-----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, N5yxLqgeWVUJIZA+HTZwJwV4sBsWv8zyrVgOJ1D7HACwd+kdClZ8vDx3WAxGk09u 9Ie9Qv65O1RYobb3+5EfTw== 0001062993-02-000161.txt : 20020426 0001062993-02-000161.hdr.sgml : 20020426 ACCESSION NUMBER: 0001062993-02-000161 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDIOME PHARMA CORP CENTRAL INDEX KEY: 0001036141 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-29338 FILM NUMBER: 02623335 BUSINESS ADDRESS: STREET 1: 3650 WESBROOK MALL STREET 2: V6S 2L2 CITY: VANCOUVER BC STATE: A1 BUSINESS PHONE: 6042225577 MAIL ADDRESS: STREET 1: 3650 WESBROCK MALL STREET 2: V6S 2L2 CITY: VANCOUVER BC 20-F 1 form20f.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934, or [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934. Commission file number 0-29338 CARDIOME PHARMA CORP. - -------------------------------------------------------------------------------- (Exact Name of the Registrant Specified in its Charter) Canada - -------------------------------------------------------------------------------- (Jurisdiction of Incorporation or Organization) 3650 Wesbrook Mall, Vancouver, British Columbia V6S 2L2 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered or to be registered pursuant to Section 12(g) of the Act: Title Name of Each Exchange on Which Quoted ------------------- --------------------------------------------- Common Shares NASD OTC Bulletin Board Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 10,308,962 Common Shares as of November 30, 2001 (after giving effect to a four-to-one reverse stock split completed March 8, 2002) Indicate by check mark whether the Company: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark which financial statement item the Company has elected to follow. Item 17 [X] Item 18 [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. NOT APPLICABLE Page 2 FORWARD-LOOKING STATEMENTS AND RISK FACTORS - ------------------------------------------- Some of the statements in this Annual Report on Form 20-F constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company has based these forward-looking statements on its current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to (1) future revenues, expenses and profitability, (2) the future development and expected growth of the Company's business and the biotech industry, (3) the Company's ability to successfully execute its business model and business strategy, (4) projected capital expenditures, and (5) trends in government regulation. Forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those suggested by these forward-looking statements. In evaluating these statements, carefully consider the risks outlined under "Item 3. Key Information - Risk Factors". Although the Company believes that the expectations reflected in the forward- looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover, the Company does not assume and no other person assumes responsibility for the accuracy and completeness of these statements. The Company does not promise to update forward-looking information to reflect actual results or changes in assumptions. Page 3 TABLE OF CONTENTS PART I 4 ITEM 1. Identity of Directors, Senior Management and Advisers 4 ITEM 2. Offer Statistics and Expected Timetable 4 ITEM 3. Key Information 4 ITEM 4. Information on the Company 17 ITEM 5. Operating and Financial Review and Prospects 33 ITEM 6. Directors, Senior Management and Employees 36 ITEM 7. Major Shareholders and Related Party Transactions 51 ITEM 8. Financial Information 53 ITEM 9. The Offer and Listing 53 ITEM 10. Additional Information 54 ITEM 11. Quantitative and Qualitative Disclosures About Market Risk 63 ITEM 12. Description of Securities Other than Equity Securities 63 PART II 63 ITEM 13. Defaults, Dividend Arrearages and Delinquencies 63 ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 63 ITEM 15. Reserved 63 ITEM 16. Reserved 64 PART III 64 ITEM 17. Financial Statements 64 ITEM 18. Financial Statements 64 ITEM 19. Financial Statements and Exhibits 64 EXHIBIT LIST I Page 4 CARDIOME PHARMA CORP. The information set forth in this Annual Report on Form 20-F is as of March 31, 2002 unless another date is indicated. All references to dollars ($) in this document are expressed in Canadian funds, unless otherwise indicated. On April 18, 2002, the exchange rate for conversion of Canadian dollars into U.S. dollars was Cdn.$1.00 = U.S.$0.6350 based upon the Federal Reserve Bank of New York noon buying rate. All references to number of shares and similar information gives effect to a four-to-one share consolidation (reverse stock split) we completed on March 8, 2002. As used in this Annual Report, unless the context otherwise indicates, the terms "we," "us," "our," and similar terms, as well as references to "Cardiome" or the "Company" mean Cardiome Pharma Corp. PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS N/A. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE N/A. ITEM 3. KEY INFORMATION SELECTED FINANCIAL DATA - ----------------------- The following selected consolidated financial data has been derived from, should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements of Cardiome prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which conforms to United States generally accepted accounting principles ("U.S. GAAP") except as disclosed in Note 16 to the consolidated financial statements included herein. This financial data should be read in conjunction with Cardiome's consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Item 5. Operating and Financial Review and Prospects". Page 5 The following financial data is expressed in Canadian dollars as used in the Company's financial statements. The exchange rate for conversion to US dollars is detailed below in this Item 3, under the heading "Currency Exchange Rates".
Cardiome Consolidated Financial Data Years Ended November 30 ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------- OPERATING DATA Revenue Research collaborative, licensing and option fees $ 197,028 $ 92,095 $ 482,876 $ 228,767 - Grant income 88,137 135,363 45,810 4,234 $ 22,260 Interest and other income 347,078 495,894 258,395 320,286 106,187 - ---------------------------------------------------------------------------------------------------------------- 632,243 723,352 787,081 553,287 128,447 - ---------------------------------------------------------------------------------------------------------------- LOSS, Canadian GAAP $(7,157,885) $(6,495,636) $(4,451,320) $(5,168,419) $(2,749,088) Basic and Diluted Loss per common share, CDN GAAP $ (0.69) $ (0.69) $ (0.66) $ (0.82) $ (0.61) Weighted average number of outstanding common shares, CDN GAAP 10,304,579 9,359,210 6,707,933 6,320,169 4,511,512 - ---------------------------------------------------------------------------------------------------------------- LOSS, Canadian GAAP $(7,157,885) $(6,495,636) $(4,451,320) $(5,168,419) $(2,749,088) Adjustment to eliminate retroactive change in accounting policy - 1,499,598 - - - Adjustment for stock-based compensation (79,100) (207,900) (51,000) (129,000) (237,500) Amortization of other assets (102,720) - - - - - ---------------------------------------------------------------------------------------------------------------- LOSS, U.S. GAAP before cumulative effect of change in accounting policy (7,339,705) (5,203,938) (4,502,320) (5,297,419) (2,986,588) Cumulative effect of change in accounting policy (1,499,598) - - - - - ---------------------------------------------------------------------------------------------------------------- LOSS, U.S. GAAP $(8,839,303) $(5,203,938) $(4,502,320) $(5,297,419) $(2,986,588) - ---------------------------------------------------------------------------------------------------------------- Loss per common share, US GAAP: Before change in accounting policy $ (0.71) $ (0.56) $ (0.67) $ (0.84) $ (0.66) Change in accounting policy (0.15) - - - - Loss per common share, US GAAP $ (0.86) $ (0.56) $ (0.67) $ (0.84) $ (0.66) Weighted average number of outstanding shares, US GAAP 10,304,579 9,359,210 6,707,933 6,320,169 4,511,512
Page 6
As at November 30 ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------- BALANCE SHEET DATA Total Assets: CDN GAAP $ 6,269,623 $13,072,040 $ 9,863,730 $ 8,808,686 $11,111,530 Unrealized gain on cash equivalents 3,351 9,150 - - - Unrealized gain on short-term investments 26,240 108,512 - - - Adjustment for future income taxes 428,000 - - - - Amortization of other assets (102,720) - - - - US GAAP $ 6,624,494 $13,189,702 $ 9,863,730 $ 8,808,686 $11,111,530 Net Assets: CDN GAAP $ 4,013,549 $10,481,434 $ 8,967,451 $ 8,088,581 $10,846,341 Unrealized gain on cash equivalents 3,351 9,150 - - - Unrealized gain on short-term investments 26,240 108,512 - - - Adjustment for future income taxes 428,000 - - - - Amortization of other assets (102,720) - - - - Adjustment for deferred revenue - 1,499,598 - - - US GAAP $ 4,368,420 $12,098,694 $ 8,967,451 $ 8,088,581 $10,846,341 Share Capital: CDN GAAP $32,251,393 $32,235,393 $25,282,040 $19,951,850 $17,541,191 Allocation of proceeds from share capital to warrants (1,085,000) (1,085,000) - - - Fair value of agents' warrants (200,000) (200,000) - - - US GAAP $30,966,393 $30,950,393 $25,282,040 $19,951,850 $17,541,191 Number of Shares Outstanding as at year-end, CDN & US GAAP 10,308,962 10,303,962 8,975,736 6,918,325 6,273,650 - ----------------------------------------------------------------------------------------------------------------
Page 7 Subsequent to the year ended November 30, 2001, the Company acquired all of the outstanding shares of Paralex, Inc., or Paralex, in exchange for 8,203,396 common shares of Cardiome. The acquisition provides the Company with certain intellectual property rights relating to the use of oxypurinol and other related compounds called xanthine oxidase inhibitors for the treatment of congestive heart failure, other cardiovascular disorders and neuromuscular disease. In connection with the acquisition, the Company completed a concurrent unit financing of approximately $30.9 million (the equivalent of approximately U.S.$19.5 million) (the "unit financing"). See "History and Development of the Company - Acquisition of Paralex" under "Item 4. Information on the Company". The following summary pro forma financial information has been derived from, should be read in conjunction with, and is qualified in its entirety by, the pro forma consolidated financial statements of Cardiome, the consolidated financial statements of each of Cardiome and Paralex and notes thereto, contained elsewhere in this Annual Report. The pro forma information reflects the estimated effect of the acquisition of Paralex by Cardiome under Canadian GAAP. The pro forma consolidated balance sheet gives effect to the acquisition and the unit financing as though they occurred on November 30, 2001, and the pro forma consolidated statement of operations for the year ended November 30, 2001 gives effect to the acquisition and the unit financing as though they occurred on December 1, 2000. Summary Pro Forma Financial Information PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA Year Ended November 30, 2001 ----------------- Revenue Research collaborative, licensing and option fees $ 197,028 Grant Income 88,137 Interest and other income 347,078 - ----------------------------------------------------------------------------- 632,243 - ----------------------------------------------------------------------------- Expenses Research and development expenses $ 5,498,838 General and administrative expenses 2,106,770 Amortization 3,725,101 - ----------------------------------------------------------------------------- 11,330,709 - ----------------------------------------------------------------------------- Loss before income taxes (10,698,466) Deferred income tax recovery 260,000 - ----------------------------------------------------------------------------- Net loss for the year, CDN GAAP $(10,438,466) - ----------------------------------------------------------------------------- Net loss per common share, CDN GAAP (0.37) Weighted average number of outstanding shares, CDN GAAP 27,879,515 - ----------------------------------------------------------------------------- Net loss for the year, Canadian GAAP $(10,438,466) Adjustment for stock-based compensation (79,100) Amortization of other assets (102,720) Cumulative effect of change in accounting policy (1,499,598) - ----------------------------------------------------------------------------- Net loss for the year, US GAAP $(12,119,884) - ----------------------------------------------------------------------------- Net loss per common share, US GAAP (0.43) Weighted average number of outstanding shares, US GAAP 27,879,515 Page 8 CURRENCY EXCHANGE RATES - ----------------------- In this Annual Report all references to dollars ($) are expressed in Canadian funds, unless otherwise indicated. As of April 18, 2002, the exchange rate for conversion of Canadian dollars into U.S. Dollars was Cdn$1.00 = U.S.$0.6350 The following table sets forth the high and low rates of exchange of Canadian dollars into U.S. dollars for each month during the previous six months and the average of such exchange rates during the five most recent fiscal years of the Company. Exchange rates represent the noon buying rate in New York City for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The average rates presented in the table below represent the average of the exchange rates on the last day of each month during a year for the past five fiscal years. Exchange Rate Canadian Dollars into U.S. Dollars ------------------------------------------------------ High Low ------------------------------------------------------ Month ended March 31, 2002 $0.6342 $0.6267 Month ended February 28, 2002 $0.6295 $0.6207 Month ended January 31, 2002 $0.6290 $0.6200 Month ended December 31, 2001 $0.6396 $0.6254 Month ended November 30, 2001 $0.6363 $0.6241 Month ended October 31, 2001 $0.6418 $0.6334 Average ------------------------------------------------------ Fiscal year ended November 30, 2001 $0.6476 Fiscal year ended November 30, 2000 $0.6748 Fiscal year ended November 30, 1999 $0.6711 Fiscal year ended November 30, 1998 $0.6763 Fiscal year ended November 30, 1997 $0.7224 Fiscal year ended November 30, 1996 $0.7331 RISK FACTORS - ------------- You should consider carefully the following risks and other information included in this Annual Report, including our historical consolidated financial statements and related notes, before you decide to purchase our common shares. The following risks and uncertainties are not the only ones we face. However, these are the risks our management believes are material. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common shares could decline and you could lose part or all of your investment. We are establishing a new pharmaceutical development business and have no developed or approved products We are in the early drug discovery and development stage and are subject to all of the risks associated with the establishment of a new business enterprise. Our proposed products are currently in the research and development stage and no revenues have been generated to date from product sales, nor do we expect to generate any product revenues in the immediate future, if ever. As a result, our business must be evaluated in light of the problems, delays, uncertainties and complications encountered in connection with a newly established pharmaceutical development business. The risks include, but are not limited to: * the possibilities that any or all of our potential products will be found to be ineffective, Page 9 * that our products, once developed, although effective, are not economical to market, * that third parties hold proprietary rights that preclude us from marketing such products, * that third parties market superior or equivalent products, or * we fail to receive necessary regulatory clearances for our proposed products. To achieve profitable operations, we must successfully develop, obtain regulatory approval for, introduce and successfully market, at a profit, products that are currently in the research and development phase. Most of the pre-clinical research and clinical development work and testing for our product candidates remains to be completed. We are not currently profitable, and no assurance can be given that: * our research and development efforts will be successful; * that required regulatory approvals will be obtained; * that any product will be safe and effective; * that any products, if developed and introduced, will be successfully marketed or achieve market acceptance; or * that products can be marketed at prices that will allow profitability to be achieved. Our failure to successfully develop, obtain regulatory approval for, or introduce and market our products that are under development would have a material adverse effect on our business, financial condition and results of operations. This Annual Report includes estimates of the number of patients who have received or might have been candidates to use a specific product. There can be no assurance that such estimates accurately reflect the true market or the extent to which such product, if successfully developed, will actually be used by patients. Furthermore, there can be no assurance that sales of such product, if any, for such uses will be profitable even if patient use occurs. We have limited revenues, a history of significant losses and an accumulated deficit We have had no sales revenue to date. Although we have been involved in the pharmaceuticals industry since 1992, we have been engaged only in research and development. We have generated limited non-sales revenue and have incurred significant operating losses, including net losses of $7,157,885, $6,495,636, and $4,451,320 for the years ended November 30, 2001, 2000 and 1999 respectively. Our revenues were $632,243, $723,352 and $787,081 for the years ended November 30, 2001, 2000 and 1999, respectively. Our future growth and profitability will be principally dependent upon our ability to successfully complete development of, obtain regulatory approvals for, and market or license our proposed products. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties encountered in connection with the establishment of a new business in a highly competitive industry, characterized by frequent new product introductions. We anticipate that we will incur substantial operating expenses in connection with the research, development, testing and approval of our proposed products and we expect these expenses to result in continuing and significant operating losses until such time as we are able to achieve adequate revenue levels. There can be no assurance that we will be able to significantly increase revenues or achieve profitable operations. We will have additional future capital needs and there are uncertainties as to our ability to raise additional funding While we recently closed an offering through which we raised gross proceeds of approximately $30.9 million (the equivalent of approximately U.S.$19.5 million), we will require substantial capital resources in order to conduct our operations. Our future capital requirements will depend on many factors, including, among other things, the following: Page 10 * continued scientific progress in our discovery, research and development projects; * the magnitude and scope of these activities; * our ability to establish corporate collaborations and licensing arrangements; * progress with pre-clinical studies, which includes pharmacological and efficacy testing in animals, toxicology testing and formulation work based on in vitro results, and clinical trials; * the time and costs involved in obtaining regulatory approvals; * the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; * the potential need to develop, acquire or license new technologies and products; and * other factors not within our control. We intend to seek such additional funding through corporate collaborations, public or private equity or debt financing and capital lease transactions; however, there can be no assurance that additional financing will be available on acceptable terms, if at all. Additional equity financing could result in significant dilution to our shareholders. If sufficient capital is not available, we may be required to delay, reduce the scope of, eliminate or divest of one or more of our discovery, research or development projects, any of which could have a material adverse effect on our business, financial condition and results of operations. Our share price has experienced volatility and may be subject to fluctuation in the future based on market conditions The market prices for the securities of biotechnology companies, including our own, have historically been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of any particular company. Certain factors such as our announcements, competition by new therapeutic products or technological innovations, government regulations, fluctuations in our operating results, results of clinical trials, public concern on safety of drugs generally, general market conditions and developments in patent and proprietary rights can have an adverse impact on the market price of our common shares. We have no assurance that any products we develop will receive regulatory approval and changes in regulatory policy could cause potential delays in receiving approval The pre-clinical studies and clinical trials of any products developed by us or our corporate collaborators and the manufacturing, labeling, sale, distribution, export or import, marketing, advertising and promotion of any of those products are subject to regulation by federal, provincial, state and local governmental authorities in the United States, principally by the Food and Drug Administration, or FDA, in Canada by the Therapeutic Products Directorate, or TPD, and by other similar agencies in other countries. Any product developed by us or our corporate collaborators, if any, must receive all relevant regulatory approvals or clearances before it may be marketed and sold in a particular country. The regulatory process, which includes extensive pre-clinical studies and clinical trials of each product in order to establish its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval or clearance. In addition, delays or rejections may be encountered based upon changes in regulatory policy during the period of product development and/or the period of review of any application for regulatory approval or clearance for a product. Delays in obtaining regulatory approvals or clearances would adversely affect the marketing of any products developed by us or our corporate collaborators, if any, impose significant additional costs on us and our corporate collaborators, diminish any competitive advantages that we or our corporate collaborators may attain and adversely affect our ability to receive royalties and generate revenues and profits. There can be no assurance that, even after such time and expenditures, any required regulatory approvals or clearances will be obtained for any products developed by us. Page 11 Regulatory approval, if granted, may entail limitations on the indicated uses for which a new product may be marketed that could limit the potential market for such product, and product approvals, once granted, may be withdrawn if problems occur after initial marketing. Furthermore, manufacturers of approved products are subject to pervasive review, including compliance with detailed regulation governing good manufacturing practices. Failure to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution. We are also subject to numerous federal, provincial and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, the environment and the use and disposal of hazardous substances, used in connection with our discovery, research and development work. In addition, we cannot predict the extent of government regulations which might have an adverse effect on the discovery, development, production and marketing of our products, and there can be no assurance that we will not be required to incur significant costs to comply with current or future laws or regulations or that we will not be adversely affected by the cost of such compliance. We believe we can use the safety and efficacy data from clinical trials of oxypurinol in the gout application, to advance the clinical trial process of oxypurinol for the treatment of congestive heart failure. However, there can be no assurance that the FDA will accept this prior clinical data for the congestive heart failure application or that we will be able to proceed with Phase II studies with oxypurinol for congestive heart failure. We cannot provide assurance that upon development our products will find market acceptance There can be no assurance that any products that we or any future corporate collaborators develop, will be approved for marketing or will ever achieve market acceptance. Our developed products, may compete with a number of traditional drugs and therapies manufactured and marketed by major pharmaceutical and biotechnology companies, as well as new products currently under development by such companies and others. The degree of market acceptance of any products we develop will depend on a number of factors, including (1) the establishment and demonstration of the clinical efficacy and safety of the product candidates, (2) their potential advantage over alternative treatment methods and reimbursement policies of government, and (3) third party payors. There can be no assurance that physicians, patients or the medical community in general will accept and utilize any products that we may develop. We have substantial competition in the pharmaceutical industry and with respect to products we are developing The pharmaceutical industry is very competitive. Many companies, as well as research organizations, currently engage in or have in the past engaged in efforts related to the development of products in the same therapeutic areas as we do. Many of the companies developing competing technologies and products have significantly greater financial resources and expertise in discovery, research and development, manufacturing, pre-clinical studies and clinical testing, obtaining regulatory approvals and marketing than we do. Other smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar to what we do. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring technologies complementary to our projects. We will face competition with respect to product efficacy and safety, ease of use and adaptability to various modes of administration, acceptance by physicians, the timing and scope of regulatory approvals, availability of resources, reimbursement coverage, price and patent position, including potentially dominant patent positions of others. There can be no assurance that competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than us and our corporate collaborators, or that such competitive products will not render our products obsolete. Page 12 We are dependent upon our key personnel, who are necessary for us to achieve our scientific and business objectives We are dependent on certain of our directors, officers, employees, consultants and scientific advisors, the loss of whose services might significantly delay or prevent achievement of our scientific or business objectives. Competition among biotechnology and pharmaceutical companies for qualified employees is intense, and the ability to retain and attract qualified individuals is critical to our success. There can be no assurance that we will be able to attract and retain such individuals currently or in the future on acceptable terms, or at all, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain "key person" life insurance on any of our officers, employees or consultants. We also have relationships with scientific collaborators at academic and other institutions, some of whom conduct research at our request or assist us in formulating our research and development strategy. These scientific collaborators are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, these collaborators may have arrangements with other companies to assist such other companies in developing technologies that may prove competitive to us. Our products will rely on licenses of proprietary technology owned by third parties The manufacture and sale of any products developed by us will involve the use of processes, products, or information, the rights of which are owned by third parties. Specifically, the rights to oxypurinol, held by us are under license pursuant to the license with The Johns Hopkins University, or JHU License and the license with ILEX Oncology, Inc., or ILEX License. Although we have obtained licenses or rights with regard to the use of certain of such processes, products, and information, there can be no assurance that such licenses or rights will not be terminated or expire during critical periods, that we will be able to obtain licenses or other rights which may be important to us, or, if obtained, that such licenses will be obtained on favourable terms. Some of these licenses provide for limited periods of exclusivity that may be extended only with the consent of the licensor. There can be no assurance that extensions will be granted on any or all such licenses. This same restriction may be contained in licenses obtained in the future. We rely on proprietary technology, the protection of which can be unpredictable and costly Our success will depend in part upon our ability and that of our future corporate collaborators, to obtain patent protection or patent licenses. The composition of matter patents for oxypurinol, our key congestive heart failure drug candidate, have expired. The JHU License provides for patent rights as they relate to the commercial use of xanthine oxidase inhibitors, or XO Inhibitors for cardiovascular disease via the sensitizing of muscle cells to calcium ions. There is no assurance that this is the method of action of XO Inhibitors. In order to obtain patent protection surrounding oxypurinol, we will be required to file patent applications relating to novel processes for manufacturing, delivery, use, new formulations or other aspects of oxypurinol. We intend to file, when appropriate, patent applications with respect to inventions. There can be no assurance, however, that any patents will be issued or that, if issued, they will be of commercial value. In addition, it is impossible to anticipate the breadth or degree of protection that patents will afford products developed by us or the underlying technology. There can be no assurance that (1) any patents issued covering such products or any patents licensed to us will not be successfully challenged, (2) such products will not infringe the patents of third parties, or (3) patents of third parties may not have to be designed around, potentially causing increased costs and delays in product development and introduction or precluding us from developing, manufacturing, or selling our planned products. The scope and validity of patents which may be obtained by third parties, the extent to which we may wish or need to obtain patent licenses, and the cost and availability of such licenses are currently unknown. If such licenses are obtained, it is likely they would be royalty-bearing which could reduce our income. If licenses cannot be obtained on an economical basis, delays in market introduction of our planned products could occur or introduction could be prevented, in some cases after the expenditure of substantial funds. If we defend or contest the validity of patents relating to our products or the products of a third party, we could incur substantial legal expenses with no assurance of success. In certain instances, we may elect not to seek patent protection but instead rely on the protection of our technology through confidentiality agreements. The value of our assets could be reduced to the extent that other persons obtain patents, or confidential measures are breached or become unenforceable. There can be no assurance that third parties may not independently develop or obtain similar technology and such third parties may be able to market competing products and obtain regulatory approval through a showing of equivalency to one Page 13 of our products which has obtained regulatory approvals, without being required to undertake the same lengthy and expensive clinical studies that we would have already completed. Litigation may also be necessary to enforce patents issued or licensed to us or to determine the scope and validity of a third party's proprietary rights. We could incur substantial costs if we are required to defend ourselves in patent suits brought by third parties, if we participate in patent suits brought against or initiated by our corporate collaborators or if we initiate such suits. There can be no assurance that funds or resources would be available to us in the event of any such litigation. Additionally, there can be no assurance that we would prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject us to significant liabilities, require disputed rights to be licensed from third parties or require us to cease using certain technology or products, any of which may have a material adverse effect on our business, financial condition and results of operations. The inability to manage our future growth could impair our operations and financial results Our future growth, if any, may cause a significant strain on our management, operational, financial and other resources. Our ability to manage our growth effectively will require us to implement and improve our operational, financial, manufacturing and management information systems and to expand, train, manage and motivate our employees. These demands may require the addition of management personnel and the development of additional expertise by management. Any increase in resources devoted to research, product development and marketing and sales efforts without a corresponding increase in our operational, financial, manufacturing and management information systems could have a material adverse effect on our business, financial condition, and results of operations. In particular, the anticipated benefits of the acquisition of Paralex will not be achieved unless we are successfully combined with Paralex in a smooth and timely manner. The combination of our business with Paralex will require integration of research and development and administrative operations. The transition to a combined company may require substantial attention from management, which has limited experience in integrating companies. The diversion of management attention and any difficulties encountered in the transition process could have an adverse impact on our ability to successfully pursue the development of our drug candidates. The risks associated with our absorption of expenses and ongoing cash requirements of Paralex, Inc. will increase the pressure on us to achieve synergistic cost reductions as rapidly as possible and, if we are unable to do so, our financial position may be impaired. There can be no assurance of the extent to which cost savings and efficiencies will be achieved by us. We are uncertain as to our ability to list our common shares on the Nasdaq National Market, Small Cap Market or American Stock Exchange We intend to apply to have our common shares listed on either the Nasdaq National Market, Nasdaq SmallCap or the American Stock Exchange, or AMEX. Although we completed a four-to-one share consolidation (reverse stock split) on March 8, 2002, the price of our common shares might not increase proportionately with the decrease in the number of outstanding shares. Accordingly, subsequent share consolidations (or reverse stock splits) could be required in order to comply with minimum bid requirements. Subsequent share consolidations may result in our failing to meet the minimum public float requirement. Accordingly, even if we are able to become listed, we may not be able to comply with all of the listing criteria required to continue a Nasdaq National Market or SmallCap Market or an AMEX listing. Additionally, we may not be able to maintain the minimum shareholders' equity, market capitalization, net income, public float, market maker and number of shareholder requirements in order to obtain and/or maintain a listing on the Nasdaq National Market, Nasdaq SmallCap Market or AMEX. If we develop products with commercial potential, we have no experience in commercial manufacturing We have no experience manufacturing commercial quantities of products and do not currently have the resources to manufacture any products that we may develop. Accordingly, if we were able to develop any products with commercial potential, we would either be required to develop the facilities to manufacture independently or be dependent upon securing a contract manufacturer or entering into another arrangement with third parties to manufacture such products. There can be no assurance that we would be able to develop such capabilities or that the terms of any such arrangement would be favourable to permit the products to compete effectively in the marketplace. Page 14 We intend to contract with ILEX or others for the manufacture of oxypurinol. We may need to contract with additional manufacturers. There can be no assurance, however, that we will be able to identify and qualify any such manufacturers, and, if able to do so, that any such manufacturing agreements will contain terms that are favourable to us, if at all. We have and will rely on contract manufacturers for the foreseeable future to produce quantities of products and substances necessary for research and development, pre-clinical trials, human clinical trials and product commercialization. There can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. There can be no assurance that third party manufacturers will be able to meet our needs with respect to timing, quantity and quality. If we are unable to contract for a sufficient supply of required products and substances on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our research and development, pre-clinical and clinical testing would be delayed, thereby delaying the submission of products for regulatory approval or the market introduction and subsequent sales of such products. Any such delay may have a material adverse effect on our business, financial condition and results of operations. If we manufacture pharmaceutical products, the products will need to comply with good manufacturing practices in the U.S., Canada or other jurisdictions The manufacturer of our pharmaceutical products, if any, will be subject to current good manufacturing practices, or GMP, or similar regulations prescribed by the FDA in the United States, the TPD in Canada and similar authorities prior to the commercial manufacture of any such products in the countries where the products are manufactured. There can be no assurance that we or any entity manufacturing products on our behalf will be able to comply with GMP or satisfy certain regulatory inspections in connection with the manufacture of our proposed products. Failure or delay by any manufacturer of our products to comply with GMP or similar regulations or satisfy regulatory inspections would have a material adverse effect on us. We do not have the marketing expertise needed for the commercialization of our products Although we do not have any foreseeable need to market products because we are in the early stage of development, we do not currently have the expertise nor the resources to market the products that we may develop. Marketing of new products and processes presents greater risks than are posed by the continued marketing of proven products and processes. Accordingly, if we are able to develop any products with commercial potential, we would either have to develop a marketing capability (including a sales force) or attempt to enter into a joint venture, license, or other arrangement with third parties to provide a substantial portion of the financial and other resources needed to market such products. There can be no assurance that we would be able to develop such a marketing capability or enter into such joint venture, license or other arrangement with a third party on favourable terms or at all. In any event, extensive licensing or joint venture agreements might result in reduced income than if we marketed the products ourselves. Our success is dependent upon the management of our corporate collaborations for services needed for the development of our products The success of our business strategy is largely dependent on our ability to enter into corporate collaborations for matters such as the development of, clinical testing of, seeking regulatory approval for and commercialization of our pharmaceutical products, and to effectively manage the relationships that may come to exist as a result of this strategy. We are currently seeking corporate collaborators, but there can be no assurance that such efforts will lead to the establishment of any such corporate collaborations on favourable terms, or at all, or that if established, any such corporate collaborations will result in the successful development of our products or the generation of significant revenues. Because we would enter into research and development collaborations at an early stage of product development, our success is highly reliant upon the performance of our future corporate collaborators, if any. The amount and timing of resources to be devoted to activities by corporate collaborators are not within our direct control, and there can be no assurance that any of our future or existing corporate collaborators will commit sufficient resources to our research and development projects or the commercialization of our products. There can be no assurance that our corporate collaborators, if any, will perform their obligations as expected. There can also be no assurance that our future and existing corporate collaborators will not pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us or that disputes will not arise with respect to ownership of technology developed under any such corporate collaborations. Page 15 Because the success of our business is largely dependent upon our ability to enter into corporate collaborations and to effectively manage issues that arise from such collaborations, management of these relationships will require significant time and effort from our management team and effective allocation of our resources. There can be no assurance that we will be able to simultaneously manage a number of corporate collaborations. The manufacture of pharmaceutical products may expose us to product liability claims The products we will attempt to develop will, in most cases, undergo extensive clinical testing and will require FDA and TPD approval prior to sale in the United States and Canada, respectively. However, despite all reasonable efforts to ensure safety, it is possible that products which are defective or to which patients react in an unexpected manner, or which are alleged to have side effects, will be sold. The sale of such products may expose us to potential liability resulting from the use of such products. Additionally, we may be exposed to product liability claims in the development of the products through administration of the drug candidates to volunteers and patients in clinical trials. Such liability might result from claims made directly by consumers or by pharmaceutical companies or others selling such products. It is impossible to predict the scope of injury or liability from such defects or unexpected reactions, or the impact on the market for such products of any allegations of these claims (even if unsupported), or the measure of damages which might be imposed as a result of any claims or the cost of defending such claims. Although our shareholders would not have personal liability for such damages, the expenses of litigation in connection with any such injuries or alleged injuries and the amount of any award imposed on us in excess of existing insurance coverage, if any, may have a material adverse impact on us. In addition, any liability that we may have as a result of the manufacture of any products could have a material adverse effect on our financial condition, business and operations, to the extent insurance coverage for such liability is not available. At present, we have secured product liability coverage for the Phase I and II clinical trials of RSD1235. Currently, we have no other product liability insurance. It is anticipated that insurance equivalent to that customarily maintained by other entities in our industry and of our approximate size will be carried by us against such product liability claims in the future. However, obtaining insurance of all kinds has become increasingly more costly and difficult and there can be no assurance that any such insurance will be available, at all, available on commercial terms or, if obtained, will be sufficient to satisfy asserted claims. We are subject to the risks associated with the use of hazardous materials in research and development conducted by us Our research and development may involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and foreign laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that safety procedures for handling and disposing of such materials will comply with the standards prescribed by federal, state, local and/or foreign regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. There can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations, or that our business, financial condition and results of operations will not be materially adversely affected by the current or future environmental laws or regulations. Our business may be materially adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means In recent years, federal, state, provincial and local officials and legislators have proposed or are reportedly considering proposing a variety of price-based reforms to the healthcare systems in the United States and Canada. Some proposals include measures that would limit or eliminate payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Further, in certain foreign markets the pricing or profitability of healthcare products is subject to government control and other measures have been prepared by legislators and government officials. While we cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposals or reforms could adversely affect the commercial viability of our potential products. Significant changes in the healthcare system in the United States and Canada and abroad might have a substantial impact on the manner in which we conduct our business. Such changes also could have a material adverse effect on our ability to raise capital. Moreover, our ability to commercialize products may be adversely affected to the extent that such proposals have a material adverse effect on our business, financial condition and results of operations. Page 16 In addition, in the United States, Canada and elsewhere, sales of healthcare products are dependent in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging the prices charged for medical products and services, and therefore uncertainty exists as to the reimbursement of existing and newly approved healthcare products. If we succeed in bringing one or more products to market, there can be no assurance that these products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive basis. Finally, given the potential market constraints on pricing, the availability of competitive products in these markets may further limit our flexibility in pricing and in obtaining adequate reimbursement for its potential products. If adequate coverage and reimbursement levels are not provided by government and third party payors for uses of our products, the market acceptance of our products would be adversely affected. The participation by our officers and directors in other businesses with whom we may enter into ventures may pose a conflict of interest that may be harmful to us Certain of our directors and officers may serve as directors or officers of other companies or have shareholdings in other companies and, to the extent that such other companies may participate in ventures in which we may participate, conflicts of interest may arise which may be harmful to our interests. In the event that such a conflict of interest arises at a meeting of our directors, a director who has such a conflict is required to advise the board of his or her conflict, and abstain from voting for or against the approval of the matter before the meeting. In accordance with the corporate laws affecting us, our directors are required to act honestly, in good faith and in our best interests. To date, we have not paid any dividends on our common shares and do not intend to declare any dividends in the foreseeable future. Currency fluctuations may impact the value of our common shares Our common shares trade on The Toronto Stock Exchange, or TSX, in Canadian dollars. In the event that our common shares become listed on a national securities exchange in the United States, the trading or listing price may be largely affected by the trading price of our common shares on the TSX. The future value of our common shares is subject to the volatility in the exchange rate between the Canadian dollar and the U.S. dollar which can be affected by risks including but not limited to, differing economic conditions, changes in political climate, differing tax structures, myriad regulations and restrictions and general foreign exchange rate volatility. A decrease in the value of the Canadian dollar relative to the U.S. dollar could result in downward price pressure on the U.S. dollar value of our common shares that are traded or listed, if at all, on a national securities exchange in the United States. We may face exposure to adverse movements in foreign currency exchange rates when our products are commercialized, if at all We intend to generate revenue and expenses internationally which is likely to be denominated in U.S. and other foreign currencies. Our intended international business will be subject to risks typical of an international business, including but not limited to, differing tax structures, myriad regulations and restrictions, and general foreign exchange rate volatility. A decrease in the value of such foreign currencies relative to the Canadian dollar could result in downward price pressure for our products or losses from currency exchange rate fluctuations. To date we have not generated sufficient revenues to warrant the necessity of hedging against risks associated with foreign exchange rate exposure. Although we may do so in the future, we cannot be sure that any hedging techniques it may implement will be successful or that its business, results of operations, financial condition and cash flows will not be materially adversely affected by exchange rate fluctuations. Page 17 ITEM 4. INFORMATION ON THE COMPANY ================================================================================ HISTORY AND DEVELOPMENT OF THE COMPANY - -------------------------------------- General Development of the Business Since 1992, Cardiome has been involved in research and development of technology acquired from the University of British Columbia used to decrease the incidence of arrhythmia, which is an abnormal electrical signal in the heart, or an abnormal heart beat resulting from such a signal. Until 2001, Cardiome was also developing this technology for local anaesthetic and other uses. In addition, Cardiome acquired technology from Drs. Macleod and Quastel of the University of British Columbia in 1997 and carried out research and development of compounds for the treatment of pain (until early 1999) and cough (until late 2000) and did some initial pre-clinical work on a compound for erectile dysfunction (until early 2000). In August 1999, Cardiome closed a $5,100,000 private placement and in April 2000, closed a $7,800,000 private placement to Canadian institutional investors. In January 2001, the Company narrowed its focus to the cardiac area and has since allocated all of its resources to its three current arrhythmia projects and one current congestive heart failure project. In July 2001, the Company completed a Phase I clinical trial for RSD1235 and has recently begun a Phase II trial of RSD1235. In October 2001, Cardiome closed a $1.1 million private placement to existing Canadian investors. In March 2002, the Company closed a concurrent public offering in Canada and private placement in the United States raising $30.9 million (the equivalent of approximately U.S. $19.5 million) and acquired Paralex by merger of the Company's wholly owned subsidiary Cardiome, Inc. into Paralex. See "History and Development of the Company - Acquisition of Paralex". Incorporation and Subsidiaries The Company was incorporated under the Company Act (British Columbia) on December 12, 1986 under the name Nortran Resources Ltd. In June 1992 the Company changed the focus of its business from mining exploration to drug research and development and changed its name to Nortran Pharmaceuticals Inc. In June 2001, the Company changed its name to Cardiome Pharma Corp. On March 8, 2002, the Company continued under the Canada Business Corporations Act. In this Annual Report, unless the context otherwise indicates, the terms "we," "us," "our," and similar terms as well as references to "Cardiome" or the "Company" refer to Cardiome Pharma Corp. together with its wholly-owned subsidiaries, Rhythm-Search Developments Ltd., a company incorporated under the Company Act (British Columbia), Atriven Cardiology Corp. (formerly 3629490 Canada Inc.), a company incorporated under the Canada Business Corporations Act and Paralex, a corporation incorporated under the Delaware General Corporation Law. The Company's head office is located at 3650 Wesbrook Mall, Vancouver, British Columbia, V6S 2L2, Canada, and the address of the registered office of the Company is 1400 - 1055 West Hastings Street, Vancouver, British Columbia, V6E 2E9, Canada. Acquisition of Paralex On March 8, 2002, the Company completed the acquisition of all of the outstanding shares of Paralex, in exchange for 8,203,396 common shares of the Company. Also, on March 8, 2002, the Company completed a concurrent financing of $30.9 million (the equivalent of approximately U.S.$19.5 million) and issued 9,309,657 common shares along with warrants for the purchase of 2,327,414 common shares. Prior to the acquisition, Paralex was a private, New York based development- stage bio-pharmaceutical company that has licensed from The John Hopkins University, or JHU, certain intellectual property relating to the use of oxypurinol and other related compounds called xanthine oxidase inhibitors, or XO Inhibitors, for the treatment of congestive heart failure other cardiovascular disorders and neuromuscular disease. Paralex also has licensed from ILEX Oncology, Inc., or ILEX, rights to oxypurinol clinical data, drug supply and know-how and an option on rights to oxypurinol, for the treatment of gout, a metabolic disease. Oxypurinol has been studied in humans and is utilized in a compassionate use program for patients who are allergic to allopurinol, a conventional treatment for gout. See "Business Overview - Licenses and Collaborative Research Agreements - JHU License" and "- ILEX License". Both of these licenses may allow the Company to potentially advance its XO Inhibitors for treatment of congestive heart failure directly into Phase II clinical development for congestive heart failure using oxypurinol, an agent that has extensive human clinical data for non-cardiovascular indications. Page 18 In connection with and as part of the acquisition of Paralex, on March 8, 2002, the Company effected a four-to-one share consolidation, or reverse stock split, resulting in its outstanding common shares being reduced from 113,172,393 to 28,293,098 and its fully diluted common shares being reduced from 136,370,232 to 34,092,558. Subsequent to the acquisition of Paralex, the Company reconstituted its board of directors. Mark Rogers, M.D., M.B.A., (newly elected Chairman of the Board), Myron Weisfeldt, M.D., Ralph Snyderman, M.D., Fred Mermelstein, Ph.D. and Elizabeth Rogers, M.D. joined previous board members Michael Walker, Ph.D. (founder and former Chairman of the Board), Robert Rieder (President and Chief Executive Officer), Alan Ezrin, Ph.D. (Chief Scientific Officer) and Kim Sun Oh. BUSINESS OVERVIEW - ----------------- General Cardiome is a drug discovery and development company focused on developing proprietary drugs to treat or prevent cardiac diseases. Cardiome targets the treatment of cardiac arrhythmia, which is an abnormal electrical signal in the heart, or an abnormal heart beat resulting from such a signal, through the use of atria-selective ion channel modulating drug candidates. Additionally, Cardiome targets the treatment of congestive heart failure, through the use of drugs known to inhibit the enzyme xanthine oxide, which is an enzyme that degrades a particular mammalian protein, xanthine oxidase, which is important to human heart function. Cardiome is currently focussing its efforts on three projects designed to prevent or treat cardiac arrhythmia and a fourth project designed to prevent or treat congestive heart failure. The RSD1235 project focuses on an atrial antiarrhythmic agent that is suitable for intravenous administration in a hospital setting and may be developed for chronic oral therapy. This project is currently in a Phase II clinical trial using intravenous administration to convert new onset atrial fibrillation patients to normal heart rhythm. The second drug candidate is RSD1122, an orally-active agent to treat arrhythmia in the ventricles of the heart, known as ventricular arrhythmia, or arrhythmia in the atria of the heart, known as atrial arrhythmia. Cardiome is currently evaluating whether or not to carry out and fund further research and development on this drug candidate. The Kv1.5 project is a discovery-stage project focused on discovering an agent that treats atrial arrhythmia by selectively blocking a specific ion channel found only in atrial cardiac tissue. Ion channels are specialized pores in the membrane of cells which assist in controlling and transferring electrical impulses, called action potentials, in cells. With respect to congestive heart failure, Cardiome may develop oxypurinol to determine if it is a safe and effective therapy for the treatment of congestive heart failure. The Company plans to file an investigational new drug application, or IND, with the FDA to begin a Phase II clinical trial on the oral application of oxypurinol to congestive heart failure by the second half of 2002. An IND must be submitted to the FDA and must become effective before human clinical trials commence. The Company plans to extend the Phase II clinical trial to include drug interaction as well as formulation development and toxicology testing and completion of a Phase I study on the intravenous application. In addition, the Company plans to exercise its option until December 2002 to acquire for US$250,000 the rights to clinical trial data for oxypurinol in the treatment of allopurinol intolerant hyperuricemia (gout). Page 19 Summary of Current Projects The following chart summarizes Cardiome's current projects, including the name of the product candidate or project, the therapeutic focus of the product and the stage of development of the product.
Product Candidate/Project Therapeutic Focus Stage of Development - -------------------------------------------------------------------------------------------------------------------- RSD1235 Atrial Arrhythmia Phase II clinical trial(1) RSD1122 Atrial and Ventricular Arrhythmia Pre-clinical(2) Kv1.5 Atrial Arrhythmia Pre-clinical(2) Oxypurinol Congestive Heart Failure Preparation for Phase II clinical trial
(1) Phase II clinical trials involve studies in a limited human population to determine the efficacy of the product for specific, targeted indications, determine optimal dosage and identify possible adverse effects and safety risks. See "Business Overview - Regulatory Environment". The Company commenced a Phase II clinical trial on the intravenous application of RSD1235 in December 2001. Results from the trial are expected by the second half of 2002. Subject to successful completion of this trial and the availability of sufficient financial resources, the Company plans to initiate a Phase I clinical trial on the oral application of RSD1235 by the second half of 2002. A Phase I trial is the initial introduction of a product into human subjects in which the compound is tested for safety, dosage, tolerance, metabolic interaction, distribution, excretion and pharmacodynamics. (2) "Pre-clinical" includes pharmacological and efficacy testing in animals, toxicology testing and formulation work based on in-vitro results. After completing pre-clinical studies, the product must be taken through Phase I, II and III clinical trials before the Company (or its collaborative partner) can apply for regulatory approval to market the product. See "Business Overview - Regulatory Environment". Antiarrhythmia Projects Antiarrhythmia Overview The heart is made up of four chambers, two on the left side (from the heart owner's perspective) and two on the right. The atria are the upper chambers of the heart. The ventricles are the lower chambers of the heart where the majority of the muscular pumping action of the heart takes place. The right side of the heart stores (right atria) and pumps (right ventricle) de-oxygenated blood to the lungs where it exchanges carbon dioxide for oxygen and returns to the left side of the heart. There, oxygenated blood moves from the left atria to the left ventricle where it is pumped through the aorta and circulated into the body. The pumping of the heart depends on the organized contraction of the atria and ventricles, each controlled by electrical impulses. The flow of these electrical impulses from cell to cell depends on the cell membrane's selective permeability to sodium, potassium or calcium ions via specialized pores, called ion channels, in the membrane of cells which assist in controlling and transferring electrical impulses, called action potentials, in cells. Arrhythmia results when cells lose the ability to correctly carry ions across the membranes causing a deviation from their normal sequence of initiation and conduction of electrical impulses and resulting in disturbances in heart rate and rhythm. Fibrillation arrhythmia describes a type of arrhythmia in which the heart chambers, instead of alternately contracting, quiver continuously in a chaotic pattern. There are two broad types of arrhythmia: atrial arrhythmia and ventricular arrhythmia. Atrial arrhythmias affect the upper chambers of the heart and are less directly life-threatening but more widespread than ventricular arrhythmias. Atrial arrhythmias require medical management to prevent further structural damage to the heart and are increasing in number with the population ageing. Ventricular arrhythmias affect the lower chambers of the heart and have immediate life-threatening implications whenever they occur. The Company's antiarrhythmic projects address both types. Ventricular Arrhythmia - ---------------------- Ventricular tachycardia and ventricular fibrillation are two types of life-threatening cardiac arrhythmias. Ventricular tachycardia is an arrhythmia originating in the ventricles of the heart where aberrant electrical activity is triggering the heart to beat much too frequently; this often prevents proper blood circulation, resulting in fainting and possibly death. Ventricular fibrillation is a form of ventricular arrhythmia most often associated with Sudden Cardiac Death where the associated electrical activity results in a complete cessation of the pumping of blood by the heart. In humans, ventricular tachycardias are arrhythmia that originate in, and drive, the ventricles at Page 20 rates above normal, and may be non-sustained, lasting a few seconds, or sustained, which may last for minutes or hours. During ventricular fibrillation the ventricles are unable to contract rhythmically and are unable to pump blood to the body. Ventricular tachycardia and fibrillation can reduce the heart's ability to maintain blood pressure; both conditions can cause death. Sudden Cardiac Death, or SCD, is the term applied to those patients who, during the onset of a heart attack, abruptly die due to the sudden onset of ventricular fibrillation. Ventricular arrhythmia is often caused by the occurrence of ischemia during a heart attack. Ischemia is the deficiency of oxygenated blood in a part of a body, usually due to functional constriction or actual obstruction of a blood vessel. Ischemia causes misfiring of ion channels which leads to the generation of aberrant electrical signals that interfere with the normal electrical signal that controls the operation of the heart. While ischemic tissue, which is tissue where blood supply is inadequate for its requirements for oxygen, nutrients and removal of metabolic by-products, from a heart attack may only develop in a portion of the heart, the electrical effect can be profound in that the disruption of the electrical signal caused in this area may disrupt the electrical impulse for the entire heart. See Figure 1. Such a malfunction may result in SCD. [GRAPHIC OMITTED] [GRAPHIC OMITTED] Normal Heart Ischemic Heart Figure 1. Normal electrical conduction in the heart vis-a-vis conduction in ischemic tissue Most drugs currently used to prevent arrhythmia following heart attacks, or myocardial infarctions have effects on the entire heart muscle, including both healthy and damaged tissue. Drugs that globally block ion channels in the heart have been associated with life-threatening side-effect arrhythmias, including one form called torsades de points, which is only found in conjunction with such ion-channel modulating drugs. In contrast to currently available antiarrhythmic drugs, some of Cardiome's antiarrhythmic drug candidates are designed to be active in the specific tissue that mediates cardiac arrhythmia, leaving the remaining cardiac tissue relatively unaffected. Instead of having activity throughout the heart, Cardiome's ventricular drug candidates (such as RSD1122) are designed to be activated by the conditions found in ischemic ventricular heart tissue, and preferentially block ion channels in such ischemic tissue. These compounds are designed to have much less activity in the healthy tissue and consequently should be safer than existing drugs. Cardiome's atrial arrhythmia drugs are similarly designed to be active in atrial tissue and relatively less active in normal ventricular tissue. Atrial Fibrillation Antiarrhythmia - ---------------------------------- Atrial fibrillation, the most common chronic arrhythmia, is a condition affecting the upper chambers of the heart. Atrial fibrillation is an arrhythmia in which the atria, instead of intermittently contracting, quivers continuously in a chaotic pattern, causing totally irregular, often rapid ventricular rate. The condition is characterized by rapid, chaotic beating that is either temporary or permanent. This condition is common but, unlike ventricular arrhythmias, is not acutely life-threatening. The main danger from such Page 21 arrhythmias is that they may cause stroke or if prolonged may lead to heart failure. Over 6,000,000 individuals in the developed world suffer occasionally or chronically from atrial arrhythmias. Current drugs used to treat atrial fibrillation suffer from the same issues that limit the usefulness of current ventricular antiarrhythmic drugs: limited efficacy combined with life-threatening side effects. Unlike current drugs used to treat atrial arrhythmia, Cardiome's drug candidates for atrial fibrillation selectively target those ion channels that are uniquely important for such atrial arrhythmias. Blockade of these channels with the Company's atrial fibrillation drug candidates has been shown in pre-clinical studies to effectively terminate atrial fibrillation. Pre-clinical studies show that Cardiome's clinical candidates appear to target these channels which mediate atrial arrhythmia without disrupting potassium channels that control normal functioning of the middle layer of heart wall composed of cardiac muscle, or the ventricular myocardium. Based on these results, the Company's management expects that its clinical candidates will display a superior cardiovascular safety profile compared with other available and emerging therapies. The Company has successfully developed two antiarrhythmic clinical candidates, RSD1235 and RSD1122 and intends to expand its drug candidate pipeline through its Kv1.5 project. Ion Channel Focus Cardiome's research and development strategy in the arrhythmia area is mainly based upon the utilization of its expertise in the field of ion channels. Cardiome focuses on the development of drugs that will modulate the activity of ion channels in a way that cures or ameliorates the impact of a particular cardiac pathology. Ion channels are cell membrane spanning proteins that permit the movement of selected ions through the channel when it is in an open state. The molecular structure of the ion channel protein determines whether the channel is in one of three states; rested (closed but able to be opened by a stimulus), activated (open), or inactivated (closed and unable to be opened by a stimulus). Cardiome's cardiac arrhythmia drugs are developed to target these ion channels and modulate their activity by either blocking or controlling the flow of ions through these pores. See Figure 2. Ion channel Ion channel Closed Open [GRAPHIC OMITTED] [GRAPHIC OMITTED] Figure 2. Voltage-gated ion channel showing structure The surface of each living cell is covered with a number of these molecular structures called "ion channels". More than 50 different ion channels have been identified in the scientific literature. These channels relate mainly to the flow of sodium, potassium, calcium, and chloride ions into and out of the body's various types of cells. The firing of these ion channels is a very basic part of all animal physiology, mediating all muscular activities and all neuronal activity. Currently, many important drugs mediate ion channel activity, either directly by blocking the firing of specific channels or indirectly by interacting with receptors or enzymes upstream of the ion channels. An example of an ion channel modulator used therapeutically is the commonly-used dental anesthetic, Lidocaine, which prevents pain by temporarily blocking the firing of sodium ion channels. Page 22 In arrhythmia, ion channels in the heart open too frequently resulting in fibrillation. Cardiome's arrhythmia drug candidates (RSD1235, RSD1122 and any Kv1.5 candidate) target abnormally active sodium and potassium ion channels in order to stop and prevent future occurrences of arrhythmia. Many of the currently approved ion channel drugs have a tendency to block these channels in both the atria and ventricles for too long a period of time. It is believed that blocking of ventricular ion channels can cause a second form of drug-induced arrhythmia that may result in Sudden Cardiac Death. Cardiome's drug candidates avoid the key ion channels of the healthy ventricles avoiding the negative side effect of depressing the electrical and mechanical activity of the heart thereby eliminating the serious side effects of drug-induced arrhythmia seen with currently used antiarrhythmic drugs. RSD1235 Project RSD1235 was developed specifically to treat atrial arrhythmia. The drug has been shown to be a safe and effective antiarrhythmic in various animal studies modeling an arrhythmia condition. That safety and efficacy profile is believed to result from the drug's atria selective mechanism of action. Animal studies indicate that the drug exhibits a much stronger impact on the electrical activity of the atria of the heart than on the ventricles. This may make it an effective and potentially safer atrial antiarrhythmic drug than existing and near term competition in this field. Clinical data suggests that RSD1235 is rapidly cleared from the body after intravenous dosing which may make it an ideal therapy for emergency intravenous use in hospital. RSD1235 is designed to have fewer side effects than currently utilized intravenous antiarrhythmic drugs. Recent pre-clinical studies have confirmed that RSD1235 also has significant oral bioavailability in animals. Cardiome completed its Phase I clinical trial of the intravenous application of RSD1235 in July 2001. The Phase I clinical trial examined the safety and metabolism of RSD1235 in humans. The current Phase II clinical trial on the intravenous application of RSD1235 is being carried out on a limited human population (60) and is designed to prove the efficacy of RSD1235 for specific targeted indications, determine optimal dosage and identify possible adverse effects and safety risks. This Phase II trial was initiated in December 2001 and clinical results are expected by the second half of 2002. The Company continues to evaluate several strategic options with respect to the further clinical development of RSD1235. It is expected that, subject to a successful Phase II clinical trial, the Company will announce its intentions for further development within the first half of 2003. The Company plans to initiate a Phase I clinical trial on the oral application of RSD1235. This Phase I trial is anticipated to commence by the second half of 2002. The Company plans to manufacture additional RSD1235 drug supplies to provide for additional formulation development, stability testing and GMP quantities for Phase I oral clinical development and further intravenous clinical development. RSD1122 Project RSD1122 is a mixed ion channel blocker, which was developed as an ischemia-selective ventricular antiarrhythmic drug, and has been shown to be a safe and effective antifibrillatory in animal studies modeling various arrhythmia conditions. Pre-clinical data suggests RSD1122 may be suitable for oral dosing, which may make it appropriate for daily long-term therapy in patients at risk of arrhythmia. In October 2000, Cardiome entered into a license agreement with AstraZeneca AB, or AstraZeneca, for the development and marketing of RSD1122. This agreement will be terminated as of June 2002 and AstraZeneca will return all rights and pre-clinical data associated with RSD1122 as Cardiome has received notice from AstraZeneca that it does not intend to proceed with the clinical development of RSD1122. Cardiome intends to evaluate the AstraZeneca pre-clinical data and, following consultation with its board of directors and scientific advisory board, decide whether or not to carry out and fund future research and development on this drug candidate. See "Business Overview - Licenses and Collaborative Research Agreements - AstraZeneca License". Kv1.5 Project The Kv1.5 Project is aimed exclusively at atrial arrhythmia. Recent research has shown that the Kv1.5 potassium channels are located in the atrial but not ventricular chambers of the heart. The Kv1.5 channel is known to be important to the early-repolarising currents that mediate atrial electrical activity. Because this channel is exclusive to the atria and important to atrial pacing, it may make an ideal target for an atrial arrhythmia drug. Cardiome is using cloned Kv1.5 potassium channels from human sourced tissue to design drugs to selectively block the Kv1.5 channel. The administration of such an atria-selective drug is expected to be safer than that of existing drugs for Page 23 atrial arrhythmia, which produce unwanted action in the ventricles. Recent Cardiome data has confirmed the ability of these drugs to modify the electrical activity of human cardiac tissue studied in the laboratory. It is expected Cardiome will select a Kv1.5 clinical candidate in 2002. Congestive Heart Failure Project Congestive Heart Failure Overview Congestive heart failure is the failure of the heart to pump blood at a rate sufficient for the metabolizing tissue. During congestive heart failure, the cardiac output decreases resulting in, among other things, an increase in venous fluid volume. It is characterized by fatigue, shortness of breath and fluid retention. It generally occurs when the left ventricle pumping capability begins to fail. Fluid begins to pool in the lungs leading to congestion which, in turn, causes breathing difficulty and swelling in the lungs. When the right ventricle is directly affected, blood begins to collect in the body's extremities resulting in swelling. In most cases, congestive heart failure is a progressive condition. The ventricular muscle over-stretches resulting in continued reduction in cardiac output, further exacerbating the condition. Current methods of treating heart failure involve one or a combination of decreasing blood pressure, removing water from the body and increasing the force of heart contraction. A number of medicines are used to increase the contraction of the heart. Unfortunately, most of these medicines are "contractility agents"; that is, they increase the contraction of the heart while simultaneously accelerating the heart's consumption of oxygen. This increased oxygen consumption can be a serious problem as many, if not most, of these patients have coronary artery disease which limits blood and oxygen supply to the heart. Thus, although such medicines may make the patient feel better initially, they may not increase life expectancy. In fact, current medicines that increase cardiac contractility, primarily inotropes such as dobutamine and dopamine, may actually decrease life expectancy. At JHU, Dr. Eduardo Marb n's research has demonstrated that the class of agents known as xanthine oxidase inhibitors, or XO Inhibitors, (which includes oxypurinol) has the ability to increase the contraction strength of the heart in patients with congestive heart failure without increasing the oxygen consumed by the heart to the extent caused by other medicines. See "Business Overview - Licenses and Collaborative Research Agreements - JHU License" and "- Marb n Agreement". In studies conducted at JHU, Dr. Marb n has shown these effects in both animals and in humans during cardiac catheterization. Accordingly, such XO Inhibitors may offer the possibility of a new mode of therapy for patients with congestive heart failure. The intellectual property encompassing Dr. Marb n's research, acquired by Paralex pursuant to the JHU License, relates not only to oxypurinol but also to any XO Inhibitor used in the treatment of congestive heart failure or other cardiovascular disorders. Cardiome believes that XO Inhibitors, including oxypurinol, have significant potential in the treatment of congestive heart failure. Oxypurinol Congestive Heart Failure Project The oxypurinol project will target both acute and chronic therapy for patients with congestive heart failure. The Company believes that the FDA will approve oxypurinol for advancement into a Phase II clinical trial for the treatment of congestive heart failure because there are extensive data supporting its safety profile. These data are comprised of: (1) a 72-patient U.S. clinical trial in allopurinol intolerant gout patients, (2) a 340-patient compassionate use program in allopurinol intolerant gout patients, (3) several clinician-sponsored clinical trials of allopurinol applied to various cardiovascular diseases and conditions, (4) a 99-patient safety and pharmacokinetic study in hyperuricemia patients in comparison to allopurinol, and (5) three decades of chronic use of allopurinol in millions of patients suffering from gout. ILEX has undertaken clinical development of oxypurinol in gout patients who are intolerant of allopurinol. See "Business Overview - Licenses and Collaborative Research Agreements - ILEX License". These patients have no other treatment option for the hyperuricemia that underlies their gout symptoms. In the clinical study, it was found that 70% of the allopurinol intolerant gout patients who received oxypurinol had no dose-limiting side effects and appeared to receive benefit (lower uric acid levels) from their use of the drug. A compassionate-use program has been underway applying oxypurinol to allopurinol intolerant gout patients for more than 10 years. More than 340 patients have been chronically treated. The program has shown that more than 70% of allopurinol intolerant patients respond well to oxypurinol. Page 24 Several small-scale clinician-sponsored prospective clinical trials have been carried out over the years applying allopurinol to various cardiovascular diseases and conditions, including congestive heart failure. No significant dose-limiting toxicities were reported in these trials, most of which were of short duration. Since oxypurinol is the primary metabolite of allopurinol, and is believed to be responsible for much of its biological activity on the xanthine oxidase pathway, this data adds strength to the assertion that oxypurinol is appropriate for immediate testing in patients with congestive heart failure. Finally, the chronic use of allopurinol as a routine treatment for gout for several decades in millions of patients speaks strongly to the safety of oxypurinol in chronic use. Since allopurinol largely metabolizes to oxypurinol, and since oxypurinol has a half-life (17 hours) approximately fivefold longer than allopurinol (three hours), it is reasonable to conclude that oxypurinol accounts for much of the biological activity of allopurinol and, therefore, has a similar safety profile. A recently-published retrospective cohort study explores the impact of allopurinol on congestive heart failure in hyperuricemic patients. The study suggests that congestive heart failure patients who are hyperuricemic have higher morbidity and mortality than non-hyperuricemic patients, and that both parameters are partially ameliorated by high-dose allopurinol. Taken together, Cardiome believes that the aforementioned evidence will provide a strong case for taking oxypurinol forward into Phase II clinical testing in congestive heart failure patients. Allopurinol has been shown to improve the efficiency of the muscular tissue of the heart, or myocardial efficiency by sensitizing the cardiac muscle cells to calcium ions. These cells can contract more strongly without a comparable increase in oxygen demand thereby improving functional efficiency. This characteristic compares favourably with current congestive heart failure therapeutic drugs that typically improve cardiac output at the cost of increased oxygen demand that, in effect, accelerates the underlying congestive heart failure disease. Inhibition of xanthine oxidase, an enzyme that degrades a particular mammalian protein, xanthine oxide, which is important to human heart function, may serve as a new pharmacological approach to the treatment of congestive heart failure. The Phase II clinical trial, planned for the second half of 2002, would represent the first prospective clinical trial of oxypurinol in congestive heart failure. The Company anticipates the completion of this trial by the end of 2003. The Company plans to proceed with a drug interaction study on the Phase II oral application. The Company will also begin formulation development and toxicology testing on the intravenous application of oxypurinol to acute congestive heart failure in the second half of 2002 with a Phase I safety study in the first half of 2003. Other Opportunities Hyperuricemia (Gout) Pursuant to the ILEX License, Cardiome has also obtained an option, until December 2002, to acquire for U.S.$250,000 the rights to clinical trial data for oxypurinol in the treatment of allopurinol intolerant hyperuricemia (gout). Cardiome plans to exercise that option. ILEX is currently testing oxypurinol in a pivotal, open-label Phase II/III clinical study for the treatment of patients with symptomatic hyperuricemia (gout) who are intolerant to allopurinol. Business Strategy Cardiome's business strategy is based around several important principles that guide the Company's activities. Core Expertise Cardiome focuses on drugs that treat cardiac diseases and conditions. By focusing its efforts in this way, Cardiome has been able to assemble teams of employees and external advisors with strong knowledge and understanding of cardiology. This collective knowledge, experience and expertise helps ensure that the novel ideas pursued are of a high caliber and are therefore more likely to result in a drug which impacts a specific disease state. Page 25 Discovery and Development Cardiome undertakes both discovery and development activities in order to create novel drug candidates and to then demonstrate their applicability in human patients. This mixture of efforts supports partnership activities and enables Cardiome to pursue internally generated discovery projects, acquire projects that dovetail with the cardiac focus as well as in-licensed later-stage projects. Multiple Projects A central principle of Cardiome's business strategy is to minimize the risk inherent in early stage drug discovery. See "Risk Factors" under "Item 3. Key Information". Cardiome emphasizes a portfolio approach to risk diversification as the Company has drug candidates: (1) within multiple independent cardiac projects (currently arrhythmia and congestive heart failure), (2) at various stages of development (pre-Clinical to Phase II), and (3) within their clinical projects that have two potential methods of dosage (intravenous for acute therapy and oral for chronic therapy). External Resources Cardiome operates as a "semi-virtual" research organization, intending to reduce internal operating expenses to allow Cardiome flexibility as well as maintain a low level of operating losses. The Company maintains a small, core team of scientists and staff with the necessary skill base, and contracts out the specialized work required for its projects, such as pre-clinical toxicology services and contract manufacturing. Collaboration Strategy Cardiome's core of expertise lies in the ability of its personnel to research and develop potential drug candidates into the clinical development stage. As part of its business strategy, Cardiome may seek collaborative partners with experience in the late-stage development and marketing of drugs in the relevant therapeutic areas. The intention is to select partners with both the human and financial resources to spearhead the late-stage clinical development of the Company's product candidates based on requirements by the FDA in the United States, the TPD in Canada as well as other drug regulatory agencies in other countries. The Company presently has no plans for developing an in-house marketing or manufacturing capability. Potential Markets Cardiome focuses on developing proprietary drugs to treat or prevent cardiac diseases. Cardiome's projects are in relatively early stages of development. Products that may result from the Company's research and development projects are not expected to be commercially available for a number of years, if at all. See "Risk Factors" under "Item 3. Key Information". The Company has no developed or approved products. Therefore, any discussion of a market for Cardiome's products is of a very preliminary nature. The broad category of cardiovascular disease, includes congestive heart failure, stroke, coronary heart disease, arrhythmias and more. The market for cardiovascular disease represents the largest drug market based on total worldwide sales of approximately U.S.$64 billion in 1998. As the general population ages, the incidence of cardiovascular disease will increase significantly. There will be an estimated 50% increase in the number of Canadians diagnosed with heart disease and stroke over the next 25 years. This demand will far surpass existing healthcare resources and facilities. The next decade will be the critical time frame in which to anticipate and manage the impact of cardiovascular disease on healthcare systems. In this endeavor, doctors are expected to look to pharmaceutical companies for therapies and treatments. Antiarrhythmic Drug Market The current antiarrhythmic drug market includes several drugs to treat the various types of arrhythmia. Although the number of antiarrhythmic drugs has grown in the past few decades, they have very undesirable characteristics. The older Class I drugs carry the risk of increased mortality and the more potent Page 26 Class III drugs such as amiodarone can be toxic to the lungs and other organs. Prescribing patterns are currently dominated by drugs to treat one type of arrhythmia, atrial fibrillation. The worldwide market for all prescribed drugs to manage arrhythmias, excluding anticoagulants, totaled U.S.$1.4 billion in 1999, with pharmaceuticals to treat atrial fibrillation arrhythmias representing approximately U.S.$1.1 billion of that total. Approximately U.S.$800 million of the U.S.$1.1 billion was in the United States alone. With respect to ventricular arrhythmia, it is estimated that 295,000 people die in the United States annually from Sudden Cardiac Death due to the condition. Cost estimates for pharmaceuticals to treat ventricular arrhythmia approach U.S.$350 million worldwide, approximately U.S.$160 million of that is attributable to the U.S. alone. While antiarrhythmic drug sales are already substantial, there still remains a major unmet market need for safe antiarrhythmics. As indicated above, current drugs for treating arrhythmia have serious side effects that limit their use. In fact, a study indicates that one of the commonly prescribed antiarrhythmics actually increases mortality rates in patient groups to which it is administered. Other studies, SWORD and meta analysis for example, have shown other drugs to be pro-arrhythmic. Ageing populations in major markets worldwide, and the increasing pharmacotherapy needs that will accompany them, will contribute to growth significantly beyond levels indicated above. One forecast for the next five to ten years is an annual growth rate in total pharmaceutical sales in the four percent range. The key driver for sales is not, however, the annual growth of the market but its absolute size. Given the serious side effects of antiarrhythmic drugs currently on the market, a product that is both safe and effective would provide for significant market penetration into what is one of the largest pharmaceutical target markets known today. Congestive Heart Failure Market Congestive heart failure is the only significant cardiovascular disorder to show a marked increase in incidence over the past 40 years. Approximately 4,700,000 persons in the United States suffer from congestive heart failure, while the developed world total is estimated at approximately 10,000,000. The American Heart Association reported that the number of hospital discharges in the United States rose from 377,000 in 1979 to 874,000 in 1994 with an associated direct and indirect cost of U.S.$18.8 billion in 1997. The incidence of newly diagnosed congestive heart failure cases exceeds 3,600,000 each year. It is the number one cause of hospitalization in the United States in patients over 65 years of age. The prognosis for congestive heart failure in terms of mortality is poor and the disease is now characterized in the United States as "epidemic". The mortality rate is comparable to the worst forms of cancer - experts indicate that 20% of patients die within three months and almost 33% of patients die within one year with a 70% mortality by year five. The current cost of pharmaceuticals to treat congestive heart failure is in excess of U.S.$1.5 billion worldwide, just under U.S.$1 billion of that cost is in the United States alone. Congestive heart failure sales will be driven by two factors: introduction of new, more effective drug compounds and the ageing population. One forecast expects major market sales of congestive heart failure drugs will increase 4% per annum over the next four years, accelerating to 9% per annum over the ensuing five years. Within two years, the major market sales for congestive heart failure drugs is forecast to be U.S.$1.9 billion, rising to U.S.$2.9 billion within 7 years. Competition The pharmaceutical and related biotechnology industries are characterized by extensive research efforts, rapid technology change and intense competition. See "Risk Factors - Substantial Competition" under "Item 3. Key Information". Competition in the biopharmaceutical industry is based primarily on product performance, including efficacy, safety, ease of use and adaptability to various modes of administration, patient compliance, price, acceptance by physicians, marketing, and distribution. Barriers to entry into the market include the availability of patent protection in the United States and other jurisdictions of commercial interest and the ability and time needed and cost required to obtain governmental approval for testing, manufacturing and marketing. Antiarrhythmia Drug Market The Company is aware of a number of companies engaged in the development of drugs in the cardiac arrhythmia therapeutic area. Additionally, there are a significant number of other pharmaceutical and biotechnology companies developing and/or marketing ion channel focused therapeutics. Some of these Page 27 companies have substantially more financial and technical resources, more extensive research and development capabilities, products at a later stage of development, and greater marketing, distribution, production and human resources than the Company. However, there are many serious cardiovascular diseases for which existing therapies are inadequate. One of the key inadequacies of many drugs is safety. Cardiome seeks to develop atria-selective ion channel-modulating drugs to overcome this inadequacy as it has found that these drugs are safer than existing therapies in initial animal studies. Cardiome's competitive advantage lies in its experience in the fields of ion channels, pathology of arrhythmias, toxicology and pharmacology, which is the science that deals with the origin, nature, chemistry, effects, and uses of drugs, and its ability to develop relevant in vitro and in vivo models for specific pathologies. There is extensive competition within the areas of antiarrhythmic drugs from existing therapies and therapies under development. In 1999, worldwide sales of pharmaceuticals to treat atrial arrhythmias were approximately U.S.$1.1 billion. The largest class in antiarrhythmic drug sales are Class I drugs (1999 sales of U.S.$303 million) which block sodium channels in cardiac cells. Class I drug examples are Rhythmol, Tambocor and Quinaglute. Class II drugs (U.S.$133 million) consist of beta blockers such as Inderol. Class III drugs (U.S.$281 million) are potassium-channel blockers such as Cordarone and Betapace. Class IV drugs (U.S.$255 million) are calcium-channel blockers such as Cardizem. Congestive Heart Failure Market The Company believes that oxypurinol, as a treatment for congestive heart failure, will be the first drug of its kind in connection with the treatment of congestive heart failure. To date, digoxin is the only known approved drug able to increase myocardial contractility with minimal increases in cardiac oxygen demand. Given that digoxin has a limited therapeutic index, which is the experimental index of the relative safety of a compound, it must be closely monitored with regular blood tests to avert the possibility of side effects that may include cardiac arrhythmia, which is often fatal. Other inotropic agents such as dopamine and dobutamine also increase myocardial contractility, but also have narrow therapeutic indices, thus minimizing their utility in the treatment of congestive heart failure. The current standard of care for congestive heart failure consists primarily of diuretics, digoxin, angiotensin converting enzyme inhibitors, or ACE- inhibitors and in some cases, a beta blocker. However, treatment options for this complicated disease may employ various combinations of the following: 1. Diuretics such as furosemide and spironolactone that remove excess fluid and decrease the workload of the heart and improve symptoms and survival. 2. Cardiac glycosides, like digoxin, that increase contractility of the heart and provide an improved neuro-hormonal environment thereby reducing the workload on the heart, improving symptoms and reducing hospitalizations. 3. Vasodilators like the nitrates, ACE-inhibitors, angiotensin II inhibitors, and calcium channel antagonists that reduce the workload of the heart, reduce blood pressure, improve coronary blood flow, improve symptoms and, in some studies like those with ACE-inhibitors, improve survival. 4. Alpha and beta adrenergic blockers, like doxazosin and carvedilol, reduce physiologic stressors, reduce the heart rate and allow the heart to function more efficiently and effectively and in the case of beta blockers, may increase survival. 5. Inotropic agents like dopamine and dobutamine are used in very severe cases to increase the contractility of the heart and improve its output. Patents and Proprietary Protection Cardiome considers its patent portfolio as one of the key value contributors to its business; therefore, the Company devotes a substantial amount of resources each year to maintaining and augmenting its patent portfolio. The Company's patent strategy is to pursue the broadest possible patent protection on its proprietary products and technology in selected jurisdictions. Accordingly, for novel compounds, claims for the compound, Page 28 composition and use will be made and for known compounds, claims directed to novel composition and/or use will be made in the patent application. The Company plans to protect its technology, inventions and improvements to its inventions by filing patent applications in selected key countries according to industry standard in a timely fashion. In addition to its patents, Cardiome also relies upon trade secrets, know-how and continuing technological innovations to develop its competitive position. It is Cardiome's policy to require its directors, employees, consultants, members of its scientific advisory board and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with the Company. In the case of employees and consultants, the agreements provide that all inventions resulting from work performed for the Company utilizing property of Cardiome or relating to the Company's business and conceived of or completed by the individual during employment are the exclusive property of the Company to the extent permitted by law. As of March 31, 2002, the Company holds rights to 122 patents and patent applications in the United States and other jurisdictions in respect of certain core technologies utilized by the Company. To date, 18 patents have been issued in the United States and other jurisdictions. Given that the patent applications for these technologies involve complex legal, scientific and factual questions, there can be no assurance that patent applications relating to technology used by the Company will result in patents being issued or that, if issued, the patents will provide a competitive advantage or will afford protection against competitors with similar technology, or will not be challenged successfully or circumvented by competitors. The Company is required to pay milestone payments and royalties for the 21 patents or patent applications licensed from, or for which Cardiome has been granted commercial rights by, the University of British Columbia and JHU. Of these patents or patent applications, 17 have been licensed under the UBC License described below under "Business Overview - Licenses and Collaborative Research Agreements - UBC License and UBC Research Agreement" and four have been licensed under the JHU License. See "Business Overview - Licenses and Collaborative Research Agreements - JHU License". The Company has no royalty obligations associated with any of the remaining of 101 patents or patent applications in its portfolio. Regulatory Environment The research and development, manufacture and marketing of pharmaceutical products are subject to regulation for safety and efficacy. Drug licensing laws require licensing of manufacturing facilities, carefully controlled research and testing of products, governmental review and approval of results prior to marketing of therapeutic products, and adherence to Good Manufacturing Practices during production. In the United States, these activities are subject to rigorous regulation by the U.S. Food and Drug Administration, or FDA, and in Canada, these activities are regulated by the Food and Drug Act (Canada) and the rules and regulations promulgated thereunder, which are enforced by the Canadian Therapeutic Products Directorate, or TPD. The success of the Company is ultimately dependent on obtaining marketing approval for drugs currently under development and will depend on its ability to comply with worldwide regulations governing the manufacturing, quality control, pre-clinical evaluation, and clinical testing of investigational new drugs. Depending upon the circumstances surrounding the clinical evaluation of a product, the Company may undertake clinical trials, contract clinical trial activities to contract research organizations or rely upon corporate partners for such development. This approach will allow the Company to make cost effective developmental decisions in a timely fashion. See "Business Overview - Business Strategy - Collaboration Strategy" and "Risk Factors" under "Item 3. Key Information". The principal activities that must be completed after initial research and before obtaining approval for marketing in Canada and the United States are as follows: 1. pre-clinical studies, which includes pharmacological and efficacy testing in animals, toxicology testing and formulation work based on in vitro results, performed to assess the safety and potential efficacy of the product; 2. submission of an investigational new drug, or IND, application, which must become effective before human clinical trials commence; Page 29 3. Phase I clinical trials, the initial introduction of the product into human subjects, under which the compound is tested for safety, dosage, tolerance, metabolic interaction, distribution, excretion and pharmacodynamics; 4. Phase II clinical trials involving studies in a limited patient population to: (1) determine the efficacy of the product for specific, targeted indications, (2) determine optimal dosage, and (3) identify possible adverse effects and safety risks; 5. Phase III clinical trials which are undertaken to further evaluate clinical efficacy of the product and to further test for its safety within an expanded patient population at geographically dispersed clinical study sites; 6. the submission of a New Drug Application, or NDA, to the government authorities in the United States, or a new drug submission, or NDS, in Canada; and 7. FDA approval of an NDA and TPD approval of an NDS prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of its manufacturing facilities. Two key factors influencing the rate of progression of clinical trials are the rate at which patients are available to participate in the research project and whether effective treatments are currently available for the disease that the drug is intended to treat. An IND must be filed and accepted by the TPD or FDA, as applicable, before each phase of human clinical trials may begin. The IND application must contain specified information including the results of the pre-clinical studies or clinical tests completed at the time of the IND application. In addition, since the method of manufacture may affect the safety and efficacy of a drug, information on manufacturing methods and standards and the stability of the drug substance and the dosage form must be presented so that the TPD or FDA can ensure that the product that may eventually be sold to the public has the same composition as that determined to be effective and safe in the clinical trials. Production methods and quality control procedures must be in place to ensure a relatively pure compound, essentially free of contamination and uniform with respect to all quality aspects. Upon completion of all clinical studies the results are submitted to the TPD as part of a Canadian NDS or to the FDA as part of a Product License Application or NDA to obtain approval to commence marketing the product. In addition, an establishment license application must be filed and approved by the FDA or TPD for the production of a product and test sites must demonstrate that Good Laboratory Practices and Good Clinical Practices have been maintained during pre-clinical and clinical evaluation. The Company may partner later stage development of its drug candidates with companies that have experience in manufacturing in accordance with Good Laboratory Practices and Good Clinical Practices. Even after marketing approval for a drug has been obtained, further studies may be required (sometimes called Phase IV studies). Post-market studies may provide additional data on safety and efficacy necessary to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested and approved. The research and development, manufacture and marketing of pharmaceutical products are subject to regulation in the United States by the FDA, in Canada by the TPD and by comparable authorities in other foreign countries. These national agencies and other federal, state, provincial and local entities will regulate the testing, manufacture, safety and promotion of any products that may be developed. Page 30 Licenses and Collaborative Research Agreements Cardiome and its subsidiaries are parties to the following licenses and collaborative research agreements: UBC License and UBC Research Agreement By agreement dated February 12, 1992, the Company acquired an option from the University of British Columbia, or UBC, to license the inventions which underlie some of the Company's novel antiarrhythmic compounds. These compounds form the basis of part of the Company's research and development efforts, being certain technology relating to aminocyclohexylamides for antiarrhythmic and local anaesthetic uses, which is referred to as the Technology. On March 29, 1996, the Company entered into a formal license agreement with UBC, or the UBC License, whereby UBC granted the Company, in consideration for the sum of $20,000 (paid) and the issuance of 25,000 common shares (issued), an exclusive, world-wide license to use and, subject to the consent of UBC, sublicense the Technology, and any improvements thereto, for antiarrhythmic and local anaesthetic uses, and to manufacture, distribute and sell products derived therefrom to the general public during the term of the UBC License. The UBC License will terminate upon the expiration of the last patent obtained under it. Under the terms of the UBC License, the Company has agreed to issue to UBC a further 25,000 common shares within 30 days of the commencement of Phase III clinical trials and an additional 25,000 common shares within 30 days of receipt of notice of new drug approval for the first drug covered by a patent of the Technology. The Company is also required to pay to UBC quarterly royalties from manufacturing revenues ranging from 1.5% for products developed from improvements to the Technology made by the Company to 3.5% for products developed from the Technology or improvements to the Technology made by UBC or UBC and the Company together, and further royalties from sublicensing revenues, subject to minimum annual royalties of $10,000 in the first two years of commercial sale and $50,000 thereafter. In addition, the Company will pay all costs associated with patent applications. The Company is required to pay UBC a $75,000 grant in each of the first five years of the UBC License (as at November 30, 2001, all fully paid), to be used at UBC's discretion to fund basic scientific research related to some aspects of the Technology to be undertaken by UBC in the laboratory of Dr. Michael Walker or his successor. The Company does not have any rights in any intellectual property arising from such research. In addition, the Company and UBC have entered into a five year research agreement, or the UBC Research Agreement, dated March 1, 1997, under which the Company is required to fund a specific and mutually agreed upon research project with respect to the Technology by paying to UBC a further $75,000 plus a further sum equal to 38% of overhead costs associated with the project, estimated at $28,500, in each of the first five years of the UBC Research Agreement (as at November 30, 2001, all fully paid). Under the UBC Research Agreement, the Company has an option to license, on an exclusive worldwide basis, any intellectual property arising from the work at UBC under the UBC Research Agreement. The UBC License and the UBC Research Agreement constituted arm's length transactions. The consideration payable under both agreements was determined through negotiations between the Company and UBC. JHU License Pursuant to an agreement dated April 18, 2001, as amended by agreement dated October 18, 2001 between the Company and JHU, the JHU License, the Company has obtained the exclusive worldwide rights to U.S. patent application Serial No. 09/186,755 (which subsequently matured into U.S. Patent No. 6,191,136 B1) and Patent Cooperation Treaty application PCT US98/23878, each filed on November 5, 1998 and European Patent Office application filed August 2, 2000 all of which were assigned to JHU and entitled "Methods for Treatment of Disorders of Cardiac Contractility", and which are referred to as the Patent Rights. The Patent Rights relate to the therapeutic, diagnostic and commercial use of XO Inhibitors for cardiovascular and neuromuscular disease, which is referred to as the Licensed Field. The Company also obtained the exclusive option to any and all technologies developed by JHU in the Licensed Field of which Eduardo Marb n, M.D. is the inventor. In consideration for the JHU License, Cardiome has paid JHU an initial license fee of U.S.$50,000. In addition, Cardiome is obligated to pay a royalty to JHU on net sales of any product developed by Paralex with the Patent Rights. If a product developed by Cardiome contains both the Patent Rights and other active ingredients, the royalty rate may be reduced, subject to a minimum Page 31 royalty rate. Cardiome's royalty payment obligation will terminate upon expiration of the Patent Rights. Further, the annual royalties are subject to certain annual minimum royalties which increase annually for the first six years that such royalties are payable. As additional consideration for the JHU License, the Company's wholly-owned subsidiary, Paralex previously issued (i) 390,000 shares of its common stock to JHU and (ii) 210,000 shares of its common stock to Dr. Marb n for a purchase price of $0.001 per share. These shares of Paralex have now been exchanged for common shares of the Company pursuant to the acquisition completed on March 8, 2002. Cardiome must reimburse JHU up to U.S.$67,500 for all costs associated with the preparation, filing, maintenance and prosecution of the Patent Rights and certain legal fees. ILEX License Pursuant to a license agreement dated December 19, 2001, or the ILEX License, between the Company and ILEX Oncology, Inc., or ILEX, ILEX granted the Company an exclusive worldwide sublicense to all of ILEX's rights under a license agreement dated March 31, 1995, between ILEX on the one hand, and Burroughs Wellcome Co. and The Wellcome Foundation, Ltd., collectively referred to as BW, on the other, as amended, which is referred to as the Original License Agreement, in the field of the treatment of hyperuricemia (gout) in humans who are intolerant of allopurinol. Under the Original License Agreement, BW had granted an exclusive license to ILEX in BW's know-how regarding, among other things, the manufacture and use of oxypurinol in that field. Under the ILEX License, ILEX also granted the Company an exclusive worldwide license, in that field, in ILEX's know-how concerning manufacture and certain uses of oxypurinol and in ILEX's oxypurinol IND, to make, have made, use, offer to sell and sell products comprising or containing oxypurinol, including an exclusive license in the ILEX trademark "OXYPRIM" for use in connection with sales efforts concerning relevant products. ILEX further granted the Company an option until December 2002 to purchase for U.S.$250,000 certain clinical trial data ILEX has and may acquire in the future, to evaluate the usage of oxypurinol in hyperuricemic patients intolerant to allopurinol. The Company plans to exercise that option. The Company also obtained the right to grant sublicenses in the above, subject to ILEX approval. Under the ILEX License, the Company agreed to pay ILEX upon execution, an initial fee of U.S.$250,000 (which has been paid by Paralex). The Company also agreed to pay BW a U.S.$200,000 milestone payment (upon FDA approval of an NDA incorporating oxypurinol) and royalties based on net sales of relevant products (subject to certain conditions), all as would otherwise be required of ILEX under the Original License Agreement. In addition, the Company agreed to perform ILEX's obligations under the Original License Agreement concerning a compassionate use program regarding relevant products. Further, the Company agreed to pay certain milestone payments to ILEX tied to the regulatory approval process. The Company also agreed to pay royalties to ILEX based on net sales of relevant products, subject to certain conditions. Finally, the Company agreed to reimburse ILEX for certain expenses, and to purchase certain supplies from ILEX. The term of the ILEX License extends until the expiration of ILEX's obligation to pay royalties under the Original License Agreement (determined on a country-by-country basis), at which time the rights licensed or sublicensed to the Company convert to a fully paid, non-exclusive, irrevocable royalty-free license or sublicense. The ILEX License purports to provide each party with the right to terminate based on certain insolvency events of the other, or if the other's breach continues after notice and beyond defined cure periods. It also provides the Company with the right to terminate upon termination of the Original License Agreement. Marban Agreement Pursuant to an agreement entered into in May 2001 and effective as of January 1, 2002, or the Marban Agreement, between the Company and Cardiosciences Consulting, Inc. ("CCI"), a private company owned by Dr. Eduardo Marban, CCI agreed to cause Dr. Eduardo Marban, the inventor of the technology licensed under the JHU License, to provide advisory services to the Company with regard to therapeutic applications of XO Inhibitors, for up to twelve days per year. The Marban Agreement states that materials, including inventions, prepared by or furnished to CCI or Dr. Marban as a direct result of performing services under the Marban Agreement will be owned exclusively by Paralex. Various obligations owed to the Company under the Marb n Agreement are expressly made subject to policies of and obligations owed by CCI and Dr. Marban to JHU. Page 32 The Company agreed to pay CCI U.S.$100,000 per year for Dr. Marban's services under the Marban Agreement, plus reimbursement of certain expenses. To date, the Company has paid Dr. Marban U.S.$25,000 under the Marban Agreement. The Marban Agreement has a term of four years. It contains no provision concerning any renewal of that term. The Marban Agreement also provides that it will automatically terminate in the event Dr. Marban is no longer available to render and is not rendering services thereunder, due to his obligations to JHU, his physical or mental disability, or his death. Antalium Collaborative Research and License Agreement The Company entered into a collaborative research and license agreement with Antalium Inc., or Antalium, on November 30, 2000, for the worldwide rights for the development and commercialization of certain nociblocker compounds developed by the Company. Pursuant to the agreement, Antalium has a right to select certain compound(s) from a group of test compounds delivered by the Company on or before May 31, 2002. As of the date of this Annual Report, Antalium has not selected any test compounds. Antalium agreed to pay the Company milestone payments and royalties based on future net sales for those compounds selected for further development. The license agreement will terminate if certain development milestones are not met. Unless otherwise terminated, the agreement will expire upon the expiration of the last issued patent. Antalium also agreed to provide screening and other tests on research compounds for the Company's cough project. MacLeod and Quastel Agreement By agreement dated November 19, 1997 entered into between the Company and Drs. MacLeod and Quastel, the Company acquired ownership to certain intellectual property related to nociblocker technology and all their therapeutic uses. The agreement provides that the Company will pay to each of Drs. MacLeod and Quastel $25,000 in each of the first five years as a University grant-in-aid, commencing April 1, 1997 (as at November 30, 2001, all fully paid). The Company is also required to pay to each of Drs. MacLeod and Quastel $250,000 upon commencement of Phase III clinical trials on a nociblocker compound licensed to the Company under the agreement, and a further $1,000,000 upon the filing of a new drug application in the United States or Canada for a nociblocker compound licensed by the Company under the agreement. The agreement further requires the Company to spend a minimum of $200,000 each year for five years on the research and development of drugs using nociblocker technology, which includes expenditures under the cough project and nociblocker project (as at November 30, 2001, minimum financial commitment satisfied). The Company does not currently devote any resources to research on the nociblocker or cough projects, other than to fulfill its minimum obligation under the agreement and to maintain patents. The consideration payable under the agreement was determined by arm's length negotiations between the Company and Drs. MacLeod and Quastel. AstraZeneca License Cardiome entered into a license agreement dated October 16, 2000 with AstraZeneca A.B, or AstraZeneca. Under the terms of the license agreement, or AstraZeneca License, Cardiome granted AstraZeneca an exclusive worldwide license to develop and market an antiarrhythmic compound, RSD1122, developed by the Company, in exchange for initial, milestone, and royalty payments. AstraZeneca assumed responsibility for all costs for the development and marketing of RSD1122. The AstraZeneca License would be terminated if certain development milestones were not met or after appropriate notice was given by AstraZeneca. On March 28, 2002 Cardiome announced that it had received a notice from AstraZeneca that AstraZeneca does not intend to proceed with clinical development of RSD1122. In accordance with the AstraZeneca License, AstraZeneca will return all rights and pre-clinical data associated with RSD1122 in June 2002 and the AstraZeneca License will terminate. Cardiome intends to evaluate the AstraZeneca pre-clinical data and, following consultation with its board of directors and scientific advisory board, decide whether or not to carry out and fund future research and development on this drug candidate. Page 33 Facilities The Company currently leases 10,030 square feet of office and laboratory space for research, development and administrative purposes in Vancouver, British Columbia. The premises are located on the UBC Endowment Lands. The term of the lease is 24 months ending on March 31, 2004. The Company may, at its option, extend the term of the lease for an additional two 24-month periods. Annual lease payments were $237,000 per annum until June 30, 2000, $254,000 per annum until March 31, 2002 and are currently $261,000 per annum. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------- OPERATIONS - ---------- The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes therein, which are prepared in accordance with Canadian GAAP. These accounting principles differ in certain respects from U.S. GAAP. The differences as they affect the consolidated financial statements of the Company are described in Note 16 to the consolidated financial statements. Since its reorganization in 1992 as a drug research and development company, Cardiome has devoted its resources primarily to fund its research and development programs. The Company's business is still at an early stage of development and has been unprofitable. The Company expects to incur additional losses for the next several years as it invests in product research and development, pre-clinical studies and clinical trials, and regulatory compliance. During the years ended November 30, 2001, November 30, 2000 and November 30, 1999, the Company incurred $5,498,838, $4,732,656 and $3,585,593, respectively, on research and development. The Company believes research and development costs will continue to increase in proportionate share to its overall budget as Cardiome moves its lead compounds in antiarrythmics toward and through clinical trials. The Company does not anticipate revenues from product sales in the foreseeable future. Over the next several years, the Company expects to derive its sources of funding from interest income and equity financing and, to the extent negotiated, licensing and collaborative research agreements. All or a portion of the payments that may be received under these agreements will likely be conditional on Cardiome achieving certain development milestones. Change In Critical Accounting Policies The following critical accounting policies involve significant judgments and estimates that are used in the preparation of the Company's consolidated financial statements. Revenue Recognition The Company records research collaborative fees, which are non-refundable, as revenue as the related research expenses are incurred pursuant to the terms of the agreement and provided collectibility is reasonably assured. Option fees are recognized when the Company has fulfilled the obligation in accordance with the provisions of the contractual arrangement. Licensing fees comprise initial fees and milestone payments derived from collaborative licensing arrangements. When the Company has no further involvement or obligation to perform under the arrangement and the related costs and effort are considered substantial, non-refundable milestone payments are recognized upon the achievement of the specified milestones. Otherwise, non-refundable milestone payments and initial fees are deferred and amortized into revenue on a straight-line basis over the term of the relevant license or related underlying product development of ten years. Effective June 1, 2001, the Company adopted a new accounting policy for recognizing license fees to be consistent with U.S. GAAP, as clarified by Staff Accounting Bulletin 101 ("SAB 101") Revenue Recognition in Financial Statements, which was issued by the U.S. Securities and Exchange Commission in December 1999. License fees, which consist of initial upfront fees and milestone payments are deferred and amortized into revenue on a straight-line basis over the term of the relevant license or related underlying product development period if the Company has future involvement or obligation to perform under the Page 34 arrangement. Previously, the Company recognized upfront license fees and milestone payments as earned in accordance with the terms of the related agreement which was generally the period the payment was received. Research and Development Expenses Research costs are expensed in the year incurred. Development costs are expensed in the year incurred unless the Company believes a development project meets generally accepted accounting criteria for deferral and amortization. Technology, License and Patent Costs The fair value of the technology acquired by the Company has been recorded as other assets. Technology and licenses are amortized on a straight-line basis over a period of ten years. The Company capitalizes patent costs associated with the preparation, filing, and obtaining of patents. The cost of the patents is amortized on a straight-line basis over the estimated useful lives of the patents of ten years. The amounts shown for technology, license and patent costs do not necessarily reflect present or future values and the ultimate amount recoverable will be dependent upon the successful development and commercialization of products based on these rights. If management determines that such costs exceed estimated net recoverable value, based on estimated future cash flows, the excess of such costs are charged to operations. Results of Operations Year ended November 30, 2001 (fiscal 2001) Compared with the Year ended November 30, 2000 (fiscal 2000) The Company incurred a net loss of $7,157,885 ($0.69 per share) in fiscal 2001 as compared to $6,495,636 ($0.69 per share) in fiscal 2000. Revenue for fiscal 2001 decreased to $632,243 as compared to $723,352 for fiscal 2000. The decrease in revenue in 2001 was due to the decline of grant income and interest income. Research collaborative, licensing and options fees increased by $104,933 as compared to fiscal 2000. The additional revenue from collaborative research revenue was offset by a decline of $47,226 in grant income and a decline of $148,816 in interest and other income. The amortization of licensing revenue from the initial payment by AstraZeneca accounted for a significant portion of the increase in research collaborative, licensing and option fees. The decrease of grant income was due to the lower grant payments from the Science Council of BC as this one-year grant ended in April 2001. The decrease in interest resulted from a lower average cash balance during fiscal 2001 as compared to the fiscal 2000. See "- Liquidity and Capital Resources". Research and development expenses for fiscal 2001 increased to $5,498,838 as compared to $4,732,656 for fiscal 2000. The increase in research and development expenditures was primarily due to the cost associated with increased operational activities as the Company completed a Phase I clinical trial and initiated a Phase II clinical trial for its lead compound, RSD1235, and progressed in its Kv1.5 project, and enhanced its research and development capabilities. The increase was also attributed to cost associated with some pre-clinical work conducted in support of the Company's licensing activities for its Cough project. General and administration expenses for fiscal 2001 increased to $1,741,193 as compared to $1,569,044 for fiscal 2000. The increase was primarily due to the cost associated with added personnel and increased investor relations activities. Year ended November 30, 2000 (fiscal 2000) Compared with the Year ended November 30, 1999 (fiscal 1999) The Company incurred a consolidated net loss of $6,495,636 ($0.69 per share) in fiscal 2000 as compared to $4,451,320 ($0.66 per share) in fiscal 1999. Revenue for fiscal 2000 decreased to $723,352 as compared to $787,081 for fiscal 1999. The decrease in revenue for fiscal 2000 was due to the decline in licensing and option fees of $390,781 compared to fiscal 1999; this decrease was offset by the additional grant income of $89,553 collected mainly from Science Page 35 Council of BC and the increase of $237,499 in interest and other income. The increase in interest resulted from a higher average cash balance during fiscal 2000 as compared to fiscal 1999. Research and development expenses increased to $4,732,656 in fiscal 2000 as compared to $3,585,593 in fiscal 1999. The increase was primarily due to the cost associated with the expansion of research activities arising from clinical trials and other research initiatives, resulting in an increase in research and development contract costs, consulting, laboratory supplies and related expenses. Research and development activities in fiscal 2000 included a Phase II clinical trial of the Company's CP1 drug candidate for non-productive cough, and pre-clinical studies of RSD1235, RSD1122, and the Kv1.5 project. General and administration expenses increased to $1,569,044 in fiscal 2000 as compared to $997,890 in fiscal 1999. The increase in general and administration expenses was primarily due to higher consulting and professional fees, regulatory fees and travel and accommodation expenses resulting from the Company's listing on the Toronto Stock Exchange and the closing of the AstraZeneca licensing deal. Year ended November 30, 1999 (fiscal 1999) Compared with the Year ended November 30, 1998 (fiscal 1998) The Company incurred a consolidated net loss of $4,451,320 ($0.66 per share) in fiscal 1999 as compared to $5,168,419 ($0.82 per share) in fiscal 1998. Revenue for fiscal 1999 increased to $787,081 as compared to $553,287 for fiscal 1998. The increase in revenue for fiscal 1999 was primarily due to the additional revenue of $254,109 generated from collaborative agreements and $41,576 of grant income compared to fiscal 1998; these increases were offset by a decline in interest and other income of $61,891. Research and development expenses increased to $3,585,593 in fiscal 1999 as compared to $3,498,787 in fiscal 1998. The slight increase of research and development was primarily due to the expansion of the Company's research team and facilities for additional in house pre-clinical studies. Research and development activities in fiscal 1999 included Phase I clinical trial of the Company's CP1, drug candidate for non-productive cough, and pre-clinical studies of the cough and antiarrhythmic research programs. General and administration expenses decreased to $997,890 in fiscal 1999 as compared to $1,553,337 in fiscal 1998. The decrease in general administration expenses was primarily due to the lower consulting and professional fees, and travel and accommodation expenses. Liquidity and Capital Resources Since its change of business to pharmaceutical research and development in 1992, the Company has financed its operations through equity financing, research fees, government grants and tax credits. In fiscal 2001, the Company received a net proceeds of $966,000 from the sale of special warrants. In fiscal 2000 the Company received $7,348,434 in net proceeds from the sale of equity securities, $509,995 upon exercise of warrants, and $151,190 upon exercise of options. On a prospective basis, the Company intends to meet its financial requirements through such means as strategic alliances with multinational drug companies, and a combination of private and public equity financings. At November 30, 2001, the Company's cash and cash equivalents and short-term investments aggregated $4,183,580 as compared to $10,219,140 at November 30, 2000. The Company invests its cash reserves in highly liquid, highly rated financial instruments such as treasury bills, commercial papers and banker's acceptances. The Company's working capital at November 30, 2001 was $3,523,091 as compared to $9,519,044 at November 30, 2000. Subsequent to the year ended November 30, 2001, the Company received additional capital resources to fund its ongoing operation through equity financing. On March 8, 2002, the Company successfully completed a public offering of 9,309,657 units of the Company at a price of $3.32 per unit for gross proceeds of $30,908,061. Each unit consists of one common share in the capital of the Company and one quarter of one common share purchase warrant of the Company. One whole warrant entitles the holder thereof to purchase one common share of the Company at any time on or before March 8, 2004 at a price of $6.64 per share. In connection with the offering, the Company paid a cash commission of $2,163,564 and issued brokers' warrants to purchase 930,966 units Page 36 (exercisable on or before March 8, 2004 for 930,966 common shares and warrants to purchase an additional 232,742 common shares at an exercise price of $6.64 per share) at a price of $3.80 per unit to the agents of the offering. In addition, on March 8, 2002, the Company completed the acquisition of all of the outstanding shares of Paralex, in exchange for 8,203,396 common shares of the Company. The Company plans to use part of the proceeds from the public offering completed on March 8, 2002, to finance the research operations of Paralex for the next two years. The Company expects that reliance on equity financing will continue during pre-clinical development and through the early clinical stages of development. The longer-term sustainability of the Company is expected to be achieved through collaborative and licensing arrangements and the creation, development and ultimate licensing or sale of intellectual property. As much as possible, the licensing or sale of intellectual property will be carried out so as to ensure an appropriate balance between future earnings potential and current liquidity. As a result of receiving additional equity financing on March 8, 2002, the Company believes that it has sufficient resources to fund operations in the next two years. However, the Company's future cash requirements may vary materially from those now expected due to a number of factors, including the progress of clinical trials, progress in product development and changes in the focus and direction of the Company's product development projects. The Company will continue to rely on outside sources of financing to meet its capital needs beyond the next two years. However, there can be no assurance that additional financing will be available on acceptable terms, if at all. If the Company is unable to obtain adequate financing, it will be necessary for the Company to delay, curtail or cancel further development of some or all of its technologies and the Company's business, financial condition and results of operations could be materially adversely affected. See "Risk Factors" under "Item 3. Key Information". ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ================================================================================ DIRECTORS AND EXECUTIVE OFFICERS - -------------------------------- Immediately following the acquisition of Paralex on March 8, 2002, Cardiome reconstituted its Board of Directors. Mark Rogers, M.D. (newly elected Chairman of the Board), Myron Weisfeldt, M.D., Ralph Snyderman, M.D., Fred Mermelstein, Ph.D. and Elizabeth Rogers, M.D. joined previous board members Michael Walker, Ph.D. (founder and former Chairman of the Board), Robert Rieder (President and Chief Executive Officer), Alan Ezrin, Ph.D. (Chief Scientific Officer) and Kim Sun Oh. All directors hold office until the next annual meeting of the shareholders of the Company or until they resign or are removed from office in accordance with the Company's articles and by-laws and the Canada Business Corporations Act. Directors and executive officers of the Company, their position and the period during which each has served as a director or officer are as follows: Name Position Period Served - -------------------------------------------------------------------------------- Mark Rogers Director since 2002 Chairman of the Board since 2002 Robert W. Rieder Director since 1997 President, Chief Executive Officer since 1998 Alan M. Ezrin Director, Chief Scientific Officer since 2001 Michael J. A. Walker Director since 1992 Kim Sun Oh Director since 1997 Fred Mermelstein Director since 2002 Page 37 Name Position Period Served - -------------------------------------------------------------------------------- Myron Weisfeldt Director since 2002 Elizabeth Rogers Director since 2002 Ralph Snyderman Director since 2002 Gregory N. Beatch Vice President, External Scientific Affairs since 1997 Christina Yip Chief Financial Officer, Corporate Secretary since 2000 and Director of Finance and Administration The following are short biographies of the directors and executive officers of the Company: Mark C. Rogers, M.D., M.B.A. - Chairman and Director Dr. Mark Rogers has been Chairman of the Board and a director of the Company since March 2002. He is the President of Paramount Capital, Inc. ("Paramount") and Paramount Capital Investments, LLC ("PCI"), a biotechnology, biomedical and biopharmaceutical merchant banking firm, and the President of Paramount Capital Asset Management, Inc. ("PCAM"). PCAM serves as the general partner and/or investment manager of the Aries and Abington group of funds. Dr. Rogers is also a member of Orion Biomedical GP, LLC, which serves as the general partner to The Orion BioMedical Funds ("Orion"), which are closed-end, private equity funds focused in the biomedical sector. In addition, Dr. Rogers also serves as a director of Genta Incorporated (Nasdaq NM: GNTA), a company specializing in anti-sense drugs for cancer, as well as several public and privately held corporations. Dr. Rogers has also been appointed as advisor to the New York City Biotechnology Emerging Industries Fund. Dr. Rogers is a physician trained in four medical specialties, including cardiology. He was appointed Professor and Chairman of the Department of Anesthesiology and Critical Care Medicine at JHU, is the author of 150 publications and 11 books and is a member of the National Academy of Sciences' Institute of Medicine. While at JHU, Dr. Rogers was made Associate Dean, managing the clinical enterprises of the medical school and was involved in the formation of a number of biomedical companies now listed on NASDAQ. He subsequently became CEO of the Duke Hospital and Health Network. Dr. Rogers was then recruited to the Perkin-Elmer Corporation, a New York Stock Exchange company specializing in analytical instruments, especially DNA sequencers, as Senior Vice President for Mergers and Acquisitions. He was involved in the restructuring of that business (now named Applera Corporation " (Applera")), which ultimately led to the creation of the Celera Genomics Group of Applera, the company that sequenced the human genome and is listed on the NYSE. At Paramount, Dr. Rogers has been involved in the creation and growth of several start-up companies, including PolaRx BioPharmaceuticals, Inc. ("PolaRx") and Innovative Drug Delivery Systems, Inc. ("IDDS"). Dr. Rogers served as Chairman of the Board of PolaRx, which had acquired the rights to arsenic trioxide for the treatment of Acute Promyelocyric Leukemia ("APL"). Following NDA submission, PolaRx was sold to Cell Therapeutics, Inc. (Nasdaq NM: CTIC). Dr. Rogers received his M.D. from Upstate Medical Center and his M.B.A. from The Wharton School of Business. He received his B.A. from Columbia University and held a Fulbright Scholarship. Dr. Rogers is married to Dr. Elizabeth Rogers who is also a director of the Company. Dr. Rogers is a member and Chair of both the Compensation Committee and Nomination Committee of the Company. Robert W. Rieder, M.B.A. - President, Chief Executive Officer (CEO) and Director Mr. Rieder has been a director since April 1997, and has been employed by the Company on a full-time basis as its President and CEO since April 1998. Mr. Rieder has extensive experience in venture capital and in operational management. He was most recently (1994 to 1998) Vice-President at MDS Ventures Pacific Inc., the Vancouver-based affiliate of MDS Capital Corp. Mr. Rieder was Chief Operating Officer for dba Telecom Inc. in 1994, and was a director of SFG Technology Inc., both Vancouver-based technology companies. Mr. Rieder Page 38 currently serves as a director of Micrologix Biotech Inc. and Synapse Technologies Inc. Mr. Rieder received his MBA from the University of Western Ontario. Mr. Rieder is a member of the Nomination Committee of the Company. Alan M. Ezrin, Ph.D. - Chief Scientific Officer (CSO) and Director Dr. Ezrin has been a director and the Company's CSO since January 2001. Dr. Ezrin has extensive research and development and business experience in both the large pharmaceutical industry and in the biotechnology sector in the U.S. and Canada. Dr. Ezrin was with Sterling-Winthrop Research Group from 1982 to 1993. In 1993, Dr. Ezrin joined Glycomed Inc. as Assistant Vice-President of Development focusing on carbohydrate-based therapeutics. Following the successful merger of Glycomed into Ligand Therapeutics, he joined RedCell Inc. as Vice-President of Development in 1995. In 1997, he led the restructuring of RedCell through creating ConjuChem Inc. in Montreal. At ConjuChem, Dr. Ezrin was acting Chief Executive Officer and then Chief Scientific Officer. Under his leadership, ConjuChem completed several pharmaceutical partnerships, positioned two new drugs in clinical trials and extended the patent portfolio, resulting in a publicly traded, product driven company. Dr. Ezrin received his Ph.D. in Pediatric Cardiology and Cardiovascular Pharmacology from the University of Miami School of Medicine. Dr. Ezrin is a member of the Nomination Committee of the Company. Michael J.A. Walker, Ph.D. - Director Dr. Walker was the Chairman of the Board from January 16, 1996 to March 11, 2002 and has been a director of the Company since February 12, 1992. Dr. Walker devotes approximately 20% of his time towards the scientific direction and general corporate development of the Company. Dr. Walker has been a Professor of Pharmacology in the Faculty of Medicine at UBC since 1986. He graduated with a specialized degree in pharmacology at the University of London, trained in industrial pharmacology at Pfizer, UK, and has held teaching positions in Europe, Asia and Africa. Dr. Walker is also the President and a director of Rhythm-Search. Dr. Walker is a member and Chair of the Corporate Governance Committee of the Company. Kim Sun Oh, C.P.A. - Director Mr. Oh was appointed to the Company's Board of Directors in November, 1997 upon the closing of a private placement with the Chemical Company of Malaysia Berhad (CCM), as required by the terms of CCM's subscription agreement. Mr. Oh is the Group Executive Director of the CCM Group. Mr. Oh, a Malaysian certified public accountant, orchestrated the management buy-out of CCM from Imperial Chemical Industries Ltd. where he had held various senior executive positions for several years. Mr. Oh currently serves as a director of IMPAX Laboratories Inc., a public company listed on NASDAQ and Immune Network Ltd., a public company traded over the NASD OTC Bulletin Board. Mr. Oh is a member and Chair of the Audit Committee of the Company. Fred H. Mermelstein, Ph.D. - Director Dr. Mermelstein serves as Director of Venture Capital at Paramount Capital Investments, LLC., where he has been involved in the founding of a number of biotechnology start-up companies, including PolaRx and IDDS. He has served as Director and Chief Scientific Officer of PolaRx and President of both Androgenics Technologies, Inc. ("Androgenics") and IDDS. He serves on the Board of Directors of a research foundation, the Jordan Heart Foundation. Dr. Mermelstein is also a member of Orion. Dr. Mermelstein is the author of 14 publications in peer-reviewed scientific journals, three patents, and recipient of several research grants from both the U.S. Army and National Institutes of Health ("NIH"). Most recently, Dr. Mermelstein has been selected as advisor to both the New York Emerging Industries Fund and Technology Transfer Fund of the New York Economic Development Organization. Dr. Mermelstein received a Ph.D. joint degree in both pharmacology and toxicology at Rutgers University and University of Medicine and Dentistry of New Jersey-Robert Wood Johnson Medical School ("UMDNJ-RWJ"). He completed his post-doctoral training in transcription/gene regulation as a research fellow of the Howard Hughes Medical Institute located in the Department of Biochemistry at UMDNJ-RWJ. Dr. Mermelstein is a member of the Audit Committee and the Compensation Committee of the Company. Page 39 Myron Weisfeldt, M.D. - Director Dr. Weisfeldt is currently the Chairman of the Department of Medicine at JHU. Dr. Weisfeldt is known for his research in cardiopulmonary resuscitation, including advocacy of public access to portable defibrillators, as well as research on cardiovascular ageing and acute coronary artery disease. He began at JHU in 1972 as Assistant Professor of Medicine and Director of the Peter Belfer laboratory for myocardial research, became Director of the Division of Cardiology in 1975, Professor of Medicine in 1978 and the Robert L. Levy Professor of Cardiology in 1979. Since 1991, Dr. Weisfeldt has served as Samuel Bard Professor of Medicine and Chair of the Department of Medicine at Columbia University's College of Physicians and Surgeons. In October 2001, Dr. Weisfeldt was made the William Osler Professor and Chairman of the Department of Medicine at JHU. He has been on several advisory committees for the NIH, including serving as Chairman of the National Heart, Lung and Blood Institute's Cardiology Advisory Board and as a member of the Board of Scientific Counselors of the National Institute on Ageing ("NIA"). Currently he is a member of the National Advisory Council of the NIA. Involved in the first use of the automatic implantable defibrillator and the initial studies of clot-busting drugs in the treatment of heart attack, Dr. Weisfeldt was awarded the American Heart Association's Award of Merit in 1989 and its Gold Heart Award in 1996. He holds four patents and is an author of more than 200 research papers. Most of his more than 200 articles relate to cardiac diseases and therapy, including some on public policy involving defibrillation. He has also served on the editorial boards of several prestigious cardiology journals, including the American Journal of Cardiology, Circulation and Circulation Research. Dr. Weisfeldt received his Bachelor and Medical Degrees with honors from JHU in 1962 and 1965, respectively. After completing his internship and residency in medicine at Columbia-Presbyterian from 1965 to 1967, he worked as a clinical associate for the NIH's Gerontology Research Center, and from 1969 to 1972 was at Massachusetts General Hospital in Boston as a Senior Assistant Resident in Medicine, then a Clinical and Research Fellow in Cardiology. Dr. Weisfeldt is a member of the Audit Committee of the Company. Elizabeth Rogers, M.D. - Director Dr. Elizabeth Rogers received her B.A. Degree from Mt. Holyoke College in 1967 and her M.D. degree from Thomas Jefferson University in 1971 and is board certified in Internal Medicine, Gastroenterology and Geriatrics. Dr. Rogers trained in Internal Medicine at Duke University Medical Center and in Geriatrics at JHU prior to joining the faculty at University of Maryland at Baltimore in 1992 where she became Professor of Medicine. In 1993, Dr. Rogers became Associate Dean of Clinical Science at Duke University Medical Center and, in 1999, became Chief of Staff at Veteran's Administration Hospital, an affiliated program of Yale University Medical School where she was responsible for the coordination of all medical activities. For the past year, Dr. Rogers has been a clinical consultant to the New York City Emerging Industries Fund and a medical consultant to Innovative Drug Delivery Systems, Inc. Dr. Rogers is married to Dr. Mark Rogers, Chairman of the Board and a director of the Company. Dr. Rogers is a member of the Corporate Governance Committee of the Company. Ralph Snyderman, Director Dr. Snyderman currently serves as President and CEO of the Duke University Health System based in North Carolina. He plays a leadership role in the Association of American Physicians, the Institute of Medicine and the Association of American Medical Colleges ("AAMC") that represents all U.S. medical schools and teaching hospitals. He currently serves as Chair of the AAMC. In 1987, Dr. Snyderman joined Genentech, the pioneering biomedical technology firm, as Vice President of Medical Research and Development and a member of their senior leadership team. A year later, he was promoted to Senior Vice President. While at Genentech, he led the development and licensing of several novel therapeutics and supervised approximately 300 staff members working in pharmacology, clinical research and regulatory affairs. Page 40 A graduate of Washington College in Chestertown, Md. (1961), Snyderman received his M.D., magna cum laude, in 1965 from the Downstate Medical Center of the State University of New York. He served his internship and residency in medicine at Duke and later worked as a Public Health Officer doing research in immunology at the NIH (1967-72). Dr. Snyderman received his first faculty appointment at Duke in 1972 where he rose rapidly through Duke's academic ranks, becoming Chief of the Division of Rheumatology and Immunobiology. By 1984, Snyderman was also the Frederic M. Hanes Professor of Medicine and Immunology. Following his career at Genentech, he returned to Duke as the James B. Duke Professor of Medicine in 1989 and Executive Dean since 1999. He has written nearly 350 manuscripts as well as numerous books. Dr. Snyderman is a member of the Compensation Committee and the Corporate Governance Committee of the Company. Gregory N. Beatch, Ph.D. - Vice President External Scientific Affairs Dr. Beatch has been Vice President, Research since June 1997 and was re-titled Vice President, External Scientific Affairs on July 20, 2001. Dr. Beatch joined the Company in September 1996 as Head of Pharmacology on a one year renewable exchange program from the TPD, the equivalent of the U.S. FDADr. Beatch was a Research Scientist for the Drugs Directorate of the TPD. In this capacity, Dr. Beatch was involved in the new drug submission and approval process. Dr. Beatch also holds Assistant Professorships in Cardiology and Pharmacology, at the University of Ottawa Heart Institute. Dr. Beatch has published numerous papers proceeding from peer reviewed grants in the field of cardiovascular drug research. Richard P. Schwarz, Jr., PhD, - Executive Director, Congestive Heart Failure Program Dr. Schwarz joined Cardiome in January 2002 to manage the pre-clinical and clinical development activities related to Cardiome's programs in the congestive heart failure area on a consultancy basis. Dr. Schwarz served previously as Executive Director, Cardiovascular Therapeutics, at Quintiles, Inc. He has 24 years of experience in the pharmaceutical/biotechnology industry and in government service. Dr. Schwarz held the position of Deputy Chief, Cardiology Program, at the National Heart, Lung and Blood Institute from 1979-1982, and served as Global Director of the Cardiovascular Clinical Development Program at the Sterling Research Group, Sterling Drug, Inc. He has also served as Senior Director, Clinical Development at Astra USA and as Vice President, Clinical Development and Regulatory Affairs at Texas Biotechnology Corporation. Dr. Schwarz has planned and directed numerous clinical programs in cardiovascular development, including studies of inotropic agents and neurohormonal modulators in congestive heart failure, and studies of thrombin inhibitors, IIb/IIIa inhibitors, and thrombolytic agents in acute coronary syndromes. He led the research team that developed the injectable inotropic agent, PRIMACOR (milrinone), for the acute treatment of congestive heart failure. His bibliography lists over 50 publications and two books. Christina Yip, CMA - Corporate Secretary, Chief Financial Officer and Director of Finance & Administration Ms. Yip has been Corporate Secretary and Director of Finance & Administration of the Company since September 13, 2000 and Chief Financial Officer of the Company since December 23, 2000. Ms. Yip joined the Company as Financial Controller in September 1998. Prior to this date Ms. Yip acted as Chief Accountant to West African Minerals Group, a group of mining companies listed on the Canadian Venture Exchange Inc. and as an articling accountant to Cinnamon, Jang, Willoughby & Company, Chartered Accountants. John Haylock - Financial Consultant Mr. Haylock joined the company in December of 2001 in the capacity of Financial Consultant. Mr. Haylock has extensive experience in corporate banking and corporate finance. From 1999 to 2001, Mr. Haylock was Vice-President at BMO Nesbitt Burns. Prior to that, Mr. Haylock spent nine years in corporate banking with Bank of Montreal. Mr. Haylock received a Mathematics degree and Chemical Engineering degree from the University of Alberta and an M.B.A. from the University of Western Ontario. Page 41 David Fedida, Ph.D., M.D. - Scientific Consultant Director of Electrophysiology, Dr. Fedida is an Associate Professor of Physiology at the University of British Columbia, where he is the inaugural Career Scientist of the Heart and Stroke Foundation of British Columbia and Yukon. He holds a B.Sc. in Physiology and Ph.D. degrees in Cardiac Electrophysiology from the University of Leeds where he studied under Professor B.R. Jewell and Dr. M. Boyett, and medical degrees (B.M., B.Ch.) from the University of Oxford (1986), where he also did postdoctoral work with Prof. Denis Noble and Frances Ashcroft. After completing full registration with the General Medical Council (UK) he entered postdoctoral training with Dr. Wayne Giles at the University of Calgary, and subsequently with Dr. Arthur Brown at Baylor College of Medicine. After a six year period as an independent investigator at Queen's University in Kingston, he moved to the University of British Columbia where he holds a number of grants from the MRC Canada and Heart and Stroke Foundation, and is involved in basic biophysical studies and antiarrhythmic drug action on cardiac ion channels. SCIENTIFIC ADVISORY BOARD - ------------------------- Management receives guidance from a Scientific Advisory Board, presently composed of the following members: Gunnar Aberg, Ph.D. Dr. Aberg is the founder and President of Bridge Pharma Inc., a research and early development pharmaceutical company based in Sarasota, Florida. Since its inception, Bridge Pharma's rapidly growing portfolio of diversified patented products is a credit to his considerable skill and experience in pharmaceutical and intellectual property issues. Prior to founding Bridge Pharma, Dr. Aberg was Senior Vice President of Research for Sepracor Inc., where he directed a research and development group focused on improvement of existing therapies. Notably, he directed Sepracor's development of Allegra, a non-sedating antihistamine without cardiotoxicity. Dr. Aberg has also held several senior research and development positions with major pharmaceutical companies including Bristol-Myers Squibb Company, Ciba-Geigy Corporation and Astra Pharmaceuticals Inc. He led research teams in these companies that have brought to the market products such as Monopril, Lopressor and Lotensin (all three are used for the treatment of high blood pressure), Tonocard (for cardiac arrhythmia), and Marcaine (for local anesthesia). Stanley Nattel, M.D. Dr. Nattel obtained BSc (1972) and MDCM (1974) degrees at McGill University, and then trained in internal medicine (1974-76, at the Royal Victoria Hospital) and clinical pharmacology (1976-78, at the Montreal General Hospital). After research and clinical training in cardiology at the Krannert Institute of Cardiology in Indianapolis (1978-80) and an additional year of research training in physiology at the University of Pennsylvania in Philadelphia (1980-81), he became a faculty member in pharmacology and medicine at McGill University and a cardiologist/clinical pharmacologist at the Montreal General Hospital. In 1987, he moved to the Montreal Heart Institute and the University of Montreal. Since 1990, Dr. Nattel has been the Scientific Director of the Research Center of the Montreal Heart Institute. Dr. Nattel's research interests have focused on the basic mechanisms determining cardiac arrhythmogenesis and governing the efficacy and safety of antiarrhythmic therapy. Eduardo Marban, M.D., Ph.D Dr. Marban is a member of the Scientific Advisory Board and a consultant of Cardiome (see "Business Overview - Licenses and Collaborative Research Agreements - Marban Agreement"). Dr. Marban currently serves as Professors of Medicine, Physiology and Biomedical Engineering at JHU. In addition, Dr. Marban is the founder and Director of the Institute of Molecular Cardiobiology, is the Michel Mirowski, M.D. Professor of Cardiology and is the Vice-Chairman for Research, Department of Medicine, all at JHU. Dr. Marban is an active full-time staff member of the Department of Medicine and is attending physician, Coronary Care Unit, The Johns Hopkins Hospital. Dr. Marban has received numerous awards and honours to this point in his career including the Research Achievement Award, International Society for Heart Research, the Basic Research Prize, American Heart Association, the Louis and Artur Lucian Award for Research in Cardiovascular Diseases and the MERIT Award from the National Heart, Lung and Blood Institute. He is currently a member of the Association of American Physicians, Program Director, SCOR in Sudden Cardiac Death, a member of the Association of University Cardiologists, a member of the Page 42 American Society for Clinical Investigation and is a Fellow, American College of Cardiology. He chairs the Basic Cardiovascular Sciences Council of the American Heart Association and is President of the Cardiac Muscle Society. Dr. Marban has published or currently has in press a total of 220 scientific articles and is currently the Editor in Chief, Circulation Research, a Consulting Editor, Circulation and Journal of Molecular and Cellular Cardiology and is on the International Advisory Board, Japanese Circulation Journal. In addition, he is the invited referee for over 20 research journals including New England Journal of Medicine, Nature, and Science. Dr. Marban was a member of the Cardiac Research Advisory Panel, Procter and Gamble Pharmaceuticals, was a consultant and founder of Physiome Sciences, Inc., a consultant to Otsuka Pharmaceutical Co., Inc. and is a founder of Paralex, a wholly-owned subsidiary of the Company. Three patents have been issued and six patents are pending by Dr. Marban. Dr. Marban received his B.S. in Mathematics, summa cum laude from Wilkes College, M.D. from Yale University in 1980 and his Ph.D from Yale University in Physiology in 1981. Dr. Marb n received his board certification from the American Board of Internal Medicine in 1984 and Cardiovascular Subspecialty in 1987. Dr. Denis Roy, M.D. Dr. Roy has been at the Montreal Heart Institute since 1982. He is a staff cardiologist and electrophysiologist, and also holds the position of President of the Council of Physicians at the Montreal Heart Institute. He has served as Chief of Electrophysiology and Head of the Department of Medicine at the Institute. He is past President of the Quebec Cardiology Association and is currently member of the Executive Committee of the Canadian Cardiovascular Society. Dr. Roy has published over 80 papers in his areas of special interest, including mechanisms and management of arrhythmias, Sudden Cardiac Death, catheter ablation, pacemakers, implantable defibrillators and antiarrhythmic drugs. Dr. Roy was the principal investigator for the Canadian Trial of Atrial Fibrillation (CTAF) study, and is the current chairman of the Multicentre International Atrial Fibrillation and Congestive Heart Failure (AF-CHF) trial, which is funded by the Canadian Institute of Health Research. Dr. Denis Roy is Professor of Medicine at the Faculty of Medicine, University of Montreal, Quebec. He received his M.D. from the Faculty of Medicine of the University of Montreal in 1976 and did his internship at the Royal Victoria Hospital and residency at the Montreal Heart Institute. Post graduate training in electrophysiology was done through a fellowship grant from the R. Samuel McLaughlin Foundation first at the University of Limburg, Maastricht, Netherlands and then at the Hospital of the University of Pennsylvania, Philadelphia. BOARD COMMITTEES - ---------------- From time to time the Board appoints, and empowers, committees to carry out specific functions on behalf of the Board. The following describes the current committees of the Board and their members: Audit Committee The Company is required to have an Audit Committee. The current members of the Audit Committee of the Company are Kim Sun Oh (Chair), Fred Mermelstein and Myron Weisfeldt, none of whom is a current or former officer of the Company. Prior to March 8, 2002, the members of the Audit Committee were Colin Mallet (Chair), Kim Sun Oh and Allen Bain, none of whom was or had been an officer of the Company, except Allen Bain who was formerly President of the Company. The Audit Committee meets at least quarterly to review the quarterly and annual financial statements before they are presented to the Board, and approves the quarterly statements on behalf of the Board. The Audit Committee meets with the Company's independent auditors at least annually to review the results of the annual audit and discuss the financial statements and any changes in accounting practices; recommends to the Board the independent auditors to be retained and the fees to be paid; and receives and considers the auditors' comments (out of the presence of management) as to the adequacy and Page 43 effectiveness of internal controls over the accounting and financial reporting systems within the Company. The Committee also reviews policies and practices concerning regular examinations of officers' expenses and perquisites, including the use of Company assets. Compensation Committee The Compensation Committee is responsible for determining the compensation of executive officers of the Company. The current members of the Committee are Mark Rogers (Chair), Ralph Snyderman and Fred Mermelstein, none of whom is a current or former officer of the Company, other than Mark Rogers, who is the current Chairman of the Board. Prior to March 8, 2002, the members of the Compensation Committee were Michael Walker (Chair), Colin Mallet and Darrell Elliott, none of whom was or had been an officer of the Company, except Michael Walker who was formerly Chairman of the Board. The Compensation Committee reviews the objectives, performance and compensation of the Chief Executive Officer at least annually and makes recommendations to the Board for change. The Committee makes recommendations based upon the Chief Executive Officers' suggestions regarding the salaries and incentive compensation for senior officers of the Company. The Committee is responsible for reviewing and recommending changes to the compensation of directors as necessary. The Committee also reviews significant changes to benefits policies and compliance with current human resource management practices, such as pay equity, performance review and staff development. Corporate Governance Committee The Corporate Governance Committee is currently comprised of Michael J.A. Walker (Chair), Ralph Snyderman and Elizabeth Rogers, none of whom is a current or former officer of the Company, other than Michael J.A. Walker, who was formerly Chairman of the Board. Prior to March 8, 2002, the members of the Corporate Governance Committee were Colin Mallet (Chair), Allen Bain, Darrell Elliott and Michael Walker, none of whom was or had been an officer of the Company, except Michael Walker who was formerly Chairman of the Board. The Corporate Governance Committee has developed a policy to govern the Company's approach to corporate governance issues and provides a forum for concerns of individual directors about matters not easily or readily discussed in a full board meeting, e.g., the performance of management. The Committee also ensures there is a clear definition and separation of the responsibilities of the Board, the Committees of the Board, the Chief Executive Officer and other management employees. It also assesses the effectiveness of the Board, its committees and individual directors on an ongoing ad hoc basis. Nomination Committee The members of the Nomination Committee of the Company are currently Mark Rogers (Chair), Alan M. Ezrin and Robert W. Rieder, all of whom are officers of the Company. Prior to March 8, 2002, the members of the Nomination Committee were Darrell Elliott (Chair), Michael Walker, and Clive Page, none of whom was or had been an officer of the Company, except Michael Walker who was formerly Chairman of the Board. The Nomination Committee identifies and recommends candidates for election to the Board. It advises the Board on all matters relating to directorship practices, including the criteria for selecting directors, policies relating to tenure and retirement of directors and compensation and benefit programs for non-employee directors. EMPLOYEES - --------- As of March 31, 2002, the Company has 31 employees, 25 of which are employed in research and development and six of which are engaged in administration. Of the 25 engaged in research and development, 13 have Ph.D. or Masters degrees in a scientific field. At this time, none of the Company's employees are subject to collective bargaining agreements. The Company expects to add a small number of employees sufficient to support the increased business activities during fiscal 2002. Page 44 COMPENSATION OF EXECUTIVE OFFICERS - ---------------------------------- Named Executive Officers of the Company "Named Executive Officer" means the chief executive officer, despite the amount of compensation of that individual, each of the Company's four most highly compensated executive officers, other than the chief executive officer, who were serving as executive officers at the end of the fiscal year ended November 30, 2001 and whose total salary and bonus exceeds $100,000, and includes any individual for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of the fiscal year ended November 30, 2001. During the most recently completed fiscal year, the Company had five Named Executive Officers - Robert W. Rieder, President and Chief Executive Officer, Alan M. Ezrin, Chief Scientific Officer, Gregory N. Beatch, Vice President, External Scientific Affairs, Barry Johnson, Director of Pharmacology and Grace Jung, Senior Director, Research. Summary of Compensation The following table is a summary of the compensation paid by the Company to its Named Executive Officers during the fiscal years ended November 30, 2001, 2000 and 1999.
Summary Compensation Table -------------------------- Long-Term Annual Compensation Compensation ----------------------------------------------------- All Year Securities Under Other Ended Nov. Salary Bonus Other Options Granted Compensation Name and Principal Position 30 ($) ($) ($) (#) ($) - ----------------------------------------------------------------------------------------------------------------------------------- Robert W. Rieder 2001 241,250 Nil Nil 7,500 Nil President and Chief Executive Officer 2000 200,000 Nil Nil 113,750 Nil 1999 200,000 Nil Nil Nil Nil Alan M. Ezrin(1) 2001 258,836 Nil 42,802(2) 195,000 60,000(3) Chief Scientific Officer 2000 - - - - - 1999 - - - - - Gregory N. Beatch(4) 2001 140,000 Nil Nil Nil Nil Vice President, External Scientific Affairs 2000 131,333 Nil Nil 16,250 Nil 1999 125,000 Nil Nil Nil Nil Barry Johnson(5) 2001 105,000 Nil Nil Nil Nil Director of Pharmacology 2000 21,875(5) Nil Nil 18,750 10,000(3) 1999 - - - - - Grace Jung(6) 2001 104,833 Nil Nil 1,875 Nil Senior Director, Research 2000 96,583 Nil Nil 6,250 Nil 1999 90,333 Nil Nil Nil Nil - -----------------------------------------------------------------------------------------------------------------------------------
(1) Dr. Alan Ezrin was hired by the Company in January 2001 at a base salary of US$190,000. During the period of January 15, 2001 to November 30, 2001, total salary paid to Dr. Ezrin was $258,836. (2) This sum represents tax allowances paid. (3) This sum represents relocation expenses paid. (4) Dr. Gregory N. Beatch's title was changed from Vice-President, Research to Vice President, External Scientific Affairs on July 20, 2001. (5) Dr. Barry Johnson was hired by the Company on September 18, 2000. This represents a base salary of $105,000, of which $21,875 was paid to Dr. Johnson for the period of September 18, 2000 to November 30, 2000. (6) Dr. Grace Jung became a Named Executive Officer effective August 1, 2001 with her base salary increase to $115,000 per annum. Page 45 Options Granted During the Most Recently Completed Fiscal Year During the fiscal year ended November 30, 2001, the following incentive stock options were granted to the Named Executive Officers.
% of Total Options Market Value Securities Granted Exercise of Securities Under to or Base Underlying Options Employees Price Options on the Date of Granted in Fiscal ($/ Date of Grant Expiration Name Grant (#) year Security) ($/Security)(1) Date - ----------------- -------- ---------------- ---------------- ---------------- ---------------- ---------------- Robert W. Rieder Aug. 22/01 7,500 2.01% $3.00 $2.88 Aug. 21/06 Alan M. Ezrin Jan. 30/01 187,500 50.34% $2.92 $3.56 Jan. 29/07 Aug. 22/01 7,500 2.01% $3.00 $2.88 Aug. 21/06 Grace Jung Aug. 22/01 1,875 0.56% $3.00 $2.88 Aug. 21/07
(1) Calculated as the closing price of the Common Shares of the Company on the TSX on the date of grant. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth details of all exercises of incentive stock options during the fiscal year ended November 30, 2001 by the Named Executive Officers and the fiscal year-end value of unexercised options on an aggregate basis:
Unexercised Options Value of Unexercised In- at Fiscal Year-End the-Money Options at Securities (#) Fiscal Year-End ($)(1) Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($) Unexercisable Unexercisable - --------------------- -------------- ----------------- ------------------- ------------------------- Robert W. Rieder - - 190,750/90,500 -/- (2) Alan M. Ezrin - - 70,000/125,000 -/- (2) Gregory N. Beatch - - 33,750/11,250 -/- (2) Barry Johnson - - 5,000/13,750 -/- (2) Grace Jung - - 17,500/3,125 -/- (2)
(1) The market value of the Common Shares of the Company on the TSX was $2.64 at fiscal year-end, November 30, 2001. (2) The exercise or base price of these options exceeded the market value of the Common Shares of the Company at fiscal year-end and hence these options were not in the money. Pension Plans The Company does not provide retirement benefits for directors or officers. Page 46 Compensation of Directors During the most recently completed fiscal year, outside directors received compensation for services provided to the Company in their capacities as directors and/or consultants and/or experts as follows: Directors' fees All Other Compensation Name of Director ($) ($) ------------------------- ------------------ ------------------------- Michael J.A. Walker 5,000 79,167(1)(2) Clive P. Page(3) 10,000 35,065(1)(2) Allen I. Bain(3) 5,000 Nil(2) Colin R. Mallet(3) 10,000 6,500(1) Kim Sun Oh 5,000 Nil Darrell Elliott(3) 10,000 9,500(1) (1) Consulting fees or meeting fees. (2) the Company paid $16,838 for contract research services to Pneumolabs (UK) Limited, a company of which Messrs. Walker, Page and Bain are directors, officers or shareholders. (3) Resigned as director effective March 8, 2002. Effective March 11, 2002, non-management directors of the Company are paid a meeting fee of US$750 per tele-conference meeting or US$2,500 per meeting attended in person. Each of the directors also receives an annual grant of incentive stock options to purchase 12,500 Common Shares of the Company. Each new non-management director also receives a grant of incentive stock options to purchase 50,000 Common Shares when he or she first joins the Board. Management directors do not receive separate compensation for their participation in board or committee meetings or for their services as directors of the Company, other than grants of incentive stock options. The Company pays all reasonable expenses associated with directors' attendance at, and participation in, Board and committee meetings, and other Company business to which a director attends. The Board annually reviews the adequacy and form of the compensation of directors and ensures the compensation realistically reflects the responsibilities and risk involved in being an effective director. Management Contracts of Named Executive Officers The Company has entered into employment agreements with each of the Named Executive Officers. Robert W. Rieder The following information was effective for the fiscal year ended November 30, 2001. Subsequent to the acquisition of Paralex by the Company completed on March 8, 2002, this employment agreement is being renegotiated by the parties and is not yet finalized as of the date hereof. Under the employment agreement with Robert W. Rieder dated March 19, 1998, as amended effective January 1, 2001, Mr. Rieder acts as President and Chief Executive Officer of the Company in consideration for an annual salary of $245,000, payable in equal semi-monthly installments. This salary is reviewed annually by the Board. Mr. Rieder is also eligible for grants of incentive stock options and bonuses, if certain objectives agreed between the Board and Mr. Rieder are met, as determined by the Board. He receives four weeks of paid vacation each year. Mr. Rieder's employment agreement has an indefinite term and may be terminated by him upon three months' written notice. If Mr. Rieder's employment is terminated without cause, Mr. Rieder is entitled to receive a severance payment equal to 12 months' salary. The agreement provides that if there is a change of control of the Company, Mr. Rieder's employment with the Company will be deemed to be terminated and, subject to certain conditions, he would be entitled to receive a severance payment equal to 24 months' salary. In addition, upon a change of control, the expiry date of all incentive stock options held by Mr. Rieder will be extended up to five years from the date of change of control to a maximum of 10 years from the date of grant. Page 47 Alan M. Ezrin The following information was effective for the fiscal year ended November 30, 2001. Subsequent to the acquisition of Paralex by the Company completed on March 8, 2002, this employment agreement is being renegotiated by the parties and is not yet finalized as of the date hereof. Under the employment agreement with Alan M. Ezrin dated June 5, 2001, effective January 15, 2001, Dr. Ezrin acts as the Chief Scientific Officer of the Company in consideration for an annual salary of US$190,000, payable in equal semi-monthly installments. He is eligible for annual payments upon achievement of annual milestones set by the Company. He also received a grant of 187,500 incentive stock options of which 62,500 vested on the date of employment and the remaining 125,000 will vest upon the achievement of annual milestones. He receives four weeks of paid vacation and a tax cash allowance of U.S.$30,000 each year. Dr. Ezrin's employment agreement has an indefinite term and may be terminated by him upon 30 days' written notice. If Dr. Ezrin's employment is terminated without cause, Dr. Ezrin is entitled to receive a severance payment equal to up to 12 months' salary. The agreement provides that if there is a change of control of the Company, Dr. Ezrin's employment with the Company will be deemed to be terminated and, subject to certain conditions, he would be entitled to receive a severance payment equal to 12 months' salary. In addition, upon a change of control, the expiry date of all incentive stock options held by Dr. Ezrin will be extended up to five years from the date of change of control to a maximum of 10 years from the date of grant. Gregory N. Beatch Under the employment agreement with Gregory N. Beatch dated November 24, 1998, as amended effective August 1, 2000 and July 16, 2001, Dr. Beatch acts as the Vice President, External Scientific Affairs of the Company in consideration for an annual salary of $140,000, payable in equal semi-monthly installments. Dr. Beatch is eligible for an annual bonus payment of up to $10,000 if certain objectives set by the Company are met. He is also eligible for grants of incentive stock options as determined by the Board. He receives three weeks of paid vacation each year. Dr. Beatch's employment agreement has an indefinite term and may be terminated by either party upon 30 days' written notice and he will be entitled to receive any salary owed up to the date of termination. If the Company terminates his employment following a change of control of the Company, Dr. Beatch is entitled to receive a severance payment equal to 18 months' salary. In addition, upon a change of control, the expiry date of all incentive stock options held by Dr. Beatch will be extended up to five years from the date of change of control to a maximum of 10 years from the date of grant, if Dr. Beatch is terminated or dismissed without cause. Barry Johnson Under the employment agreement with Barry Johnson dated September 18, 2000, Dr. Johnson acts as the Director of Pharmacology of the Company in consideration for an annual salary of $105,000, payable in equal semi-monthly installments. He is also eligible for grants of incentive stock options as determined by the Board. He receives three weeks of paid vacation each year. Dr. Johnson's employment agreement has an indefinite term and may be terminated by either party upon three months' written notice and he will be entitled to receive any salary owed up to the date of termination. Grace Jung Under the employment agreement with Grace Jung dated September 8, 1998, as amended effective August 1, 2001, Dr. Jung acts as Senior Director, Research of the Company in consideration for an annual salary of $115,000, payable in equal semi-monthly installments. Dr. Jung is eligible for an annual bonus payment of up to $10,000 if certain objectives set by the Company are met. She is also eligible for grants of incentive stock options as determined by the Board. Dr. Jung receives four weeks of paid vacation each year. Dr. Jung's employment agreement may be terminated by either party upon three months' written notice and she will be entitled to receive any salary owed up to the date of termination. Page 48 The Named Executive Officers participate in all employee benefits maintained by the Company, including any group disability plan, insurance plan, medical and dental plans, and are entitled to reimbursement of all reasonable out-of-pocket Company-related expenses. Directors' and Officers' Insurance The Company maintains liability insurance for its directors and officers in the aggregate amount of $5,000,000, subject to a deductible loss of $10,000, $25,000 or $100,000 payable by the Company for employment practice liability, general liability or U.S. securities claims respectively. The Company pays a total annual premium of $36,000, which premium has not been specifically allocated between directors as a group and officers as a group. Indebtedness of Directors and Officers No director or officer of the Company or any associate or affiliate of such person is or has been indebted to the Company or its subsidiaries at any time since the beginning of the last completed fiscal year of the Company. SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS - --------------------------------------------------- The following table sets out details of the shares and options of the Company that are held by directors and executive officers of the Company as at March 31, 2002.
Number of Percentage of Issued Number of Common and Outstanding Shares held Exercise Expiration Name Shares Common Shares Under Options Price Date - -------------------------------------------------------------------------------------------------------------------- Mark Rogers Nil N/A N/A N/A N/A Robert Rieder 39,900 0.14% 50,000 $5.52 September 12, 2006 50,000 $5.08 March 24, 2006 13,750 $7.24 March 29, 2005 150,000 $5.96 March 17, 2003 10,000 $5.68 April 20, 2002 7,500 $3.00 August 21, 2006 7,500 $3.68 February 4, 2007 Alan Ezrin 11,575 0.04% 187,500 $2.92 January 29, 2007 7,500 $3.00 August 21, 2006 7,500 $3.68 February 4, 2007 Michael Walker 615,517 2.18% 7,500 $3.00 August 21, 2006 7,500 $3.68 February 4, 2007 Kim Sun Oh 27,000 0.1% 7,500 $3.00 August 21, 2006 7,500 $3.68 February 4, 2007 Fred Mermelstein 931,085 3.29% N/A N/A N/A Myron Weisfeldt Nil N/A N/A N/A N/A Elizabeth Rogers 454,091 1.60% N/A N/A N/A Ralph Snyderman Nil N/A N/A N/A N/A Gregory Beatch 12,500 0.04% 16,250 $5.08 May 24, 2006 15,000 $5.00 May 29, 2002 13,750 $4.20 October 15, 2004 Christina Yip Nil N/A 9,375 $5.52 September 12, 2006 5,625 $5.08 May 24, 2006 3,750 $5.04 January 10, 2005 2,500 $5.08 November 26, 2007
Page 49
Number of Percentage of Issued Number of Common and Outstanding Shares held Exercise Expiration Name Shares Common Shares Under Options Price Date - -------------------------------------------------------------------------------------------------------------------- Barry Johnson Nil N/A 18,750 $6.20 September 17, 2006 Grace Jung Nil N/A 6,250 $5.08 May 24, 2006 1,875 $3.00 August 21, 2007 12,500 $4.20 October 15, 2004 TOTAL 2,091,668 7.39% 626,875
Stock Option Plan At the Company's annual meeting of shareholders held May 28, 2001, the Company adopted a new stock option plan. The purpose of the plan is to enable the Company to attract and retain personnel of the highest calibre by offering to them an opportunity to share in any increase in value of the shares resulting from their efforts and provide incentive to the Company's employees, officers, directors and consultants responsible for the continued success of the Company. All of the options that have been and will be granted under the plan must be exercised within a maximum period of ten years following the effective date of the plan. The Board designates the recipients of options and determines the number of common shares covered by each option, the date of vesting, the exercise price and the expiry date of such option and any other question relating thereto. Under the plan, the exercise price per common share is no less than the closing price per common share on the TSX on the trading day immediately preceding the day of grant. The maximum number of common shares that are currently issuable under the plan is 1,500,000 common shares. The board of directors has approved amendments to the plan which increase the number of common shares issuable under the plan to 5,500,000. These amendments are subject to shareholder approval. The maximum number of common shares that may be optioned in favour of any single individual under the plan will not exceed 5% of the issued and outstanding common shares at the date of the grant. The maximum number of common shares which may be optioned in favour of directors and senior officers under the plan is 10% of the issued and outstanding common shares at the date of the grant. Incentive Stock Options The following table summarizes the outstanding incentive stock options of the Company as of March 31, 2002.
Market Value on Date of Grant Number of Options Exercise Price Date of Grant Expiry Date - --------------------------------------------------------------------------------------------------------------- (a) Executive Officers (4 persons) April 21, 1997 10,000 $5.68 $5.32 April 20, 2002 May 30, 1997 15,000 $5.00 $4.56 May 29, 2002 March 18, 1998 150,000 $5.96 $6.36 March 17, 2003 October 16, 1998 13,750 $4.20 $4.08 October 15, 2004 January 11, 1999 3,750 $5.04 $5.16 January 10, 2005 March 30, 2000 13,750 $7.24 $7.24 March 29, 2005 May 25, 2000 71,875 $5.08 $5.20 May 24, 2006
Page 50
September 13, 2000 59,375 $5.52 $6.12 September 12, 2006 August 22, 2001 15,000 $3.00 $2.88 August 21, 2006 January 30, 2001 187,500 $2.92 $3.56 January 29, 2007 November 27, 2001 2,500 $2.80 $2.76 November 26, 2007 February 5, 2002 15,000 $3.68 $3.48 February 4, 2007 ------- 557,500 (b) Non-Executive and Former Directors (6 persons) April 3, 2001 37,500 $2.80 $2.80 April 2, 2002 February 9, 1999 15,000 $4.40 $4.40 February 8, 2004 November 1, 1999 12,500 $2.44 $2.40 October 31, 2004 August 22, 2001 45,000 $3.00 $2.88 August 21, 2006 February 5, 2002 45,000 $3.68 $3.48 February 4, 2007 ------- 155,000 (c) Employees and Former Employees (26 persons) April 3, 1997 35,000 $5.60 $6.08 April 2, 2002 May 30, 1997 5,000 $5.00 $4.56 May 29, 2002 June 12, 1998 23,750 $6.32 $5.40 June 11, 2004 October 16, 1998 21,250 $4.20 $4.08 October 15, 2004 November 1, 1999 2,500 $2.44 $2.40 October 31, 2005 May 25, 2000 40,938 $5.08 $5.20 May 24, 2006 September 18, 2000 18,750 $6.20 $6.20 September 17, 2006 December 19, 2000 9,375 $2.60 $2.32 December 18, 2006 May 28, 2001 7,500 $3.52 $3.48 May 27, 2007 August 22, 2001 18,750 $3.00 $2.88 August 21, 2007 November 27, 2001 57,500 $2.80 $2.76 November 26, 2007 ------- 240,313 (d) Scientific Advisory Board Members, Consultants and Former Consultants (9 persons) April 3, 1997 37,500 $5.60 $6.08 April 2, 2002 September 5, 2001 5,000 $2.92 $2.80 July 31, 2002 November 1, 1999 25,000 $2.44 $2.40 October 31, 2002 June 12, 1998 30,000 $6.32 $5.40 June 11, 2004
Page 51
October 16, 1998 31,250 $4.20 $4.08 October 15, 2004 February 25, 1999 12,500 $4.20 $4.08 February 24, 2005 November 1, 1999 12,500 $2.44 $2.40 October 31, 2005 February 14, 2000 12,500 $4.20 $4.72 February 13, 2006 September 13, 2000 5,000 $5.52 $6.12 September 12, 2006 December 13, 2001 25,000 $3.00 $2.68 December 12, 2007 --------- 196,250 TOTAL: 1,149,063
The options have been granted as incentives and not in lieu of any compensation for services, and are subject to cancellation should the optionee cease to act in a designated capacity. There can be no assurance that the options described above will be exercised. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ================================================================================ MAJOR SHAREHOLDERS - ------------------ The Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other person or entity. The following table sets forth certain information as of March 31, 2002 concerning the beneficial ownership of common shares of the Company as to each person known to the management of the Company that is a beneficial owner of more than 5% of the outstanding shares of the Company:
Title of Class Identity of Person or Group Amount Owned Percentage of Class - ----------------------------------------------------------------------------------------------------------------- Common shares Lindsay Rosenwald 2000 Family Trusts and 2,585,608(2) 9.14% the Lindsay Rosenwald 2000 Irrevocable Trust(2) Common shares Pembroke Management Ltd.(1)(3) 2,470,000 8.73% Common shares RBC Global Investment Management Inc.(1) 2,182,623 7.70% Common shares AGF Funds Inc.(1) 1,608,012 5.68% - -----------------------------------------------------------------------------------------------------------------
(1) Based on ownership of, or control or direction over, the shares. (2) Shares are registered in the name of Jay Lobell, as trustee for these trusts. Mr. Rosenwald disclaims beneficial ownership of these shares. These shares were acquired on March 8, 2002 in connection with the acquisition of Paralex by the Company. (3) To the knowledge of the Company, this shareholder has not previously owned more than 5% of the outstanding shares of the Company. The Company's major shareholders do not have different voting rights than other shareholders. UNITED STATES SHAREHOLDERS - -------------------------- On March 31, 2002, the Company had 55 (2001 - 33 and 2000 - 33) registered shareholders with addresses in the United States holding approximately 9,537,919 common shares or approximately 33.71% (2001 - 10.46% and 2000 - 12.24%) of the total number of issued and outstanding shares. US residents also hold warrants to purchase 896,023 common shares. Residents of the United States may beneficially own common shares and warrants registered in the names of non-residents of the United States. Page 52 RELATED PARTY TRANSACTIONS - -------------------------- Conflict of Interest Although the directors and officers of the Company have various fiduciary obligations to the Company, situations may arise where the interests of the directors and officers of the subsidiaries of the Company or of the other shareholders thereof (other than the Company) could conflict with those of the Company. The potential conflicts of interest arise as a result of common ownership and certain common directors, officers and personnel of the Company, such subsidiaries and their associates and their affiliates. These conflicts are normally resolved in accordance with the applicable statutory provisions and common law requirements for the disclosure of conflicts at meetings of the directors held for the purposes, inter alia, of acquiring assets or dealing in assets in which directors have an interest. Some of the directors and officers of the Company are also directors and officers of other reporting companies. It is possible, therefore, that a conflict may arise between their duties as a director or officer of the Company and their duties as a director or officer of such companies. All such conflicts are disclosed by them in accordance with the Canada Business Corporations Act and they govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law. Related Party Transactions Mark C. Rogers, M.D., M.B.A., Chairman of the Board of the Company, is the President of Paramount, a New York venture capital firm. The Company had an agreement with Paramount pursuant to which the Company agreed to issue to Paramount 187,500 warrants of the Company and to pay a fee to Paramount in connection with the completion of the acquisition of Paralex. The fee was determined to be U.S. $235,825 and was paid in April 2002. Pursuant to the same agreement, the Company has paid US$15,000 in retainer fees to Paramount as at November 30, 2001. This agreement was terminated in February 2002. The following are payments made by the Company in related party transactions during the fiscal years ended November 30, 2001, 2000 and 1999. 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Paid to companies with a common director for: - - contract research services 16,838 30,539 163,954 - - administrative consulting services - - 6,500 Paid to directors for: - - research consulting services 113,732 104,901 37,761 - - administrative consulting services 16,500 30,700 3,500 Accounts receivable from directors and/or companies with a common director 1,500 - - Accounts payable to directors and/or companies with a common director 84,709 18,276 40,690 ================================================================================ All transactions are recorded at their exchange amounts and accounts receivable and accounts payable are subject to normal trade terms. Page 53 ITEM 8. FINANCIAL INFORMATION ================================================================================ FINANCIAL STATEMENTS - -------------------- The following financial statements are included in this Annual Report: 1. audited consolidated financial statements of the Company including the consolidated balance sheets as at November 30, 2001 and 2000, the consolidated statements of loss and deficit and cash flow for the years ended November 30, 2001, 2000 and 1999, and the notes to those statements and the auditor's report thereon; 2. audited financial statements of Paralex including the balance sheet as at November 30, 2001, the statements of loss, deficit and cash flows for the period from January 26, 2001 (date of incorporation) to November 30, 2001, the notes to those statements and the auditor's report thereon; and 3. pro forma consolidated financial statements of the Company including the pro forma consolidated balance sheet as at November 30, 2001, the pro forma consolidated statements of loss for the year ended November 30, 2001 and the notes to those statements. LEGAL OR ARBITRATION PROCEEDINGS - -------------------------------- Cardiome is not a party to any material pending legal or arbitration proceedings and is not aware of any contemplated legal proceedings to which it may be a party. DIVIDEND POLICY - --------------- The Company has not declared or paid any dividends on its outstanding common shares since its inception and does not anticipate that it will do so in the foreseeable future. The declaration of dividends on the common shares of the Company is within the discretion of the Company's board of directors and will depend on the assessment of, among other factors, earnings, capital requirements and the operating and financial condition of the Company. At the present time the Company's anticipated capital requirements are such that it intends to follow a policy of retaining earnings in order to finance the further development of its business. SIGNIFICANT CHANGES - ------------------- On March 8, 2002, the Company completed the acquisition of all of the outstanding shares of Paralex in exchange for 8,203,396 common shares. Also, on March 8, 2002 the Company completed a concurrent financing of $30,908,061 (the equivalent of approximately U.S.$19,500,000) and issued 9,309,657 common shares along with warrants for the purchase of 2,327,414 common shares. See "Business Overview - History and Development - Acquisition of Paralex". On March 28, 2002 Cardiome announced that it had received a notice from AstraZeneca that AstraZeneca does not intend to proceed with clinical development of RSD1122. In accordance with the AstraZeneca License, AstraZeneca will return all rights and pre-clinical data associated with RSD1122 in June 2002 and the AstraZeneca License will terminate. Cardiome intends to evaluate the AstraZeneca pre-clinical data and, following consultation with its board of directors and scientific advisory board, decide whether or not to carry out and fund future research and development on this drug candidate. See "Licenses and Collaborative Research Agreements - AstraZeneca License" under "Item 4. Information on the Company". ITEM 9. THE OFFER AND LISTING ================================================================================ The Company's common shares have traded on the Toronto Stock Exchange (the "TSX") since July 25, 2000 under the symbol "COM" (previously "NRT"), and in the United States are quoted on the NASD OTC Electronic Bulletin Board under the symbol "COMRF" (previously "NTRDF"). The Company's common shares were also traded on the TSX Venture Exchange Inc. until February 2, 2001. Page 54 The following table sets forth the high and low sales prices (Cdn. Dollars) of the Company's common shares on the TSX and TSX Venture Exchange for the last five fiscal years of the Company as well as the high and low sales prices (U.S. Dollars) on the NASD OTC Electronic Bulletin Board of the Company's common shares since the Company's common shares traded over the NASD OTC Electronic Bulletin Board. The information set forth below in the column entitled Toronto Stock Exchange reflects the highest and lowest sale prices reported on either the TSX or the TSX Venture Exchange, as the case may be, for each time period which includes any date from July 25, 2000 through February 1, 2001, All share prices on the following table reflect the four-to-one share consolidation (reverse stock split) completed on March 8, 2002.
Toronto Stock Exchange NASD OTC Electronic Bulletin Time Period Price Range (in Cdn.$) Price Range (in U.S.$) - ------------------------------------------------------------------------------------------------------------- High Low High Low ---------------------------------------------------------------------- April 1 to April 18, 2002 $2.80 $2.56 $1.72 $1.50 Month ended March 31, 2002 $3.15 $2.70 $2.20 $1.55 Month ended February 28, 2002 $4.24 $3.40 $2.64 $2.20 Month ended January 31, 2002 $5.20 $3.52 $3.20 $1.76 Month ended December 31, 2001 $3.60 $2.56 $2.60 $1.48 Month ended November 30, 2001 $3.40 $2.24 $2.28 $1.52 Fiscal year ended November 30, 2001: Fourth Quarter $3.56 $1.60 $2.28 $1.40 Third Quarter $3.92 $2.60 $2.40 $1.60 Second Quarter $3.80 $2.40 $2.52 $1.60 First Quarter $4.00 $2.00 $3.36 $1.40 Fiscal year ended November 30, 2000: Fourth Quarter $7.20 $4.08 $9.00 $2.76 Third Quarter $6.80 $4.64 $4.36 $3.00 Second Quarter $10.84 $4.32 $7.52 $2.64 First Quarter $6.20 $1.88 $4.76 $1.00 Fiscal year ended November 30, 1999: $6.92 $2.00 $4.52 $1.36 Fiscal year ended November 30, 1998: $12.60 $3.32 $13.00 $2.00 Fiscal year ended November 30, 1997: $7.52 $2.60 $6.20 $2.44
ITEM 10. ADDITIONAL INFORMATION ================================================================================ ARTICLES & BY-LAWS - ------------------ The Company was continued under the Canada Business Corporations Act, or the CBCA on March 8, 2002 under number 402208-4. The Company has no restrictions on its business imposed by the CBCA. The Company is authorized to issue an unlimited common shares without par value, of which 28,308,098 common shares are issued and outstanding as of the date of this Annual Report. All of the common shares rank equally as to voting rights, participation in a distribution of the assets of the Company on a liquidation, dissolution or winding-up of the Company and the entitlement to dividends. The holders of the common shares are entitled to receive notice of all meetings of shareholders and to attend and vote at the meetings. Each common share carries with it the right to one vote. There are no limitations on the rights of holders to own common shares. Page 55 In the event of liquidation, dissolution or winding-up of the Company or other distribution of its assets, the holders of the common shares will be entitled to receive, on a pro-rata basis, all of the assets remaining after the Company has paid out its liabilities. Distribution in the form of dividends, if any, will be set by the board of directors. Provision as to modification, amendment or variation of the rights attached to the common shares are contained in the Company's articles and by-laws and the CBCA. Generally speaking, substantive changes to the rights attached to the common shares will require the approval of the holders of common shares by special resolution (at least two-thirds of the votes cast). There are no restrictions on the repurchase or redemption by the Company of common shares. There are no indentures or agreements limiting the payment of dividends. There are no conversion rights, special liquidation rights, sinking fund provisions, pre-emptive rights or subscription rights attached to any common shares. Holders of common shares are not liable to further capital calls by the Company. The directors have the power to convene general meetings of the shareholders of the Company and to set the record date for such meetings to determine the shareholders of record entitled to receive notice of and attend and vote at such meetings. Meetings must be held annually, at least every 15 months, and if they are not convened by the directors, may be requisitioned by shareholders in certain circumstances. The directors must stand for election at each annual meeting of shareholders. Meetings of the shareholders may be held anywhere in Canada or in New York, New York; Seattle, Washington; San Francisco, California; Los Angeles, California; San Diego, California; or Boston, Massachusetts. If a director is materially interested in a proposal, arrangement or contract, the director must disclose in writing the nature and extent of his interest to the Company or request to have it entered in the minutes of a meeting of the directors. A director may not vote on any resolutions to approve proposals, arrangements or contracts in which they are materially interested unless it is a proposal, arrangement or contract: (1) relating primarily to the director's remuneration as a director, officer, employee or agent of the Company or an affiliate, (2) for indemnity or insurance for the director, or (3) with an affiliate. The directors of the Company have the power to borrow money from any source and upon any terms and conditions on behalf of the Company, subject to their fiduciary duties and the CBCA. There is no requirement that the directors must hold shares of the Company to qualify as directors and directors are not required to retire at a specified age. The CBCA requires that 25% of the directors of a corporation must be resident Canadians. MATERIAL CONTRACTS - ------------------ 1. License agreement dated March 29, 1996 with the University of British Columbia. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 2. Research Agreement dated March 1, 1997 with the University of British Columbia. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 3. Agreement dated November 19, 1997 with Drs. MacLeod and Quastel. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 4. Agreement dated October 16, 2000 with AstraZeneca. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 5. Collaborative Research and License Agreement dated November 30, 2000 with Antalium Inc. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 6. Employment Agreement dated March 19, 1998 and subsequent Amendment Agreement dated March 20, 2001 with Mr. Robert Rieder. See "Item 6. Directors, Senior Management and Employees - Management Contracts of Named Executive Officers". Page 56 7. Employment Agreement dated November 24, 1998 with Dr. Gregory Beatch. See "Item 6. Directors, Senior Management and Employees - Management Contracts of Named Executive Officers." 8. Employment Agreement dated June 5, 2001 with Dr. Alan M. Ezrin. See "Item 6. Directors, Senior Management and Employees - Management Contracts of Named Executive Officers." 9. License agreement dated April 18, 2001, as amended by agreement dated October 18, 2001 between Paralex and The Johns Hopkins University. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." 10. License agreement dated December 19, 2001 between Paralex and ILEX Oncology, Inc. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements" 11. Agreement dated May 2001 and dated as of January 1, 2002 between Paralex and Cardiosciences Consulting, Inc. See "Item 4. Information on the Company - Business Overview - Licenses and Collaborative Research Agreements." EXCHANGE CONTROLS - ----------------- There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of common shares of the Company, other than withholding tax requirements. See "Item 10. Canadian Federal Income Taxation" and "Certain United States Federal Income Tax Consequences". There is no limitation imposed by Canadian law or by the charter or other constituent documents of the Company on the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (Canada) (the "Investment Act"). The following discussion summarizes the principal features of the Investment Act for a non-resident who proposes to acquire common shares of the Company. It is general only, it is not a substitute for independent advice from an investor's own advisor, and it does not anticipate statutory or regulatory amendments. The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture (each an "entity") that is not a "Canadian" as defined in the Investment Act (a "non-Canadian"), unless after review the Director of Investments appointed by the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in common shares of the Company by a non-Canadian other than a "WTO Investor" (as defined in the Investment Act and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization) when the Company was not controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of the Company and the value of the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Act, was Cdn.$5,000,000 or more, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada's cultural heritage or national identity, regardless of the value of the assets of the Company. An investment in common shares of the Company by a WTO Investor, or by a non-Canadian when the Company was controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment in 2002 to acquire control of the Company and the value of the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Act, exceeds Cdn.$218 million. A non-Canadian would acquire control of the Company for the purposes of the Investment Act if the non-Canadian acquired a majority of the common shares of the Company. The acquisition of less than a majority but one third or more of the common shares of the Company would be presumed to be an acquisition of control of the Company unless it could be established that, on the acquisition, the Company was not controlled in fact by the acquiror through the ownership of common shares. Certain transactions relating to common shares of the Company would be exempt from the Investment Act, including: (a) acquisition of common shares of the Company by a person in the ordinary course of that person's business as a trader or dealer in securities, Page 57 (b) acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Act, and (c) acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of common shares, remained unchanged. CANADIAN FEDERAL INCOME TAXATION - -------------------------------- The following discussion summarizes the principal Canadian federal income tax considerations generally applicable to a person (an "Investor") who acquires one or more common shares pursuant to this Registration Statement, and who at all material times for the purposes of the Income Tax Act (Canada) (the "Canadian Act") deals at arm's length with the Company, holds all common shares solely as capital property, is a non-resident of Canada, and does not, and is not deemed to, use or hold any Common share in or in the course of carrying on business in Canada. It is assumed that the common shares will at all material times be listed on a stock exchange that is prescribed for the purposes of the Canadian Act. This summary is based on the current provisions of the Canadian Act, including the regulations thereunder, and the Canada-United States Income Tax Convention (1980) (the "Treaty") as amended. This summary takes into account all specific proposals to amend the Canadian Act and the regulations thereunder publicly announced by the government of Canada to the date hereof and the Company's understanding of the current published administrative and assessing practices of Canada Customs and Revenue Agency. It is assumed that all such amendments will be enacted substantially as currently proposed, and that there will be no other material change to any such law or practice, although no assurances can be given in these respects. Except to the extent otherwise expressly set out herein, this summary does not take into account any provincial, territorial or foreign income tax law or treaty. This summary is not, and is not to be construed as, tax advice to any particular Investor. Each prospective and current Investor is urged to obtain independent advice as to the Canadian income tax consequences of an investment in common shares applicable to the Investor's particular circumstances. An Investor generally will not be subject to tax pursuant to the Canadian Act on any capital gain realized by the Investor on a disposition of a Common share unless the Common share constitutes "taxable Canadian property" to the Investor for purposes of the Canadian Act and the Investor is not eligible for relief pursuant to an applicable bilateral tax treaty. A Common share that is disposed of by an Investor will not constitute taxable Canadian property of the Investor provided that the Common share is listed on a stock exchange that is prescribed for the purposes of the Canadian Act (the Canadian Venture Exchange is so prescribed), and that neither the Investor, nor one or more persons with whom the Investor did not deal at arm's length, alone or together at any time in the five years immediately preceding the disposition owned 25% or more of the issued shares of any class of the capital stock of the Company. In addition, the Treaty generally will exempt an Investor who is a resident of the United States for the purposes of the Treaty, and who would otherwise be liable to pay Canadian income tax in respect of any capital gain realized by the Investor on the disposition of a Common share, from such liability provided that the value of the Common share is not derived principally from real property (including resource property) situated in Canada or that the Investor does not have, and has not had within the 12-month period preceding the disposition, a "permanent establishment" or "fixed base", as those terms are defined for the purposes of the Treaty, available to the Investor in Canada. The Treaty may not be available to a non-resident investor that is a U.S. LLC which is not subject to tax in the U.S. Any dividend on a Common share, including a stock dividend, paid or credited, or deemed to be paid or credited, by the Company to an Investor will be subject to Canadian withholding tax at the rate of 25% on the gross amount of the dividend, or such lesser rate as may be available under an applicable income tax treaty. Pursuant to the Treaty, the rate of withholding tax applicable to a dividend paid on a Common share to an Investor who is a resident of the United States for the purposes of the Treaty will be reduced to 5% if the beneficial owner of the dividend is a company that owns at least 10% of the voting stock of the Company, and in any other case will be reduced to 15%, of the gross amount of the dividend. It is Canada Customs and Revenue Agency's position that the Treaty reductions are not available to an Investor that is a "limited liability company" resident in the United States. The Company will be required to withhold any such tax from the dividend, and remit the tax directly to Canada Customs and Revenue Agency for the account of the Investor. Page 58 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES - ----------------------------------------------------- The following is a general discussion of the material United States Federal income tax law for U.S. holders that hold such common shares as a capital asset, as defined under United States Federal income tax law and is limited to discussion of U.S. Holders that own less than 10% of the common stock. This discussion does not address all potentially relevant Federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of Federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any future legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. The following discussion is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of common shares of the Company and no opinion or representation with respect to the United States Federal income tax consequences to any such holder or prospective holder is made. Accordingly, holders and prospective holders of common shares of the Company should consult their own tax advisors about the Federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares of the Company. U.S. Holders As used herein, a "U.S. Holder" is a holder of common shares of the Company who or which is a citizen or individual resident (or is treated as a citizen or individual resident) of the United States for federal income tax purposes, a corporation or partnership created or organized (or treated as created or organized for federal income tax purposes) in the United States, including only the States and District of Columbia, or under the law of the United States or any State or Territory or any political subdivision thereof, or a trust or estate the income of which is includable in its gross income for federal income tax purposes without regard to its source, if, (i) a court within the United States is able to exercise primary supervision over the administration of the trust and (ii) one or more United States trustees have the authority to control all substantial decisions of the trust. For purposes of this discussion, a U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers and Holders who acquired their stock through the exercise of employee stock options or otherwise as compensation. Distributions on common shares of the Company U.S. Holders, who are not subject to any of the provisions described in the "Other Consideration for U.S. Holders" section, and who receive distributions (including constructive dividends) with respect to common shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Any Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder's United States Federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States Federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below). To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the common shares and thereafter as gain from the sale or exchange of the common shares. Preferential tax rates for long-term capital gains are applicable to a U.S. Holder which is an individual, estate or trust, if such holder has satisfied applicable holding period requirements. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder which is a corporation. Dividends paid on the common shares of the Company will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder which is a corporation may, under certain circumstances, be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualifies as a "foreign personal holding company" or a "passive foreign investment company", as defined below) if such U.S. Holder owns shares Page 59 representing at least 10% of the voting power and value of the Company. The availability of this deduction is subject to several complex limitations which are beyond the scope of this discussion. Foreign Tax Credit A U.S. Holder, who does not fall under any of the provisions contained within the "Other Consideration for U.S. Holders" section, and who pays (or has had withheld from distributions) Canadian income tax with respect to the ownership of common shares of the Company may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States income tax liability that the U.S. Holder's foreign source income bears to his or its world-wide taxable income. In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", "shipping income", and certain other classifications of income. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of common shares of the Company should consult their own tax advisors regarding their individual circumstances. Disposition of common shares of the Company A U.S. Holder, who does not fall under any of the provisions contained within the "Other Consideration for U.S. Holders" section, will recognize gain or loss upon the sale of common shares of the Company equal to the difference, if any, between the amount of cash plus the fair market value of any property received, and the Holder's tax basis in the common shares of the Company. This gain or loss will be capital gain or loss if the common shares are a capital asset in the hands of the U.S. Holder unless the Company was a controlled foreign corporation at the time of the disposition. For the effect on the Company of becoming a controlled corporation, see "Controlled Foreign Corporation Status" below. Any capital gain will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital losses are subject to significant limitations. For U.S. Holders who are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders which are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. Other Considerations for U.S. Holders In the following circumstances, the above sections of this discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of common shares of the Company: Foreign Personal Holding Company If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Company's outstanding shares is owned, actually or constructively, by five or fewer individuals who are citizens or residents of the United States and 60% or more of the Company's gross income for such year was derived from certain passive sources (e.g., interest, dividends, annuities and royalties), the Company would be treated as a "foreign personal holding company." In that event, U.S. Holders that hold common shares of the Company would be required to include in income for such year their allocable portion of the Company's passive income which would have been treated as a dividend had that passive income actually been distributed. The Company does not believe that it is currently a foreign personal holding company. Page 60 Foreign Investment Company If 50% or more of the combined voting power or total value of the Company's outstanding shares are held, actually or constructively, by U.S. Holders, as defined in the "U.S. Holders" section above, and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that the Company might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging common shares of the Company to be treated as ordinary income rather than capital gains. The Company does not believe that it is currently a foreign investment company. Passive Foreign Investment Company A U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a passive foreign investment company ("PFIC") is subject to U.S. federal income taxation of that foreign corporation under one of two alternative tax methods at the election of each such U.S. Holder. Section 1297 of the Code defines a PFIC as a corporation that is not formed in the United States and, for any taxable year, either (i) 75% or more of its gross income is "passive income," which includes but is not limited to interest, dividends and certain rents and royalties or (ii) the average percentage, by value (or, if the company is a controlled foreign corporation or makes an election, adjusted tax basis), of its assets that produce or are held for the production of "passive income" is 50% or more. The Company believes that it is a PFIC. As a PFIC, each U. S. Holder must determine under which of the alternative tax methods it wishes to be taxed. Under one method, a U.S. Holder who elects in a timely manner to treat the Company as a Qualified Electing Fund ("QEF"), as defined in the Code, (an "Electing U.S. Holder") will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year in which the Company's qualifies as a PFIC on his pro-rata share of the Company's (i) "net capital gain" (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain to the Electing U.S. Holder and (ii) "ordinary earnings" (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income to the Electing U.S. Holder, in each case, for the U.S. Holder's taxable year in which (or with which) the Company taxable year ends, regardless of whether such amounts are actually distributed. A QEF election also allows the Electing U.S. Holder to (i) generally treat any gain recognized on the disposition of his common shares (or deemed to be recognized on the pledge of his common shares) as capital gain; (ii) treat his share of the Company's net capital gain, if any, as long-term capital gain instead of ordinary income, and (iii) either avoid interest charges resulting from PFIC status altogether (see discussion of interest charge below), or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of the Company's annual realized net capital gain and ordinary earnings subject, however, to an interest charge. If the Electing U.S. Holder is not a corporation, such an interest charge would be treated as "personal interest" that is not deductible at all in taxable years beginning after 1990. The procedure a U.S. Holder must comply with in making an timely QEF election will depend on whether the year of the election is the first year in the U.S. Holder's holding period in which the Company is a PFIC. If the U.S. Holder makes a QEF election in such first year, (sometimes referred to as a "Pedigreed QEF Election"), then the U.S. Holder may make the QEF election by simply filing the appropriate documents at the time the U.S. Holder files its tax return for such first year. If, however, the Company qualified as a PFIC in a prior year during which the U.S. Holder owned stock, then in addition to filing documents, the U.S. Holder may also elect to recognize as an "excess distribution" (i) under the rules of Section 1291 (discussed below), any gain that he would otherwise recognize if the U.S. Holder sold his stock on the application date or (ii) if the Company is a controlled foreign corporation ("CFC"), the Holder's pro rata share of the corporation's earnings and profits. (But see "Elimination of Overlap Between Subpart F Rules and PFIC Provisions"). Either the deemed sale election or the deemed dividend election will result in the U.S. Holder being deemed to have made a timely QEF election. With respect to a situation in which a Pedigreed QEF election is made, if the Company no longer qualifies as a PFIC in a subsequent year, normal Code rules apply, not the PFIC rules. Page 61 If a U.S. Holder has not made a QEF Election at any time (a "Non-electing U.S. Holder"), then special taxation rules under Section 1291 of the Code will apply to (i) gains recognized on the disposition (or deemed to be recognized by reason of a pledge) of his common shares and (ii) certain "excess distributions", as specially defined, by the Company. Generally, an "excess distribution" is the portion of a distribution that exceeds 125% of the average distributions received by the U.S. Holder during the preceding three taxable years. A Non-electing U.S. Holder generally would be required to pro-rate all gains realized on the disposition of his common shares and all excess distributions over the entire holding period for the common shares. All gains or excess distributions allocated to prior years of the U.S. Holder during which the Company was a PFIC would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year. A Non-electing U.S. Holder that is not a corporation must treat this interest charge as "personal interest" which, as discussed above, is wholly non-deductible. The balance of the gain or the excess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with respect to such balance. If the Company is a PFIC for any taxable year during which a Non-electing U.S. Holder holds common shares, then the Company will continue to be treated as a PFIC with respect to such common shares, even if it is no longer by definition a PFIC. A Non-electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-Electing U.S. Holders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC. Under Section 1291(f) of the Code, the Department of the Treasury has issued proposed regulations that would treat as taxable certain transfers of PFIC stock by Non-electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. If a U.S. Holder makes a QEF Election that is not a Pedigreed Election (i.e., it is made after the first year during which the Company is a PFIC and the U.S. Holder holds shares of the Company) (a "Non-Pedigreed Election"), the QEF rules apply prospectively but do not apply to years prior to the year in which the QEF first becomes effective. U.S. Holders should consult their tax advisors regarding the specific consequences of making a Non-Pedigreed QEF Election. Certain special, generally adverse, rules will apply with respect to the common shares while the Company is a PFIC whether or not it is treated as a QEF. For example under Section 1298(b)(6) of the Code, a U.S. Holder who uses PFIC stock as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such stock. The foregoing discussion is based on currently effective provisions of the Code, existing and proposed regulations thereunder, and current administrative rulings and court decisions, all of which are subject to change. Any such change could affect the validity of this discussion. In addition, the implementation of certain aspects of the PFIC rules requires the issuance of regulations which in many instances have not been promulgated and which may have retroactive effect. There can be no assurance that any of these proposals will be enacted or promulgated, and if so, the form they will take or the effect that they may have on this discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. Holders of the Company are strongly urged to consult their own tax advisors concerning the impact of these rules on their investment in the Company. Mark-to-Market Election for PFIC Stock Section 1296 of the Code provides that a U.S. Holder of a PFIC may make a mark-to-market election with respect to the stock of the PFIC if such stock is marketable as defined below. This provision is designed to provide a current inclusion provision for persons that are Non-Electing Holders. Under the election, any excess of the fair market value of the PFIC stock at the close of the tax year over the Holder's adjusted basis in the stock is included in the Holder's income. The Holder may deduct any excess of the adjusted basis of the PFIC stock over its fair market value at the close of the tax year. However, deductions are limited to the net mark-to-market gains on the stock that the Holder included in income in prior tax years, or so called "unreversed inclusions." Page 62 For purposes of the election, PFIC stock is marketable if it is regularly traded on (1) a national securities exchange that is registered with the U.S. Securities and Exchange Commission, (2) the national market system established under Section 11A of the Securities Exchange Act of 1934, or (3) an exchange or market that the IRS determines has rules sufficient to ensure that the market price represents legitimate and sound fair market value. A Holder's adjusted basis of PFIC stock is increased by the income recognized under the mark-to-market election and decreased by the deductions allowed under the election. If a U.S. Holder owns PFIC stock indirectly through a foreign entity, the basis adjustments apply to the basis of the PFIC stock in the hands of the foreign entity for the purpose of applying the PFIC rules to the tax treatment of the U.S. owner. Similar basis adjustments are made to the basis of the property through which the U.S. persons hold the PFIC stock. Income recognized under the mark-to-market election and gain on the sale of PFIC stock with respect to which an election is made is treated as ordinary income. Deductions allowed under the election and loss on the sale of PFIC with respect to which an election is made, to the extent that the amount of loss does not exceed the net mark-to-market gains previously included, are treated as ordinary losses. The U.S. or foreign source of any income or losses is determined as if the amount were a gain or loss from the sale of stock in the PFIC. If PFIC stock is owned by a CFC (discussed below), the CFC is treated as a U.S. person that may make the mark-to-market election. Amounts includable in the CFC's income under the election are treated as foreign personal holding company income, and deductions are allocable to foreign personal holding company income. The rules of Code Section 1291 applicable to nonqualified funds generally do not apply to a U.S. Holder for tax years for which a mark-to-market election is in effect. If Code Section 1291 is applied and a mark-to-market election was in effect for any prior tax year, the U.S. Holder's holding period for the PFIC stock is treated as beginning immediately after the last tax year of the election. However, if a taxpayer makes a mark-to-market election for PFIC stock that is a nonqualified fund after the beginning of a taxpayer's holding period for such stock, a coordination rule applies to ensure that the taxpayer does not avoid the interest charge with respect to amounts attributable to periods before the election. Controlled Foreign Corporation Status If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by U.S. Holders, each of whom own 10% or more of the total combined voting power of all classes of stock of the Company, the Company would be treated as a "controlled foreign corporation" or "CFC" under Subpart F of the Code. This classification would bring into effect many complex results including the required inclusion by such 10% U.S. Holders in income of their pro rata shares of "Subpart F income" (as defined by the Code) of the Company and the Company's earnings invested in "U.S. property" (as defined by the Code). In addition, under Section 1248 of the Code, gain from the sale or exchange of common shares of the Company recognized by a shareholder who was a 10% U.S. Holder of the Company (while it constituted a CFC) at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged. The Company believes that is is not currently a CFC. Because of the complexity of Subpart F, and because the Company may never be a CFC, a more detailed review of these rules is beyond of the scope of this discussion. Elimination of Overlap Between Subpart F Rules and PFIC Provisions Under Section 1297(e) of the Code, a PFIC that is also a CFC will not be treated as a PFIC with respect to certain 10% U.S. Holders. For the exception to apply, (i) the corporation must be a CFC within the meaning of section 957(a) of the Code and (ii) the U.S. Holder must be subject to the current inclusion rules of Subpart F with respect to such corporation (i.e., the U.S. Holder is a "United States Shareholder," see "Controlled Foreign Corporation," above). The exception only applies to that portion of a U.S. Holder's holding period beginning after December 31, 1997. For that portion of a United States Holder before January 1, 1998, the ordinary PFIC and QEF rules continue to apply. This rule is designed to eliminate the risk that a U.S. Holder would be required to include a foreign corporation's earnings currently under both Subpart F and the PFIC or QEF rules. Page 63 AVAILABILITY OF DOCUMENTS - ------------------------- Copies of all filings made with the Securities and Exchange Commission can be obtained from www.sec.gov. Copies of all documents filed with the Securities Commission in Canada can be obtained from the website located at www.sedar.com. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ================================================================================ The Company's exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income it can earn on its cash equivalents and on the increase or decrease in the amount of interest expense the Company must pay with respect to its capital lease obligations and long-term debt. The Company is subject to interest rate risk on its cash equivalents which at November 30, 2001 had an average interest rate of approximately 4.64%. During the fiscal year ended November 30, 2001, the Company was subject to interest rate risk on its capital lease obligations which carried an annual rate of 8.5% to 11.% and on its long-term debt which carried an annual rate of 10.77%. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company ensures the safety and preservation of its invested principal funds by limiting default risk, market risk and reinvestment risk, and mitigates default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments. Declines in interest rates over time will, however, reduce the Company's interest income while increases in interest rates over time will increase its interest expense. FOREIGN CURRENCY RISK - --------------------- The Company has operated primarily in Canada and most transactions in the fiscal year ending November 30, 2001, have been made in Canadian dollars. The Company also maintains U.S. currency accounts for transactions in settlement of U.S. dollars. The Company has not had any material exposure to foreign currency rate fluctuations, nor does it have any foreign currency hedging instruments in place. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ================================================================================ N/A. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ================================================================================ N/A. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS ================================================================================ The Company was incorporated under the Company Act (British Columbia). On March 8, 2002, the Company continued under the Canada Business Corporations Act. The rights of securities holders are substantially similar under the Company Act (British Columbia) and the Canada Business Corporations Act. In addition, on March 8, 2002, the Company effected a four-to-one share consolidation, or reverse stock split, resulting in its outstanding common shares being reduced from 113,172,393 to 28,293,098 and its fully diluted common shares being reduced from 136,370,232 to 34,092,558. Other than a pro rata reduction in each shareholder's number of shares, this transaction does not modify the rights of such shareholders. ITEM 15. RESERVED ================================================================================ Page 64 ITEM 16. RESERVED ================================================================================ PART III ITEM 17. FINANCIAL STATEMENTS ================================================================================ The financial statements filed as part of this Annual Report are listed in "Item 19. Financial Statements and Exhibits". The financial statements of the Company included herein, are stated in accordance with accounting principles generally accepted in Canada and have been reconciled to United States GAAP. The financial statements of Paralex included herein are stated in accordance with accounting principles generally accepted in the United States. For the history of exchange rates which were in effect for Canadian dollars against United States dollars, see "Item 3. Key Information - Currency Exchange Rates". ITEM 18. FINANCIAL STATEMENTS ================================================================================ The Company has elected to provide financial statements pursuant to "Item 17. Financial Statements". ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS ================================================================================ A. Financial Statements 1. audited consolidated financial statements of the Company including the consolidated balance sheets as at November 30, 2001 and 2000, the consolidated statements of loss and deficit and cash flow for the years ended November 30, 2001, 2000 and 1999, and the notes to those statements and the auditor's report thereon; 2. audited financial statements of Paralex including the balance sheet as at November 30, 2001, the statements of loss, deficit and cash flows for the period from January 26, 2001 (date of incorporation) to November 30, 2001, the notes to those statements and the auditor's report thereon; and 3. pro forma consolidated financial statements of the Company including the pro forma consolidated balance sheet as at November 30, 2001, the pro forma consolidated statements of loss for the year ended November 30, 2001 and the notes to those statements. B. Exhibits 1.1 Articles of Continuance of the Company(1) 1.2 By-Laws of the Company(2) 2.1 Form of Company's common share certificate. (3) 4.1 License agreement dated March 29, 1996 with the University of British Columbia(4) 4.2 Research Agreement dated March 1, 1997 with the University of British Columbia(5) 4.3 Agreement dated November 19, 1997 with Drs. MacLeod and Quastel(6) 4.4 Agreement dated October 16, 2000 with AstraZeneca (7) 4.5* Collaborative Research and License Agreement dated November 30, 2000 with Antalium Inc. 4.6 Investment Agreement dated May 24, 2000 with FutureFund Capital (VCC) Corp.(8) 4.7 Employment Agreement dated March 19, 1998 and subsequent Amendment Agreement dated March 20, 2001 with Mr. Robert Rieder. (9) 4.8 Employment Agreement dated November 24, 1998 with Dr. Gregory Beatch. (10) Page 65 4.9* Employment Agreement dated June 5, 2001 with Dr. Alan M. Ezrin. 4.10 2001 share option plan (11) 4.11* Introduction Agreement dated August 10, 2001 with Paramount Capital, Inc. 4.12* Acquisition Agreement dated December 21, 2001 with Paralex, Inc. and Cardiome, Inc. 4.13* Agency Agreement dated February 28, 2002 with Sprott Securities Inc. and Raymond James Ltd. 4.14* License agreement dated April 18, 2001, as amended by agreement dated October 18, 2001 between Paralex and The Johns Hopkins University. 4.15* License agreement dated December 19, 2001 between Paralex and ILEX Oncology, Inc. 4.16* Agreement dated May 2001 and dated as of January 1, 2002 between Paralex and Cardiosciences Consulting, Inc. 4.17 Common Share Purchase Warrant Indenture dated March 8, 2002 (including form of warrant) (12) 4.18 Form of warrant dated March 8, 2002 (included in Exhibit 4.17). (13) 4.19 Warrant dated March 8, 2002 issued to Paramount Capital, Inc. (14) 4.20* Warrant dated March 8, 2002 issued to Sprott Securities Inc. 4.21* Warrant dated March 8, 2002 issued to Raymond James Ltd. 4.22 Form of Subscription Agreement (15) 4.23 Registration Rights Agreement dated March 8, 2002 (16) 8.1* Subsidiaries of Company 10.1* Consent of Ernst & Young LLP, Independent Auditors Notes: * Filed herewith (1) Filed as exhibit 3.1 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002). (2) Filed as exhibit 3.2 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (3) Filed as exhibit 4.1 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (4) Filed as exhibit No. 3.1 to the Company's Registration Statement on Form 20-F (File No. 0-29338 filed on August 22, 1997). (5) Filed as exhibit No. 3.4 to the Company's Registration Statement on Form 20-F (File No. 0-29338 filed on August 22, 1997). (6) Filed as exhibit 2.8 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 1997 (File No. 0-29338). (7) Filed as exhibit 4.8 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed on June 4, 2001). Certain portions of this exhibit were omitted and filed separately with the Commission pursuant to an application for confidential treatment under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. (8) Filed as exhibit 4.11 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (9) Filed as exhibit 4.12 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (10) Filed as exhibit 4.13 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (11) Filed as exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed on June 4, 2001). (12) Filed as exhibit 4.2 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (13) Filed as exhibit 4.5 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) Page 66 (14) Filed as exhibit 4.6 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (15) Filed as exhibit 4.3 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (16) Filed as exhibit 4.4 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) Page 67 SIGNATURES - ---------- Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Company certifies that it meets all of the requirements for filing an Annual Report on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf. CARDIOME PHARMA CORP. /s/ Robert W. Rieder (signed) - -------------------------------------- Robert W. Rieder President and Chief Executive Officer Date: April 19, 2002 Consolidated Financial Statements Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) (Expressed in Canadian dollars) November 30, 2001 AUDITORS' REPORT To the Shareholders of Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) We have audited the consolidated balance sheets of Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) as at November 30, 2001 and 2000 and the consolidated statements of loss and deficit and cash flows for each of the years in the three year period ended November 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the three year period ended November 30, 2001 in accordance with Canadian generally accepted accounting principles. As required by the Company Act (British Columbia), we report that, in our opinion, these principles have been applied except for the change in the method of accounting for income taxes as explained in note 3[a] to the financial statements, on a consistent basis. As discussed in note 3 to the financial statements, the Company retroactively changed its policies for revenue recognition and its method of determining loss per common share. Vancouver, Canada, February 8, 2002 (except as to note 19[a] and 19[c] which are as of March 8, 2002 and note 19[e] which /s/ Ernst & Young LLP is as of March 28, 2002) Chartered Accountants Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the financial statements. Although we conducted our audits in accordance with both Canadian and U.S. generally accepted auditing standards, our report to the shareholders dated February 8, 2002 (except as to note 19[a] and 19[c] which are as of March 8, 2002 and note 19[e] which is as of March 28, 2002) is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements. Vancouver, Canada, /s/ Ernst & Young LLP February 8, 2002. Chartered Accountants Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) Incorporated under the laws of British Columbia CONSOLIDATED BALANCE SHEETS [See Note 1 - Nature of Operations and Basis of Presentation] As at November 30 (expressed in Canadian dollars) 2001 2000 $ $ - -------------------------------------------------------------------------------- [restated - see note 3[b]] ASSETS Current Cash and cash equivalents [note 5] 1,381,750 3,247,479 Short-term investments [notes 5, 9 and 10] 2,801,830 6,971,661 Amounts receivable and other [notes 6 and 15] 247,211 390,912 - -------------------------------------------------------------------------------- Total current assets 4,430,791 10,610,052 Capital assets [note 7] 302,583 452,970 Other assets [note 8] 1,536,249 2,009,018 - -------------------------------------------------------------------------------- 6,269,623 13,072,040 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities [note 15] 907,700 999,702 Current portion of capital lease obligations - 41,145 Current portion of long-term debt [note 10] - 50,161 - -------------------------------------------------------------------------------- Total current liabilities 907,700 1,091,008 Deferred revenue 1,348,374 1,499,598 - -------------------------------------------------------------------------------- Total liabilities 2,256,074 2,590,606 - -------------------------------------------------------------------------------- Commitments [note 12] Shareholders' equity Share capital [note 11] 32,251,393 32,235,393 Special warrants [note 11[c]] 966,000 - Contributed surplus [note 11[f]] 1,192,266 1,056,266 Deficit (30,396,110) (22,810,225) - -------------------------------------------------------------------------------- Total shareholders' equity 4,013,549 10,481,434 - -------------------------------------------------------------------------------- 6,269,623 13,072,040 ================================================================================ See accompanying notes On behalf of the Board: /s/ Robert W. Rieder /s/ Colin R. Mallet Director Director Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT [See Note 1 - Nature of Operations and Basis of Presentation] Years ended November 30 (expressed in Canadian dollars)
2001 2000 1999 $ $ $ - ------------------------------------------------------------------------------------------------------------------ [restated - [restated - see notes 3[b] and 3[c]] see note 3[c]] REVENUE Research collaborative, licensing and option fees [notes 3[b] and 13] 197,028 92,095 482,876 Grant income 88,137 135,363 45,810 Interest and other income 347,078 495,894 258,395 - ------------------------------------------------------------------------------------------------------------------ 632,243 723,352 787,081 - ------------------------------------------------------------------------------------------------------------------ EXPENSES [note 15] Research and development [note 18] 5,498,838 4,732,656 3,585,593 General and administration [note 18] 1,741,193 1,569,044 997,890 Amortization 550,097 917,288 654,918 - ------------------------------------------------------------------------------------------------------------------ 7,790,128 7,218,988 5,238,401 - ------------------------------------------------------------------------------------------------------------------ Loss for the year (7,157,885) (6,495,636) (4,451,320) Deficit, beginning of year (22,810,225) (16,314,589) (11,863,269) Adjustment for future income taxes [note 3[a]] (428,000) - - - ------------------------------------------------------------------------------------------------------------------ Deficit, end of year (30,396,110) (22,810,225) (16,314,589) - ------------------------------------------------------------------------------------------------------------------ Net loss per common share [notes 3[c] and 11[h]] (0.69) (0.69) (0.66) - ------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding [notes 3[c] and 11[h]] 10,304,579 9,359,210 6,707,933 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS [See Note 1 - Nature of Operations and Basis of Presentation] Years ended November 30 (expressed in Canadian dollars)
2001 2000 1999 $ $ $ - ------------------------------------------------------------------------------------------------------------------ [restated - see note 3[b] OPERATING ACTIVITIES Loss for the year (7,157,885) (6,495,636) (4,451,320) Add items not affecting cash: Amortization 550,097 917,288 654,918 Stock-based compensation 136,000 16,000 - Changes in non-cash working capital items relating to operations: Amounts receivable and other 143,701 (132,396) 18,744 Accounts payable and accrued liabilities (214,156) 253,458 227,062 Deferred revenue (151,224) 1,499,598 - - ------------------------------------------------------------------------------------------------------------------ Cash used in operating activities (6,693,467) (3,941,688) (3,550,596) - ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Issuance of share capital - 8,009,619 5,412,353 Issuance of special warrants 966,000 - - Payment on obligations under capital leases (41,145) (60,602) (71,221) Repayment of long-term debt (50,161) (68,829) (61,830) - ------------------------------------------------------------------------------------------------------------------ Cash provided by financing activities 874,694 7,880,188 5,279,302 - ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of capital assets (74,776) (179,085) (60,190) Patent costs capitalized (125,090) (324,445) (168,160) Short-term investments 4,169,831 (4,396,494) (1,210,917) Increase in deferred acquisition costs (16,921) - - - ------------------------------------------------------------------------------------------------------------------ Cash provided by (used in) investing activities 3,953,044 (4,900,024) (1,439,267) - ------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents during the year (1,865,729) (961,524) 289,439 Cash and cash equivalents, beginning of year 3,247,479 4,209,003 3,919,564 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year 1,381,750 3,247,479 4,209,003 - ------------------------------------------------------------------------------------------------------------------ Supplemental cash flow information: Interest paid 5,369 15,850 27,704 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes Page 1 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Cardiome Pharma Corp. (the "Company") was incorporated under the Company Act (British Columbia) on December 12, 1986 under the name Nortran Resources Ltd. On June 24, 1992, the Company changed its name to Nortran Pharmaceuticals Inc. On June 20, 2001, the Company changed its name to Cardiome Pharma Corp. The Company is a drug discovery company engaged in the treatment of pathologies and conditions which are mediated by cellular ion channels. The Company's primary focus is the discovery and development of drugs designed to prevent cardiac arrhythmias. To date, the Company has not yet determined the ultimate economic viability of the drugs and has not commenced commercial operations for its drugs. The Company's consolidated financial statements for the year ended November 30, 2001 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future. The Company has suffered recurring losses and negative cash flows and has an accumulated deficit of $30,396,110 at November 30, 2001. These factors raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon its ability to obtain additional capital. Management expects to raise additional capital through private placements and public offerings [note 19]. The outcome of these matters cannot be predicted at this time. If the Company is unable to obtain adequate additional financing, management will be required to curtail the Company's operations. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue in business. 2. SIGNIFICANT ACCOUNTING POLICIES The Company prepares its accounts in accordance with Canadian generally accepted accounting principles. A reconciliation of amounts presented in accordance with United States generally accepted accounting principles is detailed in note 16. The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements: Page 2 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Principles of consolidation These consolidated financial statements include the accounts of Cardiome Pharma Corp., its wholly-owned Canadian subsidiaries, Rhythm-Search Developments Ltd. (RSD) and Atriven Cardiology Inc., and its wholly-owned United States subsidiary, Cardiome, Inc., an inactive company with nominal assets and liabilities. Cardiome, Inc. was incorporated on November 9, 2001 under the General Corporation Law of the State of Delaware. Significant intercompany accounts and transactions have been eliminated on consolidation. Use of estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts recorded in the consolidated financial statements. Actual results could differ from those estimates. Foreign currency translation Monetary assets and liabilities in foreign currencies are translated at the exchange rates in effect at the balance sheet date. All other assets and liabilities are translated at rates prevailing when the assets were acquired or liabilities incurred. Income and expense items are translated at the exchange rates in effect on the date of the transaction. Resulting exchange gains or losses are included in the determination of loss for the year. Cardiome, Inc. is considered an integrated foreign operation and its accounts are translated using the temporal method. Under this method, monetary items are translated at exchange rates in effect at the balance sheet date and non- monetary items are translated at exchange rates in effect at the time of the transactions. Revenue and expense items are translated at the average exchange rate during the year. Foreign exchange gains and losses are included in the determination of loss for the year. Cash equivalents The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents, which are carried at lower of cost or market. Page 3 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Short-term investments The Company considers all highly liquid financial instruments with an original maturity greater than 90 days to be short-term investments. Short-term investments are considered available for sale and are carried at the lower of cost or market. Capital assets Capital assets are recorded at cost less accumulated amortization. The Company records amortization of laboratory, computer and office equipment and web-site development costs on a straight-line basis over 3 to 5 years. Leasehold improvements are amortized on a straight-line basis over the term of the lease plus one renewal period. Equipment under capital lease is amortized on a straight-line basis over the shorter of the lease term or 5 years. Technology, license and patent costs The fair value of the technology acquired has been recorded as other assets. Technology and licenses are amortized on a straight-line basis over a period of ten years. The Company capitalizes patent costs associated with the preparation, filing, and obtaining of patents. The cost of the patents is amortized on a straight-line basis over the estimated useful lives of the patents of ten years. The amounts shown for technology, license and patent costs do not necessarily reflect present or future values and the ultimate amount recoverable will be dependent upon the successful development and commercialization of products based on these rights. If management determines that such costs exceed estimated net recoverable value, based on estimated future cash flows, the excess of such costs are charged to operations. Leases Leases have been classified as either capital or operating leases. Leases which transfer substantially all of the benefits and risks incidental to the ownership of assets are accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred. Page 4 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Government assistance Government assistance towards current expenses is included in revenue when there is reasonable assurance that the Company has complied with all conditions necessary to receive the grants and collectibility is reasonably assured. Revenue Research collaborative fees, which are non-refundable, are recorded as revenue as the related research expenses are incurred pursuant to the terms of the agreement and provided collectibility is reasonably assured. Option fees are recognized when the Company has fulfilled the obligation in accordance with the provisions of the contractual arrangement. Licensing fees comprise initial fees and milestone payments derived from collaborative licensing arrangements. When the Company has no further involvement or obligation to perform under the arrangement and the related costs and effort are considered substantial, non-refundable milestones are recognized upon the achievement of the specified milestones. Otherwise, non-refundable milestone payments and initial fees are deferred and amortized into revenue on a straight-line basis over the term of the relevant license or related underlying product development of ten years. Research and development costs Research costs are expensed in the year incurred. Development costs are expensed in the year incurred unless the Company believes a development project meets generally accepted accounting criteria for deferral and amortization. Stock based compensation The Company grants stock options to executive officers and directors, employees, consultants and clinical advisory board members pursuant to a stock option plan described in note 11[d]. No compensation is recognized for these plans when common shares are awarded or stock options are granted to officers, directors and employees. Any consideration received on exercise of stock options or the purchase of stock is credited to share capital. If common shares are repurchased, the excess or deficiency of the consideration paid over the carrying amount of the common shares cancelled is charged or credited to contributed surplus or deficit. Page 5 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Future income taxes The Company accounts for income taxes using the liability method of tax allocation. Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in earnings in the period that includes the enactment date. Future income tax assets are recorded in the financial statements if realization is considered more likely than not. Loss per common share Loss per common share is computed by dividing the net loss for the year by the weighted average number of common shares outstanding during the year, excluding shares held in escrow or other contingently issuable common shares. Diluted loss per common share has not been presented because outstanding options and warrants are anti-dilutive. 3. CHANGE IN ACCOUNTING PRINCIPLES [a] Income taxes Effective December 1, 2000, the Company adopted the new recommendations of The Canadian Institute of Chartered Accountants with respect to accounting for income taxes. The change has been applied retroactively and, as permitted, the comparative financial statements have not been restated. The change in accounting policy resulted in an increase in future tax assets, a decrease in technology, an increase in future tax liabilities and an increase in the deficit at December 1, 2000 of $428,000 and a reduction in amortization expense and net loss for the year ended November 30, 2001 of $102,720. Before the adoption of the new recommendations, income tax expense was determined using the deferral method of tax allocation. Page 6 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 3. CHANGE IN ACCOUNTING PRINCIPLES (cont'd.) [b] Revenue recognition Effective June 1, 2001, the Company changed its accounting policy for recognizing license fees to be consistent with U.S. GAAP, as clarified by Staff Accounting Bulletin 101 ("SAB 101") Revenue Recognition in Financial Statements, which was issued by the U.S. Securities and Exchange Commission in December 1999. License fees, which consist of initial upfront fees and milestone payments are deferred and amortized into revenue on a straight-line basis over the term of the relevant license or related underlying product development period if the Company has future involvement or obligation to perform under the arrangement, as described in note 2. Previously, the Company recognized upfront license fees and milestone payments as earned in accordance with the terms of the related agreement which was generally the period the payment was received. During the year ended November 30, 2001, the change resulted in an increase in research collaborative, licensing, and option fees and a decrease in the net loss of $151,224 from $7,309,109 that would have been reported had the change not been made. This change has been applied retroactively and prior periods have been restated with the following effect:
As originally reported As restated Years ended November 30, Years ended November 30, 2001 2000 1999 2001 2000 1999 $ $ $ $ $ $ - ----------------------------------------------------------------------------------------------------------------------- Research collaborative, licensing and option fees 197,028 2,081,046 482,876 197,028 92,095 482,876 Loss for the year (7,157,885) (4,496,038) (4,451,320) (7,157,885) (6,495,636) (4,451,320) Net loss per common share [note 3[c]] (0.69) (0.48) (0.63) (0.69) (0.69) (0.66) Deferred revenue 1,348,374 - - 1,348,374 (1,499,598) - Deficit (30,396,110) (20,810,627) (16,314,589) (30,396,110) (22,810,225) (16,314,589) - -----------------------------------------------------------------------------------------------------------------------
[c] Loss per common share Effective September 1, 2001, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants Section 3500 ("Earnings per share") with respect to the calculation of loss per common share. The change in accounting policy has been applied retroactively and all prior years have been restated. The impact of this change in accounting policy was to exclude escrowed shares [note 11[f]] from the weighted average number of common shares outstanding in the calculation of loss per common share. For the year ended November 30, 2001, the change resulted in an increase in the loss per common share of $nil [2000 - $nil; 1999 - $0.03] to $0.69 [2000 - $0.69; 1999 - $0.66] from $0.69 [2000 - $0.69; 1999 - $0.63] that would have been reported had the change not been made. Page 8 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 4. FINANCIAL INSTRUMENTS For certain of the Company's financial instruments, including cash equivalents, short-term investments, amounts receivable and other, and accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short-term nature. The long-term debt and the obligations under capital leases bore interest at rates which, in management's opinion, approximated the current interest rates and therefore, approximated their fair value. 5. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents include approximately $1,094,000 [2000 - $2,914,000] of commercial papers, bankers' acceptances and term deposits with an average interest rate of 4.64% at November 30, 2001 [2000 - 6.02%]. In addition, cash equivalents include amounts denominated in U.S. dollars aggregating $nil [November 30, 2000 - $1,216,560 (US$792,031)]. Short-term investments comprise mainly commercial papers and term deposits with an average interest rate of 3.23% at November 30, 2001 [2000 - 5.76%] and maturities to April 2002 [2000 - July 2001]. 6. AMOUNTS RECEIVABLE AND OTHER 2001 2000 $ $ - ----------------------------------------------------------------------------- Prepaid expenses 147,681 137,287 Interest and other receivables 99,530 253,625 - ----------------------------------------------------------------------------- 247,211 390,912 - ----------------------------------------------------------------------------- Page 9 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 7. CAPITAL ASSETS Accumulated Net book Cost amortization value $ $ $ - -------------------------------------------------------------------------------- 2001 Laboratory equipment 728,194 509,386 218,808 Computer equipment 369,468 360,322 9,146 Office equipment 109,242 67,848 41,394 Leasehold improvements 29,255 7,765 21,490 Web-site development costs 13,640 1,895 11,745 - -------------------------------------------------------------------------------- 1,249,799 947,216 302,583 - -------------------------------------------------------------------------------- 2000 Laboratory equipment 583,238 310,588 272,650 Computer equipment 347,998 299,304 48,694 Office equipment 98,451 46,585 51,866 Leasehold improvements 10,093 2,021 8,072 Equipment under capital lease 135,243 63,555 71,688 - -------------------------------------------------------------------------------- 1,175,023 722,053 452,970 - -------------------------------------------------------------------------------- Page 10 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 8. OTHER ASSETS Accumulated Net book Cost amortization value $ $ $ - -------------------------------------------------------------------------------- 2001 Technology 2,968,193 2,190,015 778,178 License 105,208 52,603 52,605 Patents 1,121,198 570,807 550,391 Deferred acquisition costs [note 19[a]] 155,075 - 155,075 - -------------------------------------------------------------------------------- Total 4,349,674 2,813,425 1,536,249 - -------------------------------------------------------------------------------- 2000 Technology 3,396,193 1,953,115 1,443,078 License 105,208 42,082 63,126 Patents 996,108 493,294 502,814 - -------------------------------------------------------------------------------- Total 4,497,509 2,488,491 2,009,018 - -------------------------------------------------------------------------------- During the year ended November 30, 2001, the Company recorded additional amortization expense of approximately $nil [2000 - $287,000; 1999 - $nil] with respect to patents no longer directly related to the Company's current focus. 9. CREDIT FACILITY At November 30, 2001, the Company has available an operating line of credit of $30,000 [2000 - $100,000]. Borrowings under this operating line of credit are collateralized by a cashable certificate of $100,000 [2000 - $100,000] which is included in short-term investments. This credit facility bears interest at the bank's prime rate and is payable on demand. At November 30, 2001 and 2000, there was no outstanding balance drawn on this credit facility. Page 11 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 10. LONG-TERM DEBT 2001 2000 $ $ - -------------------------------------------------------------------------------- Promissory note with interest rate of 10.77% per annum, repaid in blended monthly instalments of $6,468 per month - 50,161 Less: current portion - (50,161) - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- As collateral, the Company assigned short-term investments with a maturity value of $100,000 to the lender, which were released as collateral in November 2001. Interest expense during the year ended November 30, 2001 amounted to $1,583 [2000 - $8,788; 1999 - $15,786]. Page 12 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL [a] Authorized 200,000,000 common shares without par value [b] Issued Number of common shares Amount # $ - -------------------------------------------------------------------------------- Balance, November 30, 1998 6,918,325 19,951,850 Issued for cash upon exercise of options 1,250 5,000 Issued for cash upon exercise of warrants [v] and [vi] 234,750 845,100 Issued for cash pursuant to private placements, net of issuance costs [iv] 1,821,411 4,480,090 - -------------------------------------------------------------------------------- Balance, November 30, 1999 8,975,736 25,282,040 Issued for cash upon exercise of options 44,500 151,190 Issued for cash upon exercise of warrants [iv] 182,141 509,995 Issued for cash pursuant to private placements, net of issuance costs [ii] and [iii] 1,476,585 7,348,434 Return of escrow shares [note 11[f]] (375,000) (1,056,266) - -------------------------------------------------------------------------------- Balance, November 30, 2000 10,303,962 32,235,393 Issued pursuant to a technology assignment agreement [i] 5,000 16,000 - -------------------------------------------------------------------------------- Balance, November 30, 2001 10,308,962 32,251,393 - -------------------------------------------------------------------------------- [i] In October 2001, the Company issued 5,000 common shares in settlement of an accounts payable balance of $16,000 with respect to a technology assignment agreement. [ii] On June 19, 2000, the Company completed a private placement of 1,387,300 special warrants at a price of $5.60 each for total gross proceeds of $7,768,880. Each special warrant was converted into one common share and one half of one common share purchase warrant, for no additional consideration. Each full warrant entitles the holder to acquire one common share at $6.40 expiring April 14, 2002. All of these warrants remain outstanding at November 30, 2001 [note 11[e]]. In connection with the private placement, the Company paid a cash commission of $543,822 and legal and professional fees of $376,624 and granted 138,730 agent's options to the lead agent of this financing which were converted into 138,730 common share purchase warrants. Each share purchase warrant entitled the holder to purchase one common share at $5.60. All of these share purchase warrants expired on October 14, 2001. Page 13 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL (cont'd.) [iii] On June 5, 2000, the Company completed a non-brokered private placement of 89,286 units at $5.60 per unit for gross proceeds of $500,000. Each unit was converted into one common share and one half of one common share purchase warrant. Each full warrant share entitles the holder to acquire one common share at $6.40 expiring June 5, 2002. All of these warrants remain outstanding as at November 30, 2001 [note 11[e]]. [iv] On November 18, 1999, the Company completed a private placement of 1,821,411 special warrants at a price of $2.80 each for total gross proceeds of $5,099,950. Each special warrant was converted into one common share at no additional cost. In connection with the private placement, the Company paid a cash commission of $304,496 and legal and professional fees of $315,364 and granted 182,141 agent's options to the lead agent of this financing which were converted into 182,141 share purchase warrants. Each share purchase warrant entitled the holder to purchase one common share at $2.80 until August 11, 2001. All share purchase warrants were exercised during the year ended November 30, 2000. [v] On June 30, 1997, the Company completed a brokered private placement of 250,000 units at $2.88 per unit for gross proceeds of $720,000. Each unit comprised one common share and one common share purchase warrant. In addition, the underwriting agent received 25,000 agent's warrants. Each full warrant entitled the holder to acquire one common share at $2.88 in the first year and $3.60 in the subsequent year. Of the 275,000 warrants issued, 55,000 were exercised during the year ended November 30, 1998 and 34,750 were exercised during the year ended November 30, 1999. The balance of 185,250 expired on June 29, 1999. [vi] On May 9, 1997, the Company completed a non-brokered private placement of 625,000 units at $2.88 per unit for gross proceeds of $1,800,000. Each unit comprised one common share and one common share purchase warrant. Each full warrant entitled the holder to acquire one common share at $2.88 in the first year and $3.60 in the subsequent year. Of the 625,000 warrants issued, 425,000 were exercised during the year ended November 30, 1998. The remaining 200,000 were exercised during the year ended November 30, 1999. Page 14 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL (cont'd.) [c] Special warrants On October 10, 2001, the Company completed a private placement of 458,583 special warrants at a price of $2.40 each for total gross proceeds of $1,100,600. Each special warrant is convertible into one common share of the Company and one half of one common share purchase warrant, for no additional consideration. Each full purchase warrant entitles the holder to acquire one common share at $3.20 expiring October 10, 2003. In connection with the private placement, the Company paid a cash commission of $28,042 and legal and professional fees of $106,558, and granted 16,691 agent's warrants to the lead agent of this financing. Each warrant entitles the holder to purchase one common share at $2.40 per share until October 10, 2003. Pursuant to a final prospectus qualifying the common shares and common share purchase warrants on January 30, 2002, the Company issued 458,583 common shares and 229,292 common share purchase warrants. [d] Stock options In May 1998, the shareholders approved the 1998 Stock Option Plan for which up to 1,000,000 common shares can be reserved for issuance to executive officers, directors, employees, consultants and clinical advisory board members of the Company. On May 28, 2001, the shareholders approved a new stock option plan ("2001 Plan") for which up to 1,500,000 common shares can be reserved for issuance to executive officers and directors, employees, consultants and clinical advisory board members of the Company. The shareholders also approved the merger of the 1998 Plan into the 2001 Plan such that the options outstanding under the 1998 Plan shall be deemed to be outstanding under the 2001 Plan to the same extent as if they were originally granted under the 2001 Plan. The shares available for issuance under the 2001 Plan generally vest over a period beginning immediately and up to 5 years with a term of six years. Of the total stock options outstanding at November 30, 2001, 180,000 options vest upon the achievement of certain milestones [November 30, 2000 - 55,000]. At November 30, 2001, the Company has 420,313 [November 30, 2000 - 85,950] common shares available for future issuance under the 2001 Plan. Page 15 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL (cont'd.) At November 30, 2001, stock options to executive officers and directors, employees, consultants and clinical advisory board members were outstanding as follows: Number of common shares under option currently exercisable Exercise price Date of expiry # # $ - -------------------------------------------------------------------------------- 37,500 37,500 2.80 April 2, 2002 72,500 72,500 5.60 April 2, 2002 10,000 10,000 5.68 April 20, 2002 20,000 20,000 5.00 May 29, 2002 5,000 2,500 2.92 July 31, 2002 25,000 25,000 2.44 October 31, 2002 150,000 120,000 5.96 March 17, 2003 15,000 15,000 4.40 February 8, 2004 57,500 55,000 6.32 June 11, 2004 66,250 66,250 4.20 October 15, 2004 12,500 12,500 2.44 October 31, 2004 7,500 7,500 5.04 January 10, 2005 12,500 5,000 4.20 February 24, 2005 13,750 13,750 7.24 March 29, 2005 15,000 12,500 2.44 October 31, 2005 12,500 5,000 4.20 February 13, 2006 117,188 72,188 5.08 May 24, 2006 60,000 60,000 3.00 August 21, 2006 66,250 33,875 5.52 September 12, 2006 18,750 5,000 6.20 September 17, 2006 9,375 - 2.60 December 18, 2006 187,500 62,500 2.92 January 29, 2007 7,500 - 3.52 May 27, 2007 18,750 - 3.00 August 21, 2007 61,875 12,500 2.80 November 26, 2007 - -------------------------------------------------------------------------------- 1,079,688 726,063 ================================================================================ Page 16 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL (cont'd.) Stock options outstanding at November 30, 2001, are summarized as follows: Number of Weighted average common shares exercise under option price # $ - -------------------------------------------------------------------------------- Balance, November 30, 1998 591,825 5.24 Options granted 120,000 3.68 Options exercised (1,250) 4.00 Options forfeited (39,825) 4.84 - -------------------------------------------------------------------------------- Balance, November 30, 1999 670,750 5.00 Options granted 318,438 5.24 Options exercised (44,500) 3.40 Options forfeited (25,000) 5.20 - -------------------------------------------------------------------------------- Balance, November 30, 2000 919,688 5.16 Options granted 391,250 2.92 Options forfeited (221,250) 5.08 Options cancelled [i] (10,000) 4.92 - -------------------------------------------------------------------------------- Balance, November 30, 2001 1,079,688 4.37 - -------------------------------------------------------------------------------- [i] On August 22, 2001, pursuant to the adoption of a new director's compensation package, the Company cancelled 10,000 stock options with an exercise price of $4.20 previously granted to a director and granted 7,500 new stock options with an exercise price of $3.00. [e] Common share purchase warrants At November 30, 2001, common share purchase warrants were outstanding as follows: Number of common shares issuable Exercise price # $ Date of expiry - -------------------------------------------------------------------------------- 693,650 6.40 April 14, 2002 44,643 6.40 June 5, 2002 187,500 [i] [i] 16,691 [note 11[c]] 2.40 October 10, 2003 229,292 [note 11[c]] 3.20 October 10, 2003 - -------------------------------------------------------------------------------- 1,171,776 - -------------------------------------------------------------------------------- [i] see note 12[d]. Page 17 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 11. SHARE CAPITAL (cont'd.) [f] Escrow shares Prior to February 22, 2000, the Company had 375,000 common shares held in escrow. The release of these shares was subject to regulatory approval upon achieving prescribed cumulative cash flow amounts. The 375,000 common shares held in escrow were cancelled effective February 22, 2000 upon the expiry of the escrow agreement. Accordingly, the weighted average per share amount attributed to the cancelled shares of $1,056,266 has been allocated to contributed surplus. [g] Commitment to issue shares Under the terms of a licensing agreement, the Company has agreed to issue 50,000 common shares to the licensor upon the achievement of certain milestones. At November 30, 2001 and 2000, these milestones had not been achieved. [h] Loss per common share 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Numerator Loss for the year (7,157,885) (6,495,636) (4,451,320) - -------------------------------------------------------------------------------- Denominator Weighted average number of common shares outstanding 10,304,579 9,445,511 7,082,933 Escrowed shares - (86,301) (375,000) - -------------------------------------------------------------------------------- 10,304,579 9,359,210 6,707,933 - -------------------------------------------------------------------------------- Loss per common share (0.69) (0.69) (0.66) - -------------------------------------------------------------------------------- Page 18 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 12. COMMITMENTS [a] Operating leases The Company leases its premises under an operating lease agreement. The minimum lease commitments under this operating lease agreement, expiring in March 2002, are approximately $80,000. Rent expense for the year ended November 30, 2001 amounted to $256,020 [2000 - $256,285; 1999 - $141,717]. [b] Research agreements The Company has entered into various collaborative research agreements requiring it to fund research expenditures of $1,400,000 for the year ending November 30, 2002. [c] License agreements Pursuant to a license agreement, the Company is responsible for payment of royalties based on a percentage of revenue, subject to certain minimum annual royalties. As at November 30, 2001 and 2000, no royalties were payable. The license agreement may be terminated by the licensor if certain development milestones are not met. Unless otherwise terminated, the agreement expires on the expiry date of the last issued patent. Pursuant to an agreement, the Company is responsible for payment of $500,000 upon commencement of Phase III clinical trials and a further $2,000,000 upon filing a New Drug Application in the United States or Canada for the licensed Nociblocker technology. As at November 30, 2001 and 2000, no amounts were payable. The agreement expires on the expiry date of the last patent relating to certain technology. Page 19 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 12. COMMITMENTS (cont'd.) [d] Service agreement In August 2001, the Company entered into a consulting agreement with a third party. The agreement requires the payment of US$5,000 per month for the term of the agreement, which expired on February 9, 2002. The Company is required to pay a fee based on the percentage of the consideration received by the Company from equity investments and/or partnering transactions facilitated by the consultant and issue additional warrants, as described in the agreement. In addition, the Company agreed to grant, subject to regulatory approval, 187,500 retainer warrants which vest on February 9, 2002 with the following terms [note 11[e]]. Number of options Exercise price # US$ Date of expiry - -------------------------------------------------------------------------------- 75,000 2.40 February 9, 2004 [i] 25,000 4.80 February 9, 2004 [i] 25,000 8.00 February 9, 2004 [i] and [ii] 37,500 2.40 February 9, 2007 [iii] 12,500 4.80 February 9, 2007 [iii] 12,500 8.00 February 9, 2007 [ii] and [iii] - -------------------------------------------------------------------------------- 187,500 - -------------------------------------------------------------------------------- The fair value of the warrants granted, which was estimated using the Black Scholes Pricing Model, in the amount of $136,000 has been recorded as an expense and an increase in contributed surplus in the consolidated financial statements for the year ended November 30, 2001. [i] The expiry date of these warrants may be extended through February 9, 2007 if certain milestones are achieved before August 9, 2003, as described in the consulting agreement. [ii] In November 2001, the exercise price of these warrants was decreased from $12.00 to $8.00, subject to regulatory and Board approval. [iii] In November 2001, the expiry date of these warrants was accelerated from February 9, 2009 to February 9, 2007, subject to regulatory and Board approval. Page 20 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 13. COLLABORATIVE AGREEMENTS On October 16, 2000, the Company entered into a licensing agreement with AstraZeneca AB ("AstraZeneca"), for the worldwide development and commercialization of RSD1122, an antiarrhythimic compound developed by the Company. Under the terms of the agreement, AstraZeneca agreed to pay the Company up to US$2,500,000 prior to the commencement of clinical trials of RSD1122, of which $nil was collected during the year ended November 30, 2001 [2000 - US$1,000,000], and further agreed to pay the Company additional payments totaling US$20,000,000 upon achievement of specified milestones relating to clinical trials, and royalties based on future net sales. AstraZeneca will assume responsibility for all costs for the development and marketing of RSD1122. The license agreement will terminate if certain development milestones are not met or after AstraZeneca provides the appropriate notice. Unless otherwise terminated, the royalty payment period will expire on the later of ten years from the first commercial sale of a product or the expiration of the last issued patent (see note 19[e]). The Company entered into a collaborative research and license agreement with Antalium Inc. ("Antalium") on November 30, 2000, for the worldwide rights for the development and commercialization of certain Nociblocker compounds developed by the Company. Pursuant to the agreement, Antalium has a right to select certain compound(s) from a group of test compounds delivered by the Company. Antalium agreed to pay the Company milestone payments and royalties based on future net sales for those compounds selected for further development. The license agreement will terminate if certain development milestones are not met. Unless otherwise terminated, the agreement will expire upon the expiration of the last issued patent. Antalium also agreed to provide screening and other tests on research compounds for the Company's cough project. Page 21 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 14. INCOME TAXES At November 30, 2001, the Company has investment tax credits and non-capital losses for income tax purposes which expire as follows: Investment Non-capital tax credits losses $ $ - ---------------------------------------------------------------------- 2002 - 332,000 2003 - 545,000 2004 4,000 1,530,000 2005 62,000 2,830,000 2006 111,000 2,549,000 2007 261,000 2,482,000 2008 520,000 3,998,000 2009 402,000 - 2010 558,000 - 2011 745,000 - - ---------------------------------------------------------------------- 2,663,000 14,266,000 - ---------------------------------------------------------------------- Page 22 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 14. INCOME TAXES (cont'd.) Significant components of the Company's future tax assets and liabilities are shown below: November 30, December 1, 2001 2000 $ $ - -------------------------------------------------------------------------------- Future tax assets: Tax loss carryforwards 5,081,900 3,725,000 Research and development deductions and credits 5,485,900 2,472,400 Tax values of depreciable assets in excess of accounting values 649,400 525,700 Revenue unearned for accounting purposes 480,300 710,000 Share issue costs 328,200 406,600 Other items 2,600 63,600 - -------------------------------------------------------------------------------- Total future tax assets 12,028,300 7,903,300 Valuation allowance (11,647,100) (7,475,300) - -------------------------------------------------------------------------------- Total future tax assets 381,200 428,000 - -------------------------------------------------------------------------------- Future tax liabilities: Accounting value of technology in excess of tax value (381,200) (428,000) - -------------------------------------------------------------------------------- Total future tax liabilities (381,200) (428,000) - -------------------------------------------------------------------------------- Net future tax assets - - - -------------------------------------------------------------------------------- The potential income tax benefits relating to these future tax assets have not been recognized in the accounts as their realization did not meet the requirements of "more likely than not" under the liability method of tax allocation. In prior periods the Company had concluded the realization of the loss carryforwards and tax credits under the deferral method of tax allocation did not meet the virtual certainty and reasonable assurance test. Accordingly, no future tax assets were recorded at November 30, 2001 and 2000. Page 23 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 14. INCOME TAXES (cont'd.) The reconciliation of income tax attributable to operations computed at the statutory tax rates to income tax expense (recovery), using a 44.62% [2000 - 45.62%; 1999 - 45.62%] statutory tax rate, is: Liability Deferral method method Years ended November 30, --------- ------------------------ 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Tax provision at combined statutory income tax rate (3,193,900) (2,963,300) (2,030,700) Occurrence of losses and deferred tax credits for which no tax benefit has been recorded 1,784,000 1,360,300 1,162,800 Amortization in excess of capital cost allowance for tax 245,500 418,500 617,000 Research and development expenses not deducted for tax purposes 1,383,100 690,700 619,400 Share issue costs (158,300) (196,500) (112,500) Utilization of losses not previously booked - - (366,700) Revenue unearned for accounting purposes [note 3[b]] (67,400) 684,100 - Other 7,000 6,200 110,700 - -------------------------------------------------------------------------------- - - - - -------------------------------------------------------------------------------- 15. RELATED PARTY TRANSACTIONS The Company has incurred expenses for services provided to related parties as follows: 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Companies with a common director for: - - contract research services 16,838 30,539 163,954 - - administrative consulting services - - 6,500 Directors for: - - research consulting services 113,732 104,901 37,761 - - administrative consulting services 16,500 30,700 3,500 - -------------------------------------------------------------------------------- Page 24 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 15. RELATED PARTY TRANSACTIONS (cont'd.) All transactions are recorded at their exchange amounts and accounts payable are subject to normal trade terms. Included in amounts receivable at November 30, 2001 is $1,500 [November 30, 2000 - - $nil] due from a company with a common director. Included in accounts payable and accrued liabilities at November 30, 2001 is $84,709 [2000 - $18,276] owing to directors and/or companies with a common director. 16. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Company prepares the consolidated financial statements in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which as applied in these consolidated financial statements conform in all material respects to United States generally accepted accounting principles ("U.S. GAAP"), except as follows: [a] As described in note 3[a], the Company adopted the liability method of accounting for income taxes. As a result of differences in the transition rules between the recommendations of The Canadian Institute of Chartered Accountants with respect to accounting for income taxes and SFAS 109, there is a $325,280 [2000 - $428,000] difference in technology and deficit under U.S. GAAP. [b] Under U.S. GAAP, the Company has allocated the gross proceeds received from its private placements to the common shares or special warrants issued and warrants granted, based on their relative fair values. For the year ended November 30, 2000, the Company has allocated the portion of gross proceeds related to the warrants of approximately $1,085,000 to contributed surplus. The fair values of the warrants and special warrants were determined using the Black Scholes pricing model. Page 25 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 16. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.) [c] For reconciliation purposes to U.S. GAAP, the Company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related interpretations, in accounting for stock options granted to executive officers, directors and employees. Compensation expense is calculated based on the difference, on the date of grant, between the fair market value of the Company's stock and the exercise price and is recorded over the vesting period of the options. For purposes of reconciliation to U.S. GAAP, the Company will record, in future periods, additional compensation expense of $nil in respect of options granted to executive officers, directors and employees below fair market value [2000 - $4,100; 1999 - $nil]. The Company accounts for the cancellation and re-issuance of stock options to executive officers, directors and employees under APB 25 and related interpretations, whereby stock options cancelled and re-granted at a lower exercise, within six months of cancellation are subject to variable accounting. For the year ended November 30, 2001, no compensation expense was recorded as a result of stock options that were cancelled and re-granted to executive officers, directors and employees. [d] Under U.S. GAAP, stock based compensation to non-employees must be recorded at the fair value of the options granted. This compensation is expensed over the vesting periods of each option grant. The fair value of the stock options granted to non-employees during the year ended November 30, 2001 was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions: dividend yield 0.0%, expected volatility 0.99 [2000 - 0.96; 1999 - 0.83], risk-free interest rate 5.0% [2000 - 6.5%; 1999 - 5.7%] and expected average option life of 4.5 years [2000 - 4.8; 1999 - 3.7]. For purposes of reconciliation to U.S. GAAP, the Company will record, subject to remeasurement as the options vest, additional compensation expense of approximately $15,000 [2000 - $121,000, 1999 - $18,000] in respect of options granted to non-employees in future periods. [e] Under U.S. GAAP, short-term investments are classified as available for sale and carried at market values with unrealized gains or losses reflected as a component of accumulated other comprehensive income. [f] Under Canadian GAAP the effect of the change in accounting policy described in note 3[b] is recorded on a retroactive basis as an adjustment to prior years' reported losses. Under U.S. GAAP, the cumulative effect of the change is recorded as an adjustment to the current year's reported net loss. Page 26 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 16. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.) The effect of the above on the Company's consolidated financial statements is set out below: Consolidated statements of loss and deficit Years ended November 30 ------------------------------------------- 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Loss for year, Canadian GAAP (7,157,885) (6,495,636) (4,451,320) Adjustment to eliminate retroactive change in accounting policy [note 16[f]] - 1,499,598 - Amortization of other assets [note 16[a]] (102,720) - - Adjustment for stock-based compensation - employees (44,100) (28,400) - - non-employees (35,000) (179,500) (51,000) - -------------------------------------------------------------------------------- Loss for the year, U.S. GAAP before cumulative effect of change in accounting policy (7,339,705) (5,203,938) (4,502,320) Cumulative effect of change in accounting policy [note 16[f]] (1,499,598) - - - -------------------------------------------------------------------------------- Loss for the year, U.S. GAAP (8,839,303) (5,203,938) (4,502,320) Reclassification adjustment for unrealized gains on short-term investments (117,662) - - Unrealized gains on investments 29,591 117,662 - - -------------------------------------------------------------------------------- Comprehensive loss for the year, U.S. GAAP (8,927,374) (5,086,276) (4,502,320) - -------------------------------------------------------------------------------- Loss for the year, U.S. GAAP (8,839,303) (5,203,938) (4,502,320) - -------------------------------------------------------------------------------- Weighted average number of common shares outstanding, U.S. GAAP 10,304,579 9,359,210 6,707,933 - -------------------------------------------------------------------------------- Loss per common share, U.S. GAAP: Before change in accounting policy (0.71) (0.56) (0.67) Change in accounting policy (0.15) - - - -------------------------------------------------------------------------------- Loss per common share, U.S. GAAP (0.86) (0.56) (0.67) - -------------------------------------------------------------------------------- Page 27 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) Balance sheets Material variations in balance sheet accounts under U.S. GAAP are as follows: 2001 2000 $ $ - -------------------------------------------------------------------------------- Cash and cash equivalents 1,385,101 3,256,629 Short-term investments 2,828,070 7,080,173 Other assets 1,861,529 2,009,018 Deferred revenue 1,348,374 - Share capital 30,966,393 30,950,393 Accumulated other comprehensive income 29,591 117,662 Contributed surplus 3,311,516 3,096,416 Deficit (30,905,080) (22,065,777) - -------------------------------------------------------------------------------- 17. SEGMENTED INFORMATION The Company operates primarily in one business segment with all of its assets and operations located in Canada. All of the Company's revenues are generated in Canada. During the year ended November 30, 2001, 92% and 8% of research collaborative, licensing and option fees are derived from 2 collaborators in Sweden and United States, respectively [November 30, 2000 - 75% from one collaborator in Sweden; November 30, 1999 - 95% from one collaborator in Switzerland]. 18. RESEARCH AND DEVELOPMENT / GENERAL AND ADMINISTRATIVE EXPENSES [a] Research and development expenses comprise: 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Consulting and other 1,135,011 748,349 457,676 Lab supplies and operating facility 846,949 873,720 626,321 Salaries and benefits 1,430,766 1,313,371 1,211,697 Research and development agreements 2,086,112 1,797,216 1,289,899 - -------------------------------------------------------------------------------- 5,498,838 4,732,656 3,585,593 - -------------------------------------------------------------------------------- Page 28 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 18. RESEARCH AND DEVELOPMENT / GENERAL AND ADMINISTRATIVE EXPENSES (cont'd.) [b] General and administrative expenses comprise: 2001 2000 1999 $ $ $ - -------------------------------------------------------------------------------- Consulting and professional fees 538,630 314,562 191,509 Office and miscellaneous 530,827 668,414 317,197 Salaries and benefits 577,117 478,181 406,796 Travel and other 94,619 107,887 82,388 - -------------------------------------------------------------------------------- 1,741,193 1,569,044 997,890 - -------------------------------------------------------------------------------- 19. SUBSEQUENT EVENTS The following events occurred subsequent to November 30, 2001: [a] On December 21, 2001, the Company entered into an acquisition agreement with Paralex, Inc., a U.S. private company, whereby the Company will acquire all of the outstanding shares of Paralex, Inc. in exchange for common shares of the Company. On February 15, 2002, the shareholders approved the acquisition of Paralex, Inc. and authorized the directors to consolidate the shares on a four for one basis, subject to regulatory approval, and continue the Company under the Canada Business Corporation Act. All share capital, options, warrants and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the share consolidation. Costs incurred as at November 30, 2001 of $155,075 in connection with this agreement have been deferred. On March 8, 2002, the Company completed the acquisition of Paralex and issued 8,203,396 common shares of the Company. [b] The Company granted 25,000 options to acquire common shares at a weighted average exercise price of $3.00 per share expiring through December 12, 2007. In addition, 16,875 options to acquire common shares of the Company were forfeited at a weighted average exercise price of $4.96 per share expiring through November 26, 2007. Page 29 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (expressed in Canadian dollars) 19. SUBSEQUENT EVENTS (cont'd.) [c] On March 8, 2002, the Company issued, pursuant to public offering, 9,309,657 units at a price of $3.32 per unit. Each unit consists of one common share of the Company and one quarter of a common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share of the Company at an exercise price of $6.64, exercisable through March 8, 2004. The gross proceeds of the offering were $30,908,061 (before agents' fees of $2,163,564 and other expenses of approximately $500,000). In addition, the Company granted the agent warrants to acquire 930,966 units for $3.80 per unit until March 8, 2004. [d] Subsequent to year end, the Company renewed its current operating lease premises agreement, with a total commitment of $521,560 through March 2004. [e] On March 28, 2002 the Company announced that it had received notice from AstraZeneca that AstraZeneca does not intend to proceed with clinical development of the Company's RSD1122 compound and accordingly will terminate the license agreement (see note 13). Financial Statements Paralex, Inc. (a development stage enterprise) (Expressed in U.S. dollars) November 30, 2001 AUDITORS' REPORT To the Board of Directors of Paralex, Inc. We have audited the balance sheet of Paralex, Inc. (a development stage enterprise) (the "Company") as at November 30, 2001 and the statements of loss and comprehensive loss, shareholders' deficit and cash flows for the period from January 26, 2001 (date of incorporation) to November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 2001 and the results of its operations and its cash flows for the period from January 26, 2001 (date of incorporation) to November 30, 2001 in accordance with generally accepted accounting principles in the United States. Vancouver, Canada, /s/Ernst & Young LLP December 21, 2001. Chartered Accountants Paralex, Inc. (a development stage enterprise) BALANCE SHEET [See Note 1 - Nature of Operations and Basis of Presentation] As at November 30 (expressed in U.S. dollars) 2001 $ - ------------------------------------------------------------------------------- ASSETS Current Cash 23,042 - ------------------------------------------------------------------------------- Total current assets 23,042 - ------------------------------------------------------------------------------- Other assets [note 4] 354,148 - ------------------------------------------------------------------------------- 377,190 =============================================================================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current Accounts payable and accrued liabilities 513,624 - ------------------------------------------------------------------------------- Total current liabilities 513,624 - ------------------------------------------------------------------------------- Long-term debt [note 5] 100,000 Commitments [note 7] Shareholders' deficit [note 6] Common shares - par value $0.001 Authorized - 20,000,000 Issued and outstanding - 4,000,000 4,000 Preferred shares - par value $0.001, issuable in series Authorized - 5,000,000 Issued and outstanding - nil - Deficit (240,434) - ------------------------------------------------------------------------------- Total shareholders' deficit (236,434) - ------------------------------------------------------------------------------- 377,190 =============================================================================== See accompanying notes On behalf of the Board: /s/ Mark C. Rogers /s/ Fred H. Mermelstein Director Director Paralex, Inc. (a development stage enterprise) STATEMENT OF LOSS AND COMPREHENSIVE LOSS [See Note 1 - Nature of Operations and Basis of Presentation] For the period from January 26, 2001 (date of incorporation) to November 30, 2001 (expressed in U.S. dollars) $ - ------------------------------------------------------------------------------- EXPENSES General and administrative [notes 5 and 9] 233,982 Amortization 6,452 - ------------------------------------------------------------------------------- Net loss and comprehensive loss for the period 240,434 =============================================================================== Loss per common share - basic and dilutive 0.06 =============================================================================== Weighted average number of common shares outstanding 3,710,000 =============================================================================== See accompanying notes Paralex, Inc. (a development stage enterprise) STATEMENT OF SHAREHOLDERS' DEFICIT [See Note 1 - Nature of Operations and Basis of Presentation] For the period from January 26, 2001 (date of incorporation) to November 30, 2001 (expressed in U.S. dollars)
Common shares Deficit Total ------------- # $ $ $ - --------------------------------------------------------------------------------------------------- Balance, January 26, 2001 - - - - Shares issued for cash [note 6] 3,400,000 3,400 - 3,400 Shares issued for license [note 6] 600,000 600 - 600 Net loss for the period - - (240,434) (240,434) - --------------------------------------------------------------------------------------------------- Balance, November 30, 2001 4,000,000 4,000 (240,434) (236,434) ===================================================================================================
See accompanying notes Paralex, Inc. (a development stage enterprise) STATEMENT OF CASH FLOWS [See Note 1 - Nature of Operations and Basis of Presentation] For the period from January 26, 2001 (date of incorporation) to November 30, 2001 (expressed in U.S. dollars) $ - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss for the period (240,434) Adjustments for non-cash items: Amortization 6,452 Changes in non-cash working capital items: Accounts payable and accrued liabilities 203,624 - ------------------------------------------------------------------------------- Cash used in operating activities (30,358) - ------------------------------------------------------------------------------- INVESTING ACTIVITIES Increase in intangible assets (50,000) - ------------------------------------------------------------------------------- Cash used in investing activities (50,000) - ------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of common shares 3,400 Proceeds from long-term debt 100,000 - ------------------------------------------------------------------------------- Cash provided by financing activities 103,400 - ------------------------------------------------------------------------------- Increase in cash, during the period 23,042 Cash, beginning of period - - ------------------------------------------------------------------------------- Cash, end of period 23,042 =============================================================================== Supplemental cash flow information: Interest paid 1,468 Common shares issued for intangible assets 600 =============================================================================== See accompanying notes Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Paralex, Inc. (a development stage enterprise) (the "Company") was incorporated on January 26, 2001 under the General Corporation Law of the State of Delaware. The Company is involved in the research and development of oxypurinol for the treatment of congestive heart failure. The Company is a development stage enterprise and commercial operations have not yet commenced. The Company's year end is December 31. The Company's financial statements for the period from January 26, 2001 (date of incorporation) to November 30, 2001 have been prepared in accordance with United States generally accepted accounting principles on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future. The Company incurred a net loss of $240,434 for the period from January 26, 2001 (date of incorporation) to November 30, 2001 and has a working capital deficiency of $490,582 and accumulated deficit of $240,434 as at November 30, 2001. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has financed its cash requirements primarily from share issuances and long-term debt. The ability of the Company to continue as a going concern is dependent upon successfully bringing its technologies to the market, achieving future profitable operations and obtaining sources of financing to sustain its operations. The Company is in the process of negotiating the sale of all of its outstanding shares to a Canadian public company [note 10[i]]. The outcome of these matters cannot be predicted at this time. No assurances can be given that adequate financing or financing on acceptable terms can be obtained in the future or that the pending sale will be completed. In the event the Company cannot obtain the necessary funds, it will be necessary to delay, curtail or cancel further development of its technologies. These financial statements do not include any adjustments to the carrying values and classifications of assets and liabilities that might be necessary should the Company be unable to continue in business. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company prepares its accounts in accordance with generally accepted accounting principles in the United States, which are not materially different from Canadian generally accepted accounting principles. The following is a summary of significant accounting policies used in the preparation of these financial statements. Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates. License costs The Company capitalizes costs paid to obtain licenses. The cost of licenses is amortized on a straight-line basis over its estimated useful life of ten years. The Company monitors the recoverability of license costs, based upon estimates using factors such as future asset utilization, business climate and future non-discounted cash flows expected to result from the use of the related assets or to be realized on sale. The Company's policy is to write down assets to their fair value in the period when it is likely that the carrying amount of the asset will not be recovered. Loss per common share Basic loss per common share has been computed by dividing net loss by the weighted average number of common shares outstanding during the period. There are no anti-dilutive securities, therefore basic and diluted loss per common share are the same. Recent pronouncements The Financial Accounting Standards Board issued a new standard (SFAS 142), entitled Goodwill and Other Intangible Assets. Intangible assets other than goodwill acquired in a business combination or other transaction for which the acquisition date is after June 30, 2001 are to be amortized based on the useful life to an enterprise, unless the life is determined to be indefinite in which case the intangible asset will not be amortized. SFAS 142 will be effective for the Company's fiscal year beginning January 1, 2003. The Company does not believe the adoption of SFAS 142 will have a material effect on the financial statements. Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 3. FINANCIAL INSTRUMENTS For certain of the Company's financial instruments including cash, accounts payable and accrued liabilities and long-term debt, the carrying values approximate fair value due to their short-term nature. 4. OTHER ASSETS
Accumulated Net book Cost amortization value $ $ $ - -------------------------------------------------------------------------------------------- 2001 Licenses 360,600 6,452 354,148 - -------------------------------------------------------------------------------------------- Total 360,600 6,452 354,148 ============================================================================================
5. LONG-TERM DEBT 2001 $ - -------------------------------------------------------------------------- Bank of America revolving credit facility bearing interest at a fixed rate of 4.40% per annum, repayable on December 20, 2002, interest payable monthly 100,000 - -------------------------------------------------------------------------- 100,000 ========================================================================== Interest expense for the period from January 26, 2001 (date of incorporation) to November 30, 2001 amounted to $1,468. On November 1, 2001, the Company entered into a loan agreement whereby the available balance under the revolving credit facility was increased to $210,000 at a fixed interest of 4.40% per annum. The maturity date of the loan was extended from July 20, 2002 to December 20, 2002. In accordance with the loan agreement, any change in ownership of 25% or more of the Company's common stock constitutes a default of the loan agreement, whereby all amounts outstanding will be payable immediately. The loan is personally guaranteed by one of the Company's executive officers. Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 6. SHARE CAPITAL The directors of the Company will designate the rights, privileges, restrictions and conditions of each series of Preferred Shares. On January 31, 2001, the directors approved the increase in authorized share capital from 5,000,000 common shares to 20,000,000 common shares with a par value of $0.001 per share and 5,000,000 preferred shares with a par value of $0.001 per share, issuable in series. On February 1, 2001, the Company issued 3,000,000 common shares at a price of $0.001 per share, for gross cash proceeds of $3,000. On April 14, 2001, the Company issued, in exchange for an exclusive patent with respect to certain technology, 600,000 common shares to Johns Hopkins University (JHU) and the inventor of the technology. The exchange has been recorded at $600 which reflects the fair value of the common shares issued. On May 14, 2001, the Company issued 400,000 common shares at a price of $0.001 per share, for gross cash proceeds of $400. 7. COMMITMENTS [i] Pursuant to a license agreement, the Company is responsible for the payment of royalties based on a percentage of revenue and subject to certain minimum annual royalties commencing at $5,000 and increasing over the next five years to $100,000 per annum. The Company also has an obligation to develop and introduce certain licensed products into commercial markets as soon as it is practicable. The agreement sets out certain milestones that need to be met in ensuring that this occurs. In addition, the Company is required to obtain $3 million of financing within 11 months and $5 million of financing within 18 months of the agreement. The patent agreement may be terminated if either party fails to perform or breaches any of its obligations under the agreement. Furthermore the Company may terminate the agreement for any reason upon giving 60 days written notice. Unless otherwise terminated, the agreement expires upon the expiration of the last issued patent. Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 7. COMMITMENTS (cont'd) [ii] In June 2001, and as amended in December 2001, the Company entered into a license and option agreement with ILEX Oncology, Inc. ("ILEX") comprising a license and sublicense for the exclusive worldwide rights for the development and commercialization of certain oxypurinol compounds held by ILEX. As part of the agreement, ILEX granted the Company an exclusive one year option to acquire ownership of and full rights to use certain data sublicensed by ILEX from a third party. Under the terms of the agreement, the Company agreed to pay ILEX an initial fee of $250,000, included in accounts payable and accrued liabilities, upon execution of the agreement and a further $250,000 upon the exercise of the option. The Company further agreed to pay ILEX additional milestone payments of up to $8 million based on the completion of phase II clinical trials, FDA approval of the first new drug application and FDA approval for marketing and commercialization of the product. The Company has also agreed to pay royalties based on future net sales. Unless otherwise terminated, the license agreement will terminate upon the expiration of ILEX's obligation to pay royalties under its original license agreement. [iii] In May 2001, the Company entered into a consulting agreement with Cardiosciences Consulting Inc., whereby Cardiosciences Consulting Inc. will provide consulting services for $100,000 per year, from January 1, 2002 through December 31, 2005. 8. RELATED PARTY TRANSACTIONS No compensation has been paid or is owing to directors or officers of the Company in respect of services rendered to November 30, 2001. Certain of the Company's directors and officers serve as directors and officers of Paramount Capital, Inc. ("Paramount"). Paramount has provided certain administrative services to the Company to November 30, 2001 for nil consideration. 9. GENERAL AND ADMINISTRATIVE $ -------------------------------------------------------------------------- Consulting and professional fees 212,599 Office and miscellaneous 1,900 Travel and other 19,483 -------------------------------------------------------------------------- 233,982 ========================================================================== Paralex, Inc. (a development stage enterprise) NOTES TO FINANCIAL STATEMENTS November 30, 2001 (expressed in U.S. dollars) 10. SUBSEQUENT EVENTS [i] On December 21, 2001, the Company entered into an acquisition agreement with Cardiome Pharma Corp. ("Cardiome"), a Canadian public company, whereby Cardiome will acquire all of the outstanding shares of the Company in exchange for approximately 33,300,000 common shares of Cardiome, based on a formula but not to exceed approximately 43,000,000 common shares. The acquisition is subject to, among other matters, approval from the shareholders of Cardiome and applicable regulatory agencies. [ii] In December 2001, the Company drew an additional $110,000 on its revolving credit facility [note 5]. Pro Forma Consolidated Financial Statements Cardiome Pharma Corp. Unaudited (Expressed in Canadian dollars) November 30, 2001 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) PRO FORMA CONSOLIDATED BALANCE SHEET As at November 30, 2001 Unaudited (expressed in Canadian dollars)
Pro forma Cardiome consolidated Pharma Paralex, Pro forma balance Corp. Inc. adjustments Note sheet $ $ $ $ - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 1,381,750 36,240 30,908,061 [2e] (159,100) [2f] 32,166,951 Short-term investments 2,801,830 - - 2,801,830 Amounts receivable and other 247,211 - - 247,211 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 4,430,791 36,240 30,748,961 35,215,992 Capital assets 302,583 - - 302,583 Other assets 1,536,249 557,004 31,654,238 [2a] 33,747,491 - ---------------------------------------------------------------------------------------------------------------------- 6,269,623 593,244 62,403,199 69,266,066 ====================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Accounts payable and accrued liabilities 907,700 807,827 763,000 [2a] 2,663,564 [2e] 5,142,091 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 907,700 807,827 3,426,564 5,142,091 Deferred revenue 1,348,374 - - 1,348,374 Long-term debt - 159,100 (159,100) [2f] - Deferred tax liability - - 2,600,000 [2a] 2,600,000 - ---------------------------------------------------------------------------------------------------------------------- 2,256,074 966,927 5,867,464 9,090,465 - ---------------------------------------------------------------------------------------------------------------------- Shareholders' equity (deficiency) Share capital 32,251,393 6,038 (6,038) [2d] 27,680,555 [2a] 237,000 [2a] 28,244,497 [2e] 88,413,445 Special warrants 966,000 - - 966,000 Contributed surplus 1,192,266 - - 1,192,266 Deficit (30,396,110) (379,721) 379,721 [2d] (30,396,110) - ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficiency) 4,013,549 (373,683) 56,535,735 60,175,601 - ---------------------------------------------------------------------------------------------------------------------- 6,269,623 593,244 62,403,199 69,266,066 ======================================================================================================================
See accompanying notes to unaudited pro forma consolidated financial statements Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Inc.) PRO FORMA CONSOLIDATED STATEMENT OF LOSS As at November 30, 2001 Unaudited (expressed in Canadian dollars)
Pro forma Cardiome consolidated Pharma Paralex, Pro forma statement Corp. Inc. adjustments Note of loss $ $ $ $ - ----------------------------------------------------------------------------------------------------------------------- REVENUE Research, collaborative, licensing and option fees 197,028 - - 197,028 Grant income 88,137 - - 88,137 Interest and other income 347,078 - - 347,078 - ----------------------------------------------------------------------------------------------------------------------- 632,243 - - 632,243 - ----------------------------------------------------------------------------------------------------------------------- EXPENSES Research and development 5,498,838 - - 5,498,838 General and administration 1,741,193 365,577 - 2,106,770 Amortization 550,097 10,004 3,165,000 [2c] 3,725,101 - ----------------------------------------------------------------------------------------------------------------------- 7,790,128 375,581 3,165,000 11,330,709 - ----------------------------------------------------------------------------------------------------------------------- Loss before income taxes (7,157,885) (375,581) (3,165,000) (10,698,466) Deferred income tax recovery - - 260,000 [2c] 260,000 - ----------------------------------------------------------------------------------------------------------------------- Net loss for the period (7,157,885) (375,581) (2,905,000) (10,438,466) ======================================================================================================================= Loss per common share - basic and diluted (0.69) (0.10) [2b] (0.37) ======================================================================================================================= Weighted average number of common shares outstanding 10,304,579 3,710,000 [2b] 27,879,515 =======================================================================================================================
See accompanying notes to unaudited pro forma consolidated financial statements Page 1 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 1. BASIS OF PRESENTATION The accompanying pro forma consolidated financial statements give effect to the acquisition of Paralex, Inc. ("Paralex") by Cardiome Pharma Corp. ("Cardiome") and the raising of $30,908,061 through the issuance of equity, as described in Cardiome's Annual Report filed on Form 20-F dated April 19, 2002 ("Annual Report"). On March 8, 2002, the Company completed a share consolidation whereby it consolidated its outstanding share capital on a one new share for four old shares basis. These pro forma consolidated financial statements have reflected this share consolidation. The accompanying pro forma consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles and derived from the audited financial statements of Paralex as at November 30, 2001 and for the period from January 26, 2001 (date of incorporation) to November 30, 2001, the audited financial statements of Paralex for the ten months ended November 30, 2001, and the audited consolidated financial statements of Cardiome as at and for the year ended November 30, 2001. A reconciliation of amounts presented in accordance with United States generally accepted accounting principles is detailed in note 3. The accounting policies used in the preparation of the pro forma consolidated financial statements are those disclosed in Cardiome's audited consolidated financial statements. Management has determined that no adjustments are necessary to conform Paralex's financial statements with the accounting policies used by Cardiome in the preparation of its consolidated financial statements. The pro forma consolidated financial statements are not necessarily indicative of the results that actually would have been achieved if the transactions reflected therein had been completed on the dates indicated or the results which may be obtained in the future. In preparing these pro forma consolidated financial statements no adjustments have been made to reflect the operating benefits and general and administrative cost savings expected to result from combining the operations of Cardiome and Paralex. The pro forma consolidated financial statements should be read in conjunction with the description of the acquisition in the Annual Report, the audited financial statements of Paralex and the audited consolidated financial statements of Cardiome, including the notes thereto, included elsewhere in the Annual Report. Page 2 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS The audited financial statements of Paralex were reported in U.S. dollars. For purposes of the pro forma consolidated balance sheet, the assets and liabilities of Paralex were translated into Canadian dollars using the exchange rate at November 30, 2001. For purposes of the pro forma consolidated statement of loss, the income and expense items of Paralex were translated into Canadian dollars using the average exchange rate for the period from January 26, 2001 (date of incorporation) to November 30, 2001. These pro forma consolidated financial statements give effect to the completion of the transactions contemplated by the Merger Agreement ("Agreement"), as more fully described in the Annual Report, as if they had occurred on November 30, 2001 with respect to the pro forma consolidated balance sheet and on December 1, 2000 with respect to the pro forma consolidated statement of loss for the year ended November 30, 2001. A summary of the transaction is as follows: On December 21, 2001, Paralex and Cardiome entered into an agreement whereby Cardiome acquired all of the issued and outstanding common shares of Paralex in exchange for 8,203,396 common shares of Cardiome. Immediately after this transaction and the additional third party financing which closed on March 8, 2002, the prior shareholders of Paralex owned approximately 29% of the total issued and outstanding common shares of Cardiome. The ongoing business will continue as that of Cardiome. Transaction costs are estimated to be approximately $763,000 in cash costs and $237,000 in common shares. Page 3 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS (cont'd.) Cardiome has been identified as the acquirer in this purchase business combination. The purchase price has been allocated to the fair value of Paralex's identifiable net assets and liabilities in accordance with the purchase method as follows: $ - -------------------------------------------------------------------------- Assets acquired: Cash 36,240 Other assets 557,004 Technology 31,654,238 - -------------------------------------------------------------------------- Total assets acquired 32,247,482 - -------------------------------------------------------------------------- Less liabilities assumed: Accounts payable and accrued liabilities 807,827 Long-term debt 159,100 Deferred tax liability 2,600,000 - -------------------------------------------------------------------------- Total liabilities assumed 3,566,927 - -------------------------------------------------------------------------- Net assets acquired 28,680,555 ========================================================================== Consideration given: 8,203,396 common shares 27,680,555 Estimated transaction costs 1,000,000 - -------------------------------------------------------------------------- Total consideration 28,680,555 ========================================================================== The allocation of the purchase price reflected in the pro forma consolidated financial statements is preliminary and based on the financial position of Paralex at November 30, 2001. The actual purchase price allocation will reflect the fair value, at the acquisition date, of the assets acquired and liabilities assumed based upon Cardiome's evaluation of such assets and liabilities following the closing of the acquisition and, accordingly, the final purchase price allocation may differ from the preliminary allocation reflected herein. In these pro forma consolidated financial statements, the excess of the consideration given over the fair value of the net liabilities assumed has been reflected as technology in the pro forma consolidated balance sheet. Technology will be amortized to income on a straight-line basis over ten years. Paralex's long-term debt becomes payable on demand in the event of a change in ownership of 25% or more. Accordingly, it is presumed this debt will be repaid with the proceeds of the equity financing. Page 4 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS (cont'd.) The following adjustments have been made to reflect the transaction described above: [a] To reflect the acquisition of Paralex's net assets in exchange for common shares and related transaction costs. Transaction costs are estimated to be $763,000 in cash costs and $237,000 in issuance of 62,500 common shares. [b] The pro forma loss per share have been calculated based on the total weighted average number of common shares held by shareholders of Cardiome during the period, 8,203,396 and 62,500 common shares assumed to be issued to effect the acquisition at December 1, 2000 and 9,309,657 common shares assumed to be issued related to the equity financing on December 1, 2000. In addition, the pro-forma loss per share gives effect to the consolidation of Cardiome outstanding shares on a one new share for four old shares basis on December 1, 2000. [c] To reflect the amortization of technology and related deferred tax liability over ten years. [d] To eliminate the share capital and shareholders' deficit of Paralex. [e] To reflect the issuance of 9,309,657 common shares for total proceeds of $30,908,061, less estimated cash transaction costs of $2,663,564. [f] To reflect the repayment of long-term debt with the proceeds of the equity financing. Page 5 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 3. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Company prepares the pro forma consolidated financial statements in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which as applied in these pro forma consolidated financial statements conform in all material respects to United States generally accepted accounting principles ("U.S. GAAP"), except as follows: Pro forma consolidated statement of loss and deficit $ - -------------------------------------------------------------------------- Loss for year, Canadian GAAP (10,438,466) Amortization of other assets (102,720) Adjustment for stock-based compensation - employees (44,100) - non-employees (35,000) - -------------------------------------------------------------------------- Loss for the year, U.S. GAAP before cumulative effect of change in accounting policy (10,620,286) Cumulative effect of change in accounting policy (1,499,598) - -------------------------------------------------------------------------- Loss for the year, U.S. GAAP (12,119,884) Reclassification adjustment for unrealized gains on short-term investments (117,662) Unrealized gains on investments 29,591 - -------------------------------------------------------------------------- Comprehensive loss for the year, U.S. GAAP (12,207,955) ========================================================================== Loss for the year, U.S. GAAP (12,119,884) ========================================================================== Weighted average number of common shares outstanding, U.S. GAAP 27,879,515 ========================================================================== Loss per common share, U.S. GAAP: Before change in accounting policy (0.38) Change in accounting policy (0.05) - -------------------------------------------------------------------------- Loss per common share, U.S. GAAP (0.43) ========================================================================== Page 6 Cardiome Pharma Corp. (formerly Nortran Pharmaceuticals Corp.) NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS As at November 30, 2001 Unaudited (expressed in Canadian dollars) 3. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.) Pro forma consolidated balance sheet Material variations in the pro forma consolidated balance sheet accounts under U.S. GAAP are as follows: $ - -------------------------------------------------------------------------- Cash and cash equivalents 32,170,302 Short-term investments 2,828,070 Other assets 34,072,771 Share capital 87,128,445 Accumulated other comprehensive income 29,591 Contributed surplus 3,311,516 Deficit (30,905,080) ========================================================================== EXHIBIT LIST ================================================================================ Exhibit Number Name of Exhibit 1.1 Articles of Continuance of the Company(1) 1.2 By-Laws of the Company(2) 2.1 Form of Company's common share certificate. (3) 4.1 License agreement dated March 29, 1996 with the University of British Columbia(4) 4.2 Research Agreement dated March 1, 1997 with the University of British Columbia(5) 4.3 Agreement dated November 19, 1997 with Drs. MacLeod and Quastel(6) 4.4 Agreement dated October 16, 2000 with AstraZeneca (7) 4.5* Collaborative Research and License Agreement dated November 30, 2000 with Antalium Inc. 4.6 Investment Agreement dated May 24, 2000 with FutureFund Capital (VCC) Corp.(8) 4.7 Employment Agreement dated March 19, 1998 and subsequent Amendment Agreement dated March 20, 2001 with Mr. Robert Rieder. (9) 4.8 Employment Agreement dated November 24, 1998 with Dr. Gregory Beatch. (10) 4.9* Employment Agreement dated June 5, 2001 with Dr. Alan M. Ezrin. 4.10 2001 share option plan (11) 4.11* Introduction Agreement dated August 10, 2001 with Paramount Capital, Inc. 4.12* Acquisition Agreement dated December 21, 2001 with Paralex, Inc. and Cardiome, Inc. 4.13* Agency Agreement dated February 28, 2002 with Sprott Securities Inc. and Raymond James Ltd. 4.14* License agreement dated April 18, 2001, as amended by agreement dated October 18, 2001 between Paralex and The Johns Hopkins University. 4.15* License agreement dated December 19, 2001 between Paralex and ILEX Oncology, Inc. 4.16* Agreement dated May 2001 and dated as of January 1, 2002 between Paralex and Cardiosciences Consulting, Inc. 4.17 Common Share Purchase Warrant Indenture dated March 8, 2002 (including form of warrant) (12) 4.18 Form of warrant dated March 8, 2002 (included in Exhibit 4.17). (13) 4.19 Warrant dated March 8, 2002 issued to Paramount Capital, Inc. (14) 4.20* Warrant dated March 8, 2002 issued to Sprott Securities Inc. 4.21* Warrant dated March 8, 2002 issued to Raymond James Ltd. 4.22 Form of Subscription Agreement (15) 4.23 Registration Rights Agreement dated March 8, 2002 (16) 8.1* Subsidiaries of Company 10.1* Consent of Ernst & Young LLP, Independent Auditors Notes: * Filed herewith (1) Filed as exhibit 3.1 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002). (2) Filed as exhibit 3.2 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (3) Filed as exhibit 4.1 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (4) Filed as exhibit No. 3.1 to the Company's Registration Statement on Form 20-F (File No. 0-29338 filed on August 22, 1997). (5) Filed as exhibit No. 3.4 to the Company's Registration Statement on Form 20-F (File No. 0-29338 filed on August 22, 1997). (6) Filed as exhibit 2.8 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 1997 (File No. 0-29338). (7) Filed as exhibit 4.8 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed on June 4, 2001). Certain portions of this exhibit were omitted and filed separately with the Commission pursuant to an application for confidential treatment under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. (8) Filed as exhibit 4.11 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (9) Filed as exhibit 4.12 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (10) Filed as exhibit 4.13 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed June 4, 2001). (11) Filed as exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year ended November 30, 2000 (File No. 0-29338 filed on June 4, 2001). (12) Filed as exhibit 4.2 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (13) Filed as exhibit 4.5 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (14) Filed as exhibit 4.6 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (15) Filed as exhibit 4.3 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) (16) Filed as exhibit 4.4 to the Company's Registration Statement on Form F-3 (File No. 333-85922 filed on April 9, 2002) EX-4 3 exhibit4-5.txt COLLABORATIVE RESEARCH AND LICENSE AGREEMENT DATED NOVEMBER 30, 2000 WITH ANTALIUM INC. Exhibit 4.5 COLLABORATIVE RESEARCH AND LICENCE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENCE AGREEMENT (this "Agreement")' is entered into on November 30, 2000 (the "Effective Date"), by and between Nortran Pharmaceuticals Inc, a British Columbia corporation. having offices at 3650 Westbrook Mall, Vancouver, BC, Canada, V6S 2L2 ("Nortran") and Antalium Inc., a Quebec corporation, having offices at 1550 Metcalfe Street, Suite 502, Montreal, QC, Canada, H3A 1X6 ("Antalium"). Nortran and Antalium may be referred herein as a "Party" or, collectively, as "Parties". WHEREAS, Nortran is engaged in discovery research for a variety of biologically active compounds and has patented Know-How for generating chemical compounds having ion channel modulatory properties; WHEREAS, Antalium is engaged in discovery research for a variety of therapeutic targets and the development of technologies to facilitate such research, and Antalium has patented technologies making use of proprietary ion channels: WHEREAS, in exchange for payment by Antalium of research funds, Nortran is willing to perform certain research and proceed together with Antalium with a medicinal chemistry program to develop drug candidates for Antalium, from which pharmaceutical products may be derived (the "Research Collaboration"); and WHEREAS, Antalium wishes to acquire an exclusive license to develop and commercialize Agreement Compounds (as defined below) and Nortran wishes to grant to Antalium such license, all in accordance with the terms and conditions set forth herein: NOW, THEREFORE, for and in consideration of the covenants, conditions and undertakings hereinafter set forth, it is agreed by and between the Parties as follows: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following meanings: 1.1 "Affiliate" of either Nortran or Antalium shall mean any corporation or other business entity which, during the term of this Agreement, controls, is controlled by or is under common control with such Party but only for so long as such entity controls, is controlled by, or is under common control with such Party. For this purpose, "control" shall mean the possession of the power to direct or cause the direction of the management and the policies of an entity whether through ownership directly or indirectly of fifty percent (50%) or more of the stock entitled to vote, and for nonstock organizations, the right to receive over fifty percent (50%) of the profits by contract or otherwise, or if not meeting the preceding requirement, any company owned or controlled by or owning or controlling such Party at the maximum control or ownership right permitted in the country where such entity exists. 1.2 "Antalium Technology" shall mean any patent application or patent owned or controlled, in whole or in part, by Antalium or its Affiliates or Sublicensees at any time during the term of this Agreement, that claims an Agreement Compound, or method of use or process for the synthesis thereof, or composition-of-matter containing such Agreement Compound. 1.3 "Antalium Research" shall mean all research activities performed solely by Antalium pursuant to the Research Collaboration and any and all information derived from such activities, including without limitation all biological, chemical, pharmacological, toxicological pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information. 1.4 "Agreement" shall mean the present agreement together with all appendices, exhibits and schedules. 1.5 "Agreement Compound" Shall mean a Test Compound, Lead Compound, Clinical Candidate, or Derivative, according to the terms and conditions set forth herein. 1.6 "Biological Criteria.' shall mean the criteria for selection and acceptance of an Active Compound, Lead Compound, Optimized Lead Compound or any Derivative of the foregoing, as determined using in vitro and/or in vivo screening procedures against selected molecular targets or animal models. 1.7 "Clinical Candidate" shall mean a Test Compound, Lead Compound or Derivative that has successfully passed a complete toxicological screen in two animal models and that Antalium intends to enter into Phase I clinical trials. 1.8 "Confidential Information" shall mean information' or material disclosed hereunder by one Party (the "Disclosing Party") to the other Party (the "Receiving Party") and as further defined in Article 8. 1.9 "Derivative" shall mean any compound derived from a Lead Compound. It is understood that "Derivative" shall include any compound derived from another Derivative. 1.10 "Effective Date" shall have the meaning as set forth in the opening paragraph. 1.11 "FDA'" shall mean the U.S. Food and Drug Administration, and any successor thereto, or any corresponding foreign registration or regulatory authority. 1.12 "Field" or "Field of Interest' shall mean the area of Pain, Pain Management, and all therapeutic, diagnostic or prophylactic uses of Agreement Compounds or any Derivatives thereof as Pain modulators, including but not limited to, local, topical and/or systemic analgesics and/or anesthetics. 1.13 "First Commercial Sale" means, with respect to a given Product, the first sale for use or consumption by the public of such Product in a country after all required approvals, including marketing and pricing approvals, have been granted by the applicable governmental drug regulatory agency of such country, "First Commercial Sale" shall not include the sale of any Product for use in clinical trials or for compassionate use prior to the grant of an NDA. 1.14 "IND" shall mean an Investigational New Drug application, as defined in the U.S. Food, Drug and Cosmetic Act and the regulations promulgated thereunder for initiating clinical trials in the United States, or any corresponding foreign application, registration or certification. 1.15 "Initial Term' shall mean the period commencing on the Effective Date and terminating on the first anniversary thereof. 1.16 "Initial Screening Program" shall mean the panel of in vitro and/or in vivo experimental procedures that Antalium will use to screen Test Compounds to select Active Compounds. 1.17 "Know-How" shall mean all data, technical information, know-how, experience, inventions, discoveries, trade secrets, compositions of matter and methods. and whether or not patentable or confidential, to the extent that such Know-How is Controlled by a Party or its Affiliates. 1.18 "Lead Compound" shall mean a Test Compound that has been chosen by Antalium for further development. 1.19 "Licensed Technology" shall mean any Patent Rights or Know-How owned or controlled in whole or in part, by Nortran, or developed in the course of and in connection with the Research Collaboration, For the purpose of this Section 1.19 the following definitions shall apply: (a) "Patent Rights" shall mean (i) all patents and patent applications existing as of the Effective Date, or covering inventions conceived and reduced to practice by Nortran alone or jointly with Antalium during the term of this Agreement, that claim an Agreement Compound or any Derivative thereof, or method of use or process for the synthesis thereof or composition-of-matter containing such Active Compound, Other Compound or Derivative Compound thereof, and (ii) any divisions, continuations, continuations-in part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in (i) above, and any substitutions, confirmations, registrations or revalidations of any of the foregoing, in each case, which is owned or controlled, in whole or part, by license, assignment or otherwise by Nortran, to the extent Nortran has the right to license or sublicense the same, and subject to any limitations and prohibitions of such license or sublicense. (b) "Know-How" shall mean all ideas, inventions, trade secrets, data, instructions, processes, formulas, expert opinions and information, including, without limitation, biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information, existing as of the Effective Date, or developed by Nortran alone or jointly with Antalium during the term of this Agreement, whether or not patentable, in each case, which is necessary for the synthesis, development and use of Agreement Compounds or any Derivative thereof and/or for the development, manufacture, use or sale or commercialization of Products, to the extent Nortran has the right to license or sublicense the same, and subject to any limitations and prohibitions of such license or sublicense. Know-How does not include any inventions otherwise included in the Patent Rights. 1.20 "Medicinal Chemistry Program" shall mean a program for the chemical synthesis of structural analogs (the "Derivatives") of an Agreement Compound(s) in order to improve the biological properties of such compound(s) towards a target or an animal model, pursuant to the Screening Programs conducted by Antalium. 1.21 "NDA" shall mean a New Drug Application, as defined in the U.S. Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification. 1.22 "Net Sales" shall mean the invoice price of Products sold by Antalium or its Affiliates or Sublicensees to Third Parties, less, to the extent included in such invoice price the total of: (i) ordinary and customary trade, quantity and/or cash discounts actually allowed, including government managed care and other contract rebates, pharmacy incentive programs, including chargebacks of pharmacy or hospital performance incentive programs or similar programs; (ii) credits, rebates and returns (including, but not limited to, wholesaler and retailer returns), (iii) freight, postage, shipping insurance, and other transportation expenses paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business. Net Sales shall also include the amount of fair market value of all other consideration received by Antalium or its Affiliates or Sublicensees in respect of Products, whether such consideration is in cash, payment in kind, exchange or another form. With respect to Products sold in combination with other products by Antalium or its Affiliates or Sublicensees in a capitation or bundled transaction (each, a "Bundled Transaction"). Net Sales of such Products shall be calculated in accordance with the following formula: The Average Selling Price shall be based on the actual average selling price of the applicable Product or product other than a Product, as the case may be, determined for the applicable period. If a Product is not sold separately and no bona tide list price exists for such Product, the Parties shall negotiate in good faith an imputed bona fide list price for such Product, and Net Sales with respect thereto shall be based on such imputed list price. 1.23 "Nortran Research" shall mean all the research and development activities concerning the Agreement compounds in the Field of Interest performed by or on behalf of Nortran, or the results of which are lawfully in Nortran's possession, and any and all information derived from such activities, including without limitation all biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information. 1.24 "Patent Rights" shall have the meaning as defined under Licensed Technology above. 1.25 "Phase I", "Phase II", and "Phase III" shall mean Phase I (or Phase I/II), Phase II (or Phase II/III). and Phase III clinical trials, respectively, in each case as prescribed by applicable FDA regulations, or any corresponding foreign statutes, rules or regulations. 1.26 "Product(s)" shall mean any pharmaceutical product in which a Lead Compound or Derivative is an ingredient and which has been authorized for sale in any regulatory jurisdiction. 1.27 "Research Collaboration" shall mean the research activities undertaken by the Parties pursuant to Article 2 below. 1.28 "Research Term" shall mean the term of the Research Collaboration, as provided in Section 2.5 below. 1.29 "Secondary Screening Program" shall mean the panel of in vitro and/or in vivo experimental procedures that Antalium will use to screen Active Compounds to select Lead Compounds. 1.30 "Screening Program(s)" shall mean the Initial Screening Program, Secondary Screening Program or any other in vitro and/or in viva experimental procedures that Antalium will use to screen Agreement Compounds. 1.31 "Sublicensee" shall mean, with respect to a particular Product, a Third Party to whom Antalium has granted a license or sublicense under the Licensed Technology to develop, make, have made, use and/or sell such Product, as used in this Agreement, "Sublicensee" shall also include a Third Party to whom Antalium has granted the right to distribute such Product, provided that such Third Party has responsibility. 1.32 "Target(s)" shall mean any molecular target that Antalium believes to be a valid therapeutic target for the identification and development of pharmaceutical products. 1.33 "Territory" shall mean the entire world. 1.34 "Test Compound" shall mean any compound or chemical entity conceived, identified, discovered, created or synthesized by Nortran and delivered to Antalium under the Agreement. 1.35 "Third Party" shall mean any person or entity other than (i) Antalium and any of its Affiliates, and (ii) Nortran and any of its Affiliates. 1.36 "Work" shall mean the research and development activities described in Section 2.2 ARTICLE 2 RESEARCH COLLABORATION 2.1 Research Location. The Parties acknowledge and agree that the Work shall be performed at such location as may be agreed between the Parties. 2.2 Research Plan 2.2.1 Discovery of Test Compounds by Nortran. Nortran shall deliver not less than 30 Test Compounds during a period not to exceed 1 month from the Effective Date, according to the schedule described in Exhibit A on all the Test Compounds, Nortran shall perform preliminary testing of potential analgesic properties using a well established in vivo pain model, the choice of which shall be at Nortran's discretion Together with the Test Compounds, Nortran shall provide Antalium upon request relevant data and information about said Compounds, including but not limited to physico-chemical properties and results and information derived from Nortran Research, as further described in Section 2.4 hereinafter. Nortran shall, at its expense, supply to Antalium the Test Compounds in individual containers, in the quantities, described in Exhibit A. Agreement Compounds delivered pursuant to the terms of this Agreement shall be suitably packed for surface or air shipment, at Nortran's discretion, and delivered to a shipping location designated by Antalium and agreed to by Nortan, at which location risk of loss shall pass to Antalium. All freight; insurance, and other shipping expenses, and all applicable taxes, duties and similar charges, as well as any special packing expenses shall be paid by Nortran, unless incurred because of a special request of Antalium. 2.2.2 Screening Program by Antalium. Antalium shall have the right but not the obligation to use Test Compounds in connection with an Initial Screening Program that shall be elaborated and conducted solely by Antalium at its discretion and expense, in compliance with Section 2.3. The objective of said Screening Program shall be to identify the Test Compounds that qualify as lead Compounds, as defined by their activity against selected targets or selected in vivo animal models (the "Biological Criteria"), and suitable for further development. After the identification of such lead Compounds, Antalium shall provide Nortran notice of such Lead Compounds selected by Antalium (up to a total of 8 compounds). If additional quantities of selected Test Compounds are required for any purpose subject to the terms and conditions herein, the cost to produce the additional amounts of such selected Lead Compounds shall be borne by Antalium, and may be undertaken by either Nortran, if Nortran so agrees, or by a contract synthesis laboratory acceptable to both Parties. 2.2.3 Medicinal Chemistry and Lead Optimization. At any time during the term of the Agreement, Antalium may initiate a Medicinal Chemistry Program to conceive, design and synthesize Derivatives with improved or optimized biological properties for use in the Field of Interest. Nortran shall promptly deliver to Antalium the structures of all Lead Compounds and the synthesis procedures used by Nortran to synthesize such Lead Compounds. Nortran shall use reasonable efforts to assist Antalium, at the expense of Antalium, in proceeding with the Medicinal Chemistry Program and agrees to provide Antalium with reasonable technical and other support, including access to Licensed Technology if required for future efforts by Antalium to develop and commercialize Products based on Agreement Compounds. It is understood by both Parties that any Nortran assistance in this regard shall be provided in the context of other demands and priorities which may be more urgent or important than the needs of Antalium. 2.3 Limited Use and Exclusivity 2.3.1 Limited Use. Antalium may use any Test Compound or Derivative solely to conduct identification and selection of compounds that may be developed and commercialized by Antalium in the Field of Interest, subject to the terms and conditions described herein. Antalium shall not use any Agreement Compound or any other application or purpose not contemplated herein without the prior written consent of Nortran, such consent to be entirely at Nortran's discretion. 2.3.2 Exclusivity. Except as otherwise expressly permitted under this Agreement, Nortran shall not conduct or fund, either by itself or at a Third Party, any research or development activity specifically intended to identify, discover, synthesize or develop compounds using any of the Test Compounds during an 18 month period starting on the Effective Date or any Lead Compounds or Derivative thereafter as leads for, or as the basis for, chemical discovery for use in the Field of Interest. 2.4 Research reports: Nortran shall provide Antalium with a report on Nortran Research regarding the Test Compounds and relevant to the Research Collaboration. 2.5 Term of the Research Collaboration 2.5.1 Research Term. The Research Collaboration shall commence on the Effective Date and, unless terminated earlier as provided in Article 11 below, the Research Collaboration shall terminate on the day of the first anniversary of the Effective Date (the "Initial Term"), unless extended pursuant to Section 2.5.2 below, in which case the Research Collaboration shall terminate on the last day of such extension term. 2.5.2 Extension of Research Term. With the written agreement of both Parties, the Research Term may be extended for up to two (2) years following the Initial Term. If it wishes to extend the Research Term, such Party must notify the other Party in writing at least sixty (60) days prior to the then current expiration date for the Research Term. The Parties shall negotiate in good faith the terms of any such extension. ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION 3.1 The selection of Lead Compound(s), Clinical Candidates, Derivative(s), and Product(s) for development and commercialization shall be at the discretion of Antalium. Unless otherwise mutually agreed, Antalium shall, at no expense to Nortran, be responsible for conducting or arranging all development and commercialization of Product(s). ARTICLE 4 LICENSE RIGHTS 4.1 License to Agreement Compounds and Corresponding Products. Subject to the terms and conditions of this Agreement, Nortran grants to Antalium an exclusive, worldwide license under the applicable Licensed Technology to develop, make, have made, and use all Lead Compounds and any Derivative thereof in the Field of Interest, in the entire Territory, and to develop, make, have made, use, import, have imported, sell, offer for sale and engage in the commercialization of any Products containing such Lead Compounds and Derivatives, in the Field of Interest, in the entire Territory, during the term of this Agreement. 4.2 Sublicenses. Antalium shall have the right to grant sublicenses, subject to and upon terms consistent with this Agreement, under the license granted in Section 4.1. Within thirty (30) days following the execution of any such sublicense, Antalium shall provide Nortran with at least the following information with respect to each Sublicensee: (i) the identity of the Sublicensee: (ii) a description of the Product, and the rights granted to the Sublicensee; and (iii) the territory in which the Product will be sold. Antalium shall remain responsible to Nortran for the compliance of each such Sublicensee with the financial and other obligations due under this Agreement. 4.3 Exclusivity in the Field of Interest. Nortran agrees that Antalium shall have exclusive rights to use Lead Compounds or Derivatives, in the Field of Interest during and in accordance with the terms of this Agreement, and that Nortran may not make, use, sell, promote, market, license or otherwise permit or authorize any Third Party to make, use, sell, promote, or market Lead Compounds or Derivatives, for any use in the Field of Interest during the term or this Agreement. Nortran covenants that it shall expressly prohibit any licensees of Nortran or its Affiliates who are licensed to make, use or sell any Agreement Compounds from making, using, selling, promoting, or marketing the Agreement Compounds for any use in the Field of Interest. 4.4 No Implied Licenses. Only the licenses granted pursuant to the express terms of this Agreement shall be of any legal force or effect, No other license rights shall be created by implication, estoppel or otherwise, Notwithstanding the provisions of this Article 4. Antalium's rights hereunder in respect of Derivatives shall be limited to compounds which are not identical to or close analogues of other Nortran owned molecules which are being commercialized outside the Field of Interest. 4.5 Commercialization. Except as otherwise agreed in writing or specifically provided in the terms of this Agreement, neither Antalium nor its Affiliates nor Sublicensees shall commercialize any Agreement Compound other than as a Product in accordance with this Agreement. 4.6 Term of License. The license granted to Antalium under this Article 4 snail expire in the event: (a) Antalium does not select a Lead Compound within eighteen (18) months ("First Expiration Period") of the Effective Date. (b) Antalium does not select a Clinical Candidate within thirty-three (33) months ("Second Expiration Period") starting from the Effective Date. 4.7 Notwithstanding Notwithstanding the provisions of Sections 4.1 through 4.6, the rights granted to Antalium by Nortran under these Sections shall be subject to the termination provisions in Article 11 "Term and Termination". ARTICLE 5 INTELLECTUAL PROPERTY 5.1 Ownership of inventions and disclosure. Title to all inventions and other intellectual property made solely by employees of Antalium, but not Nortran, in the course of and in connection with the Research Collaboration ("Antalium Inventions") shall be deemed owned by Antalium. Title to all inventions and other intellectual property made solely by employees of Nortran, but not Antalium, in the course of and in connection with the Research Collaboration ("Nortran Inventions") shall be deemed owned by Nortran. Title to all inventions and other intellectual property made jointly by employees of Antalium and Nortran in the course of and in connection with the Research Collaboration ("Joint Inventions") shall be deemed owned jointly by Nortran and Antalium. Inventorship of inventions and other intellectual property conceived and/ or reduced to practice pursuant to this Agreement shall be determined in accordance with the laws of Canada. Each Party shall promptly disclose to the other any inventions made in connection with this Agreement. It is understood that both parties grant one another a worldwide, exclusive (except as to each other), right and license, with the right to sub- license, to develop, make, have made, use, sell, offer for sale, have sold, import and have imported Products, under any Patent Rights and Intellectual Property jointly owned by Nortran and Antalium. 5.2 Patent Filing and Prosecution. 5.2.1 Responsibilities (a) Nortran Inventions. Nortran shall be responsible for preparing, filing, prosecuting and maintaining, in such countries in the Territory as it deems appropriate, patent applications and patents directed to Nortran Inventions included within the Licensed Technology and conducting any interferences, re-examinations, reissues and oppositions relating to such patent applications and patents. (b) Antalium Inventions. Antalium shall be responsible for preparing, filing, prosecuting and maintaining, in such countries in the Territory as it deems appropriate, patent applications and patents directed to all Antalium Inventions, and conducting any interferences, re-examinations, reissues and oppositions relating to such patent applications and patents. (c) Joint Inventions. Subject to Sections 5.3 and 5.4. Antalium shall be responsible for preparing, filing, prosecuting and maintaining in the Territory, or any countries agreed by Antalium and Nortran, patent applications and patents directed to all Joint Inventions, and conducting any interferences, re- examinations, reissues and oppositions relating thereto. 5.2.2 Failure to Prosecute. (a) Nortran Failure to Prosecute. Nortran may elect, upon ninety (90) days prior notice, to discontinue prosecution of any patent applications filed by Nortran pursuant to Section 5.2.1(a) or 5.2.1(c) above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Sections. In the event Nortran declines to file or, having filed, fails to further prosecute or maintain any patent applications or patents described in such Sections, or conduct any proceedings including, but not limited to, interferences, re-examinations, reissues, oppositions relating thereto, then Antalium shall have the right to prepare, file, prosecute and maintain such patent applications and patents in such countries as it deems appropriate, and conduct such proceedings, at its sole expense in such case, Nortran shall immediately execute all necessary documents that may be required in order to enable Antalium to file, prosecute and maintain such patent applications and to conduct any such proceedings. (b) Antalium Failure to Prosecute. Antalium may elect, upon ninety (90) days prior notice, to discontinue prosecution of any patent applications filed pursuant to Section 5.2.1 (b) or 5.21 (c) above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Section. In the event Antalium declines to tile or, having filed, fails to further prosecute or maintain any patent applications or patents described in such Section, or conduct any proceedings including, but not limited to, interferences, re-examinations, reissues, oppositions relating thereto, then Nortran shall have the right to prepare, file, prosecute and maintain such patent applications and patents in such countries as it deems appropriate, and conduct such proceedings, at its sole expense. In such case, Antalium shall immediately execute all necessary documents that may be required in order to enable Nortran to file, prosecute and maintain such patent applications and to conduct any such proceedings. 5.3 Cooperation. Antalium and Nortran shall consult together upon all matters relating to the filing, prosecution, and maintenance of patents described in Article 4. This shall include giving the other Party the opportunity to review and comment upon the text of any priority application before filing, consultation about the decision whether or not to foreign file, and if so, in which countries; and giving the other Party the opportunity, as far in advance of filing dates as feasible, to fully review and comment on the basic foreign filing text. Each Party shall provide to the other copies of any search reports and official actions, including notice of all interferences, reissues, re-examinations, and oppositions received from the relevant patent offices promptly after receipt. Each Party, whether or not involved in the filing, prosecution, defense or enforcement of any Patent Rights hereunder or In the defense of any infringement claims by Third Parties, shall reasonably cooperate with and assist the other in connection with activities subject to Section 5.2,5.6,5.7, at the other's request. Each Party shall execute and procure that its employee inventors shall execute all documents reasonably required in connection with the filing, prosecution, or maintenance of patents directed to all the Joint Inventions. 5.4 Costs. Responsibilities for costs incurred under this Articles shall be as follows: (a) Nortran shall pay all out-of-pocket costs incurred in connection with the conduct of the activities described in Sections 5.2.1(a) (b) Antalium shall pay all out-of-pocket costs incurred in connection with the conduct of the activities described in Section 5.2.1(b). (c) Subject to Section 5.2.2, the Parties shall reimburse each other so as to equally share the out-of-pocket costs incurred in connection with conduct of the activities described in Section 5.2.1(c). 5.5 Copies During the term of this Agreement Antalium shall promptly provide to Nortran a copy of any patent applications filed by Antalium or its Affiliates or Sublicensees, after the publication thereof, relating to any Agreement Compounds. During the term of this Agreement, Nortran shall promptly provide to Antalium a copy of any patent applications filed by Nortran, after the publication thereof, relating to any Agreement Compounds. 5.6 Enforcement and Defense. 5.6.1 Notice. Each Party shall promptly notify the other of any knowledge it acquires of any potential infringement of the Licensed Technology or the Antalium Technology by a Third Party. 5.6.2 Joint Inventions. In the event Nortran or Antalium becomes aware of any actual or threatened infringement of any patent filed pursuant to Section 5.2.1 (c), that Party shall promptly notify the other and the Parties shall promptly discuss how to proceed in connection with such actual or threatened infringement. Unless otherwise agreed by the Parties, the terms of Sections 5.63 and 5.6.4 shall apply; provided, the Parties may decide to jointly defend against any patent infringement by Third Parties, in which case the Parties shall also agree on allocation of costs and damages. 5.6.3 Antalium. Antalium shall have the initial right, but not the obligation, to take reasonable legal action to enforce against infringements by Third Parties or defend any declaratory judgment action relating to any patent filed pursuant to Section 5.2.1 (c), at its sole cost and expense. If, within six (6) months following receipt of such notice from Nortran Antalium fails to take such action to halt a commercially significant infringement, Nortran shall, in its sole discretion, have the right, at its sole expense, to take such action. Antalium shall have the right to enforce patents filed pursuant to Section 5.2.1 (b), in its sole discretion, unless Nortran has acquired a license to Antalium interest in such patents. 5.6.4 Nortran. Nortran shall have the initial right, but not the obligation, to take reasonable legal action to enforce against patent infringement by Third Parties or defend any declaratory judgment action relating to any patent filed pursuant to Section 5.2.1 (a), at its sole cost and expense. If, within six (6) months following receipt of such notice from Antalium Nortran fails to take such action to halt a commercially significant infringement, Antalium shall, in its sole discretion, have the right, at its expense, to take such action. 5.6.5 Cooperation; Costs and Recoveries. At the request and expense of either Party, the other Party shall give the requesting Party all reasonable assistance required to file and conduct any such proceeding and shall be entitled to retain any and all awards or damages obtained therefrom. 5.7 Infringement claims. In the event the manufacture, sale, use, distribution or marketing of any Product pursuant to this Agreement, because of the practice of the Licensed Technology or the Antalium Technology, results in any claim, suit or proceeding alleging patent infringement against Nortran or Antalium (or its Affiliates or Sublicensees), such Party shall promptly notify the other Party hereto in writing setting forth the facts of such claim in reasonable detail. The defendant shall have the exclusive right and obligation 10 defend and control the defense of any such claim, suit or proceeding, at its own expense, using counsel of its own choice; provided, however, it shall not enter into any settlement which admits or concedes that any aspect of the Antalium Technology (in the case of Nortran) or the Licensed Technology (in the case of Antalium) is invalid or unenforceable, without the prior written consent of such other Party. The defendant shall keep the other Party hereto reasonably informed of all material developments in connection with any such claim, suit or proceeding. In the event Antalium is the defendant, any costs and expenses of Antalium in defending a suit, arising solely out of the use of Licensed Technology, and any amounts that Antalium is required to pay to the Third Party in order to settle or otherwise dispose of such suit or in damages or other amounts finally awarded to such Third Parties in such suit, may be offset by Antalium against any amounts that Antalium owes to Nortran under Sections 6.2 and 6.3; provided that Antalium may not settle such suit without Nortran's prior written approval, such approval to not be unreasonably withheld or delayed. ARTICLE 6 FINANCIAL TERMS 6.1 Research Funding (a) In recognition of the research done by Nortran on Antalium's behalf before the Effective Date, Antalium shall provide to Nortran a research funding of five hundred thousand dollars ($500,000.00) to enable Nortran to carry out Nortran's responsibilities in accordance with Article 2. (b) No withholding. The amounts paid to Nortran pursuant to this Section 6.1(a) are funding for the Research Collaboration and shall be made without withholding for taxes or any other charge, unless required by law. 6.2 Milestone Payments In partial consideration of the rights granted to Antalium under this Agreement, Antalium shall pay Nortran the following amounts within sixty (60) days after each occurrence of the following milestones with respect to an Agreement Compound or Product: (a) $10,000 per compound selected as a Lead Compound regardless of the number of Lead Compounds selected. (b) $100,000 per compound selected as Clinical Candidate, regardless of the number of Clinical Candidates selected. (c) $3,000,000.00 upon the dosing of the first patient in a Phase III clinical trial (as prescribed by applicable FDA regulations, or any corresponding foreign statutes, rules or regulations). (d) $5,000,000.00 upon the approval of a New Drug Application ("NDA")(or its equivalent or non-U.S. counterpart in any jurisdiction). (e) It is understood that Antalium shall have no obligation to pay any of the milestone payments set forth above more than one (1) time with respect to a particular molecular target within the Field, regardless of how many Products are commercialized in respect of such target and regardless of the number of jurisdictions involved. The milestone payments shall be made on a target-by-target basis, so that if Antalium ceases all development of a particular Lead Compound or Derivative (or corresponding Product) after having made payments with respect to such Lead Compound, Derivative or Product under this Section 6.2 on the accomplishment of milestones specified herein, there Shall be no payment due upon the accomplishment of those same milestones with respect to a subsequent Agreement Compound, or Product hereunder that is active against the same molecular target. For greater certainty, the amounts payable hereunder include any Lead Compound Derivative or Product. 6.3 Royalties Royalties shall be payable on any Product which contains a Lead Compound, or Derivative. 6.3.1 Earned Royalties. In consideration for the licenses and rights granted by Nortran to Antalium under this Agreement, Antalium shall pay to Nortran during the applicable Royalty Period an earned royalty of ten percent (10%) of Net Sales of Products. 6.3.2 Pass-through Royalties. In the case of sublicenses, Antalium shall pay to Nortran, as royalty, twenty percent (20%) of all sub- licensing revenues including all milestone payments, once collected. Milestone payments to Nortran in accordance with Section 6.2, are excluded from such pass-through royalties for greater certainty, bulk sales of Product to a third party shall be considered as sub- licenses and therefore subject to the 20% royalty rate. 6.3.3 Royalty Period. The royalty payments set forth above shall be payable for each Product on a product-by-product and country-by- country basis from the time of First Commercial Sale of Product in such country until the last-to-expire or -lapse of Patent Rights containing a Valid Claim with respect to the Agreement Compound which is an ingredient of such Product in such country. At the end of such period, Antalium shall have a fully paid-up, non-exclusive, royalty-free license, with the right to sublicense, under any unpatented Licensed Technology to make, have made, use and sell products on a country-by-country and product-by product basis. ARTICLE 7 PAYMENTS, BOOKS AND RECORDS 7.1 Royalty Reports and Payments. After the First Commercial Sale of a Product on which royalties are payable by Antalium or its Affiliates or Sublicensees hereunder, Antalium shall make quarterly written reports to Nortran within ninety (90) days after the end of each calendar quarter, stating in each such report, separately for Antalium and each Affiliate and Sublicensee, the number, description, and aggregate Net Sales, by country, of each Product sold during the calendar quarter upon which a royalty is payable under Section 6.3.1 above. In the event that any Net Sales are based on Bundled Transactions, such reports shall include a statement showing the calculation of the Net Sales with respect to such Bundled Transactions. Concurrently with the making of such reports, Antalium shall pay to Nortran royalties due at the rates specified in such Sections. 7.2 Payment Method All payments due under this Agreement shall be made by bank wire transfer in immediately available funds to a bank account designated by Nortran. All payments hereunder shall be made in Canadian dollars In the event that the due date of any payment subject to Article 6 hereof is a Saturday, Sunday or national holiday, such payment may be paid on the following business day. Any payments that are not paid on the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate as reported by the Canadian Imperial Bank of Commerce ("CIBC"), on the date such payment is due, plus an additional one percent (1%), calculated on the number of days such payment is delinquent. 7.3 Currency Conversion. The royalty payments due shall be calculated at Antalium's customary internal corporate monthly exchange rates for the last month of the calendar quarter for which remittance is made for royalties for each month and each currency, Antalium's customary internal corporate monthly exchange rate shall equal the arithmetic average of the daily exchange rates (obtained as described below) during the period from (i) the 20th day of the preceding month (or, if such 20th day is not a business day, the immediately preceding business day) through (ii) the 19th day of the current month (or, if such 19th day is not a business day, the immediately preceding business day); each daily exchange rate shall be obtained from the Reuters Daily Rate Report or The Wall Street Journal, Eastern U.S. Edition, or, if not so available, as furnished by Antalium's local Affiliates. 7.4 Records' Inspection. Antalium and its Affiliates and Sublicensees shall keep complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable under this Agreement. Such books and records shall be kept in the principal place of business of this Agreement. Such books and records shall be kept at the principal place of business of such Party, as the case may be, for at least three (3) years following the end of the calendar quarter to which they pertain. Such records shall be open for inspection during such three (3) year period by a public accounting firm to whom Antalium has no reasonable objection, solely for the purpose of verifying royalty statements hereunder. Such inspections may be made no more than once each calendar year at reasonable times and on reasonable notice. Inspections conducted under this Section 7.4 shall be at the expense of Nortran, unless a variation or error producing an increase exceeding five (5%) of the amount stated for any period covered by the inspection is established in the course of any such inspection, whereupon all reasonable costs relating to the inspection for such period and any unpaid amounts that are discovered shall be paid promptly by Antalium together with interest thereon from the date such payments were due at the prime rate as reported by the CIBC plus an additional one percent (1%). 7.5 Tax Matters 7.5.1 Withholding Taxes. All milestone payments, royalty amounts and license fees required to be paid to Nortran pursuant to this Agreement shall be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction other than Canada ("Withholding Taxes") Antalium shall provide Nortran a certificate evidencing payment of any Withholding Taxes hereunder, and shall provide any further assistance reasonably requested by Nortran to enable Nortran to obtain the benefit of any such deduction. 7.5.2 Other Taxes. Nortran shall be responsible for any sales taxes, use taxes, transfer taxes or similar governmental charges required to be paid in connection with the transfer of the Agreement Compounds. In the event that Antalium is required to pay any such amounts, and reasonably documents payment, Nortran shall promptly reimburse Nortran for such amounts. ARTICLE 8 CONFIDENTIALITY 8.1 Confidential Information. Except as expressly provided herein, the Parties agree that, for the Term of this Agreement and for five (5) years thereafter, the Receiving Party, except as expressly provided in this Article 8, shall not disclose to any Third Party or use for any purpose any Confidential Information of the Disclosing Party, howsoever acquired by the Receiving Party, except to the extent that it can be established by the Receiving Party by competent proof that such information: (a) was already known to the Receiving Party, other than under an obligation of confidentiality, at the time of disclosure: (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the Receiving Party in breach of this Agreement; (d) was independently developed by the Receiving Party as demonstrated by documented evidence prepared contemporaneously with such independent development; (e) was, subsequently, lawfully disclosed to the Receiving Party by a person other than the Disclosing Party; or (f) was approved in writing by the Disclosing Party for public disclosure by the Receiving Party. 8.2 Permitted Use and Disclosures. Each Party hereto may use or disclose information disclosed to it by the other Party to the extent such information is included in the Licensed Technology or the Antalium Technology, as the case may be, and to the extent such use or disclosure is reasonably necessary and permitted in the exercise of such rights granted hereunder in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or court order or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sublicense or otherwise exercising license rights expressly granted by the other Party to it pursuant to the terms of this Agreement, provided that if a Party is required to make any such disclosure, other than pursuant to a confidentiality agreement, it shall give reasonable advance notice to the other Party of such disclosure and, save to the extent inappropriate in the case of patent applications, shall use its reasonable efforts to secure confidential treatment of such information in consultation with the other Party prior to its disclosure (whether through protective orders or otherwise) and disclose only the minimum necessary to comply with such requirements. 8.3 Nondisclosure of Terms. Each of the Parties hereto agrees not to disclose the terms of this Agreement to any Third Party without the prior written consent of the other Party hereto, which consent shall not be unreasonably withheld, except to such Party's attorneys, advisors, investors and others on a need to know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law. Notwithstanding the foregoing, the Parties shall agree Upon Q press release and timing to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement; thereafter, Nortran and Antalium may each disclose to Third Parties the information contained in such press release and Q&A without the need for further approval by the other. In addition, Antalium and Nortran may make public statements regarding the progress of the Research Collaboration and the achievement of milestones and fees with respect thereto, following consultation and mutual agreement, the consent of neither Party to be unreasonably withheld. 8.4 Acknowledgement of Confidentiality. Antalium acknowledges and confirms that all communications and information relating to this Agreement received from Nortran prior to the date of this Agreement shall be deemed to be Confidential Information under this Agreement and shall be deemed to have been received under an obligation of confidentiality from the time of its receipt on the terms as set out in this Agreement. ARTICLE 9 REPRESENTATIONS AND WARRANTIES 9.1 Representations and warranties of both Parties Each Party hereby represents and warrants to the other Party as follows: 9.1.1 Existence. Such Party is duly organized and validly existing under the laws of the province of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. 9.1.2 Authorization and Enforcement of Obligations. (a) Such Party has the requisite power and authority and the legal right to enter into this Agreement and to perform its obligations hereunder: and (b) Such Party has taken all requisite action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder. This Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, binding obligation enforceable against such Party in accordance with its terms except as enforcement may be limited by equitable remedies or defenses and applicable bankruptcy laws. 9.1.3 No Consent. All necessary consents, approvals and authorizations from all governmental authorities and other persons or Third Parties required to be obtained by such Party in connection with the execution and delivery of this Agreement have been obtained. 9.1.4 No Conflict. The execution, delivery and performance of this Agreement by such Party do not conflict with any agreement, instrument or understanding, oral or written, to which such Party is a Party or by which such Party may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over such Party. 9.1.5 No Consequential Damages. In addition to the other limitations set out in this Article 9, in no event shall either Party be liable to the other for any indirect, consequential, special, incidental or contingent damages of any nature whatsoever, including but not limited to loss of revenue or profit, or loss of use of either, or costs of capital. 9.2 Representations and Warranties of Nortran. Nortran hereby represents and warrants to Antalium as follows: (a) It has not previously granted, and during the term of this Agreement shall not knowingly make, any commitment or grant any rights which are in conflict in any material way with the rights and licenses granted herein. (b) To the best of its knowledge, it is the owner or licensee of all of the Licensed Technology in existence on the Effective Date, and has therefore the right to grant the licenses or sublicenses granted under this Agreement, as the case may be. (c) To the best of its knowledge as of the Effective Date, there are no existing or threatened actions, suits or claims pending against it with respect to the Licensed Technology. (d) To the best of its knowledge as of the Effective Date, the creation or synthesis of Agreement Compounds or any Derivative thereof by Nortran does not infringe any patent rights of any Third Party. 9.3 Disclaimer Antalium and Nortran specifically disclaim any guarantee that the Research Collaboration shall be successful, in whole or in part. The failure of the Parties to successfully develop Agreement Compounds or Derivative thereof or Products shall not constitute a breach of any representation or warranty or other obligation under this Agreement, EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, NORTRAN AND ANTALIUM MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE TECHNOLOGY AND INFORMATION DISCLOSED HEREUNDER OR PRODUCTS INCLUDING. BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY TECHNOLOGY. PATENTED OR UNPATENTED, OR NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ALL TECHNOLOGY AND INFORMATION IS PROVIDED "AS IS." ARTICLE 10 INDEMNIFICATION 10.1 Antalium Antalium agrees to indemnify, defend and hold Nortran and its Affiliates and their respective directors, officers, employees, agents and their respective successors, heirs and assigns (the "Nortran Indemnitees") harmless from and against any losses, costs, claims, damages, liabilities or expense (including reasonable attorneys' and professional fees and other expenses of litigation) (collectively, "Liabilities") arising, directly or indirectly out of or in connection with Third Party claims, suits, actions, demands or judgments, relating to (i) any Products developed, manufactured, used, sold or otherwise distributed by or on behalf of Antalium, its Affiliates or Sublicensees or other designees (including, without limitation. product liability and patent Infringement claims), (ii) Antalium' performance of the Research Collaboration; and (iii) any breach by Antalium of the representations and warranties made in this Agreement, except, in each case, to the extent such Liabilities result from a material breach of this Agreement by Nortran, gross negligence or intentional misconduct of Nortran. 10.2 Nortran Nortran agrees to indemnify. defend and hold Antalium, its Affiliates and its Sublicensees and their respective directors, officers, employees, agents and their respective heirs and assigns (the "Antalium Indemnitees") harmless from and against any losses, costs, claims, damages, liabilities or expense (including reasonable attorneys' and professional fees and other expenses of litigation) (collectively, "liabilities") arising, directly or indirectly out of or in connection with Third Party claims, suits, actions, demands or judgments, relating to (i) any product based on an Agreement Compound developed, manufactured, used, sold or otherwise distributed by or on behalf of Nortran, its Affiliates, licensees or other designees as permitted under this Agreement (including, without limitation, product liability, patent infringement and other Intellectual Property claims), (ii) the performance of the Research Collaboration by Nortran, and (iii) any breach by Nortran of its representations and warranties made in this Agreement, except, in each case, to the extent such Liabilities result from a material breach of this Agreement by Antalium, gross negligence or intentional misconduct of Antalium. 10.3 Procedure In the event that any Indemnitee (either a Antalium Indemnitee or a Nortran Indemnitee) intends to claim indemnification under this Article 10 it shall promptly notify the other Party in writing of such alleged Liability. The indemnifying Party shall have the right to control the defense thereof with counsel of its choice as long as such counsel is reasonably acceptable to Indemnitee; provided, however, that any Indemnitee shall have the right to retain its own counsel at its own expense, for any reason, including if representation of any Indemnitee by the counsel retained by the indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnitee and any other Party reasonably represented by such counsel in such proceeding. The affected Indemnitee shall cooperate with the indemnifying Party and its legal representatives in the investigation of any action, claim or liability covered by this Article 10. The Indemnitee shall not, except at its own cost, voluntarily make any payment or incur any expense with respect to any claim or suit without the prior written consent of the indemnifying Party, which such Party shall not be required to give. ARTICLE 11 TERM AND TERMINATION 11.1 Term of Agreement This Agreement shall commence on the Effective Date and shall remain. In full force and effect until the expiration of the last to expire of the applicable Patent Rights covering any royalty-bearing Licensed Product, on a country-by-country basis, unless earlier terminated as provided in this Article 11. 11.2 Early Termination. Notwithstanding the provisions of Article 4 and Section 11.1, this Agreement shall terminate if: (a) after a period of more than 18 months starting from the Effective Date, Antalium fails to select a Lead Compound. (b) after a period of more than 33 months starting from the Effective Date, Antalium fails to select a Clinical Candidate. (c) If a Clinical Candidate is selected but a period of more than 12 months elapses between selection of Clinical Candidate and the dosing of the first patient in a Phase I clinical trials and receipt by Antalium of written notification from Nortran that such a gap has occurred. 11.3 Termination for breach of payment obligations. In the event that Antalium fails to make timely payment of any amounts due to Nortran under this Agreement. Nortran may terminate the Research Collaboration and/or this Agreement upon sixty (60) days written notice to Antalium, unless Antalium pays all past-due amounts within such sixty-day notice period. 11.4 Termination for Default. If either Party breaches any material provision of this Agreement (other than as provided in Sections 11.2 and 11.3) and if such breach is not corrected within 90 days after the non-breaching Party gives notice of the default to the breaching Party, the non-breaching Party may terminate the Research Collaboration and/or this Agreement immediately by giving notice of the termination, effective on the date of the notice; provided, however, that if any such breach is not capable of being cured within the aforesaid 90-day period, so long as the breaching Party (or any Third Party on its behalf) commences to cure the breach promptly after receiving notice of the breach from the non-breaching Party and thereafter diligently prosecutes the cure to completion as soon as is practicable, the non-breaching Party may not terminate this Agreement unless the breaching Party (or any Third Party on its behalf), notwithstanding such efforts, is unable to cure the breach within 80 days after the other Party gives notice of the default, in which case the non-breaching Party may terminate this Agreement immediately by giving notice of the termination, effective on the date of the notice. 11.5 Termination for Insolvency. If voluntary or involuntary proceedings by or against a Party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party, or proceedings are instituted by or against such Party for corporate reorganization, dissolution, liquidation or winding-up of such Party, which proceedings, if involuntary, shall not have been dismissed within sixty (60) days after the date of filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within sixty (60) days thereafter, the other Party may immediately terminate the Research Collaboration and/or this Agreement, effective upon notice of such termination. 11.6 Voluntary Termination of License Rights. Antalium may terminate the license rights granted to it by Nortran under Article 4 of this Agreement with respect to any particular country or countries in the Territory or with respect to a particular Agreement Compound or Product by giving Nortran at least thirty (30) days written notice thereof. 11.7 Mutual Termination. By written agreement, the Parties may at any time terminate this Agreement on mutually acceptable terms. 11.8 Effect of termination 11.8.1 Accrued Rights and Obligations. Termination of this Agreement for any reason shall not release either Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination nor preclude either Party from pursuing any rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. 11.8.2 Return of Materials. Upon any termination of this Agreement or the licenses granted to either Party pursuant to this Agreement, the Parties shall promptly return to each other all Confidential Information (including, without limitation, all Know-How) received from the other Party, except one copy of which may be retained for archival purposes. 11.8.3 Post-Termination Product Sales. In the event of the cancellation or termination of any license rights with respect to a Product prior to the expiration of this Agreement, inventory of such Product may be sold for up 10 one year after date of termination or such longer period as the Parties may agree, provided earned royalties are paid thereon. 11.8.4 Licenses. (a) Following expiration of the term of this Agreement with respect to a Product in a country pursuant to Section 11.1, Antalium shall have the royalty-free, perpetual right to make, have made, use and sell such, Product in such country. Following expiration of the term of this Agreement with respect to every Product in every country pursuant to Section 11.1, Antalium shall have the royalty-free, perpetual right to continue to make, have made, use and sell all Products worldwide. (b) The licenses granted to Antalium herein shall terminate in the event of any termination of the Agreement by Nortran pursuant to Sections 11.2, 11.3, 11.4, or 11.5. Notwithstanding the foregoing, in the event of termination of this Agreement for Insolvency of Nortran, pursuant to Section 11.5, all licenses and rights granted to Antalium shall remain in full force and effect, subject to the terms and conditions of this Agreement applicable thereto. (c) If more than one Product is being commercially developed or exploited by Antalium or its Affiliates or Sublicensees hereunder, and Nortran terminates this Agreement pursuant to Section 11.3 or 11.4 due to a breach relating only to a single Product, then Nortran shall be entitled to terminate this Agreement only with respect to the applicable Product. (d) Except as expressly provided in this Section 11.8.4, in the event of any termination of this Agreement, the licenses granted under this Agreement to either Party prior to the effective date of such termination shall remain in effect, subject to the terms and conditions of this Agreement applicable thereto. In such event, the applicable provisions of Articles 4, 6 and 9 shall survive and be applicable to such licenses in addition to the provisions which survive pursuant to Section 12.16. ARTICLE 12 GENERAL PROVISIONS 12.1 Governing Law. This Agreement and any dispute arising from the construction, performance or breach hereof shall be governed, construed and enforced in accordance with the laws of the Province of Quebec; and the laws of Canada applicable in the Province of Quebec. 12.2 Compliance with Laws. In exercising their rights under this Agreement, the Parties shall fully comply in all material respects with the requirements of any and all applicable laws, regulations, rules, and orders of any government body having jurisdiction over the exercise of rights under this Agreement, including, without limitation, those applicable to the discovery, development, manufacture, distribution, import and export, and sale of pharmaceutical products pursuant to this Agreement. 12.3 Notices. All notices, reports, payments, requests, consents, demands and other communications between Nortran and Antalium, pertaining to subjects related to this Agreement, shall be in writing and shall be deemed duly given and effective (A) when actually received by mail or personal delivery, or (B) when mailed by prepaid registered or certified mail to the receiving Party at the address set forth below, or to such other address as may be later designated by written notice from either Party to the other Party on the fifth (5th) day following the deposit thereof in the mail, or (C) when transmitted by facsimile, at the facsimile of such receiving Party set forth below, on the day of transmittal thereof: Nortran's Notification Address: Nortran Pharmaceuticals Inc. 3650 Westbrook Mall Vancouver, BC, Canada, V6S 2L2 Facsimile: (604) 222-6617 Attention of: The Chief Executive Officer Antalium's Notification Address: Antalium Inc. 1550 Metcalfe Street, Suite 502 Montreal, QC Canada, H3A 1X6 Facsimile: (514) 842-1505 Attention of: The Chief Executive Officer 12.4 Entire Agreement. This Agreement, constitutes the entire agreement, both written and oral, between the Parties with respect to the subject matter hereof, and all prior agreements respecting the subject matter hereof. either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect. No amendment or change hereof or addition hereto shall be effective or binding on either of the Parties hereto unless reduced to writing and executed by a duly authorized representative of each, of Nortran and Antalium. 12.5 Amendment. This Agreement may not be amended or modified except by written agreement signed by both Parties. 12.6 Assignment. This Agreement shall not be assignable by either Party to any Third Party without the written consent of the other Party hereto; provided, however, that either Party may assign this Agreement, without the other's consent, to an entity that acquires all or substantially all of the business or assets of such party to which this. Agreement pertains, whether by merger, reorganization, operation of law, acquisition, sale, or otherwise. This Agreement shall be binding upon and accrue to the benefit of any permitted assignee, and any such assignee shall agree to perform the obligations of the assignor. 12.7 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect to the fullest extent permitted by law without said provision, and the Parties shall amend the Agreement to the extent feasible to lawfully include the substance of the excluded term to as fully as possible realize the intent of the Parties and their commercial bargain. 12.8 Waiver of Rights. In order to be effective, any waiver, by either Party, of any right under this Agreement, must be in writing signed by an authorized representative of the Party making the waiver No such waiver of failure of Nortran or Antalium to enforce a right or strict performance under this Agreement shall be deemed to be a waiver or forbearance which would in any way prevent Nortran or Antalium from subsequently asserting or exercising any such rights, making a claim not specifically waived, or requiring strict performance of this Agreement. No such waiver or failure to enforce shall affect the validity of this Agreement or be a continuing waiver excusing compliance with any provision of this Agreement in the future. 12.9 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors and permitted assigns. 12.10 Co-operation. Each Party hereto agrees to co-operate with the other to insure that each may have and enjoy to the fullest extent, all rights conveyed under this Agreement. If at any time after the date hereof any Party, acting reasonably, requests further documents, instruments or assurances in order to carry out the provisions hereof, then the Party from which such documents, instruments or assurances are requested shall promptly execute and deliver any such documents, instruments and assurances and do all things reasonably necessary to carry out the provisions hereof, all at the cast and expense of the Party requesting such assurance. 12.11 Mediation. Any dispute with respect to the present Agreement, and which cannot be settle by negotiation between the Parties, shall firstly be submitted to mediation by the Parties, who shall to this end appoint a mediator whose expertise appears relevant to the matter in question, If the mediation process does not resolve the disagreement within sixty (60) days, the Parties shall have recourse to arbitration in accordance with subsection 12.12 hereafter, Mediator costs shall be equally shared by the Parties to this Agreement. 12.12 Arbitration. Any controversy which shall arise between the Ponies to this Agreement concerning its construction or application, or the rights, duties or obligations of any Party to this Agreement, shall be referred to an arbitration, the award and determination of which shall be final and binding upon the Par-ties hereto, the whole in accordance with the provisions of the Code of Civil Procedure of the Province of Quebec. The procedure of the arbitration shall be as follows: (a) Upon the written demand of any of the Parties concerned, the Parties shall meet and attempt to appoint a single arbitrator. If they are unable to agree on a single arbitrator then upon the written demand of any of them and within thirty (30) days of such demand, the Person making the demand shall apply to any Judge of the Superior Court of the Province of Quebec, to appoint such arbitrator that meets the criteria set forth pursuant to the provisions of section (b) of this Arbitration Schedule. (b) The arbitrator selected to act hereunder shall be (i) affiliated with a recognized national or international arbitration tribunal and (ii) qualified by education and training to pass upon the particular question or questions in dispute. (c) The single arbitrator so chosen shall proceed immediately to hear and determine the matter or matters in dispute. The decision of the arbitrator shall be made within forty-five (45) days after his appointment, subject to any reasonable delay due to unforeseen circumstances. Notwithstanding the foregoing, in the event the single arbitrator fails to make a decision within ninety (90) days after his appointment then any of the Parties concerned may elect to have a new single arbitrator chosen in like manner as if none had previously been selected. (d) The decision of the single arbitrator shall be in writing and signed by the single arbitrator and shall be final and binding upon all of the Parties hereto as to any matter or matters so submitted to arbitration and the Parties shall perform the terms and conditions thereof. (e) The compensation and expenses of the single arbitrator (unless otherwise determined by the arbitrator) shall be paid equally by the Parties that are Party to the arbitration unless otherwise directed. (f) None of the Parties concerned shall be deemed to be in default of any matter being arbitrated until ten (10) days after the decision of the arbitrator is delivered to all of them. 12.13 Injunctive Relief. Notwithstanding Section 12.12, both Parties agree that any Party hereto may be Irreparably damaged if any provision of this Agreement is not performed by the other Party in accordance with its terms. Accordingly, the Parties shall be entitled to apply for an injunction or injunctions to prevent breaches of any of the provisions of this Agreement by the other Party and may specifically enforce such provisions by an action instituted in a court having jurisdiction. These specific remedies are in addition to any other remedy to which either Party may be entitled at law or in equity. 12.14 Force majeure. A Party to this Agreement may not be held responsible to the other Party and shall not lose any rights hereunder or be liable to the other Party for damages or losses for any default or delay in execution caused by circumstances beyond its control, which comprises, without however being limited thereto, Acts of God, war, natural disasters, fire, trade disputes, strikes, lockouts, embargo, governmental measures, including any intervention by the Ministere du revenu du Quebec or Revenue Canada or any regulatory body, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence or intentional conduct or misconduct of the non-performing Party, provided however that the Party that is excused from performance takes all the necessary measures to prevent, cease or terminate such events, measures or facts making the execution impossible, provided, however, that in no event shall a Party be required to settle any labor dispute or disturbance. 12.15 Independent Contractors. The relationship of the Parties hereto is that of independent contractors. Neither Party hereto is to be deemed to be an agent, partner, or joint venturer of the other Party for any purpose as a result of this Agreement or the transactions contemplated thereby. 12.16 Survival of Articles. The following Articles shall survive any termination or expiration of this Agreement: Article 1 (Definitions), 5 (Intellectual Property), 8 (Confidential Information), 9 (Representations and Warranties), 10 (Indemnification), 11 (Term and Termination) and 12. (General Provisions). 12.17 Negotiation. This Agreement has been negotiated by the Parties and shall be fairly interpreted in accordance with its terms and without any rules of construction relating to which Party drafted the Agreement being applied in favor or against either Party. 12.18 Headings. The section and subsection titles and headings contained in this Agreement are for convenience and reference only. Such titles and headings do not form a part of this Agreement, shall not define or limit the scope of the sections or subsections, and shall not affect the construction or interpretation of any of the sections or subsections. 12.19 Language. The Parties hereto hereby acknowledge that they have agreed to this Agreement being drawn up in the English language only. Les Parties reconnaissent avoir consenti a ce que le present contrat de recherche soit redige en langue anglaise seulement. 12.20 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their authorized representatives and delivered in duplicate originals as of the Effective Date. Nortran Pharmaceuticals Inc. Antalium Inc. Per: /s/ Robert Rieder /s/ Kazimierz Babinski -------------------- ------------------------ Robert Rieder Kazimierz Babinski Chief Executive Officer Chief Executive Officer EXHIBIT A In accordance with Section 2.2, Nortran shall deliver to Antalium a minimum of 30 different Agreement compounds according to the schedule set forth in Table 1 below: TABLE 1 Compound Quantity Delivered By -------- -------- ------------ RSD990 300 mg November 30, 2000 RSD1002 300 mg November 30, 2000 RSD1007 300 mg November 30, 2000 RSD1008 300 mg November 30, 2000 RSD1018 300 mg November 30, 2000 RSD1020 300 mg November 30, 2000 RSD1025 300 mg November 30, 2000 RSD1070 300 mg November 30, 2000 RSD1200 300 mg November 30, 2000 RSD1208 300 mg November 30, 2000 The remaining 20 compounds (100 mg quantity) to be selected by Antalium from the following list and delivered by November 30. 2000. RSD961 RSD1029 RSO962 RSD1034 RSD970 FSD1041 RSD971 RSD1044 RSD974 RSDI045 RSD981 RSDlO49 RSD983 RSDl171 RSD986 RSD1172 RSD994 RSD1174 RSD995 RSD1186 RSD998 RSD1197 RSD999 RSD1198 RSD1001 RSD1199 RSD1004 EX-4 4 exhibit4-9.txt EMPLOYMENT AGREEMENT DATED JUNE 5, 2001 WITH DR. ALAN M. EZRIN. Exhibit 4.9 Page 1 EMPLOYMENT AGREEMENT This agreement is made as of the 5th of June 2001. Between: DR. ALAN EZRIN, 110 Quintas Lane, Moraga, California, 94556 (the "Employee") and CARDIOME PHARMA CORP., a corporation incorporated under the laws of the Province of British Columbia and having its registered office at Suite 1100, 1055 West Hastings Street, Vancouver B.C. V6E 2E9 (the "Company") WHEREAS: A. The Company is engaged in pharmaceutical research and development (the "Business"); B. The Company and the Employee previously entered into a preliminary agreement dated January 4, 2001; and C. The parties wish by this agreement to record the terms and conditions on which the Employee has agreed to serve as Chief Scientific Officer for the Company. NOW THEREFORE in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. Employment Scope 1.1 Subject to the terms of this Agreement, the Company agrees to employ, and the Employee agrees to serve the Company as Chief Scientific Officer during the Term (hereinafter defined). Term 1.2 The term of this Agreement (the "Term") shall commence on January 15, 2001 (the "Date of Commencement") and shall continue until this Agreement is terminated in accordance with Part 4 or Part 5.2. Page 2 Reporting 1.3 The Employee shall report and be directly responsible to the Company's President and CEO. Outside Directorships; Professional Development 1.4 The Employee will be permitted to maintain existing outside directorships and also to engage in reasonable developmental activities (as set out in Schedule "C"), in addition to the duties described below. 2. Compensation Salary 2.1 The Company agrees to pay the Employee and the Employee agrees to accept as remuneration for his services an annual salary in the amount of US$190,000 in the first year payable by equal semi-monthly installments, exclusive of any other benefits referred to herein. The salary will be reviewed annually. "Annual salary" shall not include any other compensation such as bonus, stock options or benefits. Tax Allowance 2.2 The Company agrees to pay the Employee and the Employee agrees to accept as tax allowance US$30,000 per annum to be drawn quarterly from a tax escrow account. Stock Options 2.3 Subject to receipt by the Company of shareholder and regulatory approval on the Company's proposed new stock option plan (the "2001 Plan"), the Company will grant the Employee an option to purchase up to 750,000 common shares in the capital of the Company. The option exercise price will be set using the Toronto Stock Exchange guidelines of the closing price immediately preceding the date of grant. The Option will be vested as follows: i. 250,000 shares vested at the date of grant; and ii. 500,000 shares vested upon achievement of specified milestones (see Schedule "B"). These shares will be vested at a rate of 50,000 shares per milestone to a maximum of 500,000 shares. Incentive Compensation 2.4 For the first two years of the Term, incentive compensation will be paid to the Employee as follows: Page 3 i. Stock option bonuses as outlined under section 2.3.ii above; and ii. Cash bonuses will be paid at a rate of US$5,000 per achieved milestone described on "Schedule B" (or as redefined in good faith discussions following commencement of employment and following first year of employment). Thereafter, the Company will negotiate with the Employee in good faith milestones upon the achievement of which options will be granted at a rate of up to 50,000 shares per annum and cash bonuses will be paid at a rate of up to 25% of base salary. Benefits 2.5 The Employee may participate in all employee benefit programs maintained by the Company, including any group disability insurance plan, medical and dental plans, on the same terms and conditions as provided to other senior officers of the Company. Vacation 2.6 The Employee shall be entitled to four weeks vacation annually to be scheduled when mutually agreed by the parties. Expenses 2.7 The Company shall reimburse the Employee for all reasonable out of pocket expenses actually, necessarily and properly incurred by him in the normal discharge of his duties for the Company. Reimbursement shall be paid against an itemized statement of expenses together with supporting invoices where applicable. Travel expenses prior to moving to Canada 2.8 The Company will reimburse the following expenses incurred by the Employee during the period prior to the Employee's relocation to Canada and in which the Employee is commuting to Canada from his US residence: i) all medical and other insurance costs for the Employee and the Employee's family during the this period; and ii) 50% of the Employee's normal in-Canada living expenses; and iii) 50% of travel costs in commuting between the Company's head office in Canada and the Employee's current residence in US. Relocation expenses 2.9 The Company will reimburse all expenses incurred at the time the Employee elects to relocate to Canada, including the expenses of moving personal possessions, real estate commissions and fees on the sale of the Employee's California home, and the commission and fees on the Employee's purchase of a new residence in association with this employment offer. Page 4 3. Obligations of the Employee Duties 3.1 The Employee shall perform such duties as are consistent with the job description set out in Schedule "A" and shall perform, observe and conform to such duties and instructions as from time to time are reasonably assigned or communicated to him by the President and CEO. Authority 3.2 The Employee is authorized, subject to the other provisions of this Agreement to do all acts and things that the Employee in his discretion deems necessary or desirable to carry out his duties provided that the Employee will not make purchases or authorize work without the Company's approval unless the expenditure has been authorized in a budget approved by the President and CEO, or the expenditure arises in circumstances which constitute an emergency requiring immediate action for the protection of the Company. Books and Records 3.3 The Employee will cause to be maintained accurate and complete books and records of the Business, preserving all accounts, records, invoices, receipts, vouchers, books, files and other documents in an orderly and organized manner available for inspection at any time by any member of the Board. Access to Information 3.4 The Company will provide the Employee with all information and access to documents and premises as are available and are requested by the Employee to enable him to perform his duties. Indemnity by the Company 3.5 The Company will indemnify the Employee against any and all claims, losses, actions, lawsuits and other proceedings, judgements and awards, and costs and expenses (including reasonable legal fees) arising by the Employee carrying out his duties or authority, except those which arise from fraudulent acts or omissions by the Employee. This indemnity shall survive termination of this Agreement. Page 5 Imported Intellectual Property 3.6 The Employee agrees that he will not use or bring to the Company any technical information, data, trade secrets, processes, products, formulae, investigations, or other intellectual property which is the property of any other previous employer. Ownership of Work Product 3.7 Any discoveries, ideas and suggestions, reports, documents, concepts, products, inventions and improvements, technology, formulae and processes together with the nature and results of research and development activities, any marketing schemes, business, joint venture or marketing contacts, or any business opportunities prepared, produced, developed or acquired at the Employee's direction or by the Employee, whether or not conceived or made during normal working hours and whether or not the Employee is specifically instructed to make or develop the same (collectively, the "Work Product") shall belong to the Company. Disclosure 3.8 The Employee will disclose and transfer to the Company all Work Product and execute and deliver to the Company all instruments or papers necessary to perfect and enforce the exclusive ownership and enjoyment of the Work Product by the Company in all countries. 4. Termination By the Employee 4.1 The Employee may terminate this Agreement and his employment by giving the Company 30 days written notice. Monies owed by the Employee to the Company up to the date of termination shall then be paid by the Employee to the Company. By the Company 4.2 Subject to clause 1.2, the Company may terminate this Agreement and the employment of the Employee summarily without notice or payment in lieu of notice: a. for cause that would, at common law, permit the Company to terminate the Employee without notice. Examples of conduct which may constitute "cause" include the following: willful breach or non-observance of this Agreement in a matter of substance, negligent performance of duties in a matter of substance, or insubordination in a matter of substance; and b. if the Employee files a voluntary petition in bankruptcy, or is adjudicated bankrupt or insolvent, or files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute or law relating to bankruptcy, insolvency or other relief for debtors. Page 6 Notice of Termination 4.3 The Company shall communicate termination by written Termination Advice. "Termination Advice" means a notice which indicates the specific termination of this Agreement relied upon and sets forth in reasonable detail the facts and circumstances to provide a basis for the termination. No purported Termination shall be effective without a Termination Advice. Duties Upon Termination 4.4 If this employment is terminated, the Employee agrees to deliver to the Company: a. a final accounting, reflecting the balance of expenses incurred on behalf of the Company as of the effective date of termination; and b. all documents pertaining to the Company or this Agreement, including but not limited to all books of account, records, formulae and processes, correspondence and contracts which may be in the Employee's possession or control. Compensation on Termination 4.5 If the Company terminates the employment of the Employee without cause, the Company shall pay to the Employee a severance amount (the "Severance Amount"), at the rate in effect on the date of the Notice of Termination equal to: a. in the first twelve months of the Term, one month salary for each month worked; and b. if after the first twelve month period, one year of salary. The severance amount shall be accepted by the Employee in full and complete satisfaction of any claims to severance pay, pay in lieu of notice or damages for dismissal, termination pay, any redundancy payment to which the Employee may then be entitled, and any other compensation or payment to which the Employee may be entitled pursuant to any claim that he may have on the grounds of constructive, wrongful or unfair dismissal or any other claim the Employee may have pursuant to any statutory or common law provision, and shall be paid in full on the date of termination. The Employee acknowledges, agrees, and accepts these terms, as conditions of this Agreement. The Employee may elect to have the Severance Amount paid to him in a single lump sum which shall be paid within thirty (30) days of the election. Page 7 Mitigation 4.6 The Employee need not mitigate any payments provided in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment created by this clause be reduced by any compensation earned by the Employee through employment permitted by this Agreement with another employer after the date of termination or otherwise. Competition 4.7 The Employee agrees not to compete with the Company in any way for the longer of: a. The period in respect of which he is receiving compensation on termination as set out in clause 4.5; or b. Twelve (12) months following the date of termination of his employment, without the written consent of the Company. This means the Employee will not individually or in partnership or conjunction with any other person or persons, firm or corporation as employee, principal, officer, agent, shareholder or in any other manner whatsoever directly or indirectly carry on or be engaged or concerned with or interested in or advise or act as consultant for, lend money to, guarantee the debts or obligations of, or otherwise provide financial assistance for, or permit his name to be used in any research or otherwise in competition with the Company. Solicitation 4.8 During employment and for a period of one year following termination of the Agreement the Employee shall not hire or take away any employee of the Company for the purposes of employment in any business related to or competitive with the business of the Company. Change of Control Definition 5.1 Change of Control is defined under this Agreement as when: i) there is an occurrence of an event whereby any person or entity becomes the beneficial owner of shares representing 50% or more of the combined voting power of the voting securities of the Company, or ii) there is a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group will hold less than a majority of the outstanding capital stock of the surviving corporation. Page 8 Termination Arrangement 5.2 Upon a Change of Control of the Company, the Employee shall be deemed to have been terminated, with the severance provisions defined under Section 5.3 hereof, provided the Employee remains available to the new entity, if required by the new entity, for up to 3 months after the Change of Control. Compensation on Termination 5.3 The Company agrees to pay the Employee and the Employee agrees to accept the following compensation package upon a Change of Control: i. A cash compensation equivalent to one year of salary, payable on the effective date of termination; ii. 50% of the options subject to achievement of objectives not already achieved, be vested immediately upon the Change of Control; iii. The expiry date of all of the options outstanding shall be extended for 5 years from the date of Change of Control irrespectable whether the Employee stay in the new entity or not. The extension of expiry date shall not exceed the maximum term allowed under the Company's Stock Option Plan that options must be exercised no later than 10 years from the date of grant; and iv. All coverage of medical and life insurance benefits, other than key man insurance, for the Employee shall continue for the period defined by the salary payment, or until they are employed elsewhere, whichever is earlier. The afore-mentioned compensation package shall be accepted by the Employee in full and complete satisfaction of any claims to other severance pay, termination pay, any redundancy payment or any other payment to which the Employee may then be entitled pursuant to a Change of Control of the Company, and any claim the Employee may have pursuant to any statutory or common law provision, and shall be paid in full on the date of termination. The Employee acknowledges, agrees, and accepts these terms, as conditions of this Agreement. Compensation for Continued Employment 5.4 Should the Employee elect to remain with the new entity on a permanent basis, the Employee shall do so under terms negotiated between the new entity and the Employee at that time. Dispute Resolution 6.1 All questions or matters in dispute shall be resolved by mediation and, if mediation is not successful within thirty (30) days, be finally determined by arbitration using a single arbitrator following the rules of the British Columbia Center for Commercial Arbitration. Page 9 7. Miscellaneous 7.1 The laws of British Columbia and Canada shall govern this Agreement. 7.2 This Agreement is not assignable by either party. 7.3 This Agreement shall endure to the benefit of and be enforceable by the Employee's legal representatives, executors, administrators, heirs, and successors. If the Employee should die while any amounts are still payable to him under this Agreement, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his legal representatives, executors, administrators, heirs, or, if there be no such designee, to the his estate. 7.4 This Agreement represents the entire agreement between the Employee and the Company concerning the subject matter hereof and supersedes any previous oral or written communications, representations, understandings or agreements with the Company or any officer or agent thereof. 7.5 Notices shall be in writing and shall be sufficiently given and deemed to have been received upon personal delivery or, if mailed, upon the first to occur of actual receipt or forty-eight (48) hours after being mailed in Canada, postage prepaid, registered or certified mail, return receipt requested, addressed to the Company or the Employee at the address shown on page one of this Agreement or at such other address as may be specified in writing to the other party, but notice of a change of address shall be effective only upon actual receipt. Notwithstanding the foregoing, if there is an interruption in postal service, all notices shall be personally delivered during the period of interruption. 7.6 Waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 7.7 Time shall be of the essence. 7.8 Unless stated otherwise, all references herein to dollar amounts refer to Canadian funds. 7.9 The recitals are an integral part of the Agreement and incorporated by reference. 8. Agreement of Voluntary and Equitable 8.1 Each of the parties acknowledge and declare that they have carefully reviewed and understand this Agreement including the Employee's rights upon termination and the restrictions on the Employee after termination, and acknowledge and agree that the terms are mutually fair and equitable. Each party was fully and plainly instructed to obtain independent legal and tax advice and each of them acknowledge that they have executed voluntarily understanding the nature and effect of this Agreement after receiving such advice. Page 9 IN WITNESS WHEREOF the Company has caused it corporate seal to be affixed by and in response of its duly authorized officers on that behalf and the Employee has set his hand and seal as of the day and year first above written. SIGNED, SEALED AND DELIVERED ) by the Employee in the presence of: ) ) /s/Christina Yip ) - ----------------------------------------) Signature ) ) Christina Yip ) - ----------------------------------------) Name ) /s/Alan M. Ezrin ) -------------------- ) EMPLOYEE'S SIGNATURE 6910 Rupert Street ) - ----------------------------------------) Address ) Vancouver, BC ) - ----------------------------------------) CARDIOME PHARMA INC. /s/Bob Rieder -------------------- AUTHORIZED SIGNATORY Page 11 Schedule "A" Duties and Responsibilities of the Chief Scientific Officer of the Company Services The Employee is expected to be engaged full time in this position subject to the outside directorships and professional development activities referred to in clause 1.4. The Employee's primary duties will relate to the supervision and guidance of the Company's scientific operations and assistance in financing and business development activities. The Employee shall select and evaluate the Company's scientific operations and report to and advise the President and CEO concerning same. Specifically the Employee will: 1. direct executives in matters concerning the scientific research, clinical development, regulatory affairs and intellectual property management of the Company; 2. systematically monitor science related operating results; 3. evaluate and control the efficiency of scientific research, clinical development, regulatory affairs and intellectual property management of the Company; 4. evaluate and recommend strategic plans proposed by executives for scientific research, clinical development, regulatory affairs and intellectual property management of the Company; 5. establish and apply policies for human resources management in scientific research, clinical development, regulatory affairs and intellectual property management of the Company, within the context of the Company's overall policy in this regard; 6. direct, manage and coordinate the Company's operational activities according to the policies and objectives specified by the President & CEO, and approved by the Board of directors; 7. assist the President and CEO in preparation of short-term and long-term strategic plans for the Company; 8. assist the President and CEO in establishing policies and objectives concerning the scientific operations, personnel, financial performance and growth of the Company; 9. give general business and technical advice concerning the scientific operations and long term planning, development and realization of strategy development; 10. identify business development opportunities and lead or assist the exploitation of such opportunities; 11. assist CEO or CFO as required in financing activities; Page 12 12. lead or assist in identifying strategic partnership activities and exploiting such activities in consultation with the CEO or his designate; 13. exercise all other powers and perform all other duties normally incident to the office of the CSO, execute all documents required to implement his duties as CSO of the Company, including but not limited to agreements, requisitions, orders for the supply of equipment or services, reports, etc. and exercise such other powers and perform such other duties as from time to time may be assigned to him by the President and CEO and the Board. Page 13 Schedule "B" Milestones 2001 - 2002 As contemplated in the Stock Option and Incentive Compensation clauses of this Agreement the Employee shall receive options and compensation upon the achievement of specific milestones. Specific milestones for 2001 - 2002 are: 1. completion of Phase I clinical trial for RSD1235 by August 30, 2001 within budget; 2. initiate (1st dosage in patient) Phase II clinical trial for RSD1235 by end of 2001; 3. validation of fungus based MTS program by end of 2001 within budget; 4. one new internally developed clinical candidates in the antiarrhythmic program by the end of 2001; 5. completion (receipt of final report) of phase II clinical trial for RSD1235 by June 30, 2002 within budget; 6. successful in-licensing deal for program in the cardiac area by the end of 2001; 7. successful implementation of a new internal cardiac internal program by the end of 2001; 8. at least one clinical candidate in the new (non antiarrhythmic) cardiac program by the end of 2002; 9. two new research collaborations (university and/or corporate) - one by the end of 2001 and the other by the end of 2002; 10. two new partnerships with pharmaceutical companies for the Company's program (each of these partnerships will carry a minimum of US$30 million of total upfront and milestone payments, and a royalty rate of 10% or more). The milestones here listed are subject to revision after commencement of employment and development of specific strategic and operational plans which shall guide the Company's activities. Page 14 Schedule "C" Outside Directorships and Professional Development Existing outside directorships and professional developmental activities the Employee may maintain shall include the following roles: 1. Director, Topigen Inc., Montreal, Canada; 2. Scientific Advisor and SAB Board Member, ConjuChem Inc. Montreal, Canada; 3. Scientific Advisor, Garmaise & Bissonet, Montreal, Canada; 4. Scientific Advisor (in non-cardiac areas), Aryx Therapeutics, Los Altos, CA, USA; 5. Scientific Advisor, BDC, Montreal, Canada. EX-4 5 exhibit4-11.txt INTRODUCTION AGREEMENT DATED AUGUST 10, 2001 WITH PARAMOUNT CAPITAL, INC. Exhibit 4.11 EXECUTION COPY August 10, 2001 Cardiome Pharma Corporation 3650 Wesbrook Mall Vancouver, BC V6S 2L2 CANADA Re: Introduction Agreement (the "Agreement") ---------------------------------------------- Dear Sirs: 1. This is to confirm our understanding that Paramount Capital, Inc. ("Paramount"), its affiliates and designees have been engaged as non exclusive introducing agent and consultant (with the exception of those services that may be performed by Paramount, regarding a merger or acquisition of the Company as described in paragraph 4 herein, in which case Paramount shall be the exclusive introducing agent and consultant) of Cardiome Pharma Corporation (the "Company") for a period of six (6) months commencing on the date hereof (as may be extended pursuant to Paragraph 10 hereto, or by mutual agreement of the parties hereto, the "Term"). 2. (a) The Company agrees that it will pay Paramount a non-refundable retainer fee in an amount equal to five thousand dollars (US$5,000) per month ("Retainer Fee"), with the first three (3) months payable at the time of the execution of this Agreement (the "Initial Retainer Fee"). (b) (1) Upon execution of this Agreement, the Company will issue to Paramount, or its designees, warrants (the "Retainer Warrants") to purchase 750,000 shares of the Company's Common Stock ("the Common Stock"). The Retainer Warrants shall immediately vest upon execution of this Agreement. The Retainer Warrants shall contain a cashless exercise feature and standard antidilution protection provisions. The Retainer Warrants shall be issued in three classes as follows: 450,000 Retainer Warrants shall be issued to Paramount pursuant to this Paragraph 2 and shall have an exercise price of US$.60 (hereinafter the "Class A Retainer Warrants"); 150,000 Retainer Warrants shall be issued to Paramount pursuant to this Paragraph 2 and shall have an exercise price of US$1.20 (hereinafter the "Class B Retainer Warrants"); and 150,000 Retainer Warrants shall be issued to Paramount pursuant to this Paragraph 2 and shall have an exercise price of US$3.00 (hereinafter the "Class C Retainer Warrants"). The term of the Retainer Warrants, subject to Paragraphs 4, 5, and 10 herein, Page 1 of 15 shall be as follows: i) 150,000 Class A Retainer Warrants shall be exercisable for a period of seven (7) years commencing on the date that is six (6) months from the date of this Agreement; ii) the remaining 300,000 Class A Retainer Warrants shall be exercisable for a period of two (2) years commencing on the date that is six (6) months from the date of this Agreement; iii) 50,000 Class B Retainer Warrants shall be exercisable for a period of seven (7) years commencing on the date that is six (6) months from the date of this Agreement; iv) the remaining 100,000 Class B Retainer Warrants shall be exercisable for a period of two (2) years commencing on the date that is six (6) months from the date of this Agreement; v) 50,000 Class C Retainer Warrants shall be exercisable for a period of seven (7) years commencing on the date that is six (6) months from the date of this Agreement; iv) the remaining 100,000 Class C Retainer Warrants shall be exercisable for a period of two (2) years commencing on the date that is six (6) months from the date of this Agreement. Notwithstanding --------------- the foregoing, IF the Company completes a Sale or Acquisition as described in - ------------- paragraph 4 herein at any time before the date that is two (2) years from the date hereof THEN all of the Retainer Warrants shall be exercisable for a period of seven (7) years commencing on the date that is six (6) months from the date of this Agreement. Notwithstanding the foregoing, should Paramount cancel this Agreement, pursuant to Paragraph 10 herein, prior to the date that is six (6) months from the date of this Agreement, then the Retainer Warrants shall automatically expire and become null and void. (2) The shares of Common Stock issuable upon exercise of the Retainer Warrants shall be included in the Company's next filed registration statement with the Securities and Exchange Commission and subsequently be freely tradeable, without restriction The Company represents and warrants that no documents are required to be filed, proceedings taken or approvals, permits, consents, orders or authorizations of regulatory authorities required to be obtained in Canada for Paramount to be able to sell the common shares issued on exercise of the Retainer Warrants through the facilities of The Toronto Stock Exchange, provided that Paramount is not a "control person" as that term is defined in the British Columbia Securities Act. In the event that documents are required to be filed, proceedings taken or approvals, permits, consents, orders or authorizations of regulatory authorities are required to be obtained in Canada for Paramount to be able to sell the common shares issued on exercise of the Retainer Warrants through the facilities of The Toronto Stock Exchange, then the Company shall use its best efforts to complete such filings or proceedings or obtain such approvals, permits, consents, orders or authorizations. (c) The Company also agrees to reimburse Paramount for all out-of pocket expenses incurred by Paramount in providing its services hereunder, including reasonable fees and disbursements of Paramount's counsel, such expenses to be paid upon submission of a bill or bills by Paramount from time to time. If any individual expense shall exceed $5,000, or the expenses in the aggregate exceed $50,000, Paramount agrees to obtain prior written authorization for such expense from the Company. Page 2 of 15 3. At its sole discretion, Paramount's services hereunder may include, among other services, identifying, contacting and introducing potential investors to the Company. Upon the closing of each Investment (as defined below) during the Term or during the twelve (12) month period following the expiration or earlier termination of the Term, the Company shall i) pay to Paramount a fee in an amount equal to seven percent (7%) of the aggregate value of such Investment; and ii) issue to Paramount warrants (the "Warrants") to purchase an amount of securities equal to ten percent (10%) of the securities sold as part of such Investment at a per share exercise price equal to one-hundred-ten percent (110%) of the per share price of such securities, exercisable until seven (7) years from the date of issuance of such Warrants. The Warrants shall contain a cashless exercise feature and standard antidilution protection provisions which shall include below market price protection (on a weighted average basis). The shares of Common Stock issuable upon exercise of the Warrants shall be i) included in the Company's next filed registration statement with the US Securities and Exchange Commission. In addition, the Company represents that it will use its commercially reasonable efforts to ensure that, immediately upon exercise of the Warrants by Paramount or its designees, at any time, such the shares of Common Stock underlying the Warrants will be freely tradable on the Toronto Stock Exchange without restriction (subject to compliance with applicable securities laws). For the purposes of this Agreement, an "Investment" shall mean any sale by the Company of its securities which is made i) during the Term or ii) during the 12 month period following the expiration of the Term to an investor first introduced to the Company by or through Paramount during or prior to the Term; provided, however, ----------------- that no compensation shall be due to Paramount pursuant to this paragraph 3 for an Investment with respect to which Paramount is entitled to compensation pursuant to an agreement between the Company and Paramount which supersedes this paragraph 3; and provided further that if the terms of both such superseding ---------------- agreement and this Agreement would be applicable to any particular investment, the terms of such superseding agreement shall govern and Paramount shall be entitled to the compensation set forth therein. 4. (a) Should the Company enter into an agreement with a party first introduced to the Company by or through Paramount during or prior to the Term pursuant to which the Company consummates a sale, merger, consolidation, tender offer, business combination or similar transaction involving a majority of the business assets or stock of the Company (a "Sale") during the Term, or during the 12 month period following the expiration of such Term, then the Company shall pay Paramount a fee equal to (i) three percent (3%) of the Aggregate Consideration (defined in paragraph 4(c) below) paid to the Company by the acquiror for that portion of the Aggregate Consideration that is less than $20,000,000; (ii) four percent (4%) of the Aggregate Consideration paid to the Company by the acquiror for that portion of the Aggregate Consideration that is greater than or equal to $20,000,000 and less than $30,000,000; and (iii) five percent (5%) of the Aggregate Consideration paid to the Company by the acquiror for that portion of the Aggregate Consideration that is greater than or equal to $30,000,000. Such fee shall be paid to Paramount, simultaneously with the closing of such Sale, in proportion to the amount of cash and securities Page 3 of 15 comprising the Aggregate Consideration paid to the Company by the acquirer, provided, however, that the Company shall pay to Paramount a cash fee based on - -------- ------- the fair market value (as determined by both Paramount and the Company) of any portion of the Aggregate Consideration received by the Company that is not in the form of cash or securities. In no event, however, will the form of the fee ------- paid to Paramount pursuant to this Paragraph 4(a) be less than fifty percent (50%) cash. Notwithstanding the foregoing, should the Company enter into an agreement to complete a Sale with any one of the companies listed on Schedule A (attached hereto) as described in this paragraph 4(a), on or prior to November 30, 2001, Paramount shall not be entitled to a fee under this Paragraph 4(a), provided, however, that should the Company enter into an agreement to complete a - -------- ------- Sale as described in this Section 4(a) with any one of the companies listed on Schedule A on or prior to November 30, 2001, the term of all the Retainer Warrants shall be seven (7) years commencing on the date that is six (6) months from the date of this Agreement. (b) Should the Company enter into an agreement with a party first introduced to the Company by or through Paramount during or prior to the Term pursuant to which the Company consummates a transaction wherein the Company acquires all or substantially all of the business assets or stock of another entity in which the Company is the surviving entity (an "Acquisition") during the Term, or during the 12 month period following the expiration of such Term, then i) the Company shall pay Paramount a fee equal to three percent (3%) of the Aggregate Consideration paid by the Company to the entity acquired; and ii) the terms of the Retainer Warrants shall all equal 7 years commencing on the date that is six months from the date of this Agreement. Such fee shall be paid to Paramount, simultaneously with the closing of such transaction, in proportion to the amount of cash and securities comprising the Aggregate Consideration paid by the Company to the entity being acquired, provided, however, that the Company -------- ------- shall pay to Paramount a cash fee based on the fair market value (as determined by both Paramount and the Company) of any portion of the Aggregate Consideration received by the Company that is not in the form of cash or securities. In no event, however, will the form of the fee paid to Paramount pursuant to this ------- Paragraph 4(b) be less than fifty percent (50%) cash. Notwithstanding the foregoing, should the Company enter into an agreement for an Acquisition with any one of the companies listed on Schedule A (attached hereto) as described in this paragraph 4(b), on or prior to November 30, 2001, Paramount shall not be entitled to a fee under this Paragraph 4(b), provided, however, that should the -------- ------- Company complete an Acquisition with any one of the companies listed on Schedule A on or prior to November 30, 2001, the term of all the Retainer Warrants shall be seven (7) years commencing on the date that is six (6) months from the date of this Agreement. (c) For purposes of calculating Paramount's fee under this Paragraph 4, the aggregate consideration ("Aggregate Consideration") paid with respect to the business, assets or stock of the Company shall equal the total of all cash, securities and/or other assets paid for such business, assets or stock by the acquiror. Aggregate Consideration shall also include: (i) any commercial bank or similar indebtedness of the Company which is repaid or for which the Page 4 of 15 responsibility to pay is assumed by the acquiror in connection with such transaction; (ii) the greater of the stated value or the liquidation value of preferred stock, convertible securities, debt securities, equity securities, notes, debentures, rights, options, and warrants of the Company which is assumed or acquired by the acquiror and which is not converted into common stock upon the consummation of such transaction; (iii) future payments for which the acquiror is obligated absolutely within one year following the consummation of transaction described in this paragraph 4 ("Acquiror Future Payments"); and (iv) future payments for which the acquiror is a) obligated to pay upon the attainment of milestones or financial results or b) obligated to pay absolutely following the date that is one year from the consummation of the transaction described in this Paragraph 4 ("Acquiror Contingent Payments"). Aggregate Contingent Payments and Aggregate Future Payments shall not include compensation paid pursuant to employment or consulting contracts, or the grant of equity incentives by the acquiror to officers or employees of the Company. The fee to be paid to Paramount as a result of Acquiror Future Payments shall be paid upon the date of closing of such Acquisition and shall be valued at the present value of the Acquiror Future Payments. The fee to be paid to Paramount as a result of Acquiror Contingent Payments shall be paid upon the receipt of such payments by the Company. In the event that a Sale of the Company or an Acquisition by the Company is consummated through a multiple-step transaction wherein the acquiror is not obligated either absolutely or upon the attainment of milestones or financial results to make future payments to further increase the acquiror's ownership in the Company (the "Multiple-Step Payments"), the Company agrees to pay Paramount a fee on such Multiple-Step Payments which shall be calculated pursuant to this Paragraph 4. Such fee shall be paid to Paramount upon receipt by the Company of such Multiple-Step Payments and shall be in addition to the fee paid to Paramount in the first step of such transaction. 5. (a) Should the Company enter into an agreement with a party first introduced to the Company by or through Paramount during or prior to the Term pursuant to which the Company consummates a Strategic Alliance(s) (as defined below) during the term, or during the 12 month period following the expiration of such Term, then i) the Company shall pay Paramount a fee equal to three percent (3%) of the Aggregate Compensation (defined in paragraph 5(c) below) and ii) the terms of the Retainer Warrants shall all equal 7 years commencing on the date that is six (6) months from the date of this Agreement. Such fee shall be paid to Paramount, simultaneously with the closing of such transaction, in proportion to the amount of cash and securities comprising the Aggregate Compensation received by or paid by the Company, its shareholders and employees in each such transaction, provided, however, that the Company shall pay to -------- ------- Paramount a cash fee based on the fair market value (as determined by both Paramount and the Company) of any portion of the Aggregate Compensation received by or paid by the Company that is not in the form of cash or securities. In no event, however, will the form of the fee paid to Paramount pursuant to this ------- Paragraph 5(a) be less than fifty percent (50%) cash. Page 5 of 15 (b) If prior to July 1, 2002, the Company is contemplating a Strategic Alliance with an entity listed on Schedule B (attached hereto) and, pursuant to the Company's written request, Paramount is asked to consult on or evaluate the Strategic Alliance for the Company or assist in the negotiation of the Strategic Alliance, in any way, then the term of all the Retainer Warrants shall become seven years commencing on the date that is six (6) months from the date of this Agreement. If, (A) at any time during the Term or during the 12 months following the expiration of the Term the Company consummates a Strategic Alliance with any entity listed on Schedule B subsequent to July 1, 2002 or any other entity not listed on Schedule B and not introduced to the Company by Paramount, and (B) pursuant to the Company's written request, Paramount is asked, prior to or during the Term, to consult on or evaluate the Strategic Alliance for the Company or to assist in the negotiation of the Strategic Alliance, in any way, then i) the term of all the Retainer Warrants shall become seven years commencing on the date that is six (6) months from the date of this Agreement and ii) the Company shall pay Paramount a fee equal to three percent (3%) of the Aggregate Compensation. (c) For the purpose of calculating Paramount's fee under this Paragraph 5, aggregate compensation ("Aggregate Compensation") shall include, but not be limited to: (i) all payments (whether the form of such payments be cash, securities, or some other form) made at the closing of such transaction for equity securities, equity security rights or similar rights; (ii) technology access fees or similar up-front payments; (iii) other future payments, including without limitation, licensing fees, lump sum payments, royalties and deferred technology access fees, to be made to or by the Company or its employees for which the Strategic Alliance partner(s) or other counter-parties (each a "Partner") is obligated absolutely and within one year following the consummation of the Strategic Alliance ("Strategic Future Payments") or either a) upon the attainment of milestones or on a percentage or royalty basis or b) obligated absolutely to pay at a time that is more than one year from the consummation of the Strategic Alliance ("Strategic Contingent Payments"); (iv) funding provided, arranged or introduced by the Partner (through reimbursement or otherwise) relative to research and development, whether such work is performed, subcontracted or managed by the Company or the Partner; and (v) the repayment or assumption by the Partner or the Company of obligations of the Company, including indebtedness for money borrowed or amounts owed by the Company or the Partners to inventors or owners of technology. It is further understood that the Aggregate Compensation shall not be reduced by the amount of the fee due to Paramount hereunder. Any portion of the Aggregate Compensation constituting Strategic Future Payments shall be paid at closing and shall be valued at the present value of the Strategic Future Payments. The fee to be paid to Paramount as a result of Strategic Contingent Payments shall be paid upon the receipt of such payments and shall be in addition to any fees paid at closing. A "Strategic Alliance" may include, but is not limited to: (i) any joint venture, partnership, license or other contract for the research, development, manufacturing, marketing, distribution, sale or other activity relating to the Company's present and/or future products or proposed products; (ii) the purchase of, or commitment to purchase from the Company, less than a Page 6 of 15 majority of the business, assets or stock of the Company by one or more Partner(s); (iii) the sale of any of the Company's assets or any rights in respect to its products and/or technology; and (iv) a commitment to provide funding for all or part of the Company's research and development activities, whether such work is performed or managed by the Company or such Partner(s). (d) For the purposes of calculating Paramount's fee, securities constituting part of Aggregate Compensation which are traded on a national or recognized foreign securities exchange or the Nasdaq SmallCap or Nasdaq National Market System shall be valued at the average closing bid price for the ten days preceding the date of the consummation or closing of any such transaction. Such securities which are traded over-the-counter shall be valued at the mean between the latest bid and asked prices for the ten days preceding the date of the consummation or closing of any such transaction. Should the Company enter into a transaction with a third party introduced to it by Paramount, Paramount shall be entitled to compensation pursuant to either this paragraph 5 or paragraph 4, but not both. 6. In the event that the Company, its directors or management initiate any discussions with a third party in furtherance of any investment (pursuant to paragraph 3), Sale, Acquisition, Investment or Strategic Alliance or receive any meaningful inquiry or are aware of the interest of any third party concerning a Sale, Acquisition, Investment or Strategic Alliance which is the subject of this Agreement, including from those entities listed on Schedule A and Schedule B, they shall promptly inform Paramount of the party and its interest. Should that Company contract with one or more of the entities to raise capital (hereinafter a 3rd Party Agent), the Company shall immediately notify Paramount. Paramount will then have the option to raise the capital the Company requires, pursuant to Paragraph 3 herein, on a pro-rata basis with such 3rd Party Agent. By way of illustration, if the Company contracts with two 3rd Party Agents to raise $3 Million, then Paramount shall have the right, but not the obligation, to raise $1 Million of the required $3 Million. The two 3rd Party Agents would then be limited to raising the remaining $2 Million required by the Company. 7. Any information or consulting advice rendered by Paramount pursuant to this Agreement, as well as the existence of this Agreement, shall not be disclosed publicly in any manner without Paramount's prior written approval (other than the minimum disclosure required to the Toronto Stock Exchange and applicable securities regulatory authorities) and shall be treated by the Company as confidential information; provided, however, that if Paramount has refused to give prior written approval and the Company has obtained a written opinion of independent counsel stating that disclosure is necessary for the Company to comply with such action and that any course of action not involving disclosure would likely result in a violation of law. The Company shall provide Paramount with all financial and other information requested by Paramount for the purposes of rendering its services pursuant to this Agreement. Page 7 of 15 8. All non-public information given to Paramount by the Company shall not be divulged by Paramount to any third parties and shall be treated by Paramount as confidential information and shall not be used by Paramount except in rendering its services pursuant to this Agreement. Paramount may rely, without independent verification, on the accuracy and completeness of any information furnished to Paramount by the Company, subject to its obligations under the securities laws. 9. (a) The Company agrees to indemnify each of Paramount, the directors, officers, employees, shareholders, controlling persons under the Act, affiliates and agents thereof (each an "Indemnitee," together, the "Indemnitees"), pay on demand and protect, defend, save and hold each Indemnitee harmless from and against any and all liabilities, damages, losses, settlements, claims, actions, suits, penalties, fines, costs or expenses (and all actions in respect thereof) (including, without limitation, reasonable attorneys' fees and related expenses) incurred by or asserted against any Indemnitee of whatever kind or nature, arising from, in connection with or occurring as a result of, this Agreement or the matters contemplated by this Agreement, including without limitation, (i) the engagement of Paramount pursuant to this Agreement or any other related agreement, including any modifications or future additions to such engagement and related activities prior to the date hereof; (ii) any act by Paramount or any Indemnitee taken in connection with this Agreement or the transactions contemplated herein other than the gross negligence or willful misconduct of Paramount; (iii) a breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement, any securities purchase agreement between the Company and investors in any securities offering or any of the other documents utilized in connection with any securities offering; (iv) the employment by the Company of any device, scheme or artifice to defraud, or the engaging by the Company in any act, practice or course of business which operates or would operate as a fraud or deceit, or any conspiracy with respect thereto, in connection with any securities offering; or (v) any untrue statement or alleged untrue statement of a material fact contained in any of the documents used in connection with or otherwise related to any securities offering or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading unless as a result of the gross negligence or willful misconduct of Paramount. The Company further agrees that it will not, without the prior written consent of Paramount, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Paramount or any Indemnitee is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Paramount and each other Indemnitee hereunder from all liability arising out of such claim, action, suit or proceeding. Notwithstanding the foregoing, the Company's obligations to Paramount for out of pocket expenses incurred by Paramount solely in providing its services hereunder shall be limited to those set forth in Paragraph 2. (b) The foregoing shall be in addition to any rights that any Indemnitee may have at common law or otherwise. Page 8 of 15 (c) The Company hereby consents to personal jurisdiction and service and venue in any court in which any claim which is subject to this Agreement is brought against any Indemnitee, if such service is made to the Company by registered mail, return receipt requested, at 3650 Wesbrook Mall, Vancouver, BC V6S 2L2, CANADA; Attn: President. 10. The Term of this Agreement shall be 6 months commencing on the date hereof. Thereafter, this Agreement shall continue on a bi-annual basis until terminated by either party upon not less than thirty (30) days notice prior to each six month period (an "Extended Term"). Upon the commencement of any Extended Term, the Company shall again pay to Paramount the Initial Retainer Fee, as designated in paragraph 2, as if this Agreement were executed for the first time. Notwithstanding the foregoing, this Agreement may be terminated solely by Paramount, for any reason, upon 30 days notice; provided, however, -------- ------- regardless of any termination, the rights to compensation (or termination or expiration thereof) contained in Paragraphs 2, 3, 4 and 5, to indemnity contained in Paragraph 9, and expense reimbursement in Paragraph 2 shall survive. 11. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. The parties hereto irrevocably consent to the jurisdiction of the courts of the State of New York and of any federal court located in such State in connection with any action or proceeding arising out of or relating to this Agreement, any document or instrument delivered pursuant to, in connection with or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument if such service of process is made to the Company by registered mail, return receipt requested, at 3650 Wesbrook Mall, Vancouver, BC V6S 2L2, CANADA; Attn: President. In any such action or proceeding, each party hereto waives personal service of any summons, complaint or other process and agrees that service thereof may be made in accordance with this Section 11. Within thirty (30) days after such service, or such other time as may be mutually agreed upon in writing by the attorneys for the parties to such action or proceeding, the party so served shall appear or answer such summons, complaint or other process. 12. This Agreement shall be binding upon Paramount and the Company and their successors and assigns. The Company shall not assign or sell all or substantially all of the Company's business and/or assets without first requiring in writing that such assignee or successor is bound by the provisions of this Agreement. 13. (a) Paramount shall not be in any way precluded from (i) entering into similar agreements with companies which engage in similar business activities or lines of business as the Company or developing or marketing any products, services or technologies that do or may in the future compete, directly or indirectly, with those of the Company, (ii) investing or owning any interest Page 9 of 15 publicly or privately in, or developing a business relationship with, any corporation, partnership or other person or entity engaged in the same or similar activities or lines or business as, or otherwise in competition with, the Company or (iii) doing business with any client, collaborator, licensor, consultant, vendor or customer of the Company. Paramount and any of its officers, directors, employees or former employees and affiliates shall not have any obligation, or be liable, to the Company solely on account of the conduct described in the preceding sentence. The Company recognizes that Paramount is not obligated to present any opportunities for an Investment, Sale, Acquisition, Strategic Alliance or any other opportunities to the Company and nothing in this Agreement shall be construed to limit Paramount's ability to introduce Investment, Sale, Acquisition, Strategic Alliance or any other opportunities to any other company. In the event that Paramount and/or any officer, director, employee or former employee or affiliate thereof acquires knowledge of a potential transaction, agreement, arrangement or other matter which may be a corporate opportunity for both Paramount and the Company, neither Paramount nor any of its officers, directors, employees or former employees or affiliates shall have any duty to communicate or offer such corporate opportunity to the Company and neither Paramount nor any of its officers, directors, employees or former employees or affiliates shall be liable to the Company for breach of any fiduciary or other duty, as a stockholder or otherwise, solely by reason of the fact that Paramount or any of its officers, directors, employees or former employees or affiliates pursue or acquire such corporate opportunity for Paramount, direct such corporate opportunity to another person or entity or communicate or fail to communicate such corporate opportunity or entity to the Company. (b) The provisions of this Section 13 shall be enforceable to the fullest extent permitted by law. 14. (a) Paramount represents and warrants to the Company that: (1) The Retainer Warrants of the Company described in this Agreement are being acquired by Paramount for investment purposes only, for the account of Paramount and not with the view to any resale or distribution thereof, and Paramount is not participating, directly or indirectly, in an underwriting of such Retainer Warrants and will not take, or cause to be taken, any action that would cause Paramount to be deemed an "underwriter," as defined in Section 2(11) of the U.S. Securities Act of 1933, as amended, of such Retainer Warrants. (2) Paramount, through its officers, directors and professional advisors, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Company. (3) Paramount has had access to all materials, books, records and documents relating to the Company as Paramount has desired. Page 10 of 15 (4) Paramount acknowledges that it has been offered the opportunity to ask questions and receive answers concerning the Company and its proposed business, and that all requests for such information have been complied with to Paramount's full satisfaction. (5) Paramount has been advised and understands that an investment in the Company involves substantial risks, and hereby represents that it is able to bear the risks of its investment in the Company. (6) Paramount further represents and acknowledges that it has been solely responsible for its own analysis of the merits and risks of such investment, and for its own analysis of the fairness and desirability of the terms of such investment. (7) Paramount was not formed for the purpose of acquiring the Retainer Warrants or any of their underlying Shares, and is duly authorized and otherwise qualified to enter into the Agreement and to issue this letter of further assurances. (8) Paramount understands and acknowledges that the Retainer Warrants and Shares are not, and will not be, registered under the U.S. Securities Act of 1933, as amended (the "Act"); that the securities being issued hereunder are being sold pursuant to the "private offering" exemption under Section 4(2) of the U. S. Securities Act of 1933 and similar exemptions under applicable state securities laws. Hence, Paramount understands that, except as provided in Paragraphs 14(a)(9), 14(a)(11) and 14(b) hereof, the shares for which Paramount has subscribed pursuant to the Agreement must be held indefinitely, unless and until subsequently registered under U.S. federal and/or applicable state securities laws, or unless an exemption from registration is available, in which case Paramount may still be limited with respect to the extent to which such Retainer Warrants may be transferred (which term, as used herein, includes, without being limited to, any sale, offer, pledge or encumbrance). (9) Paramount understands and agrees that each certificate evidencing the securities issued under the Agreement shall be stamped conspicuously on its face "SEE TRANSFER AND OTHER RESTRICTIONS ON REVERSE," and on its reverse side shall be stamped or imprinted with, and such securities' transfer shall be subject to the terms of, the following legend: NOTICE: RESTRICTION ON TRANSFER AND OTHER MATTERS THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED OR DISPOSED OF UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE UNITED STATES Page 11 of 15 STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, OR (B) THIS CORPORATION RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THESE SECURITIES (CONCURRED IN BY LEGAL COUNSEL FOR THIS CORPORATION) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THIS CORPORATION OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. (10) Paramount hereby consents to the notation of "STOP TRANSFER" restrictions in the Company's stock transfer books relative to its holdings, and to assist in the enforcement of the covenants and limitations set forth herein. (11) Paramount understands and agrees that the Retainer Warrants and underlying Shares shall not be transferable except upon the conditions hereinafter specified, which conditions are intended to ensure compliance with the exemptions sought to be obtained by the Company under applicable securities laws. (12) Paramount represents that it is not a resident in British Columbia. (b) Paragraphs 14(a)(9) and 14(a)(11) hereof notwithstanding, following the expiration of any hold periods imposed by Canadian law and for so long as the Company remains a Foreign Issuer, as defined in Rule 902 of the U.S. Securities and Exchange Commission, the Company will instruct its Transfer Agent that any U.S. restrictive legend applicable to the Shares is to be promptly removed upon their sale in compliance with the requirements of Rule 904 of the U.S. Securities and Exchange Commission (c) The parties hereto acknowledge that the Company's obligation to effect such transfers is subject to future changes to relevant provisions of United States' securities laws (or the Company's status thereunder) that affect the conditions under which such restrictive legends may be removed, and agree that in the event of any such change they will work together in good faith to adopt an alternative procedure for the removal of such legends in accordance with then available exemptions. (d) Paramount acknowledges that: i) no securities commission or similar regulatory authority has reviewed or passed on the merits of the securities, or underlying securities, that may be issued in connection with this Agreement (collectively the "Securities"); ii) there is no government or other insurance covering the Securities; iii) there are risks associated with the purchase of the Securities; iv) there are restrictions on Paramount's ability to resell the securities and it is the responsibility of Paramount to find out what those restrictions are and to comply with them before selling the Securities; v) the Company has advised Paramount that the Company is relying on an exemption from Page 12 of 15 the requirement to provide Paramount with a prospectus and to sell securities through a person registered to sell securities under the Securities Act (British Columbia) and, as a consequence of acquiring securities pursuant to this exemption, certain protections, rights and remedies provided by the Securities Act (British Columbia), including statutory rights of rescission or damages, will not be available to Paramount; vi) the certificates representing the Securities will be endorsed with a legend stating that the Securities are subject to a hold period and may not be traded in British Columbia until the expiry of the hold period except as permitted by the Securities Act (British Columbia) and the rules thereto; and vii) the Company's obligations pursuant to this Agreement are subject to the prior approval of the Toronto Stock Exchange. Sincerely yours, PARAMOUNT CAPITAL, INC. By: /s/ Lindsay A. Rosenwald ---------------------------------- Name: Lindsay A. Rosenwald, M.D. Title: Chairman of the Board Confirmed as of the date hereof: CARDIOME PHARMA CORPORATION By: /s/ Bob Rieder ---------------------------------- Name: Bob Rieder Title: President and CEO Page 13 of 15 SCHEDULE A M&A EXCEPTIONS Discovery Therapeutics Inc. CV Therapeutics Inc. Icager, Inc. Transgene S.A. / Eurekardio Page 14 of 15 SCHEDULE B PARTNERING EXCEPTIONS Merck Glaxo Smithkline Servier Proctor and Gamble Solvay Schwarz Pharma Medtronics CV Therapeutics Astra Zeneca Aventis Sanofi - Synthelabo Berlex Page 15 of 15 EX-4 6 exhibit4-12.txt ACQUISITION AGREEMENT DATED DECEMBER 21, 2001 WITH PARALEX, INC. AND CARDIOME, INC. Exhibit 4.12 AGREEMENT AND PLAN OF MERGER AMONG CARDIOME PHARMA CORP. PARALEX, INC. AND CARDIOME, INC. Dated as of December 21, 2001 Page i TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1. THE MERGER 1 1.1 The Merger 1 1.2 Effective Time 2 1.3 Effective Time of the Merger 2 1.4 Certificate of Incorporation; By-laws 2 1.5 Directors and Officers 2 1.6 Effect on Capital Stock 2 1.7 Dissenting Shares 3 1.8 Surrender of Company Certificates 4 1.9 No Further Ownership Rights in Company Common Stock 5 1.10 Lost, Stolen or Destroyed Company Certificates 6 1.11 Taking Necessary Action; Further Action 6 ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 6 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 13 ARTICLE 4. COVENANTS 22 4.1 Covenants of the Company 22 4.2 Covenants of Parent 24 ARTICLE 5. ADDITIONAL AGREEMENTS 26 5.1 Meetings of Stockholders 26 5.2 Access to Information and Confidentiality 26 5.3 Consents and Approvals 27 5.4 Investment Agreements 27 5.5 Notification of Certain Matters 27 5.6 Further Action 28 5.7 Public Announcements 28 5.8 Registration Rights Agreement 28 5.9 Board and Management 28 5.10 Listing 28 5.11 Stock Split 29 ARTICLE 6. CONDITIONS OF MERGER 29 6.1 Conditions for the Benefit of the Company, Parent and Merger Sub. 29 6.2 Additional Conditions for the Benefit of Parent and Merger Sub 30 6.3 Additional Conditions to Obligation of the Company 31 ARTICLE 7. TERMINATION, AMENDMENT AND WAIVER 33 7.1 Termination 33 7.2 Notice of Unfulfilled Conditions 34 7.3 Mutual Termination 34 7.4 Effect of Termination 34 7.5 Fees and Expenses 34 7.6 Amendment 34 7.7 Waiver 35 Page ii ARTICLE 8. EXCLUSIVITY 35 ARTICLE 9. GENERAL PROVISIONS 36 9.1 Non-Survival of Representations, Warranties and Agreements 36 9.2 Notices 36 9.3 Certain Definitions 37 9.4 Proceeds of Financing 39 9.5 Director and Officer Insurance 39 9.6 Headings 40 9.7 Severability 40 9.8 Entire Agreement 40 9.9 Assignment 40 9.10 Parties in Interest 40 9.11 Governing Law 40 9.12 Counterparts and Facsimile 40 NOTE: THE EXHIBITS AND SCHEDULES ARE NOT INCLUDED IN THIS VERSION OF THE AGREEMENT AND PLAN OF MERGER EXHIBITS - -------- Exhibit A Certificate of Merger Exhibit 5.2 Form of Confidentiality Agreement Exhibit 5.4 Form of Investment Agreement Exhibit 5.8 Form of Registration Rights Agreement Exhibit 6.1(g) Form of Lock Up Agreement SCHEDULES - --------- Schedule 2.1(b) List of Stockholders of Company, Liens, Options Schedule 2.1(g) List of Employment, Management and Services Agreements Schedule 2.1(h) Outstanding Agreements Regarding Company Stock Schedule 2.1(n) Conduct of Business of Company Outside Ordinary Course Schedule 2.1(p) List of Material Contracts of Company Schedule 2.1(r) List of Brokerage Fees Schedule 2.1(t)(i) List of Third Party IP Rights Schedule 2.1(t)(iii) Description of Claims on Company IP Schedule 2.1(w) List of Significant Contracts Schedule 3.1(b) List of Outstanding Options, Warrants and Rights Schedule 3.1(d) List of Parent Subs Schedule 3.1(o) List of Material Contracts of Parent Schedule 3.1(q) Description of Liabilities of Parent in connection with Agreement Schedule 3.1(s)(ii) List of Parent Intellectual Property Schedule 3.1(s)(iii) List of Parent Licenses Schedule 3.1(s)(v) List of Claims on Parent Intellectual Property Schedule 9.3 Example of Share Adjustment Calculation Page 1 AGREEMENT AND PLAN OF MERGER, dated as of December 21, 2001 (the "Agreement") AMONG: CARDIOME PHARMA CORP., a British Columbia corporation having its principal place of business at 3650 Wesbrook Mall, Vancouver, British Columbia V6S 2L2 ("Parent") AND: CARDIOME, INC., a Delaware corporation and a wholly owned subsidiary of Parent, having an office at 3650 Wesbrook Mall, Vancouver, British Columbia V6S 2L2 ("Merger Sub") AND: PARALEX, INC., a Delaware corporation having is principal place of business at 787 Seventh Avenue, New York, NY 10019 (the "Company") WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that it is in the best interests of their respective stockholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein; and WHEREAS, in furtherance of such acquisition, the Boards of Directors of Parent ("Parent Board"), Merger Sub and the Company have each approved the merger (the "Merger") of Merger Sub with and into the Company in accordance with the General Corporation Law of the State of Delaware ("Delaware Law") and upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: ARTICLE 1. THE MERGER 1.1 The Merger. ----------- At the Effective Time (as defined in Section 1.2) and subject to, and upon the terms and conditions of, this Agreement and Delaware Law, Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Company." Following the Merger, the Surviving Company shall be a wholly owned subsidiary of the Parent. It is intended that the merger constitute a tax free reorganization under Section 368(a)(2)(E) of the Code. Page 2 1.2 Effective Time. --------------- As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article 6, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger in the form attached as Exhibit A (the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware Law (the time of such filing being the "Effective Time"). 1.3 Effective Time of the Merger. ----------------------------- At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Company, and all debts, liabilities, obligations and duties of the Company and Merger Sub shall become the debts, liabilities, obligations and duties of the Surviving Company. 1.4 Certificate of Incorporation; By-laws. -------------------------------------- (a) Unless otherwise determined by Parent and the Company prior to the Effective Time, at the Effective Time the Certificate of Incorporation of the Company, as amended pursuant to the Certificate of Merger, shall be the Certificate of Incorporation of the Surviving Company until thereafter amended as provided by law and such Certificate of Incorporation; and (b) The By-laws of the Company shall be the By-laws of the Surviving Company until thereafter amended as provided by Delaware Law, the Certificate of Incorporation of the Surviving Company and such By- laws. 1.5 Directors and Officers. ----------------------- The director of Merger Sub immediately prior to the Effective Time, Dr. Alan Ezrin, shall be the initial director of the Surviving Company, to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Company, and the officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Company, in each case until their respective successors are duly elected or appointed and qualified. 1.6 Effect on Capital Stock. ------------------------ At the Effective Time, by virtue of the Merger and, except as provided herein, without any action on the part of Merger Sub, Parent, the Company or the holders of any of the Company Common Stock (as defined below), the following shall be deemed to have occurred: (a) Conversion of Company Common Stock. The issued and outstanding common stock, $0.001 par value per share, of the Company immediately prior to the Effective Time (the "Company Common Stock") other than shares of Company Common Stock to be cancelled pursuant to Section 1.6(c) and any Dissenting Shares (as defined and to the extent provided in Section 1.7) shall be converted automatically into a number of common shares of Parent without par value ("Parent Common Shares") equal to 43,070,181 less the Share Adjustment (the "Merger Shares"). Page 3 (b) Exchange Ratio. Each of the Company Stockholders shall receive its pro rata portion of the Merger Shares, as follows: each share of Company Common Stock (other than shares of Company Common Stock to be cancelled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into a number of fully paid and nonassessable Parent Common Shares equal to the product of one (1) times the Exchange Ratio, upon surrender of the certificate representing such share of Company Common Stock in the manner provided in Section 1.8. Accordingly, at and after the Effective Time, each Company Certificate (as defined below) shall thereinafter represent the right to receive the Parent Common Shares as contemplated in this Section 1.6. (c) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of Company Common Stock held in the treasury of the Company and each share of Company Common Stock owned by Merger Sub, Parent or any direct or indirect wholly owned subsidiary of Parent or of the Company immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof. (d) Capital Stock of Merger Sub. Each share of common stock, $0.001 par value, of Merger Sub issued to Parent and outstanding immediately prior to the Effective Time, which shall be the only shares of capital stock of Merger Sub outstanding prior to the Effective Time and shall be owned by Parent at the Effective Time, shall be converted into and exchanged for one validly issued, fully paid and non-assessable share of common stock, par value $0.001 per share, of the Surviving Company and shall constitute at the Effective Time all of the issued and outstanding capital stock of the Surviving Company. (e) Adjustment to Exchange Ratio. The Merger Shares and the Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Shares or Company Common Stock), reorganization, recapitalization or other like change with respect to Parent Common Shares or Company Common Stock occurring after the date hereof and prior to the Effective Time and the Merger Shares and the Exchange Ratio shall be reduced to reflect the costs and expenses of the Company in connection with the transactions contemplated hereunder that are paid prior to the Effective Time pursuant to Section 7.5 to the extent such payment was not funded through additional Company Liabilities reflected in the Share Adjustment (f) Fractional Shares. No fraction of a Parent Common Share will be issued. Each Company Stockholder who would otherwise be entitled to receive a fraction of a Parent Common Share (after aggregating all fractional Parent Common Shares to be received by such holder) shall have the number of shares they are to receive rounded up to the next whole number of shares. (g) Defined Terms. Unless otherwise defined herein, capitalized terms shall have the meaning set forth in Section 9.3 hereof. 1.7 Dissenting Shares. ------------------ Notwithstanding any provisions of this Agreement to the contrary, any shares of capital stock of the Company outstanding immediately prior to the Effective Time held by any person that has not consented to the Merger and has demanded and perfected his right of appraisal of such shares in accordance with Delaware Law Page 4 and who, as of the Effective Time, has not effectively withdrawn or lost such right to appraisal ("Dissenting Shares"), shall not be converted into or represent a right to receive Parent Common Shares pursuant to Section 1.6, but the holder thereof shall only be entitled to such rights as are granted by Delaware Law. Notwithstanding the foregoing, if any holder of shares of capital stock of the Company who demands appraisal of such shares under Delaware Law shall effectively withdraw or lose (through failure to perfect or otherwise) his or her right to appraisal, then, as of the later of the Effective Time or the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive Parent Common Shares pursuant to Section 1.6, without interest thereon, upon surrender of the certificate or certificates representing such shares. The Company shall give Parent prompt notice of any written demands for appraisal of any shares of capital stock of the Company, withdrawals of such demands and any other instruments served pursuant to Delaware Law and received by the Company. The Company shall give Parent the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under Delaware Law hereunder. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal of any capital stock of the Company or offer to settle or settle any such demands. 1.8 Surrender of Company Certificates. ---------------------------------- (a) Exchange Agent. Prior to the Effective Time, Parent shall designate a bank or trust company to act as exchange agent (the "Exchange Agent") in the Merger, which may be its registrar and transfer agent. (b) Parent to Provide Common Stock. Upon the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article 1, through such reasonable procedures as Parent may adopt, the Parent Common Shares issuable pursuant to Section 1.6 in exchange for outstanding shares of Company Common Stock. (c) Exchange Procedure. Promptly after the Effective Time, the Surviving Company shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates (the "Company Certificates") which immediately prior to the Effective Time represented outstanding shares of Company Common Stock whose shares were converted into the right to receive Parent Common Shares pursuant to Section 1.6: (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon delivery of the Company Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify); and (ii) instructions for use in effecting the surrender of the Company Certificates for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent. Upon surrender of the Company Certificates to the Exchange Agent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Company Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole Parent Common Shares which such holder has the right to receive pursuant to Section 1.6 (the "Parent Certificates"), and the Company Certificate so surrendered shall forthwith be cancelled. Until so surrendered, each outstanding Company Certificate that, prior to the Effective Time, represented shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the Page 5 payment of dividends, to evidence the ownership of the number of full Parent Common Shares into which shares of Company Common Stock shall have been so converted in accordance with Section 1.6. (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Shares with a record date after the Effective Time will be paid to the holder of any unsurrendered Company Certificate with respect to Parent Common Shares represented thereby until the holder of record of such Company Certificate shall surrender such Company Certificate. Subject to applicable law, following surrender of any such Company Certificate, there shall be paid to the record holder of the certificates representing whole Parent Common Shares issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such Parent Common Shares. (e) Transfers of Ownership. If any certificate for Parent Common Shares is to be issued in a name other than that in which the Company Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that (i) the Company Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer, (ii) that the person requesting such exchange will have paid to Parent, or any agent designated by it, any transfer or other taxes required by reason of the issuance of a certificate for Parent Common Shares in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable and (iii) that an opinion shall have been delivered to Parent on behalf of the transferor to the effect that such transfer will not violate Canadian or United States securities laws or regulations. (f) No Liability. Notwithstanding anything to the contrary in this Section 1.8, none of the Exchange Agent, the Surviving Company or any party hereto shall be liable to a Company Stockholder for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Investment Agreement. As a condition precedent to the receipt of Parent Common Shares, a Company Stockholder must execute and deliver to Parent an Investment Agreement in the form attached as Exhibit 5.4. 1.9 No Further Ownership Rights in Company Common Stock. --------------------------------------------------- All Parent Common Shares issued upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock, and there shall be no further registration of transfers on the records of the Surviving Company of shares of Company Common Stock which are outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Certificates are presented to the Surviving Company for any reason, they shall be cancelled and exchanged for Parent Common Shares as provided in this Article 1 and appropriately entered into the stock ledger of the Surviving Company. Page 6 1.10 Lost, Stolen or Destroyed Company Certificates. ----------------------------------------------- In the event any Company Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such Parent Common Shares, as may be required pursuant to Section 1.6; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. 1.11 Taking Necessary Action; Further Action. ---------------------------------------- If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Company with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2.1 The Company hereby represents and warrants to Parent and Merger Sub that: (a) the Company is a corporation duly organized, validly existing and in good standing under Delaware Law, has all requisite corporate power and authority to carry on its business as now being carried on by it and to own or lease and operate its properties and assets and is licensed or otherwise qualified to carry on business in each jurisdiction in which a material amount of its business is conducted or wherein the character of the properties and assets now owned by it makes such qualification necessary; (b) the authorized capital of the Company consists of 20,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share, of which 4,000,000 shares of Company Common Stock and no shares of Preferred Stock are validly issued and outstanding as fully paid and non-assessable shares, of which none are subject to escrow or pooling arrangements; a complete list of the Company's stockholders and the number of shares of Company Common Stock held by them is attached hereto as Schedule 2.1(b). Except as set forth in Schedule 2.1(b), all of the issued and outstanding shares of Company capital stock were duly authorized and validly issued and are fully paid and nonassessable and are free of any liens or encumbrances created by or resulting from the actions of the Company, and are not subject to preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or By-Laws of the Company or any agreement to which the Company is a party or by which it is bound. All outstanding shares of Company capital stock were issued in compliance with all applicable federal and state securities laws. Except as described in this Section 2.1(b) or reflected in Schedule 2.1(b), the Company does not have and is not bound, and will not be bound as of the Effective Time, by any outstanding subscriptions, options, warrants, convertible securities, calls, commitments, agreements or obligations of any character, or rights or obligations capable of becoming any of the foregoing, calling for the purchase, redemption or issuance of any shares of Company capital stock or any other equity security of the Company or any securities representing Page 7 the right to purchase or otherwise receive any shares of Company capital stock or any other equity security of the Company; (c) the Company is not subject to any reporting requirements of the Exchange Act; (d) the Company has no subsidiaries; (e) the Company has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the Company (the "Company Board"). The Company Board has directed that this Agreement and the transactions contemplated hereby be submitted to the Company Stockholders for approval and, except for the adoption of this Agreement by the requisite vote of the Company Stockholders, no other corporate proceedings on the part of the Company are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by the Company and (assuming due authorization, execution and delivery by Parent and Merger Sub) constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally; (f) [Reserved]; (g) except as set forth in Schedule 2.1(g), the Company is not a party to any employment, management or service agreements; (h) Except as set forth in Schedule 2.1(h) the Company has no outstanding agreements or obligations in respect of the registration, repurchase, redemption, exchange or conversion of any of its outstanding securities and there are no pre-emptive rights or, to the knowledge of the Company, voting, stockholder or other similar agreements pertaining to the shares of Company Common Stock or Preferred Stock; (i) at the time of delivery pursuant to Section 4.1(h), the Company Audited Financials will present fairly the financial condition and results of operations of the Company at such dates and for the respective periods indicated in such financial statements and have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis except as otherwise stated in the notes to such financial statements; (j) since October 31, 2001, there has been no material adverse change in the business, operations, properties, assets or condition, financial or otherwise, of the Company from that shown in the Company Audited Financials; (k) the books and records of the Company fairly and accurately set out and disclose in all material respects the financial position of the Company at the date hereof, all financial transactions relating to the Company have been accurately recorded in such books and records Page 8 and the minute books of the Company contain all records of the meetings and proceedings of the Company Board and the Company Stockholders; (l) the Company does not have any liability or obligation including, without limitation, tax liabilities, whether accrued, absolute, contingent or otherwise, not reflected in the Company Audited Financials including the notes thereto, except liabilities and obligations that may be reflected on the Closing Date Balance Sheet, which liabilities and obligations are not materially adverse in the aggregate to the Company on a consolidated basis and do not exceed in the aggregate US$25,000, and none of which results from, arises out, relates to, is in the nature of or was caused by any breach of contract, tort, breach of warranty, infringement or violation of law. Except as disclosed in the Company Audited Financials, there are no outstanding loans by the Company to any of the Company Stockholders; (m) there is no reasonable basis for and to the Company's knowledge, there are no actions, suits, proceedings, investigations or outstanding claims or demands, whether or not purportedly on behalf of the Company, instituted, pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its property or assets at law or in equity or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator, nor to the Company's knowledge, is there any judgment, order, decree or award of any court or other governmental authority having jurisdiction, obtained, pending or, to the knowledge of the Company, threatened against the Company or any of its property or assets.; (n) except as described in Schedule 2.1(n), since October 31, 2001 there has not occurred: (1) any acquisition or sale, transfer or other disposition by the Company of any asset or property; (2) any damage, destruction or loss whether or not covered by insurance; (3) any declaration, setting aside or payment of any dividend or any other distributions in respect of the capital stock or other equity securities of the Company; (4) any issuance of any shares of the capital stock of the Company or any direct or indirect redemption, purchase or other acquisition of any of the capital stock or other equity securities of the Company; (5) any increase in the compensation, pension or other benefits payable or to become payable by the Company to any of its officers or employees, or any bonus payments or arrangements made to or with any of them; (6) any incurrence by the Company of any obligations or liabilities, whether absolute, accrued, contingent or otherwise (including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others); (7) any discharge or satisfaction by the Company of any material lien or encumbrance or payment by the Company of any obligation or liability (fixed or contingent); (8) any change in any assumptions underlying or methods of calculating any debt, contingency, or other reserve of the Company; (9) any cancellation of any debt or claim or any waiver of any right of in an amount; (10) any disposition, assignment, transfer or lapse of any right of the Company to use any patent, registered trademark, trade name, copyright, know-how or process; (11) any change in any method of accounting or in any accounting practice of the Company; (12) any payment, other than salary payments to employees of the Company, loan or advance by the Company to, or any sale, transfer or lease of any of Company's properties or assets to, or any other contract, commitment, agreement, understanding, arrangement or transaction with, any officer, director or shareholder of Company; (13) the creation or imposition of any lien on the Company properties or assets; (14) any capital expenditures by the Company; (15) any agreement, whether in writing or otherwise, to take any of Page 9 the foregoing actions described in this Section 2.1(n); or (16) any material adverse change in the business, properties, assets, liabilities, condition (financial or otherwise) or prospects of the Company, taken as a whole. (o) the business of the Company is being conducted in all material respects in compliance with all applicable laws, regulations, ordinances, by-laws, orders and decrees of all authorities having jurisdiction over the Company; (p) attached hereto as Schedule 2.1(p) is a complete list of each contract or agreement between the Company and any other person, and each such contract is in full force and effect and, to the knowledge of the Company, is valid, binding and enforceable against each of the parties thereto in accordance with its terms and no material breach or default exists in respect thereof on the part of any party thereto and no event has occurred which, with the giving of notice or the lapse of time or both, would constitute such a material breach or default. All material statutory municipal and other licenses, consents, permits and authorities necessary or desirable for the carrying on of the business and activities of the Company as now carried on, have been obtained and are valid and subsisting and all conditions thereof have been complied with in all material respects and, to the knowledge of the Company, none of them are likely to be suspended, cancelled, revised, refused or revoked; (q) none of the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby or the fulfilment of or compliance with the terms and provisions hereof do, nor will they (with the giving of notice or the lapse of time or both): (i) violate any provision of any law or administrative regulation or any judicial or administrative order, award, judgment or decree applicable to the Company; (ii) conflict with any of the terms, conditions or provisions of the charter documents (including the bylaws) of the Company; (iii) violate, materially conflict with, result in a material breach of, constitute a material default under or accelerate or permit the acceleration of the performance required by, any agreement, covenant, undertaking, commitment, instrument, judgment, order, decree, note, bond, mortgage, license, sublicense, lease or other obligation, or award to which the Company is a party or by which it is bound or to which any of its property or assets is subject; or (iv) result in the cancellation, suspension or material alteration in the terms of any material license, permit or authority held by the Company or in the creation of any lien, charge, security interest or encumbrance upon any material assets of the Company under any such material agreement, covenant, undertaking, commitment, instrument, judgment, order, decree or award or give to any other person any material interest or rights, including rights of purchase, termination, cancellation or acceleration, under any such material agreement, covenant, undertaking, commitment, instrument, judgment, order, decree or award; (r) except as described in Schedule 2.1(r), the Company has not incurred any liability for brokerage fees, finder's fees, agent's commissions or other similar forms of compensation in connection with this Agreement or the transactions contemplated hereby; Page 10 (s) the shares of Company Common Stock or Preferred Stock are not listed on any stock exchange; (t) as to the "Company Intellectual Property," which means (A) that certain License Agreement between the Company and Johns Hopkins University dated April 18, 2001 (the "Johns Hopkins License") and all of the Company's rights and obligations thereunder (all of which by virtue of this Agreement pass through and inure to the benefit of the Surviving Company, including the representations and warranties of Johns Hopkins University), (B) that certain Sub-License Agreement between the Company and ILEX Oncology, Inc. dated June 22, 2001 (the "Sublicense Agreement"), (C) as of the Effective Time, the License and Option Agreement dated December 19, 2001, covering ILEX Technology (as defined in Section 9.3) and all of the Company's rights and obligations thereunder which shall supersede and replace (B) above (the "ILEX Agreement"), and (D) the Marban Agreement and all of the Company's rights and obligations thereunder; (i) except as described in Schedule 2.1(t)(i) the Company is not a party to any agreement pursuant to which any third party is authorized to use any Company Intellectual Property; (ii) the Company is not, and to the knowledge of the Company, without independent investigation, no party to any agreements pertaining in any way to the Company's rights in the Company Intellectual Property, including the Johns Hopkins License, is in violation of such agreements, and the execution and delivery of this Agreement and the performance by the Company of its obligations hereunder will not impair in any material respect the Company's rights or alter the rights or obligations of any third party under or violate any such agreements, and the Johns Hopkins License is fully paid up as of the Effective Time; (iii) except as set forth in Schedule 2.1(t)(iii) hereto, to the knowledge of Company without independent investigation, no claims with respect to the Company Intellectual Property have been asserted or, to the knowledge of the Company, are threatened by any person, nor does the Company have knowledge without independent investigation of any valid grounds for any bona fide claims (A) to the effect that the manufacture, sale or use of any product, or any licensing of any Company Intellectual Property, infringes on any copyright, patent, trademark or trade secret or violates any third party's rights in any domain name or any other third party proprietary rights, (B) against the use by the Company of any Company Intellectual Property, or (C) challenging the ownership, control, validity or effectiveness of any of the Company Intellectual Property; and to the knowledge of Company, no proceedings have been initiated pertaining to patent interferences or patent oppositions relating to Company Intellectual Property or portions thereof; (iv) to the knowledge of the Company, without independent investigation, all patents and registered trademarks encompassed by or part of the Company Intellectual Property Page 11 are valid and subsisting, and no copyright encompassed by or part of the Company Intellectual Property has been forfeited to the public domain. To the Company's knowledge, without independent investigation, there is no material unauthorized use, infringement or misappropriation of any of the Company Intellectual Property by any third party, including any employee or former employee of the Company; (v) to the knowledge of the Company, without independent investigation, the Company Intellectual Property is free and clear of all liens, claims, encumbrances, rights, or equities whatsoever of any third party. Company has not encumbered or agreed that any third party may encumber (through liens, claims, rights or equities) the Company Intellectual Property except for any encumbrances granted under the John Hopkins License and the Sublicense Agreement; (vi) [Reserved] (vii) To the knowledge of Company, without independent investigation, the Company has not been sued or charged in writing as a defendant in any claim, suit, action or proceeding which involves a claim of infringement of patents, trademarks, service marks, trade names, trade dress, trade secrets, copyrights, moral rights, or domain names, and which has not been finally terminated prior to the date hereof. Company has no knowledge of any infringement liability with respect to, or infringement by, the Company or any of its subsidiaries of any patents, trademarks, service marks, trade names, trade dress, trade secrets, copyrights, moral rights, or domain names of another; (u) other than the Company Intellectual Property, the Company does not own or otherwise have any rights (including without limitation under any license) to or under any patents; inventions; trademarks; service marks; trade names; trade dress; trade secrets; copyrights; moral rights; domain names; any renewal rights, applications, and registrations for any of the foregoing; any goodwill associated with such trademarks, service marks, trade names, and trade dress; technology; computer software programs or applications (in source and/or object code form); any documents and files relating to design, end user documentation, quality control, sales, marketing or customer support, and any schematics, records (including, without limitation, clinical records), or databases, the intellectual property rights in which pertain to any of the foregoing; any know- how or tangible or intangible proprietary information or materials; or any third-party proprietary or confidential information; (v) for purposes of this Article 2, "Taxes" means taxes, duties, fees, premiums, assessments, imposts, levies and other charges of any kind whatsoever imposed by any governmental authority, including all interest, penalties, fines, additions to tax or other additional amounts imposed in respect thereof, including those levied on, or measured by, or referred to as, income, gross receipts, profits, capital, transfer, land transfer, sales, goods and services, harmonized sales, use, value-added, excise, stamp, withholding, business, franchising, property, employer health, payroll, employment, health, social services, education and social security taxes, all surtaxes, all customs duties and import and export taxes, all licence, franchise and registration fees and all employment insurance, health insurance and other government pension plan premiums or contributions. All tax returns, reports and forms of the Page 12 Company required to be filed by or with the respect to the activities of Company under the laws of any jurisdiction, domestic or foreign, have been duly and timely filed, which returns, reports and statements are true, correct and complete in all respects, and all Taxes, fees and other governmental charges of any nature whatsoever which were required to be paid have been paid. Complete and accurate copies of all tax returns filed, if any, have been previously delivered to Parent. There are no liens for taxes upon the Company or its assets except liens for current Company taxes not yet due. Company has made available to Parent complete copies of all the income tax returns, all examination reports by any taxing authority, and any statements of deficiencies proposed or assessed against or agreed by Company. Company has received no written notice of any claimed, proposed or assessed deficiencies or any adjustment for any Tax; (w) except as described in Schedule 2.1 (w), the Company is not a party to or subject to: (i) any union contract, employment contract or arrangement providing for future compensation, written or oral, with any officer, consultant, director or employee not terminable at will by the Company; (ii) any employee benefit plan or other plan or contract or arrangement, written or oral, requiring Company to provide bonuses, pensions, deferred compensation, retirement payments, profit sharing or the like; (iii) any lease of real or personal property; (iv) except for trade indebtedness incurred in the ordinary course of business, any indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee or otherwise; or (v) any contracts containing covenants purporting to limit Company's freedom to compete in any line of business in any geographical area; (x) the information supplied by the Company for inclusion in the Information Circular (as hereinafter defined) to be filed with all applicable securities regulatory authorities as part of the registration statement to be filed pursuant to the Registration Rights Agreement described in Section 5.8 hereof, or to be sent to the shareholders of Parent in connection with the meeting of Parent shareholders (the "Parent Shareholders") to consider the Merger (the "Parent Meeting") (such information circular as amended or supplemented is referred to herein as the "Information Circular"), shall not, on the date the Information Circular (or any amendment thereof or supplement thereto) is first mailed to Parent Shareholders, at the time of the Parent Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it was made, be false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein, not false or misleading. If at any time prior to the Effective Time any event relating to the Company or any of its respecting affiliates, officers or directors should be discovered by the Company which should be set forth in an amendment to the registration statement or a supplement to the Information Circular, the Company shall promptly inform Parent and Merger Sub. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub which is contained in any of the foregoing documents; (y) the Company Board has, as of the date of this Agreement, (i) determined that the Merger is fair to, and in the best interest of the Company and its stockholders, and (ii) has agreed to recommend that its stockholders approve this Agreement and the transactions contemplated herein; Page 13 (z) to the knowledge of the Company, neither the Company nor any of its affiliates has taken or agreed to take any action, failed to take any action or is aware of any fact or circumstance that would prevent the Merger from constituting a tax-free reorganization within the meaning of Section 368(a) of the Code or that would cause any of the Company Stockholders to recognize gain for U.S. income tax purposes upon the exchange of their Company Common Stock for Parent Common Shares pursuant to the Merger; and (aa) No representation, warranty or statement made by the Company in this Agreement or in the Schedules or Exhibits attached hereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein not misleading. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 3.1 Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company that: (a) each of Parent, Parent Subsidiaries and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all requisite corporate power and authority to carry on its business as now being carried on by it and to own or lease and operate its properties and assets and is licensed or otherwise qualified to carry on business in each jurisdiction in which a material amount of its business is conducted or wherein the character of the properties and assets now owned by it makes such qualification necessary; (b) the authorized capital of Parent consists of 200,000,000 common shares without par value of which on the date hereof, 41,235,848 Parent Common Shares are validly issued and outstanding as fully paid and non-assessable shares. Upon exercise of the Special Warrants (as defined in Section 9.3) outstanding on the date hereof, there will be 43,070,181 validly issued and outstanding fully paid and non-assessable Parent Common Shares. Upon exercise or conversion of all other warrants, rights, notes, preferred stock, and any other convertible securities and options outstanding on the date hereof there will be 52,001,035 validly issued and outstanding fully paid and non-assessable Parent Common Shares. Except as set forth in Schedule 3.1(b), all of the issued and outstanding Parent Common Shares were duly authorized and validly issued and are fully paid and nonassessable and are free of any liens or encumbrances created by or resulting from the actions of the Parent, and are not subject to preemptive rights or rights of first refusal created by statute, the Memorandum or Articles of the Parent or any agreement to which the Parent is a party or by which it is bound. All Parent Common Shares outstanding on the date hereof have been offered, issued, sold and delivered by Parent in compliance with: (i) all registration or qualification and prospectus requirements (or applicable exemptions therefrom) of all applicable Canadian Securities Laws (as defined below) and other applicable securities laws; and (ii) all material requirements set forth in applicable agreements or instruments. Except as described in this Section 3.1(b) or reflected in the Schedule 3.1(b) the Parent does not have and is not bound by any outstanding subscriptions, options, warrants, convertible securities, calls, commitments, agreements or obligations of any character calling for the purchase, redemption or issuance of any Parent Common Shares or any other equity security of the Parent or any securities representing the right to purchase or otherwise receive any Parent Common Shares or any other equity security of the Parent; Page 14 (c) Parent is a reporting issuer in good standing under the securities laws of the Provinces of British Columbia, Alberta, Ontario, Quebec and the Yukon Territory, the rules, their respective regulations, prescribed forms, orders and rulings made thereunder and the policy statements issued by the securities commissions or other applicable securities regulatory authorities thereunder (the "Canadian Securities Laws") and is in material compliance with the by-laws, rules and regulations of The Toronto Stock Exchange. Parent has timely filed all material forms, reports and documents required to be filed by Parent under the Canadian Securities Laws and the rules and regulations of The Toronto Stock Exchange since Parent became a reporting issuer under the Canadian Securities Laws or commenced listing on The Toronto Stock Exchange, as applicable, other than a failure to timely file any such document which would not have a material adverse effect on the Parent or an adverse effect on the ability to resell on The Toronto Stock Exchange the Parent Common Shares issued to the Company Stockholders in the Merger; provided, however, that all such material required forms, reports and documents required to be filed by Parent before the date of this Agreement have been filed. All such required forms, reports and documents are referred to herein as the "Parent Securities Reports." As of their respective dates, the Parent Securities Reports (i) were prepared in accordance with the requirements of applicable Canadian Securities Laws and the rules and regulations of The Toronto Stock Exchange applicable to such Parent Securities Reports, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any misrepresentation of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Parent represents and warrants that, as of the date of this Agreement it is eligible to utilize clause 74(2)(8) of the Securities Act (British Columbia) in relation to the issue by Parent of the Parent Common Shares to the Company Stockholders pursuant to the terms of this Agreement; Parent is a "qualifying issuer" (as that term is defined in Multilateral Instrument 45-102 Resale of Securities) ("MI 45-102"). With regard to Canadian Securities Laws, by virtue of the application of MI 45-102, the Parent Common Shares issuable to the Company Stockholders upon consummation of the Merger will be freely resaleable in Canada on The Toronto Stock Exchange provided that the following conditions are met at the time of the trade: (i) Parent is or has been a reporting issuer in a jurisdiction listed in Appendix B of MI 45-102 for a period of four (4) months immediately preceding the trade; (ii) the trade is not a "control distribution", as defined in MI 45-102; (iii) no unusual effort is made to prepare the market or to create a demand for the securities that are the subject of the trade; (iv) no extraordinary commission or consideration is paid to a person or company in respect of the trade; and (v) if the selling security holder is an insider or officer of Parent, the selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation; (d) The authorized and issued capital of Merger Sub consists of One Thousand shares of common stock, all of which are held by Parent. In addition to Merger Sub, Parent has two wholly owned subsidiaries which are disclosed in Schedule 3.1(d) (together with Merger Sub, collectively referred to as the "Parent Subsidiaries"). Parent owns Page 15 all of the issued and outstanding shares or capital stock of the Parent Subsidiaries, as the case may be, and Parent Subsidiaries do not have and are not bound by any outstanding subscriptions, options, warrants, convertible securities, calls, commitments, agreements or obligations or any character calling for the purchase, redemption or issuance of any shares or capital stock or other equity security of Parent Subsidiaries or any securities representing the right to purchase or otherwise receive any shares of Parent Subsidiary capital stock or any other equity security of Parent Subsidiaries. All outstanding shares of Parent Subsidiary capital stock were issued in compliance with applicable Canadian Securities Laws and applicable U.S. securities laws; (e) The Parent has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby subject to shareholder approval. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Parent Board. Except for the adoption and approval of this Agreement and approval of the Merger by the requisite vote of the Parent Shareholders, no other corporate proceedings on the part of the Parent or the Parent Subsidiaries are necessary to approve this Agreement or the Merger. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by the Parent and (assuming due authorization, execution and delivery by Company) constitute valid and binding obligations of the Parent, enforceable against the Parent in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. Merger Sub has all requisite corporate power and authority to enter into, execute, deliver and perform its obligations under, this Agreement. The execution, delivery and performance by Merger Sub of this Agreement has been duly authorized by the Merger Sub board of directors in accordance with its charter documents and applicable laws. This Agreement constitutes, when executed by the other parties hereto, the valid and binding obligation of Merger Sub, enforceable in accordance with its terms, except as such enforceability may be limited by applicable insolvency, bankruptcy, reorganization or other similar laws affecting creditors' rights generally and applicable equitable principles (whether considered in a proceeding at law or in equity); (f) except as disclosed in Schedule 3.1(b) there are no pre-emptive rights or, to the knowledge of Parent, voting, stockholders or other similar agreements pertaining to the Parent Common Shares. The Parent Common Shares to be issued to the Stockholders in the Merger, when issued in accordance with the provisions of this Agreement, will be validly issued, fully paid and non-assessable, and not subject to any encumbrances or pre-emptive rights except for applicable restrictions on transfer imposed by applicable securities laws, including those imposed by the 1933 Act and Rule 144 promulgated under the 1933 Act, and under applicable "blue sky" state securities laws or Canadian Securities Laws, and will be issued in compliance with Canadian Securities Laws, and applicable United States and applicable state securities laws; (g) except with respect to the registration rights and requirements of the Special Warrants described in Schedule 3.1(b) and with respect to the registration rights of the holders of Common Stock pursuant to the Registration Rights Agreement, the Parent and the Merger Sub are under no obligations to register or qualify any capital stock of the Parent or Merger Sub pursuant to any registration rights agreement or similar agreement; Page 16 (h) the audited consolidated financial statements of Parent for its fiscal year ended November 30, 2000 (the "Parent Audited Financials") and the unaudited consolidated financial statements for the nine months ended August 31, 2001 present fairly the financial condition and results of operations of Parent as at such dates and for the respective periods indicated in such financial statements and have been prepared in accordance with Canadian generally accepted accounting principles applied on a consistent basis, except as otherwise stated in the notes to such financial statements and comply with all applicable requirements of Canadian Securities Laws; (i) since August 31, 2001, there has been no material adverse change in the business, operations, properties, assets or condition, financial or otherwise, of Parent from that shown in the unaudited consolidated financial statements of Parent for the period ended August 31, 2001; (j) the books and records of Parent fairly and accurately set out and disclose in all material respects the financial position of Parent as at the date hereof, all material financial transactions relating to Parent have been accurately recorded in such books and records and the minute books of Parent contain all records of the meetings and proceedings of the stockholders and directors of Parent; (k) Parent and Parent Subsidiaries do not have any material liability or obligation including, without limitation, tax liabilities, whether accrued, absolute, contingent or otherwise, not reflected in the Parent Audited Financials or their unaudited consolidated financial statements for the nine months ended August 31, 2001, except liabilities and obligations incurred in the ordinary course of its business since August 31, 2001, which liabilities and obligations are not materially adverse in the aggregate to Parent on a consolidated basis. Except as disclosed in the Public Documents, there are no outstanding loans by the Parent to any Parent Shareholders. The Parent (i) has been released from all securities, guarantees, and indemnities given by or binding upon the Parent in relation to any debt or obligation of its shareholders and/or all or any third parties and (ii) no such securities and indemnities exist; (l) there is no basis for and there are no material actions, suits, proceedings, investigations or outstanding claims or demands, whether or not purportedly on behalf of Parent, instituted, pending or, to the knowledge of Parent, without independent investigation, threatened against or materially adversely affecting Parent or any of its property or assets at law or in equity or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator, nor is there any judgment, order, decree or award of any court or other governmental authority having jurisdiction, obtained, pending or, to the knowledge of Parent without independent investigation, threatened against Parent or any of its property or assets, which would prevent or materially hinder the consummation of the transactions contemplated by this Agreement or which would involve the reasonable possibility of any material judgment or liability, whether or not covered by insurance, or which in the aggregate would have a material adverse effect on the business, operations, properties, assets or condition, financial or otherwise, of Parent, except as disclosed in the Public Documents; (m) Except as described in the Public Documents, the Parent and each Parent Subsidiary has conducted its business only in the ordinary course and there has not occurred with respect to Parent or any Parent Subsidiary: (1) any acquisition or sale, transfer or other disposition of any asset or property other than inventory in the Page 17 ordinary course of business; (2) any damage, destruction or loss whether or not covered by insurance, in excess of $10,000 in the aggregate; (3) any declaration, setting aside or payment of any dividend or any other distributions in respect of the capital stock or other equity securities; (4) any issuance of any shares of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock or other equity securities; (5) any increase in the compensation, pension or other benefits payable or to become payable to any of its officers or employees, or any bonus payments or arrangements made to or with any of them (other than annual or periodic increases made in the ordinary course of business consistent with past practice); (6) any incurrence of any obligations or liabilities, whether absolute, accrued, contingent or otherwise (including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others), other than obligations and liabilities incurred in the ordinary course of business or as contemplated hereby; (7) any discharge or satisfaction of any material lien or encumbrance or payment of any obligation or liability (fixed or contingent) in an amount exceeding $10,000 other than in the ordinary course of business; (8) any change in any assumptions underlying or methods of calculating any debt, contingency or other reserve; (9) any cancellation of any debt or claim or any waiver of any right of in an amount exceeding $10,000; (10) any disposition, assignment, transfer or lapse of any right to use any patent, registered trademark, trade name, copyright, know-how or process; (11) any change in any method of accounting or in any accounting practice; (12) any payment, other than salary payments to employees, loan or advance to, or any sale, transfer or lease of any of Parent's or any Parent Subsidiary's properties or assets to, or any other contract, commitment, agreement, understanding, arrangement or transaction with, any officer, director or shareholder of Parent or any Parent Subsidiary; (13) the creation or imposition of any lien properties or assets; (14) any capital expenditures in excess of $10,000; (15) any agreement, whether in writing or otherwise, to take any of the foregoing actions described in this Section 3.1(m); or (16) any material adverse change in the business, properties, assets, liabilities, condition (financial or otherwise) or prospects of the Parent, taken as a whole; (n) the business of Parent and each Parent Subsidiary is being conducted in all material respects in compliance with all applicable laws, regulations, ordinances, by-laws, orders and decrees of all authorities having jurisdiction. All of the outstanding shares of Merger Sub capital stock are owned by Parent and have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with Canadian Securities Laws, and applicable United States and applicable state securities laws. Merger Sub was formed for the sole purpose of consummating the Merger and has no assets or liabilities except as necessary for such purpose; (o) attached hereto as Schedule 3.1(o) is a complete list of each contract or agreement between Parent and each Parent Subsidiary and any other person which is material to the ownership, use or operation of a material portion of the business, properties or assets of Parent or Parent Subsidiaries and each such contract is in full force and effect and, to the knowledge of Parent, is valid, binding and enforceable against each of the parties thereto in accordance with its terms and no material breach or default exists in respect thereof on the part of any party thereto and no event has occurred which, with the giving of notice or the lapse of time or both, would constitute such a material breach or default. All material statutory municipal and other licenses, consents, permits and authorities necessary or desirable for the carrying on of the business or activities of the Parent as now carried on have been obtained and are valid and subsisting and all conditions thereof have been complied with in all material respects and, to the knowledge of Parent, none of them are likely to be suspended, cancelled, revised, revoked or refused; Page 18 (p) none of the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby or the fulfilment of or compliance with the terms and provisions hereof do or will, nor will they with the giving of notice or the lapse of time or both: (i) violate any provision of any law or administrative regulation or any judicial or administrative order, award, judgment or decree applicable to Parent or any Parent Subsidiary; (ii) conflict with any of the terms, conditions or provisions of the charter documents (including the Articles and bylaws) of Parent or any Parent Subsidiary; (iii) violate, materially conflict with, result in a material breach of a material provision of, constitute a material default under or accelerate or permit the acceleration of the performance required by, any material agreement, covenant, undertaking, commitment, instrument, judgment, order, decree, note, bond, mortgage, license, sublicense, lease or other obligation, or award to which Parent or any Parent Subsidiary is a party or by which any of it is bound or to which any of its property or assets is subject; or (iv) result in the cancellation, suspension or material alteration in the terms of any material license, permit or authority held by Parent or any Parent Subsidiary or in the creation of any lien, charge, security interest or encumbrance upon any material assets of Parent or any Parent Subsidiary under any such material agreement, covenant, undertaking, commitment, instrument, judgment, order, decree or award or give to any other person any material interest or rights, including rights of purchase, termination, cancellation or acceleration, under any such material agreement, covenant, undertaking, commitment, instrument, judgment, order, decree or award; (q) neither Parent nor any Parent Subsidiary has incurred any liability for brokerage fees, finder's fees, agent's commissions or other similar forms of compensation in connection with this Agreement or the transactions contemplated hereby, except as disclosed in Schedule 3.1(q) hereto; (r) the Parent Common Shares are listed on The Toronto Stock Exchange and are traded over the counter on the NASDAQ OTC Bulletin Board; (s) (i) Parent and Parent Subsidiaries own, have licensed or otherwise have sufficient rights to use rights to all patents, trademarks, trade names, copyrights, and any applications therefore, technology, know-how, tangible or intangible proprietary information or material that in any material respect are used or proposed to be used in the business of Parent or Parent Subsidiaries as currently conducted or as proposed to be conducted within the twelve months following the date hereof (the "Parent Intellectual Property"); Page 19 (ii) Schedule 3.1(s)(ii) hereto lists all registered patents, registered trademarks, registered and material unregistered copyrights, trade names, and any applications therefore, included in the Parent Intellectual Property, and specifies the jurisdictions in which each such Parent Intellectual Property has been issued or registered or in which an application for such issuance and registration has been filed, including the respective registration or application numbers; (iii) Schedule 3.1(s)(iii) hereto also list all material licenses, sublicenses and other agreements ("Parent Licenses") as to which Parent or any of Parent Subsidiaries is a party and pursuant to which Parent or any Parent Subsidiary or any other person is authorized to use any Parent Intellectual Property or other trade secret material to Parent or any of its subsidiaries; (iv) neither Parent nor any Parent Subsidiary is in violation of, and the execution and delivery of this Agreement and the performance by Parent of its obligations hereunder will not impair in any material respect Parent's rights or alter the rights or obligations of any third party under any Parent License; (v) except as set forth in Schedule 3.1(s)(v), to the knowledge of Parent without independent investigation, no claims with respect to the Parent Intellectual Property have been asserted or, to the knowledge of Parent without independent investigation, are threatened by any person, nor does Parent or any subsidiary of Parent have knowledge, without independent investigation, of any valid grounds for any bona fide claims (A) to the effect that the manufacture, sale or use of any product, or any licensing of any Parent Intellectual Property, as now used or offered or proposed for sale, use or licensing by Parent or any Parent Subsidiary, infringes on any copyright, patent or trade secret or violates any third party's rights in any domain name or any other third party proprietary rights, (B) against the use by Parent or any Parent Subsidiary of any Parent Intellectual Property, or (C) challenging the ownership, control, validity or effectiveness of any of the Parent Intellectual Property; and no proceedings have been initiated pertaining to patent interferences or patent oppositions relating to Parent Intellectual Property or portions thereof; (vi) to the Parent's knowledge, all patents and registered trademarks held by the Parent or any Parent Subsidiary are valid and subsisting, and no copyright owned by or licensed to the Parent or any Parent Subsidiary has been forfeited to the public domain. To Parent's knowledge, without independent investigation, there is no material unauthorized use, infringement or misappropriation of any of the Parent Intellectual Property by any third party, including any employee or former employee of the Parent or any Parent Subsidiary; and (vii) to the knowledge of Parent, without independent investigation, neither the Parent or any Parent Subsidiary has been sued or charged in writing as a defendant in any claim, suit, action or proceeding which involves a claim of infringement of patents, trademarks, service marks, trade names, trade dress, trade secrets, copyrights, moral rights, or domain names, and which has not been finally terminated prior to the date hereof; Page 20 (viii) Parent has no knowledge of any infringement liability with respect to, or infringement by, Parent or any Parent Subsidiary of any patents, trademarks, service marks, trade names, trade dress, trade secrets, copyrights, moral rights or domain names of another; (t) For purposes of this Article 3, "Taxes" means taxes, duties, fees, premiums, assessments, imposts, levies and other charges of any kind whatsoever imposed by any governmental authority, including all interest, penalties, fines, additions to tax or other additional amounts imposed in respect thereof, including those levied on, or measured by, or referred to as, income, gross receipts, profits, capital, transfer, land transfer, sales, goods and services, harmonized sales, use, value-added, excise, stamp, withholding, business, franchising, property, employer health, payroll, employment, health, social services, education and social security taxes, all surtaxes, all customs duties and import and export taxes, all licence, franchise and registration fees and all employment insurance, health insurance and Canada, Quebec and other government pension plan premiums or contributions. There are no liens for Taxes upon the Parent or any Parent Subsidiary or its property or assets except liens for current Taxes not yet due. All tax returns, reports, declarations, elections, notices, filings and forms ("Returns") of the Parent and Parent Subsidiaries required to be filed by or with respect to the Parent or Parent Subsidiaries under the laws of any jurisdiction, domestic or foreign in respect of Taxes, have been duly and timely filed, which Returns, reports and statements are true, correct and complete in all respects and correctly report all income and other amounts and information required to be reported thereon and all Taxes, fees and other governmental charges of any nature whatsoever, which were required to be paid have been paid, including all installments on account of Taxes for the current year that are due and payable by it whether or not assessed by the appropriate governmental authority. Complete and accurate copies of all tax returns filed have been made available to Company. There are no liens for Taxes upon Parent, or any Parent Subsidiary or any of their respective assets except liens for current Taxes not yet due. Parent has made available to the Company complete copies of all the tax returns for the last five taxable years of Parent, all examination reports by any taxing authority for the last five taxable years of Parent, and any statements of deficiencies proposed or assessed against or agreed by Parent or any Parent Subsidiary for the last five taxable years of Parent. Neither Parent, nor any Parent Subsidiary has received written notice of any claimed, proposed or assessed deficiencies or any adjustment for any Tax. Each of Parent and Parent Subsidiaries have duly and timely withheld from any amount paid or credited to it or for the account or benefit of any person the amount of all Taxes and other deductions required by any applicable laws to be withheld from any such amount and have duly and timely remitted the same to the appropriate governmental authority; (u) the Parent Board has, as of the date of this Agreement subject to issuance of the Fairness Opinion, determined that the Merger is fair to, and in the best interest of the Parent and Parent Shareholders; (v) To the knowledge of the Parent, neither the Parent nor Parent Subsidiary nor any of their affiliates has taken or agreed to take any action, failed to take any action or is aware of any fact or circumstance that would prevent the Merger from constituting a tax- free reorganization within the meaning of Section 368(a) of the Code or that would cause any of the Company Stockholders to recognize Page 21 gain for U.S. income tax purposes upon the exchange of their Company Common Stock for Parent Common Shares pursuant to the Merger; (w) [Reserved]; (x) To the knowledge of Parent, with respect to all properties owned, operated or leased by the Parent or any Parent Subsidiary, Parent or Parent Subsidiaries, as applicable, have obtained and currently maintain all material environmental permits required for their business and operations and are in compliance with all such environmental permits. There are no legal proceedings pending nor, to the knowledge of the Parent, threatened to modify or revoke any such environmental permits. The Parent has not received any notice from any source that there is lacking any environmental permit required for the current use or operation of the business of the Parent and Parent Subsidiaries, or any property owned, operated or leased by the Parent and Parent Subsidiaries. To the knowledge of the Parent, all properties owned, operated or leased by the Parent, or Parent Subsidiaries comply with all applicable environmental laws, regulations and rules; (y) Each of Parent and each Parent Subsidiary have complied in all material respects with, and are in compliance in all material respects with, all laws, statutes and governmental regulations and all judicial or administrative tribunal orders, judgments, writs, injunctions or decrees applicable to its business. Neither Parent, nor any Parent Subsidiary has been charged with any violation of any provision of any Canadian, federal, state, provincial, local or foreign law or administrative regulation in respect of its business. All material statutory, municipal and other licenses, consents, permits and authorities necessary or desirable for the carrying on of the business and activities of each of Parent, Merger Sub and Parent Subsidiary as now carried on, have been obtained and are valid and subsisting; (z) In respect of all of Parent's and Parent Subsidiary's insurance: (i) all premiums have been duly paid to date; and (ii) no material claim is outstanding, and to the knowledge of Parent, no circumstances exist which are likely to give rise to any material claim by or against Parent or any Parent Subsidiary; (aa) Each employee bonus, profit sharing, retirement, stock purchase, stock option, insurance, medical, life, disability, severance, or other benefit plan ("Plan") covering active, former, or retired employees, officers, and directors of the Parent is listed in the Public Documents. No Plan is covered by Title IV of ERISA or Code Section 412. No claims are pending or to the knowledge of Parent, without independent investigation, anticipated against the Parent or the Parent Subsidiaries or the Plans with respect to any Plan, except for payment of benefits in the ordinary course of business, and no employee or beneficiary has pending or has threatened any appeal or litigation regarding any denial of a benefit under any Plan. To the knowledge of Parent, there are no restrictions on the rights of Company to amend or terminate any Plan without incurring any liability therefore; (ab) Neither Parent nor any Parent Subsidiary, nor, to each of the Parent's and Merger Sub's knowledge, any director, officer, agent, employee or other person acting on behalf of Parent or any Parent Subsidiary, has (i) used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 30A of the Exchange Act or Page 22 any other applicable foreign, federal or provincial law of Canada, (ii) accepted or received any unlawful contributions, payments, expenditures or gifts or (iii) made any false or fictitious entries in the books and records of Parent, or any Parent Subsidiary; (ac) Either Parent or Parent Subsidiaries are, and at the Effective Time will be, the true and lawful owner of all of the material properties and assets reflected on the Parent Balance Sheet or acquired and used in any of Parent's or any Parent Subsidiary's business since the date thereof and not sold or otherwise disposed of in the ordinary course of business since such date, free and clear of all material liens, title defects, mortgages, charges, pledges, hypothecations, security interests and encumbrances; (ad) Parent has furnished or made available to Company a true and correct copy of each Parent Securities Report filed for the five years preceding the date hereof. If at any time prior to the Effective Time any event relating to Parent or the Parent Subsidiaries should be disclosed by Parent which should be set forth in an amendment to the Parent Securities Reports or a supplement to the Parent Securities Reports, the Parent will promptly inform the Company; (ae) No representation, warranty or statement made by each of Parent and Merger Sub in this Agreement or in the Schedules or Exhibits attached hereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein not misleading. ARTICLE 4. COVENANTS 4.1 Covenants of the Company. ------------------------ The Company hereby covenants and agrees with Parent and Merger Sub that prior to the Effective Time, the Company will: (a) subject to termination under Article 7, until the Effective Time: (i) not enter into any transaction or incur any obligation or liability, except as contemplated in this Agreement or as otherwise agreed to by Parent; (ii) not merge into or with, amalgamate or consolidate with, enter into any other corporate reorganization with, sell all or any part of its assets to any other corporation or person, or perform any act or enter into any transaction or negotiation which interferes or is inconsistent with the completion of the transactions contemplated hereby or would render inaccurate in any material way any of the representations and warranties set forth in Article 2 hereof if such representations and warranties were made at a date subsequent to such act, negotiation or transaction and all references to the date of this Agreement therein were deemed to be such later date, except as contemplated in this Agreement and, without limiting the generality of the foregoing, the Company will not, without the prior written consent of Parent: (A) make any distribution by way of dividend, return of capital or otherwise to or for the benefit of its stockholders; Page 23 (B) issue any shares or other securities exercisable for, convertible into or exchangeable for shares or enter into any commitment or agreement therefore; (C) increase or decrease its paid-up capital; or (D) alter or amend its charter documents as the same exist at the date of this Agreement; (b) do all such acts and things as may be reasonably necessary or required in order to give effect to the Merger and, without limiting the generality of the foregoing, the Company will apply for and use its good faith efforts to obtain: (A) the approval of the Company Stockholders required for the implementation of the Merger; and (B) such other consents, orders and approvals as counsel may advise are necessary or desirable for the implementation of the Merger and transactions contemplated by this Agreement. (c) give the representatives of Parent full access, during normal business hours and upon reasonable notice, to all of the assets, properties, books, records, agreements and commitments of the Company and furnish such information concerning the Company as Parent may reasonably request; (d) use all reasonable efforts to cause each of the conditions set forth in Article 6 hereof which require action by it to be satisfied on or before the time required for satisfaction; (e) provide all information reasonably requested by Parent for the Parent Information Circular and such information will be accurate and complete; (f) use best efforts to acquire an option, license or other legal claim on the ILEX Technology (as defined in Section 9.3), in form and substance acceptable to Parent at its sole discretion; (g) [Reserved]; (h) on or before December 31, 2001, provide to Parent audited financial statements for the Company for the period from inception of the Company to November 30, 2001 that present fairly the financial condition and results of operations of the Company at such date and for the period indicated therein, prepared in accordance with United States generally accepted accounting principles applied on a consistent basis (the "Company Audited Financials"); (i) not take or cause to be taken any action which would disqualify the Merger as a tax-free reorganization under Section 368 of the Code or that would cause any of the Company Stockholders to recognize gain for U.S. income tax purposes upon the exchange of their Company Common Stock for Parent Common Shares pursuant to the Merger; (j) not conduct any business or commercial activities except as expressly contemplated by this Agreement; and Page 24 (k) timely prepare all required income tax returns, taking into account extensions, and prior to filing such returns, shall present drafts of such income tax returns to Parent for its review and comment. 4.2 Covenants of Parent. -------------------- Parent and Merger Sub, jointly and severally, hereby covenant and agree with the Company that prior to the Effective Time, Parent and Parent Subsidiaries will: (a) subject to termination under Article 7, until the Effective Time: (i) not alter or amend their respective charter documents as the same exist at the date of this Agreement except as contemplated hereunder or in connection with authorization (but not issuance) of a class of preferred shares to facilitate financing of Parent following the Effective Time or to the extent permitted by clause (g) below; (ii) not engage in any business transaction or incur any obligation if the same would have a material adverse effect on Parent, any Parent Subsidiary or the Merger; (iii) do all such acts and things as may be reasonably necessary or required in order to give effect to the Merger and, without limiting the generality of the foregoing, Parent will apply for and use its good faith efforts to obtain: (A) the approval of the Parent Shareholders required for the implementation of the Merger; and (B) such other consents, orders and approvals as counsel may advise are necessary or desirable for the implementation of the Merger and transactions contemplated by this Agreement; (iv) give the representatives of the Company full access, during normal business hours and upon reasonable notice, to all of the assets, properties, books, records, agreements and commitments of Parent and furnish such information concerning Parent as the Company may reasonably request; (v) use all reasonable efforts to cause each of the conditions set forth in Article 6 hereof which require action by it to be satisfied with on or before the time required for satisfaction. (b) following the receipt of the Fairness Opinion (as described in Section 6.2(f)), submit to the Parent Shareholders the Parent Board's recommendation that the Parent Shareholders approve this Agreement and the Merger (unless in the written opinion of Parent's outside counsel such recommendation would breach the fiduciary obligations of the Parent Board), and to the extent required by applicable law, convene the Parent Meeting and solicit proxies to be voted at the Parent Meeting in favor of the approval of this Agreement and the Merger. (c) not make, nor cause any Parent Subsidiary to make, any declaration setting aside or payment of any dividend or any other distributions in respect of any of their respective equity securities except as expressly permitted herein. Page 25 (d) not sell or otherwise dispose of, nor permit any Parent Subsidiary to dispose of, any capital asset in excess of $25,000 or other than in the ordinary course of business consistent with its normal business practices. (e) use and shall cause each Parent Subsidiary to use its commercially reasonable best efforts to preserve intact its business organizations and to preserve its present relationships with any suppliers and customers. (f) not, and shall cause Parent Subsidiaries not to, take or cause to be taken any action which would disqualify the Merger as a tax free reorganization under Section 368 of the Code or cause the Company's Stockholders to recognize gain for U.S. income tax purposes upon the exchange of their Company Common Stock for Parent Common Shares pursuant to the Merger. (g) not issue, sell or grant options, or permit any Parent Subsidiary to issue, sell or grant (except pursuant to existing agreements or plans), warrants or rights to purchase or subscribe to, or enter into any arrangement or contract with respect to the issuance or sale of, any of its capital stock or rights or obligations convertible into or exchangeable for any shares of its capital stock or make any changes (by split-up, combination, reorganization or otherwise) in its capital structure, except (i) as agreed to by the parties hereto in writing (including under this Agreement and the Registration Rights Agreement), and (ii) issuance of employee options consistent with past practice. Notwithstanding anything contained herein, Parent shall be permitted to increase (but not issue) the amount of capital stock issuable under its stock incentive plans so long as the shares issuable under such plans will not exceed 15% of the issued and outstanding shares of all classes of Parent following the Merger and the financing described in Section 6.2(e). (h) use its commercially reasonable best efforts to maintain in full force and effect and in the same amounts policies of insurance comparable in amount and scope of coverage now maintained on behalf of itself and/or any Parent Subsidiaries and not amend or cancel any such policies of insurance. (i) prepare and file all Parent Tax Returns, taxes and other tax reports, filings and amendments thereto required to be filed by it and/or any Parent Subsidiaries, on a timely basis, taking into account extensions, and in a manner consistent with past practice and duly and timely remit and pay all Taxes when due. (j) promptly notify the Company of the occurrence of any extraordinary event adversely affecting Parent, Merger Sub or any Parent Subsidiary or their respective businesses affairs, prospects, operations, properties, assets or conditions. (k) to the extent permitted under applicable laws, will provide all information requested by Company regarding Parent and Parent Subsidiaries reasonably necessary for inclusion in the proxy to be submitted by Company to its stockholders in connection with the approval this Agreement and the Merger. (l) not enter into, nor permit Parent Subsidiaries to enter into, any transaction with any of the officers and directors of Parent, or any Parent Subsidiary, or any immediate family member of any of the foregoing, or any entity in which any of such persons has a material interest (other than a publicly-held corporation whose stock is traded on a national securities exchange or an over the counter market and less than 1% of the stock of which is beneficially owned by such persons). Page 26 (m) except to the extent required by Parent's external auditors, not permit a change in its or any Parent Subsidiary's methods of maintaining its books, accounts or business records or, except as required by GAAP (in which event prior notice shall be given to the Company), change any of its accounting principles or the methods by which such principles are applied for tax and accounting purposes. (n) not and will not permit any Parent Subsidiary to (i) incur any indebtedness for borrowed money other than such obligations as are disclosed in the Public Documents, trade debt and other obligations incurred in the ordinary course, (ii) create any fixed or floating charge, lien or encumbrance over any part of its properties or assets, except in the ordinary course of business or as disclosed in the Public Documents, (iii) make any loan to any other Person, except as disclosed in the Public Documents or (iv) guarantee the liabilities of any or obligations of any other person or entity, except as disclosed in the Public Documents. (o) take all actions necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Merger and the other transactions contemplated by the Merger on the terms and subject to the conditions set forth in this Agreement. (p) take all actions necessary to cooperate with the Company and its counsel to obtain the tax opinion referred to in Section 6.3(h), including, without limitation, the furnishing of a representation letter (the "Representation Letter") to counsel for the Company, in a form reasonably requested by Company counsel. Notwithstanding anything herein to the contrary, the Representation Letter shall survive the closing of the Merger and shall be enforceable by, and be executed in favor of, the Company Stockholders as third party beneficiaries. ARTICLE 5. ADDITIONAL AGREEMENTS 5.1 Meetings of Stockholders. ------------------------- (a) The Company shall promptly after the date hereof take all action necessary in accordance with Delaware Law and its Certificate of Incorporation and By-laws to secure the approval of this Agreement and the transactions contemplated hereby from the Stockholders. The Company shall use its best efforts to solicit from Company Stockholders proxies or written consents in favor of the Merger and shall take all other action necessary or advisable to secure the vote or consent of Company Stockholders required by Delaware Law to effect the Merger. (b) Parent shall promptly after the date hereof take all action necessary in accordance with all applicable laws and as required by The Toronto Stock Exchange and its Memorandum and Articles of Incorporation to convene the Parent Meeting. Parent shall use its best efforts to solicit from Parent Shareholders proxies in favour of the Merger and shall take all other action necessary or advisable to secure the vote or consent of Parent Shareholders required by all applicable laws and as required by The Toronto Stock Exchange to effect the Merger. 5.2 Access to Information and Confidentiality. ------------------------------------------ (a) Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which such party is subject (from which such party shall use reasonable efforts to be released) the Company and Parent shall each (and shall cause each of their respective subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other, reasonable access, during the period prior to the Effective Time, to Page 27 all its properties, books, contracts, commitments and records and, during such period, each of the Company and Parent shall (and shall cause each of their respective subsidiaries to) furnish promptly to the other all information concerning its business, properties and personnel as such other party may reasonably request, and each party shall make available to the other party the appropriate individuals for discussion of such party's business, properties and personnel as the other party may reasonably request; and (b) Each party will keep such information confidential in accordance with the terms of the Confidentiality Agreement attached hereto as Exhibit 5.2. 5.3 Consents and Approvals. ----------------------- (a) The Company, Parent and Merger Sub shall use their reasonable best efforts to obtain all consents, waivers, approvals, authorizations or orders (including, without limitation, all United States and foreign governmental and regulatory rulings and approvals and approvals of The Toronto Stock Exchange), and the Company, Parent, and Merger Sub shall make all filings (including, without limitation, all filings with United States and foreign governmental or regulatory agencies and The Toronto Stock Exchange) required in connection with the authorization, execution and delivery of this Agreement by the Company, Parent, and Merger Sub, and the consummation by them of the transactions contemplated thereby. The Company and Parent shall furnish all information required by the other to be included in the proxy materials prepared by them or for any application or other filing to be made pursuant to the rules and regulations of any United States or foreign governmental body in connection with the transactions contemplated by this Agreement. (b) The Parent shall, at the sole cost of the Parent, use reasonable best efforts to obtain the conditional approval of The Toronto Stock Exchange for the listing thereon of the Parent Common Shares issued to the Stockholders in connection with the Merger and shall use reasonable best efforts to obtain any other approvals, consents or authorization required from applicable governmental authorities or third parties required in connection with the transactions contemplated hereby (other than approvals, consents or authorizations relating to the Company), including without limitation, the issuance of the Parent Common Shares to the Stockholders in connection with the Merger. 5.4 Investment Agreements. ---------------------- The Company shall use its best efforts to cause each Company Stockholder to deliver to Parent, prior to the Effective Time, a written agreement (an "Investment Agreement") in the form attached hereto as Exhibit 5.4. 5.5 Notification of Certain Matters. -------------------------------- The Company shall give prompt written notice to Parent, and Parent shall give prompt written notice to the Company, of: (a) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate; Page 28 (b) any failure of the Company, Parent or Merger Sub, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; and (c) Any other non-public event or development that could reasonably be expected to materially and adversely impact such party or its ability to consummate the transactions contemplated hereunder. 5.6 Further Action. --------------- Upon the terms and subject to the conditions hereof, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to obtain in a timely manner all necessary waivers, consents and approvals of third parties and to effect all necessary registrations and filings, and to otherwise satisfy or cause to be satisfied all conditions precedent to its obligations under this Agreement. 5.7 Public Announcements. --------------------- Each of Parent and the Company shall receive written consent from each other before issuing any press release or otherwise making any public statements with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to receiving such consent; provided, however, that if any party is required by applicable law to make any public announcement or other disclosure with respect to the Merger or this Agreement, such party shall provide notice to the other party as soon as is reasonably practicable and shall consult with the other party with respect to the content of such announcement or disclosure. 5.8 Registration Rights Agreement. ------------------------------ At the Effective Time, Parent will execute and deliver a Registration Rights Agreement in the form attached hereto as Exhibit 5.8. 5.9 Board and Management. --------------------- Forthwith after the Effective Time, the Parent Board will be reconstituted to contain nine directors, four of whom are nominees of Parent, four of whom are nominees of the Company and one of whom is nominated by the other eight directors. On or prior to the Effective Time, Parent will continue its jurisdiction of incorporation to a territory within Canada which will permit such nomination and allocation of Directorships. 5.10 Listing. -------- Parent shall use its reasonable best efforts to (i) have the Parent Common Shares listed on the NASDAQ National Market or SmallCap Market (collectively, "NASDAQ") or the American Stock Exchange and (ii) be in compliance with the initial requirements thereof. Parent shall provide copies to and consult with Company and allow the Company to participate in the preparation of the initial listing application and any and all written responses in respect of any communications with or appearances before NASDAQ or the American Stock Exchange. Page 29 5.11 Stock Split. ------------ In connection with Parent's obligations under Section 5.10, Parent shall solicit the consent of Parent Shareholders to effect a reverse stock split. Once approved, the reverse stock split shall be effected as reasonably deemed necessary by the Parent in order that Parent may comply with the initial listing requirements of NASDAQ or the American Stock Exchange. ARTICLE 6. CONDITIONS OF MERGER 6.1 Conditions for the Benefit of the Company, Parent and Merger Sub. ----------------------------------------------------------------- The respective obligations of each of the Company, Parent and Merger Sub to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the Merger, with or without amendment, shall have been approved by the Company Stockholders in accordance with the provisions of Delaware Law, at the Parent Meeting by the Parent Shareholders in accordance with the provisions of all applicable laws, the charter documents of the Company, the charter documents of Parent, and the requirements of any applicable regulatory authorities; (b) the Certificate of Merger shall have been filed and accepted in form and substance satisfactory to each of Parent and the Company acting reasonably and having regard to this Agreement; (c) The Toronto Stock Exchange shall have approved the terms of the Merger and shall have conditionally approved the listing thereon of the additional Parent Common Shares issuable to the Company Stockholders pursuant to, or in connection with, the Merger, as of the Effective Time, subject to compliance with the usual requirements of The Toronto Stock Exchange; (d) all other consents, orders, regulations and approvals, including regulatory and judicial approvals and orders required or necessary or desirable for the completion of the transactions provided for in this Agreement and the Merger shall have been obtained or received from the persons, authorities or bodies having jurisdiction in the circumstances; (e) there shall not be in force any order or decree of a court of competent jurisdiction, any federal, provincial, municipal or other governmental department or any commission, board, agency or regulatory body restraining, interfering with or enjoining the consummation of the transactions contemplated by this Agreement, including, without limitation, the Merger; (f) none of the consents, orders, regulations or approvals contemplated herein shall contain terms or conditions or require undertakings or security deemed unsatisfactory or unacceptable by either of Parent or the Company, acting reasonably; (g) directors or officers of Parent will have executed lock up agreements in the form of Exhibit 6.1(g) that prohibit the sale of Parent Common Shares until the effective date of the first registration statement under the Registration Rights Agreement. Page 30 6.2 Additional Conditions for the Benefit of Parent and Merger Sub. --------------------------------------------------------------- The obligations of Parent and Merger Sub to effect the Merger are also subject to each of the following conditions at or prior to the Effective Time: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Effective Time, except for changes contemplated by this Agreement, and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date) with the same force and effect as if made on and as of the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and Chief Financial Officer of the Company; (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and Chief Financial Officer of the Company; (c) ILEX Technology. The Company shall have acquired an option, license or other legal claim on the ILEX Technology, exercisable by Parent at or after the Effective Time, in form and substance acceptable to Parent in its sole discretion or the Parent shall have expressly waived this condition in a writing signed by both parties hereto; (d) Audited Financial Statements. The Company shall have delivered the Company Audited Financials to Parent and they shall be reasonably acceptable to Parent; (e) Financing. An equity financing of Parent of not less than US$10 million, on terms reasonably acceptable to Parent shall have been arranged (the "Financing"); (f) Fairness Opinion. Within five days of delivery to Parent by Company of the final ILEX Agreement, an independent investment banker or financial adviser, at the sole discretion and expense of Parent, shall have issued an opinion to Parent's directors generally supporting the fairness and reasonableness to the Parent of the transaction contemplated hereby (the "Fairness Opinion"); (g) Consents Obtained. All material consents, waivers, approvals, authorizations or orders required to be obtained (including consents of third parties in connection with the Company Intellectual Property to the transactions contemplated hereunder and the consent of the lender under the Promissory Note/Line of Credit described in Schedule 2.1(n)), and all filings required to be made, by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company; (h) Due Diligence. Parent shall have completed its due diligence investigation of Company and obtained results satisfactory to it and its advisors not later than December 24, 2001; Page 31 (i) Delivery of Resolutions. Company shall have delivered to Parent: (A) certified copies of resolutions duly passed by the Company Board approving this Agreement and the consummation of the transactions contemplated hereby; and (B) certified copies of the resolutions of the Company Stockholders approving the Merger and the consummation of the transactions contemplated thereby; (j) [Reserved]; (k) Investment Agreement. Parent shall have received from each person who is identified as an "affiliate" of the Company, an Investment Agreement substantially in the form attached hereto as Exhibit 5.4; (l) No Dissenters. The statutory period under Delaware Law for exercise of dissenter's rights shall have elapsed without the holders of Company Common Stock holding more than 3% of the Company Common Stock having exercised such dissenter's rights; (m) Company Certificate of Merger. Company shall have duly executed and delivered to the Secretary of State of the State of Delaware a Certificate of Merger, a copy of which shall be delivered to Parent; (n) Delivery of Corporate Documents. Company shall have delivered to Parent: (i) a certificate or certificates dated as of dates not more than five days prior to the Effective Time date, from the Secretary of State of the State of Delaware, and other corporate authorities as to the good standing, and qualification to do business, of the Company in each jurisdiction where it is so qualified and (ii) the Certificate of Incorporation of the Company, certified by the Secretary of State of the State of Delaware as of a date not more than five days prior to the Effective Time; and (o) Acceptance by Counsel for Parent. The form and substance of all legal matters contemplated hereby and of all papers delivered hereunder shall be reasonably acceptable to Preston Gates & Ellis LLP, counsel to the Parent. 6.3 Additional Conditions to Obligation of the Company. --------------------------------------------------- The obligation of the Company to effect the Merger is also subject each of the following conditions at or prior to the Effective Time: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct in all material respects on and as of the Effective Time, except for changes contemplated by this Agreement, and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date) with the same force and effect as if made on and as of the Effective Time, and the Company shall have received a certificate to such effect signed by the President and Chief Financial Officer of each of Parent and Merger Sub; (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and the Company shall Page 32 have received a certificate to such effect signed by the President and Chief Financial Officer of each of Parent and Merger Sub; (c) Consents Obtained. All material consents, waivers, approvals, authorizations or orders required to be obtained, and all filings required to be made, by Parent and Merger Sub for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by Parent and Merger Sub; (d) Due Diligence. The Company shall have completed its due diligence investigation of Parent and Merger Sub and obtained results satisfactory to it and its advisors not later than December 24, 2001; (e) Delivery of Resolutions. Parent and Merger Sub shall have delivered to the Company: (i) certified copies of resolutions duly passed by the Parent Board and board of directors of Merger Sub approving this Agreement and the consummation of the transactions contemplated hereby; and (ii) certified copies of the resolutions of Parent Shareholders and the stockholders of Merger Sub duly passed at the Parent Meeting and a meeting of the stockholders of Merger Sub approving the Merger and the consummation of the transactions contemplated thereby; (f) [Reserved]; (g) TSE Conditional Approval. Parent shall have delivered to Company a certified copy of the approval described in Section 6.1(c) hereof. (h) Tax Free Reorganization. The Company shall have received an opinion of its counsel that the transactions contemplated hereunder shall qualify as a tax free reorganization under Section 368 of the Code and that the Company Stockholders will not recognize gain for U.S. income tax purposes upon the exchange of their Company Common Stock for Parent Common Shares pursuant to the Merger. (i) Delivery of Corporate Documents. Parent shall have delivered to -------------------------------- Company: (i) a certificate or certificates dated as of dates not more than five days prior to the Effective Time, from the Registrar of Companies of British Columbia or the Director General of Corporations of Industry Canada, as applicable, and other appropriate authorities as to the good standing, and qualification to do business, of Parent and each Parent Subsidiary (other than Merger Sub) in each jurisdiction where such entities are so qualified; and (ii) a certified copy of the Memorandum and Articles of Parent and the Memorandum and Articles (or similar charter documents) of each Parent Subsidiary, certified by the Secretary of State of the State of Delaware in the case of Merger Sub, or the applicable governmental authority in case of Parent or other Parent Subsidiary as of a date not more than five days prior to the Effective Time. (j) Company Certificates of Merger. To the extent required by Delaware ------------------------------ Law, Merger Sub shall have duly executed and delivered the Secretary of State of the State of Delaware a Company Certificate of Merger, a copy of which shall be delivered to the Company. Page 33 (k) No Injunction. No material injunction shall have been obtained, and -------------- no material suit, action or other proceeding shall be pending or threatened before any court or governmental entity in which it is sought to restrain or prohibit or, in the reasonable belief of the Board of Directors of the Company, materially modify the consummation of the transactions contemplated hereby, or involving a claim that the consummation of the transactions contemplated hereby would result in a violation of any law, decree or regulation of any government entity. (l) Acceptance by Counsel to Company. The form and substance of all --------------------------------- legal matters contemplated hereby and of all papers delivered hereunder shall be reasonably acceptable to Dickstein Shapiro Morin & Oshinsky, LLP, counsel to the Company. (m) Delivery of Legal Opinion. Catalyst Corporate Finance Lawyers, ------------------------- counsel for Parent, shall have delivered to Company an opinion with respect to the resale of the Merger Shares in a form acceptable to Company and its counsel acting reasonably. ARTICLE 7. TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. ------------ (a) This Agreement may be terminated by Parent or the Company and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the Company Stockholders or Parent Shareholders or both by mutual agreement of the parties in accordance with Section 7.3 hereof; (b) This Agreement may be terminated by Parent, and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the Parent Shareholders, if (i) any of the conditions in Sections 6.1 and 6.2 are not satisfied by the dates specified for satisfaction, if any, (ii) if the Company breaches any of its representations, warranties, or covenants herein in any material respect and such breach remains uncured for a period of ten days after notice of such breach provided by Parent, (iii) if the Company breaches Company's obligations set forth in Article 8, or (iv) if the Effective Time does not occur prior to February 28, 2002. Notwithstanding the foregoing, in order to terminate this Agreement by reason of breach of Section 6.2(f) or (h), Parent must deliver written notice of such termination to Company on or prior to December 24, 2001; (c) This Agreement may be terminated by the Company and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of Company, if (i) any of the conditions in Sections 6.1 and 6.3 are not satisfied by the dates specified for satisfaction, if any, (ii) if Parent breaches any of its representations, warranties, or covenants herein in any material respect and such breach remains uncured for a period of ten days after notice of such breach provided by Company, (iii) if Parent breaches any of its obligations set forth in Article 8, or (iv) if the Effective Time does not occur prior to February 28, 2002. Notwithstanding the foregoing, in order to terminate this Agreement by reason of breach of Section 6.3(d), Company must deliver written notice of such termination to Parent on or prior to December 24, 2001. Upon termination of this agreement as a result of the foregoing, all parties will return all documentation, information and any other property in its possession or control, to the owners of such property, and the parties will have no further rights or obligations Page 34 to each other except for accrued rights and obligations arising from any prior breach of this agreement, or unless expressly provided for in this Agreement. 7.2 Notice of Unfulfilled Conditions. --------------------------------- If either of Parent or the Company shall determine at any time prior to the Effective Time that it intends to refuse to consummate the Merger or any of the other transactions contemplated hereby because of any unfulfilled or unperformed condition contained in this Agreement on the part of the other of them to be fulfilled or performed, Parent or the Company, as the case may be, shall so notify the other of them forthwith upon making such determination in order that such other of them shall have the right and opportunity to take such steps, at its own expense, as may be necessary for the purpose of fulfilling or performing such condition within a reasonable period of time, but in no event later than ten business days after receipt of notice of such intention. 7.3 Mutual Termination. ------------------- This Agreement may, at any time before or after the holding of the Parent Meeting, but no later than the last business day immediately preceding the Effective Time, be terminated by mutual agreement of the directors of Parent and the Company without further action on the part of Parent or Company Stockholders. 7.4 Effect of Termination. ---------------------- In the event of the termination of this Agreement pursuant to Section 7.3 this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except: (a) with respect to the obligation to return all documentation, information and any other property as provided in Section 7.1 and to abide by the provisions of the Confidentiality Agreement; and (b) nothing herein shall relieve any party from liability for any breach hereof. 7.5 Fees and Expenses. ------------------ Each party will bear its own costs in respect of the transactions contemplated hereby. The Company shall use its best efforts to pay its costs in connection with the transactions contemplated hereby, including, without limitation, legal and accounting fees or expenses, on or before the Effective Time. 7.6 Amendment. ---------- This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the Company Stockholders, no amendment may be made which would reduce the amount or change the type of consideration into which each share of the Company Common Stock shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Page 35 7.7 Waiver. ------- At any time prior to the Effective Time, any party hereto may: (a) extend the time for the performance of any of the obligations or other acts required hereunder; (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions contained herein, in the case of each of Subsections (a), (b) and (c), by or of the other parties hereto. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE 8. EXCLUSIVITY In consideration of the actions to be taken and expenses to be incurred by Parent and the Company in furtherance of this agreement without the prior written consent of the other party (which written consent shall not be unreasonably withheld or delayed), each of Parent and the Company agrees that until the Effective Time or termination of this Agreement by either party, each shall not solicit or negotiate any offer to buy, or offer to agree to sell, or sell, any of its assets or its shares (except as permitted in Article 6 and other than shares issued in financing transaction approved by the Parent Board or pursuant to the exercise of options, warrants or other rights to purchase securities outstanding as of the date hereof or pursuant to incentive stock options granted after the date hereof pursuant to Parent's incentive stock option plan) or any interest therein and shall not merge or enter into a business combination with or solicit or negotiate any offer to merge or enter into a business combination with or into any corporation or entity other than the other party (each such transaction being referred to as a "Proposed Acquisition Transaction"); provided, that nothing in this clause will in any way limit Parent or the Company from responding to any proposal of any other person or dealing with (said "dealing with" shall exclude solicitation) any other person in respect of the foregoing that is not solicited by Parent or the Company if in the good faith opinion of the Parent or the Company Board and in the written opinion of such parties' outside counsel, a failure to do so would represent a breach of fiduciary obligations of the directors of Parent or the Company. Each of Parent and Company will immediately notify the other if any discussions or negotiations are sought to be initiated, any inquiry or proposal is made, or any information is requested with respect to any Proposed Acquisition Transaction and notify the other of the terms of any proposal which it may receive in respect of such Proposed Acquisition Transaction, including, without limitation, the identity of the prospective purchaser or acquiring party. Each of Parent and Company shall provide the other a copy of any written offer received in respect of a Proposed Acquisition Transaction. Nothing contained in this Article 8 shall prohibit Parent from taking and disclosing to Parent Shareholders a position contemplated by Rule 14d-9 or 14e-2 promulgated under the Exchange Act or from making any disclosure to the Parent Shareholders if, in the good faith judgment of the Parent Board, after consultation with outside counsel, failure to so disclose would be inconsistent with its obligations under applicable law; provided, however, that, subject to -------- ------- the preceding paragraph, neither Parent nor the Parent Board nor any committee thereof shall withdraw, or propose publicly to withdraw, its position with respect to this Agreement or the Merger or approve or recommend, or propose publicly to approve or recommend, a competing proposal, without providing written notice to the other parties as soon as reasonably practicable. Page 36 ARTICLE 9. GENERAL PROVISIONS 9.1 Non-Survival of Representations, Warranties and Agreements. ----------------------------------------------------------- Subject to Section 4.2(p), the representations, warranties and agreements in this Agreement shall terminate one day subsequent to the Effective Time; provided that the agreements contained in Section 5.10 and Section 5.11 shall survive for a period of one year. 9.2 Notices. -------- All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered or mailed if delivered personally or mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like changes of address shall be effective upon receipt): (a) if the Parent or Merger Sub: Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, BC V6S 2L2 Attention: President Facsimile No.: (604) 222-6617 with a copy to: Catalyst Corporate Finance Lawyers Suite 1400, 1055 West Hastings Street Vancouver, B.C. V6E 2E1 Attention: Michael Varabioff Telecopier No.: (604) 443-7000 and: Preston Gates & Ellis LLP, Suite 5000 701 Fifth Ave, Seattle, WA 98104 Telecopier No. (206) 623-7022 Attention: Gary J. Kocher (b) if to the Company: Paralex, Inc. 787 Seventh Avenue, 48th Floor New York, NY 10019 Attention: David Tanen Telecopier No.: (212) 554-4355 Page 37 with a copy to: Dickstein Shapiro Morin & Oshinsky, LLP 1177 Avenue of the Americas, 41st Floor New York, NY 10036-2174 Attention: Ira L. Kotel, Esq. Telecopier No.: (212) 997-9880 9.3 Certain Definitions. -------------------- For purposes of this Agreement, the term: "1933 Act" means the United States Securities Act of 1933, as amended, "affiliates" means a person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; including, without limitation, any partnership or joint venture in which the person (either alone, or through or together with any other subsidiary) has, directly or indirectly, an interest of 5% or more. "beneficial owner" with respect to any shares of the Company Common Stock, means a person who shall be deemed to be the beneficial owner of such shares: (i) which such person or any of its affiliates or associates beneficially owns, directly or indirectly; (ii) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) has, directly or indirectly: (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise; or (B) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or persons with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares. "business day" means any day other than a day on which banks in New York are required or authorized to be closed. "Closing Date Balance Sheet" means an unaudited balance sheet of the Company prepared accordance with United States generally accepted accounting principles, on a basis consistent with the Company Audited Financials as of a date that is within three (3) days of the Effective Time and mutually acceptable to Company and Parent. The Closing Date Balance Sheet shall include the then outstanding amounts under any lines of credit and costs to acquire the ILEX Technology and associated rights and accrued expenses in connection with the transactions contemplated hereunder. Page 38 "Code" means the Internal Revenue Code of 1986, as amended. "Company Audited Financials" has the meaning set forth in Section 4.1(h). "Company Stockholders" means the holders of common stock of the Company. "Confidentiality Agreement" means the Confidentiality Agreement dated September 10, 2001, between Parent and Company. "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise. "Deemed Per Share Purchase Price" is defined as the lower of (i) the average closing bid price of Parent Shares on The Toronto Stock Exchange on the ten Business Days prior to and including October 31, 2001, and (ii) $Cdn.60. "Exchange Act" shall mean the U.S. Securities and Exchange Act of 1934. "Exchange Ratio" shall mean a number equal to the number of Merger Shares divided by the number of shares of Company Common Stock. "ILEX Agreement" is defined in Section 2.1(t). "ILEX Technology" means all rights, information and material necessary to launch a Phase II (efficacy) clinical trial of oxypurinol for cardiovascular disease as reasonably determined by Parent within five days of delivery by Company to Parent of the final ILEX Agreement, including without limitation, all data obtained by ILEX Oncology Inc. ("ILEX") in the course of their pre-clinical and clinical development of oxypurinol, all drug material in the possession of ILEX, and exclusive rights to any formulation, manufacturing processes, and know-how generated by ILEX or in-licensed by ILEX from third parties, and includes without limitation all of the following to the extent that they materially pertain to the foregoing: patents; inventions; trademarks; service marks; trade names; trade dress; trade secrets; copyrights; moral rights; domain names; any renewal rights, applications, and registrations for any of the foregoing; all goodwill associated with such trademarks, service marks, trade names, and trade dress; technology; computer software programs or applications (in both source and object code form); all documents and files relating to design, end user documentation, quality control, sales, marketing or customer support, and all schematics, records (including without limitation clinical records), and databases, the intellectual property rights in which pertain to any of the foregoing; and all know-how and tangible or intangible proprietary information or materials. "knowledge" shall mean with respect to a party, with respect to any matter in question, that any of the chief executive officer, chief financial officer, or general counsel or controller (or equivalent officer that performs the equivalent functions, regardless of title) has actual knowledge of such matter, after reasonable inquiry unless otherwise specifically noted. Page 39 "Marban Agreement" shall mean that Consulting Agreement effective as of January 1, 2002, between Company and Cardiosciences Consulting, Inc. "Parent Information Circular" means the Information Circular of Parent to be used in connection with the Parent Meeting. "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act). "Public Documents" means any and all documents filed with securities commissions or similar regulatory authorities in the US or Canada. "Share Adjustment" means the reduction in the number, if any of the Merger Shares deliverable at the Effective Time pursuant to Section 1.6 calculated based on the following formula: (CP Cash plus Company Liabilities) divided by the Deemed Per Share Purchase Price. For purposes of this definition, (i) "CP Cash" means the sum of the positive amount of cash and readily liquid assets (including marketable securities, money market accounts and similarly liquid assets), if any on Parent's Balance Sheet as of October 31, 2001, and (ii) "Company Liabilities" means all liabilities of Company, of any nature expressed in Canadian Dollars, reflected on the Closing Date Balance Sheet of the Company including the indebtedness of Company pursuant to the Promissory Note/Line of Credit described in Schedule 2.1(n). In no event shall the Share Adjustment increase the number of Merger Shares deliverable at the Effective Time pursuant to Section 1.6. "Company Liabilities" for purposes of this section shall not include any fees or payments owed currently, upon milestones, or pursuant to any royalty obligations with respect to the Company Intellectual Property except for the initiation fee pursuant to Article 4.1 of the ILEX Agreement. An example of such calculation is included as Schedule 9.3. "Special Warrants" means those special warrants issued in connection with the October, 2001 Financing of the Parent. "subsidiary" or "subsidiaries" of the Company, the Surviving Company, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Company, Parent or such other person, as the case may be, (either alone or through or together with any other subsidiary) owns, directly or indirectly, more than 50% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. 9.4 Proceeds of Financing. ---------------------- The proceeds of the Financing shall be utilized to repay the Promissory Note/Line of Credit described in Schedule 2.1(n), as the same may be amended (such amendment to be subject to Parent approval, which approval will not be unreasonably withheld) and to fund the Company and Parent. 9.5 Director and Officer Insurance. ------------------------------- Following the Merger, Parent shall provide to all directors nominated to the Parent Board pursuant to Section 5.9 (the "New Board Members") all rights to indemnification and advancement of expenses and all limitations on liability existing in favor of any current member of the Parent Board as provided in the Memorandum or Articles or Bylaws of, or otherwise provided by, Parent, in accordance with the terms and conditions thereof as existing on the Effective Time. Page 40 Parent shall cause to be maintained in effect, and extended to cover the New Board Members, Parent's current directors' and officers' liability insurance policy or substitute coverage under other policies providing coverage on terms and conditions that are no less advantageous to the New Board Members than the Parent's insurance in effect as of the Effective Time. 9.6 Headings. --------- The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.7 Severability. ------------- If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 9.8 Entire Agreement. ----------------- This Agreement constitutes the entire agreement and supersedes all prior agreements and undertakings (other than the Confidentiality Agreement), both written and oral, among the parties, or any of them, with respect to the subject matter hereof and, except as otherwise expressly provided herein, are not intended to confer upon any other person any rights or remedies hereunder. 9.9 Assignment. ----------- This Agreement shall not be assigned by operation of law or otherwise. 9.10 Parties in Interest. -------------------- This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and by virtue of their approval of the merger, the Company Stockholders, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 9.11 Governing Law. -------------- This Agreement shall be governed by, and construed in accordance with Delaware Law. 9.12 Counterparts and Facsimile. --------------------------- This Agreement may be executed in one or more counterparts and facsimile, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. [Remainder of page intentionally blank] Page 41 [SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER] IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. CARDIOME PHARMA CORP. By: (signed)/s/ Bob Rieder ------------------------------------------ Authorized Signatory CARDIOME, INC. By: (signed) /s/ Alan Ezrin ------------------------------------------ Authorized Signatory PARALEX, INC. By: (signed) /s/ Mark C. Rogers ------------------------------------------ Authorized Signatory EX-4 7 exhibit4-13.txt AGENCY AGREEMENT DATED FEBRUARY 28, 2002 WITH SPROTT SECURITIES INC. AND RAYMOND JAMES LTD. Exhibit 4.13 AGENCY AGREEMENT ---------------- February 28, 2002 Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, B.C. V6S 2L2 Attention: Bob Rieder, President and Chief Executive Officer - ------------------------------------------------------------ Dear Sirs: We understand that the authorized capital of Cardiome Pharma Corp. (the "Company"), a British Columbia company, consists of 200,000,000 common shares ("Common Shares"). We further understand that the Company, upon the terms and conditions and for the purposes set forth in the (final) prospectus to be dated on or about February 28, 2002, proposes to issue and offer for sale a minimum of 19,378,313 and a maximum of 29,067,469 units ("Offered Units") at a price of $0.83 per unit (the "Offering Price"). Each unit (a "Unit") will consist of one Common Share and one-quarter of one Common Share purchase warrant (a "Warrant"). Each whole Warrant will be exercisable for one Common Share at an exercise price of $1.66 for a period of 24 months from the Closing Date (as hereinafter defined). The Company also proposes to issue and offer for sale up to an additional 9,689,157 Units pursuant to an Over-Allotment Option described below (collectively the "Optioned Units"); and up to that number equal to 15% of the number of Units sold at Closing pursuant to a Greenshoe Option described below (collectively the "Greenshoe Units"), all in accordance with and on the terms and conditions set forth in this Agreement. The Common Shares and the Warrants forming the Units have the material attributes described in the (final) prospectus of the Company to be dated February 28, 2002. 1. APPOINTMENT OF AGENTS --------------------- (1) Based upon the foregoing and subject to the terms and conditions set out below, the Company hereby appoints Sprott Securities Inc. ("Sprott") and Raymond James Ltd., (collectively, the "Agents" and, individually, an "Agent") to act as its sole and exclusive agents, and the Agents hereby accept such appointment, to effect the sale of the Offered Units for an aggregate purchase price of a minimum of $16,084,000 and a maximum of $24,126,000 (exclusive of any Optioned Units or Greenshoe Units) (the "Offering"), on a best efforts basis to persons resident in Qualifying Jurisdictions (as hereinafter defined) and to persons resident offshore or in the United States on a private placement best efforts basis. The Agents agree to use their best efforts to sell the Offered Units, but it is hereby understood and agreed that the Agents shall act as agent only and are under no obligation to purchase any of the Offered Units, although any Agent may subscribe for Offered Units, subject to applicable laws, if it so desires. Page 2 (2) The Agents may engage other persons, selected at their sole discretion, to offer securities in the United States who are members of the National Association of Securities Dealers, Inc., ("NASD") and who have entered into a selected dealers agreement (each such person being hereinafter referred to as a "Selected Dealer") with one or both of the Agents pursuant to which such Selected Dealer agrees to comply with all the obligations of the Agents hereunder as if such Selected Dealer were a party hereto for the benefit of the Company, and the Agents may allow such persons to receive such part of the compensation and payment of expenses payable to the Agents hereunder as the Agents shall determine. (3) The Company (on the basis set out in the first paragraph hereof) hereby grants to the Agents an option (the "Over-Allotment Option") to purchase and/or offer for sale to the public the Optioned Units at the Offering Price, all upon the terms and conditions set forth herein for the purchase and sale of the Offered Units. Subject to regulatory approval, the Over- Allotment Option shall be exercisable at any time from the date hereof until 48 hours prior to the Closing Time (as defined below) (the "Over- Allotment Option Expiry Time"). The Over-Allotment Option shall be exercisable in whole or in part by Sprott, on behalf of the Agents, by giving written notice to the Company not later than the Over-Allotment Option Expiry Time, specifying the number of Optioned Units to be purchased. Upon furnishing such notice, the Company shall sell, in accordance with and subject to the provisions hereof, the number of Optioned Units indicated in such notice. (4) The Company (on the basis set out in the first paragraph hereof) hereby grants to the Agents an option (the "Greenshoe Option") to purchase and/or offer for sale to the public the Greenshoe Units at the Offering Price, all upon the terms and conditions set forth herein for the purchase and sale of the Offered Units. The Greenshoe Option is solely to cover over-allotments, if any. The Greenshoe Option shall be exercisable at any time from the date hereof and for a period ending 60 days after the Closing Date (as defined below) (the "Greenshoe Option Expiry Date"). The Greenshoe Option shall be exercisable in whole or in part by Sprott, on behalf of the Agents, by giving written notice to the Company not later than 5:00 p.m. (Toronto time) on the Greenshoe Option Expiry Date, specifying the number of Greenshoe Units to be purchased and the date and time of completion of the sale of the Greenshoe Units (which shall not be less than three business days after the date of notice and not more than five business days after the Greenshoe Option Expiry Date). Upon furnishing such notice, the Agents shall purchase and the Company shall sell, in accordance with and subject to the provisions hereof, the number of Greenshoe Units indicated in such notice. (5) In this Agreement: (a) "1933 Act" means the United States Securities Act of 1933, as amended; (b) "Acquisition" means the acquisition of Paralex, Inc. pursuant to the terms and conditions of an agreement and plan of merger dated as of Page 3 December 21, 2001 (the "Merger Agreement") between the Company, Paralex, Inc. and Cardiome, Inc., as amended; (c) "Agents' Commission" has the meaning ascribed thereto in Section 3 of this Agreement; (d) "Agents' Personnel" has the meaning ascribed thereto in Subsection 13(a) hereof; (e) "Agreement" means this agreement between the Company and the Agents dated as of the date hereof; (f) "Alternative Transaction" has the meaning ascribed thereto in Subsection 4(e) hereof; (g) "Auditors" means Ernst & Young LLP, the auditors of the Company; (h) "Audited Financial Statements" means the audited consolidated financial statements of the Company as at and for the twelve month period ended November 30, 2001; (i) "business day" means a day which is not a Saturday, a Sunday or a statutory or civic holiday in the City of Toronto or the City of Vancouver; (j) "Closing" means the completion of the issue and sale by the Company of the Offered Units and the Optioned Units, as the case may be, pursuant to this Agreement; (k) "Closing Date" means the date or dates on which the Closing will be completed, the first of which shall be March 8, 2002, or such other date as agreed to by the Company and the Agents provided that (i) the purchase and sale of at least 19,379,845 Units shall have been completed on the first Closing Date; and (ii) in no event shall a Closing occur later than May 8, 2002; (l) "Closing Time" means 8:30 a.m. (Toronto time) on the Closing Date or such other time on the Closing Date as the Company and the Agents may agree upon; (m) "Common Shares" has the meaning ascribed thereto in the first paragraph of this Agreement; (n) "Disclosure Certificate" has the meaning ascribed thereto in Subsection 6(b); (o) "Exchange" means The Toronto Stock Exchange; (p) "final MRRS Decision Document" means the decision document issued in accordance with the Mutual Reliance Review System evidencing that final receipts for the Prospectus have been issued for each of the Qualifying Jurisdictions; Page 4 (q) "Financial Information" has the meaning ascribed thereto in clause 6(c)(i) hereof; (r) "Greenshoe Option" has the meaning ascribed thereof in Subsection 1(4) of this Agreement; (s) "Greenshoe Option Expiry Date" has the meaning ascribed thereto in Subsection 1(4) of this Agreement; (t) "Greenshoe Units" has the meaning ascribed thereto in the first paragraph of this Agreement; (u) "Intellectual Property" has the meaning ascribed thereto in subsection 2(nn) hereof; (v) "Material Agreements" with respect to any company means any agreement to which such company is a party or by which it is bound that is material to the assets and properties, business, results of operations, prospects or condition (financial or otherwise) of such company (on a consolidated basis); (w) "misrepresentation", "material fact" and "material change" have the respective meanings ascribed thereto in the Securities Act (Ontario) except as otherwise expressly provided in this Agreement; (x) "Mutual Reliance Review System" means the mutual reliance review system provided for under National Policy 43-201 Mutual Reliance Review System for Prospectuses and Annual Information Forms of the Canadian Securities Administrators; (y) "Offering" means the issuance and offering for sale to the public of the Offered Units, the Optioned Units and the Greenshoe Units pursuant to the terms hereof; (z) "Offering Price" shall have the meaning ascribed thereto in the first paragraph of this Agreement; (aa) "Offered Units" has the meaning ascribed thereto in the first paragraph of this Agreement; (bb) "Optioned Units" has the meaning ascribed thereto in the first paragraph of this Agreement; (cc) "Over-Allotment Option" has the meaning ascribed thereto in Subsection 1(3) of the Agreement; (dd) "Over-Allotment Option Expiry Time" has the meaning ascribed thereto in Subsection 1(3) of this Agreement; (ee) "Paralex Financial Statements" means the audited financial statements of Paralex Inc. for the period from incorporation until November 30, 2001; Page 5 (ff) "preliminary MRRS Decision Document" means the decision document issued in accordance with the Mutual Reliance Review System evidencing that receipts for the Preliminary Prospectus have been issued for each of the Qualifying Jurisdictions; (gg) "Preliminary Prospectus" means the preliminary prospectus of the Company dated February 5, 2002; (hh) "Prospectus" means the (final) prospectus of the Company to be dated on or about February 28, 2002; (ii) "Qualifying Jurisdictions" means each of the provinces of British Columbia, Alberta, Manitoba, Ontario and Quebec; (jj) "Reporting Jurisdictions" means each of British Columbia, Alberta, Ontario, Quebec and the Yukon; (kk) "Securities Laws" means the applicable securities laws, regulations, rules, published policy statements and prescribed forms, collectively, of each of the Qualifying Jurisdictions and the rules of the Exchange; (ll) "Securities Regulators" means the securities commission or similar regulatory authority in each of the Qualifying Jurisdictions; (mm) "Selected Dealer" shall have the meaning ascribed thereto in Subsection 1(2) of this Agreement and, for greater certainty, shall include Paramount Capital, Inc. (nn) "Significant Interest Companies" means those companies (other than the Subsidiaries) in which the Company owns beneficially or exercises control or direction over 20% or more of the outstanding voting securities; (oo) "Subsidiaries" means the subsidiaries of the Company more particularly listed in paragraph 2(b) hereof; (pp) "Supplementary Material" has the meaning ascribed thereto in Section 8 of this Agreement; (qq) "US Securities Laws" means the 1933 Act, all rules and regulations promulgated thereunder and the applicable securities ("blue sky") laws of the states of the United States; and (rr) "United States" means the United States of America, its territories and possessions, any state of the United States, and the District of Columbia. Any reference in this Agreement to any Section, Subsection or Subparagraph shall refer to a Section, Subsection or Subparagraph of this Agreement. Words importing the singular number only shall include the plural and vice versa, and words importing the use of any gender shall include all genders. Page 6 All defined terms herein denoted by initial capital letters and not otherwise defined have the meanings attributed thereto in the Preliminary Prospectus. The following schedules are attached to this Agreement, which schedules are deemed to be a part hereof and are hereby incorporated by reference herein: Schedule "A" - Form of Agents' Certificate Schedule "B" - Form of Compensation Warrant Schedule "C" - Form of U.S. Subscription Agreement 2. REPRESENTATIONS, WARRANTIES & COVENANTS OF THE COMPANY ------------------------------------------------------ The Company hereby represents and warrants to and with the Agents that as at the date hereof: (a) the Company and each of the Subsidiaries has been duly incorporated and is existing under the laws of its jurisdiction of incorporation and has all requisite power and authority necessary to, and is qualified to, carry on its business as now conducted and to own or lease its properties and assets in all jurisdictions in which it currently carries on business and/ or owns or leases its properties and assets; and the Company has all required corporate power and authority to undertake the Offering; (b) the Company has no subsidiaries other than the Subsidiaries and no Significant Interest Companies and the Company beneficially owns, directly or indirectly, the percentage indicated below of all the issued and outstanding shares in the capital of each of the Subsidiaries free and clear of all mortgages, liens, charges, pledges, security interests, encumbrances, claims or demands of any kind whatsoever, and, to the best of the Company's knowledge all of such shares have been duly authorized and validly issued and are outstanding as fully-paid shares and no person has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option, for the purchase from the Company of any interest in any of such shares or for the issue or allotment of any unissued shares in the capital of any Subsidiary or any other security convertible into or exchangeable for any such shares: -------------------------------------------------------------------------- Name of Subsidiary Jurisdiction of Incorporation Beneficial Ownership by the Company -------------------------------------------------------------------------- Rhythm-Search British Columbia 100% Developments Ltd. -------------------------------------------------------------------------- Cardiome, Inc. Delaware 100% -------------------------------------------------------------------------- Atriven Cardiology Corp. Canada 100% -------------------------------------------------------------------------- (c) the authorized capital of the Company consists of 200,000,000 Common Shares, of which, as at February 27, 2002, 43,070,181 Common Shares are issued and outstanding; Page 7 (d) the currently issued and outstanding Common Shares are listed and posted for trading on the Exchange and no order ceasing or suspending trading in any securities of the Company or prohibiting the sale of the Offered Units, the Optioned Units or the Greenshoe Units or the trading of any of the Company's issued securities has been issued by a Securities Regulator and no proceedings for such purpose are pending or, to the knowledge of the Company, threatened; (e) to the knowledge of the Company, no agreement is in force or effect which in any manner affects the voting or control of any of the securities of the Company or any of its Subsidiaries; (f) except as set forth in the Prospectus or the Disclosure Certificate, no person, firm or company, as of the date hereof, has any agreement or option, or any right or privilege (whether preemptive or contractual) capable of becoming an agreement or option, for the purchase, subscription or issuance of any Common Shares, any securities of the Subsidiaries or for any securities convertible into or exchangeable for Common Shares or any securities of the Subsidiaries; (g) the Company is a reporting issuer or its equivalent under the Securities Laws of each of the Reporting Jurisdictions and is a "qualifying issuer" as such term is defined in Multilateral Instrument 45-102 Resale of Securities; the Company is not in default in any material respect of any requirement of the Securities Laws of the Reporting Jurisdictions and the Company is not included on a list of defaulting reporting issuers maintained by any of the securities regulatory authorities in the Reporting Jurisdictions. In particular, without limiting the foregoing, the Company is in compliance at the date hereof with its obligations to make timely disclosure of all material changes relating to it and since November 30, 2001 (other than in respect of material change reports previously filed on a confidential basis and thereafter made public or material change reports previously filed on a confidential basis and in respect of which no material change ever resulted) no such disclosure has been made on a confidential basis and there is no material change relating to the Company which has occurred and with respect to which the requisite material change statement has not been filed; (h) each of the Company and its Subsidiaries has conducted and is conducting its business in compliance with all applicable laws, rules and regulations of each jurisdiction in which its business is carried on and is duly licensed, registered or qualified in all jurisdictions in which it owns, leases or operates its property or carries on business to enable its business to be carried on as now or proposed to be conducted and its property and assets to be owned, leased and operated and all such licences, registrations and qualifications are and will at the Closing Time be valid, subsisting and in good standing, except in respect of matters which do not and will not result in any material adverse change to the business, business prospects or condition (financial or otherwise) of the Company and its Subsidiaries, and except for the failure to be so qualified or the absence of any such license, registration or qualification which does not and will not have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company and its Subsidiaries or on the power or authority of each of the Company and its Subsidiaries to perform its obligations under this Agreement or the Material Agreements; Page 8 (i) neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any material certificate, authority, permit or license necessary to conduct the business now owned or operated by it which, if the subject of an unfavourable decision, ruling or finding, would materially and adversely affect the conduct of the business, operations, financial condition or income of the Company or any of its Subsidiaries; (j) neither the Company nor, to the best of the Company's knowledge, any other party to a Material Agreement with the Company is in material default in the observance or performance of any term or obligation to be performed by it under any Material Agreement to which the Company is a party and no event has occurred which with notice or lapse of time or both would constitute such a default, in any such case which default or event would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company and its Subsidiaries (on a consolidated basis); (k) the execution and delivery of this Agreement and the performance of the transactions contemplated hereunder does not and will not: (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, stock exchange, securities association or other third party, except: (i) such as have been obtained; or (ii) such as may be required under the applicable by-laws, policies, regulations and prescribed forms of the Exchange (subject to applicable listing conditions); (ii) result in a breach of or default under, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach of or default under, and do not and will not conflict with: (A) any of the terms, conditions or provisions of the articles, by-laws or resolutions of the shareholders, directors or any committee of directors of the Company or any of its Subsidiaries or any material indenture, agreement or instrument to which the Company or any of its Subsidiaries is a party or by which it or they are contractually bound; or (B) to the best of the Company's knowledge, any statute, rule, regulation or law applicable to the Company or any of its Subsidiaries, including, without limitation, the Securities Laws, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or its Subsidiaries; and (iii) give rise to any lien, charge or claim in or with respect to the properties or assets now owned by the Company or its Subsidiaries or the acceleration of or the maturity of any debt under any Page 9 indenture, mortgage, lease, agreement or instrument binding or affecting any of them or any of their properties; (l) the Company is not aware of any legislation, or proposed legislation (published by a legislative body), which it anticipates will materially and adversely affect the business, affairs, operations, assets, liabilities (contingent or otherwise) or prospects of the Company and its Subsidiaries, considered as a whole; (m) the Company has, and to the best of the Company's knowledge the directors and officers of the Company have, answered every question or inquiry of the Agents and their counsel in connection with the Agents' due diligence investigations fully and truthfully; (n) the Company has all required corporate power and authority to create, issue and sell the Offered Units, the Optioned Units and the Greenshoe Units and to enter into and to carry out the provisions of this Agreement; (o) the Company's Auditors are independent public accountants as required by the Securities Laws and U.S. Securities Laws; there has never been any reportable disagreement (within the meaning of National Policy Statement No. 31 of the Canadian Securities Administrators) with the present or any former auditor of the Company; (p) each of the Company and its Subsidiaries has filed all federal, provincial, state, local and foreign tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the assets and properties, business, results of operations, prospects or condition (financial or otherwise) of the Company and its Subsidiaries) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith; (q) the Company has established on its books and records reserves that are adequate for the payment of all taxes not yet due and payable and there are no liens for taxes on the assets of the Company and the Subsidiaries, and there are no audits known by the Company's management to be pending of the tax returns of the Company or the Subsidiaries (whether federal, state, provincial, local or foreign) and there are no claims which have been or may be asserted relating to any such tax returns, which audits and claims, if determined adversely, would result in the assertion by any governmental agency of any deficiency that would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company or the Subsidiaries; (r) no domestic or foreign taxation authority has asserted or, to the best of the Company's knowledge, threatened to assert any assessment, claim or liability for taxes due or to become due in connection with any review or examination of the tax returns of the Company or the Subsidiaries (including, without limitation, any predecessor companies) filed for any year which would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company or the Subsidiaries; Page 10 (s) each of the Company and the Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; (t) at the Closing Time, the Company will have filed all documents, taken all proceedings and obtained all regulatory consents necessary (including, without limitation, consents of the Exchange) in connection with the sale of the Offered Units, the Optioned Units and the Greenshoe Units; (u) all the information and statements contained in the Preliminary Prospectus and the Prospectus shall, at the respective dates of delivery thereof, constitute full, true and plain disclosure of all material facts relating to each of the Offering, the Company, Paralex, Inc., the Subsidiaries, the Offered Units and the Greenshoe Units (provided that this representation is not intended to extend to information and statements included in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Agents relating to the Agents specifically for use therein); (v) the Preliminary Prospectus, the Prospectus and any Supplementary Material shall contain the disclosure required by all requirements of the Securities Laws; (w) this Agreement and all other agreements required in connection with the issue and sale of the Offered Units, the Optioned Units and the Greenshoe Units and each of the Material Agreements to which the Company is a party, including but not limited to, the Merger Agreement, shall be, as at the date of the Prospectus, duly authorized, executed and delivered by the Company and shall be legal, valid and binding obligations of the Company enforceable in accordance with their respective terms (except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally, (ii) general equitable principles or (iii) limitations under applicable law in respect of rights of indemnity, contribution and waiver of contribution); (x) the attributes of the Offered Units, the Optioned Units and the Greenshoe Units will, at the Closing Time, conform in all material respects with the description thereof contained in the Prospectus; (y) other than the Agents, any Selected Dealers or any subagents, there is no person acting or purporting to act at the request of the Company or the Subsidiaries who is entitled to any brokerage or agency fee in connection with the transactions contemplated herein and in the event any person acting or purporting to act for the Company or the Subsidiaries establishes a claim for any such fee from the Agents, the Company covenants to indemnify and hold harmless the Agents with respect thereto and with respect to all costs incurred in the defence thereof; Page 11 (z) the minute books and corporate records of the Company, its Subsidiaries and, to the best of the Company's knowledge, Paralex, Inc. requested by and made available to Aird & Berlis LLP in connection with its due diligence investigations of the Company for the periods from its date of incorporation or amalgamation to the date of examination thereof contain all material proceedings (or certified copies thereof) of the shareholders, the board of directors and all committees of the board of directors of the Company and there have been no other meetings where Company business was transacted, resolutions or proceedings of the shareholders, board of directors or any committee of the board of directors of the Company to the date hereof of such corporate records and minute books not reflected in such minute books and other records; (aa) there is not, in the constating documents or by-laws of the Company or the Subsidiaries or in any agreement, mortgage, note, debenture, indenture or other instrument or document to which the Company or the Subsidiaries is party, any restriction upon or impediment to the declaration of payment of dividends by the directors of the Company or the Subsidiaries on the payment of dividends by the Company or the Subsidiaries to the holders of its securities; (bb) Pacific Corporate Trust Company, at its principal offices in the cities of Toronto and Vancouver, has been duly appointed transfer agent and registrar for the Common Shares; (cc) the Audited Financial Statements of the Company: (i) have been prepared in accordance with Canadian generally accepted accounting principles applied on a basis consistent with those of preceding fiscal periods; (ii) present fully, fairly and correctly, in all material respects, the assets, liabilities and financial condition of the Company and its Subsidiaries as at November 30, 2001, respectively, and the results of its operations and the changes in its financial position for the periods then ended; (iii) are in accordance with the books and records of the Company; (iv) contain and reflect all necessary material adjustments for a fair presentation of the results of operations and the financial condition of the business of the Company and its Subsidiaries on a basis for the periods covered thereby; and (v) contain and reflect adequate provision or allowance for all reasonably anticipated liabilities, expenses and losses of the Company and its Subsidiaries; (dd) since November 30, 2001, there has been no material adverse change in the financial position or condition of the business of the Company or its Subsidiaries, from that indicated by the Audited Financial Statements, nor has there been any material adverse change in the affairs, business, prospects, liabilities, assets, operations or condition of the business (financial or otherwise) that the Company is aware of; (ee) except as set forth in the Disclosure Certificate, there are no actions, suits, proceedings or inquiries pending or, to the knowledge of the Company, threatened against or affecting the Company or the Subsidiaries at law or in equity or before or by any federal, provincial, municipal or Page 12 other governmental department, commission, board, bureau, agency or instrumentality which in any way materially adversely affects, or may in any way materially adversely affect, the business, operations or condition (financial or otherwise) of the Company or the Subsidiaries or its properties or assets or which affects or may affect the distribution of Offered Units, the Optioned Units or the Greenshoe Units and except as set forth in the Disclosure Certificate, since November 30, 2001, no bonuses have been paid or are payable to any director or officer of the Company; (ff) except as disclosed in the Prospectus, none of the directors or officers of the Company, any holder of more than ten per cent of any class of shares of the Company, or any associate or affiliate of any of the foregoing persons or companies (as such terms are defined in the Securities Act (Ontario)), has any material interest, direct or indirect, in any material transaction within the previous two years or any proposed material transaction which, as the case may be, materially affected, is material to or will materially affect the Company or the Subsidiaries on a consolidated basis; (gg) with respect to each premises which is material to the Company on a consolidated basis and which the Company or any of its Subsidiaries occupies as tenant (the "Leased Premises"), the Company or such Subsidiary occupies the Leased Premises and has the exclusive right to occupy and use the Leased Premises and each of the leases pursuant to which the Company and/or its Subsidiaries occupies the Leased Premises is in good standing and in full force and effect; (hh) there has not been and there is not currently any labour disruption or conflict which is adversely affecting or could adversely affect, in a material manner, the carrying on of the Company's or any Subsidiary's business, considered as a whole; (ii) the Company has procured and maintains adequate insurance against all insurable risks that the Company is aware of which are material to the Company and its Subsidiaries, considered as a whole; (jj) except as set forth in the Disclosure Certificate, each of the Company and the Subsidiaries and, to the best of the Company's knowledge, Paralex, Inc. has not caused or permitted the release, in any manner whatsoever, of any pollutants, contaminants, chemicals or industrial toxic or hazardous waste or substances (collectively, "Hazardous Substances") on or from any of its properties or assets or any such release on or from a facility owned or operated by third parties with respect to which the Company or the Subsidiaries is or may reasonably be alleged to have material liability nor has it or any of the Subsidiaries received any notice that it is potentially responsible for a federal, provincial, municipal or local clean-up site or corrective action under any applicable laws, statutes, ordinances, by-laws, regulations or any orders, directions or decisions rendered by any ministry, department or administrative regulatory agency relating to the protection of the environment, occupational health and safety or otherwise relating to dealing with Hazardous Substances; (kk) no securities commission or other regulatory authority has issued any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus; Page 13 (ll) the Company and the Subsidiaries are entitled to use, without payment of any material royalty or other fee all of the tradenames, trademarks, patents, designs, processes, copy rights and licenses currently used by the Company and/or the Subsidiaries in carrying on its business (the "Intellectual Property") including, but not limited to, the Intellectual Property listed in the Disclosure Certificate, such Intellectual Property being the only tradenames, trademarks, patents, designs, processes, copyrights and licences required in connection with the business and now used by the Company and/or the Subsidiaries in the course of carrying on its business; (mm) there are no material restrictions on the ability of the Company or its Subsidiaries to use and exploit all rights in the Intellectual Property required in the ordinary course of the Company's or its Subsidiaries' business. None of the rights of the Company or its Subsidiaries in the Intellectual Property will be impaired or affected in any way by the transactions contemplated by this Agreement. To the best of the knowledge of the Company, the conduct of the business of each of the Company and its Subsidiaries and the use of the Intellectual Property does not infringe, and each of the Company and its Subsidiaries has not received any notice, complaint, threat or claim alleging infringement of, any patent, trade mark, trade name, copyright, industrial design, trade secret or other intellectual property or proprietary right of any other person, and the conduct of the business of each of the Company and its Subsidiaries does not, to the best of the Company's knowledge, include any activity which may constitute passing off. Each of the Company and its Subsidiaries has no notice of any infringements of the Intellectual Property or material claims against the Intellectual Property by any third party; and (nn) to the best of the Company's knowledge, the representations and warranties of Paralex Inc. contained in Article 2 of the Merger Agreement are true and correct as at the date hereof. The Company further acknowledges that the Agents are relying upon such representations, warranties, covenants and agreements. Each certificate required to be provided in accordance with the terms of this Agreement, signed by any two officers of the Company and delivered to the Agents or counsel for the Agents shall be deemed to be a representation and warranty by the Company to the Agents as to the matters covered by such certificate. 3. AGENTS' COMPENSATION -------------------- (a) In consideration for the Agents' services in: (a) assisting in the preparation of this Agreement, the Preliminary Prospectus, the Prospectus and any Supplementary Material; (b) forming and managing banking, selling or other groups for the distribution of the Offered Units, the Optioned Units and the Greenshoe Units, as the case may be; (c) distributing the Offered Units, the Optioned Units and the Greenshoe Units, as the case may be, both directly and through other registered dealers and brokers in the Qualifying Jurisdictions, United States and offshore; and (d) all other matters in connection with the issue and sale of the Offered Units, the Optioned Units and the Greenshoe Units, as the case may be, in the Qualifying Jurisdictions, United States and offshore, the Company agrees to pay, or cause to be paid, to Sprott, on behalf of the Agents, by Page 14 certified cheque or bank draft at the Closing Time or deducted from the gross proceeds paid by Sprott to the Company, a fee (the "Agents' Commission") equal to 7% of the gross proceeds of the sale of the Offered Units, the Optioned Units and the Greenshoe Units. (b) In addition to the Agents' Commission, as additional consideration for the performance of its obligations hereunder, the Company shall issue to the Agents or, subject to applicable Securities Laws, as they may direct at the Closing Time, compensation warrants (the "Compensation Warrants"), substantially in the form set out in Schedule "B" hereto, entitling the Agents to purchase, in the aggregate, that number of Units equal to 10% of the aggregate number of Offered Units, Optioned Units and Greenshoe Units sold pursuant to the Offering exercisable for a period of 24 months following the Closing Date at an exercise price equal to 115% of the Offering Price or such other price that is agreed upon by the Company and Sprott, which is acceptable to the Exchange. 4. CLOSING PROCEDURES AND ELECTION FOR GREENSHOE UNITS --------------------------------------------------- (a) The purchase of the Offered Units shall be completed at the Closing Time on the Closing Date at the offices of Catalyst Corporate Finance Lawyers, Suite 1400, 1055 West Hastings Street, Vancouver, B.C. V6E 2E9, or at such other place as Sprott and the Company may agree. If the Agents exercise the Over-Allotment Option in whole or in part, in accordance with the provisions hereof, the purchase and sale of the Optioned Units shall be completed in the same manner as the Offered Units and at the Closing Time. All provisions of this Agreement with respect to the sale of the Offered Units shall apply, mutatis mutandis, to the sale of the Optioned Units. (b) If the Agents exercise the Greenshoe Option in whole or in part from time to time, in accordance with the provisions hereof, the purchase and sale of such Greenshoe Units shall be completed in the same manner as the Closing (the "Additional Closing") but at the time and on the date (the "Additional Closing Time" and "Additional Closing Date") set for such purchase in the notice provided to the Company by Sprott, on behalf of the Agents. All provisions of this Agreement with respect to the sale of the Offered Units shall apply (except for the provisions of Section 12 in respect of which only subsections 12(a), (d), (e), (f), (g) and (h) shall apply), mutatis mutandis, to the sale of the Greenshoe Units at any Additional Closing, with the Additional Closing Time being substituted for the Closing Time, the Additional Closing Date being substituted for the Closing Date, the Greenshoe Units being substituted for the Offered Units, and any other required substitutions being made. If the Greenshoe Option is exercised at least two business days prior to the Closing Time, the sale of the Greenshoe Units shall be made contemporaneously with the sale of the Offered Units. (c) The issue and sale of the Offered Units shall be completed by the Company issuing and delivering to the Agents (i) one certificate representing the Common Shares forming part of the Units to be issued and sold to Canadian and other non-U.S. purchasers; (ii) certificates containing the appropriate legend representing the Common Shares forming part of the Units to be issued and sold to purchasers resident in the United States; (iii) one certificate representing the Warrants forming part of the Units to be issued and sold to Canadian and other non-U.S. purchasers; and (iv) certificates containing the appropriate legend representing the Warrants Page 15 forming part of the Units to be issued and sold to purchasers resident in the United States, each of such certificates duly registered in the names of purchasers as the Agents shall notify the Company in writing not less than two business days prior to the Closing Time. Contemporaneously therewith: (i) Sprott on behalf of the Agents, shall pay to the Company, or as it may direct, the purchase price for the Offered Units and, if applicable, the Optioned Units in Canadian funds by certified cheque or bank draft; and (ii) the Company, shall pay to Sprott, on behalf of the Agents, the Agents' Commission in the manner described in Section 3 hereof. (d) The Company shall make all necessary arrangements for the exchange of the certificates representing the Offered Units delivered at the Closing Time at the principal offices of Pacific Corporate Trust Company in the Cities of Toronto and Vancouver for certificates representing the aggregate number of Offered Units and, if applicable, the Optioned Units in such denominations and registered in such names as shall be designated by or on behalf of the Agents not less than two business days prior to the Closing Time. All such exchanges are to be made without cost to the Agents. (e) If the Offering is not completed due to the Company's failure to proceed because of an Alternative Transaction which is entered into by the Company or any of its Subsidiaries on or before March 1, 2002, the Company shall, within 10 days of the consummation of such Alternative Transaction, pay the Agents a fee equal to U.S. $150,000 plus all of the Agents' expenses and disbursements to date (including, without limitation, fees and disbursements of the Agents' legal counsel). For the purposes hereof, an "Alternative Transaction" means an issuance of securities of the Company in excess of 5% of the total value or number of securities currently outstanding or a business transaction involving the Company or any of its Subsidiaries including, without limitation, a merger, amalgamation, arrangement, reorganization, joint venture, sale of all or substantially all assets, exchange of assets or any similar transaction other than issuances of securities pursuant to (i) the Acquisition or (ii) as set out herein. 5. COMPLIANCE WITH SECURITIES LAWS ------------------------------- (a) The Company shall use its best efforts to, as soon as possible and in any event not later than 5:00 p.m. (Toronto time) on or about February 28, 2002, or such later date as the Company and the Agents may agree, obtain a final MRRS Decision Document for the Prospectus from the British Columbia Securities Commission as principal regulator pursuant to the Mutual Reliance Review System and fulfil all other requirements as appropriate in order to qualify the Offered Units, the Optioned Units and the Greenshoe Units for distribution in the Qualifying Jurisdictions. (b) The Company shall cause to be delivered to the Agents, without charge, as soon as possible following receipt of a final MRRS Decision Document such number of commercial copies of the Prospectus in the English language and the French language in the Cities of Toronto, Montreal, Calgary and Vancouver as the Agents shall reasonably require (and in respect of which they have provided the Company's printer with reasonable advance notice). (c) The Company shall cause to be delivered to the Agents commercial copies of any Supplementary Material required to be delivered to the Agents or to be delivered to purchasers or prospective purchasers in the Qualifying Page 16 Jurisdictions of the Offered Units, the Optioned Units and the Greenshoe Units as soon as possible and in any event not later than 9:00 a.m. of the third day following the date of such Supplementary Material (or the next business day if such third day is not a business day) or such other time and date as the Company and the Agents may agree. (d) The Agents shall, and shall require any investment dealer or broker (other than the Agents but including any Selected Dealers) with which the Agents have a contractual relationship in respect of the distribution of the Offered Units, the Optioned Units and the Greenshoe Units (each, a "Selling Firm") to agree to, comply with applicable laws, including the Securities Laws and U.S. Securities Laws, in connection with the distribution hereof and shall offer the Offered Units, the Optioned Units and the Greenshoe Units for sale to the public directly and through Selling Firms upon the terms and conditions set out in the Prospectus and this Agreement. The Agents shall, and shall require any Selling Firm to offer for sale to the public and sell the Offered Units, the Optioned Units or the Greenshoe Units only in those jurisdictions where they may be lawfully offered for sale or sold. (e) The Agents shall: (i) use all reasonable efforts to complete and cause each Selling Firm to use all reasonable efforts to complete the distribution of the Offered Units and the Optioned Units as soon as reasonably practicable; (ii) promptly notify the Company when, in their opinion, the Agents and the Selling Firms have ceased distribution of the Offered Units, the Optioned Units and the Greenshoe Units; (iii) upon completion of the distribution of the Offered Units, the Optioned Units and the Greenshoe Units provide a breakdown of the number of Offered Units, Optioned Units and Greenshoe Units distributed in each of the Qualifying Jurisdictions where such breakdown is required for the purpose of calculating fees payable to the Securities Regulators; and (iv) furnish the Company on a timely basis all information necessary to enable the Company to file a Form D with the SEC and to file all necessary "blue sky" securities filings with each state. (f) The Agents shall, and shall require any Selling Firm to agree to, distribute the Offered Units, the Optioned Units and the Greenshoe Units in a manner which complies with all applicable laws and regulations in each jurisdiction into and from which they may offer to sell the Offered Units, the Optioned Units or the Greenshoe Units or distribute the Prospectus or any Supplementary Material in connection with the distribution of the Offered Units, the Optioned Units and the Greenshoe Units and will not, directly or indirectly, offer, sell or deliver any Offered Units, Optioned Units or Greenshoe Units or deliver the Prospectus or any Supplementary Material to any person in any jurisdiction other than in the Qualifying Jurisdictions except in a manner which will not require the Company to comply with the registration, prospectus, filing, continuous disclosure or other similar requirements under the applicable securities laws of such other jurisdictions or pay any additional governmental filing fees which relate to such other jurisdictions. Subject to the foregoing, Selected Dealers shall be entitled to offer the Offered Units, the Optioned Units and the Greenshoe Units in the United States solely pursuant to Rule 506 of Regulation D under the 1933 Act. (g) (A) As used in this Agreement, the following terms shall have the meanings indicated: Page 17 (1) "Accredited Investor" means an accredited investor as that term is defined in Rule 501(a) of Regulation D; (2) "Directed Selling Efforts" means directed selling efforts as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the Offered Securities and includes the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of the Offered Securities; (3) "Offered Securities" means the Offered Units, the Optioned Units and the Greenshoe Units; (4) "Regulation D" means Regulation D promulgated under the 1933 Act; (5) "Regulation S" means Regulation S promulgated under the 1933 Act; (6) "SEC" means the United States Securities and Exchange Commission; (7) "Substantial U.S. Market Interest" means substantial U.S. market interest as that term is defined in Regulation S; (8) "U.S. Exchange Act" means the United States Securities Exchange Act of 1934, as amended; and (9) "U.S. Person" means a U.S. person as that term is defined in Regulation S. (B) The Company and each Agent: (1) acknowledge that the Offered Securities have not been and will not be registered with the SEC under the 1933 Act and that the Offered Securities are being offered and sold: (x) outside the United States pursuant to a "safe harbor" provided by Regulation S; and (y) in the United States pursuant to the exemption from registration provided by Rule 506 of Regulation D; and (2) agree that neither they, nor any of their respective affiliates, nor any person acting on behalf of the foregoing have made or will make, except to the extent permitted by Subsection 5(g)(D)(8): (x) any offer to sell or solicitation of an offer to buy any of the Offered Securities to any person in the United States or (y) any sale of the Offered Securities Page 18 to any person unless the seller of such Offered Securities and any person acting on its behalf reasonably believes that at the time such person placed the order to purchase Offered Securities such person was outside the United States. (C) The Company hereby represents, warrants, covenants and agrees with each Agent that: (1) the Company is, and until the Closing Time will be, a "foreign private issuer" within the meaning of Regulation S and reasonably believes that there is no Substantial U.S. Market Interest with respect to the Common Shares of the Company; and the Company is not and does not own or control (and for two years from the Closing Time will not be and will not own or control) an open-end investment company, closed-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended; (2) the Preliminary Prospectus, the Prospectus, and the United States Confidential Private Placement Memorandum referred to in Schedule "C" hereto and any Supplementary Material at the respective dates thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at the Closing Time, collectively, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (3) none of the Company, its Subsidiaries, their affiliates or anyone acting on its or their behalf (other than the Agents, their affiliates, any Selected Dealer or subagent, or any person acting on its or their behalf, as to which no representation is made) directly or indirectly, has taken or will take any action in violation of Regulation M under the U.S. Exchange Act or that would cause the exemption afforded by Regulation S or Rule 506 of Regulation D to be unavailable for offers and sales of the Offered Securities; (4) none of the Company, its Subsidiaries, their affiliates or any person acting on its or their behalf (other than the Agents, their affiliates, any Selected Dealer or subagent, or any person acting on their behalf, in respect of which no representation is made) has engaged or will engage in any Directed Selling Efforts with respect to the Offered Securities or has taken or will take any action (including sale of securities into the United States) that would cause the exemptions afforded by Rule 506 of Regulation D or Page 19 Regulation S to be unavailable for offers and sales of the Offered Securities pursuant to this Agreement; (5) none of the Company, its Subsidiaries, their affiliates or any person acting on their behalf (other than the Agents, their affiliates, any Selected Dealer or subagent, or any person acting on its or their behalf, in respect of which no representation is made) has offered or will offer to sell, or has solicited or will solicit offers to buy, the Offered Securities in the United States by means of any form of general solicitation or general advertising (as those terms are used in Regulation D) or in any manner involving a public offering within the meaning of Section 4(2) of the 1933 Act; and (6) the Company will, at the request of the Agents or any Selected Dealer, execute and file with the SEC a Form D relating to the offer and sale of the Offered Securities and execute and file such other documents as may be required under applicable United States state securities ("blue sky") laws. (D) Each of the Agents, on a joint and several basis, represents, warrants, covenants and agrees to and with the Company that: (1) it is aware that the Offered Securities have not been and will not be registered under the 1933 Act and have not and may not be offered or sold outside the United States except pursuant to Rule 903 of Regulation S or within the United States except pursuant to an exemption from the registration requirements of the 1933 Act provided by Rule 506 of Regulation D, in the manner contemplated in this Subsection 5(g); (2) such Agent, its affiliates or any persons acting on its behalf (other than the Company, its affiliates or any person acting on their behalf, as to which no representation is made) have not engaged and will not engage in any Directed Selling Efforts with respect to the Offered Securities, and has not taken nor will take any action that would cause Rule 903 of Regulation S or the exemption afforded by Rule 506 of Regulation D to be unavailable for offers and sales of the Offered Securities pursuant to this Agreement; (3) offers to sell the Offered Securities within the United States have been and will be made on behalf of the Company only through Selected Dealers who are United States registered broker dealers and all sales of the Offered Securities in the United States shall be made by the Company pursuant to Rule 506 of Regulation D; (4) it has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities, except with its affiliates or any selling group Page 20 members in accordance with this Subparagraph 5(g)(D) or with the prior written consent of the Company; (5) it will require each Selected Dealer to agree in writing, for the benefit of the Company, to comply with, and shall use its best efforts to ensure that each Selected Dealer complies with, the provisions of this Subparagraph 5(g)(D) as if such provisions applied to such selling group member; (6) all offers and sales of the Offered Securities in the United States will be effected in transactions exempt from the registration or qualification provisions of applicable state securities ("blue sky") laws and in accordance with all applicable U.S. federal and state broker-dealer requirements; (7) it has not, either directly, or through any person acting on its or their behalf, solicited and will not solicit offers for, and has not offered and will not offer to sell, the Offered Securities in the United States by means of any form of general solicitation or general advertising (as those terms are used in Regulation D) or in any manner involving a public offering within the meaning of Section 4(2) of the 1933 Act, including advertisements, articles, notices or other communications published in any newspaper, magazine, or similar media broadcast over radio or television or in any seminar or meeting whose attendees have been invited by general solicitation or advertising in connection with the offer or sale of the Offered Securities to U.S. Persons; (8) offers to sell and solicitation of offers to buy the Offered Securities in the United States shall be made only to persons with whom an Agent or any Selected Dealer has a pre-existing relationship and to whom such Agent or Selected Dealer has reasonable grounds to believe and believes to be Accredited Investors and only in states of the United States where such Agent or Selected Dealer is registered or otherwise exempt from registration and sales of Offered Securities in the United States will be made only to persons reasonably believed to be Accredited Investors and who execute and deliver a U.S. Subscription Agreement in the form of Schedule "C" hereto; (9) at Closing, it will deliver to the Company a certificate, substantially in the form of Schedule "A" to this Agreement executed by each Selected Dealer relating to the manner of the offer and sale of Offered Securities in the United States; and (10) neither such Agent, its affiliates or any person acting on its or their behalf (other than the Company, its third party affiliates and any third party acting on their behalf, as to which no representation is made) has taken or will take, Page 21 directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with offer and sale of the Offered Securities. 6. DELIVERY OF PROSPECTUSES ------------------------ (a) The Company shall deliver to the Agents, without charge, in Toronto, contemporaneously with or prior to the issuance of a preliminary MRRS Decision Document: (i) a copy of the Preliminary Prospectus in the English language and the French language, signed as required by the Securities Laws of the Qualifying Jurisdictions; (ii) a copy of any other document required to be filed by the Company under the Securities Laws in connection with the public offering of the Offered Units, the Optioned Units and the Greenshoe Units in each of the Qualifying Jurisdictions; and (iii) a copy of all documents, in the English and French languages, incorporated, or containing information incorporated, by reference in to the Preliminary Prospectus, if such documents have not previously been delivered to the Agents. (b) The Company shall also deliver to the Agents, without charge, in Toronto, as soon as practicable after the issuance of a preliminary MRRS Decision Document: (i) an opinion of the Company's counsel addressed to the Agents and their counsel, in form and substance satisfactory to the Agents, acting reasonably, substantially to the effect that, except for the financial statements in the Preliminary Prospectus including the notes thereto (collectively, the "Financial Information"), the Preliminary Prospectus printed in the French language (i) is in all material respects a complete and adequate translation of the Preliminary Prospectus printed in the English language; and (ii) the English and French language versions of the Preliminary Prospectus, except for such information, are not susceptible of any materially different interpretation with respect to any material matter contained therein; (ii) an opinion of the Auditors addressed to the Agents and their counsel, in form and substance satisfactory to the Agents, acting reasonably, substantially to the effect that the Financial Information in the French language version of the Preliminary Prospectus is, in all material respects, a complete and proper translation of the English language version; and (iii) a certificate (the "Disclosure Certificate") addressed to the Agents signed by the President and Chief Executive Officer of the Company (or such other officer of the Company, acceptable to the Agents) in his capacity as an officer of the Company, addressed to the Agents to the effect that, to the best of his knowledge, information and belief, after due enquiry, the information disclosed in the schedules attached thereto relating to certain Page 22 factual matters in connection with the representations and warranties set forth in Section 2 hereof are true and correct as at the date hereof. (c) The Company shall deliver to the Agents, without charge, in Toronto, contemporaneously with or prior to the issuance of a final MRRS Decision Document: (i) a copy of the Prospectus in the English language and the French language, signed as required by the Securities Laws of the Qualifying Jurisdictions; (ii) a copy of any other document required to be filed by the Company under the Securities Laws in connection with the public offering of the Offered Units, the Optioned Units and the Greenshoe Units in each of the Qualifying Jurisdictions; (iii) evidence reasonably satisfactory to the Agents that an application to list the Offered Units, the Optioned Units and the Greenshoe Units on the Exchange has been conditionally accepted by the Exchange; and (iv) a comfort letter of the Auditors dated the date of the Prospectus and addressed to the Agents and the directors of the Company, in form and substance satisfactory to the Agents, acting reasonably relating to the Audited Financial Statements and the Paralex Financial Statements and setting out agreed upon procedures carried out by the Auditors and the findings as a result of the procedures with respect to the financial information, accounting data and other numerical data contained in the Prospectus since the respective date as of which specified financial information is given in the Prospectus to a date not more than two business days prior to the date of such letter. (d) The Company shall also deliver to the Agents, without charge, in Toronto, contemporaneously with or prior to the issuance of the final MRRS Decision Document for the Prospectus: (i) an opinion of the Company's counsel addressed to the Agents and their counsel, in form and substance satisfactory to the Agents, acting reasonably, substantially to the effect that except for the Financial Information, the Prospectus printed in the French language (i) is in all material respects a complete and adequate translation of the Prospectus printed in the English language; and (ii) the English and French language versions of the Prospectus, except for such information, are not susceptible of any materially different interpretation with respect to any material matter contained therein; and (ii) an opinion of the Auditors addressed to the Agents and their counsel, in form and substance satisfactory to the Agents, acting reasonably, substantially to the effect that the Financial Information in the French language version of the Prospectus is, in all material respects, a complete and proper translation of the English language version. Page 23 7. NOTICE OF MATERIAL CHANGE ---------------------------- During the period of distribution or distribution to the public (as defined in the Securities Laws) of the Offered Units, the Optioned Units and the Greenshoe Units, which shall be the period from the date hereof to the date upon which the Company has received the notice referred to in clause (ii) of Section 17 hereof, the Company shall promptly notify the Agents in writing of: (a) any material change (actual, or, to the knowledge of the Company, proposed or threatened) in any or all of the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of the Company; and (b) except for that which relates solely to the Agents, any change in a material fact contained or incorporated by reference in the Preliminary Prospectus, Prospectus and/or any Supplementary Material, or the existence of a new material fact, which, in either case, is of such a nature as to render the Preliminary Prospectus, Prospectus and/or any Supplementary Material untrue or misleading in any material respect or not in compliance with the Securities Laws or to result in a misrepresentation in the Preliminary Prospectus, Prospectus and/or any Supplementary Material. In any such case, the Company shall promptly and, in any event within applicable time limitations, comply with all legal requirements necessary to comply with the Securities Laws applicable to continued distribution of the Offered Units, the Optioned Units and the Greenshoe Units in the Qualifying Jurisdictions as contemplated by Section 5 hereof. The Company shall in good faith discuss with the Agents any change in circumstances (actual, proposed or prospective) which is of such a nature that there is reasonable doubt whether notice need be given to the Agents pursuant to this Section. 8. SUPPLEMENTARY MATERIAL ---------------------- The Company shall also deliver to the Agents and their counsel duly signed copies of any amendments or supplements to the Preliminary Prospectus, the Prospectus or other documents required to be filed by the Company under the Securities Laws in connection with the Offering (collectively, the "Supplementary Material"), together with copies of any other documents required to be filed with the Supplementary Material. The Preliminary Prospectus, the Prospectus and the Supplementary Material shall be in form and substance satisfactory to the Agents, acting reasonably. The provisions of Sections 5, 6 and 9 hereof shall apply, with any changes required by the context, to any Supplementary Material of which copies are, under the applicable Securities Laws, required to be delivered to any purchaser or prospective purchaser of the Offered Units, the Optioned Units and the Greenshoe Units. 9. REPRESENTATIONS AND WARRANTIES REGARDING THE PROSPECTUS ------------------------------------------------------- The delivery to the Agents of the Preliminary Prospectus, Prospectus or any Supplementary Material shall constitute the representation and warranty of the Company to the Agents that, at the time of such respective deliveries: (a) (i) such documents contain full, true and plain disclosure of all material facts relating to the Company, (ii) the attributes of the Offered Units, the Optioned Units and the Greenshoe Units conform in all material respects with the description contained therein, and Page 24 (iii) no material facts have been omitted therefrom which are necessary to make the statements therein not misleading in light of the circumstances in which they are made; (b) such documents contain no misrepresentations; and (c) such documents comply with the Securities Laws, provided, however, that the foregoing representations and warranties will not apply with respect to information and statements contained in the Preliminary Prospectus and the Prospectus or misrepresentations with respect thereto or omissions therefrom which relate solely to the Agents. Such delivery shall constitute the consent of the Company to the use of the Preliminary Prospectus, the Prospectus and the Supplementary Material by the Agents and other dealers, brokers and broker-dealers whose registration permits them to offer and sell the Offered Units, the Optioned Units and the Greenshoe Units pursuant to the Prospectus in the Qualifying Jurisdictions in accordance with the Securities Laws as contemplated in this Agreement. 10. COVENANTS OF THE COMPANY ------------------------ The Company covenants and agrees with the Agents as follows: (a) The Company will advise the Agents, promptly after receiving notice thereof, of the time when the Prospectus, or any amendment or supplement thereto, has been filed and a MRRS Decision Document therefor been obtained and will provide evidence satisfactory to the Agents of each such filing and issuance of such MRRS decision documents. (b) The Company will advise the Agents, promptly after receiving notice or obtaining knowledge thereof, of: (i) the issuance by any Securities Regulator of any order preventing or suspending the use of the Prospectus or any amendment or supplement thereto; (ii) the suspension of the qualification of the Offered Units, the Optioned Units and the Greenshoe Units for offering or sale in any of the Qualifying Jurisdictions; (iii) the institution or threatening of any proceeding for any such purpose; or (iv) any request made by any Securities Regulator for amending or supplementing the Prospectus or for additional information relating to the distribution of the Offered Units, the Optioned Units and the Greenshoe Units pursuant to the Prospectus. The Company will use its reasonable best efforts to prevent the issuance of any such order and, if any such order is issued, to obtain the withdrawal thereof as quickly as possible. (c) The Company will not, directly or indirectly, without the prior written consent of Sprott, on behalf of the Agents, which consent shall not be unreasonably withheld, issue, offer, sell, grant any option to purchase or otherwise dispose of (or announce any issue, offer, sale, grant of any option to purchase or other disposition of or intention to do) any Common Shares or any securities convertible into, or exchangeable or exercisable for, Common Shares or any shares ranking pari-passu or superior thereto for a period of 120 Page 25 days after the Closing Date other than: (i) the issuance of Common Shares in connection with the exercise or conversion of any commitments, options, warrants or other convertible securities outstanding as at the date hereof, the particulars of which have been disclosed in the Prospectus or to the Agents in writing; (ii) the issuance of stock options pursuant to the Company's stock option plan and the issuance of Common Shares pursuant to any exercise of such options; (iii) the issuance of Units in connection with the exercise, if any, of the Over-Allotment Option; (iv) the issuance of Units in connection with the exercise, if any, of the Greenshoe Option; the issuance of the Brokers' Warrants; (vi) the issuance of Common Shares in connection with the due exercise, if any, of the Warrants or Brokers' Warrants; and (vii) the issuance of Common Shares pursuant to the Acquisition. (d) The Company will use its reasonable best efforts to maintain its status as a "reporting issuer" (or the equivalent thereof) not in default of the requirements of the Securities Laws of each of the Qualifying Jurisdictions to the date which is two years following the Closing Date. (e) The Company will use its reasonable best efforts to maintain the listing of the Common Shares on the Exchange to the date which is one year following the Closing Date and to ensure that the Common Shares forming part of the Offered Units, the Optioned Units and the Greenshoe Units, the Common Shares issuable upon the due exercise of the Warrants and the Compensation Warrants will be listed and posted for trading on the Exchange upon their issue. Page 26 11. EXPENSES -------- The Company agrees, in the manner hereinafter provided, to pay all of the reasonable costs, fees and expenses of or incidental to the offering, delivery and/or sale of the Offered Units, and the Optioned Units and the Greenshoe Units, if any, whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated pursuant to Section 15 hereof, including all costs and expenses incidental to: (i) the translation and printing or other production of documents with respect to such transactions, including all costs of translating into French and printing the English and French language versions of the Preliminary Prospectus, the Prospectus, any Supplementary Material and each amendment or supplement thereto and similar material; (ii) all reasonable arrangements relating to the delivery to the Agents of copies of the foregoing documents; (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company; (iv) the preparation, issuance and delivery to the Agents of any certificates evidencing the Units, including all transfer agent's, sub-transfer agent's, registrar's and sub-registrar's fees; (v) the qualification of the Units and the Compensation Warrants (to the extent permitted by Applicable Securities Laws) under the Securities Laws of the Qualifying Jurisdictions; (vi) the private placement of the Offered Units or Optioned Units in the United States; (vii) the filing fees of the Securities Regulators relating to the Units; (viii) the listing fees for the Common Shares forming part of the Units and the Common Shares issuable upon the due exercise of the Warrants and the Compensation Warrants on the Exchange; (ix) the fees and disbursements of Canadian and U.S. legal counsel to the Agents (to a maximum of US$100,000, excluding GST); (x) 50% of all fees and disbursements of Canadian and U.S. legal counsel to the Agents in excess of US$100,000); and (xi) the reasonable out-of-pocket expenses of the Agents on presentation of reasonable invoices and supporting documentation for same. 12. CONDITIONS OF CLOSING --------------------- The closing of the Offering shall be subject to the accuracy of the representations and warranties of the Company contained in this Agreement as of the date of this Agreement and as of the Closing Time as if made at and as of the Closing Time, to the accuracy of the statements of the officers of the Company and others made pursuant to this Section 12, to the performance by the Company of its covenants and agreements under this Agreement and to the following additional conditions: (a) The Agents shall have received an opinion, dated the Closing Date, of Catalyst Corporate Finance Lawyers, counsel for the Company in form and substance reasonably satisfactory to Aird & Berlis LLP, counsel for the Agents, and as to such matters as may be reasonably required by the Agents; it being understood that such counsel may rely: (i) to the extent appropriate in the circumstances, as to matters of fact, on certificates of the Company executed on its behalf by the Chief Executive Officer and the Chief Financial Officer (or such other officers of the Company acceptable to the Agents, acting reasonably) and on certificates of Pacific Corporate Trust Company, the registrar and transfer agent for the Common Shares; (ii) on the opinions of local counsel (signed copies of which shall be addressed to and delivered to the Agents and their counsel) reasonably acceptable to the Agents' counsel as to the qualification of the Offered Units, the Optioned Units and the Greenshoe Units for sale to the public and as to other matters in the Qualifying Jurisdictions applicable to the offering of the Offered Units, the Optioned Units and the Greenshoe Units and as to Page 27 other matters of law under the laws of Alberta, Manitoba, Ontario and Quebec or the laws of Canada applicable therein; and (iii) as to matters of fact not independently established, on certificates of the Auditors; and that the Agents' counsel may rely on the opinion of the Company's counsel as to matters which relate specifically to the Company and to the securities laws of the Province of British Columbia. (b) The Agents shall have received an opinion from Preston Gates Ellis LLP, in form and substance reasonably satisfactory to the Company, the Agents and their respective counsel to the effect that registration under the 1933 Act is not required for the offer and sale of the Offered Securities pursuant to this Agreement. (c) The Agents shall have received incumbency certificates dated the Closing Date including specimen signatures of the Chief Executive Officer and any other officer of the Company signing this Agreement or any document delivered hereunder. (d) The Agents shall have received from the Auditors a letter dated the Closing Date in form and substance satisfactory to the Agents to the effect that, in all material respects, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than two business days prior to the date of such letter) the conclusions and findings of such firm with respect to the financial statements, financial information and other matters covered by its letter referred to in Subparagraph 6(c)(iv) hereof are confirmed. References to the Prospectus in this Subparagraph shall include any Supplementary Material at the date of such letter. (e) The Agents shall have received a certificate, dated the Closing Date, of the Chief Executive Officer and the Chief Financial Officer of the Company (or such other officers of the Company acceptable to the Agents, acting reasonably), in their capacity as officers of the Company, addressed to the Agents to the effect that, to the best of their knowledge, information and belief, after due enquiry: (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects as if made at and as of the Closing Time and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied in all material respects at or prior to the Closing Time; (ii) no order, ruling or determination having the effect of preventing the use of the Prospectus or suspending the sale or ceasing, suspending or restricting the trading of Common Shares in any of the Qualifying Jurisdictions has been issued or made by any stock exchange, securities commission or regulatory authority and is continuing in effect and no proceedings, investigations or enquiries for that purpose have been instituted or are pending; Page 28 (iii) the memorandum and articles of the Company attached to the certificate are full, true and correct copies, unamended, and in effect on the date thereof; (iv) the minutes or other records of various proceedings and actions of the Company's Board of Directors attached to the certificate relating to the Offering are full, true and correct copies thereof and have not been modified or rescinded as of the date thereof; (v) since the date hereof, there has been no material adverse change in the business, affairs, operations, assets, liabilities or capital of the Company; and (vi) as to such other matters as the Agents may reasonably request. (f) The Common Shares forming part of the Units and the Common Shares issuable upon the due exercise of the Warrants and the Compensation Warrants shall have been approved for listing as at 4:01 p.m. (Toronto time) on the business day immediately preceding Closing and posted for trading on the Exchange as at the opening of business on the Closing Date, subject only to the official notices of issuance and fulfilment of such other conditions of the Exchange as may only be fulfilled after the Closing Time. (g) The Acquisition shall have been approved by the Company's shareholders and all matters pertaining to the Acquisition shall be completed in escrow in accordance with and on the terms and conditions set forth in the Merger Agreement, subject only to the completion of the Offering for gross proceeds of a minimum of US$10,000,000. (h) The Agents shall have received certificates, issued under section 72(8) of the Securities Act (Ontario) and similar provisions of the Securities Laws of the other Qualifying Jurisdictions where applicable stating that the Company is not in default under the Securities Act (Ontario) and the applicable Securities Laws of the other Qualifying Jurisdictions, respectively. (i) The Agents shall have received a certificate from Pacific Corporate Trust Company stating the issued capital of the Company as at the close of business on the day immediately preceding the Closing Date. (j) The Agents shall have had access to the Company's management and the right to conduct due diligence satisfactory to the Agents, in their sole discretion, prior to filing the Preliminary Prospectus and, if applicable, any amendments thereto, and the right to update such due diligence prior to the filing of the Prospectus and, if applicable, any amendments thereto, and shall not have identified material adverse information which, as at the date hereof, had not been widely disseminated to the public. Page 29 It is understood that the Agents may waive in whole or in part or extend the time for compliance with any of such terms and conditions without prejudice to its rights in respect of any other of the foregoing terms and conditions or any other or subsequent breach or noncompliance, provided that to be binding on the Agents any such waiver or extension must be in writing and signed by each of them other than the delivery of the opinion referred to in Subparagraph 12(a) above which may be waived by Sprott on behalf of the Agents, orally. 13. INDEMNIFICATION AND CONTRIBUTION -------------------------------- (a) The Company hereby agrees to protect, indemnify and save harmless each of the Agents and each of their respective directors, officers, employees, shareholders and agents (including, for greater certainty, any Selected Dealers) (collectively, the "Agents' Personnel") from and against any and all losses (other than loss of profits), claims, actions, causes of action, demands, costs, damages, liabilities, whether joint or several caused or incurred by reason of or in connection with the transactions contemplated hereby including, without limitation, the following: (i) any information or statement (except information or a statement relating solely to the Agents) contained in the Preliminary Prospectus, the Prospectus, any Supplementary Material, the management information circular of the Company dated January 11, 2002 or in any amended or supplemental prospectus or in any supplemental, additional or ancillary material, information, evidence, return, report, application, statement, table or document that may be filed by or on behalf of the Company under any of the Securities Laws in connection with the Offering (collectively the "Offering Documents") at which time and in the light of the circumstances under which it was made contains or is alleged to contain a misrepresentation; and/or (ii) the omission or alleged omission (other than a material fact omitted in reliance upon and in conformity with written information furnished to the Company by the Agents relating to the Agents specifically for use therein) in the Offering Documents of any material fact or material information required to be stated or necessary to make the statements therein not misleading in the light of the circumstances in which it was made; and/or (iii) any order made or inquiry, investigation or proceeding commenced or threatened by any Securities Regulator or other competent authority based upon any untrue statement or omission or alleged untrue statement or omission or any misrepresentation or alleged misrepresentation in any of the Offering Documents, other than a statement included in reliance upon and in conformity with written information furnished to the Company by the Agents relating to the Agents specifically for use therein, which prevents or restricts the trading in the Common Shares of the Company or the distribution to the public of the Units in any of the Qualifying Jurisdictions; and/or Page 30 (iv) the non-compliance by the Company with any requirement of Securities Laws or regulatory requirements; and/or (v) any breach of any or all of the representations, warranties and covenants on the part of the Company contained in this Agreement or the failure of the Company to comply with any of its obligations hereunder, and will reimburse the Agents promptly upon demand for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such losses, claims, damages, liabilities or actions in respect thereof, as incurred. (b) The Company shall not, without the prior written consent of the Agents, which shall not be unreasonably withheld, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any Agent or any Agents' Personnel are a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Agent and each Agents' Personnel from all liability arising out of such claim, action, suit or proceeding. (c) Notwithstanding the foregoing, an indemnifying party shall not be liable for the settlement of any claim or action in respect of which indemnity may be sought hereunder, effected without its written consent, which consent shall not be unreasonably withheld. (d) If any matter or thing contemplated by this paragraph shall be asserted against any person in respect of which indemnification is or might reasonably be considered to be provided, such person (the "Indemnified Party") will notify the Company as soon as possible and in any event on a timely basis, of the nature of such claim, provided that the omission so to notify the Company will not relieve the Company from any liability which it may have to any Indemnified Party and the Company shall be entitled (but not required) to assume the defence of any suit brought to enforce such claim; provided, however, that the defence shall be through legal counsel acceptable to the Indemnified Party, acting reasonably, and that no settlement may be made by the Company or the Indemnified Party without the prior written consent of the other which consent shall not be unreasonably withheld. (e) In any such claim, the Indemnified Party shall have the right to retain other counsel to act on the Indemnified Party's behalf, provided that the fees and disbursements of such other counsel shall be paid by the Indemnified Party, unless (i) the Company and the Indemnified Party mutually agree to retain such other counsel or (ii) the named parties to any such claim (including any third or implicated party) include both the Indemnified Party on the one hand and the Company, on the other hand, and the representation of the Company and the Indemnified Party by the same counsel would be Page 31 inappropriate due to actual or potential conflicting interests, in which event such fees and disbursements shall be paid by the Company. (f) To the extent that any Indemnified Party is not a party to this Agreement, the Agents shall obtain and hold the right and benefit of the indemnity provisions hereunder in trust for and on behalf of such Indemnified Party. (g) The Company hereby waives all rights which it may have by statute or common law to recover contribution from the Agents in respect of losses, claims, costs, damages, expenses or liabilities which it may suffer or incur directly or indirectly (in this paragraph, "losses") by reason of or in consequence of an Offering Document containing a misrepresentation (other than in respect of information or a statement relating solely to the Agents); provided, however, that such waiver shall not apply in respect of losses resulting from a claim (i) based upon a misrepresentation in any written information or statements furnished by the Agents to the person making such claim other than written information or statements contained in the Preliminary Prospectus, the Prospectus, any Supplementary Material, the United States Confidential Private Placement Memorandum referred to in Schedule "C" hereto or any document prepared or approved by the Company; (ii) based upon a misrepresentation or omission of a material fact where the Agents have not delivered to the person making such claim a copy of the Prospectus or any Supplementary Material which is required by Securities Laws to be delivered to such person within the time required therefor and which corrects the misrepresentation or omission; or (iii) based upon an act of gross negligence or wilful misconduct of the Agents or the Agents' Personnel in the course of sales or marketing efforts relating to the Offering. (h) In the event that the indemnity provided for above is, for any reason, illegal or unenforceable as being contrary to public policy or for any other reason, each of the Agents and the Company shall contribute to the aggregate of all losses, claims, costs, damages, expenses or liabilities (including any legal or other expenses reasonably incurred by the Indemnified Party in connection with investigating or defending any action or claim which is the subject of this section but excluding loss of profits or consequential damages) of the nature provided for above such that the Agents shall be responsible for that portion represented by the percentage that the Agents' Commission paid by the Company to the Agents bears to the gross proceeds realized from the sale and distribution of the Units and the Company shall be responsible for the balance, whether or not it has been sued, provided that, in no event, shall any Agent be responsible for any amount in excess of the amount of the Agents' Commission actually received by it. In the event that the Company may be held to be entitled to contribution from an Agent under the provisions of any statute or law, the Company shall be limited to contribution in an amount not exceeding the lesser of: (i) the portion of the full amount of losses, claims, costs, damages, expenses and liabilities, giving rise to such contribution for which such Agent is responsible, as determined above, and (ii) the amount of the Agents' Commission actually received by such Agent. Notwithstanding the foregoing, a party guilty of fraudulent misrepresentation shall not be entitled to contribution from the other party. Any party entitled to contribution will, promptly after Page 32 receiving notice of commencement of any claim, action, suit or proceeding against such party in respect of which a claim for contribution may be made against the other party under this section, notify such party from whom contribution may be sought. In no case shall such party from whom contribution may be sought be liable under this Agreement unless such notice has been provided, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have otherwise than under this section. (i) The rights to indemnity and contribution provided in this Agreement shall be in addition and not in derogation of any other right to indemnity or contribution which the Agents may have by statute or otherwise by law. 14. SURVIVAL -------- All representations, warranties, obligations, agreements and indemnities of the Company and the Agents contained in this Agreement or contained in certificates or other documents delivered pursuant hereto shall survive the purchase of the Units and shall continue in full force and effect for a period of three years following the Closing Date. In the event that the Closing does not occur through no fault of the Company, there will be no further liability on the part of the Company or the Agents under this Agreement except in respect of any liability of the Company which may have arisen or may thereafter arise under Sections 11 or 13 hereof. 15. TERMINATION ----------- This Agreement may be terminated in the sole discretion of the Agents (or any one of them) by written notice to the Company given prior to the Closing Time in the event that: (a) the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied under this Agreement at or prior to the Closing Time; or (b) at or prior to the Closing Time: (i) there shall have occurred any adverse material change or there shall be discovered any previously undisclosed adverse material fact in relation to the Company; or (ii) there shall have occurred any change in the Securities Laws of any Reporting Jurisdiction or Qualifying Jurisdiction or any inquiry, investigation or other proceeding is made or any order is issued under or pursuant to any statute of Canada or any province thereof or any statute of the United States or any state thereof or any stock exchange in relation to the Company or any of its securities (except for any inquiry, investigation or other proceeding based upon activities of the Agents and not upon activities of the Company); which, in the opinion of the Agents, prevents or restricts trading in or the distribution of the Common Shares and Warrants forming the Units and/or the Common Shares issuable upon the due exercise of the Warrants or the Compensation Warrants or adversely affects or might reasonably be expected to adversely affect the market price or value of the Common Shares; or (iii) if there should develop, occur or come into effect or existence any event, action, state, condition or major financial occurrence or catastrophe of national or international consequence or any law or regulation which, in the reasonable opinion of the Agents, seriously adversely affects or involves, or will seriously adversely affect or involve, the financial markets or the business, operations or affairs of the Company and its Subsidiaries, taken as a whole; (iv) a cease trading order is made by any securities regulator or other competent authority by reason of the fault of the Company or its directors, officers and agents and such cease trading order is not rescinded within 48 hours; (v) if the Company fails to obtain the approval of the Exchange for the listing of the Common Shares comprising part of the Units and issuable upon the exercise of the Warrants or the Compensation Warrants, as the case may be; or (vi) the due diligence investigations of the Agents identify a material adverse fact with respect to the Corporation or any of its Subsidiaries or the Units which existed as of the date hereof but which had not been publicly disclosed. Termination of this Agreement pursuant to this Section 15 shall be without liability of any party to any other party except as provided in Sections 11, 13 or 15 hereof. The rights of termination contained in this Section 15 are in addition to any other rights or remedies the Agents may have in respect of any default, act or failure to act or non-compliance by the Company in respect of any of the matters contemplated by this Agreement or otherwise. Any termination pursuant to the foregoing provisions shall be effected by notice in writing delivered by Sprott, on behalf of the Agents, to the Company at its address as herein set out. In the event of a termination pursuant to the provisions hereof and notice having been given, as aforesaid, there will be no further liability on the part of the Agents under this Agreement. Upon such withdrawal of services, the Company shall be relieved of its exclusivity obligations referred to in subsection 1(1) hereof and its obligations to pay the Agents' Commission, but shall continue to perform, fulfill and satisfy its obligations under sections 11, 13, and 14 hereof. This Agreement may be terminated in writing by either party at any time after 60 days following the filing of the Preliminary Prospectus, in the event the Offering has not closed, in which case the Company shall be relieved of its exclusivity obligations referred to in subsection 1(1) hereof and its obligations to pay the Agents' Commission, but shall continue to perform, fulfill and satisfy its obligations under sections 11, 13, and 14 hereof. Page 34 16. NOTICES ------- All communications hereunder shall be in writing and shall be delivered or telecopied and confirmed by mail, and shall, (a) in the case of notice to the Company, be addressed and sent to: Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, B.C. V6S 2L2 Facsimile No.: (604) Attention: Bob Rieder with a copy to: Catalyst Corporate Finance Lawyers Suite 1400, 1055 West Hastings Street Vancouver, B.C. Facsimile No.: (604) 443-7000 Attention: Michael Varabioff (b) and in the case of notice to the Agents, be addressed and sent to: Sprott Securities Inc. Royal Bank Plaza, South Tower 200 Bay Street Suite 3450 Toronto, Ontario M5J 2J1 Facsimile No.: (416) 943-6496 Attention: Jeff Kennedy Raymond James Ltd. Suite 2200, 925 West Georgia St. Vancouver, B.C. V6C 3L2 Facsimile No.: (604) 659-8398 Attention: Patrick J. Wolfe and if delivered personally shall be considered to be given on the date of delivery and if given by facsimile shall be deemed to have been received two hours after such faxing, provided that if such faxing takes place on a day other than a business day or after normal business hours, it shall be deemed to have been received at 9:00 a.m. (local time) on the first business day after the sending of such facsimile. Any party hereto may change its address for notice at any time by giving notice to the other parties to this agreement pursuant to the provisions of this paragraph. Page 35 17. POST CLOSING COVENANTS OF THE AGENTS ------------------------------------ The Agents shall, after the Closing Time: (i) use their best efforts to terminate, and to cause the members of any banking, selling or other group to terminate, distribution to the public of the Offered Units, the Optioned Units and the Greenshoe Units (after the Additional Closing Time) as promptly as possible; (ii) give prompt written notice to the Company when, in the opinion of the Agents, they and the members of such groups have ceased distribution to the public of the Offered Units, the Optioned Units and the Greenshoe Units; and (iii) provide upon the cessation of distribution, a breakdown of the total proceeds realized from such distribution in the respective Qualifying Jurisdictions in which such information is or may be required by the appropriate Securities Regulators. 18. TERMS, PROVISIONS AND CONDITIONS -------------------------------- It is understood that the Agents may waive, in whole or in part, or extend the time for compliance with, any of the terms, provisions and conditions of this Agreement without prejudice to their rights in respect of any other term, provisions and conditions or any other or subsequent breach or non-compliance by the Company with any such terms, provisions or conditions, provided that to be binding on the Agents any such waiver or extension must be in writing. 19. SEVERABILITY ------------ If any provision of this Agreement shall be adjudged by a competent authority to be invalid or for any reason unenforceable, to the extent permitted by law, such invalidity or unenforceability shall not affect the validity, enforceability or operation of any other provision herein. 20. SUCCESSORS ---------- Except as contemplated herein, no party hereto may assign this Agreement or any part hereof without the prior written consent of the other parties hereto. Subject to the foregoing, this Agreement shall enure to the benefit of, and shall be binding upon, the Agents and the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions contained in this Agreement; this Agreement and all conditions and provisions of this Agreement being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that the covenants and indemnities of the Company contained in Section 13 hereof shall also be for the benefit of the Agents' Personnel; and the covenants of the Agents contained in Section 5 hereof shall also be for the benefit of all officers, directors, employees and agents of the Company. 21. APPLICABLE LAW AND SUBMISSION TO JURISDICTION --------------------------------------------- The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the Province of British Columbia and the federal laws applicable therein. The parties hereto hereby attorn to the jurisdiction of the courts of the Province of British Columbia. Page 36 22. COUNTERPARTS ------------ This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 23. ENTIRE AGREEMENT ---------------- This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supercedes the letter agreement dated January 11, 2002 other than paragraph 15 thereof between the Company and Sprott, which letter agreement (other than paragraph 15 thereof) is hereby terminated. 24. TIME OF ESSENCE --------------- Time shall be of the essence of this Agreement. Page 37 If the foregoing is in accordance with your understanding and agreed to by you, please signify your acceptance on the accompanying counterparts of this letter and return the same to us, whereupon this letter as so accepted shall constitute a binding agreement between us in accordance with the foregoing. Yours very truly, SPROTT SECURITIES INC. Per: /s/ W. Jeff Kennedy --------------------------------- Authorized Signing Officer RAYMOND JAMES LTD. Per: /s/ Patrick J. Wolfe --------------------------------- Authorized Signing Officer Page 38 Accepted this 28th day of February, 2002. CARDIOME PHARMA CORP. Per: /s/ Bob Reider --------------------------------- Bob Rieder President and Chief Executive Officer Page 39 SCHEDULE "A" FORM OF SELECTED DEALER CERTIFICATE In connection with the private placement in the United States of the Offered Securities of Cardiome Pharma Corp. (the "Company"), pursuant to the agency agreement dated February 28, 2002 among the Company and the Agents named therein (the "Agency Agreement"), the undersigned does hereby certify to the Company as follows: 1. it is a duly registered broker or dealer with the United States Securities and Exchange Commission and is a member of, and in good standing with, the National Association of Securities Dealers, Inc. on the date hereof; 2. it has not engaged or will engage in any directed selling efforts (as defined in Rule 902 of Regulation S) with respect to the Offered Securities and it has complied and will comply with the offering restriction requirements of Regulation S. 3. each offeree was provided with a copy of the U.S. private placement memorandum, including (A) the Canadian final prospectus dated February 28, 2002 relating to the Offered Securities; and (B) a U.S. covering memorandum for the offering of the Offered Securities in the United States; and 4. immediately prior to its transmitting such U.S. private placement memorandum to such offerees, it had reasonable grounds to believe and did believe that each offeree was an Accredited Investor and, on the date hereof, it continues to believe that each U.S. person purchasing Offered Securities from it is an Accredited Investor. The undersigned represents, warrants and covenants to the Company that, in connection with all sales of the Offered Securities in the United States or to, or for the account of a U.S. Person: 1. neither it nor its representatives have utilized, and none of such persons will utilize, any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act), including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising, in connection with the offer or sale of the Offered Securities in the United States or have offered or will offer to sell any Offered Securities in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; 2. it has not used and will not use any written material other than the Preliminary Prospectus, the Prospectus, any Prospectus Amendment, Confidential Private Placement Memorandum, any document incorporated therein by reference or a cover letter to accompany such documents in a form approved by the Company (such cover letter and accompanying documents, which shall include at least the Preliminary Prospectus or the Prospectus and the Confidential Private Placement Memorandum being referred to herein Page 40 as the "Offering Documents"), and each offeree of the Offered Securities in the United States has been or will be sent a copy of the Offering Documents; and 3. it has had a pre-existing substantial relationship with each offeree of the Offered Securities contacted or to be contacted by it in the United States and have reasonable grounds to believe and did believe, on the date hereof, continue to believe that each such offeree is an "accredited investor", as such term is defined in Rule 501(a) under the Securities Act. Terms used in this certificate have the meanings given to them in the Agency Agreement unless otherwise defined herein. Dated this day of March, 2002. [SELECTED DEALER] By:_________________________ Name: Title: SCHEDULE "B" FORM OF COMPENSATION WARRANT [The following legend to be inserted on any certificate representing compensation warrants not qualified by prospectus or any securities issued upon due exercise thereof: UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THE SECURITIES SHALL NOT TRADE THE SECURITIES BEFORE JULY 9, 2002.] [The following legend to be inserted on any certificate representing compensation warrants issued to persons resident in the United States or any securities issued upon due exercise thereof: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FORM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AFTER PROVIDING A SATISFACTORY LEGAL OPINION TO THE CORPORATION. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE TRANSFER AGENT FOR SUCH SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT.] COMPENSATION WARRANTS TO PURCHASE UNITS OF CARDIOME PHARMA CORP. (Existing under the laws of the British Columbia) Void After March [ ], 2004 THIS CERTIFIES that, for value received, (the "Holder"), is the registered holder of compensation warrants (the "Compensation Warrants") each of which entitle the holder, subject to the terms and conditions set forth in this Compensation Warrant Certificate, to purchase from Cardiome Pharma Corp. (the "Corporation"), one unit (a "Unit"), each Unit consisting of one common share of the Corporation (a "Common Share") and one-quarter of one share purchase warrant (a "Warrant"), at any time until 5:00 p.m. (Toronto time) on March , 2004 (the "Time of Expiry") on payment of $0.95 per Unit (the "Exercise Price"). Each whole Warrant is exercisable for one Share at a price of $1.66 per Share at any time until March , 2004. The number of Units which the Holder is entitled to acquire upon exercise of the Compensation Warrants and the Exercise Price are subject to adjustment as hereinafter provided. Page 2 1. Exercise of Compensation Warrants --------------------------------- (a) Election to Purchase. The rights evidenced by this certificate may be -------------------- exercised by the Holder in whole or in part and in accordance with the provisions hereof by: (i) surrender of this Compensation Warrant Certificate together with an Election to Exercise in substantially the form attached hereto as Schedule 1, properly completed and executed, together with payment by certified cheque or bank draft of the Aggregate Purchase Price (as defined in Schedule "1") for the number of Units specified in the Election to Exercise at the office of the Corporation at 3650 Westbrook Mall, Vancouver, British Columbia V6S 2L2, or such other address in Canada as may be notified in writing by the Corporation (the "Corporation Office"); or (ii) the surrender of this Compensation Warrant Certificate together with a form in substantially the form attached hereto as Schedule 2 properly completed and executed (the "Cashless Exercise Form") at the address set forth in clause (i) above. Such presentation and surrender shall be deemed a waiver of the Holder's obligation to pay the Aggregate Purchase Price (as defined in Schedule "1"), or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Compensation Warrant Certificate for that number of Units subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then Current Market Price and the Exercise Price, and the denominator of which shall be the then Current Market Price. For the purposes of any computation under this Section 1(a)(ii) the then "Current Market Price" shall be the closing price of the Common Shares on The Toronto Stock Exchange on the last trading day immediately prior to the date of the duly executed Cashless Exercise Form. In the event that the rights evidenced by this certificate are exercised in part, the Corporation shall, contemporaneously with the issuance of the Units issuable on the exercise of the Compensation Warrants so exercised, issue to the Holder a Compensation Warrant Certificate on identical terms in respect of that number of Units in respect of which the Holder has not exercised the rights evidenced by this certificate. (b) Exercise. The Corporation shall, within three business days after -------- receiving a duly executed Election to Exercise and the Aggregate Purchase Price (as defined in Schedule "1") or Cashless Exercise Form, as the case may be, for the number of Units specified therein Page 3 (the "Exercise Date"), issue that number of Units specified in the Election to Exercise or that number of Units determined under Section 1(a)(ii) and specified in the Cashless Exercise Form. (c) Certificates. ------------ (i) As promptly as practicable after the Exercise Date, the Corporation shall issue and deliver to the Holder, registered in the name of the Holder, certificates for the number of Common Shares and Warrants, respectively, for the number of Units specified in the Election to Exercise or Cashless Exercise Form, as the case may be. (ii) To the extent permitted by law, such exercise shall be deemed to have been effected as of the close of business on the Exercise Date, and at such time the rights of the Holder with respect to the number of Compensation Warrants which have been exercised as such shall cease. (d) Fractional Shares No fractional Common Shares shall be issued upon ----------------- exercise of any Compensation Warrant and no payments or adjustment shall be made upon any exercise on account of any cash dividends on the Common Shares issued upon such exercise. (e) Corporate Changes ----------------- (i) Subject to paragraph 1(e)(ii) hereof, if, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall be a party to any reorganization, merger, dissolution or sale of all or substantially all of its assets, whether or not the Corporation is the surviving entity, the number of Compensation Warrants evidenced by this certificate shall be adjusted so that the holder hereof shall be entitled to acquire the same number and type of securities to which the holder of that number of Units of the Corporation subject to the unexercised Compensation Warrants would have been entitled by reason of such reorganization, merger, dissolution or sale of all or substantially all of its assets (the "Event"), and the Exercise Price shall be adjusted to be the amount determined by multiplying the Exercise Price in effect immediately prior to the Event by the number of Shares subject to the unexercised Compensation Warrants immediately prior to the Event, and dividing the product thereof by the number of securities to which the holder of that number of Shares subject to the unexercised Compensation Warrants would have been entitled to by reason of such Event. (ii) If after an event referred to in paragraph 1(e)(i) hereof, the Corporation is unable to deliver securities to the Holder pursuant to the proper exercise of a Compensation Warrant, the Corporation may satisfy such obligations to the Holder Page 4 hereunder by paying to the Holder in cash the difference between the Exercise Price of all unexercised Compensation Warrants granted hereunder and the Fair Market Value on the Exercise Date of the securities to which the Holder would be entitled to upon exercise of all unexercised Compensation Warrants. Adjustments under this subparagraph (e) or (subject to subparagraph (o)) any determinations as to the Fair Market Value of any securities shall be made by the board of directors of the Corporation, or any committee thereof specifically designated by the board of directors to be responsible therefor, and any reasonable determination made by such board or committee thereof shall be binding and conclusive, subject only to any disputes being resolved by the Corporation's auditors, whose determination shall be binding and conclusive. (f) Subdivision or Consolidation of Shares -------------------------------------- (i) In the event that, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall subdivide its outstanding common shares ("Common Shares") into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Common Shares of the Corporation shall be consolidated into a smaller number of shares, the Exercise Price in effect immediately prior to such consolidation shall be proportionately increased. (ii) Upon each adjustment of the Exercise Price as provided herein, the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Units (calculated to the nearest tenth of a Unit) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Units which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (g) Change or Reclassification. In the event that, after the date of --------------------------- issuance of this Certificate and prior to the Time of Expiry, the Corporation shall change or reclassify its outstanding Common Shares into a different class of securities, the rights evidenced by the Compensation Warrants shall be adjusted as follows so as to apply to the successor class of securities: (i) the number of the successor class of securities which the Holder shall be entitled to acquire as part of the Units shall be that number of the successor class of securities which a holder of that number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification would have been entitled to by reason of such change or reclassification; and Page 5 (ii) the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the change or reclassification by the number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification, and dividing the product thereof by the number of successor securities determined in paragraph 1(g)(i) hereof. (h) Offering to Shareholders. If and whenever at any time after the date ------------------------ of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall fix a record date or if a date of entitlement to receive is otherwise established (any such date being hereinafter referred to in this subsection 1(h) as the "record date") for the issuance of rights, options or warrants to all or substantially all the holders or the outstanding Common Shares entitling them, for a period expiring not more than 45 days after such record date, to subscribe for or purchase Common Shares or securities convertible into or exchangeable for Common Shares at a price per share or, as the case may be, having a conversion or exchange price per share less than 95% of the Fair Market Value (as hereinafter defined) on such record date, the Exercise Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Exercise Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date plus a number equal to the number arrived at by dividing the aggregate subscription or purchase price of the total number of additional Common Shares offered for subscription or purchase or, as the case may be, the aggregate conversion or exchange price of the convertible or exchangeable securities so offered by such Fair Market Value, and of which the denominator shall be the total number of Common Shares outstanding on such record date plus the total number of additional Common Shares so offered (or into which the convertible or exchangeable securities so offered are convertible or exchangeable); Common Shares owned by or held for the account of the Corporation or any subsidiary of the Corporation shall be deemed not to be outstanding for the purpose of any such computation; such adjustment shall be made successively whenever such a record date is fixed; to the extent that any rights or warrants are not so issued or any such rights or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or to the Exercise Price which would then be in effect based upon the number of Common Shares or conversion or exchange rights contained in convertible or exchangeable securities actually issued upon the exercise of such rights or warrants, as the case may be. (i) Carry Over of Adjustments. No adjustment of the Exercise Price shall ------------------------- be made if the amount of such adjustment shall be less than 1% of the Exercise Price in effect immediately prior to the event giving rise to the adjustment, provided, however, that in such case any Page 6 adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least 1% of the Exercise Price. (j) Notice of Adjustment. Upon any adjustment of the number of Units and --------------------- upon any adjustment of the Exercise Price, then and in each such case the Corporation shall give written notice thereof to the Holder, which notice shall state the Exercise Price and the number of Units or other securities subject to the unexercised Compensation Warrants resulting from such adjustment, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the request of the Holder there shall be transmitted promptly to the Holder a statement of the firm of independent chartered accountants retained to audit the financial statements of the Corporation to the effect that such firm concurs in the Corporation's calculation of the change. (k) Other Notices. In case at any time after the date of issuance of this -------------- Certificate and prior to the Time of Expiry: (i) the Corporation shall declare any dividend upon its Common Shares payable in kind; (ii) the Corporation shall offer for subscription pro rata to the holders of its Common Shares any additional shares of any class or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation, amalgamation or merger of the Corporation with, or sale of all or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then, in any one or more of such cases, (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002) the Corporation shall give to the Holder (A) at least 10 days' prior written notice of the date on which a record date shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002), merger, amalgamation, sale, dissolution, liquidation or winding-up and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Shares shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of Common Shares shall be entitled to exchange Page 7 their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case may be. (l) Shares to be Reserved. The Corporation will at all times keep ---------------------- available, and reserve if necessary under Canadian law, out of its authorized Common Shares, solely for the purpose of issue upon the exercise of the Compensation Warrants and the Warrants issuable upon the exercise of the Compensation Warrants, such number of Common Shares as shall then be issuable upon the due exercise of the Compensation Warrants and the due exercise of the Warrants issuable upon the due exercise of the Compensation Warrants. The Corporation covenants and agrees that all Common Shares which shall be so issuable will, upon issuance, be duly authorized and issued as fully paid and non-assessable. The Corporation will take all such actions as may be necessary to ensure that all such Common Shares may be so issued without violation of any applicable requirements of any exchange upon which the Common Shares may be listed or in respect of which the Common Shares are qualified for unlisted trading privileges. The Corporation will take all such actions are within its power to ensure that all such Common Shares may be so issued without violation of any applicable law. (m) Issue Tax. The issuance of certificates for Common Shares upon the --------- due exercise of Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, shall be made without charge to the Holder for any issuance tax in respect thereto, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder. (n) Listing. The Corporation will, at its expense and as expeditiously as ------- possible, use its reasonable commercial efforts to cause all Common Shares issuable upon the due exercise of the Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, to be duly listed on The Toronto Stock Exchange prior to the issuance of such Common Shares. (o) Fair Market Value. For the purposes of any computation hereunder, the ------------------ "Fair Market Value" at any date shall be the weighted average sale price per share for the Common Shares of the Corporation for the 20 consecutive trading days immediately before such date on The Toronto Stock Exchange or such other stock exchange on which the Common Shares may then be listed, or, if the shares or any other security in respect of which a determination of Fair Market Value is being made are not listed on any stock exchange, the Fair Market Value shall be Page 8 determined by the directors, which determination shall be conclusive. The weighted average price shall be determined by dividing the aggregate sale price of all such shares sold on the said exchange during the said 20 consecutive trading days by the total number of such shares so sold. 2. Replacement ----------- Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Compensation Warrant Certificate and, if requested by the Corporation, upon delivery of a bond of indemnity satisfactory to the Corporation (or, in the case of mutilation, upon surrender of this Compensation Warrant Certificate), the Corporation will issue to the Holder a replacement certificate (containing the same terms and conditions as this Compensation Warrant Certificate). 3. Expiry Date ----------- The Compensation Warrants shall expire and all rights to purchase Units hereunder shall cease and become null and void at 5:00 p.m. (Toronto time) on March , 2004. 4. Covenant -------- So long as any Compensation Warrants remain outstanding the Corporation covenants that it shall do or cause to be done all things necessary to maintain its status as a reporting issuer not in default in each of the Reporting Jurisdictions. 5. U.S. Securities Laws -------------------- The holder: (a) acknowledges that the Common Shares and Warrants issuable upon the exercise of this Compensation Warrant have not been and will not be registered under the United States Securities Act of 1933, as amended (the "1933 Act"), or the securities laws of any state of the United States and may be offered and sold only outside the United States pursuant to Regulation S under the 1933 Act ("Regulation S") or in the United States in transactions exempt from such registration; (b) agrees that to the extent required by the 1933 Act or state securities laws: (i) such Common Shares and Warrants may be subject to a "distribution compliance period" imposed by Regulation S or a holding period imposed upon "restricted securities" under the 1933 Act or by applicable state law; and (ii) stop transfer orders may be placed on such Common Shares and Warrants and the certificates therefor may bear legends restricting their transfer. Page 9 6. Defined Terms ------------- All capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the agency agreement dated as of February 28, 2002 between the Corporation and Sprott Securities Inc. and Raymond James Ltd. 7. Governing Law ------------- The laws of the Province of British Columbia and the laws of Canada applicable therein shall govern the Compensation Warrants. 8. Assignment, Successors ---------------------- Unless otherwise consented to in writing by the Corporation, such consent not to be unreasonably withheld, this Compensation Warrant Certificate may not be assigned. This Compensation Warrant Certificate shall enure to the benefit of the Holder and its successors and shall be binding on the Corporation and its successors. IN WITNESS WHEREOF the Corporation has caused this Compensation Warrant Certificate to be signed by a duly authorized officer. DATED as of ________________, 2002. CARDIOME PHARMA CORP. Per:__________________________ Schedule "1" ------------ Election to Exercise The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: ________________________ (b) Number of Units to be Acquired: ________________________ (c) Exercise Price per Unit: $______________________________ (d) Aggregate Purchase Price [(b) multiplied by (c)] $_______________________ and hereby tenders a certified cheque, bank draft or cash for such Aggregate Purchase Price, and directs such Units to be registered and certificates therefor to be issued as directed below. The undersigned represents that: [Please check one box] * It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. * Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ ____________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Schedule "2" ------------ Cashless Exercise Form The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: ________________________ (b) Exercise Price per Unit: ________________________ (c) Current Market Price: $__________________________ (d) Number of Units to be Acquired: $________________________ [(a) x ((c) - (b))/(c)] and directs such Units to be registered and certificates therefore to be issued as directed below. The undersigned represents that: [Please check one box] * It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. * Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ _________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Exhibit 1 Representation Letter ____________, 2002 Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, B.C. V6S 2L2 CANADA Ladies and Gentlemen: In connection with the purchase by the undersigned on this date of common shares and warrants (the "Securities") of Cardiome Pharma Corp. (the "Company"), the undersigned hereby confirms to you that: 1. The undersigned: (a) is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D under the United States Securities Act of 1933, as amended (the "Securities Act") because it is a broker-dealer registered pursuant to Section 15 of the United States Securities Exchange Act of 1934, as amended; and (b) is purchasing the Securities for its own account and not with a view to resale, distribution or other disposition in a manner that would violate the registration requirements of the Securities Act. 2. It acknowledges that neither the Securities nor any interest therein has been or will be registered under the Securities Act or the securities laws of any State or other political subdivision of the United States. 3. It further acknowledges and agrees that, because the Securities have not been registered under the Securities Act and are being offered and sold in a private offering under the exemption afforded by Section 4(2) of the Securities Act, the Shares are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act and cannot be reoffered or resold unless they are subsequently registered under the Securities Act or an exemption from registration thereunder is available, and that it will continue to bear the economic risk of its investment in the Shares for an indefinite period of time. 4. It agrees that it will not re-offer, resell, pledge, hypothecate or otherwise transfer or dispose of the Securities (or securities that may be received in replacement thereof or in exchange therefore) except: (a) pursuant to an effective registration statement under the Securities Act; Page 2 (b) in a transaction outside the United States meeting the requirements of Rule 904 of Regulation S under the Securities Act; or (c) in a transaction exempt from registration under the Securities Act and, in each case in compliance with any applicable state securities ("blue sky") laws. It agrees that in connection with any transaction pursuant to the foregoing clause (c), it will furnish to the Company a written opinion of counsel acceptable to the Company to the effect that such offer, sale, pledge, hypothecation, transfer or disposition is in compliance with the registration requirements of all applicable United States federal and state securities laws. It acknowledges and agrees that each certificate for the Securities (and any certificate issued in replacement therefore) shall bear a restrictive legend in substantially the following form and that an appropriate stop transfer order implementing the same shall be lodged with the transfer agent: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACTO F 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FORM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AFTER PROVIDING A SATISFACTORY LEGAL OPINION TO THE CORPORATION. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE TRANSFER AGENT FOR SUCH SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT. 5. The undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Securities. It acknowledges that it has had access to such information concerning the Company as it has deemed necessary to make an informed decision to purchase Securities, and has been afforded the opportunity to ask questions and receive satisfactory answers from representatives of the Company regarding the Company and the terms and conditions relating to investment in the Company, and all such questions have been answered to its full satisfaction. Very truly yours, SCHEDULE "C" FORM OF U.S. SUBSCRIPTION AGREEMENT Exhibit 4.3 Page EX 4.3-1 SUBSCRIPTION AGREEMENT ---------------------- This SUBSCRIPTION AGREEMENT (this "Agreement") made as of the last date set forth on the signature page hereof between Cardiome Pharma Corp. (the "Company"), and the undersigned (the "Subscriber"). W I T N E S S E T H: WHEREAS, Sprott Securities Inc. ("Sprott") and Raymond James Ltd. have been retained by the Company to act as agents (collectively the "Agents"), in the sale of units (the "Units," defined below) and in connection therewith, Sprott has retained Paramount Capital Inc. ("Paramount") to act as an agent, on a "best efforts" basis, in the private offering of the Units pursuant to Regulation D under the Act of 1933 as amended (the "Act") in the United States (Paramount and any of its agents, employees, officers, directors, consultants or assigns, hereinafter the "Selected Dealer"); and WHEREAS the Company desires to issue a minimum of _____ Units and a maximum of Units of the Company (the "Offering") at a price of $__________ per Unit ("Offering Price") for minimum gross proceeds of $10,000,000 ("Minimum Offering") and maximum gross proceeds of $15,000,000 ("Maximum Offering") on or before March 15, 2002, subject to an extension of 60 days at the discretion of the Agents and the Company without notice to the investors (the "Closing Date"). In addition, the Company has granted the Agents an option to offer an additional $5,000,000 of Units to cover over-allotments, if any (the "Over allotment Option"). The Minimum Offering will be offered on a "all or none, best efforts" basis. The Maximum Offering and the Over allotment Option, if exercised, will be offered on a "best efforts" basis. Each Unit consists of one common share, no par value (a "Cardiome Share"), in the capital of the Company and one quarter of one Cardiome Share purchase warrant (a "Cardiome Warrant") of the Company. Subject to adjustment in certain events, one whole Cardiome Warrant will entitle the holder thereof to purchase one Cardiome Share at any time on or before 24 months after the Closing Date ("Expiry Date") at a price equal to 200% of the Offering Price. The Offering Price was determined by the Agents and the Company. The Cardiome Shares and the Cardiome Warrants are being issued pursuant to the attached Offering Materials (defined below). The minimum investment by each individual investor will be $100,000 subject to the discretion of the Selected Dealer to accept purchases of lesser amounts. Unless otherwise stated, all dollar amounts in this Agreement refer to United States Dollars; and WHEREAS, the Subscriber desires to purchase that number of Units set forth on the signature page hereof on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto do hereby agree as follows: I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER -------------------------------------------------------- 1.1 Subject to the terms and conditions hereinafter set forth and in the Preliminary Prospectus of the Company, filed with Canadian securities regulators, dated February 5, 2002 (such prospectus, together with all amendments thereof' and supplements and exhibits thereto, the "Prospectus"), the Confidential Private Placement Memorandum of the Company, dated February 20, 2002, (such memorandum, together with all amendments thereof and supplements and exhibits thereto, the "Memorandum"), this Agreement, as amended and supplemented (collectively with the Prospectus and the Memorandum, the "Offering Materials"), the Subscriber hereby irrevocably purchases for itself and agrees to purchase Page EX 4.3-2 from the Company such number of Units and the Company agrees to sell to the Subscriber such number of Units, as is set forth on the signature page hereof at a price per Unit equal to the Offering Price. The purchase price is payable by solely wire transfer of immediately available funds, pursuant to the payment instructions described in the Memorandum, contemporaneously with the execution and delivery of this Agreement, as supplemented. The Subscriber understands, however, that the purchase and sale of the Units is contingent upon the Company making sales of the Minimum Offering prior to the Offering Termination Date (as defined in Section 3.2 below). 1.2 The Subscriber hereby warrants and represents that it recognizes that the purchase of the Units involves a high degree of risk including, but not limited to, the following: (a) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Units; (b) the Subscriber may not be able to liquidate its investment, (c) transferability of the Cardiome Shares, the Cardiome Warrants, and the Cardiome Shares issuable upon exercise of the Cardiome Warrants (sometimes hereinafter collectively referred to as the "Securities") is limited. Without limiting the generality of the representations set forth in Section 1.5 below, the Subscriber represents that the Subscriber has carefully reviewed the section of the Prospectus captioned "Risk Factors" and the section of the Memorandum entitled "Additional Risk Factors for United States Investors" 1.3 The Subscriber represents that: it is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D, as indicated by the Subscriber's responses to the questions contained in Article VII hereof, and by reason of its business and financial experience and the business and financial experience of those persons it may have retained to advise it with respect to its investment in the Securities it, together with such advisors, has such knowledge, sophistication and experience in business and financial matters that it is capable of evaluating the merits and risks of the prospective investment. 1.4 The Subscriber hereby acknowledges and represents that: (a) the Subscriber has knowledge and experience in business and financial matters, prior investment experience, including investment in securities that are non-listed, unregistered and/or not traded on a national securities exchange nor on the National Association of Securities Dealers, Inc. (the "NASD") automated quotation system ("NASDAQ"), or the Subscriber, at its own risk and expense, has employed the services of a "purchaser representative" (as defined in Rule 501(h) of Regulation D), attorney and/or accountant to read all of the documents furnished or made available by the Company to the Subscriber to evaluate the merits and risks of such an investment on the Subscriber's behalf; (b) the Subscriber recognizes the highly speculative nature of this investment; and (c) the Subscriber is able to bear the economic risk that the Subscriber hereby assumes. 1.5 The Subscriber hereby acknowledges receipt and careful review of the Offering Materials and hereby represents that the Subscriber has been furnished by the Company during the course of the Offering with all information regarding the Company, the terms and conditions of the Offering and any additional information that the Subscriber has requested or desired to know, and has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the Company and the terms and conditions of the Offering. 1.6 (a) In making the decision to invest in the Units, the Subscriber has not relied on the Agents or the Selected Dealer, but has relied solely upon the information provided by the Company in the Offering Materials. To the extent necessary, the Subscriber has retained, at its own risk and expense, and relied upon appropriate professional advice regarding the investment, tax and legal merits and consequences of this Agreement and the purchase of the Units hereunder. The Subscriber disclaims reliance on any statements made or information provided by any person or entity in the course of the Subscriber's consideration of an investment in the Units other than the Offering Materials. Page EX 4.3-3 The Subscriber acknowledges and agrees that (i) the Company has prepared the Offering Materials and that no other person, including without limitation, the Agents and the Selected Dealer, has supplied any information for inclusion in the Offering Materials other than information furnished in writing to the Company by the Agents or the Selected Dealer specifically for inclusion in those parts of the Offering Materials relating specifically to the Agents or the Selected Dealer, respectively; (ii) neither the Agents nor the Selected Dealer has responsibility for the accuracy or completeness of the Offering Materials; and (iii) the Subscriber has not relied upon the independent investigation or verification, if any, that may have been undertaken by the Agents or the Selected Dealer. (b) The Subscriber represents that (i) the Subscriber was contacted regarding the sale of the Units by the Company, the Agents, or the Selected Dealer (or their respective authorized agents or representatives) with whom the Subscriber had a prior substantial pre-existing relationship and (ii) no Units were offered or sold to it by means of any form of general solicitation or general advertising, and in connection therewith, the Subscriber did not receive any general solicitation or general advertising including, but not limited to: (A) receive or review any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, whether closed circuit, or generally available; or (B) attend any seminar meeting or industry investor conference whose attendees were invited by any general solicitation or general advertising. 1.7 The Subscriber hereby represents that the Subscriber, either by reason of the Subscriber's business or financial experience or the business or financial experience of the Subscriber's professional advisors (who are unaffiliated with and not compensated by the Company or any affiliate or selling agent of the Company, including Paramount, directly or indirectly), has the capacity to protect the Subscriber's own interests in connection with the transaction contemplated hereby. 1.8 The Subscriber hereby acknowledges that the Offering has not been reviewed by the United States Securities and Exchange Commission (the "SEC") nor any state regulatory authority as the Offering is intended to be exempt from the registration requirements of Section 5 of the Act pursuant to Regulation D and the registration requirements of applicable state "blue sky" securities laws or regulations. 1.9 The Subscriber understands that the Cardiome Shares and Cardiome Warrants comprising the Units have not been registered under the Act or under any state securities or "blue sky" laws or regulations by reason of a claimed exemption that depends, in part, upon the Subscriber's investment intention and agrees not to sell, pledge, assign or otherwise transfer or dispose of the Securities unless they are registered under the Act and under any applicable state securities or "blue sky" laws or regulations or unless an exemption from such registration is available, subject to Section 1.11 herein. In this connection, the Subscriber hereby represents that the Subscriber is purchasing the Securities for the Subscriber's own account for investment purposes only and not with a view toward the resale or distribution to others. The Subscriber, if an entity, further represents that it was not formed for the purpose of purchasing the Securities. 1.10 The Subscriber understands that there is no public market in the United States for the Securities and that no market may develop in the United States for any of such Securities. The Subscriber understands that even if a public market develops for such Securities, Rule 144 ("Rule 144") promulgated under the Act requires for non-affiliates, among other conditions, a one-year holding period prior to the resale in the United States (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the Act. The Subscriber understands and hereby acknowledges that the Company is under no obligation to register any of the Securities under the Act or any state securities or "blue sky" laws other than as set forth in Article V. Page EX 4.3-4 1.11 The Subscriber agrees that if it decides to offer, sell or otherwise transfer, pledge or hypothecate all or any part of the Securities, it will not offer, sell or otherwise transfer, pledge or hypothecate any of such Securities (other than pursuant to an effective registration statement under the Act), directly or indirectly unless an offer and sale or other disposition is: (i) to the Company; or (ii) made outside the United States in accordance with the requirements of Rule 904 of Regulation S under the Act; or (iii) made pursuant to the exemption from registration under the Act provided by Rule 144 thereunder; or (iv) in a transaction that does not require registration under the Act or any applicable United States state laws, rules and regulations governing the offer and sale of securities, and it has theretofore furnished to the Company an opinion to that effect of counsel of recognized standing reasonably satisfactory to the Company. 1.12 The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Securities that such Securities have not been registered under the Act or any state securities or "blue sky" laws and setting forth or referring to the restrictions on transferability and sale thereof contained in this Agreement. The Subscriber is aware that the Company will make a notation in its appropriate records with respect to the restrictions on the transferability of such Securities. The legend to be placed on each certificate shall be in form substantially similar to the following: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE ISSUER, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AFTER PROVIDING A SATISFACTORY LEGAL OPINION TO THE ISSUER. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY," MAY BE OBTAINED FROM THE TRANSFER AGENT FOR SUCH SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE ISSUER, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT. Provided that the Securities are being sold pursuant to Section 1.11 (ii) above, the Company covenants and represents that the legend nay be removed by providing a declaration to the transfer agent for the Securities of the Company substantially as attached hereto as Appendix A (or as the Company may prescribe from time to time) upon the sale of the Securities by the Subscriber. Page EX 4.3-5 1.13 The Subscriber understands that the Selected Dealer, the Agents, and/or the Company will review this Agreement and are hereby given authority by the Subscriber to call the Subscriber's bank or place of employment or otherwise review the financial standing of the Subscriber; and it is further agreed that the Selected Dealer, the Agents and the Company, each at their sole discretion, reserve the unrestricted right, without further documentation or agreement on the part of the Subscriber, to reject or limit any purchase, to accept purchases for fractional Units and to close the Offering to the Subscriber at any time and that the Company will issue stop transfer instructions to its transfer agent with respect to such Securities. 1.14 The Subscriber hereby represents that the address of the Subscriber furnished by Subscriber on the signature page hereof is the Subscriber's principal residence if the Subscriber is an individual or its principal business address if it is a corporation or other entity. 1.15 The Subscriber represents that the Subscriber has full power and authority (corporate, statutory and otherwise) to execute and deliver this Agreement and to purchase the Units. This Agreement constitutes the legal, valid and binding obligation of the Subscriber, enforceable against the Subscriber in accordance with its terms. 1.16 If the Subscriber is a corporation, partnership, limited liability company, trust, employee benefit plan, individual retirement account, Keogh Plan, or other tax-exempt entity, it is authorized and qualified to invest in the Company and the person signing this Agreement on behalf of such entity has been duly authorized by such entity to do so 1.17 The Subscriber acknowledges that if he or she is a Registered Representative of an NASD member firm, he or she must give such firm the notice required by the NASD's Rules of Fair Practice, receipt of which must be acknowledged by such firm in Section 7.4 below. 1.18 (a) The Subscriber agrees not to issue any public statement with respect to the Subscriber's investment or proposed investment in the Company or the terms of any agreement or covenant between them and the Company without the Company's prior written consent, except such disclosures as may be required under applicable law or under any applicable order, rule or regulation. (b) The Company agrees not to disclose the name, address or any other information about the Subscriber, except as required by law or applicable regulatory authorities; provided, that the Company may use the name (but not the address) of the Subscriber in any registration statement filed pursuant to Article V in which the Subscriber's Securities are included. 1.19 The Subscriber represents and warrants that it has not engaged, consented to or authorized any broker, finder or intermediary to act on its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement. The Subscriber hereby agrees to indemnify and hold harmless the Company from and against all fees, commissions or other payments owing to any such person or firm acting on behalf of the Subscriber hereunder. 1.20 The Subscriber agrees to hold the Company and its directors, officers, employees, affiliates, controlling persons and agents (including the Selected Dealer, the Agents and their respective officers, directors, employees, counsel, controlling persons and agents) and their respective heirs, representatives, successors and assigns harmless and to indemnify them against all liabilities, costs and expenses incurred by them as a result of (a) any sale or distribution of the Securities by the Subscriber in violation of the Act or any applicable state securities or "blue sky" laws; or (b) any false representation or warranty or any breach or failure by the Subscriber to comply with any covenant made by the Subscriber in this Agreement (including the Confidential Investor Questionnaire contained in Article VII herein) or any Page EX 4.3-6 other document furnished by the Subscriber to any of the foregoing in connection with this transaction. 1.21 The Subscriber understands, acknowledges and agrees with the Company and the Selected Dealer that, except as otherwise set forth herein, that the subscription hereunder is irrevocable by the Subscriber, that, except as required by law, the Subscriber is not entitled to cancel, terminate or revoke this Agreement or any agreements of the Subscriber hereunder and that this Agreement and such other agreements shall survive the death or disability of the Subscriber and shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and permitted assigns. If the Subscriber is more than one person, the obligations of the Subscriber hereunder shall be joint and several and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his/her heirs, executors, administrators, successors, legal representatives and permitted assigns. 1.22 The Subscriber understands, acknowledges and agrees with the Company, the Agents and the Selected Dealer that the Offering is intended to be exempt from registration under the Act pursuant to the provisions of Regulation D thereunder, which is in part dependent upon the truth, completeness and accuracy of the representations made by the Subscriber herein. 1.23 The Subscriber understands and acknowledges the Selected Dealer has been engaged by Sprott to act as a introducing agent and is acting as a introducing agent in connection with this Offering and will receive a commission in the form of both cash and warrants from Sprott and Sprott will reimburse the Selected Dealer's reasonable out-of-pocket expenses in connection with the Offering (including legal fees). 1.24 The Subscriber acknowledges that the information contained in this Agreement or otherwise made available to the Subscriber is confidential and non-public and agrees that all such information shall be kept in confidence by the Subscriber and neither used by the Subscriber for the Subscriber's personal benefit (other than in connection with this Agreement, as supplemented) nor disclosed to any third party for any reason, notwithstanding that the Subscriber's subscription may not be accepted by the Company; provided, however, that this obligation shall not apply to any such information that (i) is part of the public knowledge or literature and readily accessible at the date hereof, (ii) becomes part of the public knowledge or literature and readily accessible by publication (except as a result of a breach of this provision) or (iii) is received from third parties (except third parties who disclose such information in violation of any confidentiality agreements or obligations, including, without limitation, any subscription or other similar agreement entered into with the Company). II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company hereby represents and warrants to the Subscriber that: 2.1 Organization, Good Standing and Qualification. The Company is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of The Province of British Columbia and has full corporate power and authority to conduct its business. 2.2 Capitalization and Voting Rights. The authorized, issued and -------------------------------- outstanding capital stock of the Company is as set forth in the Prospectus, as of the date of the Prospectus, and all issued and outstanding shares of the Company are validly issued, fully paid and nonassessable. As of January 31, 2001, except as set forth in the Prospectus, there are no outstanding options, warrants, agreements, convertible securities, preemptive rights or other rights to subscribe for or to purchase any shares of capital stock of the Company. Page EX 4.3-7 Except as set forth in the Prospectus and as otherwise required by law, there are no restrictions upon the voting or transfer of any of the shares of capital stock of the Company pursuant to the Company's Memorandum and Articles of Incorporation or other governing documents or any agreement or other instruments to which the Company is a party or by which the Company is bound. 2.3 Authorization; Enforceability. The Company has all corporate ----------------------------- right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the (i) authorization execution, delivery and performance of this Agreement by the Company; and (ii) authorization, sale, issuance and delivery of the Securities contemplated hereby and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy. The Cardiome Shares, when issued and fully paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable. The Company shall, at all times when any of the Cardiome Warrants remain outstanding, have authorized and reserved for issuance a sufficient number of Cardiome Shares to provide for exercise of the Cardiome Warrants. Upon the exercise of the Cardiome Warrants in accordance with their terms and the issuance and delivery of the Cardiome Shares issuable upon exercise of the Cardiome Warrants, such Cardiome Shares will be validly issued, fully paid and nonassessable. The issuance and sale of the Cardiome Shares contemplated hereby and the issuance and sale of the Cardiome Shares underlying the Cardiome Warrants, will not give rise to any preemptive rights or rights of first refusal on behalf of any person which have not been waived in connection with this Offering. 2.4 No Conflict; Governmental Consents. ----------------------------------- (a) The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby will not result in the violation of any material law, statute, role, regulation, order, writ, injunction, judgment or decree of any court or governmental authority to or by which the Company is bound, or of any provision of the Memorandum and Articles of Incorporation of the Company, and will not conflict with, or result in a material breach or violation of, any of the terms or provisions of, or constitute (with due notice or lapse of time or both) a default under, any lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Company is a party or by which it is bound or to which any of its properties or assets is subject, nor result in the creation or imposition of any lien upon any of the properties or assets of the Company. (b) No consent, approval, authorization or other order of any governmental authority is required to be obtained by the Company in connection with the authorization, execution and delivery of this Agreement or with the authorization, issue and sale of the Units or the Securities comprising the Units, except such filings as may be required to be made with the SEC, NASD, NASDAQ, the Toronto Stock Exchange (the "TSE") and with any state or foreign blue sky or other securities regulatory authority and any Canadian securities regulatory authority, all of which filing has been or will be timely made. 2.5 Litigation. The Company knows of no pending or threatened legal or ---------- governmental proceedings against the Company which could materially adversely affect the business, property, financial condition or operations of the Company or which materially and adversely questions the validity of this Agreement or any agreements related to the transactions contemplated hereby or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which could materially adversely affect the business, property, financial condition or operations of Page EX 4.3-8 the Company. There is no action, suit, proceeding or investigation by the Company currently pending in any court or before any arbitrator or that the Company intends to initiate. 2.6 Disclosure. The information set forth in the Offering Materials as ---------- of the date of the Prospectus contains no untrue statement of a material fact nor omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 2.7 Investment Company. The Company is not an "investment company" ------------------- within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder. 2.8 Selected Dealer. The Company has engaged, consented to and ---------------- authorized the Agents to act as exclusive agents of the Company solely in connection with the transactions contemplated by this Agreement. Sprott, with the consent of the Company, will pay the Selected Dealer a commission in the form of both cash and Broker's Warrants (as defined in the Prospectus) and will reimburse the Selected Dealer's reasonable out-of-pocket expenses incurred in connection with the Offering (including legal fees). III. TERMS OF SUBSCRIPTION --------------------- 3.1 The minimum investment that may be made by any prospective investor in the Units is $100,000. Subscriptions for investment below the minimum investment may be accepted at the discretion of the Selected Dealer. 3.2 Pending the sale of the Units, all funds paid hereunder shall be deposited by the Company in escrow with Sprott. If the Company shall not have obtained subscriptions (including this subscription) equal to the Minimum Offering on or before the Closing Date (such date, as it may be so extended, the "Offering Termination Date"), then this purchase shall be void and all funds paid hereunder by the Subscriber shall be promptly returned to the Subscriber, without interest. The Subscriber hereby authorizes and directs the Company, the Agents and the Selected Dealer to direct Sprott to return any funds for unaccepted purchases to the same account from which the funds were drawn, including any customer account maintained with the Selected Dealer. 3.3 Upon receipt of sales of at least the Minimum Offering, on or prior to the Offering Termination Date, the Company, the Agents, and the Selected Dealer will conduct a closing at a time and place of their choice, of the purchase and sale of Units (the "Closing"). 3.4 Certificates representing the Units purchased by the Subscriber pursuant to this Agreement will be prepared for delivery to the Subscriber within 10 business days following the Closing. The Subscriber hereby authorizes and directs the Company to deliver the certificates representing the Units purchased by the Subscriber pursuant to this Agreement directly to the Subscriber's account maintained by the Selected Dealer, if any, or, if no such account exists, to the residential or business address indicated on the signature page hereto. IV. CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBERS -------------------------------------------- 4.1 The Subscriber's obligation to purchase the Units at the Closing at which such purchase is to be consummated is subject to the fulfillment on or prior to such Closing of the following conditions, which conditions may be waived at the option of the Subscriber to the extent permitted by law: Page EX 4.3-9 (a) Representations and Warranties Correct. The representations -------------------------------------- and warranties made by the Company in Article II hereof shall be true and correct in all material respects. (b) Covenants. All covenants, agreements and conditions contained --------- in this Agreement to be performed by the Company on or prior to the date of such Closing shall have been performed or complied with in all material respects. (c) No Legal Order Pending. There shall not then be in effect any ---------------------- legal or other order enjoining or restraining the transactions contemplated by this Agreement. (d) No Law Prohibiting or Restricting Such Sale. There shall not ------------------------------------------- be in effect any law, rule or regulation prohibiting or restricting such sale or requiting any consent or approval of any person, which shall not have been obtained, to issue the Securities (except as otherwise provided in this Agreement). (e) The Acquisition is Complete. All material conditions of the --------------------------- Acquisition Agreement (as defined in the Prospectus), with the exception of this Offering, shall have been satisfied by the Company and Paralex (as defined in the Prospectus). V. REGISTRATION RIGHTS ------------------- 5.1 As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" shall mean, with respect to any Person (as defined below), any other Person controlling, controlled by or under direct or indirect common control with such Person (for the purposes of this definition "control," when used with respect to any specified Person, shall mean the power to direct the management and policies of such person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing). (b) "Business Day" shall mean a day Monday through Friday on which banks are generally open for business in New York. (c) "Exchange Act" shall mean the United States Securities Exchange Act of 1934. (d) "Holder" or "Holders" shall mean the Subscriber(s) who hold Registrable Securities (including, without limitation, Cardiome Shares issuable upon exercise of the "Cardiome Warrants or any person(s) to whom the rights under this Article V have been transferred in accordance with Section 5.9 hereof). (e) "Person" shall mean any individual, corporation, limited liability company, partnership, trust or other nongovernmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise). (f) The terms "register," "registered" and "registration" refer to the registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement. (g) "Registrable Securities" shall mean (i) the Cardiome Shares issued as part of the Units; (ii) the Cardiome Shares issuable upon exercise of the Cardiome Warrants; and (iii) any Cardiome Shares issued as (or issuable upon the conversion of any warrant, right or other security which is issued as) a Page EX 4.3-10 dividend or other distribution with respect to or in replacement of the Cardiome Shares issued as part of the Units, the Cardiome Warrants, and/or the Cardiome Shares underlying the Cardiome Warrants; provided, however, that securities shall only be treated as Registrable Securities if and only for so long as they (A) have not been disposed of pursuant to a registration statement declared effective by the SEC; (B) have not been sold in a transaction exempt from the registration and prospectus delivery requirements of the Exchange Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale; (C) are held by a Holder or a permitted transferee pursuant to Section 5.9; or (D) have not become eligible for sale pursuant to Rule 144(k) (or any successor thereto) under the Act. (h) "Registration Expenses" shall mean all expenses incurred by the Company in complying with Section 5.2 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and expenses of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the fees of legal counsel for any Holder). (i) "Registration Statement" shall have the meaning ascribed to such term in Section 5.2. (j) "Registration Period" shall have the meaning ascribed to such term in Section 5.2. (k) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and expenses of legal counsel for any Holder. 5.2 (a) Subject to the terms herein, the Company shall, as soon as practicable but not later than 30 days after the Closing Date (the "Outside Filing Date"), (a) file a registration statement (the "Registration Statement") for resale by the Holders of the Registrable Securities with the SEC and use its best efforts to have such Registration Statement declared effective by the SEC prior to the date which is 90 days after the initial filing of the Registration Statement; and (b) cause such Registration Statement to remain effective for the period (the "Registration Period") until the earlier of (i) such date as the holders of the securities have completed the distribution described in the Registration Statement; (ii) at such time that such shares are no longer, by reason of Rule 144(k) under the Act, required to be registered for the sale thereof by such holders; or (iii) such time that no Holders are in possession of Registrable Securities. (b) Prior to the Closing Date, the Company will obtain the conditional approval of the TSE to the listing of the Cardiome Shares and the Cardiome Shares issuable upon exercise of the Cardiome Warrants for resale on the TSE. (c) Notwithstanding the foregoing, the Company shall not be obligated to enter into any underwriting agreement for the sale of any of the Registrable Securities. 5.3 All Registration Expenses incurred in connection with any registration, qualification, exemption or compliance pursuant to Section 5.2 shall be borne by the Company. All Selling Expenses relating to the sale of securities registered by or on behalf of Holders shall be borne by such Holders pro rata on the basis of the number of securities so registered. 5.4 In the case of the registration, qualification, exemption or compliance effected by the Company pursuant to this Agreement, the Company shall, upon reasonable request, inform each Holder as to the status of such Page EX 4.3-11 registration, qualification, exemption and compliance. At its expense the Company shall: (a) use its best efforts to keep such registration, and any qualification, exemption or compliance under state or federal securities laws which the Company determines to obtain, continuously effective during the Registration Period; (b) advise the Holders as soon as practicable: (i) when the Registration Statement or any amendment thereto has been filed with the SEC and when the Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the SEC for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for such purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in the Registration Statement or the prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in the light of the circumstances under which they were made) not misleading; (c) make every reasonable; effort to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time; (d) furnish to each Holder, without charge, at least one copy of such Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference) in the form filed with the SEC; (e) during the Registration Period, deliver to each Holder, without charge, as many copies of the prospectus included in such Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use, consistent with the provisions hereof, of the prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the prospectus or any amendment or supplement thereto. In addition, upon the reasonable request of the Holder and subject in all cases to confidentiality protections reasonably acceptable to the Company, the Company will meet with a Holder or a representative thereof at the Company's headquarters to discuss all information relevant for disclosure in the Registration Statement coveting the Registrable Securities, and will otherwise cooperate with any Holder conducting an investigation for the purpose of reducing or eliminating such Holder's exposure to liability under the Exchange Act, including the reasonable production of information at the Company's headquarters; Page EX 4.3-12 (f) during the Registration Period, deliver to each Holder, without charge, (i) as soon as practicable (but in the case of the annual report of the Company to its stockholders, within 180 days after the end of each fiscal year of the Company) one copy of the following documents: (A) its annual report to its stockholders, if any (which annual report shall contain audited financial statements with a reconciliation to generally accepted accounting principles in the United States of America prepared by a firm of certified public accountants of recognized standing); (B) if not included in substance in its annual report to stockholders, its annual report on Form 20F (or such similar form); (C) each of its quarterly or periodic reports on Form 6K (or similar form), and (D) a copy of the full Registration Statement (the foregoing, in each case, excluding exhibits); and (ii) upon reasonable request, all exhibits excluded by the parenthetical to the immediately preceding clause (D), and all other information that is generally available to the public; (g) use commercially reasonable efforts to qualify any of the Registrable Securities for sale in such states as the Holder reasonably designates. However, the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction, and do any and all other acts or things reasonably necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of the Registrable Securities covered by such Registration Statement; (h) cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to any Registration Statement free of any restrictive legends to the extent not required at such time and in such denominations and registered in such names as Holders may request at least five (5) business days prior to sales of Registrable Securities pursuant to such Registration Statement; (i) upon the occurrence of any event contemplated by Section 5.4(b)(v) above, the Company shall promptly prepare a post-effective amendment to the Registration Statement or a supplement to the related prospectus, or file any other required document so that, as thereafter promptly delivered to purchasers of the Registrable Securities included therein, the prospectus will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (j) use its best efforts to comply with all applicable rules and regulations of the SEC, and will make generally available to the Holder not later than 60 days (or 140 days if the fiscal quarter is the fourth fiscal quarter) after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement satisfying the provisions of Section 11(a) of the Exchange Act. 5.5 The Holders shall have no right to take any action to restrain, enjoin or otherwise delay any registration pursuant to Section 5.2 hereof as a result of any controversy that may arise with respect to the interpretation or implementation of this Agreement. 5.6 (a) To the extent permitted by law, the Company shall indemnify and hold harmless the Holder, and each Person controlling such Holder, if any, within the meaning of Section 15 of the Act, with respect to which any registration, qualification or compliance has been effected pursuant to this Agreement, against all claims, losses, damages and liabilities (or action in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or Page EX 4.3-13 necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse each Holder, and each Person controlling such Holder, if any, for reasonable legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred; provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based upon any untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder and stated to be specifically for use in preparation of the Registration Statement, prospectus or offering circular; provided, further, that the Company will not be liable in any such case where the claim, loss, damage or liability arises out of or is related to the failure of the Holder to comply with the covenants and agreements contained in this Agreement respecting sales of Registrable Securities, and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement or alleged untrue statement or omission or alleged omission made in the preliminary prospectus but eliminated or remedied in (i) the amended prospectus on file with the SEC at the time the registration statement becomes effective, (ii) in an amended prospectus filed with the SEC pursuant to Rule 424(b) of the Act, or (iii) in the prospectus subject to completion under Rule 434 of the Act, which together meet the requirements of Section 10(a) of the Act (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any such Holder or any such controlling Person, if a copy of the Final Prospectus furnished by the Company to the Holder for delivery was not furnished to the Person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Act and the Final Prospectus would have cured the defect giving rise to such loss, liability, claim or damage. (b) The Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, and each Person who controls the Company within the meaning of Section 15 of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse the Company, such directors and officers, and each Person controlling the Company for reasonable legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred, in each case to the extent, but only to the extent, that such untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided, however, that the indemnity shall not apply to the extent that such claim, loss, damage or liability results frown the fact that a current copy of the prospectus was not made available to the Holder and such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage or liability. Notwithstanding the foregoing, in no event shall a Holder be liable for any such claims, losses, damages or liabilities in excess of the net proceeds received by such Holder from the sale of Registrable Securities covered by such Registration Statement, except in the event of fraud by such Holder. (c) Each party entitled to indemnification under this Section 5.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Page EX 4.3-14 Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such Indemnified Party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is materially prejudicial to the ability of the Indemnifying Party to defend against such claim or litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 5.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Holder the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holder and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holder agree that it would not be just and equitable if contribution pursuant to this Section 5.6(d) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5.6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to above in this Section 5.6(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim, subject to the provisions of Section 5.6(d) hereof. The Parties agree that it would not be just and equitable if contributions pursuant to this Section 5.6 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations as set forth in this Section 5.6. Notwithstanding the provisions of this Section 5.6(d), the Holder shall not be required to contribute any amount or make any other payments under this Agreement which in the aggregate exceed the net proceeds received by such Holder from the sale of Registrable Securities covered by such Registration Statement. No person guilty of fraudulent misrepresentation (within the meaning of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 5.7 (a) The Holder agrees that, upon receipt of any notice from the Company of the happening of any event requiting the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to the Holders, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until its receipt of copies of the supplemented or amended prospectus from the Company, such prospectus to be forwarded promptly to the Subscriber by the Company, and, if so directed by the Company, the Holder shall deliver to the Company all copies, other than permanent file copies then in the Holder's possession, of the prospectus coveting such Registrable Securities current at the time of receipt of such notice. Page EX 4.3-15 (b) The Holder shall suspend, upon request of the Company, any disposition of Registrable Securities pursuant to the Registration Statement and prospectus contemplated by Section 5.2 during (i) any period not to exceed two 30-day periods within any one 12-month period the Company requires in connection with a primary underwritten offering of equity securities and (ii) any period, not to exceed one 45-day period within any one 12-month period, when the Company determines in good faith that offers and sales pursuant thereto should not be made by reason of the presence of material undisclosed circumstances or developments with respect to which the disclosure that would be required in such a prospectus is premature, would have an adverse effect on the Company or is otherwise inadvisable. (c) As a condition to the inclusion of its Registrable Securities, each Holder shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing or as shall be required in connection with any registration, qualification or compliance referred to in this Article V. (d) The Holder hereby covenants with the Company (i) not to make any sale of the Registrable Securities without effectively causing the prospectus delivery requirements under the Exchange Act to be satisfied, and (ii) if such Registrable Securities are to be sold by any method or in any transaction other than on a national securities exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the TSE or in the over-the-counter market, in privately negotiated transactions, or in a combination of such methods, to notify the Company at least five (5) business days prior to the date on which the Holder first offers to sell any such Registrable Securities. (e) The Holder acknowledges and agrees that the Registrable Securities sold pursuant to the Registration Statement described in this Section are not transferable on the books of the Company unless the stock certificate submitted to the transfer agent evidencing such Registrable Securities is accompanied by a certificate reasonably satisfactory to the Company to the effect that (i) the Registrable Securities have been sold in accordance with such Registration Statement and (ii) the requirement of delivering a current prospectus has been satisfied. (f) The Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to the Registration Statement which would constitute a violation of Regulation M under the Exchange Act or any other applicable rule, regulation or law. (g) At the end of the Registration Period, the Holders shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. 5.8 With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which at any time permit the sale of the Registrable Securities to the public without registration, the Company shall use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and Page EX 4.3-16 (c) so long as the Holder owns any unregistered Registrable Securities, furnish to the Holder, upon any reasonable request, a written statement by the Company as to its compliance with Rule 144 under the Act, and of the Exchange Act, a copy of the most recent annual, or quarterly report of the Company, and such other reports and documents of the Company as the Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 5.9 The rights to cause the Company to register Registrable Securities granted to the Holders by the Company under Section 5.2 may be assigned in full by the Holder in connection with a transfer by such Holder of its Registrable Securities, provided, however, that (i) such transfer may otherwise be effected in accordance with applicable securities laws; (ii) the Holder gives written notice to the Company of such transfer; and (iii) the transferee agrees to comply with the terms and provisions of this Agreement, and such transfer is otherwise in compliance with this Agreement. Except as specifically permitted by this Section 5.9, the rights of the Holder with respect to Registrable Securities as set out herein shall not be transferable to any other Person, and any attempted transfer shall be null and void and shall cause all rights of the Holder to be forfeited. 5.10 With the written consent of the Company and the Holder, any provision of this Article V may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) or amended. VI. MISCELLANEOUS ------------- 6.1 Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, or delivered by hand against written receipt therefor, addressed as follows: if to the, to it at: Cardiome Pharma Corp. 3650 Westbrook Mall Vancouver, BC V6S 2L2 Canada Attn: President With a copy to: Catalyst Corporate Finance Lawyers 1400-1055 West Hastings Street Vancouver, BC V6E 2E9 Canada Attn: Michael Varabioff, Esq. And Preston Gates & Ellis LLP 701 Fifth Avenue Suite 5000 Seattle, WA 98104 Attn: Sam Haviland Page EX 4.3-17 If to Selected Dealer Paramount Capital, Inc. 787 7th Avenue New York, NY 10019 Attn: Stephen C. Rocamboli, Esq. If to Agents Sprott Securities, Inc. Royal Bank Plaza South 200 Bay Street, Suite 3450 Toronto, ON M5J 2J2 Attn: Robert Chalmers Raymond James Ltd. 925 West Georgia Street Suite 2200 Vancouver, BC V6C 3L2 Attn: Patrick Wolfe if to the Subscriber, to the Subscriber's address indicated on the signature page of this Agreement. Notices shall be deemed to have been given or delivered on the date of mailing, except notices of change of address, which shall be deemed to have been given or delivered when received. 6.2 Except as otherwise provided herein, this Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 6.3 Subject to the provisions of Section 5.9, this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, legal representatives, successors and assigns. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. 6.4 Upon the execution and delivery of this Agreement by the Subscriber, this Agreement shall become a binding obligation of the Subscriber with respect to the purchase of Units as herein provided, subject, however, to the right hereby :reserved by the Company to enter into the same agreements with other purchasers and to add and/or delete other persons as purchasers. 6.5 NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO SUCH STATE'S PRINCIPLES OF CONFLICTS OF LAW. IN THE EVENT THAT A JUDICIAL PROCEEDING IS NECESSARY, THE SOLE FORUM FOR RESOLVING DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT IS THE SUPREME COURT OF THE STATE OF NEW YORK IN AND FOR THE COUNTY OF NEW YORK OR THE FEDERAL COURTS FOR SUCH STATE AND COUNTY, AND ALL RELATED APPELLATE COURTS, THE Page EX 4.3-18 PARTIES HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF SUCH COURTS AND AGREE TO SAID VENUE. 6.6 In order to discourage frivolous claims the parties agree that unless a claimant in any proceeding arising out of this Agreement succeeds in establishing his claim and recovering a judgment against another party (regardless of whether such claimant succeeds against one of the other parties to the action), then the other party shall be entitled to recover from such claimant all of its/their reasonable legal costs and expenses relating to such proceeding and/or incurred in preparation therefor. 6.7 The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. If any provision of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced in whole or in part, such provision shall be interpreted so as to remain enforceable to the maximum extent permissible consistent with applicable law and the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and effect and enforceable to the extent they are valid, legal and enforceable, and no provisions shall be deemed dependent upon any other covenant or provision unless so expressed herein. 6.8 It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 6.9 The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 6.10 This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 6.11 Nothing in this Agreement shall create or be deemed to create any rights in any person or entity not a party to this Agreement, except (a) for the holders of Registrable Securities and (b) for the Selected Dealer pursuant to Sections 1.6(a), 2.8, and 5.6 hereof. VII. CONFIDENTIAL INVESTOR QUESTIONNAIRE ----------------------------------- 7.1 The Subscriber represents and warrants that he, she or it comes within at least one category marked below, and that for any category marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish any additional information which the Company deems necessary in order to verify the answers set forth below. Category A ___ The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000. Explanation. In calculating net worth you may include equity in personal property and real estate, including your principal residence, cash, short-term investments, stock and securities. Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property. Page EX 4.3-19 Category B ___ The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding: any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year. Category C ___ The undersigned is a director or executive officer of the Company which is issuing and selling the Units. Category D ___ The undersigned is a bank, as defined in Section 3(a)(2) of the Act; a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company ("SBIC") licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors (describe entity). ----------------------------------------------------------- Category E ___ The undersigned is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940. (describe entity) ----------------------------------------------------------- Category F ___ The undersigned is either a corporation, partnership, Massachusetts business trust, or non-profit organization within the meaning of Section 501 (c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Units and with total assets in excess of $5,000,000. (describe entity) ----------------------------------------------------------- ----------------------------------------------------------- Category G ___ The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Units, where the purchase is directed by a "sophisticated investor" as defined in Regulation 506(b) (2)(ii) under the Act. Page EX 4.3-20 Category H ___ The undersigned is an entity (other than a trust) in which all of the equity owners are "accredited investors" within one or more of the above categories. If relying upon this Category alone, each equity owner must complete a separate copy of this Agreement. (describe entity) ----------------------------------------------------------- ----------------------------------------------------------- The undersigned agrees that the undersigned will notify the Company at any time on or prior to the Closing Date in the event that the representations and warranties in this Agreement shall cease to be true, accurate and complete. 7.2 SUITABILITY (please answer each question) (a) For an individual Subscriber, please describe your current employment, including the company by which you are employed and its principal business: -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- (b) For an individual Subscriber, please describe any college or graduate degrees held by you: -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- (c) For all Subscribers, please list types of prior investments: -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- (d) For all Subscribers, please state whether you have you participated in other private placements before: ------------------ YES _____ NO _____ (e) If your answer to question (d) above was "YES", please indicate frequency of such prior participation in private ------- placements of: ---------- Public Private Public or Private Companies Companies Biotechnology Companies -------------------- ----------------- ----------------------- Frequently -------------------- ----------------- ----------------------- Occasionally -------------------- ----------------- ----------------------- Never -------------------- ----------------- ----------------------- Page EX 4.3-21 (f) For individual Subscribers, do you expect your current level of income to significantly decrease in the foreseeable future: YES _____ NO _____ (g) For trust, corporate, partnership and other institutional Subscribers, do you expect your total assets to significantly decrease in the foreseeable future: YES _____ NO _____ (h) For all Subscribers, do you have any other investments or contingent liabilities which you reasonably anticipate could cause you to need sudden cash requirements in excess of cash readily available to you: YES _____ NO _____ (i) For all Subscribers, are you familiar with the risk aspects and the non-liquidity of investments such as the securities for which you seek to purchase? YES _____ NO _____ (j) For all Subscribers, do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment? YES _____ NO _____ 7.3 MANNER IN WHICH TITLE IS TO BE HELD. (circle one) ----------------------------------- (a) Individual Ownership (b) Community Property (c) Joint Tenant with Right of Survivorship (both parties must sign) (d) Partnership* (e) Tenants in Common (f) Company* (g) Trust* (h) Other *If Units are being purchased for by an entity, the attached Certificate of Signatory must also be completed. 7.4 NASD AFFILIATION. ----------------- Are you affiliated or associated with an NASD member firm (please check one): YES _____ NO _____ If Yes, please describe: - -------------------------------------------- - -------------------------------------------- Page EX 4.3-22 *If Subscriber is a Registered Representative with an NASD member firm, have the following acknowledgment signed by the appropriate party: The undersigned NASD member firm acknowledges receipt of the notice required by Article 3, Sections 28(a) and (b) of the Rules of Fair Practice. - ------------------------------------------- Name of NASD Member Firm By: Authorized Officer Date: _____________________________________ 7.5 The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in the Confidential Investor Questionnaire contained in this Article VII and such answers have been provided under the assumption that the Company will rely on them. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page EX 4.3-23 UNITS PURCHASED _________ X OFFERING PRICE (______) = $________________ ----------- ------ ------------------------- ("PURCHASE PRICE") - ------------------------------------- -------------------------------------- Signature Signature (if purchasing jointly) Name Typed or Printed Name Typed or Printed - ------------------------------------- -------------------------------------- Entity Name Entity Name - ------------------------------------- -------------------------------------- Address Address - ------------------------------------- -------------------------------------- City, State and Zip Code City, State and Zip Code - ------------------------------------- -------------------------------------- Telephone-Business Telephone-Business - ------------------------------------- -------------------------------------- Telephone-Residence Telephone-Residence - ------------------------------------- -------------------------------------- Facsimile-Business Facsimile-Business - ------------------------------------- -------------------------------------- Facsimile-Residence Facsimile-Residence - ------------------------------------- -------------------------------------- Tax ID # or Social Security # Tax ID # or Social Security # Name in which securities should be issued: Dated: ___________________, 2002 This Subscription Agreement is agreed to and accepted as of ___________, 2002. CARDIOME PHARMA CORP. By: ---------------------------------- Name: Title: Page EX 4.3-24 CERTIFICATE OF SIGNATORY (To be completed if Units are being purchased for by an entity) I, ___________________________________ am the ________________________________ of ________________________________ (the "Entity"). I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Subscription Agreement and to purchase and hold the Units, and certify further that the Subscription Agreement has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity. IN WITNESS WHEREOF, I have set my hand this ____ day of ___________________. (Signature) Page EX 4.3-25 REGULATION "S" RESALE REPRESENTATION LETTER ------------------------------------------- Cardiome Pharma Corp. 3650 Westbrook Mall Vancouver, BC Canada V6S 2L2 Attn: President To Whom It May Concern: The undersigned (A) acknowledges that the sale of the securities of Cardiome Pharma Corp. (the "Company") to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "Act") and (B) certifies that: (1) the offer of such securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believes that the buyer was outside the United States or (b) the transaction was executed on or through the facilities of The Toronto Stock Exchange and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States; (2) neither the seller (or its affiliates) nor any person acting on its behalf engaged in any "directed selling efforts" in the United States in connection with the offer and sale of such securities; (3) the sale is bona fide and not for the purpose of "washing off" the resale restrictions imposed because the securities are "restricted securities" (as such term is defined in Rule 144(a)(3) under the Act); (4) the seller does not have a short position in the securities sold and does not intend to replace the securities sold in reliance on Rule 904 with fungible unrestricted securities; (5) the contemplated sale is not a transaction, or part of a series of transactions which, although in technical compliance with Regulation S, is part of a plan or scheme to evade the registration provisions of the Act; and (6) the undersigned is not an "affiliate" (as defined in Rule 405 under the Act) of the Issuer. Terms used herein have the meanings given to them by Regulation S. - ------------------------------------- By: Its: Date: EX-4 8 exhibit4-14.txt LICENSE AGREEMENT DATED APRIL 18, 2001, AS AMENDED BY AGREEMENT DATED OCTOBER 18, 2001 BETWEEN PARALEX AND THE JOHNS HOPKINS UNIVERSITY. Exhibit 4.14 EXCLUSIVE AGREEMENT BETWEEN THE JOHNS HOPKINS UNIVERSITY & PARALEX ____________________ JHU Ref: DM - 3326 Page 2 LICENSE AGREEMENT THIS LICENSE AGREEMENT (the "Agreement") is entered into by and between THE JOHNS HOPKINS UNIVERSITY, a Maryland corporation having an address at 111 Market Place, Suite 906, Baltimore, MD 21202 ("JHU") and PARALEX, INC., a Delaware corporation having an address of 787 Seventh Avenue, 48`" Floor, New York, NY 10019 (Company), with respect to the following: RECITALS WHEREAS, as a center for research and education, JHU is interested in licensing PATENT RIGHTS (hereinafter defined) in a manner that will benefit the public by facilitating the distribution of useful products and the utilization of new methods, but is without capacity to commercially develop, manufacture, and distribute any such products or methods; and WHEREAS, a valuable invention entitled "Xanthine Oxidase Inhibitors as Calcium-Sensitizing Therapeutic Agents for Heart Failure" (JHU Ref. DM-3326) was developed during the course of research conducted by Dr. Eduardo Marban at JHU (hereinafter, "Inventor"); and WHEREAS, JHU has acquired through assignment all rights, title and interest, with the exception of certain retained rights by the United States government, in its interest in said valuable invention; and WHEREAS, Company desires to commercially develop, manufacture, use and distribute such products and processes throughout the world; NOW THEREFORE, in consideration of the premises and the mutual promises and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS All references to particular Exhibits and Articles shall mean the Exhibits to, and Articles of, this Agreement, unless otherwise specified. For the purposes of this Agreement and the Exhibits hereto, the following words and phrases shall have the following meanings: Page 3 1.1 "AFFILIATED COMPANY" as used herein in either singular or plural shall mean any corporation, company, partnership, joint venture or other entity, which controls, is controlled by or is under common control with Company. For purposes of this Paragraph 1.1, control shall mean the direct or indirect ownership of at least fifty-percent (50%). 1.2 "EFFECTIVE DATE" of this License Agreement shall mean the date the last party hereto has executed this Agreement. 1.3 "EXCLUSIVE LICENSE" shall mean a grant by JHU to Company of its entire right and interest in the PATENT RIGHTS subject to rights retained the United States government in accordance with P.L. 96-517, as amended by P.L. 98-620, and subject to the retained right of JHU to make, have made, provide and use for its and The Johns Hopkins Health Systems' non-commercial, research and education purposes LICENSED PRODUCT, including the ability to distribute any biological material for nonprofit academic research use to non-commercial entities as is customary in the scientific community. 1.4 "LICENSED FIELD" shall mean therapeutic, diagnostic and commercial use of xanthine oxidase inhibitors for cardiovascular and neuromuscular disease. 1.5 "LICENSED PRODUCT" as used herein in either singular or plural shall mean any method or service, material, compositions, drug, or other product, the manufacture, use or sale of which would constitute, but for the license granted to Company pursuant to this Agreement, an infringement of an allowed claim of PATENT RIGHTS (infringement shall include, but is not limited to, direct, contributory, or inducement to infringe). 1.6 "NET SALES" shall mean gross sales revenues and fees billed by Company, AFFILIATED COMPANY and SUBLICENSEE from the sale of LICENSED PRODUCT less trade discounts allowed, refunds, returns and recalls , and sales taxes., In the event that Company, AFFILIATED COMPANY or its SUBLICENSEE sells a LICENSED PRODUCT or in combination with other active ingredients or components which are not LICENSED PRODUCTS ("Other Items"), the NET SALES for purposes of royalty payments on the combination shall be calculated as follows: (a) If all LICENSED PRODUCTS and Other Items contained in the combination are available separately, the NET SALES for purposes of royalty payments will be calculated by multiplying the NET SALES of the combination by the fraction A/A+B, where A is the separately available Page 4 price of all LICENSED PRODUCTS in the combination, and B is the separately available price for all Other Items in the combination. (b) If the combination includes Other items which are not sold separately (but all LICENSED PRODUCTS contained in the combination are available separately), the NET SALES for purposes of royalty payments will be calculated by multiplying the NET SALES of the combination by A/C, where A is as defined above and C is the invoiced price of the combination. (c) If the LICENSED PRODUCTS and Other Items contained in the combination are not sold separately, the NET SALES for such combination shall be NET SALES of such combination as defined in the first sentence of this Paragraph 1.8. However, the parties agree to negotiate a reduction in the royalty rate to reflect the fair value that the LICENSED PRODUCTS attributed to the overall product sold, but in no event shall the royalty rates be reduced by greater than fifty percent (50%), and subject to section 3.3 herein. The term "Other Items" does not include solvents, diluents, carriers, excipients, buffers or the like used in formulating a product. 1.7 "PATENT RIGHTS" shall mean U.S. patent application Serial No. 09/186,755 (allowed claims) and PCT application PCT/US98/23878, each filed on 11/5/98; EPO application filed 08/0212000; all assigned to JHU entitled "Methods for Treatment of Disorders of Cardiac Contractility"; and the inventions disclosed and claimed therein, and all continuations, divisions, continuation- in-parts and reissues based thereof, and any corresponding foreign patent applications, and any patents, patents of addition, or other equivalent foreign patent rights issuing, granted or registered thereon. Continuations-in-part are included in the definition of PATENT RIGHT(S) to the extent the new matter in a continuation-in-part supports claims originally filed in the parent applications (U.S. patent application Serial No. 09,186,755 and PCT application PCT/US98/ 23878) or the claims in the continuations-in-part are supported by the original disclosures of the parent applications. 1.8 "SUBLICENSEE" as used herein in either singular or plural shall mean any person or entity other than an AFFILIATED COMPANY to which Company has granted a sublicense under this Agreement. Page 5 ARTICLE II LICENSE and OPTION GRANT 2.1 Grant. Subject to the terms and conditions of this Agreement, JHU hereby grants to Company an EXCLUSIVE LICENSE to develop, make, have made, use, and sell the LICENSED PRODUCT in the United States and worldwide under the PATENT RIGHTS in the LICENSED FIELD. 2.2 Sublicense. Company may sublicense the Grant under Paragraph 2.1 to others under this Agreement, subject to JHU's approval which shall not be unreasonably withheld, and shall provide a copy of each such sublicense agreement to JHU promptly after it is executed. Each sublicense shall be consistent with the terms of this Agreement. 2.3 Option. (a) JHU shall grant to the Company an exclusive Option to JHU owned technology in the LICENSED FIELD, unencumbered by third parties, of which Eduardo Marban is a JHU inventor. JHU shall promptly notify Company of each such technology (invention) developed under the Option and agrees to provide such information as reasonably requested to evaluate the invention. Technology developed later than five years after the EFFECTIVE DATE will not be included in this Option. (b) Company shall have sixty (60) days from the date of such notification of an invention (Option Period) to exercise its Option. Company shall exercise this Option by providing JHU formal written notification of its decision and a written statement, reasonably satisfactory to JHU, of its intent and ability to develop at least one product or process utilizing the invention for the public good as soon as practical, consistent with sound business practices and judgement. Failure to provide the above notification and statement during the Option Period will result in the Option to the invention being terminated. (c) Upon exercise of the Option and for a period not to exceed three (3) months, JHU and Company agree to negotiate in good faith to reach agreement and enter into a license agreement at substantially the same terms and conditions as set forth in this License Agreement. If after three months, JHU and Company are unable to reach agreement on the terms of a license agreement, then, for a period of ninety (90) days thereafter, before JHU may offer to a third party the opportunity to obtain a license with respect to such invention on terms more favorable than those offered to Company, JHU must first offer each such license opportunity to Company on the more favorable terms. Company shall have sixty (60) days within which to accept or reject each such offer. (d) JHU is under no obligation to pursue any rights, including but not limited to patent rights, for any invention. Page 6 ARTICLE III FEES, ROYALTIES, & PAYMENTS 3.1 License Fee. Company shall pay to JHU within thirty (30) days of the EFFECTIVE DATE of this Agreement a license fee as set forth in Exhibit A. --------- JHU will not submit an invoice for the license fee, which is nonrefundable and shall not be credited against royalties or other fees. 3.2 Minimum Annual Royalties. Company shall pay to JHU minimum annual royalties as set forth in Exhibit A. These minimum annual royalties shall be due --------- within thirty (30) days each anniversary of the EFFECTIVE DATE beginning with the first anniversary. In any year where there are sales of LICENSED PRODUCT the minimum annual royalties shall be credited against running royalties due in that year. 3.3 Royalties. Company shall pay to JHU, a running royalty as set forth in Exhibit A, for each LICENSED PRODUCT by Company, AFFILIATED COMPANIES and ---------- SUBLICENSEE, based on NET SALES of ex-factory finished goods for the term of this Agreement. Such payments shall be made quarterly. In order to insure JHU the full royalty payments contemplated hereunder, Company agrees that in the event any LICENSED PRODUCT shall be sold to an AFFILIATED COMPANY or SUBLICENSEE or to a corporation, firm or association with which Company shall have any agreement, understanding or arrangement with respect to consideration (such as, among other things, an option to purchase stock or actual stock ownership, or an arrangement involving division of profits or special rebates or allowances) the royalties to be paid hereunder for such LICENSED PRODUCT shall be that which would have been received in an arms-length transaction, based on sales of like quantity and quality products at or about the time of such transaction. Under no circumstances shall the running royalty rate as set forth in Exhibit A be reduced by greater than 50%, regardless of any applicable provisions contained herein. 3.4 Equity. Within thirty (30) days of the EFFECTIVE DATE, Company shall issue a number of shares of common stock, par value $.001 per share (the "Common Stock") to JHU and/or its designees representing fifteen percent (15%) of the initial outstanding Common Stock of the Company. The initial outstanding Common Stock of the Company is currently contemplated to be 5,000,000 shares. The Company shall agree that any financing conducted by it shall be done at a pre-money valuation equal to or greater then $3,000,000. JHU shall be entitled to receive piggy-back registration rights and information rights to be set forth in a definitive stockholders agreement. 3.5. Legal Reimbursement. Company shall reimburse JHU, within thirty (30) days of the receipt of an invoice from JHU, for reasonable legal costs Page 7 associated with the review of this Agreement, corporate and equity documents, such costs not to exceed $7,500. 3.6 Patent Reimbursement. Company will reimburse JHU up to sixty thousand dollars ($60,000) within thirty (30) days of the receipt of an invoice(s) and copy(ies) of billings from JHU, for all costs associated with the preparation, filing, maintenance, and prosecution of PATENT RIGHTS incurred by JHU on or before the EFFECTIVE DATE of this Agreement. In accordance with Paragraph 4.1 below, Company will reimburse JHU, within thirty (30) days of the receipt of an invoice from JHU, for all reasonable costs, without limitation, associated with the preparation, filing, maintenance, prosecution and extension of term of PATENT RIGHTS incurred by JHU subsequent to the EFFECTIVE DATE of this Agreement. 3.7 Form of Payment. All payments under this Agreement snail be made in U.S. Dollars the Company. Checks are to be made payable to "The Johns Hopkins University". Wire transfers may be made through: The Johns Hopkins University All First Bank 25 S. Charles Street Baltimore, Maryland 21203 Transit/Routing/ABA number. 052000113 Account Number: 09000522 Reference: JHU SOM Office of Technology Licensing (JHU REF. DM -3326) Attn: Alan Mullenax Company shall be responsible for any and all costs associated with wire transfers. 3.8 Late Payments. In the event that any payment due hereunder is not made when due, the payment shall accrue interest beginning on the tenth day following the due date thereof, calculated at the annual rate of the sum of (a) two percent (2%) plus (b) the prime interest rate quoted by The Wall Street Journal on the date said payment is due, the interest being compounded on the last day of each calendar quarter, provided however, that in no event shall said annual interest rate exceed the maximum legal interest rate for corporations. Each such payment when made shall be accompanied by all interest so accrued. Said interest and the payment and acceptance thereof shall not negate or waive the right of JHU to seek any other remedy, legal or equitable, to which it may be entitled because of the delinquency of any payment including, but not limited to termination of this Agreement as set forth in Paragraph 9.2. 3.9 Third Party Patents. In the event that Company, acting in good faith, must enter into licensing agreements with one or more third parties holding patent rights which may be infringed by Company's practice of the PATENT Page 8 RIGHTS set forth herein, then Company shall have the right to deduct the running royalty rate demanded by the third party(ies) from JHU's running royalty rate (#3 on Exhibit A) provided that in no event shall JHU's running royalty rate be reduced by more than 50%, and subject to section 3.3 herein. ARTICLE IV PATENT PROSECUTION, MAINTENANCE, & INFRINGEMENT 4.1 Prosecution & Maintenance. (a) JHU, at Company's expense, shall file, prosecute and maintain all patents and patent applications specified under PATENT RIGHTS upon authorization of Company and Company shall be licensed thereunder. Title to all such patents and patent applications shall reside in JHU. JHU shall direct counsel to diligently prosecute and maintain the United States patent applications and patents comprising PATENT RIGHTS, using counsel of its choice. JI-11's counsel shall take instructions only from JHU, provided, however, that JHU shall consult with Company as to all matters relating to the PATENT RIGHTS. If a change in patent counsel is required as deemed by JHU and/ or Company, JHU shall consult with Company with respect to selection of new patent counsel. Selection of new patent counsel shall be reasonably acceptable to both parties. JHU shall provide Company with copies of all relevant documentation in advance of filing so that Company may be informed and apprised of the continuing prosecution and provide consultative comments and suggestions to JHU. Company agrees to keep this documentation confidential. (b) JHU shall give due consideration to amending any patent application to include claims reasonably requested by Company to protect the LICENSED PRODUCTS contemplated to be sold under this Agreement. (c) JHU shall cooperate with Company in applying for an extension of the term of any patent included within PATENT RIGHTS if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984. Company shall prepare all such documents, and JHU agrees to execute such documents and to take such additional action as Company may reasonably request in connection therewith. (d) JHU shall, at the request of Company, file, prosecute, and maintain patent applications and patents covered by PATENT RIGHTS in foreign countries if available, and provided that Company has provided JHU written notification of its request at least sixty (60) days before such action is due. Failure to provide such written notification can be considered by JHU as Company's decision not to file. Company consents to the filing of all PCT and foreign patent applications that have already been filed as of the Effective Date. (e) Company's obligation to underwrite and to pay foreign patent prosecution costs shall continue for so long as this Agreement remains in effect, provided, however, that Company may terminate its obligations with respect to any given patent application or patent upon three (3) months' prior written notice to JHU. JHU shall use reasonable efforts to curtail future patent costs when such a notice is received from Company. Company shall promptly pay patent costs which cannot be so curtailed, and all patent related costs incurred Page 9 and royalties due up to the date of Company's written notice. Commencing on the effective date of such notice, JHU may continue prosecution and/or maintenance of such application(s) or patent(s) at its sole discretion and expense, and Company shall have no further right or licenses thereunder. JHU retains the right to license such right and licenses to third parties. (f) JHU shall not abandon any patent applications or issued patent comprising a part of the PATENT RIGHTS or otherwise fail to prosecute diligently or maintain any JHU PATENT RIGHTS except following at least forty-five (45) days written notice to Company, following which, Company shall have the right, but not the obligation, to commence or continue such prosecution and to maintain any such PATENT RIGHTS under its own control and expense. 4.2 Notification. Each party will notify the other promptly in writing when any infringement by another is uncovered or suspected. 4.3 Infringement. Company shall have the first right to enforce any patent within PATENT RIGHTS against any infringement or alleged infringement thereof, and shall at all times keep JHU informed as to the status thereof. Company may, in its sole judgment and at its own expense, institute suit against any such infringer or alleged infringer and control, settle, and defend such suit in a manner consistent with the terms and provisions hereof and recover, for its account, any damages, awards or settlements resulting therefrom, subject to Paragraph 4.4. This right to sue for infringement shall not be used in an arbitrary or capricious manner. JHU shall reasonably cooperate in any such litigation at Company's expense. If Company elects not to enforce any patent within the PATENT RIGHTS, then it shall so notify JHU in writing within ninety (90) days of receiving notice that an infringement exists, and JHU may, in its sole judgment and at its own expense, take steps to enforce any patent and control, settle, and defend such suit in a manner consistent with the terms and provisions hereof, and recover, for its own account, any damages, awards or settlements resulting therefrom. 4.4 Recovery. Any recovery by Company under Paragraph 4.3 shall be deemed to reflect loss of commercial sales, and Company shall pay to JHU four percent (4%) of the recovery net of all reasonable costs and expenses associated with each suit or settlement. If the cost and expenses exceed the recovery, then one- half (1/2) of the excess shall be credited against royalties payable by Company to JHU hereunder in connection with sales in the country of such legal proceedings, provided, however, that any such credit under this Paragraph shall not exceed fifty percent (50%) of the royalties otherwise payable ta,JHU with regard to sales in the country of such action in any one calendar year, with any excess credit being carried forward to future calendar years. Page 10 ARTICLE V OBLIGATIONS OF THE PARTIES 5.1 Reports. Company shall provide to JHU within thirty (30) days of the end of each March and December after the EFFECTIVE DATE of this Agreement, a written report to JHU of the amount of LICENSED sold, the total NET SALES of such LICENSED PRODUCT and the running royalties due to JHU as a result of NET SALES by Company, AFFILIATED COMPANIES and SUBLICENSEE thereof. Payment of any such royalties due shall accompany such report. The report of sales and royalties due shall be substantially in the format of the sales and royalty report form given in Exhibit B. Until Company, an AFFILIATED COMPANY or a --------- SUBLICENSEE has achieved a first commercial sale of a LICENSED PRODUCT and received FDA market approval, a report shall be submitted at the end of every June and December after the EFFECTIVE DATE of this Agreement and will include a full written report describing Company's, AFFILIATED COMPANIES or any SUBLICENSEE's technical efforts towards meeting its obligations under the terms of this Agreement. 5.2 Records. Company shall make and retain, for a period of three (3) years following the period of each report required by Paragraph 5.1, true and accurate records, files and books of account containing all the data reasonably required for the full computation and verification of sales and other information required in Paragraph 5.1. Such books and records shall be in accordance with generally accepted accounting principles consistently applied. Company shall permit the inspection and copying of such records, files and books of account by JHU or its agents during regular business hours upon ten (10) business days' written notice to Company. Such inspection shall not be made more than once each calendar year. All costs of such inspection and copying shall be paid by JHU, provided that if any such inspection shall reveal that an error has been made in the amount equal to five percent (5%) or more of such payment, such costs shall be borne by Company. Company shall include in any agreement with its AFFILIATED COMPANIES or its SUBLICENSEE which permits such party to make, use or sell the LICENSED PRODUCT, a provision requiring such party to retain records of sales and provisions of LICENSED PRODUCT and other information as required in Paragraph 5.1 and permit JHU to inspect such records as required by this Paragraph. 5.3 Product Development Diligence. The Company shall exercise reasonable efforts to develop and to introduce LICENSED PRODUCT into the commercial market as soon as practicable, consistent with sound and reasonable business practice and judgment. Thereafter, until the expiration of the Agreement, the Company shall endeavor to keep such products reasonably available to the public. To this end, the Company shall use its reasonable best efforts to meet the following milestones for LICENSED PRODUCT on the following anniversaries of the EFFECTIVE DATE: Sixty (60) Days Submit a business plan to JHU Three (3) Years Commence Phase Illl studies Eight (8) Years File a New Drug Application (NDA) or its equivalent Page 11 with the US FDA or a European Nation party to the EMEA 5.4 Financial Diligence. The Company shall have obtained the following financing by the following anniversaries of the EFFECTIVE DATE: Six (6) Months $3,000,000 Eighteen (18) Months $5,000,000 --------------------------------- TOTAL $8,000,000 In the event that the Company has not obtained such funding on or before the milestone dates, then JHU shall have the right, but not the obligation, to terminate the license granted to the Company under this Agreement, subject to the Company's right to cure such failure within 60 days from the date of such milestone. 5.5 Patent Acknowledgement. Company agrees that all packaging containing individual LICENSED PRODUCT sold by Company, AFFILIATED COMPANIES and SUBLICENSEE of Company will be marked with the number of the applicable patent(s) licensed hereunder in accordance with each country's patent laws. ARTICLE VI REPRESENTATIONS 6.1 Representations by JHU. (a) JHU warrants that it has good and marketable title to its interest in the inventions claimed under PATENT RIGHTS with the exception of certain retained rights of the United States government. JHU does not warrant the validity of any patents or that practice under such shall be free of infringement. EXCEPT AS EXPRESSLY SET FORTH IN THIS PARAGRAPH 6.1, COMPANY, AFFILIATED COMPANIES AND SUBLICENSEE AGREE THAT THE PATENT RIGHTS ARE PROVIDED "AS IS", AND THAT JHU MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE PERFORMANCE OF LICENSED PRODUCT INCLUDING THEIR SAFETY, EFFECTIVENESS, OR COMMERCIAL VIABILITY. JHU DISCLAIMS ALL WARRANTIES WITH REGARD TO PRODUCT LICENSED UNDER THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ALL WARRANTIES, EXPRESS OR IMPLIED, OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, JHU ADDITIONALLY DISCLAIMS ALL OBLIGATIONS AND LIABILITIES ON THE PART OF JHU AND INVENTOR, FOR DAMAGES, INCLUDING, BUT NOT LIMITED TO, DIRECT, INDIRECT, SPECIAL, AND CONSEQUENTIAL DAMAGES, ATTORNEYS' AND EXPERTS' FEES, AND COURT COSTS (EVEN IF JHU HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, FEES OR COSTS), ARISING OUT OF OR IN CONNECTION WITH THE MANUFACTURE, USE, OR SALE OF THE PRODUCT LICENSED UNDER THIS AGREEMENT COMPANY, AFFILIATED COMPANIES AND SUBLICENSEE ASSUME ALL RESPONSIBILITY AND LIABILITY FOR LOSS OR DAMAGE CAUSED BY Page 12 A PRODUCT MANUFACTURED, USED, OR SOLD BY COMPANY, ITS SUBLICENSEE AND AFFILIATED COMPANIES WHICH IS A LICENSED PRODUCT AS DEFINED IN THIS AGREEMENT. (b) To the best of JHU's knowledge and belief as of the EFFECTIVE DATE, JHU has all right, title, and interest in and to its ownership interest in the PATENT RIGHTS, with the exception of certain rights retained by the U.S. government, and to the best of JHU's knowledge and belief, there are no licenses, options, liens, or threatened legal disputes, proceedings or claims on the EFFECTIVE DATE noticed to the Office of General Counsel of JHU or the JHU School of Medicine Office of Technology Licensing relating to, or adversely affecting, or limiting its rights or the rights of Company under this Agreement. (c) To the best of JHU's knowledge and belief, as of the EFFECTIVE DATE, there is no claim, pending or threatened, of which the Director or the Office of General Counsel of JHU has notice, of infringement, interference, or invalidity regarding any part or all of the PATENT RIGHTS and their use as contemplated in the underlying patent applications as presently drafted. ARTICLE VII INDEMNIFICATION 7.1 Indemnification. JHU and the Inventor of LICENSED PRODUCT and will not, under the provisions of this Agreement or otherwise, have control over the manner in which Company or its AFFILIATED COMPANIES or its SUBLICENSEE or those operating for its account or third parties who purchase LICENSED from any of the foregoing entities, practice the inventions of LICENSED PRODUCT. Company shall defend and hold JHU, The Johns Hopkins Health Systems, their present and former trustees, officers, Inventor of PATENT RIGHTS, agents, faculty, employees and students harmless as against any judgments, fees, expenses, or other costs arising from or incidental to any product liability or other lawsuit, claim, demand or other action brought as a consequence of the practice of said inventions by any of the foregoing entities, whether or not JHU or said Inventor, either jointly or severally, is named as a party defendant in any such lawsuit. Practice of the inventions covered by LICENSED PRODUCT by an AFFILIATED COMPANY or an agent or a SUBLICENSEE or a third party on behalf of or for the account of Company or by a third party who purchases LICENSED PRODUCT, shall be considered Company's practice of said inventions for purposes of this Paragraph. The obligation of Company to defend and indemnify as set out in this Paragraph shall survive the termination of this Agreement. Page 13 ARTICLE VIII CONFIDENTIALITY 8.1 Confidentiality. If necessary, the parties will exchange information, which they consider to be confidential. The recipient of such information agrees to accept the disclosure of said information which is marked as confidential at the time it is sent to the recipient, and to employ all reasonable efforts to maintain the information secret and confidential, such efforts to be no less than the degree of care employed by the recipient to preserve and safeguard its own confidential information. The information shall not be disclosed or revealed to anyone except employees or agents of the recipient who have a need to know the information and who have entered into a secrecy agreement with the recipient under which such employees or agents are required to maintain confidential the proprietary information of the recipient and such employees or agents shall be advised by the recipient of the confidential nature of the information and that the information shall be treated accordingly. The obligations of this Paragraph shall also apply to AFFILIATED COMPANIES and/or SUBLICENSEE provided such information by Company. JHU's, Company's, AFFILIATED COMPANIES, and SUBLICENSEES' obligations under this Paragraph shall extend until three (3) years after the termination of this Agreement. 8.2 Exceptions. The recipient's obligations under Paragraph 8.1 shall not extend to any part of the information: a. that can be demonstrated to have been in the public domain or publicly known and readily available to the trade or the public prior to the date of the disclosure; or b. that can be demonstrated, from written records to have been in the recipient's possession or readily available to the recipient from another source not under obligation of secrecy to the disclosing party prior to the disclosure; or c. that becomes part of the public domain or publicly known by publication or otherwise, not due to any unauthorized act by the recipient; or d. that is demonstrated from written records to have been developed by or for the receiving party without reference to confidential information disclosed by the disclosing party. e. that is required to be disclosed by law, government regulation or court order. Page 14 8.3 Right to Publish. JHU may publish manuscripts, abstracts or the like describing the PATENT RIGHTS, inventions contained therein provided confidential information of Company as defined in Paragraph 8.1, is not included or without first obtaining approval from Company to include such confidential information. Otherwise, JHU and the Inventor shall be free to publish manuscripts and abstracts or the like directed to the work done at JHU related to the licensed technology without prior approval. ARTICLE IX TERM & TERMINATION 9.1 Term. The term of this Agreement shall commence on the EFFECTIVE DATE and shall continue, in each country, until the date of expiration of the last to expire patent included within PATENT RIGHTS in that country or if no patents issue then for a term of twenty (20) years from the EFFECTIVE DATE of this Agreement. 9.2 Termination By Either Party. This Agreement may be terminated by either party, in the event that the other party (a) files or has filed against it a petition under the Bankruptcy Act, makes an assignment for the benefit of creditors, has a receiver appointed for it or a substantial part of its assets, or otherwise takes advantage of any statute or law designed for relief of debtors or (b) fails to perform or otherwise breaches any of its obligations hereunder, if, following the giving of notice by the terminating party of its intent to terminate and stating the grounds therefor, the party receiving such notice shall not have cured the failure or breach within forty-five (45) days for a financial breach (with the exception of Funding Diligence controlled by Paragraph 5.4) or sixty (60) days for a non-financial breach. In no event, however, shall such notice or intention to terminate be deemed to waive any rights to damages or any other remedy which the party giving notice of breach may have as a consequence of such failure or breach. 9.3 Termination by Company. Company may terminate this Agreement and the license granted herein, for any reason, upon giving JHU sixty (60) days written notice. 9.4 Obligations and Duties upon Termination. If this Agreement is terminated, both parties shall be released from all obligations and duties imposed or assumed hereunder to the extent so terminated, except as expressly provided to the contrary in this Agreement. Upon termination, both parties shall cease any further use of the confidential information disclosed to the receiving party by the other party. Termination of this Agreement, for whatever reason, shall not affect the obligation of either party to make any payments for which it is liable prior to or upon such termination. Termination shall not affect JHU's right to recover unpaid royalties or fees or reimbursement for patent expenses incurred pursuant to Paragraph 4.1 and legal expenses pursuant to Paragraph 3.5 prior to termination. Upon termination Company shall submit a final royalty report to JHU and any royalty payments and unreimbursed patent Page 15 expenses due JHU shall become immediately payable. Furthermore, upon termination of this Agreement, all rights in and to the licensed technology including PATENT RIGHTS shall revert immediately to JHU at no cost to JHU. Upon termination of this Agreement, any SUBLICENSEE shall become a direct licensee of JHU. Company shall provide written notice of such to each SUBLICENSEE with a copy of such notice provided to JHU. ARTICLE X MISCELLANEOUS 10.1 Use of Name. Except as set forth below, neither party shall use the name of the other without such party's prior written consent. Company shall not use the name of The Johns Hopkins University or The Johns Hopkins Health System or any of its constituent parts, such as the Johns Hopkins Hospital or any contraction thereof or the name of Inventor of PATENT RIGHTS in any advertising, promotional, sales literature or fundraising documents without prior written consent from an officer of JHU, unless otherwise required by law. Company shall allow at least seven (7) business days notice of any proposed public disclosure for JHU's review and comment or to provide written consent. 10.2 No Partnership. Nothing in this Agreement shall be construed to create any agency, employment, partnership, joint venture or similar relationship between the parties other than that of a licensor/licensee. Neither party shall have any right or authority whatsoever to incur any liability or obligation (express or implied) or otherwise act in any manner in the name or on the behalf of the other, or to make any promise, warranty or representation binding on the other. 10.3 Notice of Claim. Each party shall give the other or its representative immediately notice of any suit or action filed, or prompt notice of any claim made, against them arising out of the performance of this Agreement. 10.4 Product Liability. Prior to initial human testing or first commercial sale of any LICENSED PRODUCT in any particular country, Company shall establish and maintain, in each country in which Company, an AFFILIATED COMPANY or SUBLICENSEE shall test or sell LICENSED PRODUCT, product liability or other appropriate insurance coverage appropriate to the risks involved in marketing LICENSED PRODUCT and will annually present evidence to JHU that such coverage is being maintained. Upon JHU's request, Company will furnish JHU with a Certificate of Insurance of each product liability insurance policy obtained. JHU shall be listed as an additional insured in Company's said insurance policies. If such Product Liability insurance is underwritten on a 'claims made' basis, Company agrees that any change in underwriters during the term of this Agreement will require the purchase of 'prior acts' coverage to ensure that coverage will be continuous throughout the term of this Agreement. Page 16 10.5 Governing Law. This Agreement shall be construed, and legal relations between the parties hereto shall be determined, in accordance with the laws of the State of Maryland applicable to contracts solely executed and wholly to be performed within the State of Maryland without giving effect to the principles of conflicts of laws. Any disputes between the parties to the Agreement shall be brought in the state or federal courts of Maryland. 10.6 Notice. All notices or communication required or permitted to be given by either party hereunder shall be deemed sufficiently given if mailed by registered mail or certified mail or sent by overnight courier, such as Federal Express, to the other party at its respective address set forth below or to such other address as one party shall give notice of to the other from time to time hereunder. Mailed notices shall be deemed to be received on the third business day following the date of mailing. Notices sent by overnight courier shall be deemed received the following business day. If to Company: Attn: Paralex, Inc. 787 Seventh Avenue, 48th Floor New York, NY 10019 Fax: (212) 554-4355 Attn: President If to JHU: Office of Technology Licensing The Johns Hopkins University School of Medicine 111 Market Place, Suite 906 Baltimore, MD 21202 Attn: Director 10.7 Compliance with All Laws. In all activities undertaken pursuant to this Agreement, both JHU and Company covenant and agree that each will in all material respects comply with such Federal, state and local laws and statutes, as may be in effect at the time of performance and all valid rules, regulations and orders thereof regulating such activities. 10.8 Successors and Assigns. Neither this Agreement nor any of the rights or obligations created herein, except for the right to receive any remuneration hereunder, may be assigned by either party, in whole or in part, without the prior written consent of the other party, except that either party shall be free to assign this Agreement in connection with any sale of substantially all of its assets without the consent of the other. Such assignment shall be subject to JHU approval, which approval shall not be unreasonably withheld. This Agreement shall bind and inure to the benefit of the successors and permitted assigns of the parties hereto. 10.9 No Waivers; Severability. No waiver of any breach of this Agreement shall constitute a waiver of any other breach of the same or other provision of this Agreement, and no waiver shall be effective unless made in writing. Any provision hereof prohibited by or unenforceable under any applicable law of any Page 17 jurisdiction shall as to such jurisdiction be deemed ineffective and deleted herefrom without affecting any other provision of this Agreement. It is the desire of the parties hereto that this Agreement be enforced to the maximum extent permitted by law, and should any provision contained herein be held by any governmental agency or court of competent jurisdiction to be void, illegal and unenforceable, the parties shall negotiate in good faith for a substitute term or provision which carries out the original intent of the parties 10.10 Entire Agreement; Amendment. Company and JHU acknowledge that they have read this entire Agreement and that this Agreement, including the attached Exhibits constitutes the entire understanding and contract between the parties hereto and supersedes any and all prior or contemporaneous oral or written communications with respect to the subject matter hereof, all of which communications are merged herein. It is expressly understood and agreed that (i) there being no expectations to the contrary between the parties hereto, no usage of trade, verbal agreement or another regular practice or method dealing within any industry or between the parties hereto shall be used to modify, interpret, supplement or alter in any manner the express terms of this Agreement; and (ii) this Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by both of the parties hereto. 10.11 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party hereto, shall impair any such right, power or remedy to such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or in any similar breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 10.12 Force Majeure. If either party fails to fulfill its obligations hereunder (other than an obligation for the payment of money), when such failure is due to an act of God, or other circumstances beyond its reasonable control, including but not limited to fire, flood, civil commotion, riot, war (declared and undeclared), revolution, or embargoes, then said failure shall be excused for the duration of such event and for such a time thereafter as is reasonable to enable the parties to resume performance under this Agreement. 10.13 Further Assurances. Each party shall, at any time, and from to time, prior to or after the EFFECTIVE DATE of this Agreement, at reasonable request of the other party, execute and deliver to the other such instruments and documents and shall take such actions as may be required to more effectively carry out the terms of this Agreement. Page 18 10.14 Survival. All representations, warranties, covenants and agreements made herein and which by their express terms or by implication are to be performed after the execution and/or termination hereof, or are prospective in nature, shall survive such execution and/or termination, as the case may be. This shall include Articles VI, VII, VIII, IX, and X. 10.15 No Third Party Beneficiaries. Nothing in this Agreement shall be construed as giving any person, firm, corporation or other entity, other than the parties hereto and their successors and permitted assigns, any right, remedy or claim under or in respect of this Agreement or any provision hereof. 10.16 Headings. Article headings are for convenient reference and not a part of this Agreement. All Exhibits are incorporated herein by this reference. 10.17 Security. JHU will maintain first interest in its license to the Company until the total licensing fee, past patent costs, legal costs of Paragraph 3.5 and equity have been delivered to JHU. 10.18 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which when taken together shall be deemed but one instrument. IN WITNESS WHEREOF, this Agreement shall take effect as of the EFFECTIVE DATE when it has been executed below by the duly authorized representatives of the parties. THE JOHNS HOPKINS UNIVERSITY By: /s/ William P. Tew April 18, 2001 ----------------------------------------------- ----------------------- Title: William P. Tew, Ph.D., Executive Director (Date) Licensing and Business Development The Johns Hopkins School of Medicine COMPANY By: /s/ signature 11/16/00 ----------------------------------------------- ----------------------- Title: Chairman & CEO (Date) Page 19 EXHIBIT A LICENSE FEE & ROYALTIES 1. License Fee: The license fee due under Paragraph 3.1 is fifty thousand dollars ($50,000). A $10,000 processing fee will be deducted by the Office of Technology Licensing from any fees received from Company. 2. Minimum Annual Royalties: The minimum annual royalties pursuant to Paragraph 3.2 are: 1st year five thousand dollars ($5,000). 2nd year ten thousand dollars ($10,000). 3rd year twenty thousand dollars ($20,000). 4th year forty thousand dollars ($40,000). 5th year sixty thousand dollars ($60,000). 6th year and beyond one hundred thousand dollars ($100,000). A $5000 maintenance fee will be deducted annually from any royalties or other fees received from Company. 3. Royalties: The running royalty rates payable under Paragraph 3.3 are- Licensed Product four percent (4%) Page 20 EXHIBIT B QUARTERLY SALES & ROYALTY REPORT FOR LICENSE AGREEMENT BETWEEN Company AND THE JOHNS HOPKINS UNIVERSITY DATED [EFFECTIVE DATE OF AGREEMENT] FOR PERIOD OF_____________________ TO ___________________ TOTAL ROYALTIES DUE FOR THIS PERIOD $______________________ - -------------------------------------------------------------------------------- PRODUCT *JHU TOTAL NET ROYALTY AMOUNT NAME REFERENCE SALES/SERVICES; RATE DUE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- * Please provide the JHU Disclosure Number or Patent Reference This report format is to be used to report quarterly royalty statements to JHU. It should be placed on Company letterhead and accompany any royalty payments due for the reporting period. This report shall be submitted even if no sales are reported. JOHNS HOPKINS U N I V E R S I T Y School of Medicine Office of Technology Licensing 111 Market Place, Suite 906 Baltimore MO 21202 (410) 347-3222 /FAX (410) 347-3201 Internet: techlicense@jhmi.edu www.med jhu.edu/otl May 15, 2001 Dr. Mark Rogers Paramount Capital 787 Seventh Avenue, 48th Fl. New York, NY 10019 Re: Exclusive License Agreement between Paralex, and The Johns Hopkins University (JHU) Ref. DM-3326 Dear Dr. Rogers: Enclosed please find two original copies of the above-referenced agreement. As discussed with Dr. William Tew, please initial the agreed-upon change to paragraph 3.4 which provides 15% of Common Stock to JHU ("JHU stock"). Return one original to my office at your earliest convenience. As you may know, JHU distributes a portion of all revenue received from the licensing of a JHU invention to the inventors. Therefore, please provide two distinct stock certificates: one for 35% of JHU stock in the name of inventor Eduardo Marban, and the second for 65% of the JHU stock to JHU. Any rounding necessary should benefit JHU's portion. Please feel free to contact our office if you have any questions. Sincerely, /s/ Ellen Dicks Ellen Dicks Senior Technology Licensing Assistant edicks@jhmi.edu - --------------- Enclosures cc: Heather A. Bakalyar, Ph.D. The Johns Hopkins University School of Medicine & Amendment to Exclusive License Agreement November 30, 2001 Amendment to LICENSE AGREEMENT This amendment is entered into by and between THE JOHNS HOPKINS UNIVERSITY, a Maryland corporation having an address at 111 Market Place, Suite 906, Baltimore, MD 21202 ("JHU") and PARALEX, INC., a Delaware corporation having an address of 787 Seventh Avenue, 48th Floor, New York, NY 10019 (Company), with respect to the following: Whereas, JHU and Company are parties to a License Agreement dated April 18, 2001 ("the License") relating to a JHU invention entitled "Xanthine Oxidase Inhibitors as Calcium-Sensitizing Therapeutic Agents for Heart Failure" (JHU Ref. DM-3326) developed during the course of research conducted by JHU inventor Dr, Eduardo Marban; and Whereas, the License requires Company to have obtained $3,000,000 in financing by 10118101; and Whereas, JHU and Company have agreed to amend the License so as Company will have sufficient time to obtain the $3,000,000 by merger with a separate corporate entity; NOW THEREFORE, the parties hereby agree as follows: * In Paragraph 5.4, delete "Six (6) Months" and replace with --Eleven (11) Months--. IN WITNESS WHEREOF, this Agreement shall take effect as of October 18, 2001 upon execution by the duly authorized representatives of the parties below. THE JOHNS HOPKINS UNIVERSITY By: /s/ William P. Tew Nov. 30, 2001 ----------------------------------------------- ----------------------- Title: William P. Tew, Ph.D., Executive Director (Date) Licensing and Business Development The Johns Hopkins School of Medicine PARALEX, INC. By: /s/ signature 11/28/01 ----------------------------------------------- ----------------------- Title: (Date) EX-4 9 exhibit4-15.txt LICENSE AGREEMENT DATED DECEMBER 19, 2001 BETWEEN PARALEX AND ILEX ONCOLOGY, INC. Exhibit 4.15 LICENSE AND OPTION AGREEMENT ---------------------------- This License and Option Agreement (the "Agreement") effective as of December 19, 2001 by and between ILEX Oncology, Inc., a Delaware corporation having its principal place of business at 4545 Horizon Hill Blvd., San Antonio, Texas 78229-2263 ("ILEX") and Paralex, Inc., a Delaware corporation having its principal place of business at 787 Seventh Avenue, 48th Floor, New York, New York 10019 ("Paralex"). WHEREAS, ILEX has licensed certain know-how and rights relating to the chemical known as Oxypurinol (the "Compound") in the United States from Burroughs Wellcome Co. ("BW"), now GlaxoSmithKline, PLC ("GSK"), and in the non-United States territory from The Wellcome Foundation Limited ("WFL"); and has developed its own body of Compound related know-how and intellectual property rights, including manufacture, know-how, regulatory filings, clinical trial information and trademark filings relating to the "OXYPRIM" trademark, all of which are potentially useful and valuable in the development and commercialization of the Compound; WHEREAS, ILEX and Paralex previously entered into a Sublicense Agreement dated June 22, 2001 (the "Sublicense Agreement") whereby ILEX sublicensed to Paralex certain of the aforesaid Compound related rights from GSK and WFL as welt as ILEX's own Compound related know-how and intellectual property rights as summarized above, to facilitate development and commercialization of the Compound in the Field; WHEREAS, ILEX and Paralex now desire to rescind and otherwise terminate the Sublicense Agreement in favor of this Agreement, in view of more recent clinical results obtained by ILEX with respect to the use of the Compound in the Field. NOW, THEREFORE, in consideration of the foregoing and mutual promises and covenants set forth therein, ILEX and Paralex hereby agree as follows, ARTICLE 1 Definitions Any capitalized term not defined in this Agreement shall have the meaning given such term in the Original License Agreement (as such term is defined below). As used in this Agreement, the following terms, whether used in the singular or the plural, shall have the following meanings: 1.1 "Development Agreement" means the Development Agreement between Catalytica Pharmaceuticals, Inc. ("Catalytica") and ILEX Product, Inc. dated August 18, 2000, a copy of which is attached hereto as Schedule 1.1. 1.2 "Effective Date" means the date hereof. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 2 1.3 "Field" means the treatment of hyperuricemia in humans who are intolerant of allopurinol. 1.4 "FDA" means the United States Food and Drug Administration. 1.5 "GSK Know-How" means the Know-How as such term is defined in the Original License Agreement. 1.6 "ILEX Clinical Trial Data Package" means the clinical trial data which ILEX has acquired, and may in the future acquire, as of the Effective Date hereof, in the current clinical trial, designated as OXPL-213 (the "Clinical Trial"), which ILEX is sponsoring to evaluate the usage of the Compound in the Field. 1.7 "ILEX Know-How" means (a) all technical information and data whether or not patentable which is owned or licensed by ILEX and which is reasonably necessary to manufacture the Compound or to use the Compound in the Field, including ail pre-clinical and clinical data, regulatory submissions, research, marketing data and any intellectual property rights (including all patents and patent applications) and Know-How relating to the Compound in the Field, other than the GSK Know-How; and (b) the Oxypurinol IND, and Orphan Drug Designation, but excluding the ILEX Clinical Trial Data Package. 1.8 "ILEX Trademark" means "OXYPRIM" trademark, including the U.S. Trademark application Serial No. 75/624,684, which was allowed on February 29, 2000, by the United States Patent and Trademark Office. 1.9 "Original License Agreement" means that certain License Agreement effective as of March 31, 1995, between BW, WFL and ILEX, as amended in that First Amendment of License Agreement dated June 1, 1998, and as further amended in that Second Amendment of License Agreement dated February 9, 2001, copies of which are attached as Schedule 1.9. 1.10 "Oxypurinol IND" means the IND (No, 3,362) filed by ILEX with the FDA for Oxypurinol. 1.11 "Product" means the Compound or any product containing the Compound which is made or developed using the GSK Know-How and/or the ILEX Know- How. 1.12 "Sublicense Agreement" means the Sublicense Agreement dated effective as of June 22, 2001 by and between ILEX and Paralex. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 3 1.13 "Third Party" means any party other than ILIAC, GSK, WFL, Paralex and their respective Affiliates and Paralex's sublicensees, if any. ARTICLE 2 Sublicense Agreement Termination 2.1 As of the effective Date hereof, ILEX and Paralex agree that the Sublicense Agreement shall be rescinded and/or otherwise terminated in favor of this Agreement, and the rights and obligations set forth in this Agreement shall supersede and replace all of the rights granted and obligations assumed in the Sublicense Agreement. ARTICLE 3 Grants 3.1 Sublicense Grant. As of the Effective Date, and subject to the terms of ----------------- this Agreement and the Original License Agreement, ILEX hereby grants to Paralex an exclusive sublicense to all of ILEX's rights under the Original License Agreement in the Field, in the Territory. 3.2 License Grant. As of the Effective Date, and subject to the terms of -------------- this Agreement and the Original License Agreement, ILEX hereby grants to Paralex an exclusive license in all fields (including without limitation the Field), in the Territory, with the right to sublicense to the ILEX Know-How to make, have made, use, offer to sell and sell Products. 3.3 Option Grant. As of the Effective Date, and subject to the terms of ------------ this Agreement and the Original License Agreement, ILEX hereby grants Paralex an exclusive option to acquire ownership of, and full rights to use the ILEX Clinical Trial Data Package (the "Option''). This Option shall expire one (1) year after the Effective Date, and may be exercised at any time during its term by Paralex providing written notice to ILEX of the Option exercise. Upon exercise of the Option, Paralex shall pay ILEX the Option Exercise Fee as set forth below in Section 4.2. 3.4 Sublicense Rights. Paralex shall have the right to sublicense the ------------------ license, sublicenses and other rights granted under this Article 3 to one or more Affiliate(s) and Third Party sublicensee(s), provided that Paralex agrees to be responsible for the performance hereunder by its Affiliates and sublicensees to which such licenses and sublicenses shall have been granted, subject to the prior written consent of ILEX, which shall not be unreasonably withheld within thirty (30) days of receipt of prior written notice of any proposed sublicense to Affiliates or Third Party sublicensees. LICENSE AND OPTION AGREEMENT 12/20/2001 3.5 Trademark License. As of the Effective Date and subject to the terms of ------------------ this Agreement, ILEX hereby grants to Paralex an exclusive license, with the right to sublicense to the ILEX trademark "OXYPRIM" for use in connection with the selling, promotion and/or advertising of Product. 3.6 Reservation of Rights. ILEX hereby reserves for itself the perpetual, ---------------------- royalty -free right to use the ILEX Know-How solely for research purposes in the Field including, but not limited to, the right to make, have made and use the Products and to refer to the Oxypurinot IND in any of its future regulatory filings with the FDA. ARTICLE 4 Consideration 4.1 Agreement Initiation Fee. As an initial payment and partial ------------------------- consideration of ILEX's granting of the sublicense and licenses set forth in Sections 3.1, 3.2 and 3.5 hereof, and the grant of the option set forth in Section 3.3, Paralex shall pay to ILEX an initiation fee of Two Hundred Fifty Thousand and 00/100 Dollars (5250,000) due and payable on the Effective Date. 4.2 Option Exercise Fee. If Paralex elects to exercise the Option for the -------------------- ILEX Clinical Trial Data Package at any time during the Option term set forth in Section 3.3, Paralex shall pay to ILEX an Option Exercise Fee of two Hundred Fifty Thousand and 00/100 Dollars ($250,000). This Option Exercise Fee shall be due and payable within ten (10) days after Paralex sends ILEX written notice of the Option exercise. 4.3 Assumption of Obligations under the Original License Agreement. As --------------------------------------------------------------- partial consideration for the sublicense, licenses and other rights granted hereunder, Paralex shall (a) pay directly to GSK, as applicable, the Milestone Payment recited in clause (iii) of Section 4.2 of the Original License Agreement and the royalties for Net Sates of Product pursuant to Article 5, each as set forth (and defined) in the Original License Agreement, and (b) perform directly the other obligations of ILEX relating to the Product set forth in Article 6, 7 and 8 of the Original License Agreement, including specifically, the Compassionate Plea Program set forth in Article B. Paralex shall not be obligated to, and ILEX shall directly, perform all other obligations pursuant to the Original License Agreement. Anything in this Agreement to the contrary notwithstanding, Paralex shall have no obligation to make any payment under Article 4 or 5 of the Original License Agreement other than (i) in the case of the milestone payment pursuant to Section 4.2 (iii) of the Original License Agreement, upon approval by the FDA of an NDA with respect to a hyperuricemic indication of the Product and (ii) in the case of any royalties for Net Sales of Product (as defined in the Original License Agreement), in respect of Net Sales of Product in the Field. Except as expressly provided in the preceding sentence, ILEX agrees and acknowledges that it will be responsible for all payment obligations under Articles 4 and 5 of the Original License Agreement. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 5 4.4 Milestone Payments. In addition to the payments under the Original ------------------- License Agreement for which Paralex is responsible pursuant to Section 4.3 hereof, and as partial consideration for the sublicense, licenses and other rights granted hereunder, Paralex shall make the following cash milestone payments to ILEX: i. $1 million upon successful completion of the first Phase II clinical trial of the Product in a cardiovascular indication; ii. $2 million upon FDA approval for marketing and commercial sale of the first New Drug Application ("NDA") filed for a cardiovascular indication of the Product; iii. $5 million upon FDA approval for marketing and commercial sale of the first NDA filed for a hyperuricemic indication of the Product; provided, however, the foregoing milestone payment shall be $4.9 million rather than $5 million if the GSK Amendment has not become effective on or prior to the date on which such payment is due; iv. As an alternative to milestone payment (iii) only, (milestones I and ii being independently payable, in any case) Paralex may, at its option, make two payments to ILEX as follows: (a) $2 million upon FDA approval for marketing and commercial sale of NDA for the first hyperuricemic indication of the Product; and (b) $4 million upon first exceeding $15 million in annual Net Sales for a hyperuricemic indication of the Product. All milestone payments set forth in this Section 4.4 shall become due and payable within sixty (60) days after the indicated milestone is achieved (except that in the case of the milestone set forth in Section 4.4, iv (b), if applicable, the milestone payment shall become due and payable within ninety (90) days after the end of the first fiscal year in which such Net Sales are achieved). Paralex shall give ILEX timely written notice of each milestone achievement. 4.5 Royalty. As partial consideration for the sublicense, licenses and -------- other rights granted hereunder, Paralex shall pay ILEX an earned royalty based on cumulative Net Sales of Product in the Field in accordance with the schedule set forth below in this Section; with the further proviso that the obligation of Paralex to pay royalties on Net Sales of Products in the Field in the Territory, shall not accrue until such time as the cumulative Net Sales with respect to the Products in the Field exceed One Million Five Hundred Thousand Dollars ($1,500,000) (the "Threshold Amount"), and upon such time that Net Sales with respect to the Products in the Field exceed the Threshold Amount, LICENSE AND OPTION AGREEMENT 12/20/2001 Page 6 royalties shall be due and payable with respect to the aggregate amount of Net Sales of the Products in the Field in the Territory, including but not limited to with respect to Net Sales of Products in the Field up to and including the Threshold Amount. Royalty Schedule for Net Sales of Product in the Field (a) 7.75% on Net Sales of the Product in the Field of the first $25,000,000 of Net Sales; (b) 5.0% on Net Sales of the Product in the Field in excess of $25,000,000, but less than $100,000,000 of Net Sates; and (c) 2.75% on Net Sales of the Product in the Field in excess of $100,000,000 of Net Sales. The royalty set forth above shall be due on all Net Sales generated by sales of the Product solely pursuant to the initial FDA label approval of Product for the Field. In addition, Paralex shall pay ILEX an earned royalty of 2% on Net Sales of Product for cardiovascular use, subsequent to any FDA approval for marketing and commercial sale of a label indication for the Product in the cardiovascular field; provided that the obligation of Paralex to pay royalties on Net Sales of Products for cardiovascular use shall not accrue until such time as the cumulative Net Sates of Products for cardiovascular use exceed the Threshold Amount, and upon such time that Net Sales of Products for cardiovascular use exceed the Threshold Amount, royalties shall be due and payable with respect to the aggregate amount of Net Sates of Products for cardiovascular use in the Territory, including but not limited to with respect to Net Sales of Products for cardiovascular use up to and including the Threshold Amount. Royalties shall be payable to ILEX pursuant to Section 4.5 until the Expiration Date (as defined in Section 10.1) and shall be payable and reportable on a periodic basis to ILEX in the same manner as royalty is paid and reported to BW and GSK under Article 6 of the Original License Agreement. 4.6 Trademark Use. From and after the First Commercial Sale of Product in -------------- the United States, Paralex agrees to use commercially reasonable efforts to exploit the ILEX Trademark in connection with the marketing and sales of the Product and to otherwise build value and goodwill for the ILEX Trademark with respect to the Product; and Paralex shall also provide all commercially reasonable assistance to ILEX in maintaining and enforcing the ILEX Trademark against Third Party infringers and shall not otherwise contest the validity of the ILEX Trademark, ILEX shall have the sole right, at its own expense, to enforce the Trademark against any Third Party infringers; provided, however, that if ILEX fails to take commercially reasonable action to enforce the Trademark LICENSE AND OPTION AGREEMENT 12/20/2001 Page 7 against a Third Party infringer within six (6) months following notice of such alleged infringement by Paralex, then Paralex may take such action as it may deem appropriate with respect to such enforcement, at its own expense and ILEX shall provide all commercially reasonable assistance to Paralex in connection therewith. In connection therewith, Paralex shall implement document control and quality assurance procedures to protect the ILEX Trademark from being diluted or diminished in value during the term of this Agreement and in connection therewith, Paralex agrees to permit ILEX to periodically inspect its advertising, promotion and sales literature and activities to confirm that reasonably suitable quality standards are iris place, In the event that an inspection by ILEX reveals any need for corrective actions, Paralex shall use all commercially reasonable efforts to perform such corrective actions. 4.7 Technology Transfer Costs. Paralex shall also reimburse ILEX for all -------------------------- reasonable and actual out-of-pocket costs for transferring materials and information comprising ILEX Know-How and the ILEX Clinical Trial Data Package (if and when Paralex exercises the Option for that Data Package) including any time expended by ILEX professional staff in the requested transfer activities beyond ten (10) man days, with the professional staff being billed at ILEX's standard services rates for third party clients. These technical transfer costs and charges shall be due and payable thirty (30) days after receipt by Paralex of an invoice from ILEX itemizing such costs on a periodic (monthly) basis. 4.8 Accrual of Royalties. No royalty shall be payable on a Product made, --------------------- sold or used for tests or development purposes or distributed as samples. No royalties shall be payable on sales among Paralex and its sublicensees, but royalties shall be payable on the initial subsequent sales by Paralex or its sublicensees to a Third Party. ARTICLE 5 Technology and Materials Transfer 5.1 Know-How. As promptly as practicable following the Effective Date and, -------- in any event, within thirty (30) days thereafter, ILEX shall make available to Paralex all of GSK Know-How, ILEX Know-How and all other rights in the Field obtained from GSK in the Original License Agreement. ILEX Know-How to be transferred shall include the Oxypurinol IND and Orphan Drug Designation, all technical information relating to Compound which is held by ILEX including information on Compound manufacturing and Product formulation and all pre-clinical and clinical information including information relating to the Compassionate Use Program, except for the ILEX Clinical Trial Data Package. In addition, ILEX will transfer its existing clinical inventory of Compound (approximately 1500 bottles each, containing 100 capsules) to a location designated in advance by Paralex, During the first ninety (90) days after the Effective Date, ILEX will also make available its professional staff, having the requisite knowledge at times reasonably requested by Paralex, to answer questions posed by Paralex with regard to the transferred technology and materials, provided the requests do not cause ILEX to spend more than five (5) man days in any given LICENSE AND OPTION AGREEMENT 12/20/2001 Page 8 consecutive thirty (30) day period and such technical assistance can be provided from ILEX's offices. 5.2 ILEX Clinical Trial Data Package. As promptly as practicable following --------------------------------- the Effective Date, ILEX shall deliver to Paralex copies of each agreement between ILEX and a Third Party relating to the conduct of the Clinical Trial (each, a "Clinical Trial Agreement"), all correspondence with the FDA relating to the Clinical Trial and all data available in- house and included in the ILEX Clinical Trial Data Package as of the Effective Date. During the term of the Option, ILEX shall (a) deliver copies of any such new data or correspondence to Paralex as promptly as practicable after such data becomes available or such correspondence is sent or received, (b) make its professional staff involved in the conduct or monitoring of the Clinical Trial available to Paralex during normal business hours upon Paralex's reasonable request to answer questions regarding the conduct or results of the Clinical Trial, and (c) give Paralex reasonable advance written notice of any proposed meeting or conference call with the FDA regarding the Clinical Trial and permit representatives of Paralex to attend any such meeting or conference call as observers. ILEX will be responsible for the payment of all expenses relating to the conduct of the Clinical Trial, including without limitation all amounts payable to Third Parties pursuant to the Clinical Trial Agreements and the transfer of the ILEX Clinical Trial Data Package to Paralex pursuant hereto. During the term of the Option, except as expressly provided in this Section 5.2, ILEX will not change the protocol pursuant to which the Clinical Trial is being conducted or amend any Clinical Trial Agreement without obtaining the prior written consent of Paralex, which consent will not be unreasonably withheld. Unless and until Paralex exercises the Option and pays the Option Exercise Fee to ILEX, Paralex shall not use the data and other information relating to the Clinical Trial made available to it by ILEX hereunder except for the sole purpose of determining whether to exercise the Option and if it does not timely exercise the Option, will return all such data and other information to ILEX promptly upon ILEX's request, with no rights to retain any copy thereof. In making the ILEX Clinical Trial Data Package available to Paralex under this Agreement, it is expressly understood and agreed by the Parties that ILEX will stop OXPL-213 at approximately 15 patients enrolled as of the Effective Date and that ILEX has no obligation to continue any activity with regard to OXPL-213 other than stopping the trial in an orderly fashion. 5.3 Bulk Compound Supply. Pursuant to the Development Agreement, ILEX has --------------------- contracted for and anticipates receiving, within sixty (60) days after the Effective Date, approximately 200kgs of cGMP bulk active Compound ("Bulk Active Order") suitable for clinical use, upon formulation into finished drug product. Paralex, on its part, agrees to purchase its requirements of bulk active Compound from ILEX, provided that the quality of the Bulk Active Order of Compound meets the specifications set forth in the Development Agreement, until such time as the Bulk Active Order under the Development Agreement is fully consumed at (a) ILEX's actual cost therefor (estimated to be about $800,000), if purchased immediately after its receipt by ILEX or (b) ILEX's actual cost plus 50%, if taken on a piecemeal, or as needed basis, Provided further that Paralex shall be obligated to purchase the entire 200 kg LICENSE AND OPTION AGREEMENT 12/20/2001 Page 9 bulk active Compound order from ILEX within the three (3) year period after the Effective Date. The bulk active Compound shall be shipped pursuant to Paralex's instructions to locations designated by Paralex and ILEX shall warrant that the bulk active Compound, at time of shipment, will meet specifications established in the Development Agreement, with Paralex's sole remedy being refund of any payment made for bulk active Compound failing the specifications. In the event of a dispute arises as to whether the bulk active Compound failed specifications, a sample shall be transferred to an independent testing laboratory, mutually acceptable to ILEX and Paralex for reanalysis, with the results of the independent; testing laboratory being binding on the parties and the party found to be in error paying for the reanalysis, After ILEX's receipt of the contracted 200kg supply of bulk active Compound under the Development Agreement, ILEX will promptly take all steps necessary to assign to Paralex all of ILEX's interest in and rights under the Development Agreement and Paralex shall accept such assignment, including all rights and any continuing obligations of ILEX set forth therein. Notwithstanding such assignment, ILEX shall be responsible for the performance of all of its obligations under the Development Agreement, including without limitation the payment of all amounts due to Catalytica in respect of the entire bulk Compound order, through the effective date of such assignment. From the Effective Date until Paralex has purchased the entire Compound order from ILEX pursuant to this Section 5.3, (a) ILEX will promptly furnish Paralex with copies of all reports or other documentation or information supplied by Catalytica pursuant to Section 2.5 of the Development Agreement, and (b) ILEX will not agree to any change in the Specifications (as defined in the Development Agreement) without obtaining Paralex's prior written consent, which will not be unreasonably withheld. ARTICLE 6 Representations, Warranties and Covenants 6.1 General. As of the effective Date, each party hereby represents and ------- warrants to the other party that (a) it has the corporate power and authority to execute and enter this Agreement and to carry out the transactions contemplated by this Agreement; (b) it has duly and validly authorized, executed and delivered this Agreement to the other party; (c) the execution, delivery and performance by it of this Agreement has been duly approved and authorized by all requisite corporate and stockholder action and when delivered, this Agreement constitutes, or will constitute, the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms, subject to the availability and enforceability of equitable remedies and to applicable bankruptcy and other taws relating to the rights of creditors generally. 6.2 ILEX. ILEX shall use reasonable efforts to cause GSK to agree to amend ---- Section 11.5 of the Original License Agreement or otherwise enter into a binding agreement in form and substance reasonably satisfactory to Paralex and its counsel (the "GSK Amendment") as promptly as practicable so that GSK would be contractually obligated to (i) continue this Agreement in the event that the original License Agreement terminates for reasons other than the expiration of ILEX'S LICENSE AND OPTION AGREEMENT 12/20/2001 Page 10 obligation to pay royalties to GSK thereunder or (ii) consent to any assignment by ILEX to Paralex of the Original License Agreement. 6.3 ILEX. As of the Effective Date, ILEX represents that (a) it owns and ---- possesses adequate and enforceable rights to license and sublicense all of the ILEX Know--How, the ILEX Trademark and other intangible property, including, but not limited to, all of ILEX'S rights, obligations and duties under the Original License Agreement (collectively the "Proprietary Rights") licensed and sublicensed or proposed to be licensed and sublicensed to Paralex under this Agreement; (b) to the best of its knowledge, it has taken all action necessary to protect its Proprietary Rights, including, but not limited to, the payment of all applicable maintenance fees, annuity payments, taxes and any other costs required by applicable law or regulation required to maintain the patent and trademark rights in full force and effect; (c) it has not received any notice of, and there are no facts known to ILEX that indicate the existence of (i) any infringement or misappropriation by any Third Party of any of the Proprietary Rights or (ii) any claim by a Third Party contesting the validity of any of the Proprietary Rights; (d) it has not received any notice of any infringement, misappropriation or violation by ILEX or any of its employees of any Proprietary Rights of Third Parties, and to the best of its knowledge, neither ILEX nor any of its employees have infringed, misappropriated or otherwise violated any Proprietary Rights of any Third Parties; (e) neither the execution nor delivery of this Agreement conflicts with or will conflict with or result in a material breach of (i) the terms, conditions or provisions of, or constitute a default under, the Original License Agreement; (ii) ILEX'S Certificate of Incorporation, as a amended, or its Bylaws; (iii) any law, ordinance, regulation, order, writ, injunction or decree of any court or administrative agency; or (iv) any other contract, agreement, license, authorization, covenant or instrument under which ILEX or any of its employees are now obligated; and (f) it is not aware of any receipt by GSK or WFL of (i) any notice of infringement, misappropriation or violation by GSK or WFL or any of their employees of any Proprietary Rights of Third Parties or (ii) any claim by a Third Party contesting the validity of any of GSK's or WFL's intellectual property related to the GSK Know-How. Schedule 1.9 hereof contains a true, correct and complete copy of the Original License Agreement. The Original License Agreement has been duly and validly authorized, executed and delivered by ILEX and, to the best of ILEX'S knowledge, GSK and WFL, and constitutes the legal, valid and binding obligation of ILEX and, to the best of ILEX'S knowledge, GSK and WFL, enforceable against each of them in accordance with its terms. ILEX has made all payments required to be made by it pursuant to the Original License Agreement through the Effective Date, including without limitation the milestone payments required pursuant to Sections 4.2(i) and (ii) thereof. The Original License Agreement is, and ILEX shall use its best efforts to cause the Original License Agreement to remain, in full force and effect, and ILEX will use- its best efforts to timely perform all obligations required to be performed by it thereunder (except for any such obligations which are to be performed by Paralex to Section 4.3 from and after the License Date.) ILEX will not agree to any amendment of the Original License Agreement that would adversely affect the rights, or increase the obligations, of Paralex under this Agreement without the prior written consent of Paralex. ILEX will, no later than ten (10) LICENSE AND OPTION AGREEMENT 12/20/2001 Page 11 days following receipt of any notice from GSK or WFL under the Original License Agreement forward a copy of such notice to Paralex. 6.4 Litigation. As of the Effective Date, ILEX represents that to the best ---------- of ILEX's knowledge, there is no action, suit, claim or proceeding at law or in equity by or before any arbitrator, governmental instrumentality or other agency now pending or, to the knowledge of ILEX, threatened against ILEX (or basis thereof known to ILEX which ILEX believes may result in the foregoing) the adverse outcome of which would have a material adverse effect on the ability of ILEX to consummate this Agreement or to carry out its duties pursuant to this Agreement. ARTICLE 7 Indemnification; Insurance 7.1 Indemnification by Paralex. Paralex agrees to indemnify and hold ILEX, --------------------------- GSK, WFL, their Affiliates, directors, officers, employees and agents harmless from and against any liabilities or damages or expenses, fees and other reasonable costs or expenses including without limitation, reasonable attorneys' fees, in connection with, arising out of, or resulting from (i) claims relating to Paralex's or its sublicensees' or subcontractors' testing, use, manufacture or sale of the products or (ii) any final, non-appealable judgment issued by a court of competent jurisdiction against Paralex in favor of ILEX or GSK or WFL or any other relevant Indemnitee under Section 7.3 of its indemnification rights set forth in clause (i) of this Section 7.1. 7.2 Indemnification by ILEX. ILEX agrees to indemnify and hold Paralex, its ------------------------ Affiliates, directors, officers, employees and agents harmless from and against any liabilities or damages or expenses, fees and other reasonable costs or expenses including without limitation, reasonable attorneys' fees, in connection with, arising out of, or resulting from (i) claims relating to ILEX's or its sublicensees' (other than Paralex) testing, use, manufacture or sale of the Products or (ii) any final, non-appealable judgment issued by a court of competent jurisdiction against ILEX in favor of Paralex or any other relevant Indemnitee under Section 7.3 of its indemnification rights set forth in clause (i) of this Section 7.2. 7.3 Indemnification Procedures. A party (the "Indemnitee") which intends to -------------------------- claim indemnification under this Article 7 shall promptly notify the indemnifying party (the "Indemnitor'") in writing of any action, claim or liability in respect of which the Indemnitee or any of its Affiliates, directors, officers, employees or agents intend to claim such indemnification. The Indemnitee shall permit, and shall cause its Affiliates, directors, officers, employees and agents to permit, the Indemnitor, at its discretion, to settle any such action, claim or liability and agrees to the complete control or such defense or settlement by the Indemnitor; provided, however, that such settlement -------- ------- does not adversely affect the Indemnitee's rights hereunder or impose any obligations on the Indemnitee in addition to those set forth LICENSE AND OPTION AGREEMENT 12/20/2001 Page 12 herein, in order for it to exercise such rights. No such action, claim or liability shall be settled without the prior written consent of the Indemnitor (the consent to which shall not be unreasonably withheld), unless such settlement, compromise or consent includes an unconditional release of each Indemnitee hereunder from all liability arising out of such action, claim or liability, and the Indemnitor shall not be responsible for any legal fees or other costs incurred other than as provided herein. The Indemnitee and its Affiliates, directors, officers, employees and agents shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification. The Indemnitee shall have the right, but not the obligation, to be represented by counsel of its own selection and expense. 7.4 Insurance. --------- (a) Following the Effective Date, Para(ex shall purchase and maintain, at its own expense, during the term of this Agreement, and for a minimum of two (2) years following the expiration, termination or cancellation of this Agreement, a product liability policy from an insurance company or companies reasonably satisfactory to ILEX, GSK and WFL. During any clinical development of the Product, such coverage shall be for at least $2,000,000 per occurrence, Promptly upon commercial introduction of the initial Product, the parties shall negotiate, in good faith, an increase in such coverage. The insurance policy relating to such coverage shall name ILEX, GSK and WFL as additional insureds by way of endorsement or otherwise as their respective interests may appear. (b) Within 30 days after the Effective Date hereof, Paralex shall cause to be delivered to ILEX an insurance certificate evidencing the insurance coverage required by this Section 7.4. Such insurance certificate shall name ILEX, GSK and WFL as additional insureds as their respective interests may appear. ARTICLE 8 Royalty Reports and Accounting 8.1 ILEX Rights. At the request of ILEX, Paralex will provide to ILEX at ------------ least five business days before the date required under the Original License Agreement, a copy of all royalty reports and accounting as required to be provided by ILEX to GSK and WFL under the terms of the Original License Agreement. In addition to any auditing reports GSK is entitled to under the Original License Agreement, Paralex shall grant to ILEX; at ILEX'S sole expense, the right to audit Paralex's books once a year, during normal business hours, under the same conditions as specified in the Original License Agreement. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 13 ARTICLE 9 Confidentiality 9.1 Treatment of Confidential Information. Except as otherwise provided in -------------------------------------- this Article 9, during the term of this Agreement, and for a period of five (5) years following the later of the termination or expiration of (i) this Agreement or (ii) the Original License Agreement: (a) Paralex will retain in confidence and use only for purposes of this Agreement, any information and data supplied by or on behalf of ILEX, GSK and WFL to Paralex under this Agreement; and (b) ILEX will retain in confidence and use only for purposes of this Agreement, any information and data supplied by or on behalf of Paralex to ILEX under this Agreement For purposes of this Agreement, all such information and data which a party is obligated to retain in confidence shall be called "Information" Paralex agrees that all information and data disclosed by GSK to ILEX pursuant to the Letter Agreement shall be covered as Information under the confidentiality sections of the Original License Agreement. 9.2 Right to Disclose. To the extent it is reasonably necessary or ------------------ appropriate to fulfill its obligations or exercise its rights under this Agreement or any rights which survive termination or expiration thereof, a Party may disclose Information to its Affiliates, sublicensees (actual and prospective), investors (actual and prospective), consultants, outside contractors and clinical investigators; provided, however, that all such entities and persons -------- ------- agree (i) to keep the Information confidential for at least the same time periods and to the same extent as each party is required to keep Information confidential and (ii) to use the Information only for such purposes as such party is entitled to use the Information. Each party or its Affiliates or, if applicable, its sublicensees, may disclose such Information to government or other regulatory authorities to the extent that such disclosure (a) is reasonably necessary to obtain patents or authorizations, to conduct clinical trials and to market commercially the Product, provided such party is otherwise entitled to engage in such activities under this Agreement or (b) is otherwise required by applicable laws or regulations. 9.3 Release From Restrictions. The obligation not to disclose Information -------------------------- shall not apply to any part of such Information that (i) is or becomes patented, published or otherwise part of the public domain other than by acts of the party obligated not to disclose such information (for purposes of this Article 9, the "Receiving Party") or its Affiliates or sublicensees in contravention of this Agreement; (ii) is rightfully disclosed to the Receiving Party or its Affiliates or sublicensees by a Third Party; provided, such Information was not obtained, directly or indirectly, from the other party under this Agreement; (iii) prior to LICENSE AND OPTION AGREEMENT 12/20/2001 Page 14 disclosure under this Agreement, was already in possession of the Receiving Party or its Affiliates or sublicensees, provided, such Information was not obtained, directly or indirectly, from the other party under this Agreement under an obligation of confidentiality; (iv) results from research and development by Receiving Party or its Affiliates or sublicensees independent of disclosures from the other party under this Agreement; (v) has been approved for publication by the parties hereto; or (vi) is Product-related information which is reasonably required to be disclosed in connection with the marketing of the Product. 9.4 Confidentiality of Agreement. Except as otherwise required by law or ----------------------------- applicable regulations or the terms of this Agreement, or otherwise mutually agreed upon by the parties hereto, each party shall treat as confidential the terms, conditions and existence of this Agreement and the Original License Agreement, Notwithstanding the foregoing, the terms, conditions and existence of this Agreement and the Original License Agreement may be disclosed by (i) either party to an Affiliate, (ii) Paralex to a sublicensee, and (iii) Paralex to Paramount Capital, Inc., or any other investment banker, placement agent, financial advisor, finder, attorney, accountant, agent, representative or prospective or actual investor to the extent that such disclosure is necessary for Paralex to conduct a financing; provided, however, that any such recipient of any disclosure pursuant to this Section 9.4 must agree to be bound by the terms and conditions of this Section 9.4 to the same extent as Paralex. 9.5 Right to Publication. ILEX agrees that Paralex shall have the right to -------------------- publish or to present publicly (collectively, a "Publication") the results of any research, work or other development performed pursuant to this Agreement by or on behalf of Paralex (collectively, "Results"). Paralex agrees to submit any proposed Publication to ILEX, for its review at least thirty five (35) days prior to submission or presentation of such Publication. If ILEX requests a delay in submission or presentation based on patent considerations, Paralex agrees to delay such submission or presentation for a period not to exceed ninety (90) days from the date of such request. Paralex further agrees to give due consideration to any comments made by ILEX or GSK, with respect to such publication but, except as set forth in the immediate following sentence, Paralex shall determine the content of the Publication. Nothing in this Section 9.5 shall be construed to allow Paralex to publish or otherwise disclose any Information disclosed to Paralex by ILEX. ARTICLE 10 Term and Termination 10.1 Term; Termination. This Agreement shall be effective as of the ------------------ Effective Date and shall continue in full force and effect until the date of the expiration of ILEX's obligation to pay royalties under the Original License Agreement, which, for the avoidance of doubt, shall be determined on a country by country basis as provided in the second paragraph of Section 5.1 of the Original License Agreement (the "Expiration Date"); at which time, notwithstanding anything to the LICENSE AND OPTION AGREEMENT 12/20/2001 Page 15 contrary contained herein, all rights licensed or sublicensed to Paralex herein shall be deemed to be converted to a fully paid, non- exclusive, irrevocable, royalty free license or sublicense of the Know-How and ILEX Know--How to Paralex in such country or countries so that Paralex may make, have made, use, offer to sell, sell and have sold the Product. Upon expiration or termination of this Agreement with respect to one or more countries of the Territory, the rights and obligations of the parties shall cease with respect to such country, except as follows: (i) the rights and obligations of the parties under Article 7 shall survive termination or expiration; (ii) upon expiration or termination for any reason, the obligations of Section 9.1 through 9.5 shall survive for the periods provided therein; (iii) upon termination, Paralex's obligations under Section 10.3, 10,4 and 10.5 shall survive; (iv) expiration or termination of this Agreement shall not relieve the parties of any other obligation accruing prior to such termination; or (v) any rights or obligations under the Original License Agreement which survive termination or expiration, To the extent relevant to the other survival provisions, Article 11 (Miscellaneous Provisions) shall also survive. 10.2 Termination for Cause. (a) ILEX will have the right, but not the ---------------------- obligation, to terminate this Agreement upon written notice to Paralex following the occurrence of any of the following: (i) upon or after the bankruptcy, dissolution, Paralex's general failure to pay its debts and other liabilities as they become due or the winding up of Paralex (other than dissolution or winding up for the purposes of reconstruction or amalgamation); or (ii) upon or after the breach of any material provision of this License Agreement by Paralex if such breach is not cured within thirty (30) days after ILEX gives Paralex written notice thereof. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 16 (b) Paralex will have the right, but not the obligation, to terminate this agreement upon written notice to ILEX following the occurrence of any of the following: (i) upon or after the bankruptcy, dissolution, ILEX's general failure to pay its debts and other liabilities as they become due or the winding up of ILEX (other than dissolution or winding up for the purposes of reconstruction or amalgamation); or (ii) upon or after the breach of any material provision of this License Agreement by ILEX if such breach is not cured within thirty (30) days after Paralex gives ILEX written notice thereof; or (iii) upon or after the termination of the Original License Agreement. 10.3 Paralex Obligations Upon Termination. ------------------------------------- (a) upon termination of this agreement pursuant to Section 10.2(a): (i) Paralex shall promptly pay ILEX and GSK any amounts due under the terms of this Agreement including the royalties which have accrued as of termination; (ii) Paralex agrees to cooperate fully with ILEX, or its respective nominees, to transfer or to hand over to ILEX or its respective nominees, health registrations and sales permissions regarding the Products in the country or countries in which termination has occurred; and (iii) in the event of termination with respect to all countries of the Territory, Paralex shall return to ILEX all copies of the Information supplied hereunder, except that Paralex's legal department may retain one copy of the Information for purposes of determining the scope of its obligations hereunder. (b) Upon termination of this Agreement pursuant to Section 10.2(b), Paralex shall have a fully paid, non-exclusive, irrevocable, royalty free license or sublicense of the ILEX Know-How to Paralex in the Territory; provided, that the Oxypurinol IND and any other filing made by ILEX with the FDA or any other government or regulatory authority that relates to the ILEX Know -How, and all data contained therein, shall be, and continue to be, the sole property and asset of Paralex; provided, further that ILEX shall maintain the right to refer to the Oxypuhnol IND in any of its future regulatory filings with the FDA. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 17 10.4 Disposition of Product. Upon termination of this Agreement pursuant to ---------------------- Section 10.2(a), Paralex shall provide ILEX with a written inventory of the Product (in the form of raw materials, work-in-process and finished goods) in its and its sublicensees' possession and shall have the right to dispose of such Product within six (6) months thereafter, subject to fulfillment of its royalty obligations relating thereto. 10.5 Sublicensees Upon Termination. If any party terminates this Agreement ------------------------------ and sublicensees of Paralex are not then in default under the terms of this sublicense agreements, ILEX shall have the obligation to assume and continue such sublicense agreements with payments thereunder being made by the sublicensees directly to ILEX. ARTICLE 11 Miscellaneous 11.1 Assignment. This Agreement and the rights and duties pertaining hereto ---------- may not be assigned by either party without first obtaining the written consent of the other party, which consent shall not be unreasonably withheld, and any such purported assignment without the written consent of the other party shall be null and void and of no force or effect; provided, however, that no such consent shall be required in connection with a merger or consolidation by either party with another company or with respect to an assignment by it in connection with a sale of all or substantially all, of its assets and properties; provided, further, that ILEX may assign its tights, obligations and duties under this Agreement, without Paralex's consent, to any assignee of ILEX's rights, obligations and duties relating to the Field under the Original License Agreement pursuant to a transfer or assignment thereof; provided, however, that notwithstanding anything to the contrary in this Section 11.1, ILEX may not assign this Agreement prior to Paralex's receipt of the GSK Amendment. 11.2 Registration. Paralex agrees to register or give required notice ------------ concerning this Agreement, through itself or through a sublicensee, in each country of the Territory where there exists an obligation under law to so register or give notice, to pay all costs and legal fees connected therewith and shall otherwise comply with all national laws applicable to this Agreement. 11.3 Force Mature. A party shall not be held liable or responsible to ------------- another party and not be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, when such failure or delay is caused by or results from fires, floods, embargoes, government regulations, prohibitions or interventions, wars, acts of war (whether war be declared or not), insurrections, riots, civil commotion, strikes, lockouts, acts of God, or any other cause beyond the reasonable control of the affected party and which have a material adverse impact on the ability of the affected party to perform its obligations hereunder. LICENSE AND OPTION AGREEMENT 12/20/2001 Page 18 11.4 Severability. Each party hereby expressly agrees and contracts that it ------------ is not the intention of any party to violate any public policy, statutory or common laws, rules, regulations, treaty or decision of any government agency, or executive body thereof, of any country or community or association of countries, that if any word, sentence, paragraph, clause or combination thereof in this Agreement is found by a court or executive body with judicial powers having jurisdiction over this Agreement or any of the parties hereto in a final in a final unappealed order to be in violation of any such provisions in any such country or community or association of countries, such words, sentences, paragraphs, clauses and/or any combination thereof shall be inoperative in such country, community or association of countries and the remainder of this Agreement shall remain binding upon the parties hereto. 11.5 Notices. Any notice required or permitted to be given hereunder shall ------- be in writing and shall be deemed to have been properly given if delivered in person, or if mailed by registered or certified mail (return receipt requested), postage prepaid, or by facsimile (and promptly confirmed by such registered or certified mail), to the addresses given below or such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. Any notice sent by registered or certified mail as aforesaid shall be deemed to have been given when mailed. In case of ILEX: ILEX Oncology, Inc. 4545 Horizon Hill Blvd. San Antonio, Texas 78229-2263 Attention: President Telephone: 210 949 8200 Facsimile: 210 949 8396 In the case of Paralex: Paralex, Inc. 787 Seventh Avenue, 48th Floor New York, New York 10019 Attention: President Telephone: 212 554 4300 Facsimile: 212 554 4355 11.6 Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Delaware, exclusive of its choice-of-law rules. 11.7 Arbitration. All disputes arising in connection with this Agreement ----------- shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association. Arbitration shall take place in New York, New York. 11.8 Entire Agreement. This Agreement and the Original License Agreement ---------------- contain the entire understanding of the parties with respect to the subject mater hereof. All express or implied agreements and LICENSE AND OPTION AGREEMENT 12/20/2001 Page 19 understandings, either oral or written, heretofore made are expressly merged in, and made a part of this Agreement. 11.9 Modification. The parties hereto may alter any of the provisions of ------------ this Agreement, but only by a written instrument duly executed by both parties hereto. 11.10 Limitation of Authority. No Party shall have any authority arising out ----------------------- of this Agreement to create any implied or express liability or obligation in the name or on behalf of any other Party, and no Party shall enter into any contract with any person or entity that purports to bind any other Party. 11.11 Waiver. The failure of a party to enforce at any time for any period ------ any of the provisions hereof shall not be construed as a waiver of such provisions or of the rights of such party thereafter to enforce each such provision. 11.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. 11.13 Captions. The captions to the several Articles and Section hereof are -------- not a part of this Agreement, but are merely guides or labels to assist in locating and reading the several Articles and Section hereof. 11.14 Responsibility for Expenses. Each Party is responsible for its own ---------------------------- expenses related to the preparation and execution of this Agreement. 11.15 Informed Review. Each Party acknowledges that it and its counsel have ---------------- received and reviewed this Agreement and that normal rules of construction, to the effect that ambiguities are to be resolved against the drafting Party, shall not apply to this Agreement or to any amendments, modifications, exhibits or attachments to this Agreement. 11.16 Non-Competition. From the Effective Date and for two years after the ---------------- termination of this Agreement, ILEX shall not in any manner, directly or indirectly, on behalf of itself or any person, firm, partnership, joint venture, corporation or other business entity (each, a "Person"), enter into or engage in any business which researches, develops, manufactures or distributes Oxypurinol, including any crystalline structure thereof ("Oxypurinol Compounds"), other than for treatments for cancer whether as an individual for its own account, or as a proprietor, partner, strategic partner, member, joint venturer, or shareholder of a Person operating or intending to operate within the area of the research, development, manufacture or distribution of LICENSE AND OPTION AGREEMENT 12/20/2001 Page 20 Oxypurinol Compounds, provided, however, that nothing in this Section 11 .1A shall prohibit ILEX from performing contract research services with respect to Oxypurinot Compounds on behalf of Third Parties where the consideration arising out of at relating to such services is not, whether in whole or In part, royalty. or equity-based; provided, further, that this Section 11.16 shall not apply if ILEX completes a merger, consolidation or similar transaction or a sale or conveyance to another Person of all or substantially all the property, assets or equity securities of ILEX in which, immediately after such transaction, the shareholders of ILEX immediately prior to such transaction hold, directly or indirectly, less than 50% of the equity securities of the resulting combined company, measured either by number of shares and other rating securities or by number of votes entitled to be cast. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. ILEX ONCOLOGY, INC. PARALEX, INC. By: /s/ Richard Love By: /s/ Mark Rogers ------------------------------- ------------------------------- Printed Name: Richard L Love Printed Name: Mark C. Rogers Title: President & CEO Title: ---------------------------- ---------------------------- LICENSE AND OPTION AGREEMENT 12/20/2001 SCHEDULE 1.1 SCHEDULE 1.9 EX-4 10 exhibit4-16.txt AGREEMENT DATED MAY 2001 AND DATED AS OF JANUARY 1, 2002 BETWEEN PARALEX AND CARDIOSCIENCES CONSULTING, INC. Exhibit 4.16 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT is dated as of January 1, 2002 by and among PARALEX, INC., (the "Corporation") a Delaware corporation having a place of business at 787 Seventh Avenue, 48th Floor, New York, NY 10019 and CARDIOSCIENCES CONSULTING, INC., a Maryland corporation having a place of business at 1014 Westwicke Lane, Lutherville, MD 21093 ("Cardiosciences", and together with the Corporation, the "Parties"). RECITALS WHEREAS, the Corporation wishes to avail itself of the "Services" (as defined herein) of Eduardo Marban, M.D., Ph.D. ("Dr. Marban"); and WHEREAS, Cardiosciences hereby represents to the Corporation that it has the sole and exclusive right to provide the Services of Dr. Marban to third parties, including the Corporation; and WHEREAS, the Corporation desires to retain Cardiosciences for the purpose of having Cardiosciences provide the Services of Dr. Marban to the Corporation; and WHEREAS, Cardiosciences has agreed to cause Dr. Marban to render such services on behalf of the Corporation, upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, Dr. Marban has consented to provide such Services, through Cardiosciences, on behalf of the Corporation, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements herein contained, the Parties hereto agree as follows: l. Services. Cardiosciences agrees to arrange for and shall cause Dr. -------- Marban, and only Dr. Marban (unless agreed, in writing, between the parties hereto) to be available to the Corporation to perform the Services described in Appendix A under the terms and conditions hereinafter set forth for and on behalf of the Corporation, all as described herein (the "Services"). Cardiosciences shall cause, and Dr. Marban by signing below where indicated has agreed, to render the Services for a period of time each year as may be reasonably required by the Company to meet its technical, scientific, and financial objectives, but in no case shall such period of time exceed twelve (12) days in any one year. Such Services shall be rendered at a site in Baltimore, Maryland, or such other site agreed to by the Parties ("Consulting Site"). Such Services shall be subject to the overall direction and control of the Corporation. 2. Term and Termination. This Consulting Agreement shall be effective as of --------------------- the date hereof and shall continue thereafter for a period of four (4) consecutive years (the "Term"). This Consulting Agreement shall automatically terminate and be of no further force or effect if, during the Term, Dr. Marban is no longer available to render and is not rendering the Services required hereunder to the Corporation by reason of (a) his employment or other obligations to Johns Hopkins University ("JHU"); (b) his physical or mental Page 2 disability (defined to mean his inability to perform the functions required of him hereunder as determined in good faith by the Corporation after consulting with experts of its choice); or (c) his death. The Corporation shall also have the right to terminate the retention of Cardiosciences hereunder for "Cause," in which event Cardiosciences shall only be entitled to the consulting fees earned hereunder through the date of termination. "Cause" shall mean, in the sole good faith judgment of the Board of Directors of the Corporation, any actions taken or omitted to be taken by Dr. Marban in bad faith, acts of dishonesty, fraud, breach of the material terms of this Consulting Agreement, conviction of Dr. Marban of any felony, or of any misdemeanor reasonably determined by the Company to involve moral turpitude and therefore negatively affecting the Company's reputation, or breach of fiduciary duty to the Corporation, whether or not materially injurious to the Corporation. 3. Compensation. As full compensation for the performance of the Services ------------ and Cardiosciences agreements hereunder, the Corporation shall pay to Cardiosciences, and Cardiosciences shall be solely and exclusively responsible for paying Dr. Marban for the performance of such Services, a consulting fee of One Hundred Thousand Dollars ($100,000) per annum payable in equal quarterly installments, in advance, of Twenty-Five Thousand Dollars ($25,000) each. In addition, Cardiosciences shall be reimbursed for reasonable and necessary travel expenses (including meals and lodging expenses) incurred by Dr. Marban at the Corporation's prior request in performing the Services at locations other than the Consulting Site. Coach class shall be used for flights of two hours or less. Reimbursement for expenses set forth in this Section 3 shall be made to Cardiosciences on behalf of Dr. Marban within fifteen (15) days of receipt by the Corporation of invoices and receipts substantiating such expenditures and detailing the Services provided. Dr. Marban acknowledges that payment of sums due by the Corporation to Cardiosciences relieves the Corporation of any obligation to him. In the event that any payment due hereunder is not made when due, the payment shall accrue interest beginning on the thirtieth (30th) day following the due date thereof, calculated at the annual rate of the sum of (a) two percent (2%) plus (b) the prime interest rate quoted by the Wall Street Journal on the date said payment is due, the interest being compounded on the last day of each calendar quarter, provided however, that in no event shall said annual interest rate exceed the maximum legal interest rate for corporations. Each such payment when made shall be accompanied by all interest so accrued. 4. Nature of Engagement; Taxes. The Parties acknowledge and agree that ---------------------------- Cardiosciences is entering into this Consulting Agreement as an independent contractor and that this Consulting Agreement does not create and shall not be construed to create a relationship of principal and agent, joint venture, co-partners, employer and employee, master and servant or any similar relationship between the Corporation and Cardiosciences or between Corporation and Dr. Marban or any person performing Services hereunder on behalf of or at the request or direction of Cardiosciences. Cardiosciences shall have sole responsibility for, and the Corporation shall have no responsibility or liability with respect to, employee benefits that the Corporation may normally extend to its employees, and the Corporation will not withhold any taxes from the compensation paid to Cardiosciences with respect to the Services performed by Dr. Marban. Page 3 Cardiosciences further agrees to indemnify and hold the Corporation harmless from and against any and all costs, damages and losses that the Corporation may incur or suffer arising out of or in connection with any claim brought by federal, state or local taxing authority with regard to Cardiosciences' failure to withhold or pay required taxes, for failure to file required forms with regard to compensation paid to Cardiosciences with respect to the Services performed by Dr. Marban for the Corporation, and compensation paid by Cardiosciences to Dr. Marban pursuant to this Consulting Agreement. The manner in which Dr. Marban renders Services will be within his sole control and discretion, subject to the provisions of Section 1 hereof. Neither Dr. Marban nor Cardiosciences (including, without limitation, all persons performing Services on behalf of or at the request or direction of such parties) shall have an expressed or implied right or authority to incur any liability, or to make any decision or to create any binding obligation, on behalf of the Corporation. The parties hereto agree that Cardiosciences directly, and Dr. Marban indirectly, are being retained and shall perform as "Independent Contractors" and shall not be employees of the Corporation. 5. Due Organization; No Conflicting Obligations. (a) Cardiosciences -------------------------------------------- represents and warrants that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, (ii) is duly qualified to do business in all states in which it is required to do so (including, without limitation, performance of the Services hereunder), (iii) has full power and authority to conduct its business and to enter into this Consulting Agreement and perform its obligations hereunder, (iv) the execution, delivery and performance of this Consulting Agreement will not (x) violate any rule, regulation, statute, order or judgment affecting Cardiosciences and/or Dr. Marban (y) breach or contravene the terms of any agreement, contract, understanding or obligation of Cardiosciences or Dr. Marban (z) violate the Certificate of Incorporation, Bylaws or other legal instruments affecting Cardiosciences or Dr. Marban, or (xx) create any lien, claim or encumbrance upon or which affects Cardiosciences or Dr. Marban. (b) Except for Dr. Marban's obligations to JHU, neither Cardiosciences nor Dr. Marban are under any express or implied obligation to any third party, or subject to any covenant, instrument, agreement or other document (including, without limitation, Cardiosciences' organizational documents), which in any way conflicts with or affects any of its respective obligations under this Consulting Agreement and Cardiosciences and Dr. Marban have obtained the consent of all third parties to enter into and perform this Consulting Agreement. Except for Dr. Marban's obligation to JHU, Cardiosciences and Dr. Marban agree that during the Term of this Consulting Agreement (or any extension period) it will not enter into any other consulting relationship which would conflict with any of its respective obligations under this Consulting Agreement. 6. Confidentiality. Cardiosciences and Dr. Marban agree to maintain in --------------- confidence all information and materials provided by, or obtained from or through, Corporation, including, without limitation, all information regarding drugs; pharmaceuticals; gene manipulations and or therapy; products, compounds and compositions resulting from chemical, DNA, genetic engineering or other methods; potential new uses of existing drugs, compounds or compositions; Page 4 medical devices; and all financial information, computer software and documentation; and other information relating to the business of Corporation (collectively, the "Confidential Information"). Neither Cardiosciences nor Dr. Marban shall publish, use or disclose Confidential Information learned, developed or acquired as a result of Services performed under this Consulting Agreement without the Corporation's prior written consent. Confidential information shall not include information that both Cardiosciences and Dr. Marban can affirmatively demonstrate (i) was rightfully in Cardiosciences or Dr. Marban's possession without any obligation of confidentiality prior to disclosure by or through Corporation; (ii) lawfully becomes part of the public knowledge, literature or generally available to the public through no act of Cardiosciences or Dr. Marban; or (iii) is obtained from any third party, provided that neither Cardiosciences nor Dr. Marban was aware that any such third party did not obtain such information from Corporation or obtain such information in confidence. Cardiosciences and Dr. Marban shall protect the Confidential Information as they would protect their own confidential information and shall take all reasonable steps to prevent the unauthorized disclosure, dissemination, or publication of the Confidential Information. In the event that Cardiosciences or Dr. Marban is requested or required (by oral questions, deposition, interrogatories, requests for information or documents, subpoena, civil investigative demand or other process) to disclose all or any part of any Confidential Information, Cardiosciences or Dr. Marban will provide the Corporation with prompt notice of such request or requirement, as well as notice of the terms and circumstances surrounding such request or requirement, so that the Corporation may seek an appropriate protective order or waive compliance with the provisions of this Consulting Agreement. In such case, the parties will consult with each other on the advisability of pursuing any such order or other legal action or available steps to resist or narrow such request or requirement. If, failing the entry of a protective order or the receipt of a waiver hereunder, Cardiosciences or Dr. Marban is, in the opinion of counsel , legally compelled to disclose Confidential Information, Cardiosciences or Dr. Marban may disclose that portion of such information which counsel advises Cardiosciences or Dr. Marban that it is legally compelled to disclose. In any event, Cardiosciences or Dr. Marban, at the sole expense of the Corporation, will use their best efforts to assist the Corporation to obtain, and will not oppose action by the Corporation to obtain, an appropriate protective order or other reliable assurance that confidential treatment will be accorded the disclosure of such information. All data, records, analyses, reports and material prepared or compiled by Cardiosciences and Dr. Marban or furnished to them as a direct result of performing services under this Consulting Agreement during the Term hereof shall be the sole and exclusive property of Corporation, and all of such data, records, analyses, reports and materials, and all copies thereof, shall be delivered to Corporation at its request or on the termination of this Consulting Agreement. The parties acknowledge that Cardiosciences and Dr. Marban's other affiliations also contain or require certain obligations of confidentiality. In discharging their duties relative to Confidential Information, Cardiosciences and Dr. Marban shall advise Corporation in writing when and if an actual or potential conflict with such other obligations arise. If such conflict with Marban's obligations to JHU cannot be resolved through good faith cooperation, Page 5 Cardiosciences and Dr. Marban are expressly excused from performing any services hereunder that would result in a breach or potential breach of confidentiality obligations owed to another entity. (b) Notwithstanding any other provision of this Consulting Agreement, nothing herein is intended or shall be interpreted as (i) granting or creating any right or license in or to Cardiosciences or Dr. Marban with respect to any patent rights, copyright rights, trademarks or other intellectual property rights owned or controlled by the Corporation, except as necessary to perform the Services, or (ii) waiving or relinquishing any rights that the Corporation may have with respect to trade secrets, know how, patent, copyright or trademark infringement. (c) The Parties expressly agree that each and every employee, agent and representative of Cardiosciences engaged in performing Services hereunder shall be advised of, be subject to, and be bound by, the obligations and restrictions relating to use and disclosure of Confidential Information set forth in this Section 6, and Cardiosciences shall assume full responsibility and liability for any breach of such obligations and restrictions by any such employee, agent or representative. Cardiosciences further agrees that if so requested by the Corporation, it will cause its employees, agents and representatives engaged in performing the Services to execute separate confidentiality agreements with the Corporation in such form as the Corporation shall provide. Cardiosciences shall not engage faculty members (other than Dr. Marban), staff, or employees of JHU for purposes of assisting in the performance of Services hereunder. (d) In the event of a breach or threatened breach of any of the provisions set forth in this Section, the Corporation shall have the right to seek monetary damages for any past breach and equitable relief, including specific performance and injunctive relief against Cardiosciences and/or any and all persons acting directly or indirectly on behalf or under the direction of Cardiosciences, to prevent or restrain any such breach. Accordingly, Cardiosciences and Marban acknowledge that, in the event of a breach or threatened breach of this Consulting Agreement by them, the Corporation may have no adequate remedy at law, and that the Corporation shall be entitled to move before a court of law, without bond, for preliminary and permanent equitable relief enjoining such - ------------ breach and requiring such prophylactic or remedial acts or conduct as the Court deems necessary or appropriate to fully protect the Corporation. Nothing in this provision shall effect a waiver of any other rights of the Corporation. 7. Ownership of Materials. All data, results, ideas, discoveries, ---------------------- inventions, reports and other works of authorship, whether or not patentable or subject to copyright, which may be made, written or conceived by Cardiosciences (including Dr. Marban and all persons performing Services on behalf of Cardiosciences) as a direct result of performing the Services hereunder, in whole or in part and whether alone or in conjunction with others (collectively, "Inventions/Works"), and all rights, title and interests in and to such Inventions/Works throughout the world, are hereby assigned to the Corporation and shall become the sole and exclusive property of the Corporation or its nominee. Cardiosciences and Dr. Marban will promptly disclose in writing all such Inventions/Works to the Corporation, and the Corporation shall have full power and authority to file and prosecute patent applications and copyright registrations throughout the world thereon and to procure and maintain patents and copyrights thereon. Cardiosciences and Dr. Marban shall, at the Page 6 Corporation's request and expense, execute applications, assignments, instruments, and other documents, and perform such acts, as its counsel may deem necessary or advisable to confirm and vest in the Corporation all right, title and interest throughout the world in and to such Inventions/Works and in and to all patent applications, patents, copyrights and other intellectual property rights thereon, and to enable and assist the Corporation in procuring, maintaining, enforcing and defending patents, petty patents, patent applications, copyrights and other applicable statutory protection throughout the world thereon. Unless and until covered by letters patent or otherwise disclosed to the public by the Corporation, Cardiosciences and Dr. Marban will treat all such Inventions/Works as Confidential Information hereunder. Without limiting the rights of the Corporation or the obligations of Cardiosciences and Dr. Marban set forth in this Section 7, it is understood that if, with respect to any particular Invention/Work, Cardiosciences and Dr. Marban desire to be granted or assigned any right or interest therein, they shall request the consent of the Corporation to such grant or assignment in a writing setting forth a specific description of such Invention/Work and describing their proposed use and/or disclosure thereof, and the Corporation may, in its discretion, consent thereto, such consent to be in writing. By way of illustration, but not limitation, "Invention/ Work" includes trade secrets, processes, discoveries, structures, inventions, designs, ideas, works of authorship, copyrightable works, trademarks, copyrights, formulas, data, know-how, show-how, improvements, inventions, product concepts, techniques, information or statistics contained in, or relating to, marketing plans, strategies, forecasts, blueprints, sketches, records, notes, devices, drawings, customer lists, patent applications, continuation applications, continuation-in- part applications, file wrapper continuation applications and divisional applications and information about the Corporation or its affiliates' employees and/or consultant (including, without limitation, the compensation, job responsibility and job performance of such employees and/or consultants). It is further understood and agreed that the Corporation will have the royalty-free and unrestricted right to use, disclose and assign to third parties any and all unpatented information, know-how, inventions, discoveries, and ideas disclosed to the Corporation by Cardiosciences and Dr. Marban in the course of the performance of Services hereunder, without any liability or obligation to Cardiosciences or Dr-Marban. Cardiosciences and Dr. Marban warrant and represent to Corporation that none of their other affiliations require, to any degree or under any conditions, that they assign their rights to any discoveries, inventions or developments created or obtained under this Consulting Agreement to any persons or entities except as set forth on Schedule 7.0 attached hereto. Cardiosciences and Dr. Marban agree that any inventions, improvements, processes, designs, materials, products, developments or discoveries (whether or not subject to patent, copyright or trademark protection) (all of the foregoing being hereinafter referred to as "Intangible Property") that they may conceive, make, invent, develop, suggest or reduce to practice (whether individually or jointly with any other person or persons), using the funds, materials, information or facilities of the Corporation in pursuit of specific projects delegated to them by the Corporation, shall be the sole, exclusive and absolute property of the Corporation. They agree to notify the Corporation of any additional collaborators on any such inventions, improvements, processes, designs, materials, products, developments or discoveries projects prior to engaging or contracting such individuals. They will ensure that their obligations under any other affiliation do not extend to intellectual property rightfully owned by Page 7 Corporation. They will assist Corporation in obtaining legal protection for such intellectual property as part of their duties and responsibilities hereunder, at the sole expense of the Corporation, and will execute such documents as reasonably necessary to secure such protection and confirm ownership in Corporation. Corporation and Cardiosciences (and Dr. Marban) agree that Cardiosciences (and Dr. Marban) will report any invention resulting from the consulting services provided under this Agreement to JHU for its review and records, and Corporation agrees to cooperate with Cardiosciences' and Dr. Marban's reporting obligations. Cardiosciences or Dr. Marban shall complete and submit a Report of Invention (ROI) to JHU's Office of Technology Licensing for (i) any invention that Cardiosciences or Dr. Marban assigns to Corporation under the terms of this Consulting Agreement, with the ROI to be submitted within ten (10) business days of such assignment and (ii) any patent application (including provisional patent applications) filed by company on which Cardiosciences of Dr. Marban is named as an inventor, with the ROI to be submitted sixty (60) days prior to the patent filing. 8. No Publication Without Consent. Cardiosciences and Dr. Marban may not ------------------------------- publish, exhibit or lecture on matters directly relating to the Services hereunder, unless they first obtain the Corporation's prior written consent thereto, such consent not to be unreasonably withheld, and the manuscript, paper, exhibit or speech shall have been approved by the Corporation. The Corporation specifically reserves the right to reproduce, disseminate and use for any purpose all or part of any paper written utilizing data generated pursuant to this Consulting Agreement and any such manuscript or paper shall be treated as an Invention/Work under Section 7 hereof. Accordingly, in the event Cardiosciences or Dr. Marban desire, individually or as a group, to publish or disclose, by written, oral or other presentation, relating to Paralex's know-how, patent rights, licenses, sublicenses, the Services, intellectual property, or any material information related thereto, then Cardiosciences or Dr. Marban shall notify the Corporation in writing by facsimile where confirmed by the receiving party, and/or by certified or registered mail (return receipt requested) of their intention at least sixty (60) days prior to any speech, lecture or other oral presentation and at least sixty (60) days before any written or other publication or disclosure. Cardiosciences and Dr. Marban shall include with such notice a description of any proposed oral presentation or, in any proposed written or other disclosure, a current draft of such proposed disclosure or abstract. The Corporation may request that Cardiosciences and Dr. Marban, no later than forty-five (45) days following the receipt of such notice, delay such presentation, publication or disclosure in order to enable the Corporation to file, or have filed on their behalf, a patent application, copyright or other appropriate form of intellectual property protection related to the information to be disclosed. Upon receipt of such request to delay such presentation, publication or disclosure, Cardiosciences and Dr. Marban shall arrange for a delay of such presentation, publication or disclosure until such time as the Corporation has filed, or had filed on its behalf, such patent application, copyright or other appropriate form of intellectual property protection in form and in substance reasonably satisfactory to the Corporation. This section shall in no way limit Dr. Marban's ability to publish the results of his academic research. 9. Assumption of Risk; Indemnification. Cardiosciences and Dr. Marban ----------------------------------- assume all risk and liability for loss of, or damage to, their property, and for Page 8 personal injury, sickness and/or disease, including death, that may be sustained by any of their employees, agents, representatives or any other persons acting directly or indirectly at the request or direction of them (collectively, the "Consultant Related Parties"), arising out of or in connection with their presence on the Corporation's property, use of the Corporation's facilities, materials, equipment or resources, and/or performance of the Services hereunder, unless caused by the Corporation's gross negligence or the gross negligence of the Corporation's employees, agents or contractors. Each of Cardiosciences and Dr. Marban hereby releases, waives and forever discharges the Corporation, its subsidiary and affiliated companies, and their respective officers, directors, agents, representatives and employees (collectively, "the Corporation Related Parties"), and agree to indemnify and hold harmless the Corporation and all the Corporation Related Parties, from and against any and all claims, causes of action, costs, losses, liabilities, expenses (including reasonable attorneys' fees) and damages (collectively, "Liabilities") that may be sustained or brought, as the case may be, by Cardiosciences or Dr. Marban or the Consultant Related Parties, or that may otherwise arise out of, or relate to, the performance of the Services including, without limitation, access to or use of the Corporation's facilities, resources, material or equipment, other than liabilities directly and solely resulting from the Corporation's willful disregard or gross negligence of their (including the Consultant Related Parties') safety and welfare. 10. Compliance with Law, Policies and Procedures. Cardiosciences and Dr. --------------------------------------------- Marban agree, on behalf of themselves and all persons performing Services on their behalf or at their request or direction, to observe the Corporation's business hours, as well as the Corporation's rules, policies and security procedures concerning conduct and the health, safety and protection of persons and property, while working on the Corporation's premises. They will comply with all applicable governmental laws, ordinances, rules and regulations applicable to the performance of Services hereunder. 11. Non-Solicitation of Employees. During the Term of this Consulting ------------------------------ Agreement and for a period of one (1) year thereafter, neither Cardiosciences nor Dr. Marban will directly or indirectly: (i) employ, hire, or cause to be employed or hired, any person who is then employed by the Corporation or was so employed within six (6) months prior thereto or a member of the Company's Scientific Advisory Board; or (ii) cause, invite, solicit, entice or induce any such person to terminate his employment with the Corporation. 12. Non-Competition. During the term of this Consulting Agreement and for a --------------- period of three years thereafter, neither Cardiosciences nor Dr. Marban shall, without the prior written consent of the Corporation, either directly or indirectly through any other person, firm or corporation, engage or participate in, or render consulting services in the "Licensed Field" as that term is defined by the Exclusive Agreement between Johns Hopkins University and the Corporation, a copy of which is attached as Appendix 1. Neither Cardiosciences nor Dr. Marban shall be encumbered from consulting in areas outside the "Licensed Field", subject to the prevailing guidelines for consulting as set forth by Johns Hopkins University, if applicable. Notwithstanding the foregoing, Dr. Marban and Cardiosciences shall provide the Corporation with i) the identity of other companies, universities, corporations or other entities that have engaged Dr. Marban and Cardiosciences as consults; ii) a brief description of the consulting duties, obligations, and services to be performed for such other Page 9 entities; and iii) a brief description of the scientific technology and "field of use" relating to such consulting services. Such descriptions will be attached hereto as Appendix 12 and shall be amended by Cardiosciences and Dr. Marban, from time to time, as applicable, but in no case later than the execution of this agreement (regarding current consulting obligations) or within 10 days of execution of future consulting agreements with other entities. 13. Injunctive and Other Equitable Relief. Cardiosciences and Dr. Marban -------------------------------------- acknowledge that, in the event of a breach of any of the provisions of this Consulting Agreement, the Corporation would sustain great and irreparable injury and damage. Therefore, in addition to any other remedies which the Corporation may have under this Consulting Agreement or otherwise, the Corporation shall be entitled to, without the posting of bond, the remedies of-injunction, specific performance and other equitable relief for a breach or threatened breach by any of the provisions of this Consulting Agreement. This Article 12 shall not, however, be construed as a waiver of any of the rights which the Corporation may have for damages or otherwise. 14. Insider Trading, Etc. Cardiosciences and Dr. Marban recognize that --------------------- in the course of his duties hereunder, Cardiosciences and Dr. Marban may receive from the Corporation or others information which may be considered "material, non-public information" concerning a public company that is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended. The Corporation, however, will use reasonable efforts to provide Dr. Marban or Cardiosciences with such material non-public information only on a "as-needed" basis. Not withstanding the foregoing, Cardiosciences and Dr. Marban agree that they will not, without the prior written consent of the Corporation (which shall not be unreasonably withheld and shall be granted or denied upon standards no more restrictive than applied to other non-executive officer and non-employee consultants and to members of the Board of Directors and Scientific Advisory Board), perform any of the following: (a) purchase, trade, offer, pledge, sell, contract to sell or to purchase or sell "short" or "short against the box" (as such terms are generally understood in the securities markets), or otherwise dispose of or acquire any securities of the Corporation or options or other derivative securities in respect of such securities while in possession of relevant material, non-public information received from the Corporation or others in connection herewith;\ (b) provide the Corporation with information with respect to any public company that may be considered material, non-public information; and (c) provide any person with material, non-public information, received from the Corporation, including any relative, associate, or other individual who intends to, or may, (i) trade securities with respect to the Corporation which is the subject of such information or (ii) otherwise directly or indirectly benefit from such information. In addition, Cardiosciences and Dr. Marban, if and to the extent that all executive officers and consultants are so bound, also agree (i) (other than upon the exercise of any stock options that have been previously granted to him or with the consent of the Corporation) also agree (i) not to acquire, or agree to acquire directly or indirectly, by purchase, tender offer or otherwise, any Page 10 assets, voting securities or indirect rights, options, warrants to acquire any assets or voting securities of the Corporation, and not to solicit or assist any other person or entity in doing any of the same; (ii) announce or publicly propose any extraordinary transaction involving the Corporation or any voting securities or assets of the Corporation; (iii) make, or in any way participate, directly or indirectly, in any "solicitation" of proxies to vote (as such terms are used in the proxy rules of the Securities and Exchange Commission), or seek, to advise or influence any person or entity with respect to the voting of any voting securities of the Corporation; or (iv) form, join or in any way participate in a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, except, in each case, with the prior written consent of the Corporation. 15. Assignment. This Consulting Agreement may not be assigned by either ---------- Party, and no obligation owed or performed by either Party hereunder may be delegated, without the prior written consent of the other Party. Any attempted assignment or delegation by either Party without any such requisite prior written consent of the other Party shall be void and ineffective for all purposes. Notwithstanding the foregoing, the Corporation may assign or transfer this Consulting Agreement in conjunction with the sale of substantially all of its assets. 16. Notice. All notices requests, consents or other communications ------- given by either party hereto shall be in writing and shall be deemed duly given if personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid, to the other party at its addresses set forth below or at such other addresses as such other Party may hereafter designate in the manner herein provided. (a) If to Consultant: CARDIOSCIENCES CONSULTING, INC. 1014 Westwicke Lane Lutherville, MD 21093 With a copy to: Dr. Eduardo Marban (b) If to the Corporation: PARALEX, INC. 787 7th Avenue, 48th Floor New York, N. Y. 10019 Attn: David M. Tanen (c) With a copy to: Stephen M. Fields, Esq. c/o McCarter & English LLP 300 Park Avenue New York, N. Y. 10022 17. Entire Agreement; Amendments. This Consulting Agreement represents ---------------------------- the entire understanding and agreement between the Parties hereto with respect Page 11 to the subject matter hereof and supersedes all prior negotiations, representations and agreements made by and between such parties. No alternation, amendment or modification of any of the terms or provisions of this Consulting Agreement shall be valid unless made pursuant to an instrument in writing signed by each of the parties hereto. 18. Governing Law. This Consulting Agreement shall be governed by, and -------------- constructed and enforced in accordance with the laws of the State of New York. 19. Mandatory Arbitration. The Corporation, Cardiosciences and Dr. --------------------- Marban hereby agree that any dispute which may arise between them out of or in connection with this Consulting Agreement, its construction, interpretation, effect, performance or nonperformance, or the consequences thereof (provided that such dispute involves only the Corporation, Cardiosciences, Dr,. Marban and any other person or entity similarly so bound to arbitrate), shall be resolved pursuant to the Commercial Arbitration Rules of the American Arbitration Association. All arbitration proceedings shall be held in New York, New York. The terms of this Paragraph 19 shall not be deemed to limit or waive any of the Corporation's rights pursuant to Paragraph 13 hereof (provided that the decision of any subsequent arbitration proceeding shall be determinative as to whether any injunction is appropriate). 20. Paragraph Headings. The paragraph headings contained in this ------------------- Consulting Agreement are for reference purposes only and shall not effect in any way the meaning or interpretation of this Consulting Agreement. 21. Severability; Reformation. If at any time subsequent to the date -------------------------- hereof any provisions of this Consulting Agreement shall be held by any court of competent jurisdiction to be illegal, void, or unenforceable, such provisions shall be of no force and effect, but the illegality or unenforceability of such provisions shall have no effect upon and shall not impair the enforceability to any provisions of this Consulting Agreement. Furthermore, if any provision of this Consulting Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the fullest extent compatible with then existing applicable law. 22. Relationship with JHU. (a) The parties hereto acknowledge that JHU is ---------------------- not a party to this Consulting Agreement which is a private contract between and among Cardiosciences, Dr. Marban and the Corporation. Accordingly, JHU is not intended to be nor is it a third party beneficiary hereof. (b) The Corporation, Cardiosciences and Dr. Marban recognize that Dr. Marban's primary duty as a full-time JHU faculty member is to JHU. The Corporation and Cardiosciences agree that JHU's polices and Dr. Marban's obligation to JHU shall govern and be afforded primacy in the event a conflict arises with this Consulting Agreement. (c) With the limited exception of citing Dr. Marban's faculty title (subject to the conditions outlined below), the Corporation and its affiliates will not use the names, likenesses, or logos of the Johns Hopkins University , any of its Schools or Divisions, or the Johns Hopkins Hospital and Health System in any of their fund-raising or investment documents, general publications, advertisements, or marketing and promotional materials (hereinafter Page 12 "Materials"). If the Corporation cites Dr. Marban's title and affiliation with JHU in its Materials, it agrees to include the following statement in such Materials as a parenthetical comment next to the consultant's name, title, and affiliation: "Participation by Dr. Marban as a consultant does not constitute or imply endorsement by The Johns Hopkins University, The Johns Hopkins Hospital, or The Johns Hopkins Health System." A request for permission to otherwise or more fully describe Dr. Marban's relationship with the Corporation must be submitted to the School of Medicine's Conflict of Interest Review Coordinator, who, In appropriate circumstances, will have it reviewed by the School of Medicine's Office of Public Affairs. (d) The Corporation recognizes that Dr. Marban, is an employee of Johns Hopkins University ("JHU") and is bound to certain policies of JHU with respect to JHU's property. (e) The Corporation recognizes that Dr. Marban, as an employee of JHU, is subject to the Invention Policy of JHU, a copy of which has been provided to the Corporation. IN WITNESS WHEREOF, the parties have executed, or have caused their duly authorized representatives to execute, this Consulting Agreement as of the date and year first above written. PARALEX, INC. By: /s/ Mark Rogers --------------------------------------- Name: Mark Rogers, M.D. Title: Chairman CARDIOSCIENCES CONSULTING, INC. By: /s/ Eduardo Marban --------------------------------------- Name: Eduardo Marban, M.D., Ph.D. Title: President AGREED AND CONSENTED AS HIS INTEREST MAY APPEAR By: /s/ Eduardo Marban - --------------------------------------- Name: Eduardo Marban, M.D., Ph.D. Appendix A DESCRIPTION OF SERVICES ----------------------- As consultant, Dr. Eduardo Marban, President/CEO of CardioSciences Consulting Inc., will serve as a member of the Corporation's Scientific Advisory Board. In addition, the Marban agrees to advise the Corporation with regard to: 1) Therapeutic applications of xanthine oxidase inhibitors in humans; 2) Therapeutic applications of xanthine oxidase inhibitors in veterinary practice; 3) Design of cardiovascular clinical trials involving xanthine oxidase inhibitors, including but not limited to heart failure and cardiogenic shock; 4) Identification and recruitment of additional consultants and/or contractors, as required; 5) Marketing, financial and regulatory support as related to items 1-3. Marban agrees to undertake, on a best-efforts basis, such consultative and advisory services as the Company shall reasonably request in connection with the Company's business. In his role as consultant to the Corporation,. Marban will report directly to the Chief Executive Officer of the Corporation. Marban hereby also agrees to serve as a member of the Corporation's Scientific Advisory Board (the "SAB"). As a member of the SAB, Marban agrees to meet at least semi-annually to advise the Corporation of advances in his field of expertise, and to consult with the Corporation, assessing the feasibility of research and development programs under consideration by the Corporation and offering guidance for current and future research and clinical applications of the Corporation's technology. In addition to SAB meetings, Marban further agrees to meet individually and in groups as called upon from time to time to review and advise the Corporation on its research, development and commercialization of its technology and to consult at reasonable times and upon reasonable prior notice with the Corporation and the Corporation's management, agents, employees and other Scientific Advisors on projects. EX-4 11 exhibit4-20.txt WARRANT DATED MARCH 8, 2002 ISSUED TO SPROTT SECURITIES INC. Exhibit 4.20 COMPENSATION WARRANTS TO PURCHASE UNITS OF CARDIOME PHARMA CORP. (Existing under the laws of the British Columbia) Void After March 8, 2004 THIS CERTIFIES that, for value received, Sprott Securities Inc. (the "Holder"), is the registered holder of 1,675,739 compensation warrants (the "Compensation Warrants") each of which entitle the holder, subject to the terms and conditions set forth in this Compensation Warrant Certificate, to purchase from Cardiome Pharma Corp. (the "Corporation"), one unit (a "Unit"), each Unit consisting of one common share of the Corporation (a "Common Share") and one-quarter of one share purchase warrant (a "Warrant"), at any time until 5:00 p.m. (Toronto time) on March 8, 2004 (the "Time of Expiry") on payment of $0.95 per Unit (the "Exercise Price"). Each whole Warrant is exercisable for one Share at a price of $1.66 per Share at any time until March 8, 2004. The number of Units which the Holder is entitled to acquire upon exercise of the Compensation Warrants and the Exercise Price are subject to adjustment as hereinafter provided. 1. Exercise of Compensation Warrants --------------------------------- (a) Election to Purchase. The rights evidenced by this certificate may be -------------------- exercised by the Holder in whole or in part and in accordance with the provisions hereof by: (i) surrender of this Compensation Warrant Certificate together with an Election to Exercise in substantially the form attached hereto as Schedule 1, properly completed and executed, together with payment by certified cheque or bank draft of the Aggregate Purchase Price (as defined in Schedule "1") for the number of Units specified in the Election to Exercise at the office of the Corporation at 3650 Westbrook Mall, Vancouver, British Columbia V6S 2L2, or such other address in Canada as may be notified in writing by the Corporation (the "Corporation Office"); or (ii) the surrender of this Compensation Warrant Certificate together with a form in substantially the form attached hereto as Schedule 2 properly completed and executed (the "Cashless Exercise Form") at the address set forth in clause (i) above. Such presentation and surrender shall be deemed a waiver of the Holder's obligation to pay the Aggregate Purchase Price (as defined in Schedule "1"), or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Compensation Warrant Certificate for that number of Units subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then Current Market Price and the Exercise Price, and the denominator of which shall be the then Current Market Price. For the purposes of any computation under this Section 1(a)(ii) the then "Current Market Price" shall be the closing price of the Common Shares on The Toronto Stock Exchange on the last trading day immediately prior to the date of the duly executed Cashless Exercise Form. In the event that the rights evidenced by this certificate are exercised in part, the Corporation shall, contemporaneously with the issuance of the Units issuable on the exercise of the Compensation Warrants so exercised, issue to the Holder a Compensation Warrant Certificate on identical terms in respect of that number of Units in respect of which the Holder has not exercised the rights evidenced by this certificate. (b) Exercise. The Corporation shall, within three business days after --------- receiving a duly executed Election to Exercise and the Aggregate Purchase Price (as defined in Schedule "1") or Cashless Exercise Form, as the case may be, for the number of Units specified therein (the "Exercise Date"), issue that number of Units specified in the Election to Exercise or that number of Units determined under Section 1(a)(ii) and specified in the Cashless Exercise Form. (c) Certificates. ------------- (i) As promptly as practicable after the Exercise Date, the Corporation shall issue and deliver to the Holder, registered in the name of the Holder, certificates for the number of Common Shares and Warrants, respectively, for the number of Units specified in the Election to Exercise or Cashless Exercise Form, as the case may be. (ii) To the extent permitted by law, such exercise shall be deemed to have been effected as of the close of business on the Exercise Date, and at such time the rights of the Holder with respect to the number of Compensation Warrants which have been exercised as such shall cease. (d) Fractional Shares. No fractional Common Shares shall be issued upon ------------------ exercise of any Compensation Warrant and no payments or adjustment shall be made upon any exercise on account of any cash dividends on the Common Shares issued upon such exercise. (e) Corporate Changes. ------------------ (i) Subject to paragraph 1(e)(ii) hereof, if, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall be a party to any reorganization, merger, dissolution or sale of all or substantially all of its assets, whether or not the Corporation is the surviving entity, the number of Compensation Warrants evidenced by this certificate shall be adjusted so that the holder hereof shall be entitled to acquire the same number and type of securities to which the holder of that number of Units of the Corporation subject to the unexercised Compensation Warrants would have been entitled by reason of such reorganization, merger, dissolution or sale of all or substantially all of its assets (the "Event"), and the Exercise Price shall be adjusted to be the amount determined by multiplying the Exercise Price in effect immediately prior to the Event by the number of Shares subject to the unexercised Compensation Warrants immediately prior to the Event, and dividing the product thereof by the number of securities to which the holder of that number of Shares subject to the unexercised Compensation Warrants would have been entitled to by reason of such Event. (ii) If after an event referred to in paragraph 1(e)(i) hereof, the Corporation is unable to deliver securities to the Holder pursuant to the proper exercise of a Compensation Warrant, the Corporation may satisfy such obligations to the Holder hereunder by paying to the Holder in cash the difference between the Exercise Price of all unexercised Compensation Warrants granted hereunder and the Fair Market Value on the Exercise Date of the securities to which the Holder would be entitled to upon exercise of all unexercised Compensation Warrants. Adjustments under this subparagraph (e) or (subject to subparagraph (o)) any determinations as to the Fair Market Value of any securities shall be made by the board of directors of the Corporation, or any committee thereof specifically designated by the board of directors to be responsible therefor, and any reasonable determination made by such board or committee thereof shall be binding and conclusive, subject only to any disputes being resolved by the Corporation's auditors, whose determination shall be binding and conclusive. (f) Subdivision or Consolidation of Shares. --------------------------------------- (i) In the event that, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall subdivide its outstanding common shares ("Common Shares") into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Common Shares of the Corporation shall be consolidated into a smaller number of shares, the Exercise Price in effect immediately prior to such consolidation shall be proportionately increased. (ii) Upon each adjustment of the Exercise Price as provided herein, the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Units (calculated to the nearest tenth of a Unit) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Units which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (g) Change or Reclassification. In the event that, after the date of --------------------------- issuance of this Certificate and prior to the Time of Expiry, the Corporation shall change or reclassify its outstanding Common Shares into a different class of securities, the rights evidenced by the Compensation Warrants shall be adjusted as follows so as to apply to the successor class of securities: (i) the number of the successor class of securities which the Holder shall be entitled to acquire as part of the Units shall be that number of the successor class of securities which a holder of that number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification would have been entitled to by reason of such change or reclassification; and (ii) the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the change or reclassification by the number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification, and dividing the product thereof by the number of successor securities determined in paragraph 1(g)(i) hereof. (h) Offering to Shareholders. If and whenever at any time after the date ------------------------- of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall fix a record date or if a date of entitlement to receive is otherwise established (any such date being hereinafter referred to in this subsection 1(h) as the "record date") for the issuance of rights, options or warrants to all or substantially all the holders or the outstanding Common Shares entitling them, for a period expiring not more than 45 days after such record date, to subscribe for or purchase Common Shares or securities convertible into or exchangeable for Common Shares at a price per share or, as the case may be, having a conversion or exchange price per share less than 95% of the Fair Market Value (as hereinafter defined) on such record date, the Exercise Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Exercise Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date plus a number equal to the number arrived at by dividing the aggregate subscription or purchase price of the total number of additional Common Shares offered for subscription or purchase or, as the case may be, the aggregate conversion or exchange price of the convertible or exchangeable securities so offered by such Fair Market Value, and of which the denominator shall be the total number of Common Shares outstanding on such record date plus the total number of additional Common Shares so offered (or into which the convertible or exchangeable securities so offered are convertible or exchangeable); Common Shares owned by or held for the account of the Corporation or any subsidiary of the Corporation shall be deemed not to be outstanding for the purpose of any such computation; such adjustment shall be made successively whenever such a record date is fixed; to the extent that any rights or warrants are not so issued or any such rights or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or to the Exercise Price which would then be in effect based upon the number of Common Shares or conversion or exchange rights contained in convertible or exchangeable securities actually issued upon the exercise of such rights or warrants, as the case may be. (i) Carry Over of Adjustments. No adjustment of the Exercise Price shall -------------------------- be made if the amount of such adjustment shall be less than 1% of the Exercise Price in effect immediately prior to the event giving rise to the adjustment, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least 1% of the Exercise Price. (j) Notice of Adjustment. Upon any adjustment of the number of Units and --------------------- upon any adjustment of the Exercise Price, then and in each such case the Corporation shall give written notice thereof to the Holder, which notice shall state the Exercise Price and the number of Units or other securities subject to the unexercised Compensation Warrants resulting from such adjustment, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the request of the Holder there shall be transmitted promptly to the Holder a statement of the firm of independent chartered accountants retained to audit the financial statements of the Corporation to the effect that such firm concurs in the Corporation's calculation of the change. (k) Other Notices. In case at any time after the date of issuance of this -------------- Certificate and prior to the Time of Expiry: (i) the Corporation shall declare any dividend upon its Common Shares payable in kind; (ii) the Corporation shall offer for subscription pro rata to the holders of its Common Shares any additional shares of any class or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation, amalgamation or merger of the Corporation with, or sale of all or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then, in any one or more of such cases, (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002) the Corporation shall give to the Holder (A) at least 10 days' prior written notice of the date on which a record date shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002), merger, amalgamation, sale, dissolution, liquidation or winding-up and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Shares shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of Common Shares shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case may be. (l) Shares to be Reserved. The Corporation will at all times keep ---------------------- available, and reserve if necessary under Canadian law, out of its authorized Common Shares, solely for the purpose of issue upon the exercise of the Compensation Warrants and the Warrants issuable upon the exercise of the Compensation Warrants, such number of Common Shares as shall then be issuable upon the due exercise of the Compensation Warrants and the due exercise of the Warrants issuable upon the due exercise of the Compensation Warrants. The Corporation covenants and agrees that all Common Shares which shall be so issuable will, upon issuance, be duly authorized and issued as fully paid and non-assessable. The Corporation will take all such actions as may be necessary to ensure that all such Common Shares may be so issued without violation of any applicable requirements of any exchange upon which the Common Shares may be listed or in respect of which the Common Shares are qualified for unlisted trading privileges. The Corporation will take all such actions are within its power to ensure that all such Common Shares may be so issued without violation of any applicable law. (m) Issue Tax. The issuance of certificates for Common Shares upon the ---------- due exercise of Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, shall be made without charge to the Holder for any issuance tax in respect thereto, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder. (n) Listing. The Corporation will, at its expense and as expeditiously as -------- possible, use its reasonable commercial efforts to cause all Common Shares issuable upon the due exercise of the Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, to be duly listed on The Toronto Stock Exchange prior to the issuance of such Common Shares. (o) Fair Market Value. For the purposes of any computation hereunder, the ------------------ "Fair Market Value" at any date shall be the weighted average sale price per share for the Common Shares of the Corporation for the 20 consecutive trading days immediately before such date on The Toronto Stock Exchange or such other stock exchange on which the Common Shares may then be listed, or, if the shares or any other security in respect of which a determination of Fair Market Value is being made are not listed on any stock exchange, the Fair Market Value shall be determined by the directors, which determination shall be conclusive. The weighted average price shall be determined by dividing the aggregate sale price of all such shares sold on the said exchange during the said 20 consecutive trading days by the total number of such shares so sold. 2. Replacement ----------- Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Compensation Warrant Certificate and, if requested by the Corporation, upon delivery of a bond of indemnity satisfactory to the Corporation (or, in the case of mutilation, upon surrender of this Compensation Warrant Certificate), the Corporation will issue to the Holder a replacement certificate (containing the same terms and conditions as this Compensation Warrant Certificate). 3. Expiry Date ----------- The Compensation Warrants shall expire and all rights to purchase Units hereunder shall cease and become null and void at 5:00 p.m. (Toronto time) on March 8, 2004. 4. Covenant -------- So long as any Compensation Warrants remain outstanding the Corporation covenants that it shall do or cause to be done all things necessary to maintain its status as a reporting issuer not in default in each of the Reporting Jurisdictions. 5. U.S. Securities Laws -------------------- The holder: (a) acknowledges that the Common Shares and Warrants issuable upon the exercise of this Compensation Warrant have not been and will not be registered under the United States Securities Act of 1933, as amended (the "1933 Act"), or the securities laws of any state of the United States and may be offered and sold only outside the United States pursuant to Regulation S under the 1933 Act ("Regulation S") or in the United States in transactions exempt from such registration; (b) agrees that to the extent required by the 1933 Act or state securities laws: (i) such Common Shares and Warrants may be subject to a "distribution compliance period" imposed by Regulation S or a holding period imposed upon "restricted securities" under the 1933 Act or by applicable state law; and (ii) stop transfer orders may be placed on such Common Shares and Warrants and the certificates therefor may bear legends restricting their transfer. 6. Defined Terms ------------- All capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the agency agreement dated as of February 28, 2002 between the Corporation and Sprott Securities Inc. and Raymond James Ltd. 7. Governing Law ------------- The laws of the Province of British Columbia and the laws of Canada applicable therein shall govern the Compensation Warrants. 8. Assignment, Successors ---------------------- Unless otherwise consented to in writing by the Corporation, such consent not to be unreasonably withheld, this Compensation Warrant Certificate may not be assigned. This Compensation Warrant Certificate shall enure to the benefit of the Holder and its successors and shall be binding on the Corporation and its successors. IN WITNESS WHEREOF the Corporation has caused this Compensation Warrant Certificate to be signed by a duly authorized officer. DATED as of the 8th day of March, 2002. CARDIOME PHARMA CORP. Per: /s/ Bob Rieder (signed) ------------------------------- Schedule "1" ------------ Election to Exercise The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: _______________________ (b) Number of Units to be Acquired: ________________________ (c) Exercise Price per Unit: $________________________ (d) Aggregate Purchase Price [(b) multiplied by (c)] $______________________ and hereby tenders a certified cheque, bank draft or cash for such Aggregate Purchase Price, and directs such Units to be registered and certificates therefor to be issued as directed below. The undersigned represents that: [Please check one box] [ ] It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. [ ] Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ ____________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Schedule "2" ------------ Cashless Exercise Form The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: _______________________ (b) Exercise Price per Unit: ________________________ (c) Current Market Price: $________________________ (d) Number of Units to be Acquired: $________________________ [(a) x ((c) - (b))/(c)] and directs such Units to be registered and certificates therefore to be issued as directed below. The undersigned represents that: [Please check one box] [ ] It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. [ ] Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ ____________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Exhibit 1 Representation Letter ____________, 2002 Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, B.C. V6S 2L2 CANADA Ladies and Gentlemen: In connection with the purchase by the undersigned on this date of common shares and warrants (the "Securities") of Cardiome Pharma Corp. (the "Company"), the undersigned hereby confirms to you that: 1. The undersigned: (a) is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D under the United States Securities Act of 1933, as amended (the "Securities Act") because it is a broker-dealer registered pursuant to Section 15 of the United States Securities Exchange Act of 1934, as amended; and (b) is purchasing the Securities for its own account and not with a view to resale, distribution or other disposition in a manner that would violate the registration requirements of the Securities Act. 2. It acknowledges that neither the Securities nor any interest therein has been or will be registered under the Securities Act or the securities laws of any State or other political subdivision of the United States. 3. It further acknowledges and agrees that, because the Securities have not been registered under the Securities Act and are being offered and sold in a private offering under the exemption afforded by Section 4(2) of the Securities Act, the Shares are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act and cannot be reoffered or resold unless they are subsequently registered under the Securities Act or an exemption from registration thereunder is available, and that it will continue to bear the economic risk of its investment in the Shares for an indefinite period of time. 4. It agrees that it will not re-offer, resell, pledge, hypothecate or otherwise transfer or dispose of the Securities (or securities that may be received in replacement thereof or in exchange therefore) except: (a) pursuant to an effective registration statement under the Securities Act; Page 2 (b) in a transaction outside the United States meeting the requirements of Rule 904 of Regulation S under the Securities Act; or (c) in a transaction exempt from registration under the Securities Act and, in each case in compliance with any applicable state securities ("blue sky") laws. It agrees that in connection with any transaction pursuant to the foregoing clause (c), it will furnish to the Company a written opinion of counsel acceptable to the Company to the effect that such offer, sale, pledge, hypothecation, transfer or disposition is in compliance with the registration requirements of all applicable United States federal and state securities laws. It acknowledges and agrees that each certificate for the Securities (and any certificate issued in replacement therefore) shall bear a restrictive legend in substantially the following form and that an appropriate stop transfer order implementing the same shall be lodged with the transfer agent: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACTO F 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FORM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AFTER PROVIDING A SATISFACTORY LEGAL OPINION TO THE CORPORATION. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE TRANSFER AGENT FOR SUCH SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT. 5. The undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Securities. It acknowledges that it has had access to such information concerning the Company as it has deemed necessary to make an informed decision to purchase Securities, and has been afforded the opportunity to ask questions and receive satisfactory answers from representatives of the Company regarding the Company and the terms and conditions relating to investment in the Company, and all such questions have been answered to its full satisfaction. Very truly yours, EX-4 12 exhibit4-21.txt WARRANT DATED MARCH 8, 2002 ISSUED TO RAYMOND JAMES LTD. Exhibit 4.21 COMPENSATION WARRANTS TO PURCHASE UNITS OF CARDIOME PHARMA CORP. (Existing under the laws of the British Columbia) Void After March 8, 2004 THIS CERTIFIES that, for value received, Raymond James Ltd. (the "Holder"), is the registered holder of 372,386 compensation warrants (the "Compensation Warrants") each of which entitle the holder, subject to the terms and conditions set forth in this Compensation Warrant Certificate, to purchase from Cardiome Pharma Corp. (the "Corporation"), one unit (a "Unit"), each Unit consisting of one common share of the Corporation (a "Common Share") and one-quarter of one share purchase warrant (a "Warrant"), at any time until 5:00 p.m. (Toronto time) on March 8, 2004 (the "Time of Expiry") on payment of $0.95 per Unit (the "Exercise Price"). Each whole Warrant is exercisable for one Share at a price of $1.66 per Share at any time until March 8, 2004. The number of Units which the Holder is entitled to acquire upon exercise of the Compensation Warrants and the Exercise Price are subject to adjustment as hereinafter provided. 1. Exercise of Compensation Warrants --------------------------------- (a) Election to Purchase. The rights evidenced by this certificate may be -------------------- exercised by the Holder in whole or in part and in accordance with the provisions hereof by: (i) surrender of this Compensation Warrant Certificate together with an Election to Exercise in substantially the form attached hereto as Schedule 1, properly completed and executed, together with payment by certified cheque or bank draft of the Aggregate Purchase Price (as defined in Schedule "1") for the number of Units specified in the Election to Exercise at the office of the Corporation at 3650 Westbrook Mall, Vancouver, British Columbia V6S 2L2, or such other address in Canada as may be notified in writing by the Corporation (the "Corporation Office"); or (ii) the surrender of this Compensation Warrant Certificate together with a form in substantially the form attached hereto as Schedule 2 properly completed and executed (the "Cashless Exercise Form") at the address set forth in clause (i) above. Such presentation and surrender shall be deemed a waiver of the Holder's obligation to pay the Aggregate Purchase Price (as defined in Schedule "1"), or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Compensation Warrant Certificate for that number of Units subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then Current Market Price and the Exercise Price, and the denominator of which shall be the then Current Market Price. For the purposes of any computation under this Section 1(a)(ii) the then "Current Market Price" shall be the closing price of the Common Shares on The Toronto Stock Exchange on the last trading day immediately prior to the date of the duly executed Cashless Exercise Form. In the event that the rights evidenced by this certificate are exercised in part, the Corporation shall, contemporaneously with the issuance of the Units issuable on the exercise of the Compensation Warrants so exercised, issue to the Holder a Compensation Warrant Certificate on identical terms in respect of that number of Units in respect of which the Holder has not exercised the rights evidenced by this certificate. (b) Exercise. The Corporation shall, within three business days after --------- receiving a duly executed Election to Exercise and the Aggregate Purchase Price (as defined in Schedule "1") or Cashless Exercise Form, as the case may be, for the number of Units specified therein (the "Exercise Date"), issue that number of Units specified in the Election to Exercise or that number of Units determined under Section 1(a)(ii) and specified in the Cashless Exercise Form. (c) Certificates. ------------- (i) As promptly as practicable after the Exercise Date, the Corporation shall issue and deliver to the Holder, registered in the name of the Holder, certificates for the number of Common Shares and Warrants, respectively, for the number of Units specified in the Election to Exercise or Cashless Exercise Form, as the case may be. (ii) To the extent permitted by law, such exercise shall be deemed to have been effected as of the close of business on the Exercise Date, and at such time the rights of the Holder with respect to the number of Compensation Warrants which have been exercised as such shall cease. (d) Fractional Shares. No fractional Common Shares shall be issued upon ------------------ exercise of any Compensation Warrant and no payments or adjustment shall be made upon any exercise on account of any cash dividends on the Common Shares issued upon such exercise. (e) Corporate Changes. ------------------ (i) Subject to paragraph 1(e)(ii) hereof, if, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall be a party to any reorganization, merger, dissolution or sale of all or substantially all of its assets, whether or not the Corporation is the surviving entity, the number of Compensation Warrants evidenced by this certificate shall be adjusted so that the holder hereof shall be entitled to acquire the same number and type of securities to which the holder of that number of Units of the Corporation subject to the unexercised Compensation Warrants would have been entitled by reason of such reorganization, merger, dissolution or sale of all or substantially all of its assets (the "Event"), and the Exercise Price shall be adjusted to be the amount determined by multiplying the Exercise Price in effect immediately prior to the Event by the number of Shares subject to the unexercised Compensation Warrants immediately prior to the Event, and dividing the product thereof by the number of securities to which the holder of that number of Shares subject to the unexercised Compensation Warrants would have been entitled to by reason of such Event. (ii) If after an event referred to in paragraph 1(e)(i) hereof, the Corporation is unable to deliver securities to the Holder pursuant to the proper exercise of a Compensation Warrant, the Corporation may satisfy such obligations to the Holder hereunder by paying to the Holder in cash the difference between the Exercise Price of all unexercised Compensation Warrants granted hereunder and the Fair Market Value on the Exercise Date of the securities to which the Holder would be entitled to upon exercise of all unexercised Compensation Warrants. Adjustments under this subparagraph (e) or (subject to subparagraph (o)) any determinations as to the Fair Market Value of any securities shall be made by the board of directors of the Corporation, or any committee thereof specifically designated by the board of directors to be responsible therefor, and any reasonable determination made by such board or committee thereof shall be binding and conclusive, subject only to any disputes being resolved by the Corporation's auditors, whose determination shall be binding and conclusive. (f) Subdivision or Consolidation of Shares. --------------------------------------- (i) In the event that, after the date of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall subdivide its outstanding common shares ("Common Shares") into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Common Shares of the Corporation shall be consolidated into a smaller number of shares, the Exercise Price in effect immediately prior to such consolidation shall be proportionately increased. (ii) Upon each adjustment of the Exercise Price as provided herein, the Holder shall thereafter be entitled to acquire, at the Exercise Price resulting from such adjustment, the number of Units (calculated to the nearest tenth of a Unit) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Units which may be acquired hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (g) Change or Reclassification. In the event that, after the date of --------------------------- issuance of this Certificate and prior to the Time of Expiry, the Corporation shall change or reclassify its outstanding Common Shares into a different class of securities, the rights evidenced by the Compensation Warrants shall be adjusted as follows so as to apply to the successor class of securities: (i) the number of the successor class of securities which the Holder shall be entitled to acquire as part of the Units shall be that number of the successor class of securities which a holder of that number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification would have been entitled to by reason of such change or reclassification; and (ii) the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the change or reclassification by the number of Units subject to the unexercised Compensation Warrants immediately prior to the change or reclassification, and dividing the product thereof by the number of successor securities determined in paragraph 1(g)(i) hereof. (h) Offering to Shareholders. If and whenever at any time after the date ------------------------- of issuance of this Certificate and prior to the Time of Expiry, the Corporation shall fix a record date or if a date of entitlement to receive is otherwise established (any such date being hereinafter referred to in this subsection 1(h) as the "record date") for the issuance of rights, options or warrants to all or substantially all the holders or the outstanding Common Shares entitling them, for a period expiring not more than 45 days after such record date, to subscribe for or purchase Common Shares or securities convertible into or exchangeable for Common Shares at a price per share or, as the case may be, having a conversion or exchange price per share less than 95% of the Fair Market Value (as hereinafter defined) on such record date, the Exercise Price shall be adjusted immediately after such record date so that it shall equal the price determined by multiplying the Exercise Price in effect on such record date by a fraction, of which the numerator shall be the total number of Common Shares outstanding on such record date plus a number equal to the number arrived at by dividing the aggregate subscription or purchase price of the total number of additional Common Shares offered for subscription or purchase or, as the case may be, the aggregate conversion or exchange price of the convertible or exchangeable securities so offered by such Fair Market Value, and of which the denominator shall be the total number of Common Shares outstanding on such record date plus the total number of additional Common Shares so offered (or into which the convertible or exchangeable securities so offered are convertible or exchangeable); Common Shares owned by or held for the account of the Corporation or any subsidiary of the Corporation shall be deemed not to be outstanding for the purpose of any such computation; such adjustment shall be made successively whenever such a record date is fixed; to the extent that any rights or warrants are not so issued or any such rights or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or to the Exercise Price which would then be in effect based upon the number of Common Shares or conversion or exchange rights contained in convertible or exchangeable securities actually issued upon the exercise of such rights or warrants, as the case may be. (i) Carry Over of Adjustments. No adjustment of the Exercise Price shall -------------------------- be made if the amount of such adjustment shall be less than 1% of the Exercise Price in effect immediately prior to the event giving rise to the adjustment, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least 1% of the Exercise Price. (j) Notice of Adjustment. Upon any adjustment of the number of Units and --------------------- upon any adjustment of the Exercise Price, then and in each such case the Corporation shall give written notice thereof to the Holder, which notice shall state the Exercise Price and the number of Units or other securities subject to the unexercised Compensation Warrants resulting from such adjustment, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the request of the Holder there shall be transmitted promptly to the Holder a statement of the firm of independent chartered accountants retained to audit the financial statements of the Corporation to the effect that such firm concurs in the Corporation's calculation of the change. (k) Other Notices. In case at any time after the date of issuance of this -------------- Certificate and prior to the Time of Expiry: (i) the Corporation shall declare any dividend upon its Common Shares payable in kind; (ii) the Corporation shall offer for subscription pro rata to the holders of its Common Shares any additional shares of any class or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation, amalgamation or merger of the Corporation with, or sale of all or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then, in any one or more of such cases, (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002) the Corporation shall give to the Holder (A) at least 10 days' prior written notice of the date on which a record date shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation (other than the consolidation disclosed in the Corporation's prospectus dated February 28, 2002), merger, amalgamation, sale, dissolution, liquidation or winding-up and (B) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (A) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Shares shall be entitled thereto, and such notice in accordance with the foregoing clause (B) shall also specify the date on which the holders of Common Shares shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case may be. (l) Shares to be Reserved. The Corporation will at all times keep ---------------------- available, and reserve if necessary under Canadian law, out of its authorized Common Shares, solely for the purpose of issue upon the exercise of the Compensation Warrants and the Warrants issuable upon the exercise of the Compensation Warrants, such number of Common Shares as shall then be issuable upon the due exercise of the Compensation Warrants and the due exercise of the Warrants issuable upon the due exercise of the Compensation Warrants. The Corporation covenants and agrees that all Common Shares which shall be so issuable will, upon issuance, be duly authorized and issued as fully paid and non-assessable. The Corporation will take all such actions as may be necessary to ensure that all such Common Shares may be so issued without violation of any applicable requirements of any exchange upon which the Common Shares may be listed or in respect of which the Common Shares are qualified for unlisted trading privileges. The Corporation will take all such actions are within its power to ensure that all such Common Shares may be so issued without violation of any applicable law. (m) Issue Tax. The issuance of certificates for Common Shares upon the ---------- due exercise of Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, shall be made without charge to the Holder for any issuance tax in respect thereto, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder. (n) Listing. The Corporation will, at its expense and as expeditiously as -------- possible, use its reasonable commercial efforts to cause all Common Shares issuable upon the due exercise of the Compensation Warrants or Warrants issuable upon the due exercise of the Compensation Warrants, as the case may be, to be duly listed on The Toronto Stock Exchange prior to the issuance of such Common Shares. (o) Fair Market Value. For the purposes of any computation hereunder, the ------------------ "Fair Market Value" at any date shall be the weighted average sale price per share for the Common Shares of the Corporation for the 20 consecutive trading days immediately before such date on The Toronto Stock Exchange or such other stock exchange on which the Common Shares may then be listed, or, if the shares or any other security in respect of which a determination of Fair Market Value is being made are not listed on any stock exchange, the Fair Market Value shall be determined by the directors, which determination shall be conclusive. The weighted average price shall be determined by dividing the aggregate sale price of all such shares sold on the said exchange during the said 20 consecutive trading days by the total number of such shares so sold. 2. Replacement ----------- Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Compensation Warrant Certificate and, if requested by the Corporation, upon delivery of a bond of indemnity satisfactory to the Corporation (or, in the case of mutilation, upon surrender of this Compensation Warrant Certificate), the Corporation will issue to the Holder a replacement certificate (containing the same terms and conditions as this Compensation Warrant Certificate). 3. Expiry Date ----------- The Compensation Warrants shall expire and all rights to purchase Units hereunder shall cease and become null and void at 5:00 p.m. (Toronto time) on March 8, 2004. 4. Covenant -------- So long as any Compensation Warrants remain outstanding the Corporation covenants that it shall do or cause to be done all things necessary to maintain its status as a reporting issuer not in default in each of the Reporting Jurisdictions. 5. U.S. Securities Laws -------------------- The holder: (a) acknowledges that the Common Shares and Warrants issuable upon the exercise of this Compensation Warrant have not been and will not be registered under the United States Securities Act of 1933, as amended (the "1933 Act"), or the securities laws of any state of the United States and may be offered and sold only outside the United States pursuant to Regulation S under the 1933 Act ("Regulation S") or in the United States in transactions exempt from such registration; (b) agrees that to the extent required by the 1933 Act or state securities laws: (i) such Common Shares and Warrants may be subject to a "distribution compliance period" imposed by Regulation S or a holding period imposed upon "restricted securities" under the 1933 Act or by applicable state law; and (ii) stop transfer orders may be placed on such Common Shares and Warrants and the certificates therefor may bear legends restricting their transfer. 6. Defined Terms ------------- All capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the agency agreement dated as of February 28, 2002 between the Corporation and Sprott Securities Inc. and Raymond James Ltd. 7. Governing Law ------------- The laws of the Province of British Columbia and the laws of Canada applicable therein shall govern the Compensation Warrants. 8. Assignment, Successors ---------------------- Unless otherwise consented to in writing by the Corporation, such consent not to be unreasonably withheld, this Compensation Warrant Certificate may not be assigned. This Compensation Warrant Certificate shall enure to the benefit of the Holder and its successors and shall be binding on the Corporation and its successors. IN WITNESS WHEREOF the Corporation has caused this Compensation Warrant Certificate to be signed by a duly authorized officer. DATED as of the 8th day of March, 2002. CARDIOME PHARMA CORP. Per: /s/ Bob Rieder (signed) ------------------------------- Schedule "1" ------------ Election to Exercise The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: _______________________ (b) Number of Units to be Acquired: ________________________ (c) Exercise Price per Unit: $________________________ (d) Aggregate Purchase Price [(b) multiplied by (c)] $______________________ and hereby tenders a certified cheque, bank draft or cash for such Aggregate Purchase Price, and directs such Units to be registered and certificates therefor to be issued as directed below. The undersigned represents that: [Please check one box] [ ] It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. [ ] Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ ____________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Schedule "2" ------------ Cashless Exercise Form The undersigned hereby irrevocably elects to exercise the number of Compensation Warrants of Cardiome Pharma Corp. set out below for the number of Units (or other property or securities subject thereto) as set forth below: (a) Number of Compensation Warrants to be Exercised: _______________________ (b) Exercise Price per Unit: ________________________ (c) Current Market Price: $________________________ (d) Number of Units to be Acquired: $________________________ [(a) x ((c) - (b))/(c)] and directs such Units to be registered and certificates therefore to be issued as directed below. The undersigned represents that: [Please check one box] [ ] It is not a U.S. person (as defined in Regulation S under the United States Securities Act of 1933, as amended), is acquiring the Units for its own account and not for the account or benefit of a U.S. person and has executed and delivered this Election outside the United States. [ ] Accompanying this Election is a Representation Letter in the form attached as Exhibit 1 to the Compensation Warrant Certificate. This Election has been executed and delivered in Canada. DATED this ______ day of ____________, 200__ . [NAME OF HOLDER] Per:________________________________ ____________________________________ Name of Registered Holder: ____________________________________ Address of Registered Holder: ____________________________________ ____________________________________ Exhibit 1 Representation Letter ____________, 2002 Cardiome Pharma Corp. 3650 Wesbrook Mall Vancouver, B.C. V6S 2L2 CANADA Ladies and Gentlemen: In connection with the purchase by the undersigned on this date of common shares and warrants (the "Securities") of Cardiome Pharma Corp. (the "Company"), the undersigned hereby confirms to you that: 1. The undersigned: (a) is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D under the United States Securities Act of 1933, as amended (the "Securities Act") because it is a broker-dealer registered pursuant to Section 15 of the United States Securities Exchange Act of 1934, as amended; and (b) is purchasing the Securities for its own account and not with a view to resale, distribution or other disposition in a manner that would violate the registration requirements of the Securities Act. 2. It acknowledges that neither the Securities nor any interest therein has been or will be registered under the Securities Act or the securities laws of any State or other political subdivision of the United States. 3. It further acknowledges and agrees that, because the Securities have not been registered under the Securities Act and are being offered and sold in a private offering under the exemption afforded by Section 4(2) of the Securities Act, the Shares are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act and cannot be reoffered or resold unless they are subsequently registered under the Securities Act or an exemption from registration thereunder is available, and that it will continue to bear the economic risk of its investment in the Shares for an indefinite period of time. 4. It agrees that it will not re-offer, resell, pledge, hypothecate or otherwise transfer or dispose of the Securities (or securities that may be received in replacement thereof or in exchange therefore) except: (a) pursuant to an effective registration statement under the Securities Act; Page 2 (b) in a transaction outside the United States meeting the requirements of Rule 904 of Regulation S under the Securities Act; or (c) in a transaction exempt from registration under the Securities Act and, in each case in compliance with any applicable state securities ("blue sky") laws. It agrees that in connection with any transaction pursuant to the foregoing clause (c), it will furnish to the Company a written opinion of counsel acceptable to the Company to the effect that such offer, sale, pledge, hypothecation, transfer or disposition is in compliance with the registration requirements of all applicable United States federal and state securities laws. It acknowledges and agrees that each certificate for the Securities (and any certificate issued in replacement therefore) shall bear a restrictive legend in substantially the following form and that an appropriate stop transfer order implementing the same shall be lodged with the transfer agent: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACTO F 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FORM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AFTER PROVIDING A SATISFACTORY LEGAL OPINION TO THE CORPORATION. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE TRANSFER AGENT FOR SUCH SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT. 5. The undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Securities. It acknowledges that it has had access to such information concerning the Company as it has deemed necessary to make an informed decision to purchase Securities, and has been afforded the opportunity to ask questions and receive satisfactory answers from representatives of the Company regarding the Company and the terms and conditions relating to investment in the Company, and all such questions have been answered to its full satisfaction. Very truly yours, EX-8 13 exhibit8-1.txt SUBSIDIARIES OF COMPANY EXHIBIT 8.1 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Name Jurisdiction - ---- ------------ Paralex, Inc. United States Rhythm-Search Developments Ltd. British Columbia, Canada Atriven Cardiology Corp. Canada EX-10 14 exhibit10-1.txt CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Exhibit 10.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT CHARTERED ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form F-3 No. 333-85922) of Cardiome Pharma Corp. and in the related Prospectus for the registration of 9,838,828 common shares of our reports (a) dated February 8, 2002 (except as to notes 19[a] and 19[c] which are as of March 8, 2002 and note 19[e] which is as of March 28, 2002) and our Comments of Auditor for US Readers on Canada-US Reporting Difference (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 1 to the consolidated financial statements) dated February 8, 2002, with respect to the consolidated financial statements of Cardiome Pharma Corp. for the year ended November 30, 2001; and (b) dated December 21, 2001 with respect to the financial statements of Paralex, Inc. for the period from January 26, 2001 (date of incorporation) to November 30, 2001, included in this Annual Report (Form 20-F) for the year ended November 30, 2001. /s/ Ernst & Young LLP Vancouver, Canada Chartered Accountants April 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----