITORING FEE: A closing fee of $17,500, payable and fully earned at closing (the "Closing Fee"), but subject to refund pursuant to the terms of the Post-Closing Letter. A fully earned and non-refundable collateral monitoring fee of $12,000 per annum, payable in advance on the date that Borrower satisfies the conditions described in Section 2.1 of the Agreement or Lender waives satisfaction of such conditions in writing and on each anniversary thereof. 4. PREPAYMENT FEE: For the Revolving Credit Loan, an amount equal to the Maximum Amount multiplied by: 3% if Lender's, obligation to make further Revolving Credit Advances or incur additional Letter of Credit Obligations is terminated (voluntarily by Borrower, upon Default or otherwise) on or after the Closing Date and on or before the first anniversary of the Closing Date, payable on the Commitment Termination Date; or 2% if Lender's obligation to make further Revolving Credit Advances or incur additional Letter of Credit Obligations is terminated (voluntarily by Borrower, upon Default or otherwise) after the first anniversary of the Closing Date and on or before the second anniversary of the Closing Date, payable on the Commitment Termination Date. Borrower acknowledges and agrees that (i) it would be difficult or impractical to calculate Lender's actual damages from early termination of Lender's obligation to make further Revolving Credit Advances and incur additional Letter of Credit Obligations for any reason pursuant to Section 1.2(c) or Section 7.2, (ii) the Prepayment Fees provided above are intended to be fair-and reasonable approximations of such damages, and (iii) the Prepayment Fees are not intended to be penalties. 5. AUDIT FEES: Borrower will reimburse Lender at the rate of $750 per person per day, plus out of pocket expenses, for the audit reviews, field examinations and collateral examinations conducted by Lender; provided, however, so long as no -------- ------- Event of Default exists, the fees and expenses payable by Borrower under this paragraph 5 shall not exceed the sum of $15,000 in the twelve-month period commencing on the Closing Date and any successive twelve-month period thereafter. Schedule E: Page 1 Schedule F SCHEDULE OF DOCUMENTS The obligation of Lender to make the initial Revolving Credit Advances and extended other credit is subject to satisfaction of the condition precedent that Lender shall have received the following, each, unless otherwise specified below or the context otherwise requires, dated the Closing Date, in form and substance satisfactory to Lender and its counsel: PRINCIPAL LOAN DOCUMENTS 1. Agreement. The Loan and Security Agreement duly executed by Borrower(s). --------- 2. Note(s). Duly executed Note(s) to the order of Lender evidencing the Loan(s). ------ 3. Borrowing Base Certificate. An original Borrowing Base Certificate duly --------------------------- executed by a responsible officer of Borrower(s). 4. Notice of Revolving Credit Advance. An origial Notice of Revolving Credit ------------------------------------ Advance duly executed by a responsible officer of Borrower(s). COLLATERAL DOCUMENTS. 1. Acknowledgment Copies of Financing Statements. Acknowledgment copies of ------------------------------------------------ proper Financing Statements (Form UCC-1) (the "Financing Statements") duly filed under the Code in all jurisdictions as may be necessary or, in the opinion of Lender, desirable to perfect Lender's Lien on the Collateral. 2. UCC Searches. Certified copies of UCC Searches, or other evidence ------------- satisfactory to Lender, listing all effective financing statements which name Borrower(s) (under present name, any previous name or any trade or doing business name) as debtor and covering all jurisdictions referred to in paragraph (1) immediately above, together with copies of such other financing statements. 3. Intellectual Property Documents. Agreements relating to the granting to --------------------------------- Lender of a security interest in Intellectual Property of Borrower(s) to the extent applicable in a form suitable for filing with the appropriate Federal filing office. 4. Other Recordings and Filings. Evidence of the completion of all other ------------------------------- recordings and filings (including UCC-3 termination statements and other Lien release documentation) as may be necessary or, in the opinion of and at the request of Lender, desirable to perfect Lender's Lien on the Collateral and ensure such Collateral is free and clear of other Liens 5. Power of Attorney. Powers of Attorney duly executed by each Credit Party ------------------ executing the Agreement. THIRD PARTY AGREEMENTS. 1. Landlord, Warehouseman/Bailee and Mortgagee Consents. Unless otherwise agreed ---------------------------------------------------- to in writing by Lender, duly executed landlord, warehouseman/bailee and mortgagee waivers and consents from the landlords and mortgagees of all of (each) Borrower's leased or owned locations where Collateral is held, in each case, in form and substance satisfactory to Lender. 2. Cash Management System. Duly executed Lock Box Account Agreements and, if ---------------- required by Lender, pledged account agreements in respect of the Disbursement Accounts as contemplated by Schedule D. 3. Salix Ltd. Subordination Agreement. The Salix Ltd. Subordination Agreement ----------------------------------- duly executed by Salix Ltd. and Lender and acknowledged by Borrower. OTHER DOCUMENTS. 1. Secretary Certificate. A Secretary Certificate in the form of Exhibit H to ---------------------- the Agreement duly completed and executed by the Secretary of each Credit Party executing the Agreement, together with all attachments thereto. 2. Environmental Audit. Copies of all existing environmental reviews and audits ------------------- and other information pertaining to actual or potential environmental claims relating to the Collateral and Borrower(s), as Lender may require. 3. Financial Statements and Projections. Copies of the Financial Statements and ------------------------------------ Projections, which Projections shall include a capital expenditures budget for Borrower(s) in form and substance satisfactory to Lender. 4. Insurance Policies. Certified copies of insurance policies described in ------------------- Section 3.16, together with evidence showing loss payable or additional insured clauses or endorsements in favor of Lender. 5. Existing Lease Agreements. Copies of any existing real property leases and -------------------------- equipment leases to which (each) Borrower is a party and any other document or instrument evidencing or relating to existing Indebtedness of Borrower(s), together with all certificates, opinions, instruments, security documents and other documents relating thereto, all of which shall be satisfactory in form and substance to Lender, certified by an authorized officer of Borrower(s) as true, correct and complete copies thereof Schedule F: Page 1 Schedule G FINANCIAL COVENANTS 1. Fixed Charge Coverage Ratio. Salix Ltd., Borrower and the other Subsidiaries --------------------------- of Salix Ltd. shall maintain a Fixed Charge Coverage Ratio on a consolidated basis of not less than 1.5:1 for each Fiscal Quarter commencing with the Fiscal Quarter ending December 31, 2001. 2. Net Income (Loss). Salix Ltd., Borrower and the other Subsidiaries of Salix ----------------- Ltd. shall achieve Net Income (Loss) on a consolidated basis of no I t less than the amount shown below for the period corresponding thereto: Period Net Income (Loss) ------ ----------------- Each Fiscal Quarter ($4,500,000) ending March 31, 2001 and June 30, 2001 Fiscal Quarter ($500,000) ending September 30, 2001 As used in this Agreement (including this Schedule G covenant), the following terms shall have the following meanings: "EBITDA" shall mean, for any period, the Net Income (Loss) of Salix Ltd., ------ Borrower and the other Subsidiaries of Salix Ltd. on a consolidated basis for such period, plus interest expense, income tax expense, amortization expense, depreciation expense and extraordinary losses and minus extraordinary gains, in each case, of Salix Ltd., Borrower and the other Subsidiaries of Salix Ltd. on a consolidated basis for such period determined in accordance with GAAP to the extent included in the determination of such Net Income (Loss). "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of the ------------------------------ following for Salix Ltd., Borrower and the other Subsidiaries of Salix Ltd. on a consolidated basis determined in accordance with GAAP: (a) EBIT7DA for such period less Capital Expenditures for such period which are not financed through the incurrence of any Indebtedness (excluding the Revolving Credit Loan) to (b) the sum of (i) interest expense paid or accrued in respect of any Indebtedness during such period, plus (ii) taxes to the extent accrued or otherwise payable ---- with respect to such period plus (iii) regularly scheduled payments of principal ---- paid or that were required to be paid on Funded Debt (excluding the Revolving Credit Loan) during such period. "Funded Debt" shall mean, for any Person, all of such Person's Indebtedness ------------ which by the terms of the agreement governing or instrument evidencing such Indebtedness matures more than one year from, or is directly or indirectly renewable or extendible at the option of such Person under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year from, the date of creation thereof, including current maturities of long-term debt, revolving credit, and short-term debt extendible beyond one year at the option of such Person. "Net Income (Loss)" shall mean with respect to any Person and for any period, ------------------ the aggregate net income (or loss) after taxes of such Person for such period, determined in accordance with GAAP. 2. Minimum Tangible Net Worth. Salix Ltd., Borrower and the other Subsidiaries -------------------- of Salix Ltd. shall maintain Tangible Net Worth of Borrower and its Subsidiaries on a consolidated basis of not less than the amount shown below at the end of the period corresponding thereto: Minimum Tangible Period Net Worth ------ --------- Fiscal Quarter ending $7,000,000 March 31, 2001 Schedule G: Page 1 Minimum Tangible Period Net Worth ------ --------- Fiscal Quarters ending $5,000,000 June 30, 2001 and September 30, 2001 Fiscal Quarter ending $7,000,000 December 31, 2001 and each Fiscal Quarter thereafter For purpose of this covenant, in Schedule G the following terms shall have the meanings set forth below: "Tangible Net Worth" shall mean, with respect to any Person, at any date, the ------------------ total assets (excluding any assets attributable to any issuances by such Person of any Stock after the Closing Date and excluding any intangible assets) minus the total liabilities, in each case, of such Person at such date determined in accordance with GAAP. 3. Capital Expenditures. Salix Ltd., Borrower and the other Subsidiaries of --------------------- Salix Ltd. on a consolidated basis shall not make aggregate Capital Expenditures, other than Capital Expenditures financed through the incurrence of Indebtedness (excluding the Revolving Credit Loan), in any Fiscal Year in excess of the amount shown below for the period corresponding thereto: Period Capital Expenditures ------ -------------------- Fiscal Year ending $750,000 December 31, 2001 Fiscal Year ending $600,000 December 31, 2002 Fiscal Year ending $500,000 December 31, 2002 Schedule G: Page 2 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT -------------------------- THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment"), dated as of this 4th day of October, 2001, is made by and between SALIX PHARMACEUTICALS, INC., a California corporation (the "Borrower"); and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (the "Lender"), to the Loan and Security Agreement, dated as of March 30, 2001 (as amended, modified, restated or supplemented from time to time, the "Loan Agreement"), between the Lender and the Borrower. All capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement. RECITALS A. Pursuant to the Loan Agreement, the Lender has agreed to make loans and extend credit to the Borrower in the amounts, upon the terms and subject to the conditions contained therein. B. The Lender and the Borrower have agreed to amend the Loan Agreement as set forth in this Amendment. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the Borrower and the Lender hereby agree as follows: ARTICLE I AMENDMENTS TO LOAN AGREEMENT The Loan Agreement is hereby amended as follows: 1.1 Interest. Section 1.5(e) is amended by adding the following sentence -------- to the end thereof. "If Borrowing Availability is not sufficient in any month for Lender to make a Loan to Borrower for the purpose of paying interest as required by this Section 1.5(e), Lender shall so notify Borrower, and Borrower shall pay Lender the sum of $6,000 by wire transfer to such account as directed by Lender by no later than the next Business Day after receipt of such notification." ARTICLE II REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Lender that: 2.1 Compliance With the Loan Agreement. As of the execution of this ------------------------------------ Amendment, the Borrower is in compliance with all of the terms and provisions set forth in the Loan Agreement and the other Loan Documents to be observed or performed by the Borrower. 2.2 Representations in Loan Agreement. The representations and ------------------------------------ warranties of the Borrower set forth in the Loan Agreement and the other Loan Documents are true and correct in all material respects except to the extent that such representations and warranties relate solely to or are specifically expressed as of a particular date or period which is past or expired as of the date hereof. 2.3 No Event of Default. No Default or Event of Default exists. ------------------- ARTICLE III GENERAL 3.1 Full Force and Effect. As expressly amended hereby, the Loan ------------------------ Agreement and the other Loan Documents shall continue in full force and effect in accordance with the provisions thereof. As used in the Loan Agreement and the other Loan Documents, "hereinafter", "hereto", "hereof", or words of similar import, shall, unless the context otherwise requires, mean the Loan Agreement or the other Loan Documents, as the case may be, as amended by this Amendment. 3.2 Applicable Law. This Amendment shall be governed by and construed in -------------- accordance with the internal laws and judicial decisions of the State of North Carolina. 3.3 Counterparts. This Amendment may be executed in one or more ------------ counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one and the same instrument. 3.4 Further Assurances. The Borrower shall execute and deliver to the ------------------- Lender such documents, certificates and opinions as the Lender may reasonably request to effect the amendments contemplated by this Amendment. 3.5 Headings. The headings of this Amendment are for the purpose of -------- reference only and shall not effect the construction of this Amendment. 3.6 Expenses. The Borrower shall reimburse the Lender for the Lender's -------- legal fees and expenses (whether in-house or outside) incurred in connection with the preparation, negotiation, execution and delivery of this Amendment and all other agreements and documents contemplated hereby. 2 3.7 Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE -------------------- LAW, THE BORROWER AND THE LENDER EACH WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AMENDMENT, THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers to be effective on the day and year first above written. BORROWER: SALIX PHARMACEUTICALS, INC. By: /s/ Adam C. Derbyshire ----------------------------------------------- Title: Vice President and Chief Financial Officer -------------------------------------------- LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Malcolm Ferguson ----------------------------------------------- Title: Vice President -------------------------------------------- 3 FIRST WAIVER TO THE LOAN AND SECURITY AGREEMENT ----------------------------------------------- This First Waiver dated as of November 12, 2001 (this "Waiver") to the Loan and Security Agreement, between GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("Lender") and SALIX PHARMACEUTICALS, INC., a California corporation ("Borrower"). WITNESSETH: ----------- WHEREAS, Borrower and Lender are parties to that certain Loan and Security Agreement, dated as of March 30, 2001 (as it may be amended, restated, modified or supplemented from time to time, the "Loan Agreement") under which Lender agreed to make certain loans and extensions of credit to Borrower; and WHEREAS, Borrower has requested that Lender waive certain Event(s) of Default under Loan Agreement, as more fully set forth herein, and Lender is agreeable to such request only on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties do hereby agree that all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Agreement and do hereby further agree as follows: STATEMENT OF TERMS ------------------ 1. Waiver of Default. Lender hereby waives the Event of Default arising ----------------- solely out of Borrower's failure to meet the maximum loss covenant for the quarter ending September 2001, set at $500,000 vs. actual results of $5,056,000 in the period. 2. Representations and Warranties. To induce Lender to enter into this ------------------------------ Waiver, each Credit Party hereto hereby warrants, represents and covenants to Lender that: (a) each representation and warranty of the Credit Parties set forth in the Loan Agreement is hereby restated and reaffirmed as true and correct on and as of the date hereof after giving affect to this Waiver as if such representation or warranty were made on and as of the date hereof (except to the extent that any such representation or warranty expressly relates to a prior specific date or period in which case it is true and correct as of such prior date or period), and no Default or Event of Default has occurred and is continuing as of this date under the Loan Agreement after giving effect to this Waiver; and (b) each Credit Party hereto has the power and is duly authorized to enter into, deliver and perform this Waiver, and this Waiver is the legal, valid and binding obligation of such Credit Party enforceable against it in accordance with its terms. 3. Conditions Precedent to Effectiveness of this Waiver. The ------------------------------------------------------------- effectiveness of this Waiver is subject to the fulfillment of the following conditions precedent: (a) Lender shall have received one or more counterparts of this Waiver duly executed and delivered by the Credit Parties hereto; (b) Any and all Guarantors of the Obligations shall have consented to the execution, delivery and performance of this Waiver and all of the transactions contemplated hereby by signing one or more counterparts of this Waiver in the appropriate space indicated below and returning same to Lender; and (c) Lender shall have received a Waiver Fee of $2,500 and a Documentation Fee of $500. 4. Continuing Effect of Loan Agreement. Except as expressly modified ------------------------------------ hereby, the provisions of the Loan Agreement, and the Liens granted thereunder, are and shall remain in full force and effect and this Waiver shall be limited precisely as drafted and shall not constitute a waiver of any Event of Default or a modification of any terms and conditions of the Loan Agreement other than as expressly set forth herein. The granting of the Waiver shall not impose or imply an obligation on Lender to grant a waiver on any future occasion (including without limitation any future waiver of the maximum loss covenant). 5. Counterparts. This Waiver may be executed in multiple counterparts ------------ each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 6. Governing Law. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED IN -------------- ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS. 2 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered as of the day and year first specified above. SALIX PHARMACEUTICALS, INC. By: /s/ Adam C. Derbyshire ----------------------------------- Name: Adam C. Derbyshire Title: Chief Financial Officer GENERAL ELECTRIC CAPITAL CORP. By: /s/ Malcolm Ferguson -------------------------------------------- Name: Malcolm Ferguson Title: Duly Authorized Signatory 3 EX-23.1 7 dex231.txt CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-3 and related Prospectus of Salix Pharmaceuticals, Ltd. for the registration of 4,600,000 shares of its common stock and to the inclusion therein of our report dated February 5, 2002, with respect to the consolidated financial statements and schedule of Salix Pharmaceuticals, Ltd. for the year ended December 31, 2001 included therein, and to the incorporation by reference therein of our report dated February 2, 2001, with respect to the consolidated financial statements and schedule of Salix Pharmaceuticals, Ltd. included in its Annual Report (Form 10-K) for the year ended December 31, 2000, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Raleigh, North Carolina February 12, 2002 - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----