SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value 6,253,009
---------------------------- ---------
(Class) (Outstanding at July 27, 1998)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
(A Development Stage Company)
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and December 31, 1997. 3
Statements of Operations - Three month and six month periods ended June
30, 1998 and June 30, 1997 and for the period January 1, 1993
(inception) through June 30, 1998. 4
Statements of Cash Flows - Six months ended June 30, 1998 and June 30,
1997 and for the period January 1, 1993 (inception) through June 30,
1998. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 11
PART II. OTHER INFORMATION
- --------------------------
Items 1 through 3 have been omitted since all items are inapplicable or
answers negative.
Item 4. Submission of Matters to Vote of Security Holders. 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signature 13
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(TM), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(TM), Xyrem(TM), "The"
Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated to Patients with
Uncommon Diseases(R) are trademarks of the Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,001,814 $ 2,150,877
Available-for-sale securities 1,682,366 5,018,353
Accounts receivable, less allowance for doubtful
accounts of $8,000 and $22,617 514,911 238,356
Other receivables 62,075 143,581
Inventories 278,974 308,548
Prepaid expenses 86,924 41,599
------------- -------------
Total current assets 4,627,064 7,901,314
Property and equipment:
Property and equipment 530,114 494,680
Accumulated depreciation (204,416) (157,044)
------------- -------------
325,698 337,636
------------- -------------
Total assets $ 4,952,762 $ 8,238,950
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Chronimed Inc. obligation - current portion $ 1,146,666 $ 876,655
Accounts payable and accrued expenses 3,083,785 2,494,766
Accrued payroll and related taxes 52,732 50,179
------------- -------------
Total current liabilities 4,283,183 3,421,600
Non current liabilities: Chronimed Inc. obligation -- 1,171,448
Commitments
Shareholders' equity:
Common Stock, $.01 par value; 25,000,000 shares authorized;
6,249,718 and 6,099,562 shares issued and outstanding 62,497 60,996
Additional paid-in capital 30,874,951 29,783,404
Deficit accumulated during the development stage (30,265,691) (26,196,538)
------------- -------------
671,757 3,647,862
Unrealized gain (loss) on available-for-sale securities (2,178) (1,960)
------------- -------------
Total shareholders' equity 669,579 3,645,902
------------- -------------
Total liabilities and shareholders' equity $ 4,952,762 $ 8,238,950
============= =============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1997 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES.
<PAGE>
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
January 1,
For the Three Months Ended For the Six Months Ended 1993
-------------------------------- ------------------------------- (Inception) to
June 30, June 30, June 30, June 30, June 30,
1998 1997 1998 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 966,630 $ 162,286 $ 2,488,601 $ 266,710 $ 3,160,120
Operating expenses:
Cost of sales 173,704 76,986 391,136 120,681 699,309
Research and
development 1,822,282 1,674,928 3,617,961 2,812,733 21,823,377
Sales and
marketing 708,555 2,488,634 1,319,843 2,684,472 5,050,275
General and
administrative 694,019 595,387 1,263,093 1,122,549 7,830,584
------------- ------------- ------------- ------------- -------------
Loss from operations (2,431,930) (4,673,649) (4,103,432) (6,473,725) (32,243,425)
------------- ------------- ------------- ------------- -------------
Other income:
Interest, net 14,137 191,921 34,279 403,215 1,977,734
------------- ------------- ------------- ------------- -------------
Net loss and deficit
accumulated during the
development stage $ (2,417,793) $ (4,481,728) $ (4,069,153) $ (6,070,510) $ (30,265,691)
============= ============= ============= ============= =============
Basic and diluted loss
per common share $ (.39) $ (.74) $ (.66) $ (1.00) $ (8.50)
============= ============= ============= ============= =============
Weighted average
number of shares
outstanding 6,186,357 6,063,088 6,147,145 6,062,005 3,560,384
============= ============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Six Months Ended January 1, 1993
------------------------------- (Inception) to
June 30, June 30, June 30,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,069,153) $ (6,070,510) $ (30,265,691)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 47,372 34,098 208,505
Loss on disposition of fixed assets -- -- 4,091
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 591,572 351,287 3,136,517
Inventories 29,575 (260,463) (278,973)
Accounts receivable and other current assets (240,374) (226,411) (673,339)
------------- ------------- -------------
Net cash used in operating activities (3,641,008) (6,171,999) (27,868,890)
INVESTING ACTIVITIES
Purchase of office equipment (35,434) (75,588) (575,678)
Proceeds from fixed asset sales -- -- 38,192
Purchases of short-term investments (2,989,232) (11,072,508) (40,161,865)
Maturities of short-term investments 6,325,000 14,981,506 38,477,320
------------- ------------- -------------
Net cash provided by (used in) investing activities 3,300,334 3,833,410 (2,222,031)
FINANCING ACTIVITIES:
Capital contribution -- -- 5,000,000
Chronimed Inc. obligation (901,437) 1,921,519 1,146,666
Stock option exercise proceeds 145,597 35,000 469,622
Value of stock issued to Chronimed 947,451 -- 947,451
Net proceeds from stock offerings -- -- 23,636,666
Expenses paid by Chronimed -- -- 892,330
------------- ------------- -------------
Net cash provided by financing activities 191,611 1,956,519 32,092,735
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (149,063) (382,070) 2,001,814
Cash and cash equivalents at beginning of
Period 2,150,877 3,927,945 --
------------- ------------- -------------
Cash and cash equivalents at end of
Period $ 2,001,814 $ 3,545,875 $ 2,001,814
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 252,643 $ 540,296 $ 2,201,300
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") is a development stage company that
acquires, develops, and markets products of high medical value intended to
address inadequately treated or uncommon diseases within selected strategic
therapeutic market segments. A drug has high medical value if it offers a major
improvement in the safety or efficacy of patient treatment and has no
substantial equivalent substitute. The Company is currently developing two
potential products and has five products that have been approved for marketing
by the Food and Drug Administration (the "FDA").
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the audited
financial statements and accompanying notes contained in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 1997.
2. 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 accompanying notes.
Actual results could differ from those estimates.
3. LOSS PER SHARE
Basic and diluted loss per share are based upon the weighted average number of
shares outstanding during the respective period. Common stock equivalents are
not included because their effect is anti-dilutive.
4. CHRONIMED OBLIGATION
The Company and Chronimed entered into an Agreement dated June 27, 1997, in
which Chronimed agreed to terminate certain agreements that had been in
existence since the spin-off of the Company from Chronimed. Among the terminated
agreements was the Marketing and Distribution Agreement dated July 2, 1994, as
amended, under which Chronimed had the exclusive right to market and distribute
four of Orphan Medical's proposed products and receive royalties with respect to
two of Orphan Medical's products. In consideration for terminating
<PAGE>
these agreements, the Company agreed to pay Chronimed compensation equal to
$2,500,000, consisting of cash and shares of the Company's Common Stock. The
Company paid $250,000 on June 27, 1997, with the remaining balance of $2,250,000
payable in quarterly installments based on a temporary royalty arrangement equal
to 3 percent of the Company's net sales beginning in the third quarter of 1997
and the issuance on a quarterly basis of Common Stock equal to 1 percent of the
Company's then issued and outstanding Common Stock beginning March 31, 1998.
Through June 30, 1998, the Company has paid Chronimed approximately $81,000 in
royalties and issued 123,056 shares of Common Stock, of which 61,178 shares have
been sold by Chronimed in market transactions for net cash proceeds of $576,183.
At June 30, 1998, the Company's unpaid obligation to Chronimed has an estimated
value of approximately $1,146,666, which is classified as a "Current Liability".
5. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development companies, manufacturers, technical service companies,
license and research agreements, and agreements with drug distributors.
Expenditures incurred under these commitments and reported as research and
development expense totaled approximately $1,584,000 and $3,058,000 for the
three and six month periods ended June 30, 1998, respectively. At June 30, 1998,
the Company estimates that it could incur approximately $3,436,000 of additional
expenditures in subsequent periods under existing commitments for those products
remaining in the Company's development portfolio. Commitments for research and
development expenditures will likely fluctuate from quarter to quarter and from
year to year depending on, among other factors, the timing of product
development and the progress of clinical development programs.
6. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 1999. The maximum amount available to the Company under this
arrangement is $500,000, subject to certain limitations. The Company's
indebtedness to the bank may not exceed the lesser of (1) 75 percent of the
Company's trade accounts receivable that have been outstanding for 90 days or
less or (2) $500,000. In addition, the Company must maintain a minimum balance
of at least $250,000 in accounts which the bank controls. Advances are charged a
variable rate of interest equal to the prime rate plus one half of a percent.
Through June 30, 1998, the Company has not borrowed under this arrangement.
7. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the three and six months ended June 30, 1998. These
reclassifications have no impact on the net loss or shareholders' equity as
previously reported.
8. SUBSEQUENT EVENT
On July 23, 1998 (the "First Issuance Date"), the Company completed the sale to
UBS Capital II LLC ("UBS Capital") of a private placement of $7.5 million of
Senior Convertible Preferred Stock (the "Preferred Shares"). The private
placement agreement also gives UBS Capital the right to invest up to an
additional $4.5 million within 90 days of the First Issuance Date. The Preferred
Shares are
<PAGE>
convertible, at the option of the holders, into shares of the Company's Common
Stock at a per share price equal to the lesser of $11.78 or 110% of the average
last sale price of the 20 trading days prior to October 21, 1998. The Preferred
Shares have anti-dilution and change of control protection, and bear a dividend
of 7.5% per annum, payable semi annually, which during the first two years may
be paid either in cash or by issuing additional Preferred Shares. In the third
year and thereafter, the dividend may be paid either in cash or by issuing
Common Stock valued at the then current market price. Ten years from the First
Issuance Date (July 23, 2008), the Company must elect to either (1) require the
conversion of all unconverted Preferred Shares into Common Stock upon the
payment by the Company, in cash or by issuing Common Stock, of a $3.0 million
conversion fee, which is subject to adjustment, or (2) redeem for cash the
holder's unconverted Preferred Shares for $1,000 per share plus accrued
dividends. An affiliate of UBS Capital will be paid on closing a four percent
arrangement fee based on amounts invested. UBS Capital is entitled to designate
an individual to serve on the Company's Board of Directors.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are not descriptions
of historical facts. The words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
may be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in the Company's "Cautionary
Statements" on Exhibit 99 to this Quarterly Report filed on Form 10-Q for the
quarterly period ended June 30, 1998.
GENERAL
Orphan Medical, Inc., a development stage company, was incorporated on June 17,
1994 in order to carry on the business previously conducted by the Orphan
Medical Division of Chronimed. From inception through June 30, 1998, the Company
has incurred losses totaling $30,265,691, consisting of $21,823,377 of research
and development expenses, $5,050,275 of sales and marketing expenses, $7,830,584
of general and administrative expenses, $2,460,811 of gross profit on sales of
approved products and $1,977,734 of net interest income. The Company's
activities have consisted primarily of obtaining the rights for pharmaceutical
products, hiring the personnel required to implement the Company's business
plan, managing the development of these products, preparing for the commercial
introduction of five products and fund raising. At June 30, 1998, five of the
Company's products have been approved by the Food and Drug Administration
("FDA") for marketing and are commercially available and two products were in
development. The Company has not generated sufficient levels of revenue from its
approved products to date to fund its operating activities and has sustained
significant operating losses each year since inception. The Company expects to
continue reporting as a development stage company at least through 1998. In
addition, the Company expects operating losses to continue into 1999.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997
Sales increased from $266,710 for the six months ended June 30, 1997 to
$2,488,601 for the six months ended June 30, 1998. The $2,221,891 increase is
principally attributable to Antizol sales, which the Company commenced shipping
for the first time in December 1997. Antizol sales growth to date reflects the
initial stocking of this product by many hospitals, and the Company expects
sales will fluctuate from quarter to quarter depending, in part, on the
Company's continued success in informing the toxicology and emergency room
communities about the merits of Antizol. Sales of Elliotts B Solution,
Cystadane, and Antizol-Vet are consistent with the Company's expectations.
Cost of sales increased from $120,681 for the six months ended June 30, 1997 to
$391,136 for the six months ended June 30, 1998. The increase of $270,455 is
principally attributable to Antizol sales and to the write-off of excess
inventory quantities of Elliotts B Solution. Cost of sales as a percentage of
sales will fluctuate from quarter to quarter and from year to year depending on,
among other factors, demand for the Company's products, new product
introductions and the mix of approved products shipped.
Research and development expense increased from $2,812,733 (43% of the total
loss from operations) for the six months ended June 30, 1997 to $3,617,961 (88%
of the total loss from operations) for the six months ended June 30, 1998. The
$805,228 increase is largely attributable to higher levels of regulatory and
clinical trial spending for Busulfex and Xyrem. The Company expects research and
development expense, principally clinical trial, regulatory and toxicology
spending, for Busulfex and Xyrem to increase significantly in the second half of
the year. Clinical trial spending for Busulfex and Xyrem will be dependent on a
number of factors, including among others: the number of human subjects required
for a trial, the number of human subjects screened and enrolled in a trial, and
the number of active clinical sites. The Company's product development schedule
for Busulfex and Xyrem, and additional products, if any, that it may develop in
the future will be influenced by regulatory decisions, competitive pressures and
the availability of funding.
Sales and marketing expenses decreased from $2,684,472 (41% of the total loss
from operations) for the six months ended June 30, 1997 to $1,319,843 (32% of
the total loss from operations) for the six months ended June 30, 1998. The
$1,364,629 decrease is principally attributable to a one-time expense of
$2,172,000 (see Note 4 - Chronimed Obligation) incurred during the six months
ended June 30, 1997, partially offset by higher spending related to the addition
of an Antizol sales force, and Antizol sales and marketing program costs
incurred during the six months ended June 30, 1998. Sales and marketing expenses
will likely increase in subsequent quarters.
General and administrative expenses increased from $1,122,549 (17% of the total
loss from operations) for the six months ended June 30, 1997 to $1,263,093 (31%
of the total loss from operations) for the six months ended June 30, 1998. The
$140,544 increase is principally related to executive management consulting
services and staff additions. General and administrative expenses are not
expected to increase significantly in subsequent quarters.
<PAGE>
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased from $403,215
for the six months ended June 30, 1997 to $34,279 for the six months ended June
30, 1998. The decrease of $368,936 is due to less interest income resulting from
lower levels of investable funds, which is further reduced by interest expense
of approximately $117,000 related to the Company's obligation to Chronimed.
Other income is expected to increase in subsequent quarters with the addition of
approximately $7.1 million in cash resulting from the July 23, 1998 sale of a
private placement, which will be available for investment as well as funding
development expenses into 1999.
Net losses for the six months ended June 30, 1998 and for the six months ended
June 30, 1997 were $(4,069,153) and $(6,070,510), respectively. Basic and
diluted loss per common share for these respective periods were $(.66) and
$(1.00), based on weighted average number of common shares outstanding of
6,147,145 and 6,062,005, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1998, the Company has used $27,868,890 to fund
operating activities. Since July 2, 1994, the effective date the Company was
spun-off from Chronimed, it has financed its operations principally from initial
working capital balances, the net proceeds from the 1995 and 1996 public
offerings, interest income and product sales. The 1995 and 1996 public offerings
resulted in aggregate net proceeds, after commissions and expenses, of
$23,636,666.
Net working capital (current assets less current liabilities) decreased from
$4,479,714 at December 31, 1997 to $343,881 at June 30, 1998. Cash and cash
equivalents, and available-for-sale securities decreased from $7,169,230 at
December 31, 1997 to $3,684,180 at June 30, 1998. The Company invests excess
cash in short-term, interest-bearing, investment grade securities.
The Company's commitments for outside development spending increased from
approximately $2,700,000 at December 31, 1997 to approximately $3,436,000 at
June 30, 1998. The $736,000 increase resulted principally from accelerating the
Xyrem development program. The Company expects future commitments for Busulfex
and Xyrem to increase significantly over current levels.
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through June 30, 1998 of $30,265,691.
These conditions give rise to the question about the Company's ability to
generate positive cash flow and fund operations. The Company believes that its
current working capital, anticipated gross profits from product sales, and the
$7.1 million in net cash proceeds from the July 23, 1998 sale of a private
placement will be sufficient to fund its operations through December 31, 1999.
These assumptions are based upon the Company substantially increasing
development expenses, increasing revenues from the sale of its Antizol product,
and the successful FDA approval and market launch of Busulfex in the second half
of 1999. Any material reduction in projected revenues and/or a delay in the FDA
approval and market launch of Busulfex will require the
<PAGE>
Company to seek additional equity or debt financing or substantially reduce the
Company's expense structure through reductions in personnel and development.
The Company's ability to raise additional capital and/or raise capital on
acceptable terms could be negatively affected in the event it no longer meets
the Nasdaq's requirements for continued listing on the National Market tier. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in the Company's case includes either: (1) net tangible
assets in excess of $4.0 million as reported on Form 10-Q or Form 10-K or (2) a
market capitalization of at least $50.0 million. At June 30, 1998, the Company's
net tangible assets equaled $669,579 and its market capitalization was
approximately $66.0 million (based on the last sale price of $10.563 and
6,249,718 shares outstanding as of June 30, 1998). Net tangible assets are
defined as total assets less total liabilities. Market capitalization is defined
as total outstanding shares multiplied by the last sales price quoted by Nasdaq.
After giving effect to the July 23, 1998 private placement of Preferred Shares,
which netted the Company approximately $7.1 million in additional net tangible
assets (i.e., cash), the Company estimates that it will have net tangible assets
in excess of the $4.0 million (thereby satisfying Nasdaq's net tangible asset
listing requirement) through at least the end the third quarter of 1998. In the
event UBS Capital exercises its right, which expires on October 21, 1998, to
invest up to an additional $4.5 million, the Company's estimated net tangible
assets are expected to exceed $4.0 million through the end of 1998. Should the
Company fail to satisfy at least one of the two aforementioned Nasdaq listing
requirements at any time after the third quarter of 1998 (or after 1998 in the
event of an additional investment by UBS Capital of at least $2.0 million), the
Company's Common Stock would no longer qualify for listing on the Nasdaq
National Market, but would qualify for quotation on the Nasdaq Small Cap Market
provided it had net tangible assets in excess of $2.0 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risks Not
Applicable
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 27, 1998.
Two matters were submitted to the shareholders for approval: (1) the election of
directors and (2) a proposal to ratify the selection of Ernst & Young LLP as the
independent public accountants for the Company.
Six nominees, namely John Howell Bullion, William B. Adams, Maurice R. Taylor,
II, Lawrence C. Weaver, Ph.D., D.Sc. (Hon.), William M. Wardell, M.D., Ph.D.,
and W. Leigh Thompson, Ph.D., M.D. and were duly elected as directors of the
Company until the next annual meeting of shareholders. Each nominee received at
least approximately ninety-nine percent of the votes cast in favor of his
election. Further results of the voting were as follows:
<PAGE>
Votes Cast for
Director the Director Votes Withheld
- -------------------------------------- --------------- --------------
John Howell Bullion 5,523,991 17,106
William B. Adams 5,526,951 14,146
Maurice R. Taylor, II 5,526,601 14,496
Lawrence C. Weaver, Ph.D., D.Sc. (Hon) 5,525,631 15,466
William M. Wardell, M.D., Ph.D. 5,525,631 15,466
W. Leigh Thompson, Ph.D., M.D. 5,526,931 14,166
The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company was approved by the Company's shareholders. A
total of 5,503,700 shares of the Company's common stock voted in favor of the
proposal, 18,020 shares of the Company's common stock voted against the proposal
and 19,377 shares of the Company's common stock abstained from voting. There
were no broker non-voters in connection with the shareholders vote for this
proposal. The proposal to ratify the selection of Ernst & Young LLP as the
independent public accountants for the Company received approximately
ninety-nine percent of the vote cast.
Item 5. Other Information
On July 17, 1998, the Company announced that Sucraid is commercially available.
The Company will sell Sucraid principally direct to patients through an
affiliate of Cardinal Health, Inc. The Company estimates that annual sales of
Sucraid will be less than $500,000.
On July 23, 1998 (the "First Issuance Date"), the Company received $7,125,000 in
net cash proceeds from the sale of a private placement of $7.5 million of Senior
Convertible Preferred Stock (the "Preferred Shares") to UBS Capital II LLC ("UBS
Capital"), a subsidiary of UBS AG. The private placement agreement also gives
UBS Capital the right to invest up to an additional $4.5 million within 90 days
of the First Issuance Date. The Preferred Shares are convertible, at the option
of the holders, into shares of the Company's Common Stock at a per share price
equal to the lesser of $11.78 or 110% of the average last sale price of the 20
trading days prior to October 21, 1998. The Preferred Shares have anti-dilution
and change of control protection, and bear a dividend of 7.5% per annum, payable
semi annually, which during the first two years may be paid either in cash or by
issuing additional Preferred Shares. In the third year and thereafter, the
dividend may be paid either in cash or by issuing Common Stock valued at the
then current market price. Upon their maturity in July 2008, the Company must
elect to either (1) require the conversion of all unconverted Preferred Shares
into Common Stock upon payment by the Company of a $3.0 million conversion fee,
or redeemed for cash. An affiliate of UBS Capital will be paid on closing a four
percent arrangement fee based on amounts invested. UBS Capital is entitled to
designate an individual to serve on the Company's Board of Directors.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT INDEX
- ---------------- ------------------------------------------------- -------------
Sequentially
Exhibit Number Description Numbered Page
- ---------------- ------------------------------------------------- -------------
3.1.1 Certificate of Designation for Senior Convertible
Preferred Stock
- ---------------- ------------------------------------------------- -------------
10.47 Loan Agreement and Security Agreement between OMI
and Riverside Bank dated May 15, 1998
- ---------------- ------------------------------------------------- -------------
10.48 Stock Purchase Agreement between OMI and UBS
Capital II LLC dated July 23, 1998
- ---------------- ------------------------------------------------- -------------
27 Financial Data Schedule - For SEC EDGAR filing
- ---------------- ------------------------------------------------- -------------
99 Cautionary Statements
- ---------------- ------------------------------------------------- -------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
--------------------
Registrant
Date July 29, 1998 By /s/ John H. Bullion
---------------------- -------------------
John H. Bullion
Chief Executive Officer
(principal executive officer)
EXHIBIT 3.1.1
CERTIFICATE OF DESIGNATION
FOR
SENIOR CONVERTIBLE PREFERRED STOCK
(Pursuant to Minnesota Statutes, Section 302A.401, Subd. 3(b))
- ---------------
The undersigned, being the Chief Executive Officer of Orphan Medical,
Inc. (the "Corporation"), a corporation organized and existing under the
Minnesota Business Corporation Act, in accordance with the provisions of
Minnesota Statutes, Section 302A.401, Subd. 3(b), does hereby certify that:
Pursuant to the authority vested in the Board of Directors of the
Corporation by the Articles of Incorporation of the Corporation, the Board of
Directors on July 14, 1998, in accordance with Minnesota Statutes, Section
302A.401, Subd. 3, duly adopted the following resolution establishing a series
of 14,000 shares of the Corporation's Preferred Stock, to be designated as its
Senior Convertible Preferred Stock.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation (the "Board of Directors") by the Articles of
Incorporation of the Corporation, the Board of Directors hereby establishes a
series of Senior Convertible Preferred Stock of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights and
preferences, of such series of shares as follows:
SENIOR CONVERTIBLE PREFERRED STOCK
Section 1. Designation; Number of Shares. The shares of such series
shall be designated as "Senior Convertible Preferred Stock" (the "Convertible
Preferred Stock"), and the number of authorized shares constituting the
Convertible Preferred Stock shall be 14,000.
Section 2. Par Value; No Cumulative Voting; No Preemptive Rights. The
Convertible Preferred Stock shall have a par value of $0.01 per share. As
provided in Articles IV and V of the Corporation's Articles of Incorporation,
holders of Convertible Preferred Stock shall not be entitled to cumulate their
votes in any election of directors in which they are entitled to vote and,
except as provided in an agreement between the Corporation and any holder of
Convertible Preferred Stock, shall not be entitled to any preemptive rights to
acquire shares of any class or series of capital stock of the Corporation.
Section 3. Rank. The Convertible Preferred Stock shall rank prior to
all of the Corporation's Common Stock, par value $0.01 per share (the "Common
Stock") and other classes of preferred stock now outstanding or hereafter
issued, both as to payment of dividends and as to distributions of assets upon
the liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary.
Section 4. Dividends and Distributions.
(a) Holders of the Convertible Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors, cumulative
dividends at the rate, in the form, at the times and in the manner set forth in
this Section 4. Such dividends shall accrue on any given share from the day of
issuance of such share and shall accrue from day to day whether or not earned or
declared.
(b) The dividend rate on the Convertible Preferred Stock shall
be $75.00 per annum per share; provided that (i) in the event that at any time
during any 730-day period individuals who constituted the Board of Directors at
the beginning of such period, or the First Issuance Date (as defined in Section
7) (whichever is later), cease for any reason to constitute a majority of the
Board of Directors then in office or (ii) the Board of Directors fails to
declare and pay in full, on any Dividend Payment Date (as defined in Section
4(c)), all dividends accrued since the last Dividend Payment Date (or with
respect to the
<PAGE>
first Dividend Payment Date, since the date of issuance), the dividend rate on
the Convertible Preferred Stock shall be increased to $200 per annum per share
unless holders of a majority of the then outstanding shares of Convertible
Preferred Stock agree to waive such increase. Any change of the dividend rate in
accordance with this Section 4(b) shall be deemed to occur on the date upon
which the event in question occurs. In the event the dividend rate is adjusted
in accordance with this Section 4(b), the Corporation shall pay such dividends
in cash.
(c) Dividends shall be payable in arrears, when and as
declared by the Board of Directors on August 1 and February 1 of each year,
commencing February 1, 1999 (each such semiannual payment date, a "Dividend
Payment Date"), except that if any such date is a Saturday, Sunday or legal
holiday then such dividend shall be payable on the first immediately succeeding
calendar day which is not a Saturday, Sunday or legal holiday. Dividends shall
accrue on each share of Convertible Preferred Stock from the date of issuance of
such shares and, after payment of a dividend as required hereunder, from and
after each Dividend Payment Date based on the number of days elapsed and a
365-day year; provided that to the extent that a dividend is not paid in cash or
stock on any Dividend Payment Date as provided in paragraph (d) below such
unpaid amount shall in turn accrue dividends at the rate specified herein until
paid as provided herein. The dividend payable on the first Dividend Payment Date
with respect to any shares of Convertible Preferred Stock shall be the pro rata
portion of the dividend rate based upon the number of days from and including
the date of issuance, up to and including such first Dividend Payment Date and a
365-day year. Each dividend shall be paid to the holders of record of shares of
the Convertible Preferred Stock as they appear on the books of the Corporation
on such record date, not more than sixty (60) days nor fewer than ten (10) days
preceding the respective Dividend Payment Date, as shall be fixed by the Board
of Directors.
(d) Any dividend payment made with respect to the Convertible
Preferred Stock, may be made, at the sole discretion of the Board of Directors,
in cash out of funds legally available for such purpose or (i) in respect of
dividends accruing on the Convertible Preferred Stock on or prior to August 1,
2000, by issuing the number of shares of Convertible Preferred Stock equal to
the amount of the dividend divided by $1,000 and (ii) in respect of dividends
accruing on the Convertible Preferred Stock after August 1, 2000, by issuing a
number of shares of Common Stock equal to the amount of the dividend divided by
the average last sale price of the Common Stock for the five (5) trading days
preceding the dividend payment date (the "Dividend Conversion Price"); provided,
that no fractional shares shall be issued; provided, further, that the
Corporation shall pay dividends in cash to the extent that the issuance of stock
would require shareholder approval pursuant to Section 4460(i) of the Rules of
the NASDAQ Stock Market or any successor rule thereto and such approval has not
been obtained. Any such dividend payment may be made, in the sole discretion of
the Board of Directors, partially in cash and partially in shares of Convertible
Preferred Stock or Common Stock, as applicable, determined in accordance with
the preceding formula; provided, that in the event that any such dividend
payment is made partially in cash and partially in shares of Convertible
Preferred Stock or Common Stock, each holder of Convertible Preferred Stock
shall receive a ratable amount of cash and Convertible Preferred Stock or Common
Stock, as the case may be, that is proportionate to the amount of Convertible
Preferred Stock held by such holder on which such dividend is paid. If any
fractional interest in a share of Convertible Preferred Stock or Common Stock
would be delivered upon any payment of dividends pursuant to this Section 4, the
Corporation, in lieu of delivering the fractional share of Convertible Preferred
Stock or Common Stock shall pay an amount to the holder thereof equal to such
fraction multiplied by $1,000 or equal to the Dividend Conversion Price, as
applicable. All shares of Convertible Preferred Stock and Common Stock issued as
a dividend shall be fully paid and nonassessable.
(e) No dividends or other distributions (other than dividends
payable in Junior Dividend Stock (as defined below)) shall be paid or set apart
for payment on, and no purchase, redemption or other acquisition shall be made
by the Corporation, or any of its subsidiaries, of, any shares of Common Stock
or other capital stock of the Corporation ranking junior as to payment of
dividends on the Convertible Preferred Stock (such Common Stock and other
capital stock being referred to herein collectively as "Junior Dividend Stock");
provided that dividends or other distributions may be paid or set
<PAGE>
apart for payment on any shares of Junior Dividend Stock at such time as less
than 20% of the Denominator Shares (as defined in Section 6(b)) remain
outstanding. Any reference to "distribution" contained in this Section 4 shall
not be deemed to include any distribution made in connection with a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
Section 5. Liquidation Preference. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Convertible Preferred Stock shall be entitled to receive out of
the assets of the Corporation an amount equal to the dividends accumulated and
unpaid thereon to the date of final distribution to such holders, whether or not
declared, without interest, plus a sum equal to $1,000 per share, and no more,
before any payment shall be made or any assets distributed to the holders of
Common Stock or any other capital stock of the Corporation ranking junior as to
liquidation rights to the Convertible Preferred Stock (such Common Stock and
other capital stock being referred to herein collectively as "Junior Liquidation
Stock"). The entire assets of the Corporation available for distribution shall
be distributed ratably among the holders of the Convertible Preferred Stock.
After payment in full of the liquidation preference of the shares of the
Convertible Preferred Stock, the holders of such shares shall not be entitled to
any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities or other property will be deemed a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 5.
Section 6. Ten Year Conversion or Redemption.
(a) On the tenth anniversary (the "Anniversary Date") of the
First Issuance Date (as defined in Section 7), the Corporation, at its election,
shall either require the conversion of all then issued and outstanding shares of
Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock at the Conversion Price (the "Anniversary Conversion") or redeem the then
issued and outstanding shares of Convertible Preferred Stock (the "Redemption")
as provided below.
(b) If the Corporation elects the Anniversary Conversion, the
Corporation shall pay a conversion fee equal to $3,000,000 (the "Conversion
Fee"), subject to adjustment, on a pro rata basis to the holders of the then
issued and outstanding shares of Convertible Preferred Stock. The Corporation
shall pay the Conversion Fee, at the election of the Board of Directors, in (i)
cash or (ii) a number of shares of Common Stock equal to the Conversion Fee
divided by the average last sale price of the Common Stock for the five (5)
trading days immediately preceding the Anniversary Date; provided, however, that
the Corporation shall pay the Conversion Fee in cash to the extent that the
issuance of stock would require shareholder approval pursuant to Section 4460(i)
of the Rules of the NASDAQ Stock Market or any successor rule thereto and such
approval has not been obtained. In the event that the number of shares of
Convertible Preferred Stock issued and outstanding as of the Anniversary Date is
less than the sum of the number of Initial Shares (as defined in Section 7(b)
below) and shares issued as dividends, if any, on the Convertible Preferred
Stock (such sum is hereinafter referred to as the "Denominator Shares") pursuant
to Section 4 hereof, then the Conversion Fee will be adjusted downward to equal
the product of (a) $3,000,000 and (b) the quotient of the number of shares of
Convertible Preferred Stock issued and outstanding as of the Anniversary Date
divided by the Denominator Shares (as adjusted for any stock split, stock
dividend, recapitalization or otherwise). On or after the Anniversary Date, each
holder of Convertible Preferred Stock shall surrender the certificate or
certificates evidencing such shares to the Corporation and the Corporation shall
deliver to such holder (i) a certificate or certificates representing the number
of shares of Common Stock equal to the number of shares of Convertible Preferred
Stock to be converted multiplied by $1,000 divided by the Conversion Price set
forth in the notice to the holder, (ii) the holder's pro rata portion of the
Conversion Fee and (iii) accrued and unpaid dividends in cash or a number of
shares of Common Stock equal to the dividend amount divided by the Conversion
Price. In addition, the following provisions of Section 7 shall be applicable to
the Anniversary Conversion: the second sentence of the second paragraph of
Section 7(a), third paragraph of Section 7(b), Section 7(d) and Section 7(e).
<PAGE>
(c) In the event the Corporation elects a Redemption, the
Corporation shall redeem for cash on the Anniversary Date all issued and
outstanding shares of Convertible Preferred Stock at a price per share equal to
$1,000 plus all accrued and unpaid dividends on such share to the Anniversary
Date (such sum being hereinafter referred to as the "Redemption Price"). On or
after the Anniversary Date, each holder of Convertible Preferred Stock shall
surrender the certificate or certificates evidencing such shares to the
Corporation at the place designated in the notice to the holder and shall
thereupon be entitled to receive payment of the Redemption Price. If, on the
Anniversary Date, funds necessary for the Redemption shall be available therefor
and shall have been irrevocably deposited or set aside, then, notwithstanding
that the certificates evidencing any shares so called for redemption shall not
have been surrendered, on the Anniversary Date, the dividends with respect to
the shares so called shall cease to accrue, such shares shall no longer be
deemed outstanding, the holders thereof shall cease to be shareholders and all
rights whatsoever with respect to such shares (except the right of the holders
thereof to receive the Redemption Price upon surrender of their certificates)
shall terminate.
(d) No more than sixty (60) nor less than twenty (20) days
prior to the Anniversary Date, the Corporation shall deliver notice, by first
class mail, postage prepaid, to each holder of record of the Convertible
Preferred Stock, addressed to such shareholder at its last address as shown on
the stock books of the Corporation. Such notice shall state whether the
Corporation has elected to effect the Anniversary Conversion or the Redemption.
If the Corporation fails to give notice as provided above, the Corporation shall
be deemed to have elected the Redemption. In the event of the Anniversary
Conversion, the notice shall also state that the Anniversary Date is the date
fixed for conversion, the then-effective Conversion Price (as defined in Section
7), whether the Conversion Fee will be paid in cash or shares of Common Stock
and the holder's pro rata portion of such, whether the accumulated and unpaid
dividends to the Anniversary Date will be paid in cash or shares of Common Stock
and that on and after the Anniversary Date, dividends will cease to accumulate
on such shares of Convertible Preferred Stock; provided that there is no default
in the payment of the Conversion Fee. In the event of the Redemption, the notice
shall also state that the Anniversary Date is the date fixed for redemption, the
Redemption Price, the place or places of payment, that the right of holders of
Convertible Preferred Stock to exercise their conversion rights in accordance
with Section 7 shall expire at the close of business on the Anniversary Date
(provided that there is no default in payment of the Redemption Price) and that
payment of the Redemption Price will be made upon presentation and surrender of
certificates representing the Convertible Preferred Stock to the Corporation or
its agent as provided in the notice
Section 7. Conversion.
(a) Holders of Convertible Preferred Stock may, at their
option upon surrender of the certificates therefor, convert any or all of their
shares of Convertible Preferred Stock into fully paid and nonassessable shares
of Common Stock (and such other securities and property as they may be entitled
to, as hereinafter provided) at any time after issuance thereof; provided, that
such conversion right shall expire at the close of business on the date, if any,
fixed for the redemption of Convertible Preferred Stock in any notice of
redemption given pursuant to Section 6 hereof if there is no default in payment
of the Redemption Price. Each share of Convertible Preferred Stock shall be
convertible at the office of any transfer agent for the Convertible Preferred
Stock, and at such other office or offices, if any, as the Board of Directors
may designate, into that number of fully paid and nonassessable shares of Common
Stock (calculated as to each conversion to the nearest whole share) as shall be
equal to $1,000 divided by the Conversion Price (as defined below) in effect at
the time of conversion. The initial Conversion Price will be the lesser of (i)
110% of the average last sale price of the Common Stock for the twenty (20)
trading days immediately prior to July 23, 1998 (the "First Issuance Date") or,
(ii) 110% of the average last sale price of the Common Stock for the twenty (20)
days immediately prior to the date that is ninety (90) days from the First
Issuance Date of the Convertible Preferred Stock, subject to adjustment from
time to time as provided in Section 8 (such conversion rate, as so adjusted from
time to time, being referred to herein as the "Conversion Price"); provided,
that in no event shall the initial Conversion Price (prior to any adjustment
provided in Section 8) be less than $8.50.
<PAGE>
The right of holders of Convertible Preferred Stock to convert
their shares shall be exercised by surrendering for such purpose to the
Corporation or its agent, as provided above, certificates representing shares to
be converted, duly endorsed in blank or accompanied by proper instruments of
transfer. The Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of Common
Stock or other securities or property upon conversion of Convertible Preferred
Stock in a name other than that of the holder of the shares of Convertible
Preferred Stock being converted, nor shall the Corporation be required to issue
or deliver any such shares or other securities or property unless and until the
person or persons requesting the issuance thereof shall have paid to the
Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(b) In the event the Common Stock trades above $40 per share
for ninety (90) consecutive trading days and the average daily reported volume
in trading for the Common Stock on all national securities exchanges and/or
reported through the automated quotation system of a registered securities
association for any twenty (20) consecutive trading days during such 90-day
period exceeds 10% of the number of shares of Common Stock into which the sum of
the number of shares of Convertible Preferred Stock issued on the First Issuance
Date and the additional shares of Convertible Preferred Stock issued to such
holders within one hundred twenty (120) days after the First Issuance Date (the
"Initial Shares") could be converted, adjusted to eliminate the effect of any
reporting of both the buy and sell side of any trade, the Corporation may, by
notice to the holders thereof, within thirty (30) days after such 90-day period,
elect to require the conversion of all the shares of Convertible Preferred Stock
then outstanding into fully paid and nonassessable shares of Common Stock at the
applicable Conversion Price.
Such notice shall be delivered by first class mail, postage
prepaid, shall be given to the holders of record of the Convertible Preferred
Stock to be converted, addressed to such shareholders at their last addresses as
shown on the stock books of the Corporation. Each such notice of conversion
shall specify the date fixed for conversion; the then-effective Conversion
Price; that accumulated but unpaid dividends to the date fixed for conversion
will be paid, at the election of the Board of Directors, in cash or in a number
of shares of Common Stock equal to the dividend amount divided by the Conversion
Price on the date fixed for conversion (which shall be within thirty (30) days
of the notice); and that on and after the conversion date, dividends will cease
to accumulate on such shares.
Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not a holder of the
Convertible Preferred Stock receives such notice; and failure so to give such
notice, or any defect in such notice, to the holders of any shares designated
for conversion shall not affect the validity of the proceedings for the
conversion of any other shares of Convertible Preferred Stock.
(c) A number of shares of the authorized but unissued Common
Stock sufficient to provide for the conversion of the Convertible Preferred
Stock outstanding upon the basis hereinbefore provided shall at all times be
reserved by the Corporation, free from preemptive rights, for such conversion,
subject to the provisions of the next paragraph. If the Corporation shall issue
any securities or make any change in its capital structure which would change
the number of shares of Common Stock into which each share of the Convertible
Preferred Stock shall be convertible as herein provided, the Corporation shall
at the same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Convertible Preferred Stock
on the new basis. The Corporation shall comply with all securities laws
regulating the offer and delivery of shares of Common Stock upon conversion of
the Convertible Preferred Stock and shall use its best efforts to list such
shares on each national securities exchange on which the Common Stock is listed
or to have such shares admitted for quotation on the NASDAQ National Market
System if the Common Stock is admitted for quotation thereon.
(d) Upon the surrender of certificates representing shares of
Convertible Preferred Stock to be converted, duly endorsed or accompanied by
proper instruments of transfer as provided above,
<PAGE>
the person converting such shares shall be deemed to be the holder of record of
the Common Stock issuable upon such conversion, and all rights with respect to
the shares surrendered shall forthwith terminate except the right to receive the
Common Stock or other securities, cash or other assets as herein provided.
(e) No fractional shares of Common Stock shall be issued upon
conversion of Convertible Preferred Stock but, in lieu of any fraction of a
share of Common Stock which would otherwise be issuable in respect of the
aggregate number of such shares surrendered for conversion at one time by the
same holder, the Corporation shall pay in cash an amount equal to the product of
(a)the Closing Price of a share of Common Stock (as defined in the next
sentence) on the last trading day before the conversion date and (b)such
fraction of a share. The "Closing Price" for each day shall be the last reported
sale price or, in case no sale takes place on such day, the average of the
closing bid and asked price on such day, in either case as reported on the New
York Stock Exchange Composite Tape, or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, on the NASDAQ National Market System, or, if the Common Stock is not
admitted for quotation on the NASDAQ National Market System, the average of the
high bid and low asked prices on such day as recorded by the National
Association of Securities Dealers, Inc. through NASDAQ, or, if the National
Association of Securities Dealers, Inc. through NASDAQ shall not have reported
any bid and asked prices for the Common Stock on such day, the average of the
bid and asked prices for such day as furnished by any New York Stock Exchange
member firm selected from time to time by the Corporation for such purpose, or,
if no such bid and asked prices can be obtained from any such firm, the fair
market value of one share of the Common Stock on such day as determined in good
faith by the Board of Directors of the Corporation.
Section 8. Adjustments to Conversion Price. Notwithstanding anything in
this Section 8 to the contrary, no change in the Conversion Price shall be made
until the cumulative effect of the adjustments called for by this Section8 since
the date of the last change in the Conversion Price would change the Conversion
Price by more than 1%. However, once the cumulative effect would result in such
a change, then the Conversion Price shall be changed to reflect all adjustments
called for by this Section8 and not previously made. Additionally, there shall
be no adjustment in the Conversion Price as a result of any issue or sale (or
deemed issue or sale) of (i)(A)shares of Common Stock that may be issued after
the First Issuance Date to Chronimed, Inc. pursuant to the terms of the
Termination Agreement between the Corporation and Chronimed, Inc., (B) shares of
Common Stock that may be issued upon exercise of stock options that are
outstanding on the First Issuance Date (as such number of shares is
proportionately adjusted for subsequent stock splits, combinations of shares and
stock dividends affecting the Common Stock), in each case pursuant to the terms
thereof as in effect on the First Issuance Date, and (C) stock options and
shares of Common Stock issuable upon exercise of such options granted to
employees and directors of the Corporation and its Subsidiaries pursuant to the
terms of stock option plans approved by the Corporation's Board of Directors if
such options are exercisable at the market price on the date of grant; provided
that the aggregate number of shares of Common Stock issued, or issuable,
pursuant to this clause (i) shall not exceed two million shares, (ii) Common
Stock upon the exercise of warrants that, as of June 30, 1998, entitled holders
to purchase an aggregate of 213,255 shares of Common Stock (which warrants were
originally issued on May 19, 1995 to R.J. Steichen & Company and a portion of
which were subsequently assigned to employees and affiliates of R.J. Steichen &
Company), (iii) Common Stock upon the conversion or exchange of the Preferred
Stock or (iv) securities pursuant to any public offering of the Company's
securities registered under the Securities Act (collectively referred to as
"Permitted Issuances"). Subject to the foregoing, the Conversion Price shall be
adjusted from time to pursuant to Section 8(a).
(a) If and whenever, on or after the First Issuance Date, the
Corporation issues or sells, or in accordance with this Section 8(a) is deemed
to have issued or sold, any shares of its Common Stock for consideration per
share less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then, unless such issuance or sale was a Permitted Issuance,
immediately upon such
<PAGE>
issue or sale or deemed issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (1) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale by the number of shares of Common Stock deemed outstanding
immediately prior to such issue or sale, plus (2) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock deemed outstanding immediately after such issue or sale.
(i) Issuance of Rights or Options. If the Corporation
in any manner grants or sells any options and the price per share for which
Common Stock is issuable upon the exercise of such options, or upon conversion
or exchange of any convertible securities issuable upon exercise of such
options, is less than the Conversion Price in effect immediately prior to the
time of the granting or sale of such options, then, unless such issuance or sale
was a Permitted Issuance, the total maximum number of shares of Common Stock
issuable upon the exercise of such options or upon conversion or exchange of the
total maximum amount of such convertible securities issuable upon the exercise
of such options shall be deemed to be outstanding and to have been issued and
sold by the Corporation at the time of the granting or sale of such options for
such price per share. For purposes of this paragraph, the "price per share for
which Common Stock is issuable" shall be determined by dividing (i) the total
amount, if any, received or receivable by the Corporation as consideration for
the granting or sale of such options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon exercise of all such
options, plus in the case of such options which relate to convertible
securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance or sale of such convertible
securities and the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the exercise of such options or
upon the conversion or exchange of all such convertible securities issuable upon
the exercise of such options. No further adjustment of the Conversion Price
shall be made when convertible securities are actually issued upon the exercise
of such options or when Common Stock is actually issued upon the exercise of
such options or the conversion or exchange of such convertible securities.
(ii) Issuance of Convertible Securities. If the Corporation in any
manner issues or sells any convertible securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then, unless such issuance or sale is a Permitted Issuance, the maximum
number of shares of Common Stock issuable upon conversion or exchange of such
convertible securities shall be deemed to be outstanding and to have been issued
and sold by the Corporation at the time of the issuance or sale of such
convertible securities for such price per share. For the purposes of this
paragraph, the "price per share for which Common Stock is issuable" shall be
determined by dividing (i) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such convertible
securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (ii)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such convertible securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such convertible securities, and if any such issue or
sale of such convertible securities is made upon exercise of any options for
which adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 8(a) no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If
the purchase price provided for in any options, the additional consideration, if
any, payable upon the conversion or exchange of any convertible securities or
the rate at which any convertible securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such options
or convertible securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; provided that in no event shall the
Conversion Price be adjusted to a price higher than the Conversion Price
<PAGE>
in effect prior to any actions described in this Section 8(a)(iii). For purposes
of this Section 8(a)(iii) if the terms of any option or convertible security
which was outstanding as of the First Issuance Date are changed in the manner
described in the immediately preceding sentence, then such option or convertible
security and the Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
change and no such change shall cause the Conversion Price hereunder to be
increased.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. Upon the expiration of any option or the termination of
any right to convert or exchange any convertible security without the exercise
of any such option or right, the Conversion Price then in effect hereunder shall
be adjusted immediately to the Conversion Price which would have been in effect
at the time of such expiration or termination had such option or convertible
security, to the extent outstanding immediately prior to such expiration or
termination, never been issued. For purposes of this Section 8(a) the expiration
or termination of any option or convertible security which was outstanding as of
the First Issuance Date shall not cause the Conversion Price hereunder to be
adjusted unless, and only to the extent that, a change in the terms of such
option or convertible security caused it to be deemed to have been issued after
the First Issuance Date. For purposes of this Section 8(a)(iv) if the terms of
any expired option or termination of any right to convert or exchange any
convertible security which was outstanding as of the First Issuance Date are
changed in the manner described in Section 8(a)(iii), then such option or
convertible security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change and no such change shall cause the Conversion Price
hereunder to be increased.
(v) Calculation of Consideration Received. If any
Common Stock, option or convertible security is issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Corporation therefor (net of discounts,
commissions and related expenses). If any Common Stock, option or convertible
security is issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the fair market price (calculated to be the average Closing
Price for the twenty (20) trading days immediately prior to the date of sale of
the securities described in the first sentence of this Section 8(a)(v)) thereof
as of the date of receipt. If any Common Stock, option or convertible Security
is issued to the owners of the non-surviving entity in connection with any
merger in which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, option or convertible security, as the case may be. The fair
value of any consideration other than cash and securities shall be determined
jointly by the Corporation and the holders of a majority of the outstanding
Convertible Preferred Stock. If such parties are unable to reach agreement
within a reasonable period of time, the fair value of such consideration shall
be determined by an independent appraiser experienced in valuing such type of
consideration jointly selected by the Corporation and the holders of a majority
of the outstanding Convertible Preferred Stock. The determination of such
appraiser shall be final and binding upon the parties, and the fees and expenses
of such appraiser shall be borne by the Corporation.
(vi) Integrated Transactions. In case any option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such option by the parties thereto, the option
shall be deemed to have been issued for a consideration of $.00.
(vii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
<PAGE>
(viii) Record Date. If the Corporation takes a record
of the holders of Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, options or in
convertible securities or (ii) to subscribe for or purchase Common Stock,
options or convertible securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or upon the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(b) Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision, or any applicable record date shall be
proportionally reduced, and if the Corporation at any time combines (by reverse
stock split or otherwise) one or more classes of its outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination or any applicable record date shall be
proportionately increased.
(c) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reclassification, consolidation, merger, sale of all
or substantially all of the Corporation's assets or other transaction, in each
case which is effected in such a manner that the holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock, is
referred to herein as an "Organic Change." Prior to the consummation of any
Organic Change, the Corporation shall make appropriate provisions (in form and
substance satisfactory to the holders of a majority of the Convertible Preferred
Stock then outstanding) to insure that each of the holders of Convertible
Preferred Stock shall thereafter have the right to acquire and receive, in lieu
of or in addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Convertible Preferred Stock, such shares of stock, securities or assets as such
holder would have received in connection with such Organic Change if such holder
had converted its Convertible Preferred Stock immediately prior to such Organic
Change, or any applicable record date thereon. In each such case, the
Corporation shall also make appropriate provisions (in form and substance
satisfactory to the holders of a majority of the Convertible Preferred Stock
then outstanding) to insure that the provisions of this Section 8 shall
thereafter be applicable to the Convertible Preferred Stock (including, in the
case of any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Corporation an immediate adjustment of the
Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Common Stock acquirable and receivable upon conversion
of Convertible Preferred Stock, if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation, merger or
sale). The Corporation shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor entity (if other than
the Corporation) resulting from consolidation or merger or the entity purchasing
such assets assumes by written instrument (in form and substance reasonably
satisfactory to the holders of a majority of the Convertible Preferred Stock
then outstanding), the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.
(d) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 8 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Corporation's Board of Directors shall make an appropriate adjustment
in the Conversion Price so as to protect the rights of the holders of
Convertible Preferred Stock; provided that no such adjustment shall increase the
Conversion Price as otherwise determined pursuant to this Section 8 or decrease
the number of shares of Common Stock issuable upon conversion of each share of
Convertible Preferred Stock.
(e) Notices.
<PAGE>
(i) Promptly after any adjustment of the Conversion
Price, the Corporation shall give written notice thereof to all holders of
Convertible Preferred Stock, setting forth in reasonable detail and certifying
the calculation of such adjustment.
(ii) The Corporation shall give written notice to all
holders of Convertible Preferred Stock at least twenty (20) days prior to the
date on which the Corporation closes its books or takes a record (a) with
respect to any dividend or distribution upon Common Stock, (b) with respect to
any pro rata subscription offer to holders of Common Stock or (c) for
determining rights to vote with respect to any Organic Change, dissolution or
liquidation.
(iii) The Corporation shall also give written notice
to the holders of Convertible Preferred Stock at least twenty (20) days prior to
the date on which any Organic Change shall take place.
Section 9. Convertible Preferred Stock Not Redeemable at Option of
Holders or Exchangeable; No Sinking Fund. The Convertible Preferred Stock shall
not be redeemable upon the request of holders thereof or exchangeable for other
capital stock (except for Common Stock upon conversion as provided herein) or
indebtedness of the Corporation or other property. The Convertible Preferred
Stock shall not be subject to the operation of a purchase, retirement or sinking
fund.
Section 10. Voting Rights. So long as 20% of the Initial Shares remain
outstanding, the holders of a majority of the Convertible Preferred Stock,
voting separately as a single class in the election of directors of the
Corporation, to the exclusion of all other classes of the Corporation's capital
stock and with each share of Convertible Preferred Stock entitled to one vote,
shall be entitled to elect one (1) director (the "Preferred Stock
Representative") to serve on the Corporation's Board of Directors until his
successor is duly elected by holders of a majority of the Convertible Preferred
Stock or he is removed from office by holders of a majority of the Convertible
Preferred Stock. If the holders of a majority of the Convertible Preferred Stock
for any reason fail to elect anyone to fill such directorship, such position
shall remain vacant until such time as the holders of a majority of the
Convertible Preferred Stock elect a director to fill such position and shall not
be filled by resolution or vote of the Corporation's Board of Directors or the
Corporation's other stockholders.
The holders of the Convertible Preferred Stock shall vote separately as
a single class, and approval of holders of a majority of the outstanding shares
of Convertible Preferred Stock shall be required, whenever a shareholder vote is
required pursuant to Section 302A.671 of the Minnesota Business Corporation Act,
or any successor provision thereto, for the purpose of according voting rights
with respect to shares acquired or to be acquired in a control share acquisition
(as defined in Section 302A.011 Subdivision 38 of the Minnesota Business
Corporation Act).
The holders of the Convertible Preferred Stock shall be entitled to
notice of all stockholders' meetings in accordance with the Corporation's
bylaws, and except in the election of directors and as otherwise provided
herein, the holders of the Convertible Preferred Stock shall be entitled to vote
on all matters submitted to the stockholders for a vote together with the
holders of the Common Stock voting together as a single class with each share of
Common Stock entitled to one vote per share and each share of Convertible
Preferred Stock entitled to one vote for each share of Common Stock issuable
upon conversion of the Convertible Preferred Stock as of the record date for
such vote or, if no record date is specified, as of the date of such vote.
Section 11. Certain Actions Not to be Taken Without Vote of Holders of
Convertible Preferred Stock. So long as the Convertible Preferred Stock is
outstanding, the Corporation shall not, without first obtaining the affirmative
vote or written consent of holders of a majority of the then issued and
outstanding shares of Convertible Preferred Stock, voting as a single class:
<PAGE>
(a) amend, repeal, modify or supplement any provision of the
Articles of Incorporation, the Bylaws of the Corporation as in effect on July
23, 1998, or any successor bylaws or this Certificate of Designation if such
amendment, repeal, modification or supplement in any way adversely affects the
powers, designations, preferences or other rights of the Convertible Preferred
Stock;
(b) authorize or effect any recapitalization or reverse stock
split of the Corporation or any other action which in any way adversely affects
the powers, designations, preferences or other rights of the Convertible
Preferred Stock;
(c) authorize or effect, in a single transaction or through a
series of related transactions, a liquidation, winding up or dissolution of the
Corporation or adoption of any plan for the same;
(d) declare or pay or set aside for payment any cash dividend
or cash distribution or other payment upon the Junior Dividend Stock, nor
redeem, purchase or otherwise acquire any Junior Dividend Stock for any
consideration other than the redemption of Common Stock from employees of the
Corporation pursuant to a stock option plan approved by the Corporation's Board
of Directors; provided that dividends or other distributions may be paid or set
apart for payment on any shares of Junior Dividend Stock at such time as less
than 20% of the Denominator Shares remain outstanding;
(e) authorize or permit the Corporation or any subsidiary of
the Corporation to issue any equity securities except for Permitted Issuances
and payment of dividends as provided in Section 4 above;
(f) incur any indebtedness unless after giving effect to the
additional indebtedness the aggregate indebtedness of the Corporation and its
subsidiaries outstanding as of the date of such incurrence (the "Determination
Date"), excluding financing that is secured by accounts receivable but not by
the Corporation's intellectual property licenses or other intellectual property
rights, does not exceed two and one-half times EBITDA of the Corporation and its
subsidiaries for the twelve month period immediately prior to the Determination
Date for which there are quarterly financial statements available. For purposes
of this Section 11, EBITDA shall mean the sum of (i) net income, (ii) interest
expense (iii) depreciation and amortization of the Corporation and its
subsidiaries and other non-cash items properly deducted in determining net
income and (iv) federal, state and local income taxes, computed and calculated
in accordance with generally accepted accounting principles;
(g) authorize or effect in a single transaction or through a
series of related transactions, the consolidation of the Corporation with, or
merger of the Corporation with or into, another person or sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the Corporation's assets to any person, or the consolidation or merger of any
other person with or into the Corporation; or
(h) authorize or permit the Corporation to enter into any
transaction with an affiliate (as defined in Rule 405 promulgated under the
Securities Act of 1933, as amended) of the Corporation or any officer or
director of the Corporation other than in his capacity as an officer or director
unless such transaction was approved by a majority of disinterested members of
the Board of Directors, including the Preferred Stock Representative.
Section 12. Outstanding Shares. For purposes of this Certificate of
Designations, all shares of Convertible Preferred Stock shall be deemed
outstanding except for (a) shares of Convertible Preferred Stock held of record
or beneficially by the Corporation or any subsidiary of the Corporation; (b)
from the date of surrender of certificates representing Convertible Preferred
Stock for conversion pursuant to Section 7, all shares of Convertible Preferred
Stock which have been converted into Common Stock or other securities or
property pursuant to Section 7; and (c) from the date fixed for redemption
pursuant to Section 6, all shares of Convertible Preferred Stock which have been
called for redemption, provided that
<PAGE>
funds necessary for such redemption are available therefor and have been
irrevocably deposited or set aside for such purpose.
Section 13. Status of Convertible Preferred Stock Upon Retirement.
Shares of Convertible Preferred Stock which are acquired or redeemed by the
Corporation or converted pursuant to Section 7 shall return to the status of
authorized and unissued shares of Preferred Stock of the Corporation without
designation as to series. Upon the acquisition or redemption by the Corporation
or conversion pursuant to Section 7 of all outstanding shares of Convertible
Preferred stock, all provisions of this Certificate of Designation shall cease
to be of further effect. Upon the occurrence of such event, the Board of
Directors of the Corporation shall have the power, pursuant to Minnesota
Statutes, Section 302A.135, Subd. 5 or any successor provision and without
shareholder action, to cause restated articles of incorporation of the
Corporation or other appropriate documents to be prepared and filed with the
Secretary of State of the State of Minnesota which reflect such removal of all
provisions relating to the Convertible Preferred Stock and/or the cancellation
of this Certificate of Designations.
IN WITNESS WHEREOF, Orphan Medical, Inc. has caused this certificate to
be signed by John Howell Bullion, it Chief Executive Officer, this 23rd day of
July, 1998.
ORPHAN MEDICAL, INC.
By
John Howell Bullion
Chief Executive Officer
EXHIBIT 10.47
Loan Agreement
Borrower: ORPHAN MEDICAL, INC. Lender: RIVERSIDE BANK
13911 RIDGEDALE DRIVE MINNESOTA CENTER OFFICE
MINNETONKA, MN 55305 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
THIS LOAN AGREEMENT between ORPHAN MEDICAL, INC. ("Borrower") and RIVERSIDE BANK
("Lender") is made and executed on the following terms and conditions. Borrower
has received prior commercial loans from Lender or has applied to Lender for a
commercial loan or loans and other financial accommodations, Including those
which may be described on any exhibit or schedule attached to this Agreement.
All such loans and financial accommodations, together with all future loans and
financial accommodations from Lender to Borrower, are referred to In this
Agreement Individually as the "Loan" and collectively as the "Loans." Borrower
understands and agrees that: (a) In granting, renewing, or extending any Loan,
Lender Is relying upon Borrower's representations, warranties, and agreements,
as set forth in this Agreement; (b) the granting, renewing, or extending of any
Loan by Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 15, 1998, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or other
right to payment for goods sold or services rendered owing to Borrower (or to a
third party grantor acceptable to Lender).
Account Debtor. The words Account Debtor" mean the person or entity obligated
upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means ORPHAN MEDICAL, INC.. The word "Borrowers
also includes, as applicable, all subsidiaries and affiliates of Borrower as
provided below in the paragraph titled "Subsidiaries and Affiliates".
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from
time to time, the lesser of (a) S500,000.00; or (b) 75.000% of the aggregate
amount of Eligible Accounts.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chapel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise.
<PAGE>
The word "Collateral" includes without limitation all collateral described below
in the section titled "COLLATERAL".
Eligible Accounts. The words "Eligible Accounts mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may borrow
shall exclude all returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an employee
or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of, or
affiliated with or related to Borrower or its shareholders, officers, or
directors.
(c) Accounts with respect to which goods are placed on consignment, guaranteed
sale, or other terms by reason of which the payment by the Account Debtor may be
conditional.
(d) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or delivered,
or the services have not been rendered, to the Account Debtor.
(g) Accounts with respect to which Lender, in its sole discretion, deems the
creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed against it a
petition in bankruptcy or an application for relief under any provision of any
state or federal bankruptcy insolvency, or debtor-in-relief acts; or who has had
appointed a trustee, custodian, or receiver for assets of such Account Debtor;
or who has made an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its payrolls) as such
debts become due.
(i) Accounts with respect to which the Account Debtor is the United States
government or any department or agency of the United States.
(j) Accounts which have not been paid in full within 90 Days from the invoice
date.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT".
Expiration Date. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entities granting a Security Interest in any Collateral for
the Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
any Indebtedness.
<PAGE>
Indebtedness. The word "Indebtedness" means and includes without limitation all
Loans, together with all other obligations, debts and liabilities of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower, or any one or more of them; whether now or hereafter voluntary or
involuntary, due or not due, absolute or contingent, liquidated or unliquidated;
whether Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery
upon such Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
Lender. The word "Lender" means RIVERSIDE BANK, its successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility described in
the Section titled "LINE OF CREDIT" below.
Loan. The word "Loan" or "Loans" means and includes without limitation any and
all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note or
notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or
title retention contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of
1986 as now or hereafter amended.
<PAGE>
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any Advance to
or for the account of Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments, opinions, reports, and
other items required under this Agreement to be in form and substance
satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all Related
Documents have been duly authorized, executed, and delivered by Borrower to
Lender.
(b) Lender shall have received such opinions of counsel, supplemental opinions,
and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly authorized,
created, and perfected with first lien priority and shall be in full force and
effect.
(d) All guaranties required by Lender for the Line of Credit shall have been
executed by each Guarantor, delivered to Lender, and be in full force and
effect.
(e) Lender, at its option and for its sole benefit, shall have conducted an
audit of Borrower's Accounts, books, records, and operations, and Lender shall
be satisfied as to their condition.
(f) Borrower shall have paid to Lender all tees, costs, and expenses specified
in this Agreement and the Related Documents as are then due and payable.
(g) There shall not exist at the time of any Advance a condition which would
constitute an Event of Default under this Agreement.
Making Loan Advances. Advances under the credit facility, as well as directions
for payment from Borrower's accounts, may be requested orally or in writing by
authorized persons. Lender may, but need not, require that all oral requests be
confirmed in writing. Each Advance shall be conclusively deemed to have been
made at the request of and for the benefit of Borrower (a) when credited to any
deposit account of Borrower maintained with Lender or (b) when advanced in
accordance with the instructions of an authorized person. Lender, at its option,
may set a cutoff time, after which all requests for Advances will be treated as
having been requested on the next Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of the
outstanding Advances shall exceed the applicable Borrowing Base, Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all Advances then
outstanding and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in which
Lender shall make entries for each Advance and such other debits and credits as
shall be appropriate in connection with the credit facility. Lender shall
provide Borrower with periodic statements of Borrower's account, which
statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30) days
after Borrower's receipt of any such statement which Borrower deems to be
incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts and general intangibles. Lender's
Security Interests in the Collateral shall be continuing liens and shall include
the proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral.
Borrower agrees and represents and warrants to Lender:
<PAGE>
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral. Upon request of
Lender, Borrower will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Borrower will note Lender's interest upon
any and all chattel paper it not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower will execute one
or more UCC financing statements and any similar statements as may be required
by applicable law, and will file such financing statements and all such similar
statements in the appropriate location or locations. Borrower hereby appoints
Lender as its irrevocable attorney-in-tact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest. Lender may
at any time, and without further authorization from Borrower, tile a carbon,
photograph, facsimile, or other reproduction of any financing statement for use
as a financing statement. Borrower will reimburse Lender for all expenses for
the perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of any
change in Borrower's name including any change to the assumed business names of
Borrower. Borrower also promptly will notify Lender of any change in Borrower's
Social Security Number or Employer Identification Number. Borrower further
agrees to notify Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge or consolidate
with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall, keep
correct and accurate records of the Collateral, all of which records shall be
available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees to
keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts
and Eligible Accounts, in form and substance satisfactory to the Lender.
Thereafter Borrower shall execute and deliver to Lender such supplemental
schedules of Eligible Accounts and such other matters and information relating
to Borrower's Accounts as Lender may request. Supplemental schedules shall be
delivered according to the following schedule: BORROWER SHALL PROVIDE LENDER
WITH BORROWING BASE CERTIFICATE DUE MONTHLY.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this Agreement
conforms to the requirements of the definition of an Eligible Account; (b) All
Account information listed on schedules delivered to Lender will be true and
correct, subject to immaterial variance; and (c) Lender, its assigns, or agents
shall have the right at any time and at Borrower's expense to inspect, examine,
and audit Borrower's records and to confirm with Account Debtors the accuracy of
such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Minnesota and is
validly existing and in good standing in all states in which Borrower is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently proposes
to engage. Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would have a
material adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by
<PAGE>
all necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any provision
of its articles of incorporation or organization, or bylaws, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental regulation,
court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal name,
and Borrower has not used, or tiled a financing statement under, any other name
for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance"
"disposal," "release," and "threatened release" as used in this Agreement, shall
have the same meanings as set forth in the "CERCLA," "SARA" the Hazardous
Materials Transportation Act, jig U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. Except as disclosed to and acknowledged by Lender in writing,
Borrower represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any hazardous
waste or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) or should have been known to Borrower. The
provisions of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration of
this Agreement and shall not be affected by Lender's acquisition of any interest
in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that
<PAGE>
would be prior or that may in any way be superior to Lender's Security Interests
and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the Related
Documents are binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance with
their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may have
any liability complies in all material respects with all applicable requirements
of law and regulations, and (i) no Reportable Event nor Prohibited Transaction
(as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower
has not withdrawn from any such plan or initiated steps to do so, (iii) no steps
have been taken to terminate any such plan, and (iv) there are no unfunded
liabilities other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 13911 RIDGEDALE DRIVE, MINNETONKA, MN 55305. Unless
Borrower has designated otherwise in writing this location is also the office or
offices where Borrower keeps its records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith furnished
by Borrower to Lender for the purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all information hereafter
furnished by or on behalf of Borrower to Lender will be true and accurate in
every material respect on the date as of which such information is dated or
certified; and none of such information is or will be incomplete by omitting to
state any material fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees that
Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until such time
as Borrower's Indebtedness shall be paid in full, or until this Agreement shall
be terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Deposit Accounts. Maintain with Lender compensating balances of available
collected funds, with an average monthly balance, in an amount not less than
$250,000.00.
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in accordance with generally
accepted accounting principles, applied on a consistent basis, and permit Lender
to examine and audit Borrower's books and records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no event
later than ninety (90) days aver the end of each fiscal year, Borrower's balance
sheet and income statement for the year ended, audited
<PAGE>
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of each
month, Borrower's balance sheet and profit and loss statement for the period
ended, prepared and certified as correct to the best knowledge and belief by
Borrower's chief financial officer or other officer or person acceptable to
Lender. All financial reports required to be provided under this Agreement shall
be prepared in accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as Lender may request
from time to time. Additional information shall be delivered according to the
following schedule: BORROWER TO MAINTAIN MINIMUM DEPOSIT RELATIONSHIP IN ITS
RIVERSIDE ACCOUNT, OR ACCOUNTS WHICH RIVERSIDE CONTROLS, OF $250,000 AT ALL
TIMES.
Insurance. Maintain tire and other risk insurance, public liability insurance,
and such other insurance as Lender may require with respect to Borrower's
properties and operations, in form, amounts, coverages and with insurance
companies reasonably acceptable to Lender. Borrower, upon request of Lender,
will deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days prior written
notice to Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by
any act, omission or default of Borrower or any other person. In connection with
all policies covering assets in which Lender holds or is offered a security
interest for the Loans Borrower will provide Lender with such loss payable or
other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current market values on the basis of which insurance has
been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any other
such agreements.
Loan Fees and Charges. In addition to all other agreed upon fees and charges,
pay the following: $3,750.00.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and
obligations, including without limitation all assessments taxes, governmental
charges, levies and liens, of every kind and nature, imposed upon Borrower or
its properties, income, or profits, prior to the date on which penalties would
attach, and all lawful claims that, if unpaid, might become a lien or charge
upon any of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same shall be
contested in good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies liens and
claims and will authorize the
<PAGE>
appropriate governmental official to deliver to Lender at any time a written
statement of any assessments, taxes, charges, levies, liens and claims against
Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender tree access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
Environmental Compliance and Reports. Borrower shall comply in all respects with
all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, leper or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal course
of business and indebtedness to Lender contemplated by this Agreement, create,
incur or assume indebtedness for borrowed money, including capital leases (b)
except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets, or
(c) sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default
<PAGE>
has occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise or
entity, or (c) incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. It Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
tiles a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other accounts. including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT
Default on Indebtedness. Failure of Borrower to make any payment when due on the
Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to perform
when due any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material respect at the time
made or furnished, or becomes false or misleading at any time thereafter.
Detective Collateralization. This Agreement or any of Related Documents ceases
to be in full force and effect (including failure of any Security Agreement to
create a valid and perfected Security Interest) at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor
<PAGE>
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or of
any of Borrower's deposit accounts with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Borrower or Grantor, as the
case may be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives
Lender written notice of the creditor or forfeiture proceeding and furnishes
reserves or a surety bond for the creditor or forfeiture proceeding satisfactory
to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is curable
and if Borrower or Grantor, as the case may be, has not been given a notice of a
similar default within the preceding twelve (12) months, it may be cured (and no
Event of Default will have occurred) if Borrower or Grantor, as the case may be,
after receiving written notice from Lender demanding cure of such default: (a)
cures the default within fifteen (15) days; or (b) it the cure requires more
than fifteen (15) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Minnesota. If there Is a lawsuit Borrower agrees upon
Lender's request to submit to the jurisdiction of the
<PAGE>
courts of HENNEPIN County, the State of Minnesota. This Agreement shall be
governed by and construed in accordance with the laws of the State of Minnesota.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will have
all the rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or against
any purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest in
the Loans. Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal claims or
defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys" fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post1udgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefascimile (unless otherwise required by law) and
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United states mail, first
class, postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties, specifying
that the notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any Borrower will
constitute notice to all Borrowers. For notice purposes, Borrower will keep
Lender informed at all times of Borrowers current address(es)
Severability. If such court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision shall
be deemed to be modified to be within the limits of enforceability or validity;
however, if offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall remain valid
and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower" as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
<PAGE>
Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any of Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY 15,1998.
BORROWER:
ORPHAN MEDICINE INC.
By:
-----------------------------
JOHN H. BULLION, CEO
LENDER:
RIVERSIDE BANK
By:
-----------------------------
Authorized Officer
EXHIBIT 10.47
PROMISSORY NOTE
Borrower: ORPHAN MEDICAL, INC. Lender: RIVERSIDE BANK
13911 RIDGEDALE DRIVE MINNESOTA CENTER OFFICE
MINNETONKA, MN 55305 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
Principal Amount: $500,000.00
Initial Rate: 9.000%
Date of Note: May 15,1998
PROMISE TO PAY. ORPHAN MEDICAL, INC. ("Borrower") promises to pay to RIVERSIDE
BANK ("Lender"), or order, In lawful money of the United States of America, the
principal amount of Five Hundred Thousand & 001100 Dollars ($500,000.00) or so
much as may be outstanding, together with Interest on the unpaid outstanding
principal balance of each advance. Interest shall be calculated from the date of
each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid Interest on May 15, 1999. in addition, Borrower will pay
regular monthly payments of accrued unpaid Interest beginning June 15, 1998, and
all subsequent interest payments are due on the same day of each month after
that. The annual interest rate for this Note is computed on a 365/360 basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the PRIME RATE OF
INTEREST AS PUBLISHED EACH BUSINESS DAY IN THE MONEY RATES SECTION OF THE WALL
STREET JOURNAL (the"Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans. If the Index becomes unavailable during the term
of this loan, Lender may designate a substitute index after notice to Borrower.
Lender will tell Borrower the current index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each DAY. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.500 percentage points over
the Index, resulting in an Initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to
<PAGE>
comply with or to perform when due any other term, obligation, covenant, or
condition contained in this Note or any agreement related to this Note, or in
any other agreement or loan Borrower has with Lender. (c) Any representation or
statement made or furnished to Lender by Borrower or on Borrower's behalf is
false or misleading in any material respect either now or at the time made or
furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes an assignment for the benefit of
creditors, cr any proceeding is commenced either by Borrower or against Borrower
under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender. (I) Any
guarantor dies or any of the other events described in this default section
occurs with respect to any guarantor of this Note. (g) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired. (h) Lender in good faith
deems itself insecure.if any default, other than a default in payment, is
curable and if Borrower has not been given a notice of a breach of the same
provision of this Note within the preceding twelve (12) months, it may be cured
(and no event of default will have occurred) if Borrower, after receiving
written notice from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole discretion
to be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Note has been delivered to
Lender and accepted by Lender In the State of Minnesota. If there Is a lawsuit,
Borrower agrees upon Lender's request to submIt to the jurisdiction of the
courts of HENNEPIN County, the State of Minnesota. ThIs Note shall be governed
by and construed In accordance with the laws of the State of Minnesota.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account). including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in ihe future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permihed by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by ALL CORPORATE ASSETS PER COMMERCIAL SECURITY
AGREEMENT DATED MAY 15,1998.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if:
(a) Borrower or any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note;
<PAGE>
(b) Borrower or any guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or ctherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower
has applied funds provided pursuant to this Note for purposes other than those
authorized by Lender; or (e) Lender in good faith deems itself insecure under
this Note or any other agreement between Lender and Borrower.
LOAN AGREEMENT. AN EXHIBIT, TITLED "LOAN AGREEMENT," IS ATTACHED TO THIS NOTE
AND BY THIS REFERENCE IS MADE A PART OF THIS NOTE JUST AS IF ALL THE PROVISIONS,
TERMS AND CONDITIONS OF THE LOAN AGREEMENT HAD BEEN FULLY SET FORTH IN THIS
NOTE.
DEPOSIT REQUIREMENT. BORROWER TO MAINTAIN A MINIMUM DEPOSIT RELATIONSHIP IN ITS
RIVERSIDE ACCOUNT, OR ACCOUNTS WHICH RIVERSIDE CONTROLS, OF $250,000.00 AT ALL
TIMES.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
SECTION DISCLOSURE. This loan is made under Minnesota Statutes, Section 47.59.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
ORPHAN MEDICAL, INC.
By
---------------------------
JOHN H. BULLION, CEO
<PAGE>
COMMERCIAL SECURITY AGREEMENT
Borrower: ORPHAN MEDICAL, INC. Lender: RIVERSIDE BANK
13911 RIDGEDALE DRIVE MINNESOTA CENTER OFFICE
MINNETONKA, MN 55305 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
THIS COMMERCIAL SECURITY AGREEMENT is entered Into between ORPHAN MEDICAL, INC.
(referred to below as "Grantor"); and RIVERSIDE BANK (referred to below as
"Lender"). For valuable consideration, Grantor grants to Lender a security
Interest in the Collateral to secure the Indebtedness and agrees that Lender
shall have the rights stated In this Agreement with respect to the Collateral,
In addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Commercial Security
Agreement from time to time.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located: All inventory, chattel paper, accounts,
equipment and general intangibles In addition, the word "Collateral" includes
all the following, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies, increases,
and additions to and all replacements of and substitutions for any property
described above.
(b) All products and produce of any of the property described in this Collateral
section.
(c) All accounts, general intangibles, instruments, rents, monies, payments, and
all other rights, arising out of a sale, lease, or other disposition of any of
the property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale, destruction,
loss, or other disposition of any of the property described in this Collateral
section.
(e) All records and data relating to any of the property described in this
Collateral section, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor's right, title,
and interest in and to all computer software required to utilize, create,
maintain, and process any such records or data on electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events of Default."
Grantor. The word "Grantor" means ORPHAN MEDICAL, INC., its successors and
assigns
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the
Note, including all principal and interest, together with all other indebtedness
and costs and expenses for which Grantor is responsible under this Agreement or
under any of the Related Documents. In addition, the word "Indebtedness"
includes all other obligations, debts and liabilities, plus interest thereon, of
Grantor, or any one or more of them, to Lender, as well as all claims by Lender
against Grantor, or any one or more of
<PAGE>
them, whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with others;
whether Grantor may be obligated as guarantor, surety, accommodation party or
otherwise; whether recovery upon such indebtedness may be or hereafter may
become barred by any statute of limitations; and whether such indebtedness may
be or hereafter may become otherwise unenforceable.
Lender. The word "Lender" means RIVERSIDE BANK, its successors and assigns.
Note. The word "Note" means the note or credit agreement dated May 15, 1998, in
the principal amount of $500,000.00 from ORPHAN MEDICAL, INC. to Lender,
together with all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the note or credit agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers all
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other accounts. including without limitation
all accounts held jointly with someone else and all accounts Grantor may open in
the future, excluding however all IRA and Keogh accounts, and all trust accounts
for which the grant of a security interest would be prohibited by law. Grantor
authorizes Lender, to the extent permitted by applicable law, to charge or
setoff all sums owing on the Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral. Upon request of
Lender, Grantor will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Grantor will note Lender's interest upon any
and all chattel paper it not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Grantor will execute one
or more UCC financing statements and any similar statements as may be required
by applicable law, and will file such financing statements and all such similar
statements in the appropriate location or locations. Grantor hereby appoints
Lender as its irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest. Lender may
at any time, and without further authorization from Grantor, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for use
as a financing statement. Grantor will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Grantor promptly will notify Lender of any
change in Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in effect
even though all or any part of the Indebtedness is paid in full and even though
for a period of time Grantor may not be indebted to Lender.
No Violation. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws do not prohibit any term or
condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, the Collateral is enforceable in
accordance with its terms, is genuine, and complies with applicable laws
concerning form, content and manner of preparation and execution and all persons
appearing to be obligated on the Collateral have authority and capacity to
contract and are in fact obligated as they appear to be on the Collateral. At
the time any account becomes subject to a security interest in favor of Lender,
the account shall be a good and valid account representing an undisputed, bona
fide
<PAGE>
indebtedness incurred by the account debtor, for merchandise held subject to
delivery instructions or theretofore shipped or delivered pursuant to a contract
of sale, or for services theretofore performed by Grantor with or for the
account debtor; there shall be no setoffs or counterclaims against any such
account; and no agreement under which any deductions or discounts may be claimed
shall have been made with the account debtor except those disclosed to Lender in
writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d) all
other properties where Collateral is or may be located. Except in the ordinary
course of its business, Grantor shall not remove the Collateral from its
existing locations without the prior written consent of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent the
Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
Minnesota, without the prior written consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not sell,
offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor
is not in default under this Agreement, Grantor may sell inventory, but only in
the ordinary course of its business and only to buyers who quality as a buyer in
the ordinary course of business. A sale in the ordinary course of Grantor's
business does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest, encumbrance,
or charge, other than the security interest provided for in this Agreement,
without the prior written consent of Lender. This includes security interests
even if junior in right to the security interests granted under this Agreement.
Unless waived by Lender, all proceeds from any disposition of the Collateral
(for whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall not
constitute consent by Lender to any sale or other disposition. Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, tree and clear of all liens and encumbrances
except for the lien of this Agreement. No financing statement covering any of
the Collateral is on file in any public office other than those which reflect
the security interest created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's rights in the Collateral
against the claims and demands of all other persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles, Grantor
shall deliver to Lender schedules of such Collateral, including such information
as Lender may require, including without limitation names and addresses of
account debtors and agings of accounts and general intangibles. insofar as the
Collateral consists of inventory and equipment, Grantor shall deliver to Lender,
as open as Lender shall require, such lists, descriptions, and designations of
such Collateral as Lender may require to identify the nature, extent, and
location of such Collateral. Such information shall be submitted for Grantor and
each of its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all tangible
Collateral in good condition and repair. Grantor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral. Lender
and its designated representatives and agents shall have the right at all
reasonable times
<PAGE>
to examine, inspect, and audit the Collateral wherever located. Grantor shall
immediately notify Lender of all cases involving the return, rejection,
repossession, loss or damage of or to any Collateral; of any request for credit
or adjustment or of any other dispute arising with respect to the Collateral;
and generally of all happenings and events affecting the Collateral or the value
or the amount of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this Agreement, upon
any promissory note or notes evidencing the Indebtedness, or upon any of the
other Related Documents. Grantor may withhold any such payment or may elect to
contest any lien it Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's interest in
the Collateral is not jeopardized in Lender's sole opinion. It the Collateral is
subjected to a lien which is not discharged within fifteen (15) days, Grantor
shall deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, attorneys' fees or other charges
that could accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral. Grantor shall name
Lender as an additional obliges under any surety bond furnished in the contest
proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly with
all laws, ordinances, rules and regulations of all governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral. Grantor may contest in good faith any such law, ordinance
or regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral never
has been, and never will be so long as this Agreement remains a lien on the
Collateral, used for the generation, manufacture, storage, transportation,
treatment, disposal, release or threatened release of any hazardous waste or
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of
1986, Pub. L. No. 9~99 ("SARA"), the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C.. Section 6901, of seq., or other applicable state or Federal laws, rules,
or regulations adopted pursuant to any of the foregoing. The terms "hazardous
waste" and "hazardous substance" shall also include, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and substances.
Grantor hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Grantor becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive the
payment
Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at least
ten (10) days' prior written notice to Lender and not including any disclaimer
of the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Grantor or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required under
this Agreement, Lender
<PAGE>
may (but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance," which will
cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of any
loss or damage to the Collateral. Lender may make proof of loss if Grantor tails
to do so within fifteen (15) days of the casualty. All proceeds of any insurance
on the Collateral, including accrued proceeds thereon, shall be held by Lender
as part of the Collateral. It Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost
of repair or restoration. If Lender does not consent to repair or replacement of
the Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds
which have not been disbursed within six (6) months after their receipt and
which Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender reserves
for payment of insurance premiums, which reserves shall be created by monthly
payments from Grantor of a sum estimated by Lender to be sufficient to produce,
at least fifteen (15) days before the premium due date, amounts at least equal
to the insurance premiums to be paid. It fifteen (15) days before payment is
due, the reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a general
deposit and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by Grantor as
they become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance premiums
required to be paid by Grantor. The responsibility for the payment of premiums
shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as Lender
may reasonably request including the following: (a) the name of the insurer; (b)
the risks insured; (c) the amount of the policy; (d) the property insured; (e)
the then current value on the basis of which insurance has been obtained and the
manner of determining that value; and (f) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender determine, as
applicable, the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. It Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender
<PAGE>
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any installment payments to become
due during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due on the
Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or in any other agreement between Lender and Grantor.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Grantor under this Agreement, the Note or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any time
and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a going
business, the insolvency of Grantor, the appointment of a receiver for any part
of Grantor's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency against
the Collateral or any other collateral securing the Indebtedness. This includes
a garnishment of any of Grantor's deposit accounts with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Grantor as
to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor gives Lender written notice of
the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the indebtedness or such Guarantor dies or becomes
incompetent. Lender, at its option, may, but shall not be required to, permit
the Guarantor's estate to assume unconditionally the obligations arising under
the guaranty in a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is curable
and if Grantor has not been given a prior notice of a breach of the same
provision of this Agreement, it may be cured (and no Event of Default will have
occurred) if Grantor, after Lender sends written notice demanding cure of such
default, (a) cures the default within fifteen (15) days; or lb), if the cure
requires more than fifteen (15) days,
<PAGE>
immediately initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Minnesota Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness, including
any prepayment penalty which Grantor would be required to pay, immediately due
and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or any
portion of the Collateral and any and all certificates of title and other
documents relating to the Collateral. Lender may require Grantor to assemble the
Collateral and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the property of Grantor
to take possession of and remove the Collateral. If the Collateral contains
other goods not covered by this Agreement at the time of repossession, Grantor
agrees Lender may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer, or
otherwise deal with the Collateral or proceeds thereof in its own name or that
of Grantor. Lender may sell the Collateral at public auction or private sale.
Unless the Collateral threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Lender will give Grantor reasonable
notice of the time after which any private sale or any other intended
disposition of the Collateral is to be made. The requirements of reasonable
notice shall be met if such notice is given at least ten (10) days before the
time of the sale or disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking, holding,
insuring, preparing for sale and selling the Collateral, shall become a part of
the Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall have
the following rights and remedies regarding the appointment of a receiver: (a)
Lender may have a receiver appointed as a matter of right, (b) the receiver may
be an employee of Lender and may serve without bond, and (c) all tees of the
receiver and his or her attorney shall become part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note rate
from date of expenditure until repaid.
Collect Revenues. Apply Accounts. Lender, either itself or through a receiver,
may collect the payments, rents, income, and revenues from the Collateral.
Lender may at any time in its discretion transfer any Collateral into its own
name or that of its nominee and receive the payments, rents, income, and
revenues therefrom and hold the same as security for the Indebtedness or apply
it to payment of the Indebtedness in such order of preference as Lender may
determine. insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chapel paper, chases in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due. For these purposes,
Lender may, on behalf of and in the name of Grantor, receive, open and dispose
of mail addressed to Grantor; change any address to which mail and payments are
to be sent; and endorse notes, checks, drabs, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender may notify account debtors and
obligers on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining on the
Indebtedness due to Lender after application of all
<PAGE>
amounts received from the exercise of the rights provided in this Agreement.
Grantor shall be liable for a deficiency even it the transaction described in
this subsection is a sale of accounts or chapel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may be
amended from time to time. In addition, Lender shall have and may exercise any
or all other rights and remedies it may have available at law, in equity, or
otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by
this Agreement or the Related Documents or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Grantor under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a pad of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the makers set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Minnesota. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of HENNEPIN County,
the State of Minnesota. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including attorneys' fees and Lender's legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may pay
someone else to help enforce this Agreement, and Grantor shall pay the costs and
expenses of such enforcement. Costs and expenses include Lender's attorneys'
fees and legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (and including efforts to
modify or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimile (unless otherwise required by law), and
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties, specifying
that the purpose of the notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one Grantor, notice to any
Grantor will constitute notice to all Grantors. For notice purposes, Grantor
will keep Lender informed at all times of Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, and recover all sums of
money or other property which may now or hereafter become due, owing or payable
from the Collateral; (b) to execute, sign and endorse any and all claims,
instruments, receipts, checks, drabs or warrants issued in payment for the
Collateral; (c) to settle or compromise any and all claims arising under
<PAGE>
the Collateral, and, in the place and stead of Grantor, to execute and deliver
its release and settlement for the claim; and (d) to file any claim or claims or
to take any action or institute or take pan in any proceedings, either in its
own name or in the name of Grantor, or otherwise, which in the discretion of
Lender may seem to be necessary or advisable. This power is given as security
for the indebtedness, and the authority hereby conferred is and shall be
irrevocable and shall remain in full force and effect until renounced by Lender.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
funding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the benefit of
the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights or of
any of Grantor's obligations as to any future transactions. Whenever the consent
of Lender is required under this Agreement, the granting of such consent by
Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MAY 15,
1998.
GRANTOR:
ORPHAN MEDICAL, INC.
By:
-----------------------------
JOHN H. BULLION, CEO
EXHIBIT 10.48
ORPHAN MEDICAL, INC.
STOCK PURCHASE AGREEMENT
Agreement, made and entered into as of the 23rd day of July, 1998,
between Orphan Medical, Inc., a Minnesota corporation (the "Company"), and each
of the persons listed on Schedule 1 to this agreement (the "Investors").
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and the Investors agree as follows:
1. Authorization of Securities. The Company shall authorize, issue and
sell an aggregate of 7,500 shares of senior convertible preferred stock, par
value $0.01 per share, which shall be issued pursuant to and shall be entitled
to such other preferences, rights and benefits as are set forth in the capital
stock provisions of the Company's Certificate of Designation, which shall be in
the form of the attached Exhibit A. On or before the Initial Closing Date (as
defined in Section 3), the Company shall cause its Articles of Incorporation to
be amended so that they will contain provisions identical to Exhibit A. As used
in this agreement, the term "Preferred Shares" shall mean the shares of senior
convertible preferred stock to be sold pursuant to this agreement, including any
shares issued pursuant to the option described in Section 2.2 hereof, and all
shares of senior convertible preferred stock issued in exchange or substitution
therefor.
2. Sale and Purchase of Preferred Shares.
2.1 Subject to the terms and conditions hereof, the Company
agrees to sell to each Investor, and each Investor severally agrees to purchase
from the Company on the Initial Closing Date, the number of Preferred Shares set
forth opposite its name on Schedule 1 at a purchase price of One Thousand
Dollars ($1,000) per share.
2.2 The Investors that purchased Preferred Shares on the
Initial Closing Date have an option to purchase, and, to the extent exercised,
the Company shall be obliged to sell to the Investors, up to an additional 4,500
Preferred Shares, subject to the limitations and procedures set forth in this
Section 2.2. Such Preferred Shares shall be sold on the same terms and
conditions as the securities being sold on the Initial Closing Date.
Notwithstanding the foregoing, if the Conversion Price (as defined in the
Certificate of Designation attached hereto as Exhibit A) is less than the last
sale price of the Company's Common Stock on the last trading day prior to the
Initial Closing Date, then the number of Preferred Shares issued on the
Supplemental Closing Date (as defined in Section 3) shall be reduced as
necessary so that the maximum number of shares of common stock, $.01 par value
per share, of the Company (the "Common Stock") issuable upon (a) conversion of
all the Preferred Shares sold by the Company pursuant to this agreement
(including Preferred Shares issued on both the Initial Closing Date and the
Supplemental Closing Date), and (b) conversion of the maximum number of
Preferred Shares that could be issued by the Company as dividends on the
Preferred Shares (in each case assuming the Preferred Shares are converted at
the Conversion Price determined as of the Supplemental Closing Date) (the
"Conversion Shares") shall be no greater than 1,250,000 (the "Maximum Conversion
Shares"). The Company shall deliver to the Investors on the date which is 90
days following the Initial Closing Date (or as soon as practicable thereafter
but in no event later than five business days following the ninetieth day after
the Initial Closing Date) written notice of the maximum aggregate number of
Preferred Shares the Investors may purchase on the Supplemental Closing Date (as
defined in Section 3), a calculation of the Maximum Conversion Shares, and a
calculation of the Conversion Price. No later than three business days after the
delivery of the Company's written notice, each Investor shall deliver to the
Company written notice of the number of Preferred Shares, if any, it shall
purchase on the Supplemental Closing Date (the "Option Notice").
<PAGE>
3. Closing. The closing of the transactions contemplated by the first
paragraph of Section 2 of this agreement shall take place at the offices of
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402, at
10:00 A.M., Minneapolis time, on July __, 1998 (the "Initial Closing Date") or
at such other place or different time or day as may be mutually acceptable to
the Investors and the Company. The supplemental closing shall take place at such
time and place as may be selected jointly by the Company and the Investors,
which in any event shall be on or before the fifth business day after delivery
of the Option Notice by the Investors to the Company (the "Supplemental Closing
Date").
At each closing, the Company will deliver to each Investor a
certificate, dated such closing date, representing the Preferred Shares
purchased by such Investor on such closing date, registered in its name as
stated on Schedule 1 (or in the name of its nominee if it so specifies to the
Company at least 48 hours prior to such closing date) against payment to the
Company of the purchase price of Preferred Shares being purchased by such
Investor, which payment shall be made by wire transfer of immediately available
funds.
4. Representations and Warranties by the Company. In order to induce
each Investor to enter into this agreement and to purchase the number of
Preferred Shares set forth after its name on Schedule 1, the Company hereby
represents and warrants to each Investor that, except as disclosed in the
attached Exhibit B:
4.1 Organization, Standing, etc. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota, and has the requisite corporate power and authority to own
its properties and to carry on its business as it is now being conducted. The
Company has the requisite corporate power and authority to issue the Preferred
Shares and the Conversion Shares and to otherwise perform its obligations under
this agreement.
4.2 Governing Instruments. The copies of the Articles of
Incorporation and bylaws of the Company which have been delivered to legal
counsel for the Investors prior to the execution of this agreement are true and
complete copies of the duly and legally adopted Articles of Incorporation and
bylaws of the Company in effect as of the date of this agreement.
4.3 Subsidiaries, Etc. The Company does not have any direct or
indirect ownership interest in any corporation, partnership, joint venture,
association or other business enterprise (a "Subsidiary"). If any entity is
listed on Exhibit B and the Company owns a controlling interest in such entity,
the representations and warranties set forth in this Article 4 are being hereby
restated with respect to such entity (modified as appropriate to the nature of
such entity).
4.4 Qualification. The Company is duly qualified, licensed or
domesticated as a foreign corporation in good standing in each jurisdiction
wherein the nature of its activities or the properties owned or leased by it
makes such qualification, licensing or domestication necessary and in which
failure to so qualify or be licensed or domesticated would have a material
adverse impact upon its business.
4.5 Financial Statements. Attached to this agreement as
Exhibit C are (a) a balance sheet, as at December 31, 1997 for the Company,
together with the related statements of income and retained earnings and changes
in financial position for the fiscal year then ended which balance sheet and
related statements have been audited by Ernst & Young LLP and (b) a balance
sheet, as at June 30, 1998 for the Company, together with the related statement
of income and changes in financial position for the six (6)-month period then
ended. Such financial statements (i) are in accordance with the books and
records of the Company, (ii) present fairly the financial condition of the
Company at the balance sheets dates and the results of its operations for the
periods therein specified, and (iii) have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with
prior accounting periods other than as set forth in the footnotes thereto and,
with respect to the interim financial
<PAGE>
statements, normal year end adjustments which are immaterial in the aggregate.
Without limiting the generality of the foregoing, the balance sheets or notes
thereto disclose all of the debts, liabilities and obligations of any nature
(whether absolute, accrued or contingent and whether due or to become due) of
the Company at December 31, 1997, and June 30, 1998, which, individually or in
the aggregate, are material and which in accordance with generally accepted
accounting principles would be required to be disclosed in such balance sheets,
and include appropriate reserves for all taxes and other liabilities accrued as
of such dates but not yet payable.
4.6 Tax Returns and Audits. All required federal, state and
local tax returns or appropriate extension requests of the Company have been
filed, and all federal, state and local taxes required to be paid with respect
to such returns have been paid or due provision for the payment thereof has been
made. The Company is not delinquent in the payment of any such tax or in the
payment of any assessment or governmental charge. The Company has not received
notice of any tax deficiency proposed or assessed against it, and it has not
executed any waiver of any statute of limitations on the assessment or
collection of any tax. None of the Company's tax returns has been audited by
governmental authorities. The Company does not have any tax liabilities except
those incurred in the ordinary course of business since March 31, 1998.
4.7 Changes, Dividends, etc. Except for the transactions
contemplated by this agreement, since March 31, 1998, the Company has not: (i)
incurred any debts, obligations or liabilities, absolute, accrued or contingent
and whether due or to become due, except current liabilities incurred in the
ordinary course of business which (individually or in the aggregate) will not
materially and adversely affect the business, properties or prospects of the
Company; (ii) paid any obligation or liability other than, or discharged or
satisfied any liens or encumbrances other than those securing, current
liabilities, in each case in the ordinary course of business; (iii) declared or
made any payment to or distribution to its shareholders as such, or purchased or
redeemed any of its shares of capital stock, or obligated itself to do so; (iv)
mortgaged, pledged or subjected to lien, charge, security interest or other
encumbrance any of its assets, tangible or intangible, except in the ordinary
course of business; (v) sold, transferred or leased any of its assets except in
the ordinary course of business; (vi) suffered any physical damage, destruction
or loss (whether or not covered by insurance) materially and adversely affecting
the properties, business or prospects of the Company; (vii) entered into any
transaction other than in the ordinary course of business; (viii) encountered
any labor difficulties or labor union organizing activities; (ix) issued or sold
any shares of capital stock or other securities (other than shares issued to
Chronimed, Inc. pursuant to the Termination Agreement dated June 27, 1997
between the Company and Chronimed, Inc. and shares issued upon exercise of
warrants or options that were outstanding as of March 31, 1998) or granted any
options, warrants, or other purchase rights with respect thereto other than
pursuant to this agreement; (x) made any acquisition or disposition of any
material assets or became involved in any other material transaction, other than
for fair value in the ordinary course of business; (xi) increased the
compensation payable, or to become payable, to any of its directors or
employees, or made any bonus payment or similar arrangement with any directors
or employees or increased the scope or nature of any fringe benefits provided
for its employees or directors, other than normal compensation adjustments and
bonuses; or (xii) agreed to do any of the foregoing other than pursuant hereto.
There has been no material adverse change in the financial condition,
operations, prospects, results of operations or business of the Company since
March 31, 1998.
4.8 SEC Reports and Financial Statements. The Company has
filed with the Securities and Exchange Commission (the "SEC") all forms,
reports, schedules, statements and other documents required to be filed by it
with the SEC, including, without limitation, the Company's Registration
Statement filed on Form S-1 on March 3, 1995, Registration Statement filed on
Form S-1 on March 11, 1996, Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q (as such documents have been amended since the time of their filing,
collectively, the "SEC Documents"), and have filed all exhibits required to be
filed with the SEC Documents. As of their respective dates or, if amended, as of
the date of the last such amendment, the SEC Documents, including, without
limitation, any financial statements or schedules included therein, complied in
all material respects with the applicable requirements
<PAGE>
of the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and did not contain any untrue statement 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 light of the circumstances under which
they were made, not misleading. None of the Company's Subsidiaries is required
to file any forms, reports or other documents with the SEC pursuant to Section
12 or 15 of the Exchange Act.
4.9 Title to Properties and Encumbrances. Except as otherwise
set forth in Exhibit C and the SEC Documents and except for properties and
assets disposed of in the ordinary course of business since March 31, 1998, the
Company has good and marketable title to all of its properties and assets,
including without limitation the properties and assets included in the balance
sheet at March 31, 1998 and the properties and assets used in the conduct of its
business, which properties and assets are not subject to any mortgage, pledge,
lease, lien, charge, security interest, encumbrance or restriction, except (a)
those which are shown and described in Exhibit C, (b) liens for taxes and
assessments or governmental charges or levies not at the time due or in respect
of which the validity thereof shall currently be contested in good faith by
appropriate proceedings, or (c) those which do not materially affect the value
of or interfere with the use made of such properties and assets.
4.10 Conditions of Properties. The plant, offices and
equipment of the Company are in good operating condition and repair, subject to
normal wear and tear.
4.11 Compliance With Applicable Laws and Other Instruments.
The business and operations of the Company have been and are being conducted in
all material respects in accordance with all applicable laws, rules and
regulations of all governmental authorities. Neither the execution nor delivery
of, nor the performance of or compliance with, this agreement nor the
consummation of the transactions contemplated hereby will, with or without the
giving of notice or passage of time, result in any breach of, or constitute a
default under, or result in the imposition of any lien or encumbrance upon any
asset or property of the Company pursuant to, any agreement or other instrument
to which the Company is a party or by which it or any of its properties, assets
or rights is bound or affected, and will not violate the Articles of
Incorporation or bylaws of the Company. The Company is not in violation of its
Articles of Incorporation or bylaws nor in violation of, or in default under,
any lien, indenture, mortgage, lease, agreement, instrument, commitment or
arrangement. The Company is not subject to any restriction which would prohibit
it from entering into or performing its obligations under this agreement.
4.12 Preferred Shares and Conversion Shares. The Preferred
Shares, when issued and paid for pursuant to the terms of this agreement, will
be duly authorized, validly issued and outstanding, fully paid, nonassessable
shares and shall have all rights, privileges and preferences specified in the
Certificate of Designation and shall be free and clear of all pledges, liens,
encumbrances and restrictions. The Conversion Shares have been reserved for
issuance and when issued upon conversion of the Preferred Shares will be duly
authorized, validly issued and outstanding, fully paid, nonassessable and free
and clear of all pledges, liens, encumbrances and restrictions.
4.13 Securities Laws. Based in part upon the representations
of the Investors in Article 5, no consent, authorization, approval, permit or
order of or filing with any governmental or regulatory authority is required
under current laws and regulations in connection with the execution and delivery
of this agreement or the offer, issuance, sale or delivery of the Preferred
Shares or the Conversion Shares, other than the qualification thereof, if
required, under applicable state securities laws, which qualification has been
or will be effected as a condition of these sales. The Company has not, directly
or through an agent, offered the Preferred Shares or any similar securities for
sale to, or solicited any offers to acquire such securities from, persons other
than the Investors and other accredited investors. Under the circumstances
contemplated by this agreement and assuming the accuracy of the representations
of the Investors in Article 5, the offer, issuance, sale and delivery of the
Preferred Shares and the Conversion Shares will not, under current laws and
regulations, require compliance with the prospectus delivery or registration
requirements of the federal Securities Act of 1933, as amended (the "Securities
Act").
<PAGE>
4.14 Intellectual Property.
(a) Intellectual Property Assets' The term "Intellectual Property
Assets" includes:
(1) the name "Orphan Medical," all fictional business names,
trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "Marks");
(2) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents");
(3) all copyrights in both published works and
unpublished works (collectively, "Copyrights");
(4) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets"), in each case
owned, used, or licensed by the Company as licensee or licensor.
(b) Agreements(The SEC Documents contain a complete and accurate list
and summary description, including any royalties paid or received by the
Company, of all material contracts and agreements relating to the Intellectual
Property Assets to which the Company is a party or by which the Company is
bound, except for any license implied by the sale of a product and perpetual,
paid-up licenses for commonly available software programs with a value of less
than $50,000 under which the Company is the licensee. There is no outstanding
and, to the Company's knowledge, no threatened dispute or disagreement with
respect to any such agreement.
(c) Know-How Necessary to Conduct the Company's Business
(1) To the Company's knowledge, the Intellectual Property
Assets are all those necessary for the operation of the Company's business as it
is currently conducted. The Company either owns or has licensed sufficient
rights to each of the Intellectual Property Assets, free and clear of all liens,
security interests, charges, encumbrances, equities, and other adverse claims,
and has the right to use without payment to a third party, except for royalties
described in the SEC Documents, all of the Intellectual Property Assets.
(2) The Company has a policy that requires all current
employees of the Company to execute written contracts with the Company that
assign to the Company all rights to any inventions, improvements, discoveries,
or information relating to the business of the Company, and all of the Company's
former and current employees have executed such a contract. No employee of the
Company has entered into any contract or agreement that restricts or limits in
any way the scope or type of work in which the employee may be engaged or
requires the employee to transfer, assign, or disclose information concerning
his work to anyone other than the Company.
(d) Patents
(1) The SEC Documents contain a complete and accurate list and
summary description of all Patents. The Company owns no Patents. The Company has
exclusive rights to use the Patents that it uses or licenses, in each case free
and clear of all liens, security interests, charges, encumbrances, entities, and
other adverse claims except for any royalties described in the SEC Documents and
for security interests in favor of Chronimed, Inc. and Riverside Bank.
(2) To the Company's knowledge, all of the Patents licensed to
or used by the Company, are currently in compliance with formal legal
requirements (including payment of filing,
<PAGE>
examination, and maintenance fees and proofs of working or use), and, to the
Company's knowledge, are valid and enforceable.
(3) No Patent has been or is now involved in any interference,
reissue, reexamination, or opposition proceeding or has had an unfavorable final
ruling against its interests in any such proceeding. To the Company's knowledge,
there is no potentially interfering patent or patent application of any third
party.
(4) To the Company's knowledge, no Patent is infringed or has
been challenged or threatened in any way. To the Company's knowledge, none of
the products manufactured and sold, nor any process or know-how used, by the
Company infringes or is alleged to infringe any patent or other proprietary
right of any other person.
(5) All products made, used, or sold under the Patents have
been marked in compliance with 35 United States Code (0) 287 and the comparable
requirements of any jurisdiction in which the products are made, used or sold.
(e) Trademarks
(1) The Company is the owner of all right, title, and interest
in and to each of its Marks, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims.
(2) All Marks that have been registered with the United States
Patent and Trademark Office are currently in compliance with all formal legal
requirements (including the timely post-registration filing of affidavits of use
and incontestability and renewal applications), and, to the Company's knowledge,
are valid and enforceable.
(3) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to the Company's knowledge, no such action is
threatened with the respect to any of the Marks.
(4) To the Company's knowledge, there is no potentially
interfering trademark or trademark application of any third party.
(5) To the Company's knowledge, no Mark is infringed
or has been challenged or threatened in any way. To the Company's knowledge,
none of the Marks used by the Company infringes or is alleged to infringe any
trade name, trademark, or service mark of any third party.
(6) All products and materials containing a Mark marking in
compliance with 15 United States Code (0) 1111 or the comparable requirements of
any jurisdiction in which such products and materials are sold.
(f) Copyrights
(1) The Company is the owner of all right, title, and interest
in and to each of its copyrights, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims.
(2) All the Copyrights are currently in compliance with legal
requirements and are, to the Company's knowledge, valid and enforceable.
(3) No Copyright is infringed or, to the Company's knowledge,
has been challenged or threatened in any way. To the Company's knowledge, none
of the subject matter of any of
<PAGE>
the Copyrights infringes or is alleged to infringe any copyright of any third
party or is a derivative work based on the work of a third party.
(g) Trade Secrets
(1) The Company has taken reasonable precautions to protect
the confidentiality and value of the Trade Secrets.
(2) The Company either owns or has licensed the rights to use
the Trade Secrets that are necessary and sufficient for the operation of the
Company's business as it is currently conducted. To the Company's knowledge,
those Trade Secrets that are not part of the public knowledge or literature have
not been used, divulged, or appropriated either for the benefit of any person or
to the detriment of the Company.
(3) The Company has not been charged with misappropriation of
know-how or trade secrets. To the Company's knowledge, no third party has
misappropriated or attempted to misappropriate the Trade Secrets.
4.15 Capital Stock. At the date hereof, the authorized capital
stock of the Company consists of 25,000,000 shares, $.01 par value per share, of
which 6,249,718 are issued and outstanding. Prior to the transactions
contemplated by this agreement, the Company has not issued any preferred shares.
All of the outstanding shares of the Company were duly authorized, validly
issued and are fully paid and nonassessable. Except as set forth on Exhibit B,
the SEC Documents contain an accurate and complete description of all
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of any
character or nature whatever, other than this agreement, under which the Company
is obligated to issue any securities of any kind representing an ownership
interest in the Company. Neither the offer nor the issuance or sale of the
Preferred Shares constitutes an event, under any anti-dilution provisions of any
securities issued or issuable by the Company or any agreements with respect to
the issuance of securities by the Company, which will either increase the number
of shares issuable pursuant to such provisions or decrease the consideration per
share to be received by the Company pursuant to such provisions. Except for the
Chronimed, Inc. Termination Agreement and the warrants that, as of June 30,
1998, entitled holders to purchase an aggregate of 213,255 shares of Common
Stock (which warrants were originally issued on May 19, 1995 to R.J. Steichen &
Company and a portion of which were subsequently assigned to employees and
affiliates of R.J. Steichen & Company) (the "Warrants"), the Company is not a
party to any agreement or understanding pursuant to which it is obligated to
register any shares of its capital stock or other securities under the
Securities Act or any other state securities laws. No holder of any security of
the Company is entitled to any preemptive or similar rights to purchase any
securities of the Company from the Company; provided, however, that nothing in
this Section 4.15 shall affect, alter or diminish any right granted to the
Investors in this agreement. All outstanding securities of the Company have been
issued in full compliance with an exemption or exemptions from the registration
and prospectus delivery requirements of the Securities Act and from the
registration and qualification requirements of all applicable state securities
laws.
4.16 Outstanding Debt. The Company does not have any material
indebtedness incurred as the result of a direct borrowing of money, including,
but not limited to, indebtedness with respect to trade accounts, except as set
forth in Exhibit B. The Company is not in default in the payment of the
principal of or interest or premium on any such indebtedness, and no event has
occurred or is continuing under the provisions of any instrument, document or
agreement evidencing or relating to any such indebtedness which with the lapse
of time or the giving of notice, or both, would constitute an event of default
thereunder.
4.17 Corporate Acts and Proceedings. This agreement has been
duly authorized by all necessary corporate action on behalf of the Company, has
been duly executed and
<PAGE>
delivered by authorized officers of the Company, and is a valid and binding
agreement on the part of the Company that is enforceable against the Company in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, moratorium, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and to judicial
limitations on the enforcement of the remedy of specific performance and other
equitable remedies. All corporate action necessary to the authorization,
creation, issuance and delivery of the Preferred Shares and the Conversion
Shares has been taken by the Company, or will be taken by the Company on or
prior to the applicable closing date.
4.18 Brokers or Finders. Except the arrangement fee described
in Section 6.10, no person, firm or corporation has or will have, as a result of
any act or omission of the Company, any right, interest or valid claim against
the Company or any Investor for any commission, fee or other compensation as a
finder or broker in connection with the transactions contemplated by this
agreement. The Company will indemnify and hold each of the Investors harmless
against any and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable in connection with
the transactions contemplated by this agreement.
4.19 Litigation; Governmental Proceedings. There are no legal
actions, suits, arbitrations or other legal, administrative or governmental
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company, or its properties or business, and the Company
is not aware of any facts which are likely to result in or form the basis for
any such action, suit or other proceeding. The Company is not in default with
respect to any judgment, order or decree of any court or any governmental agency
or instrumentality. The Company has not been threatened with any action or
proceeding under any business or zoning ordinance, law or regulation.
4.20 No Undisclosed Liabilities. Except for liabilities not in
excess of $50,000 individually or $100,000 in the aggregate, each incurred in
the ordinary course of business and consistent with past practice, and
liabilities incurred in connection with the consummation of the transactions
contemplated hereby (none of which, individually or in the aggregate, could
reasonably have a material adverse effect on the business, operations, financial
condition, prospects or results of operation of the Company) since March 31,
1998, the Company has not incurred any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) which would be required by
GAAP to be reflected on a consolidated balance sheet of the Company (including
the notes thereto), or which individually or in the aggregate, could reasonably
be expected to have a material adverse effect on the business, operations,
financial condition, prospects or results of operations of the Company.
4.21 Insurance. There is in full force and effect one or more
policies of insurance issued by insurers of recognized responsibility, insuring
the Company and its properties and business against such losses and risks, and
in such amounts, as are customary in the case of corporations of established
reputation engaged in the same or similar businesses and similarly situated. The
Company has not been refused any insurance coverage sought or applied for, and
the Company has no reason to believe that it will be unable to renew its
existing insurance coverage as and when the same shall expire upon the terms
similar to those presently in effect, other than possible increases in premiums
that do not result from any act or omission of the Company.
4.22 Material Contracts.
(a) The SEC Documents contain a description, as of the date of
this agreement, of all material agreements or instruments to which the Company
is a party or by which the Company is bound (collectively, the "Material
Contracts").
(b) Each of the Material Contracts is in full force and effect
and constitutes a valid and binding obligation of the Company and, to the
Company's knowledge, the other party thereto.
<PAGE>
4.23 Transactions with Affiliates. Except as set forth in the
SEC Documents, none of the officers, employees, directors or other affiliates of
the Company are a party to any transactions with the Company. There have been no
assumptions or guarantees by the Company of any obligations of such persons.
4.24 Completeness and Accuracy of Information. No
representation or warranty of the Company contained in this agreement contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein not misleading in
light of the circumstances in which the same were made.
4.25 Products: Regulatory Matters.
(a) There are no regulatory actions by the United States Food
and Drug Administration ("FDA") or other such similar regulatory body pending
or, to the Company's knowledge, threatened against the Company with respect to
any pharmaceutical products that could reasonably be expected to have a material
adverse effect on the business, operations, financial condition, prospects or
results of operation of the Company.
(b) All pharmaceutical products of the Company (i) have been
produced in accordance with good manufacturing practices, (ii) comply with all
applicable requirements of the FDA and applicable state regulations and (iii) to
the Company's knowledge, do not violate or conflict with the rights of any third
party.
(c) To the Company's knowledge, (i) there is no basis for a
recall, withdrawal or seizure by any governmental entity of any pharmaceutical
product of the Company and (ii) there are no facts which would cause the Company
to withdraw, recall or seize any pharmaceutical product of the Company from the
market or terminate any applications for new drugs which have been submitted by
the Company to the FDA.
(d) (i) No pharmaceutical product of the Company has been
recalled by the Company (whether voluntary or otherwise) at any time during the
past two (2) years and (ii) there are no pending proceedings, nor have there
been any proceedings within the last two (2) years, before any governmental
entity seeking the recall, withdrawal or seizure of any pharmaceutical product
of the Company from the market.
(e) All statements of the Company set forth in the SEC
Documents regarding the Company's orphan drug designations and the status of its
pharmaceutical products are true and correct in all material respects.
4.26 Employee Benefits. The SEC Documents and Exhibit C hereto
contain all information regarding employee benefit plans that is material to the
business, operations and financial condition of the Company. To the Company's
knowledge, the execution and delivery of this agreement and the sale of the
Preferred Shares thereunder will not involve any prohibited transaction within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
or Section 4975 of the Internal Revenue Code of 1986, as amended.
5. Representations of the Investors. Each Investor represents for
itself that:
5.1 Investment Intent. The Preferred Shares being acquired by
such Investor are being purchased for investment for such Investor's own account
and not with the view to, or for resale in connection with, any distribution or
public offering thereof. Such Investor understands that the Preferred Shares
have not been registered under the Securities Act or any state securities laws
by reason of their contemplated issuance in transactions exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
and applicable state securities laws, and that the reliance of the Company and
others upon these exemptions is predicated in part upon this representation by
each Investor.
<PAGE>
Such Investor further understands that the Preferred Shares may not be
transferred or resold without (i) registration under the Securities Act and any
applicable state securities laws, or (ii) an exemption from the requirements of
the Securities Act and applicable state securities laws.
5.2 Location of Principal Office, Qualification as an
Accredited Investor, Etc. The state in which such Investor's principal office
(or domicile, if such Investor is an individual) is located is the state set
forth in such Investor's address on Schedule 1. Such Investor acknowledges that
the Company has made available to such Investor at a reasonable time prior to
the execution of this agreement the opportunity to ask questions and receive
answers concerning the terms and conditions of the sale of securities
contemplated by this agreement and to obtain any additional information (which
the Company possesses or can acquire without unreasonable effort or expense) as
may be necessary to verify the accuracy of information furnished to such
Investor. Such Investor (a) is able to bear the loss of its entire investment in
the Preferred Shares without any material adverse effect on its business,
operations or prospects, and (b) has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
the investment to be made by it pursuant to this agreement.
5.3 Acts and Proceedings. This agreement has been duly
authorized by all necessary action on the part of such Investor, has been duly
executed and delivered by such Investor, and is a valid and binding agreement of
such Investor.
5.4 No Brokers or Finders. Except for a fee to be paid to an
affiliate of UBS Capital II LLC, no person, firm or corporation has or will
have, as a result of any act or omission by such Investor, any right, interest
or valid claim against the Company for any commission, fee or other compensation
as a finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this agreement. Such Investor will indemnify and
hold the Company harmless against any and all liability with respect to any such
commission, fee or other compensation which may be payable or determined to be
payable as a result of the actions of such Investor in connection with the
transactions contemplated by this agreement.
5.5 Exculpation Among Investors. Such Investor acknowledges
that in making its decision to invest in the Company, it is not relying on any
other Investor or upon any person, firm or company, other than the Company and
its officers, employees and/or directors. Such Investor agrees that no other
Investor, nor the partners, employees, officers or controlling persons of any
other Investor shall be liable for any actions taken by such Investor, or
omitted to be taken by such Investor, in connection with such investment.
5.6 Accredited Investor. Such Investor is an "Accredited
Investor" within the meaning of Rule 501 promulgated under the Securities Act.
6. Conditions of Each Investor's Obligation. The obligation to purchase
and pay for the Preferred Shares which each Investor has agreed to purchase on
the applicable closing date is subject to the fulfillment prior to or on such
closing date of the conditions set forth in this Article 6.
6.1 No Errors, etc. The representations and warranties of the
Company under this agreement shall be true and correct in all material respects
as of the applicable closing date with the same effect as though made on and as
of such closing date.
6.2 Compliance with Agreement. The Company shall have
performed and complied with all agreements or covenants required by this
agreement to be performed and complied with by it prior to or as of the
applicable closing date.
6.3 Certificate of Officers. The Company shall have delivered
to the Investors a certificate, dated the applicable closing date, executed by
the Chief Executive Officer of the Company and certifying to the satisfaction of
the conditions specified in Sections 6.1 and 6.2.
<PAGE>
6.4 Opinion of Intellectual Property. The Company shall have
delivered to each Investor an opinion, satisfactory to each of the Investors, of
Schwegman, Lundberg, Woessmer & Kluth, P.A., intellectual property counsel for
the Company, dated the applicable closing date substantially in the form
attached hereto as Exhibit D hereto.
6.5 Board of Directors. Upon the Closing, the Company's Board
of Directors shall consist of seven directors, one of whom shall be Michael
Greene.
6.6 Legal Opinion. The Investors shall have received an
originally executed opinion of Dorsey & Whitney LLP, counsel for the Company,
dated as of the Initial Closing Date or Supplemental Closing Date, as
applicable, in the form attached as Exhibit E with changes made to reflect the
matters related to the applicable closing date.
6.7 Necessary Consents. On or before the applicable closing
date, the Company shall have obtained any consents of any person or governmental
authority necessary for the consummation of the transactions contemplated under
this Agreement and the Investors shall have received satisfactory evidence of
such consents; provided, however, that the Company shall not attempt to obtain
shareholder approval of such transactions based on the Company's belief that the
Nasdaq Marketplace Rules do not require shareholder approval.
6.8 No Material Adverse Effect. Since March 31, 1998, no
event, change or effect shall have occurred that is materially adverse to the
consolidated financial condition, business, results of operations, cash flows or
prospects of the Company or that materially impairs the ability of the Company
to perform or the Investor to enforce the obligations of the Company under this
agreement.
6.9 Certificate of Designation. On or prior to the Initial
Closing Date, the Company shall have filed with the Secretary of State of the
State of Minnesota, the Certificate of Designation attached at Exhibit A and the
Certificate of Designation shall have become effective.
6.10 Payment of Fees and Expenses. The Company shall have paid
(i) on or before the Initial Closing Date and Supplemental Closing Date, as
applicable, or on the date of receipt of invoices (if later), the reasonable
fees, charges and disbursements of the Investors, including the fees and
expenses of Kaye, Scholer, Fierman, Hays & Handler, LLP, which shall not exceed
$75,000 and (ii) on or before the Initial Closing Date and the Supplemental
Closing Date, an arrangement fee to the Investor equal to four percent (4%) of
the stated value of the Preferred Shares purchased by the Investor on the
Initial Closing Date and Supplemental Closing Date, respectively.
6.11 Injunctions, Restraining Order or Adverse Litigation. No
order, judgment or decree of any court, arbitral tribunal, administrative agency
or other governmental or regulatory authority or agency shall purport to enjoin
or restrain the Investors from acquiring the Preferred Shares on the Initial
Closing Date or the Supplemental Closing date, as applicable.
6.12 Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transaction shall be satisfactory in
form and substance to legal counsel for the Investors.
7. Affirmative Covenants of the Company.
7.1. Limitation on Issuance of Additional Equity Securities.
The Company hereby covenants and agrees that, except for Permitted Issuances (as
defined in Section 11(b)), for so long as any Preferred Shares remain
outstanding, the Company shall not issue shares of Common Stock or
<PAGE>
options, warrants or other rights to purchase shares of Common Stock or
securities convertible into shares of Common Stock at a price less than the
Conversion Price, unless:
(a) such issuance would not result in a reduction of the Conversion
Price; or
(b) the Company receives written confirmation from Nasdaq that no
shareholder approval is required to effectuate the anti-dilution provisions set
forth in Section 8(c) of the Certificate of Designation if such provisions would
be triggered as a result of such issuance; or
(c) shareholder approval for such issuance is obtained.
7.2 Financial and Business Information. The Company will
maintain, and cause each of its Subsidiaries to maintain, a system of accounting
established in accordance with sound business practices to permit preparation of
financial statements in conformity with GAAP. The Company during the term of
this agreement will, and will cause its Subsidiaries to, deliver to the
Investors:
(a) As soon as practicable and in any event within 120 days after the
close of each fiscal year of the Company, a consolidated and consolidating
balance sheet of the Company and its Subsidiaries as of the close of such fiscal
year and consolidated statements of operations, shareholders' equity and cash
flows for the Company and its Subsidiaries for the fiscal year then ended,
together with the report thereon of Ernst & Young LLP, the Company's independent
certified public accountants (it being understood by the parties hereto that the
delivery to the Investors of the Company's annual report on Form 10-K will
satisfy the requirements of this Section 7.2(a));
(b) As soon as practicable and in any event within 45 days after the
end of the first three fiscal quarters of each fiscal year, the consolidated and
consolidating balance sheet of the Company and its Subsidiaries as at the end of
such fiscal quarter and the related consolidated and consolidating statements of
operations, shareholders' equity and cash flows of the Company and its
Subsidiaries for such fiscal quarter and for the period from the beginning of
the current fiscal year to the end of such fiscal quarter, all in reasonable
detail and certified by the chief financial officer of the Company that they
fairly present the financial condition of Company and its Subsidiaries as the
dates indicated and the results of its operations and its cash flows for the
periods indicated, subject to changes resulting from audit and normal year-end
adjustments (it being understood by the parties hereto that the delivery to the
Investor of the Company's quarterly report on Form 10-Q will satisfy the
requirements of this Section 7.2(b);
(c) As soon as practicable and in any event within 30 days after the
end of each month, the internal financial statements of the Company and its
Subsidiaries for such month (other than the months referred to in Section 7.2(a)
and Section 7.2(b) above) and certified by the chief executive officer or the
chief financial officer of the Company that such statements were prepared in
accordance with the Company's accounting policies, consistently applied for the
period indicated;
(d) Prompt notice of any event having a material adverse effect on the
business, operations, financial condition, prospects or results of operation of
the Company;
(e) Promptly upon their becoming available, copies of (a) all financial
statements, reports, notices and proxy statements sent or made available
generally by the Company to its security holders, (b) all regular and periodic
reports filed by the Company or any of its Subsidiaries with any securities
exchange or with the SEC or any governmental or private regulatory authority,
(c) all press releases and other statements made available generally by the
Company or any of its Subsidiaries to the public concerning material
developments in the business of the Company or any of its Subsidiaries;
(f) Promptly upon any officer of Company or any of its Subsidiaries
obtaining knowledge of any condition or event that constitutes a violation or
default or potential event of default under any indebtedness of the Company or
any of its Subsidiaries, or becoming aware that any person has given any
<PAGE>
notice or taken any other action with respect to a claimed event of default or
potential event of default, notice of any such event; and
(e) Within a reasonable time, such other information about the
property, financial condition and operations of the Company and its Subsidiaries
as the Investors may from time to time reasonably request.
7.3 Notice of Certain Events. The Company will, and will cause
its Subsidiaries to, promptly give notice in writing to each Investor of any
litigation or proceeding before any court or administrative body involving the
Company or any Subsidiary which, if determined adversely to the Company or such
subsidiary, would be reasonably likely to have a material adverse effect on the
business, operations, financial condition, prospects or results of operation of
the Company.
8. Conversion of Preferred Shares.
8.1 Conversion of Preferred Shares.
(a) Any holder of any Preferred Shares may, at its option, from and
after the occurrence of such events as are set forth in the relevant provisions
of the Company's Articles of Incorporation, convert such Preferred Shares, or
any part thereof, into Conversion Shares at the Conversion Price and upon the
terms and conditions and subject to the adjustments set forth in the Company's
Articles of Incorporation.
(b) Each Preferred Share shall be automatically converted into
Conversion Shares on the terms and conditions set forth in the Company's
Articles of Incorporation.
8.2 Stock Fully Paid; Reservation of Shares. The Company
covenants and agrees that all Conversion Shares that may be issued upon the
exercise of the conversion privilege referred to in Section 8.1 will, upon
issuance in accordance with the terms of the Company's Articles of
Incorporation, be fully paid and nonassessable and free from all taxes, liens
and charges (except for taxes, if any, upon the income of the holder and
applicable transfer taxes) with respect to the issue thereof, and that the
issuance thereof shall not give rise to any preemptive rights on the part of any
person. The Company further covenants and agrees that the Company will at all
times have authorized and reserved a sufficient number of its common shares for
the purpose of issuance upon the exercise of such conversion privilege.
8.3 Adjustment of Number of Shares and Conversion Price. The
number of common shares issuable upon conversion of Preferred Shares and the
Conversion Price with respect thereto shall be subject to adjustment from time
to time as set forth in the Company's Articles of Incorporation.
9. Redemption of Preferred Shares. The Company may redeem and
repurchase Preferred Shares from the holders thereof, and will redeem and
repurchase the Preferred Shares from the holders thereof, at the times and upon
the terms and conditions set forth in the Company's Articles of Incorporation.
10. Registration Rights. The Company acknowledges and agrees that the
Investors shall have the registration rights set forth on Exhibit F.
11. Right of First Refusal.
(a) In the event (and on each occasion) that, after the date hereof,
the Company shall propose to issue equity securities, any rights, warrants or
options to purchase equity securities or any securities convertible into equity
securities ("New Securities"), other than a Permitted Issuance (as defined
below), the Company shall give the Investors written notice (an "Offer Notice")
of the Company's proposal,
<PAGE>
describing the material terms upon which the Company has proposed to issue the
New Securities. The Investors shall have fifteen (15) business days from the
date on which the Company shall give the written Offer Notice to agree to
purchase such New Securities, in whole or in part, upon the terms specified in
the Offer Notice, and in compliance with paragraph (c) of this Section 11, by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased by such Investors. If, in connection with such a
proposed issuance of New Securities, an Investor shall for any reason fail or
refuse to give such written notice to the Company within such period of fifteen
(15) business days, such Investor shall, for all purposes of this Section 11, be
deemed to have refused (in that particular instance only) to purchase any of
such New Securities and to have waived (in that particular instance only) all
rights of such Investor under this Section 11 to purchase any of such New
Securities. If an Investor gives written notice of its intent to purchase such
New Securities an Investor shall close upon such purchase within twenty (20)
days after the date of the delivery of the Investor's notice to the Company
electing to purchase New Securities.
(b) "Permitted Issuance" shall mean (i) the issuance or sale of (A)
Common Stock upon the exercise of any options to acquire Common Stock that are
outstanding on the First Issuance Date (as defined in Section 7 of the
Certificate of Designation) (as such number of shares is proportionately
adjusted for subsequent stock splits, combinations of shares and stock dividends
affecting the Common Stock), in each case pursuant to the terms thereof as in
effect on the First Issuance Date, (B) shares of Common Stock that may be issued
after the First Issuance Date to Chronimed, Inc. pursuant to the terms of the
Termination Agreement between the Company and Chronimed, Inc., and (C) stock
options and shares of Common Stock issuable upon exercise of such options
granted to employees and directors of the Company and its Subsidiaries pursuant
to the terms of stock option plans approved by the Company's Board of Directors
if such options are excersisable at the market price on the date of grant;
provided that the aggregate number of shares of Common Stock issued, or
issuable, pursuant to this clause (i) shall not exceed two million shares, (ii)
the issuance of Common Stock upon the exercise of the Warrants, (iii) the
issuance of Common Stock upon the conversion or exchange of the Preferred Stock
and (iv) the issuance of securities pursuant to any public offering of the
Company's securities registered under the Securities Act.
(c) In the event that the Investor shall fail or refuse to exercise in
full its preemptive rights within said fifteen (15) day period, the Company
shall have sixty (60) days thereafter (the "Sale Period") to sell the quantity
of New Securities which the Investors did not agree to purchase pursuant to
paragraph (c) of this Section 11, upon the terms specified in the Company's
Offer Notice to the Investors. In the event the Company has not sold the New
Securities within the Sale Period, the Company will not thereafter issue or sell
any New Securities without first offering such securities to the Investors in
the manner provided by the foregoing provisions of this Section 11.
(d) The Company will not, at any time after the effective date of this
agreement, enter into any agreement or contract (whether written or oral) which
is inconsistent in any respect with the right of first refusal granted by the
Company to the Investors pursuant to this Section 11.
12. Restriction on Transfer of Shares.
12.1 Restrictions. The Preferred Shares and Conversion Shares
are only transferable pursuant to (a) a public offering registered under the
Securities Act or (b) pursuant to an exemption from the registration
requirements of the Securities Act and applicable state securities or blue sky
laws.
12.2 Legend. Each certificate representing Preferred Shares
shall be endorsed with the following legend:
<PAGE>
"The shares represented by this certificate may not be transferred without (i)
an exemption from the registration requirements under the Federal Securities Act
of 1933, as amended, and all applicable state securities laws or (ii) such
registration."
Upon the conversion of any Preferred Shares, unless the Company receives an
opinion of counsel satisfactory to the Company to the effect that a transfer of
the Conversion Shares may be made without registration or further restriction on
transfer, or unless such Conversion Shares are being disposed of pursuant to a
registration under the Securities Act, the same legend shall be endorsed on the
certificate evidencing such Conversion Shares.
12.3 Removal of Legend. Any legend endorsed on a certificate
evidencing a security pursuant to Section 12.2 hereof shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
security, if such security is being disposed of pursuant to a registration under
the Securities Act or pursuant to Rule 144 or any similar rule then in effect or
if such holder provides the Company with an opinion of counsel satisfactory to
the Company to the effect that a transfer of such security may be made without
registration. In addition, if the holder of such security delivers to the
Company an opinion of such counsel to the effect that no subsequent transfer of
such security will require registration under the Securities Act, the Company
will promptly upon such contemplated transfer deliver new certificates
evidencing such security that do not bear the legend set forth in Section 12.2.
13. Miscellaneous.
13.1 No Waivers; Cumulative Remedies. No failure or delay on
the part of the Investors, or any other holder of any Purchased Shares in
exercising any right, power or remedy hereunder or thereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder or thereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
13.2 Amendments; Waiver and Consents. This agreement may be
amended or modified, and the obligations of the Company and the rights of the
holders of Purchased Shares under this agreement may be waived only by the
written consent of holders of a majority of the Conversion Shares issuable upon
conversion and the Conversion Shares that have been issued as a result of
conversion and that have not been resold in a public offering or transferred
pursuant to Rule 144 promulgated under the Securities Act. Any waiver or consent
may be given subject to satisfaction of conditions stated therein and any waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
13.3 Changes, Waivers, Etc. Neither this agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, except to the extent
provided in Section 13.2.
13.4 Expenses. Whether or not the transactions contemplated
hereby shall be consummated, the Company agrees to pay promptly (a) the fees,
expenses and disbursements of counsel to the Investors in connection with the
negotiation, preparation, execution, delivery and administration of this
agreement, the Certificate of Designation and the transactions contemplated
hereby and thereby, not to exceed $75,000, and any consents, amendments, waivers
or other modifications hereto or thereto and any other documents or matters
requested by the Company; and (b) all costs and expenses, including reasonable
attorneys' fees and costs of settlement, incurred by the Investors in enforcing
any obligations of or in collecting any payments due from the Company hereunder
or as a holder of Preferred Shares or Conversion Shares by reason of any breach
or default by the Company or in connection with any
<PAGE>
refinancing or restructuring of the arrangements provided hereunder in the
nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings.
13.5 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, or mailed first-class postage prepaid, registered or certified mail,
(a) if to any holder of any Purchased Shares addressed to such
holder at its address as shown on the books of the Company, or at such other
address as such holder may specify by written notice to the Company, or
(b) if to the Company at 13911 Ridgedale Drive, Minnetonka,
Minnesota 55305. Attention: President; or at such other address as the Company
may specify by written notice to the Investors.
13.6 Assignment.
(a) This agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(b) The Investors may freely assign their rights, interests
and obligations under Section 2.2 to their affiliates. The Investors may not
assign their rights, interests and obligations set forth in Section 2.2 to any
non-affiliate without the consent of the Company, which may not be unreasonably
withheld.
(c) The Investors may freely assign their rights, interests
and obligations attached to the Preferred Shares and the Conversion Shares, as
applicable, upon transfer of such Shares in accordance with Section 5.1.
(d) Neither this agreement nor any of the rights, interests or
obligations hereunder may be assigned by the Company without the prior written
consent of the Investors hereto.
13.7 Severability. Whenever possible, each provision of this
agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this agreement.
13.8 Complete Agreement. This agreement and other exhibits and
schedules hereto contain the complete agreement between the parties and
supersede any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter
hereof in any way.
13.9 Governing Law. The internal law, without regard to
conflicts of laws principles, of the State of New York will govern all questions
concerning the construction, validity and interpretation of this agreement and
the performance of the obligations imposed by this agreement.
13.10 Counterparts. This agreement may be executed
concurrently 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.
13.11 Definition of Purchased Shares. For purposes of this
agreement the term "Purchased Shares" shall refer to and include (a) the
Preferred Shares, (b) the Conversion Shares, and (c) any shares of capital stock
of the Company issued with respect to, or in exchange for, any of the foregoing
in any corporate recapitalization or corporate restructuring.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this agreement to
be executed by its duly authorized representative and each of the Investors has
caused this agreement to be executed by signing in counterpart the acceptance
form attached to this agreement.
ORPHAN MEDICAL, INC.
By
Its
------------------------
UBS CAPITAL II LLC
By
By
<PAGE>
Schedule 1
Investor Preferred Shares
UBS Capital II LLC 7,500
<PAGE>
EXHIBIT F
REGISTRATION RIGHTS PROVISIONS
Capitalized terms used herein have the meanings set forth in Section 8.
1. Demand Registration.
(a) At any time and from time to time, a Majority-in-Interest
of the Holders shall have the right, by written notice (the "Demand Notice")
given to the Company, to request the Company to file with the SEC a Registration
Statement with respect to all or any portion of the Registrable Shares held by
such Holders and/or the Registrable Shares issuable upon conversion of Shares
held by such Holders, as designated by such Holders. Upon receipt of any such
Demand Notice, the Company shall promptly, but in no event more than five days
after receipt thereof, notify all other Holders of the receipt of such Demand
Notice and, subject to the limitations set forth below, shall include in the
proposed registration all Registrable Shares with respect to which the Company
has received written requests for inclusion therein within 20 days after
delivery of the Company's notice. In connection with any Demand Registration in
which more than one holder of securities participates, in the event that such
Demand Registration involves an underwritten offering and the managing
underwriter or underwriters participating in such offering advise in writing the
Holders of Registrable Shares and the holders of other securities to be included
in such offering that the total number of Registrable Shares and other
securities to be included in such offering exceeds the amount that can be sold
in (or during the time of) such offering without delaying or jeopardizing the
success of such offering (including the price per share of the Registrable
Shares and other securities to be sold), then the amount of Registrable Shares
and other securities to be offered for the account of such Holders shall be
reduced as follows: first, pro rata on the basis of the number of securities
other than Registrable Shares and Warrant Shares requested to be registered by
the holders of such securities; and second, pro rata on the basis of the number
of Warrants Shares and Registrable Shares requested to be registered by the
holders of such securities. The Holders as a group shall be entitled to two
Demand Registrations pursuant to this Section 1; provided, that any Demand
Registration that does not become effective or is not maintained for the time
period required in accordance with Section 1(c) shall not count as one of such
Demand Registrations, except as set forth in Section 1(f); provided, further,
that if the Demanding Holders have requested inclusion in such Demand
Registration and 75% or less of the securities so requested to be included have
been included, the Holders as a group shall be entitled to an additional Demand
Registration hereunder on the same terms and conditions as would have applied to
the Holders had such earlier Demand Registration not been made. Anything herein
to the contrary notwithstanding, the Company shall not be required to effect a
Demand Registration pursuant to this Section 1 within a period of six (6) months
after the effective date of any other Demand Registration.
(b) The Company, within 45 days of the date on which the
Company receives a Demand Notice given by Holders in accordance with Section
1(a) hereof, shall file with the SEC, and the Company shall thereafter use its
best efforts to cause to be declared effective within 90 days following the date
the Company receives such Demand Notice, a Registration Statement on the
appropriate form for the registration and sale, in accordance with the intended
method or methods of distribution requested by the Holders, of the total number
of Registrable Shares specified by the Holders in such Demand Notice (a "Demand
Registration").
(c) The Company shall use commercially reasonable efforts to
keep each Registration Statement filed pursuant to this Section 1 continuously
effective and usable for the resale of the Registrable Shares covered thereby
for a period of 270 days from the date on which the SEC declares such
Registration Statement effective, as such period may be extended pursuant to
this Section 1, or in the case of a Shelf Registration, for a period of two
years from the date that the SEC declares such "shelf" Registration Statement
effective, or if shorter, until all the Registrable Shares covered by such
Registration Statement have been sold pursuant to such Registration Statement.
<PAGE>
(d) The Company shall be entitled to postpone the filing of
any Registration Statement otherwise required to be prepared and filed by the
Company pursuant to this Section 1, or suspend the use of any effective
Registration Statement under this Section 1, for a reasonable period of time
which shall be as short as practicable, but in any event not in excess of 60
days (a "Delay Period"), if the Company determines in good faith that the
registration and distribution of the Registrable Shares covered or to be covered
by such Registration Statement would materially interfere with any pending
material financing, acquisition or corporate reorganization or other material
corporate development involving the Company or any of its Subsidiaries or would
require premature disclosure thereof and promptly gives the Holders written
notice of such determination, containing a statement of the reasons for such
postponement and an approximation of the period of the anticipated delay;
provided, however, that (i) the aggregate number of days included in all Delay
Periods during any consecutive 12 months shall not exceed the aggregate of (x)
180 days minus (y) the number of days occurring during all Interruption Periods
during such consecutive 12 months and (ii) a period of at least 60 days shall
elapse between the termination of any Delay Period or Interruption Period and
the commencement of the immediately succeeding Delay Period. If the Company
shall so postpone the filing of a Registration Statement, the Holders of
Registrable Shares to be registered shall have the right to withdraw the request
for registration by giving written notice to the Company from the Holders of a
majority of the Registrable Shares that were to be registered within 45 days
after receipt of the notice of postponement or, if earlier, the termination of
such Delay Period. The time period for which the Company is required to maintain
the effectiveness of any Registration Statement shall be extended by the
aggregate number of days of all Delay Periods and all Interruption Periods
occurring during such Registration and any extension thereof is hereinafter
referred to as the "Effectiveness Period". The Company shall not be entitled to
initiate a Delay Period unless it shall (A) to the extent permitted by
agreements with other security holders of the Company, concurrently prohibit
sales by such other security holders under registration statements covering
securities held by such other security holders and (B) in accordance with the
Company's policies from time to time in effect, forbid purchases and sales in
the open market by senior executives of the Company.
(e) The Demanding Holders may, at any time prior to the
effective date of the Registration Statement relating to a Demand Registration,
revoke such request by providing a written notice to the Company revoking such
request. In the event of such revocation, the Demanding Holders shall reimburse
the Company for all of its out-of-pocket expenses incurred in connection with
the preparation, filing and processing of the Registration Statement, unless (i)
there has been a material adverse change in the business, assets, properties,
condition (financial or other), results of operations or prospects of the
Company and its Subsidiaries, since the time of the Demand Notice, (ii) such
revocation was based on the Company's failure to comply in any material respect
with its obligations hereunder or (iii) the Demanding Holders choose to count
the Demand Registration as one of the Demand Registrations to which the
Demanding Holders are entitled pursuant to the penultimate sentence of Section
1(a).
2. Piggyback Registration.
(a) Right to Piggyback. If at any time the Company proposes to
file a registration statement under the Securities Act with respect to a public
offering of securities of the same type as the Registrable Shares for its own
account (other than a registration statement (i) on Form S-8 or any successor
form thereto, (ii) filed solely in connection with a dividend reinvestment plan
or employee benefit plan covering officers or directors of the Company or its
Affiliates or (iii) on Form S-4 or any successor form thereto, in connection
with a merger, acquisition or similar corporate transaction) or for the account
of any holder of securities of the same type as the Registrable Shares, then the
Company shall give written notice of such proposed filing to the Holders at
least 30 days before the anticipated filing date. Such notice shall offer the
Holders the opportunity to register such number of Registrable Shares as they
may request (a "Piggyback Registration"). Subject to Section 2(b) hereof, the
Company shall include in each such Piggyback Registration all Registrable Shares
with respect to which the Company has received written requests for inclusion
therein within 20 days after notice has been given to the Holders. Each Holder
shall
<PAGE>
be permitted to withdraw all or any portion of the Registrable Shares of such
Holder from a Piggyback Registration at any time prior to the effective date of
such Piggyback Registration.
(b) Priority on Piggyback Registrations. The Company shall
permit the Holders to include all such Registrable Shares on the same terms and
conditions as any similar securities, if any, of the Company included therein.
Notwithstanding the foregoing, if the Company or the managing underwriter or
underwriters participating in such offering advise the Holders in writing that
the total number of securities requested to be included in such Piggyback
Registration exceeds the number which can be sold in (or during the time of)
such offering without delaying or jeopardizing the success of the offering
(including the price per share of the securities to be sold), then the number of
securities to be offered for the account of the Holders and other holders of
securities who requested to have securities included in such Registration
Statement shall be reduced (to zero if necessary) pro rata on the basis of the
number or amount of Common Stock (or the equivalent) requested to be registered
by each such Holder or holder participating in such offering.
(c) Right To Abandon. Nothing in this Section 2 shall create
any liability on the part of the Company to the Holders if the Company in its
sole discretion should decide not to file a registration statement proposed to
be filed pursuant to Section 2(a) hereof or to withdraw such registration
statement subsequent to its filing, regardless of any action whatsoever that a
Holder may have taken, whether as a result of the issuance by the Company of any
notice hereunder or otherwise.
3. Registration Procedures. In connection with the
registration obligations of the Company pursuant to and in accordance with
Sections 1 and 2 hereof (and subject to Sections 1 and 2 hereof), the Company
shall use commercially reasonable efforts to effect such registration to permit
the sale of such Registrable Shares in accordance with the intended method or
methods of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible (but subject to Sections 1 and 2 hereof):
(a) prepare and file with the SEC a Registration Statement for
the sale of the Registrable Shares on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate in accordance
with such Holders' intended method or methods of distribution thereof, subject
to Section 1(b) hereof, and use commercially reasonable efforts to cause such
Registration Statement to become effective and remain effective as provided
herein;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) to such Registration Statement, and such supplements
to the related Prospectus, as may be required by the applicable rules,
regulations or instructions under the Securities Act during the applicable
period in accordance with the intended methods of disposition specified by the
Holders of the Registrable Shares covered by such Registration Statement, make
generally available earnings statements satisfying the provisions of Section
11(a) of the Securities Act (provided that the Company shall be deemed to have
complied with this clause if it has complied with Rule 158 under the Securities
Act), and cause the related Prospectus as so supplemented to be filed pursuant
to Rule 424 under the Securities Act; provided, however, that before filing a
Registration Statement or Prospectus, or any amendments or supplements thereto
(other than reports required to be filed by it under the Exchange Act), the
Company shall furnish to the Holders of Registrable Shares covered by such
Registration Statement and their counsel for review and comment, copies of all
documents proposed to be filed;
(c) notify the Holders of any Registrable Shares covered by
such Registration Statement promptly and (if requested) confirm such notice in
writing, (i) when a Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to such Registration Statement or
any post-effective amendment, when the same has become effective, (ii) of any
request by the SEC for amendments or supplements to such Registration Statement
or the related Prospectus or for additional information regarding such Holders,
(iii) of the issuance by the SEC of any stop order suspending the effectiveness
of such Registration Statement or the initiation of any proceedings for that
<PAGE>
purpose, (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Shares 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 such Registration Statement,
Prospectus or documents incorporated or deemed to be incorporated therein by
reference so that they will not contain any 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;
(d) use commercially reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of such Registration
Statement, or the lifting of any suspension of the qualification or exemption
from qualification of any Registrable Shares for sale in any jurisdiction in the
United States;
(e) furnish to the Holder of any Registrable Shares covered by
such Registration Statement, each counsel for such Holders and each managing
underwriter, if any, without charge, one conformed copy of such Registration
Statement, as declared effective by the SEC, and of each post-effective
amendment thereto, in each case including financial statements and schedules and
all reports incorporated or deemed to be incorporated therein by reference; and
deliver, without charge, such number of copies of the preliminary prospectus,
any amended preliminary prospectus, each final Prospectus and any post-effective
amendment or supplement thereto, as such Holder may reasonably request in order
to facilitate the disposition of the Registrable Shares of such Holder covered
by such Registration Statement in conformity with the requirements of the
Securities Act;
(f) prior to any public offering of Registrable Shares covered
by such Registration Statement, use commercially reasonable efforts to register
or qualify such Registrable Shares for offer and sale under the securities or
Blue Sky laws of such jurisdictions as the Holders of such Registrable Shares
shall reasonably request in writing; provided, however, that the Company shall
in no event be required to qualify generally to do business as a foreign
corporation or as a dealer in any jurisdiction where it is not at the time so
qualified or to execute or file a general consent to service of process in any
such jurisdiction where it has not theretofore done so or to take any action
that would subject it to general service of process or taxation in any such
jurisdiction where it is not then subject;
(g) upon the occurrence of any event contemplated by paragraph
3(c)(v) above, prepare a supplement or post-effective amendment to such
Registration Statement or the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference and file any other required
document so that, as thereafter delivered to the purchaser of the Registrable
Shares being sold thereunder (including upon the termination of any Delay
Period), such Prospectus will not contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading;
(h) use its best efforts to cause all Registrable Shares
covered by such Registration Statement to be listed on each securities exchange,
if any, on which similar securities issued by the Company are then listed or
quoted and, if no such securities are so listed, to be listed on the Nasdaq
Stock Market and, if listed on the Nasdaq Stock Market, use its best efforts to
secure designation of all such Registrable Shares covered by such registration
statement as "NASDAQ Securities" within the meaning of Rule 11Aa2-1 promulgated
under the Exchange Act or, failing that, to secure Nasdaq Stock Market
authorization for such Registrable Shares;
(i) on or before the effective date of such Registration
Statement, provide the transfer agent of the Company for the Registrable Shares
with printed certificates for the Registrable Shares covered by such
Registration Statement, which are in a form eligible for deposit with The
Depository Trust Company;
<PAGE>
(j) make available for inspection by any Holder of Registrable
Shares included in such Registration Statement, any underwriter participating in
any offering pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by any such Holder or underwriter
(collectively, the "Inspectors"), all financial and other records and other
information, pertinent corporate documents and properties of any of the Company
and its Subsidiaries and affiliates (collectively, the "Records"), as shall be
reasonably necessary to enable them to exercise their due diligence
responsibilities; provided, however, that the Records that the Company
determines, in good faith, to be confidential and which it notifies the
Inspectors in writing are confidential shall not be disclosed to any Inspector
unless such Inspector signs a confidentiality agreement reasonably satisfactory
to the Company (which shall permit the disclosure of such Records in such
Registration Statement or the related Prospectus if necessary to avoid or
correct a material misstatement in or material omission from such Registration
Statement or Prospectus) or either (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in such Registration
Statement or (ii) the release of such Records is ordered pursuant to a subpoena
or other order from a court of competent jurisdiction; provided, further, that
(A) any decision regarding the disclosure of information pursuant to subclause
(i) shall be made only after consultation with counsel for the applicable
Inspectors and the Company and (B) with respect to any release of Records
pursuant to subclause (ii), each Holder of Registrable Shares agrees that it
shall, promptly after learning that disclosure of such Records is sought in a
court having jurisdiction, give notice to the Company so that the Company, at
the Company's expense, may undertake appropriate action to prevent disclosure of
such Records; and
(k) if such offering is an underwritten offering, enter into
such agreements (including an underwriting agreement in form, scope and
substance as is customary in underwritten offerings) and take all such other
appropriate and reasonable actions requested by the Holders of a majority of the
Registrable Shares being sold in connection therewith (including those
reasonably requested by the managing underwriters) in order to expedite or
facilitate the disposition of such Registrable Shares, and in such connection,
(i) use commercially reasonable efforts to obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managing underwriters and
counsel to the Holders of the Registrable Shares being sold), addressed to each
selling Holder of Registrable Shares covered by such Registration Statement and
each of the underwriters as to the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be reasonably
requested by such counsel and underwriters, (ii) use commercially reasonable
efforts to obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to each selling holder of Registrable Shares covered by
the Registration Statement (unless such accountants shall be prohibited from so
addressing such letters by applicable standards of the accounting profession)
and each of the underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters in connection
with underwritten offerings, (iii) if requested and if an underwriting agreement
is entered into, provide indemnification provisions and procedures reasonably
requested by such underwriters. The above shall be done at each closing under
such underwriting or similar agreement, or as and to the extent required
thereunder. The Company may require each Holder of Registrable Shares covered by
a Registration Statement to furnish, within a period not less than 20 days from
the date of receipt of such request, such information regarding such Holder and
such Holder's intended method of disposition of such Registrable Shares as it
may from time to time reasonably request in writing. If any such information is
not furnished within such period, the Company may exclude such Holder's
Registrable Shares from such Registration Statement. Each Holder of Registrable
Shares covered by a Registration Statement agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(c)(v) hereof, that such Holder shall
forthwith discontinue disposition of any Registrable Shares covered by such
Registration Statement or the related Prospectus until receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 3(g) hereof, or
until such Holder is advised in writing by the Company that the use of the
applicable Prospectus may be resumed, and has received copies of any amended or
<PAGE>
supplemented Prospectus or any additional or supplemental filings which are
incorporated, or deemed to be incorporated, by reference in such Prospectus
(such period during which disposition is discontinued being an "Interruption
Period") and, if requested by the Company, the Holder shall deliver to the
Company (at the expense of the Company) all copies then in its possession, other
than permanent file copies then in such holder's possession, of the Prospectus
covering such Registrable Shares at the time of receipt of such request. Each
Holder of Registrable Shares covered by a Registration Statement further agrees
not to utilize any material other than the applicable current preliminary
prospectus or Prospectus in connection with the offering of such Registrable
Shares.
4. Registration Expenses. Whether or not any Registration
Statement is filed or becomes effective but subject to Section 1(e), the Company
shall pay all costs, fees and expenses incident to the Company's performance of
or compliance with this Agreement, including (i) all registration and filing
fees, including National Association of Securities Dealers filing fees, (ii) all
fees and expenses of compliance with securities or Blue Sky laws, including
reasonable fees and disbursements of counsel in connection therewith, (iii)
printing expenses (including expenses of printing certificates for Registrable
Shares and of printing prospectuses if the printing of prospectuses is requested
by the Holders or the managing underwriter, if any), (iv) messenger, telephone
and delivery expenses, (v) fees and disbursements of counsel for the Company,
(vi) fees and disbursements of all independent certified public accountants of
the Company (including expenses of any "cold comfort" letters required in
connection with this Agreement) and all other persons retained by the Company in
connection with such Registration Statement, (vii) fees and disbursements of one
counsel, other than the Company's counsel, representing all of the Holders of
Registrable Shares being registered, selected by a Majority-in-Interest of
Holders of the Registrable Shares being registered, or in the event of a Demand
Registration, selected by the Demanding Holders and reasonably satisfactory to a
Majority-in-Interest of Holders of the Registrable Shares being registered other
than the Demanding Holders, [DISCUSS] (viii) fees and disbursements of
underwriters customarily paid by the issuers or sellers of securities and (ix)
all other costs, fees and expenses incident to the Company's performance or
compliance with this Agreement. Notwithstanding the foregoing, any discounts,
commissions or brokers' fees or fees of similar securities industry
professionals and any transfer taxes relating to the disposition of the
Registrable Shares by a Holder, will be payable by such Holder and the Company
will have no obligation to pay any such amounts.
5. Underwriting Requirements.
(a) Subject to Section 5(b) hereof, the Demanding Holders
shall have the right, by written notice, to require that any Demand Registration
provide for an underwritten offering.
(b) In the case of any underwritten offering pursuant to a
Demand Registration, the Demanding Holders shall select the institution or
institutions that shall manage or lead such offering, which institution or
institutions shall be reasonably satisfactory to the Company. In the case of any
underwritten offering pursuant to a Piggyback Registration, the Company shall
select the institution or institutions that shall manage or lead such offering.
No Holder shall be entitled to participate in an underwritten offering unless
and until such Holder has entered into an underwriting or other agreement with
such institution or institutions for such offering in such form as the Company
and such institution or institutions shall determine and such form is on terms
customary for such an offering.
(c) Each Holder participating in a Registration shall promptly
supply in writing such information as the Demanding Holders, the Company or the
underwriters reasonably request.
6. Indemnification.
(a) Indemnification by the Company. The Company shall
indemnify and hold harmless, to the full extent permitted by law, each Holder of
Registrable Shares whose Registrable Shares are covered by a Registration
Statement or Prospectus, the officers, directors and agents and employees of
each
<PAGE>
of them, each Person who controls each such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent lawful, from and against any and all losses, claims, damages,
liabilities, judgment, costs (including, without limitation, costs of
investigation, preparation and reasonable attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or based upon any untrue
or alleged untrue statement of a material fact contained in such Registration
Statement or Prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as the same are based upon
information furnished in writing to the Company by or on behalf of such Holder
expressly for use therein.
(b) Indemnification by Holder of Registrable Shares. In
connection with any Registration Statement in which a Holder is participating,
such Holder shall indemnify and hold harmless, to the full extent permitted by
law, the Company, its directors, officers, agents or employees, each Person who
controls the Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act) and the directors, officers, agents or employees
of such controlling Persons, from and against all Losses arising out of or based
upon any untrue or alleged untrue statement of a material fact contained in such
Registration Statement or the related Prospectus or any amendment or supplement
thereto, or any preliminary prospectus, or arising out of or based upon any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue or alleged untrue statement or omission or
alleged omission is based upon any information furnished in writing by or on
behalf of such Holder to the Company expressly for use in such Registration
Statement or Prospectus. Each Holder's indemnity obligations under this Section
6 shall be limited to the total sales proceeds (net of all underwriting
discounts and commissions) actually received by such Holder in connection with
the applicable offering.
(c) Conduct of Indemnification Proceedings. If any Person
shall be entitled to indemnity hereunder (an "indemnified party"), such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any proceeding with respect to which such indemnified party
seeks indemnification or contribution pursuant hereto; provided, however, that
the delay or failure to so notify the indemnifying party shall not relieve the
indemnifying party from any obligation or liability except to the extent that
the indemnifying party has been prejudiced by such delay or failure. The
indemnifying party shall have the right, exercisable by giving written notice to
an indemnified party promptly after the receipt of written notice from such
indemnified party of such claim or proceeding, to assume, at the indemnifying
party's expense, the defense of any such claim or proceeding, with counsel
reasonably satisfactory to such indemnified party; provided, however, that (i)
an indemnified party shall have the right to employ separate counsel in any such
claim or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless: (1) the indemnifying party agrees to pay such fees and expenses; (2) the
indemnifying party fails promptly to assume the defense of such claim or
proceeding or fails to employ counsel reasonably satisfactory to such
indemnified party; or (3) the named parties to any proceeding (including
impleaded parties) include both such indemnified party and the indemnifying
party, and such indemnified party shall have been advised by counsel that there
may be one or more legal defenses available to it that are inconsistent with
those available to the indemnifying party or that a conflict of interest is
likely to exist among such indemnified party and any other indemnified parties
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party); and (ii) subject to
clause (3) above, the indemnifying party shall not, in connection with any one
such claim or proceeding or separate but substantially similar or related claims
or proceedings in the same jurisdiction, arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one firm of attorneys (together with appropriate local counsel) at any time for
all of the indemnified parties, or for fees and expenses that are not
reasonable. Whether or not such defense is assumed by the indemnifying party,
such indemnified party shall not be subject to any liability for any settlement
made without its consent. The indemnifying party shall not consent to entry of
any judgment or enter into any settlement unless (i) there is no finding or
admission of any violation of any
<PAGE>
rights of any person and no effect on any other claims that may be made against
the indemnified party, (ii) the sole relief provided is monetary damages that
are paid in full by the indemnifying party and (iii) such judgment or settlement
includes as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release, in form and substance
reasonably satisfactory to the indemnified party, from all liability in respect
of such claim or litigation for which such indemnified party would be entitled
to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this
Section 6 is unavailable to an indemnified party in respect of any Losses (other
than in accordance with its terms), then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party, on the one hand, and such indemnified party, on the other hand, in
connection with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations. The relative
fault of such indemnifying party, on the one hand, and indemnified party, on the
other hand, shall be determined by reference to, among other things, whether any
action in question, including any untrue statement of a material fact or
omission or alleged omission to state a material fact, has been taken by, or
relates to information supplied by, such indemnifying party or indemnified
party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed to
include any legal or other fees or expenses incurred by such party in connection
with any investigation or proceeding. The parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 6(d) were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in the two
immediately preceding sentences. Notwithstanding the provisions of this Section
6(d), an indemnifying party that is a Holder shall not be required to contribute
any amount which is in excess of the amount by which the total proceeds (net of
all underwriting discounts and commissions) received by such Holder from the
sale of the Registrable Shares sold by such Holder in the applicable offering
exceed the amount of any damages that such indemnifying party has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
7. Granting of Registration Rights. The Company shall not
grant any registration rights inconsistent with those granted hereunder or that
give any security holder a position with respect to cut-backs that are superior
to the Holders' position as granted herein, without the consent of a
Majority-in-Interest of the Holders of the Registrable Shares (voting together
as a single class).
8. Definitions. As used in this Exhibit F, the following terms
shall have the following meanings:
"Business Day" means any day that is not a Saturday, a Sunday
or a legal holiday on which banking institutions in the State of New York are
not required to be open.
"Common Stock" means the Company's Common Stock, $.01 par
value and any other securities into which such Common Stock may hereafter be
changed.
"Delay Period" shall have the meaning set forth in Section
1(d) hereof.
"Demand Notice" shall have the meaning set forth in Section
1(a) hereof.
"Demand Registration" shall have the meaning set forth in
Section 1(b) hereof.
"Demanding Holders" means the Holders delivering the Demand
Notice pursuant to Section 1(a) hereof.
<PAGE>
"Effectiveness Period" shall have the meaning set forth in
Section 1(d) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.
"Holders" means UBS Capital II LLC and any other holder of
Registrable Shares or securities exercisable for Registrable Shares.
"Interruption Period" shall have the meaning set forth in
Section 3(k) hereof.
"Majority-in-Interest" of any group of Holders means holders
of more than 50% of the Registrable Shares held by such Holders or issuable to
such Holders upon conversion of Shares.
"person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Piggyback Registration" shall have the meaning set forth in
Section 2 hereof.
"Prospectus" means the prospectus included in any Registration
Statement (including a prospectus that discloses information previously omitted
from a prospectus filed as part of an effective registration statement in
reliance upon Rule 430A), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Shares covered by such Registration Statement and all other
amendments and supplements to such prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
"Registrable Shares" means (i) shares of Common Stock issuable
or issued upon conversion of the Shares or issued as dividends on the Shares and
(ii) any shares of Common Stock issued or issuable with respect to the shares of
Common Stock referred to in clause (i) above upon any stock split, stock
dividend, recapitalization or similar event; provided, however, that shares of
Common Stock shall only be registrable pursuant to this Agreement if and so long
as they have not been (i) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (ii) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions
and restrictive legends with respect to such shares of Common Stock are removed
upon the consummation of such sale and the Company and the seller and purchaser
of such shares of Common Stock shall have received an opinion of counsel for the
seller, which shall be in form and content reasonably satisfactory to the
Company and the seller and purchaser and their respective counsel, to the effect
that such shares of Common Stock in the hands of the purchaser are freely
transferable without restriction or registration under the Securities Act in any
public or private transaction.
"Registration" means registration under the Securities Act of
an offering of Registrable Shares pursuant to a Demand Registration or a
Piggyback Registration.
"Registration Statement" means any registration statement
under the Securities Act of the Company that covers any of the Registrable
Shares pursuant to the provisions of this Agreement, including the related
Prospectus, all amendments and supplements to such registration statement,
including pre- and post-effective amendments, all exhibits thereto and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder.
<PAGE>
"Shares" means the outstanding shares of Senior Convertible
Preferred Stock, par value $.01 per share, of the Company and any securities
(other than Common Stock) into which such shares may hereafter be changed
"Shelf Registration" means an offering on a delayed or
continuous basis pursuant to Rule 415 (or any similar rule that may be adopted
by the SEC) promulgated under the Securities Act.
"Stock Purchase Agreement" means the Stock Purchase Agreement,
dated as of July __, 1998, between the Company and the investors signatory
thereto.
"underwritten registration or underwritten offering" means a
registration under the Securities Act in which securities of the Company are
sold to an underwriter for reoffering to the public.
"Warrant Shares" means shares of Common Stock issuable or
issued upon exercise of the warrant dated May 19, 1995 issued to R.J. Steichen &
Company.
Unless otherwise stated other capitalized terms contained
herein have the meanings set forth in the Securities Purchase Agreement.
9. Miscellaneous.
(a) Rules 144 and 144A. The Company covenants that it will
file any reports required to be filed by it under the Securities Act and the
Exchange Act so as to enable Holders holding Registrable Shares to sell such
Registrable Shares without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rules 144 and 144A under the
Securities Act, as each such Rule may be amended from time to time, or (b) any
similar rule or rules hereafter adopted by the SEC. Upon the request of any such
Holder, the Company will forthwith deliver to such Holder a written statement as
to whether it has complied with such requirements.
(b) Termination. This Agreement and the obligations of the
Company and the Holders hereunder (other than Section 6 hereof) shall terminate
on the first date on which no Registrable Shares remain outstanding.
(c) Notices. All notices, demands, requests, or other
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to the Registration Rights set forth in this
Exhibit F shall be given in accordance with Section 14.4 of the Stock Purchase
Agreement.
(d) Stock Purchase Agreement. This Exhibit F is deemed a part
of the Stock Purchase Agreement.
EXHIBIT 99
ORPHAN MEDICAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected. The Company desires to take advantage of these
"safe harbor" provisions and is filing this Exhibit 99 in order to do so.
Accordingly, when used in this Annual Report on Form 10-K and in future filings
by the Company with the Securities and Exchange Commission, quarterly reports,
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company hereby cautions readers that the following important
factors, among others, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any forward-looking statements made by or on behalf of the Company.
LACK OF REVENUES AND PROFITABLE OPERATIONS; UNCERTAINTY OF FUTURE FINANCIAL
RESULTS.
The Company has been unprofitable since its inception in January 1993 and had an
accumulated deficit of $30,265,691 as of June 30, 1998. From inception through
June 30, 1998, the Company reported Elliotts B Solution, Cystadane, Antizol-Vet,
and Antizol sales of $3,160,120 and gross profit on such sales of $2,460,811,
which is not sufficient to sustain future product development or business
growth. The Company expects operating losses to continue into 1999 because gross
profit from its five approved products, including Sucraid, is not expected to
offset additional spending required to complete the development plans for
Busulfex and Xyrem, and for additional sales and marketing spending for the new
product introductions. The amount of these losses may vary significantly from
year-to-year and quarter-to-quarter and will depend on, among other factors, the
timing of product development and regulatory approval. There can be no assurance
that the Company will ever generate material product revenues or achieve
profitability.
DEVELOPMENT STAGE COMPANY.
The Company is in the development stage and its operations and the development
of its proposed products are subject to all of the risks inherent in the
establishment of a new business enterprise, including reliance on key personnel,
the lack of fully-developed products, insufficient capital, a competitive
environment characterized by numerous well-established and well-capitalized
competitors, expected operating losses into 1999, a market subject to extensive
regulatory oversight, and reliance on outside contractors for the manufacture
and distribution of its proposed products. The likelihood of the success of the
Company must be considered in light of the problems, expenses and delays
frequently encountered in connection with the development of new pharmaceutical
products or medical products and the competitive and regulatory environment in
which the Company operates.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE.
The Company's cash, cash equivalents, and short-term investments as of June 30,
1998 plus the $7.1 million in net cash proceeds from the July 23, 1998 sale of a
private placement are expected to be sufficient to fund the Company's operations
through 1999. However, should the Company realize any material reduction in
product revenues and/or a delay in the FDA approval and market launch of
Busulfex, the Company may require additional funding to fully implement its
development plan for Xyrem. Adequate funds for the Company's operations, whether
from financial markets or from other sources, may not be available when needed
on terms attractive to the Company, or at all. Lack of funding could cause the
Company to delay, scale back or eliminate some or all of its products currently
under development, including acquisition and licensing programs, or prevent the
commercial introduction of some or all of its products altogether.
<PAGE>
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY.
The Company has adopted a license and acquisition strategy to build its product
portfolio. The Company's strategy for growth is dependent upon its continued
ability to identify and acquire new pharmaceutical products targeted at niche
markets within selected strategic therapeutic market segments ("STMS"). Because
the Company does not engage in proprietary research and development of new
pharmaceutical products, it must rely upon the willingness of others to sell or
license pharmaceutical product opportunities to the Company. Other companies,
including those with substantially greater resources, are competing with the
Company to acquire such products. There can be no assurance that the Company
will be able to acquire rights to additional products on acceptable terms, if at
all. The failure of the Company to acquire or license new pharmaceutical
products within a selected STMS or to promote and market commercially successful
products within an existing STMS could have a material adverse effect on the
Company's business and its prospects.
The Company has contractual production rights to certain compounds through
various license agreements. These agreements are generally terminable by the
licensor for cause upon short notice or in the event the Company is insolvent or
bankrupt, does not apply minimum resources and efforts to develop the compound
under license or does not achieve certain minimum royalty payments. There can be
no assurance that the agreements will not be so terminated and, if terminated,
that the Company will be able to enter into similar agreements on terms as
favorable to the Company as those contained in its existing license agreements.
FOREIGN MARKETING ALLIANCES; NO ASSURANCE OF FOREIGN LICENSEES.
The Company's strategy for the exploitation of foreign markets for its products
is to enter into marketing alliances with multinational and foreign
pharmaceutical companies. From inception through June 30, 1998, the Company has
entered into distribution agreements to sell Cystadane in Australia and New
Zealand, and Antizol in Europe. Sales of Cystadane for Australia and New Zealand
have not been nor are they expected to be material. Distribution of Antizol in
Europe will initially be done on a "named patient" or "emergency use" basis
until full regulatory approval is obtained, and the Company does not expect such
"emergency use" distribution to result in material sales. Distribution of
Antizol in Europe through normal or the usual distribution channels will not
commence until the product has received marketing approval in each European
country into which the distributor expects to sell the product. The Company
typically receives upfront fees for entering into such arrangements and expects
to realize future benefits because the Company will be the exclusive supplier of
the product sold to the distributor in these foreign markets. However, there can
be no assurance that the Company will be able to negotiate additional alliances
for its other products on acceptable terms, if at all, or that such alliances
will be successful. The Company will be substantially dependent upon the
companies it has contracted with to date for the successful distribution of
Cystadane and Antizol outside the U.S. and, if these companies are unsuccessful
in their distribution efforts, it would be difficult for the Company to contract
with other distributors for these products within the licensed territories.
GOVERNMENT REGULATION; NEED FOR FDA AND OTHER REGULATORY APPROVALS.
Government regulation in the United States and abroad will be a significant
factor in the production, testing and marketing of the Company's current and
future products. Prior to marketing, each of the Company's products must undergo
an extensive regulatory approval process conducted by the United States Food and
Drug Administration (the "FDA") and by comparable agencies in other countries.
The approval process can take many years and require the expenditure of
substantial resources, and there can be no assurance that any product that the
Company may develop will be approved by the FDA or any foreign regulatory
authority in a timely manner, or at all. Generally, only a very small percentage
of newly discovered pharmaceutical compounds that enter pre-clinical development
are approved for sale. The Company will not be permitted to market any medicine
it may develop as a prescription product in any jurisdiction in which the
product does not receive regulatory approval. Once approved, the Division of
Drug Marketing, Advertising and Communication ("DDMAC"), the FDA's marketing
surveillance department within the Center for Drugs, must approve marketing
claims, which are the basis for a product's labeling, advertising and promotion.
There can be no assurance that the claims the Company is seeking will be
approved by DDMAC. The failure to obtain acceptable marketing claims on a
product from DDMAC could have a material adverse effect on the Company and its
prospects.
<PAGE>
The Company depends on external laboratories and medical institutions to conduct
its pre-clinical and clinical testing in compliance with clinical and laboratory
practices established by the FDA. The data obtained from pre-clinical and
clinical testing are subject to varying interpretations that could delay, limit
or prevent regulatory approval. In addition, delays or rejection may be
encountered based upon changes in FDA policy for drug approval during the period
of development and by the requirements for regulatory review of each submitted
New Drug Application ("NDA"). Moreover, even if the FDA approves a product, such
approval may entail commercially unacceptable limitations on the uses, or
"indications," for which a product may be marketed, and further studies may be
required to provide additional data on safety or effectiveness. The FDA also
requires post-marketing adverse event surveillance programs to monitor the
product's side effects.
An approved FDA product and the product's manufacturer are subject to continual
regulatory review and the later discovery of previously unknown problems with a
product or manufacturer may result in restrictions or sanctions on such products
or manufacturer, including the withdrawal of such product from the market. Most
changes in the manufacturing procedures for any of the Company's approved
products and any change in manufacturers will require the approval of the FDA
prior to their implementation. Obtaining the FDA's approval for a change in
manufacturing procedures or change in manufacturers could cause production
delays and loss of sales, which would have a material adverse effect the
Company's business and its prospects.
In certain countries, the sales price of a product must also be approved after
marketing approval is granted. No assurance can be given that satisfactory
prices can be obtained in foreign markets even if marketing approval is granted
by foreign regulatory authorities.
ORPHAN DRUG STATUS.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects populations of fewer than 200,000 people in the United
States. Orphan drug designation must be requested before submitting an NDA, and
after the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicized by the FDA. Under
current law, orphan drug status is conferred upon the first company to receive
FDA approval to market the designated drug for the designated indication, which
also grants United States marketing exclusivity for a period of seven years
following approval by the NDA, subject to certain limitations. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process. Moreover, although obtaining FDA approval to market
a product with orphan drug status can be advantageous, there can be no assurance
that the scope of protection or the level of marketing exclusivity that is
currently afforded by orphan drug status and marketing approval will remain in
effect in the future. Busulfex and Xyrem have orphan drug designation; while
Antizol, Elliotts B Solution, Cystadane, and Sucraid have orphan drug status.
There can be no assurance, however, that any product candidates will receive an
orphan drug designation or that any of the Company's products with such a
designation will be the first to be approved by the FDA for the designated
indication, thereby obtaining orphan drug status (i.e., marketing exclusivity).
Orphan drug designation does not prevent other manufacturers from attempting to
develop the same drug for the designated indication or from obtaining the
approval of an NDA for their drug prior to the approval of the Company's NDA. If
another sponsor's NDA for the same drug and the same indication is approved
first, that sponsor is entitled to exclusive marketing rights if that sponsor
has received orphan drug designation for its drug. In that case, the FDA would
refrain from approving an application by the Company to market its competing
product for seven years, subject to certain limitations. There can be no
assurance that competing products will not receive orphan drug designations and
FDA marketing approval before the Company's products.
NDA approval of a drug with an orphan drug designation does not prevent the FDA
from approving the same drug for a different indication, or a molecular
variation of the same drug for the same indication. Because doctors are not
restricted by the FDA from prescribing an approved drug for uses not approved by
the FDA, it is also possible that another company's drug could be prescribed for
indications for which the Company's product has received orphan drug designation
and NDA approval. Such prescribing of approved drugs for unapproved uses
(commonly referred to as "off label" use) could adversely affect the marketing
potential of products that have received orphan drug designation and NDA
approval. In addition, NDA approval of a drug with an orphan drug designation
does not provide any marketing exclusivity in foreign markets. The possible
amendment of the Orphan Drug Act by the
<PAGE>
United States Congress has been the subject of frequent discussion. Although no
significant changes to the Orphan Drug Act have been made for a number of years,
members of Congress have from time to time proposed legislation that would limit
the application of the Orphan Drug Act. There can be no assurance as to the
precise scope of protection that may be afforded by orphan drug designation and
marketing approval in the future or that the current level of exclusivity will
remain in effect.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. The
Company's success will depend, in part, on its ability to enjoy, obtain and
enforce protection for its products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of its trade
secrets and operate without infringing the proprietary rights of third parties.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal and factual questions. At June 30, 1998,
Busulfex is the only product that the Company has under development for which
the use of or treatment methods licensed by the Company are covered by United
States patents. The Company evaluates the desirability of seeking patent or
other forms of protection for its products in foreign markets based on the
expected costs and relative benefits of attaining such protection. There can be
no assurance that any patents will be issued from any applications or that any
issued patents will afford adequate protection to the Company. Further, there
can be no assurance that any issued patents will not be challenged, invalidated,
infringed or circumvented or that any rights granted thereunder will provide
competitive advantages to the Company. Parties not affiliated with the Company
have obtained or may obtain United States or foreign patents or possess or may
possess proprietary rights relating to the Company's products. There can be no
assurance that patents now in existence or hereafter issued to others will not
adversely affect the development or commercialization of the Company's products
or that the Company's planned activities will not infringe patents owned by
others.
The Company could incur substantial costs in defending itself in infringement
suits brought against it or any of its licensors or in asserting any
infringement claims that the Company may have against others. The Company could
also incur substantial costs in connection with any suits relating to matters
for which the Company has agreed to indemnify its licensors or distributors. An
adverse outcome in any such litigation could have a material adverse effect on
the Company's business and prospects. In addition, the Company could be required
to obtain licenses under patents or other proprietary rights of third parties.
No assurance can be given that any such licenses would be made available on
terms acceptable to the Company, or at all. If the Company is required to, and
does not obtain any such required licenses, it could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more of its
products.
Busulfex and Xyrem are in the development stage. Even if the development of such
products is successful and marketing clearance from the FDA is obtained, there
can be no assurance that applicable patent coverage, if any, will not have
expired or will not expire shortly after such approval. Any such expiration
could have a material adverse effect on the sales and profitability of such
product. Further, some of the compounds the Company has developed or intends to
develop (Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem and
Sucraid) are believed to be in the public domain or not presently subject to
patent protection in the United States.
The Company also seeks to protect its proprietary information and technology in
part by confidentiality agreements and inventors' rights agreements with its
employees. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise be disclosed to or discovered by its
competitors.
COMPETITION; RAPID TECHNOLOGICAL CHANGE.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources, marketing experience, research and development staffs and facilities
than the Company. Although the Company seeks to limit potential sources of
competition by developing products that are eligible for orphan drug designation
and NDA approval or other forms of protection, there can be no assurance that
the Company's competitors will not succeed in developing similar technologies
and products more rapidly than the Company or
<PAGE>
that these competing technologies and products will not be more effective than
any of those that are being or will be developed by the Company.
The Company is aware of products being developed by potential competitors that
have received orphan drug designations for the same respective indications as
Busulfex and Xyrem. If these drugs are approved for marketing before the
Company's products, the Company would be required to obtain a license from these
entities before its own competing products could be marketed. There can be no
assurance that any required license would be available on commercially
acceptable terms, or at all.
The pharmaceutical industry has experienced rapid and significant technological
change. The Company expects that pharmaceutical technology will continue to
develop rapidly, and the Company's future success will depend, in large part, on
its ability to develop and maintain a competitive position. Technological
development by others may result in the Company's products becoming obsolete
before they are marketed or before the Company recovers a significant portion of
the development and commercialization expenses incurred with respect to such
products. In addition, alternative therapies or new medical treatments could
alter existing treatment regimes, and thereby reduce the need for one or more of
the Company's products, which would adversely affect the Company's business and
its prospects.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY.
Only five of the Company's products have been approved for marketing by
regulatory authorities in the United States or elsewhere. Even if the balance of
the Company's products are approved for sale, there can be no assurance that
they will be commercially successful or that they will obtain the results
expected. The Company may encounter unanticipated problems relating to the
development, manufacturing, distribution and marketing of its products, some of
which may be beyond the Company's financial and technical capacity to solve. The
failure to adequately address any such problems could have a material adverse
effect on the Company's business and its prospects.
No drug development portfolio can be completely insulated from potential
failures, and it is likely that some products selected for development by the
Company will not produce the results expected during clinical studies, not
receive FDA approval or fail to generate product sales of an acceptable level.
The Company has terminated the development of eleven products from its portfolio
since inception: L-Cycloserine in 1994, Glucaric Acid in 1996, and nine products
in 1997. With respect to the nine products terminated in 1997, the Company took
this action in order to focus its development efforts on those products that fit
within three selected STMS: Antidote, Oncology Support, and Sleep Disorders. The
Company recorded a one-time charge of $780,000 in the third quarter of 1997 for
the estimated cost of winding down the development plans for nine development
products. In addition, the Company believes that several of the products
terminated in 1997 may have value to another pharmaceutical company and it will
seek to license or sell its rights relating to these products. The termination
of the development of any one or more of the Company's current products could
have a material adverse effect on the Company and its prospects.
Most orphan drugs have a potential United States market of less than $10 million
annually and many address annual markets of less than $1 million. There can be
no assurance that the Company's sales of its products will be profitable even if
accepted and used by patients and medical specialists.
DEPENDENCE UPON OTHERS FOR CLINICAL TESTING AND MANUFACTURING.
The Company does not have and does not intend to establish any internal product
testing, manufacturing or distribution capabilities. Accordingly, the Company
will be required to enter into arrangements with other companies for the
clinical testing, manufacture and distribution of its products. The inability of
the Company to retain third-parties for these purposes on acceptable terms could
adversely affect the Company's ability to develop and market its products. Any
failures by third-parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair the Company's ability
to deliver its products on a timely basis or otherwise impair the Company's
competitive position. In addition, the Company's dependence on third-parties for
the development, manufacture and distribution of its products may adversely
affect its potential profit margins and its ability to develop and deliver its
products on a timely basis. The manufacture of drugs can be an expensive, time
consuming and complex process and may require the use of materials with limited
availability or a
<PAGE>
dependence on sole suppliers. In addition, several of the Company's products
have not yet been manufactured in commercial quantities, and there can be no
assurance that such products can be so manufactured in a cost-effective manner.
Manufacturers of the Company's products will be subject to applicable good
manufacturing practices ("GMP") prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into or maintain relationships
either domestically or abroad with manufacturers whose facilities and procedures
comply or will continue to comply with GMP or applicable foreign requirements.
Should manufacturing agreements be entered into, the Company will be dependent
on such manufacturers for continued compliance with GMP and applicable foreign
standards. Failure by a manufacturer of the Company's products to comply with
GMP or applicable foreign requirements could result in significant time delays
or the inability of the Company to commercialize or continue to market a product
and could have a material adverse effect on the Company and its prospects. In
the United States, failure to comply with GMP or other applicable legal
requirements can lead to federal seizure of violative products, injunctive
actions brought by the federal government, and potential criminal and civil
liability on the part of a company and its officers and employees.
DEPENDENCE UPON OTHERS FOR DISTRIBUTION.
The Company has an exclusive agreement with Cardinal Health, Inc. ("Cardinal"),
whereby Cardinal, through its Specialty Companies, will provide a variety of
services to support the effective distribution of Orphan Medical's products.
Cardinal will provide integrated distribution and operations services to process
and support transactions between Orphan Medical and wholesalers, specialty
distributors, and direct customers; reimbursement management; patient assistance
and information hotline services; and specialty distribution and marketing
services to physician practices. Elliotts B Solution, Antizol, and Sucraid are
currently distributed by Cardinal, which also will distribute the Company's
proposed products should those products receive marketing clearance from the FDA
in the future. The Company will, therefore, be substantially dependent upon
Cardinal's ability to successfully distribute Elliotts B Solution, Antizol,
Sucraid and all of the Company's proposed products that receive marketing
clearance from the FDA.
Cystadane is currently distributed in the U.S. by Chronimed Inc. ("Chronimed"),
which distributes this product directly to patients through its mail order
pharmacy. The Company is substantially dependent upon Chronimed's ability to
successfully distribute Cystadane directly to patients in the U.S.
Antizol-Vet is currently distributed exclusively through W.A. Butler Company
("Butler"), the largest distributor of veterinary pharmaceuticals in the United
States. The Company is substantially dependent upon Butler's ability to
successfully distribute Antizol-Vet. The management of this product and reliance
on the sales efforts of a contract distributor has proven to be more difficult
than the Company originally expected and the Company is presently reviewing its
options with respect to the Antizol-Vet product, which could include the sale or
licensing of its rights to this product.
There can be no assurance that other distribution companies would be available
or continue to be available on commercially acceptable terms, if at all. The
loss of a distributor or failure to renew agreements with an existing
distributor could have a material adverse effect on the Company and its
prospects.
UNCERTAIN EXTENT OF PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The Company's ability to commercialize its products successfully will depend in
part on the price it may be able to charge for its products and on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. Government officials and private health
insurers are increasingly challenging the price of medical products and
services. Significant uncertainty exists as to the pricing flexibility suppliers
will have with respect to, and the reimbursement status of, newly approved
health care products.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement government control of pricing
and profitability of prescription pharmaceuticals. Cost controls, if mandated by
a government agency, could decrease the price the Company receives for its
products or products it may develop in the future and, by preventing the
recovery of development costs, which could be substantial, and an
<PAGE>
appropriate profit margin, could have a material adverse effect on the Company.
Furthermore, federal and state regulations govern or influence the reimbursement
to health care providers in connection with medical treatment of certain
patients. If any actions are taken by federal and/or state governments, such
actions could adversely affect the prospects for sales of the Company's
products. There can be no assurance that actions taken by federal and/or state
governments, if any, with regard to health care reform will not have a material
adverse effect on the Company and its prospects.
Certain third-party payors may attempt to further control costs by selecting
exclusive providers of their pharmaceutical products. If such arrangements were
made with competitors of the Company, such payors would not reimburse patients
for purchases of the Company's competing products. This lack of reimbursement
would diminish the market for the Company's products and could have a material
adverse effect on the Company and its prospects.
RISK OF PRODUCT RECALL
Product recalls may be issued at the discretion of the Company, the FDA, the
U.S. Federal Trade Commission, or other government agencies having regulatory
authority for product sales, and may occur due to disputed labeling claims,
manufacturing issues, quality defects, or other reasons. No assurance can be
given that product recalls will not occur. The Company does not carry any
insurance to cover the risk of a potential product recall. Any product recall
could have a material adverse effect on the Company and its prospects.
PRODUCT LIABILITY AND INSURANCE RISKS.
The testing and sale of human health care products by the Company entails an
inherent risk that product liability claims may be asserted against the Company.
As the Company expands the scope of its clinical testing, the Company will be
exposed to increasing potential liabilities. The pharmaceutical industry has
experienced increasing difficulty in maintaining product liability insurance
coverage at reasonable levels, and substantial increases in insurance premium
costs in many cases have rendered coverage economically impractical. The Company
currently carries product liability coverage in the aggregate amount of $10
million for all claims made in any policy year. Although to date the Company has
not been the subject of any product liability or other claims, there can be no
assurance that the Company will be able to maintain product liability insurance
on acceptable terms or that its insurance will provide adequate coverage against
potential claims. The successful assertion of any uninsured product liability or
other claim against the Company could have a material adverse effect on the
Company's business and prospects.
DEPENDENCE ON CERTAIN OFFICERS AND KEY MANAGEMENT PERSONNEL.
The Company's success will be largely dependent upon the efforts of its
executive officers and key management personnel. The loss of the services of an
executive officer or one or more key employees, or the inability of the Company
to attract and retain skilled management and marketing personnel in the future,
could have a material adverse effect on the Company and its prospects.
YEAR 2000 READINESS ISSUE.
The Company has assessed and continues to assess the impact of the so called
"Year 2000 Readiness Issue" on its reporting systems and operations. The Year
2000 Readiness Issue relates to the ability of computer hardware, software, and
firmware products to accurately process date/time data (including calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations.
In addition, it relates to the ability to properly exchange time/date data
between such products. When the year 2000 occurs, systems that are not year 2000
compliant might recognize the year 2000 as the year 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause the Company's
systems, or the systems used by the Company's suppliers, distributors, customers
or regulatory agencies (i.e., FDA) to process critical financial and operational
information incorrectly, or not at all.
The Company's strategy is and has been to replace its older, inefficient systems
with current technology, which is both year 2000 compliant and more efficient.
In addition, the Company has purchased and implemented financial and operational
software upgrades that are year 2000 compliant. Because the Company has been
active in upgrading computer systems, including related operating and
application software, to provide for greater employee
<PAGE>
efficiency and customer responsiveness, direct expenses related to specific Year
2000 Readiness Issues should not be material to the Company's financial
statements. In addition, the Company has confirmed with its principal vendors
and distributors that they have implemented Year 2000 Readiness programs.
However, there can be no assurance that the systems of third parties on which
the Company currently relies or may rely on in the future will be year 2000
compliant, or that the failure of a third party's system due to the Year 2000
Readiness Issue would not have a material adverse effect on the Company and its
prospects.
RESTRICTIONS, COVENANTS AND RIGHTS RELATED TO SENIOR CONVERTIBLE PREFERRED STOCK
On July 23, 1998 (the "First Issuance Date"), the Company completed the sale to
UBS Capital II LLC ("UBS Capital") of a private placement of $7.5 million of
Senior Convertible Preferred Stock (the "Preferred Shares"). The private
placement agreement also gives UBS Capital the right to invest up to an
additional $4.5 million within 90 days of the First Issuance Date. In
conjunction with the issuance of the Preferred Shares, the Company agreed to
several restrictions and covenants, and granted certain voting and other rights
to the holders of the Preferred Shares, including but not limited to the
following:
1. The Company is restricted from issuing additional equity securities,
including convertible debt instruments, warrants, and stock options,
except for a "Permitted Issuances", which are limited to: (A) shares
of Common Stock issued after the First Issuance Date to Chronimed,
Inc. pursuant to the terms of the Termination Agreement between the
Company and Chronimed, Inc., (B) shares of Common Stock issued upon
exercise of stock options that are outstanding on the First Issuance
Date, (C) stock options granted and shares of Common Stock issuable
upon exercise of such options pursuant to the terms of stock option
plans approved by the Company's Board of Directors; provided that
the aggregate number of shares of Common Stock issued, or issuable,
under (A), (B) and (C) shall not exceed two million shares, (D)
Common Stock issued upon the exercise of currently outstanding
warrants that, as of June 30, 1998, entitled holders to purchase an
aggregate of 213,255 shares of Common Stock, (E) Common Stock issued
upon the conversion of the Preferred Shares, and (F) securities
issued pursuant to any public offering of the Company's securities
registered under the Securities Act. In addition, the sale of any
private placement of equity securities must be approved by a
majority vote of the holders of the Preferred Shares and, if
approved by the holders, UBS Capital has the right of first refusal
with respect to the purchase or sale of any such securities.
2. As of the First Issuance Date, the Preferred Shares are convertible,
at the option of the holders, into shares of the Company's Common
Stock at a per share price equal to the lesser of $11.78 or 110% of
the average last sale price of the 20 trading days prior to October
21, 1998, but not less than $8.50 per share. If and whenever, on or
after the First Issuance Date, the Company issues or sells, or is
deemed to have issued or sold, any shares of its Common Stock for
consideration per share less than the conversion price in effect for
the Preferred Shares immediately prior to the time of such issue or
sale, then, unless such issuance or sale was a Permitted Issuance
(as described above), immediately upon such issue or sale or deemed
issue or sale the conversion price shall be reduced to the
conversion price determined by dividing (i) the sum of (1) the
product derived by multiplying the conversion price in effect
immediately prior to such issue or sale by the number of shares of
Common Stock deemed outstanding immediately prior to such issue or
sale, plus (2) the consideration, if any, received by the Company
upon such issue or sale, by (ii) the number of shares of Common
Stock deemed outstanding immediately after such issue or sale.
3. The dividend rate on the Preferred Shares is 7.5 percent per annum,
which is payable at the option of the Company in either cash or by
issuing additional Preferred Shares (on the first four dividend
payment dates) or by issuing Common Stock (after the fourth dividend
payment date). However, unless waived by a majority of the holders
of Preferred Shares, the dividend rate will increase to 20 percent
per annum, payable solely in cash, if either (i) at any time during
any 730-day period individuals who constituted the Board of
Directors at the beginning of such period, or the First Issuance
Date (whichever is later), cease for any reason to constitute a
majority of the Board of Directors then in office or (ii) the Board
<PAGE>
of Directors fails to declare and pay in full, on any semi annual
Dividend Payment Date (as defined in Section 4 (c) of Exhibit
3.1.1).
4. The Company is restricted from incurring any indebtedness unless
after giving effect to the additional indebtedness the aggregate
indebtedness of the Corporation and its subsidiaries outstanding as
of the date of such incurrence, excluding financing that is secured
by accounts receivable but not by the Corporation's intellectual
property licenses or other intellectual property rights, does not
exceed two and one-half times EBITDA of the Company for the twelve
month period immediately prior to the date of such incurrence for
which there are quarterly financial statements available. For
purposes of this restriction, EBITDA shall mean the sum of (i) net
income, (ii) interest expense (iii) depreciation and amortization,
and other non-cash items properly deducted in determining net income
and (iv) federal, state and local income taxes, computed and
calculated in accordance with generally accepted accounting
principles.
5. The Company is restricted from paying with respect to its issued and
outstanding Common Stock any cash dividends, cash distributions not
classified as dividends, or cash payments on the redemption of such
Common Stock. This restriction shall apply as long as at least 20
percent of the issued Preferred Shares remain outstanding.
6. For as long as 20% of the Initial Shares (as defined under Section
7(b) of Exhibit 3.1.1) remain outstanding, the holders of a majority
of the Preferred Shares, voting separately as a single class in the
election of directors of the Company, to the exclusion of all other
classes of the Company's Common Stock and with each share of the
Preferred Shares entitled to one vote, shall be entitled to elect
one (1) director to serve on the Company's Board of Directors until
his successor is duly elected by holders of a majority of the
Preferred Shares or he is removed from office by holders of a
majority of the Preferred Shares.
7. The holders of the Preferred Shares shall vote separately as a
single class, and approval of holders of a majority of the
outstanding shares of Preferred Shares shall be required, whenever a
shareholder vote is required pursuant to Section 302A.671 of the
Minnesota Business Corporation Act, or any successor provision
thereto, for the purpose of according voting rights with respect to
shares acquired or to be acquired in a control share acquisition (as
defined in Section 302A.011 Subdivision 38 of the Minnesota Business
Corporation Act). In addition, holders of Preferred Shares are
entitled to vote on all other matters requiring shareholder approval
on an "as if" converted basis.
8. Ten years from the First Issuance Date, the Company must elect to
either (1) require the holder to convert all remaining unconverted
Preferred Shares into Common Stock upon the payment by the Company
of a Conversion Fee to the holder, payable in cash or Common Stock,
or (2) redeem for cash the holder's unconverted Preferred Shares for
$1,000 per share plus accrued dividends. The conversion fee cannot
exceed $3.0 million and will be reduced prorata to the extent the
number of unconverted Preferred Shares at the end of the ten year
term is less than the number of Preferred Shares issued to the
holders during the ten year term.
RELATIONSHIP WITH CHRONIMED.
Although the Company believes the agreements that it had with Chronimed since
its July 1, 1994 spin-off were commercially reasonable, such agreements were not
the product of arms-length negotiations. In June 1997, the Company terminated
these agreements (the "Termination Agreement"), except for the Cystadane
Agreement. The Termination Agreement provides that the Company pay Chronimed
compensation equal to $2,500,000, consisting of cash and shares of the Company's
Common Stock. The October 1996 Cystadane Agreement between the Company and
Chronimed applies solely to the domestic distribution of Cystadane. Several of
the Company's directors and executive officers are current or former employees,
shareholders and/or directors of Chronimed. The Termination Agreement and the
October 1996 Cystadane Agreement were approved by all of the independent outside
members of the Company's Board of Directors.
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE AND DILUTION OF STOCK - TERMINATION AGREEMENT
WITH CHRONIMED.
The Company paid $250,000 on signing the Termination Agreement in June 1997, and
had a remaining obligation to compensate Chronimed with cash and Common Stock
having a total value of $2,250,000. Cash payments against this remaining
obligation are to be based on a 3 percent temporary royalty on the Company's
product sales, which the Company began paying quarterly on September 30, 1997.
Unregistered shares of Common Stock equal to 1 percent of the Company's
outstanding shares at each quarter end, which the Company began issuing on March
31, 1998, are to be issued quarterly to Chronimed. The Company is obligated to
continue paying the royalties and issuing Common Stock until the sum of all
royalty payments and the market value (as defined below) of all issued Common
Stock equals $2,250,000. The Company is obligated file a registration statement
with the Securities and Exchange Commission to register such shares. The market
value of shares issued to Chronimed as payment against the remaining obligation
of $2,250,000 will be determined as follows: (i) the market value of any such
shares sold within 90 days after the effective date of a registration statement
covering such shares will be equal to the net proceeds realized by Chronimed
from the sale of such shares, or (ii) the market value of any such shares not
sold within 90 days after the effective date of a registration statement
covering such shares will be equal to the average last bid price for shares of
the CompanyAEs Common Stock as reported on Nasdaq for the last five days within
the 90 day period. The Company anticipates Chronimed will sell in the open
market the shares it receives from the Company within the 90 day period. The
Company has the option, regardless of the market price of its Common Stock, to
buy-out for cash the remaining obligation to Chronimed. Through June 30, 1998,
the Company has paid Chronimed approximately $81,000 in royalties and issued
123,056 shares of Common Stock, of which 61,178 shares have been sold by
Chronimed in market transactions for net cash proceeds of $576,183. At June 30,
1998, the Company's unpaid obligation to Chronimed has an estimated value of
approximately $1,146,666, which is classified as a "Current Liability".
There is risk that the Company's current shareholders' ownership could be
substantially diluted and/or the market value of their shares adversely affected
in the event any one or a combination of the following events occur: (1) sales
by Chronimed of the Company's Common Stock cause the price of the Company's
Common Stock to decrease; (2) in the event of a decline in the value of the
Company's Common Stock, the Company would be required to issue more shares in
subsequent periods to satisfy its remaining obligation to Chronimed; or (3) the
Company's sales of future products are significantly less than forecast, which
would decrease the temporary royalty payments that would be applied against the
remaining obligation and, thereby, increase the number of shares required to be
issued to Chronimed. The realization of any one or combination of these risks,
or the decision by the Company to exercise its option to effect a cash buy-out
of the remaining obligation, could have a material adverse effect on the
Company's business, its prospects and its shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - LOSS OF NASDAQ NATIONAL MARKET LISTING.
There is risk that the market value and the liquidity of the public float for
the Company's Common Stock could be adversely affected in the event the Company
no longer meets the Nasdaq's requirements for continued listing on the National
Market tier. For continued listing on the Nasdaq National Market, a company must
satisfy a number of requirements, which in the Company's case includes either:
(1) net tangible assets in excess of $4.0 million as reported on Form 10-Q or
Form 10-K or (2) a market capitalization of at least $50.0 million. At June 30,
1998, the Company's net tangible assets equaled $669,579 and its market
capitalization was approximately $66.0 million (based on the last sale price of
$10.563 and 6,249,718 shares outstanding as of June 30, 1998). Net tangible
assets are defined as total assets less total liabilities. Market capitalization
is defined as total outstanding shares multiplied by the last sales price quoted
by Nasdaq. After giving effect to the July 23, 1998 private placement of
Preferred Shares, which netted the Company approximately $7.1 million in
additional net tangible assets (i.e., cash), the Company estimates that it will
have net tangible assets in excess of the $4.0 million (thereby satisfying
Nasdaq's net tangible asset listing requirement) through at least the end the
third quarter of 1998. In the event UBS Capital exercises its right, which
expires on October 21, 1998, to invest up to an additional $4.5 million, the
Company's estimated net tangible assets are expected to exceed $4.0 million
through the end of 1998. Should the Company fail to satisfy at least one of the
two aforementioned Nasdaq listing requirements at any time after the third
quarter of
<PAGE>
1998 (or after 1998 in the event of an additional investment by UBS Capital of
at least $2.0 million), the Company's Common Stock would no longer qualify for
listing on the Nasdaq National Market, but would qualify for quotation on the
Nasdaq Small Cap Market provided it had net tangible assets in excess of $2.0
million. The Company's ability to raise additional capital and the market value
of the Company's Common Stock could be adversely affected by failing to meet
Nasdaq's requirements for listing on either the National Market or the Small Cap
Market. The realization of any one or combination of these risks could have a
material adverse effect on the Company's business, its prospects and its
shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE - GENERAL.
There is generally significant volatility in the market prices of securities of
early stage pharmaceutical companies. Contributing to this volatility are
various factors and events, such as the announcements by the Company or its
competitors of new product developments, clinical testing results, governmental
approvals, regulations or actions, developments or disputes relating to patents
or proprietary rights, public concern over the safety of therapies and
fluctuations in financial performance from period to period. These and other
factors and events may have a significant impact on the Company's business and
on the market price of the Common Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying balance sheets of ORPHAN MEDICAL, INC. as of June 30, 1998 and the
related statements of operations for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,001,814
<SECURITIES> 1,682,366
<RECEIVABLES> 584,986
<ALLOWANCES> 8,000
<INVENTORY> 278,974
<CURRENT-ASSETS> 4,627,064
<PP&E> 530,114
<DEPRECIATION> 204,416
<TOTAL-ASSETS> 4,952,762
<CURRENT-LIABILITIES> 4,283,183
<BONDS> 0
0
0
<COMMON> 62,497
<OTHER-SE> 607,082
<TOTAL-LIABILITY-AND-EQUITY> 4,952,762
<SALES> 2,488,601
<TOTAL-REVENUES> 2,488,601
<CGS> 391,136
<TOTAL-COSTS> 391,136
<OTHER-EXPENSES> 6,200,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (34,279)
<INCOME-PRETAX> (4,069,153)
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<NET-INCOME> (4,069,153)
<EPS-PRIMARY> (.66)
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</TABLE>
