SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999
[ ] 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 250,
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 6,593,707
---------------------------- ---------
(Class) (Outstanding at November 5, 1999)
<PAGE>
INDEX
ORPHAN MEDICAL, INC.(R)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1999 and December 31, 1998. 3
Statements of Operations - Three and nine months ended September 30, 1999 and September 30,
1998. 4
Statements of Cash Flows - Nine months ended September 30, 1999 and September 30, 1998. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 8
PART II. OTHER INFORMATION
- ---------------------------
Items 1, 3, 4, 5 have been omitted since all items are inapplicable or answers
negative.
Item 2. Changes in securities and use of proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(TM),
Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(R), "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.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,895,765 $ 2,980,342
Available-for-sale securities 2,797,894 4,541,141
Accounts receivable, less allowance for doubtful
accounts and returns of $85,000 and $48,620 773,511 989,339
Other receivables 5,425 6,925
Inventories 413,659 112,725
Prepaid expenses 68,041 115,231
------------ ------------
Total current assets 6,954,295 8,745,703
Property and equipment:
Property and equipment 590,025 556,358
Accumulated depreciation (334,862) (255,331)
------------ ------------
255,163 301,027
------------ ------------
Total assets $ 7,209,458 $ 9,046,730
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 410,205 $ 586,816
Accrued outdated product return allowance 412,978 304,582
Accrued expenses 2,013,523 2,579,755
------------ ------------
Total current liabilities 2,836,706 3,471,153
Commitments
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value; 14,000 shares
authorized; 8,088 and 7,500 shares issued and
outstanding, respectively 81 75
Series B Convertible Preferred Stock, $.01 par value; 5,000
shares authorized; 2,950 shares issued and outstanding 30 --
Series C Convertible Preferred Stock, $.01 par value; 4,000
shares authorized; 0 shares issued and outstanding -- --
Series D Non-Voting Preferred Stock, $.01 par value; 1,500,000
shares authorized; 0 shares issued and outstanding -- --
Common Stock, $.01 par value; 25,000,000 shares authorized; 6,569,207
and 6,560,096 shares issued and outstanding,
respectively 65,927 65,601
Additional paid-in capital 43,592,290 39,946,113
Accumulated deficit (39,282,054) (34,433,640)
------------ ------------
4,376,274 5,578,149
Unrealized gain (loss) on available-for-sale securities (3,522) (2,572)
------------ ------------
Total shareholders' equity 4,372,752 5,575,577
------------ ------------
Total liabilities and shareholders' equity $ 7,209,458 $ 9,046,730
============ ============
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1998 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.
3
<PAGE>
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues, net $ 1,427,649 $ 897,515 $ 4,353,947 $ 3,543,324
Cost of sales 213,608 265,255 739,938 805,599
----------- ----------- ----------- -----------
Gross Profit 1,214,041 632,260 3,614,009 2,737,725
Operating expenses:
Research and development 1,030,299 1,764,674 3,698,110 5,382,635
Sales and marketing 860,447 572,439 2,397,364 1,892,281
General and administrative 628,692 616,457 1,995,787 1,887,551
----------- ----------- ----------- -----------
Total operating expenses 2,519,438 2,953,570 8,091,261 9,162,467
----------- ----------- ----------- -----------
Loss from operations (1,305,397) (2,321,310) (4,477,252) (6,424,743)
Other income:
Interest, net 76,183 79,811 223,465 114,091
----------- ----------- ----------- -----------
Net loss (1,229,214) (2,241,499) (4,253,787) (6,310,652)
Less: Preferred stock dividends 186,147 107,877 474,209 107,877
----------- ----------- ----------- -----------
Net loss attributable to common
shareholders $(1,415,361) $(2,349,376) $(4,727,996) $(6,418,529)
=========== =========== =========== ===========
Basic and diluted loss per
common share $ (0.21) $ (0.38) $ (0.72) $ (1.04)
=========== =========== =========== ===========
Weighted average number of
shares outstanding 6,586,875 6,261,505 6,586,427 6,185,684
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------------
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,253,787) $(6,310,652)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 79,532 72,518
Compensatory options 51,195 --
Changes in operating assets and liabilities:
Accounts payable and accrued expenses (634,447) 498,326
Inventories (300,934) 112,146
Accounts receivable and current assets 264,517 (125,401)
----------- -----------
Net cash used in operating activities (4,799,555) (5,753,063)
INVESTING ACTIVITIES
Purchase of office equipment (33,667) (52,436)
Purchases of short-term investments (6,229,077) (8,177,157)
Maturities of short-term investments 7,971,374 8,020,000
----------- -----------
Net cash provided by (used in) investing activities 1,708,630 (209,593)
FINANCING ACTIVITIES:
Chronimed Inc. obligation -- (1,378,441)
Stock option exercise proceeds 802,414 270,597
Proceeds from the issuance preferred stock 2,875,861 7,078,035
Stock issued to Chronimed -- 1,440,942
Common stock redeemed (676,563) --
Cash dividends on preferred stock (995) --
----------- -----------
Net cash provided by financing activities 3,006,349 7,411,133
----------- -----------
Increase (decrease) in cash and cash equivalents 84,577 1,448,477
Cash and cash equivalents at beginning of
Period 2,980,342 2,150,877
----------- -----------
Cash and cash equivalents at end of
Period $ 2,895,765 $ 3,599,354
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received $ 204,611 $ 330,525
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") 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 has six
products that have been approved for marketing by the Food and Drug
Administration (the "FDA") and is currently developing one potential product.
The Company expects to seek additional products for development. In the first
quarter of 1999, the Company no longer considered itself to be in the
development stage.
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 nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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, 1998.
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. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development companies, manufacturers, technical service companies,
license and research agreements, agreements with drug distributors, and other
sales and marketing agreements. At September 30, 1999, the Company estimates
that it could incur approximately $2,701,000 of additional expenditures in
subsequent periods under existing commitments. 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
<PAGE>
4. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on May 15, 2000. 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 September 30, 1999, the Company has not borrowed under this arrangement.
5. FINANCING TRANSACTION
On August 2, 1999, the Company completed a $5.0 million financing transaction
with UBS Capital II, LLC, a subsidiary of UBS AG. The funding consisted of a
purchase of 2,950 shares of the Company's Series B Convertible Preferred Stock
for an aggregate purchase price of $2.95 million and $2.05 million of debt in
the form of a line of credit. The Series B Convertible Preferred Stock may be
converted prior to August 2, 2009 into common shares at a price of $6.50 per
share. Amounts outstanding under this line of credit bear an interest rate of
7.5% and mature on August 2, 2002. Through September 30, 1999 the company has
not borrowed under this arrangement.
In connection with the financing, UBS Capital also received two seven-year
warrants. One of the warrants entitles UBS Capital to receive, upon payment of
the $2.05 million exercise price, either 2,950 shares of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and which is convertible to shares of the Company's Series D Non-Voting
Preferred Stock at a conversion price of $6.50 per share) or 315,385 shares of
Series D Non-Voting Preferred Stock (which is equivalent to common stock except
that it has no voting rights) or a combination of Series C Convertible Preferred
Stock and Series D Non-Voting Preferred Stock, so long as the combined purchase
price for the shares does not exceed $2.05 million. The second warrant, issued
in relation to the line of credit, entitled UBS Capital to purchase 282,353
shares of Series D Non-Voting Preferred Stock at an exercise price of $4.25 per
share. The Company can require the exercise of the warrants under certain
conditions. The value of the warrants is amortized over the term of the line of
credit to interest expense.
The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock held by UBS Capital as of August 1 (after giving
effect to the semi-annual in-kind dividend distributions, the most recent of
which was August 1, 1999), which resulted in a decrease in the conversion price
of those shares from $8.50 to $8.14 per share.
6. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the period ended September 30, 1999. These
reclassifications have no impact on the net loss or shareholders' equity as
previously reported.
7
<PAGE>
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 September 30, 1999.
GENERAL
Orphan Medical, Inc. was incorporated on June 17, 1994 in order to carry on the
business previously conducted by the Orphan Medical Division of Chronimed, Inc.
("Chronimed"). The Company's activities since inception 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 six products,
building the sales of these products, and fund raising. At September 30, 1999,
six of the Company's products have been approved by the Food and Drug
Administration ("FDA") for marketing and are commercially available and one
product was in active development. To date the Company has not generated
sufficient revenues from its approved products to fund its operating activities
and has sustained significant operating losses each year since inception. In
addition, the Company expects operating losses to continue through 2000.
RECENT DEVELOPMENTS
On August 2, 1999, the Company completed a $5.0 million financing transaction
with UBS Capital II, LLC, a subsidiary of UBS AG. The funding consisted of 2,950
shares of the Company's Series B Preferred Stock for an aggregate purchase
price of $2.95 million and $2.05 million of debt in the form of a line of
credit. The Series B Convertible Preferred Stock may be converted prior to
August 2, 2009 into common shares at a price of $6.50 per share and carries a
7.5% coupon. Amounts outstanding under this line of credit bear an interest rate
of 7.5% and mature on August 2, 2002. The Company has not drawn on this debt
however expects to in 2000.
In connection with the financing, UBS Capital also received two seven-year
warrants. One of the warrants entitles UBS Capital to receive, upon payment of
the $2.05 million exercise price, either 2,05o million of Series C Convertible
Preferred Stock (which is similar to the Series B Convertible Preferred Stock
and which is convertible into share of Series D Non-Voting Preferred Stock and
also has a conversion price of $6.50 per share) or 315,385 shares of Series D
Non-Voting Preferred Stock (which is equivalent to common stock except that it
has no voting rights) or a combination of Series C Convertible Preferred Stock
and Series D Non-Voting Preferred Stock, so long as the combined purchase price
for the shares does not exceed $2.05 million. The other warrant, issued in
relation to the debt, entitles UBS Capital to purchase 282,353 shares of Series
D
8
<PAGE>
Non-Voting Preferred Stock at an exercise price of $4.25 per share. The Company
can require exercise of both warrants, in whole or in part, any time after July
23, 2002 in the event the last sale price of the Company's common stock is
greater or equal to $13 per share for ten (10) consecutive trading days
immediately preceding the date the Company gives notice to the holder of its
intention to require exercise of the warrant.
All series of stock and warrants issued in connection with the UBS financing
transaction have antidilution provisions.
The financing triggered antidilution provisions relating to the $8.1 million of
the Senior Preferred Stock held by UBS Capital as of August 1 (after giving
effect to the semi-annual in-kind dividend distributions, the most recent of
which was August 1, 1999), which resulted in a decrease in the conversion price
of those shares from $8.50 to $8.14 per share.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
Net loss applicable to common shareholders was $1.4 million for the three months
ended September 30, 1999 compared to $2.3 million for the three months ended
September 30, 1998. The decrease in the loss results principally from increases
in sales resulting from the commercialization of Busulfex(R) (busulfan)
Injection and lower research and development spending. In addition, the Company
had higher sales and marketing spending for Busulfex. The preferred stock
dividend increased the net loss applicable to common shareholders.
Net sales increased 73% to $1.4 million for the three months ended September 30,
1999 compared to $0.9 million the prior year. The increase in net sales reflects
the addition of Busulfex to the Company's commercialized products in February
1999. Sales of Busulfex are less than the Company's expectations as a result of
slower penetration into the market. This is a result of the FDA's approval of a
more restricted indication than planned, outpatient use of oral busulfan growing
faster than anticipated, and the complex, time-consuming process in getting
transplant centers to change their protocols. The Company is aware of an
academic study to evaluate once or twice a day dosing of Busulfex in order that
it might be used on an outpatient basis. The Company expects sales of Busulfex
to increase in future periods as more hospitals include Busulfex in their
treatment protocols, however United States market penetration will be slower
than anticipated. The Company has also signed a definitive agreement with Pierre
Fabre Medicament, granting the French company exclusive rights to market and
distribute Busulfex in 21 European countries, Argentina, and South Africa. The
Company also received approval from Canada's Therapeutic Products Programme
(TPP) to market Busulfex in that country. The approved indication provides for
use of Busulfex as a conditioning regimen prior to bone marrow or hematopoietic
progenitor cell transplantation, when used in combination with other
chemotherapeutic agents and/or radiotherapy. Indications under the approval
include acute lymphocytic leukemia, acute non-lymphocytic leukemia, acute
myeloid leukemia, chronic myeloid leukemia, non-Hodgkin's lymphoma, Hodgkin's
disease, multiple myeloma, myelodysplastic syndrome, breast cancer, ovarian
cancer and several genetic diseases. The sales of Antizol(R) (fomepizole)
Injection were slightly above the Company's expectations. Sales of Elliotts B
Solution, Cystadane, Antizol-Vet, and Sucraid are consistent with the Company's
expectations for 1999.
9
<PAGE>
Gross profit margins increased to 85% for the 1999 quarter compared to 70% for
the 1998 quarter. Cost of sales was $0.2 million for the three months ended
September 30, 1999 compared to $0.3 million for the same period the prior year.
Cost of sales as a percentage of net 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 decreased 42% from $1.8 million for the three
months ended September 30, 1998 to $1.0 million for three months ended September
30, 1999. The decrease results from lower research and development spending on
Busulfex offset by increased spending for Xyrem(R) (sodium oxybate) oral
solution. The prior year's quarter included research and development spending on
products whose clinical trials have been concluded, the most significant which
is busulfex. The Company met with the FDA in the third quarter to determine the
NDA requirements for Xyrem. Development activities were slowed until the outcome
of this meeting was known. The Company expects research and development expense
to increase significantly over current levels in subsequent quarters due to an
acceleration of the development plans for Xyrem. In February 1999, the Company
began shipping Xyrem for use in its Treatment IND trial and expects to charge
enrolled patients for the drug utilized in the trial. Any income generated by
the Treatment IND, which is not expected to be material, will be used to offset
development expense. Clinical spending for Xyrem will continue to 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.
Sales and marketing expense increased 50% from $0.6 million for the three months
ended September 30, 1998 to $0.9 million for the three months ended September
30, 1999. This increase is largely attributable to significantly higher spending
related to the commercialization of Busulfex. Sales and marketing expenses will
likely continue to increase in subsequent quarters.
General and administrative expense was consistent from period to period and
remained $0.6 million. General and administrative expenses are not expected to
increase significantly in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. The decrease from the prior year is
the result of lower balances available for investment.
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and Series B Convertible Preferred Stock that was
issued on August 2, 1999. Each series has a dividend rate of 7.5%. Both
preferred stock dividends are cumulative and payable in arrears, when and as
declared by the Company's Board of Directors on August 1 and February 1 of each
year. Preferred stock dividends were $0.2 million for the three months ended
September 30, 1999 compared to $0.1 million for the same period the prior year.
The Company intends to satisfy its dividend payment obligations by the issuance
of additional preferred stock through August 1, 2000, which will cause preferred
stock dividends to increase in subsequent quarters.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
Net loss applicable to common shareholders was $4.7 million for the nine months
ended September 30, 1999 compared to $6.4 million for the nine months ended
September 30, 1998. The decrease in the loss results principally from higher
sales volume resulting from the commercialization of Busulfex and lower research
and development spending for Busulfex, offset by higher research and development
spending for Xyrem and increases in sales and marketing and general and
administrative expenses. The Company had higher sales and marketing spending for
Busulfex as a result of the commercialization of the product in February 1999.
The Company also had increased general and administrative expense resulting from
compensation expense associated with staffing increases.
Net sales increased 23% to $4.4 million for the nine months ended September 30,
1999 compared to $3.5 million for the nine months ended September 30, 1998. The
increase in net sales reflects the addition of Busulfex to the Company's
commercialized products in February 1999. As indicated above, sales of Busulfex
are less than anticipated as a result of slower than penetration into the
market. The Company expects sales of Busulfex to increase in future periods, as
more hospitals include Busulfex in their treatment protocols. The sales of
Antizol will be at lower levels on an annualized basis than in1998 since future
orders will most likely be based on use as poisonings occur. Sales of Elliotts B
Solution, Cystadane, Antizol-Vet, Antizol, and Sucraid are consistent with the
Company's expectations for 1999 and are not expected to increase significantly
in future periods.
Gross profit margins increased to 83% for the nine months ended September 30,
1999 compared to 77% for the same period the prior year. Cost of sales for the
period ended September 30, 1999 was $0.7 million compared to $0.8 million for
the same period the prior year. Cost of sales as a percentage of net 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 decreased 31% to $3.7 million for the nine
months ended September 30, 1999 compared to $5.4 million for the same period the
prior year. This number largely reflects increased spending for Xyrem, and the
prior year's period included research and development spending on products whose
clinical trials have been concluded, the most significant being Busulfex. The
Company expects research and development expense to increase significantly over
current levels in subsequent quarters due to an acceleration of the development
plans for Xyrem. In February 1999, the Company began shipping Xyrem for use in
its Treatment IND trial and expects to charge enrolled patients for the drug
used in the trial. Any income generated by the Treatment IND, which is not
expected to be material, will be used to offset development expense. Clinical
spending for Xyrem will continue to 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.
Sales and marketing expense increased 27% to $2.4 million for the nine months
ended September 30, 1999 from $1.9 million for the nine months ended September
30, 1998. This increase is largely attributable to higher spending related to
the commercialization of Busulfex. Sales and marketing expenses will likely
increase in subsequent quarters.
General and administrative expense increased 6% to $2.0 million for the nine
months
11
<PAGE>
ended September 30, 1999 from $1.9 million for the same period the prior year.
This increase is principally related to increased salary expense resulting from
staffing increases and salary adjustments. General and administrative expenses
are not expected to increase significantly in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. The increase from the prior year is
the result of additional invested funds from the successful preferred stock
offering in the third quarter of 1998 and the settlement of the Company's
obligation to Chronimed in December 1998.
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and Series B Convertible Preferred Stock issued
August 2, 1999. Preferred stock dividends were $0.5 million for the nine months
ended September 30, 1999 compared to $0.1 million for the nine months ended
September 30, 1998.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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, the net
proceeds from the 1998 and 1999 private placements of preferred stock, interest
income and product sales. The 1995 and 1996 public offerings, and both private
placements, resulted in aggregate net proceeds, after commissions and expenses,
of $33.5 million.
Net working capital (current assets less current liabilities) decreased from
$5.3 million at December 31, 1998 to $4.1 million at September 30, 1999. Cash
and cash equivalents, and available-for-sale securities decreased from $7.5
million at December 31, 1998 to $5.7 million at September 30, 1999. The Company
continues to invest its excess cash in interest-bearing, investment grade
securities. The Company has a $0.5 million commercial revolving line of credit
with a bank, expiring on May 15, 2000. As discussed previously, the Company has
obtained a $2.05 million line of credit facility with UBS capital bearing
interest at 7.5% maturing on August 2, 2002.
The Company's commitments for outside development spending decreased from
approximately $3.4 million at December 31, 1998 to $2.7 million at September 30,
1999. The decrease resulted principally from the commercialization of Busulfex
offset by additional commitments for the development of Xyrem. The Company
expects additional future commitments for Xyrem as the product advances toward
NDA submission to the FDA.
The Company has experienced recurring losses from operations since inception,
with continuing losses expected through at least the end of fiscal 2000. The
Company believes that its current working capital and anticipated gross profits
from product sales will be sufficient to fund its operations through December
31, 2000. These assumptions are based upon the Company substantially increasing
development expenses and revenues from the sale of its six marketed products.
These conditions give rise to the question about the Company's ability to
generate positive cash flow and fund operations. Any material reduction in
projected revenues will require the 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. 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 September 30, 1999, the
Company's net tangible assets equaled $4.4 million and its market capitalization
was approximately $44.5 million (based on the last sale price of $6.75 and
6,588,707 shares outstanding). Net tangible assets are defined as total assets,
less any intangible assets, less total liabilities. The Company is continuing to
seek additional capital to ensure compliance with the Nasdaq requirements and
maintain its Nasdaq listing. As long as the Company meets at least one of the
aforementioned Nasdaq listing requirements, the Company's Common Stock would
qualify for listing on the Nasdaq National Market. If the Company did not meet
either of the Nasdaq requirements, the Company would qualify
13
<PAGE>
for quotation on the Nasdaq Small Cap Market provided it had net tangible assets
in excess of $2.0 million.
IMPACT OF 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.
The Year 2000 Readiness Issue also 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 its suppliers, distributors,
customers or regulatory agencies (i.e., FDA) to process critical financial and
operational information incorrectly, or not at all.
The Company's information technology ("IT") systems consist of computer hardware
systems and software applications supplied by third parties. The Company's
strategy has been to replace its IT systems with current technology, which is
both year 2000 compliant and more efficient. The Company has also purchased and
implemented financial and operational software upgrades that are year 2000
compliant. For the three and nine months ended September 30, 1999, the Company
IT system purchases have not been material. The Company's IT systems are year
2000 compliant.
The Company's assessment of internal systems includes a review of
non-information technology ("non IT") systems. This assessment includes a review
of the Company's internal equipment and facilities. Based upon this review, the
Company believes that its processes and equipment are year 2000 compliant.
The Company has identified third parties with which it has material
relationships, including suppliers, distributors and other key vendors of
materials and services. The Company has confirmed with these parties or
organizations that they have implemented Year 2000 Readiness Programs. The
Company has not developed a contingency plan to provide for continuity of
business operations in the event material third parties experience a disruption
of service due to the Year 2000 Readiness Issue, which could include, but not
limited to, loss of electricity, loss of communications (data and voice), and
loss of transportation services. However, even if all material third parties
confirm that they are or expect to be year 2000 compliant by December 31, 1999,
it is not possible to state with certainty that such parties will be compliant.
If the Company's remediation plan is not successful, or if third party systems
on which the Company relies should fail, there could be a significant disruption
of the Company's ability to transact business with its customers and suppliers.
It is impossible to fully assess the potential consequences in the event service
interruptions from suppliers occur or in the event that there are disruptions in
such infrastructure areas as utilities, communications, transportation, banking
and government.
14
<PAGE>
PART II - OTHER INFORMATION
Items 1, 3, 4 and 5 are not applicable.
Item 2. Changes in Securities and Use of Proceeds
On August 2, 1999, the Company issued 2,950 shares of Series B Convertible
Preferred Stock (the "Preferred Shares") in a private placement.
On August 2, 1999, the Company issued 2,950 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Shares") in a private placement. The
private placement, which did not involve a public offering of the shares, was
exempt from registration under Section 4 (2) of the Securities Act of 1933, as
amended. These shares are entitled to receive cumulative dividends at $75.00 per
annum (or more in certain circumstances) and have both dividend and liquidation
preferences over the Common Stock. The Series B Preferred Shares are
convertible, at the option of the holder, into shares of the Company's Common
Stock at a price equal to $6.50 per share. On the tenth anniversary of the
issuance date, the Company must either (i) convert the shares into Common Stock,
subject to a $1.2 million conversion fee payable in additional Common Stock, or
(ii) redeem the shares for cash at $1,000 per share plus accrued dividends. In
addition, the Company may not take certain actions without the approval of the
Preferred Shares holders.
On August 2, 1999, the Company issued warrants to purchase 2,050 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Shares") or to
purchase 315,385 shares of the Series D Convertible Preferred Stock (the "Series
D Preferred Shares") in a private. The Series C Preferred Shares, if issued, are
convertible, at the option of the holder, into shares of the Company's Common
Stock at a price equal to $6.50 per share. On the tenth anniversary of the
issuance date, the Company must either (i) convert the shares into Common Stock,
subject to a $0.8 million conversion fee payable in additional Common Stock, or
(ii) redeem the shares for cash at $1,000 per share plus accrued dividends. The
Series D Preferred Shares, if issued, automatically convert into shares of the
Company's Common Stock upon transfer to a permitted investor. If such shares are
subsequently transferred to a person that is not a permitted investor the shares
of common stock so transferred automatically convert back into shares of Series
D Non-Voting Preferred Stock. A permitted investor is defined in Article III,
Section % of the Certificate of Designation, which is attached to this report as
Exhibit 3.1. The Series C Preferred Shares, if issued, are entitled to receive
cumulative dividends at $75.00 per annum (or more in certain circumstances) and
have both dividend and liquidation preferences over the Common Stock. The Series
D Preferred Shares have no dividends and no liquidation preferences.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT INDEX
- ------------------- --------------------------------------------------------------------- ---------------------------
Exhibit Number Sequentially
Description Numbered Page
- ------------------- --------------------------------------------------------------------- ---------------------------
<S> <C> <C>
3.1 Certificate of Designation for Series B, C and D Preferred Stock 18
- ------------------- --------------------------------------------------------------------- ---------------------------
4.1 Warrant to purchase shares of Series C Convertible Preferred Stock 38
or Series D Non-Voting Preferred Stock
- ------------------- --------------------------------------------------------------------- ---------------------------
4.2 Warrant to purchase shares Series D Non-Voting Preferred Stock 50
- ------------------- --------------------------------------------------------------------- ---------------------------
10.1 Stock Purchase Agreement between OMI and UBS Capital II LLC dated 62
August 2, 1999
- ------------------- --------------------------------------------------------------------- ---------------------------
10.2 Promissory Note between OMI and UBS Capital II LLC dated August 2, 101
1999
- ------------------- --------------------------------------------------------------------- ---------------------------
99 Cautionary Statements 113
- ------------------- --------------------------------------------------------------------- ---------------------------
27 Financial Data Schedule - For SEC EDGAR filing 126
- ------------------- --------------------------------------------------------------------- ---------------------------
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 10, 1999 pertaining to the announcement
of a financing transaction with UBS Capital.
16
<PAGE>
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 November 12, 1999 By /s/ John H. Bullion
----------------- -------------------
John H. Bullion
Chief Executive Officer
(principal executive officer)
17
EXHIBIT 3.1
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATION
ORPHAN MEDICAL, INC.
--------------
CERTIFICATE OF DESIGNATION
FOR
SERIES B CONVERTIBLE PREFERRED STOCK
AND
SERIES C CONVERTIBLE PREFERRED STOCK
AND
SERIES D NON-VOTING 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 22, 1999, in accordance with Minnesota Statutes, Section
302A.401, Subd. 3, duly adopted the following resolution establishing a series
of 5,000 shares of the Corporation's capital stock to be designated as its
Series B Convertible Preferred Stock, a series of 4,000 shares of the
Corporation's capital stock to be designated as its Series C Convertible
Preferred Stock and a series of 1,500,000 shares of the Corporation's capital
stock to be designated as its Series D Non-Voting 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 Series B Convertible Preferred Stock of the Corporation, a series of
Series C Convertible Preferred Stock of the Corporation and a series of Series D
Non-Voting Preferred Stock of the Corporation and hereby states the designation
and number of shares, and fixes the relative rights and preferences, of each
such series of shares as follows:
ARTICLE I
SERIES B CONVERTIBLE PREFERRED STOCK
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of such series
shall be designated as "Series B Convertible Preferred Stock" (the "Series B
Preferred Stock"), and the number of authorized shares constituting the Series B
Preferred Stock shall be 5,000.
SECTION 2. PAR VALUE; NO PREEMPTIVE RIGHTS. The Series B Preferred
Stock shall have a par value of $0.01 per share. As provided in Article V of the
Corporation's Articles of Incorporation, holders of Series B 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 Series B Preferred Stock shall rank prior to
all of the Corporation's common stock, par value $0.01 per share (the "Common
Stock"), the Corporation's Series D Convertible Preferred Stock, par value $0.01
per share (the "Series D Preferred Stock") and all other classes of preferred
stock, except that the Series B Preferred Stock shall rank pari passu to the
Corporation's Series C Convertible Preferred Stock, par value $0.01 per share
(the "Series C Preferred Stock") and is subordinated to the Corporation's Senior
Convertible Preferred Stock, par value $0.01 per share (the "Senior
18
<PAGE>
Convertible 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,
unless otherwise agreed upon in writing by the holders of a majority of the
outstanding shares of Series B Preferred Stock.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS.
(a) Holders of the Series B 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 Series B 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 date on which shares of Series B
Preferred Stock are issued (the "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 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 first Dividend Payment Date, since
the date of issuance), the dividend rate on the Series B Preferred Stock shall
be increased to $200 per annum per share unless holders of a majority of the
then outstanding shares of Series B 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, 2000 (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 Series B 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 Series B 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 Series B 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 Series B
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 by issuing the number
of shares of Series B Preferred Stock equal to the amount of the dividend
divided by $1,000 (the "Dividend Conversion Price"); provided, that no
fractional shares shall be issued. Any such dividend payment may be made, in the
sole discretion of the Board of Directors, partially in cash and partially in
shares of Series B Preferred Stock 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 Series B Preferred Stock, each
holder of Series B Preferred Stock shall receive a ratable amount of cash and
Series B Preferred Stock that is proportionate to the amount of Series B
Preferred Stock held by such holder on which such dividend is paid. If any
fractional interest in a share of Series B Preferred Stock would be delivered
upon any payment of dividends pursuant to this Section 4, the Corporation, in
lieu of delivering the fractional share of Series B Preferred Stock shall pay an
amount to the holder thereof equal to such fraction multiplied by the Dividend
Conversion Price. All shares of Series B Preferred Stock issued as a dividend
shall be fully paid and nonassessable.
19
<PAGE>
(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 Series B 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 apart for
payment on any shares of Junior Dividend Stock at such time as less than 20% of
the Initial Shares (as defined in Section 7(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 Series B Preferred Stock shall be entitled to receive out of the
assets of the Corporation, after distributions required to be made to the
holders of any shares of any the Corporation's preferred stock ranking senior to
the Series B Preferred Stock, 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 Series B Preferred Stock (such Common Stock and other
capital stock being referred to herein collectively as "Junior Liquidation
Stock"). The assets of the Corporation available for distribution to the holders
of the Series B Preferred Stock and any other shares of the Corporation's
preferred stock ranking pari passu to the Series B Preferred Stock shall be
distributed ratably among the holders of the Series B Preferred Stock and the
holders of any such other shares of the Corporation's preferred stock ranking
pari passu to the Series B Preferred Stock. After payment in full of the
liquidation preference of the shares of the Series B 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
Issuance Date (as defined in Section 4(b)), the Corporation, at its election,
shall either require the conversion of all then issued and outstanding shares of
Series B Preferred Stock into fully paid and nonassessable shares of Common
Stock at the Conversion Price (as that term is defined in Section 7(a))(the
"Anniversary Conversion") or redeem the then issued and outstanding shares of
Series B Preferred Stock (the "Redemption") as provided below.
(b) If the Corporation elects the Anniversary Conversion, the
Corporation shall pay a conversion fee equal to $1,180,000 (the "Conversion
Fee"), subject to adjustment, on a pro rata basis to the holders of the then
issued and outstanding shares of Series B 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 Series B
Preferred Stock issued and outstanding as of the Anniversary Date is less than
the number of Initial Shares (as defined in Section 7(b) below), then the
Conversion Fee will be adjusted downward to equal the product of (a) $1,180,000
and (b) the quotient of the number of shares of Series B Preferred Stock issued
and outstanding as of the Anniversary Date divided by the Initial Shares (as
adjusted for any stock split, stock dividend, recapitalization or otherwise). On
or after the Anniversary Date, each holder of Series B 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 Series B Preferred Stock to be converted multiplied by
$1,000 divided by the Conversion
20
<PAGE>
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).
(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 Series B 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 Series B 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 Series B 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
Series B 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 Series B
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 Series B Preferred Stock to the Corporation or its agent as
provided in the notice
SECTION 7. CONVERSION.
(a) Holders of Series B Preferred Stock may, at their option
upon surrender of the certificates therefor, convert any or all of their shares
of Series B 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 Series B 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 Series B Preferred Stock shall be convertible at
the office of any transfer agent for the Series B 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 $6.50, 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").
The right of holders of Series B 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
21
<PAGE>
property upon conversion of Series B Preferred Stock in a name other than that
of the holder of the shares of Series B 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 shares
of Series B Preferred Stock could be converted (the "Initial Shares"), 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 Series B 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 Series B 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
Series B Preferred 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
Series B 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 Series B Preferred Stock.
(c) A number of shares of the authorized but unissued Common
Stock sufficient to provide for the conversion of the Series B 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 Series B 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 Series B 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 Series B
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
Series B Preferred Stock to be converted, duly endorsed or accompanied by proper
instruments of transfer as provided above, 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 Series B 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
22
<PAGE>
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 Section 8
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 Section 8 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 upon exercise of stock options that are outstanding on the
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 Issuance Date, and (B) 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, or such other amount as the holders of a majority
of the outstanding shares of Series B Preferred Stock shall agree to in writing;
(ii) Common Stock upon the exercise of warrants that, as of June 30, 1999,
entitled holders to purchase an aggregate of 206,725 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 issued upon the
conversion or exchange of the Series B Preferred Stock or the Senior Convertible
Preferred Stock; (iv) shares of Series D Preferred Stock or Series C Preferred
Stock issuable upon the exercise of warrants granted to UBS Capital II LLC or
its assignees (the "Warrants") or upon conversion of the Series C Preferred
Stock under the terms of the Warrants; (v) Common Stock issuable upon conversion
of shares of Series D Preferred Stock upon a Transfer Conversion (as defined in
Article III Section 5 hereof) or upon exercise of the Warrants; (vi) Common
Stock issuable as payment of interest on that certain Promissory Note dated
August 2, 1999 in the face amount of $2,050,000; (vii) securities pursuant to
any public offering of the Company's securities registered under the Securities
Act or (viii) the issuance and sale of the Company's Common Stock pursuant to
the terms of any employee stock purchase plan approved by the Company's Board of
Directors, up to a maximum of 100,000 shares (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 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 issue or sale or deemed issue or sale the Conversion Price
shall be reduced to an amount equal to the price per share at which such Common
Stock was sold or at which such shares of Common Stock are issuable upon the
exercise of such rights or warrants.
(i) For purposes of this Section 8(a), the following
definitions apply:
(A) "deemed to have issued or sold" shall mean the
issuance, grant or sale of Common Stock of the Company
or securities which are directly or indirectly
exercisable or convertible into shares of Common Stock,
or warrants or options for the purchase, directly or
indirectly, thereof, other than Permitted Issuances.
23
<PAGE>
(B) "consideration per share" for which Common
Stock is issued or issuable shall mean (1) with respect
to the issuance, grant or sale of options or warrants to
purchase shares of Common Stock, an amount 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 or warrants, plus the
minimum aggregate amount of additional consideration
payable to the Corporation upon exercise of all such
options and warrants, 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 and warrants or upon the conversion or
exchange of all such convertible securities issuable
upon the exercise of such options, and (2) with respect
to the issuance, grant or sale of Common Stock of the
Company or securities directly or indirectly exercisable
or convertible into shares of Common Stock, an amount
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.
(ii) 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 in effect prior to any
actions described in this Section 8(a)(ii). For purposes of
this Section 8(a)(ii) if the terms of any option or
convertible security which was outstanding as of the 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.
(iii) 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)(iii)) 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 Series B Preferred Stock. If
such parties are unable to reach agreement within a reasonable
period of time, the fair value of
24
<PAGE>
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 Series B 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.
(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 Series B Preferred
Stock then outstanding) to insure that each of the holders of Series B 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
Series B 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 Series B 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 Series B Preferred Stock then
outstanding) to insure that the provisions of this Section 8 shall thereafter be
applicable to the Series B 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 Series B 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 Series B 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 Series B
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 Series B
Preferred Stock.
(e) Notices.
(i) Promptly after any adjustment of the Conversion
Price, the Corporation shall give written notice thereof to
all holders of Series B 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 Series B Preferred Stock at least twenty (20) days
prior to the date on which the Corporation closes its books or
25
<PAGE>
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 Series B Preferred Stock at least twenty (20)
days prior to the date on which any Organic Change shall take
place.
SECTION 9. SERIES B PREFERRED STOCK NOT REDEEMABLE AT OPTION OF
HOLDERS OR EXCHANGEABLE; NO SINKING FUND. The Series B 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 Series B Preferred Stock
shall not be subject to the operation of a purchase, retirement or sinking fund.
SECTION 10. NO VOTING RIGHTS. The holders of Series B Preferred
Stock shall not have voting rights except as specifically provided in this
Certificate of Designation or as otherwise required by law.
SECTION 11. OUTSTANDING SHARES. For purposes of this Certificate of
Designation, all shares of Series B Preferred Stock shall be deemed outstanding
except for (a) shares of Series B 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 Series B Preferred Stock for conversion
pursuant to Section 7, all shares of Series B 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 Series B Preferred Stock which have been called for redemption, provided that
funds necessary for such redemption are available therefor and have been
irrevocably deposited or set aside for such purpose.
SECTION 12. STATUS OF SERIES B PREFERRED STOCK UPON RETIREMENT.
Shares of Series B 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 Series B
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 Series B Preferred Stock and/or the cancellation of
this Certificate of Designations.
ARTICLE II
SERIES C CONVERTIBLE PREFERRED STOCK
Unless otherwise indicated, all capitalized terms used in this
Article II shall have the meanings assigned to such terms in Article I of this
Certificate of Designation.
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of such series
shall be designated as "Series C Convertible Preferred Stock" (the "Series C
Preferred Stock"), and the number of authorized shares constituting the Series C
Preferred Stock shall be 4,000.
SECTION 2. PAR VALUE; NO PREEMPTIVE RIGHTS. The Series C Preferred
Stock shall have a par value of $0.01 per share. As provided in Article V of the
Corporation's Articles of Incorporation, holders of Series C Preferred Stock
shall not be entitled to any preemptive rights to acquire shares of any class or
series of capital stock of the Corporation.
26
<PAGE>
SECTION 3. RANK. The Series C Preferred Stock shall rank prior to
all of the Corporation's Common Stock, the Series D Preferred Stock and all
other classes of preferred stock, except that the Series C Preferred Stock shall
rank pari passu with the Corporation's Series B Preferred Stock and is
subordinated to the Corporation's Senior Convertible 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, unless otherwise agreed upon in
writing by the holders of a majority of the outstanding shares of Series C
Preferred Stock.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS.
(a) Holders of the Series C 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 Series C 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 date on which shares of Series C
Preferred Stock are issued (the "Series C 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 of Directors fails to declare and pay in full, on any
Dividend Payment Date, all dividends accrued since the last Dividend Payment
Date (or with respect to the first Dividend Payment Date, since the date of
issuance), the dividend rate on the Series C Preferred Stock shall be increased
to $200 per annum per share unless holders of a majority of the then outstanding
shares of Series C 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, on each 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 Series C 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 Series C 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
Series C 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 Series C
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 by issuing the number
of shares of Series C Preferred Stock equal to the amount of the dividend
divided by $1,000 (the "Series C Dividend Conversion Price"); provided, that no
fractional shares shall be issued. Any such dividend payment may be made, in the
sole discretion of the Board of Directors, partially in cash and partially in
shares of Series C Preferred Stock 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 Series C Preferred Stock, each
holder of Series C Preferred Stock shall receive a ratable amount of cash and
Series C Preferred Stock that is proportionate to the amount of Series C
Preferred Stock held by such holder on which such dividend is paid. If any
fractional interest in a share of Series C Preferred Stock would be delivered
upon any payment of dividends pursuant to this Section 4, the Corporation, in
lieu of delivering the fractional share of Series C Preferred Stock shall pay an
amount to the holder thereof equal to such fraction multiplied by the Series C
Dividend Conversion Price. All shares of Series C Preferred Stock issued as a
dividend shall be fully paid and nonassessable.
27
<PAGE>
(e) No dividends or other distributions (other than dividends
payable in Junior Dividend Stock) 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 Junior Dividend Stock; 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 Initial
Series C Shares (as defined in Section 7(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 Series C 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 any
Junior Liquidation Stock. The assets of the Corporation available for
distribution to the holders of the Series C Preferred Stock shall be distributed
ratably among the holders of the Series C Preferred Stock. After payment in full
of the liquidation preference of the shares of the Series C 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 Anniversary Date of the Series C Issuance Date (as
defined in Section 4(b)), the Corporation, at its election, shall either require
the conversion of all then issued and outstanding shares of Series C Preferred
Stock into fully paid and nonassessable shares of Series D Preferred Stock at
the Series C Conversion Price(defined in Section 7(a)) (the "Series C
Anniversary Conversion") or redeem the then issued and outstanding shares of
Series C Preferred Stock (the "Series C Redemption") as provided below.
(b) If the Corporation elects the Series C Anniversary
Conversion, the Corporation shall pay a conversion fee equal to $820,000 (the
"Series C Conversion Fee"), subject to adjustment, on a pro rata basis to the
holders of the then issued and outstanding shares of Series C Preferred Stock.
The Corporation shall pay the Series C 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 Series C 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 Series C 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 Series C Preferred Stock issued and outstanding as
of the Anniversary Date is less than the number of Initial Series C Shares (as
defined in Section 7(b) below), then the Series C Conversion Fee will be
adjusted downward to equal the product of (a) $820,000 and (b) the quotient of
the number of shares of Series C Preferred Stock issued and outstanding as of
the Anniversary Date divided by the Initial Series C Shares (as adjusted for any
stock split, stock dividend, recapitalization or otherwise). On or after the
Anniversary Date, each holder of Series C 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 Series D Preferred Stock equal to the
number of shares of Series C Preferred Stock to be converted multiplied by
$1,000 divided by the Series C Conversion Price set forth in the notice to the
holder, (ii) the holder's pro rata portion of the Series C Conversion Fee and
(iii) accrued and unpaid dividends in cash or a number of shares of Series D
Preferred Stock equal to the dividend amount divided by the Series C Conversion
Price. In addition, the following provisions of Section 7 shall be applicable to
the Series C 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).
28
<PAGE>
(c) In the event the Corporation elects a Series C Redemption,
the Corporation shall redeem for cash on the Anniversary Date all issued and
outstanding shares of Series C 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 "Series C Redemption
Price"). On or after the Anniversary Date, each holder of Series C 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 Series C Redemption Price. If,
on the Anniversary Date, funds necessary for the Series C 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 Series C 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 Series C 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 Series C Anniversary Conversion or the Series C Redemption. If the
Corporation fails to give notice as provided above, the Corporation shall be
deemed to have elected the Series C Redemption. In the event of the Series C
Anniversary Conversion, the notice shall also state that the Anniversary Date is
the date fixed for conversion, the then-effective Series C Conversion Price,
whether the Series C Conversion Fee will be paid in cash or shares of Series D
Preferred 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 Series D Preferred Stock and that on and after the Anniversary Date,
dividends will cease to accumulate on such shares of Series C Preferred Stock;
provided that there is no default in the payment of the Series C Conversion Fee.
In the event of the Series C Redemption, the notice shall also state that the
Anniversary Date is the date fixed for redemption, the Series C Redemption
Price, the place or places of payment, that the right of holders of Series C
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 Series C Redemption Price) and that
payment of the Series C Redemption Price will be made upon presentation and
surrender of certificates representing the Series C Preferred Stock to the
Corporation or its agent as provided in the notice
SECTION 7. CONVERSION.
(a) Holders of Series C Preferred Stock may, at their option
upon surrender of the certificates therefor, convert any or all of their shares
of Series C Preferred Stock into fully paid and nonassessable shares of Series D
Preferred 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 Series C 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 Series C Preferred Stock shall be convertible at
the office of any transfer agent for the Series C 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 Series D Preferred Stock
(calculated as to each conversion to the nearest whole share) as shall be equal
to $1,000 divided by the Series C Conversion Price (as defined below) in effect
at the time of conversion. The initial conversion price will be $6.50, 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 "Series C
Conversion Price").
The right of holders of Series C 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 Series
D Preferred Stock or other securities or property upon conversion of Series C
Preferred Stock in a name other than that of the holder of the shares of Series
C 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
29
<PAGE>
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 Corporation's 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 Series D Preferred Stock
into which the shares of Series C Preferred Stock could be converted (the
"Initial Series C Shares"), 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 Series C Preferred Stock then
outstanding into fully paid and nonassessable shares of Series D Preferred Stock
at the applicable Series C Conversion Price.
Such notice shall be delivered by first class mail, postage
prepaid, shall be given to the holders of record of the Series C 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 Series C 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 Series C Preferred Stock equal to the dividend amount divided by
$1,000; 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
Series C 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 Series C Preferred Stock.
(c) A number of shares of the authorized but unissued Series D
Preferred Stock sufficient to provide for the conversion of the Series C
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 Series D Preferred Stock into which each
share of the Series C 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 Series D Preferred
Stock authorized and reserved, free from preemptive rights, for conversion of
the outstanding Series C Preferred Stock on the new basis. The Corporation shall
comply with all securities laws regulating the offer and delivery of shares of
Series D Preferred Stock upon conversion of the Series C Preferred Stock and
shall use its best efforts to list such shares on each national securities
exchange on which the Series D Preferred Stock may be listed or to have such
shares admitted for quotation on the NASDAQ National Market System if the Series
D Preferred Stock is admitted for quotation thereon.
(d) Upon the surrender of certificates representing shares of
Series C Preferred Stock to be converted, duly endorsed or accompanied by proper
instruments of transfer as provided above, the person converting such shares
shall be deemed to be the holder of record of the Series D Preferred Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Series D
Preferred Stock or other securities, cash or other assets as herein provided.
(e) No fractional shares of Series D Preferred Stock shall be
issued upon conversion of Series C Preferred Stock but, in lieu of any fraction
of a share of Series D Preferred 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
30
<PAGE>
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 SERIES C CONVERSION PRICE. Notwithstanding
anything in this Section 8 to the contrary, no change in the Series C Conversion
Price shall be made until the cumulative effect of the adjustments called for by
this Section 8 since the date of the last change in the Series C Conversion
Price would change the Series C Conversion Price by more than 1%. However, once
the cumulative effect would result in such a change, then the Series C
Conversion Price shall be changed to reflect all adjustments called for by this
Section 8 and not previously made. Additionally, there shall be no adjustment in
the Series C Conversion Price as a result of any Permitted Issuance. Subject to
the foregoing, the Series C Conversion Price shall be adjusted from time to
pursuant to Section 8(a).
(a) If and whenever, on or after the Series C 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 Series C 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 issue or sale or deemed issue or sale the Series
C Conversion Price shall be reduced to an amount equal to the price per share at
which such Common Stock was sold or at which such shares of Common Stock are
issuable upon the exercise of such rights or warrants.
(i) For purposes of this Section 8(a), the following
definitions apply:
(A) "deemed to have issued or sold" shall mean the
issuance, grant or sale of Common Stock of the Company
or securities which are directly or indirectly
exercisable or convertible into shares of Common Stock,
or warrants or options for the purchase, directly or
indirectly, thereof, other than Permitted Issuances.
(B) "consideration per share" for which Common
Stock is issued or issuable shall mean (1) with respect
to the issuance, grant or sale of options or warrants to
purchase shares of Common Stock, an amount 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 or warrants, plus the
minimum aggregate amount of additional consideration
payable to the Corporation upon exercise of all such
options and warrants, 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 and warrants or upon the conversion or
exchange of all such convertible securities issuable
upon the exercise of such options, and (2) with respect
to the issuance, grant or sale of Common Stock of the
Company or securities directly or indirectly exercisable
or convertible into shares of Common Stock, an amount
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.
(ii) 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
31
<PAGE>
securities or the rate at which any convertible securities are
convertible into or exchangeable for Common Stock changes at
any time, the Series C Conversion Price in effect at the time
of such change shall be immediately adjusted to the Series C
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 Series C Conversion Price be adjusted to a
price higher than the Series C Conversion Price in effect
prior to any actions described in this Section 8(a)(ii). For
purposes of this Section 8(a)(ii) if the terms of any option
or convertible security which was outstanding as of the Series
C 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 Series C Conversion Price hereunder to
be increased.
(iii) 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)(iii)) 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 Series C 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 Series C
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.
(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
Series D Preferred Stock into a greater number of shares, the Series C
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 Series D Preferred Stock into a smaller number of
shares, the Series C 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 Series D Preferred
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Series D
Preferred 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 Series C Preferred Stock then outstanding) to insure that each of the
holders of Series C 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
Series D Preferred Stock immediately theretofore acquirable and receivable upon
the conversion of such holder's Series C Preferred Stock, such shares of stock,
securities or
32
<PAGE>
assets as such holder would have received in connection with such Organic Change
if such holder had converted its Series C 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 Series C Preferred Stock then
outstanding) to insure that the provisions of this Section 8 shall thereafter be
applicable to the Series C 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 Series C Conversion
Price to the value for the Series D Preferred Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Series D Preferred Stock acquirable and receivable upon
conversion of Series C Preferred Stock, if the value so reflected is less than
the Series C 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 Series C 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
Series C Conversion Price so as to protect the rights of the holders of Series C
Preferred Stock; provided that no such adjustment shall increase the Series C
Conversion Price as otherwise determined pursuant to this Section 8 or decrease
the number of shares of Series D Preferred Stock issuable upon conversion of
each share of Series C Preferred Stock.
(e) Notices.
(i) Promptly after any adjustment of the Series C
Conversion Price, the Corporation shall give written notice
thereof to all holders of Series C 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 Series C 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 Series D Preferred Stock, (b) with respect
to any pro rata subscription offer to holders of Series D
Preferred 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 Series C Preferred Stock at least twenty (20)
days prior to the date on which any Organic Change shall take
place.
SECTION 9. SERIES C PREFERRED STOCK NOT REDEEMABLE AT OPTION OF
HOLDERS OR EXCHANGEABLE; NO SINKING FUND. The Series C Preferred Stock shall not
be redeemable upon the request of holders thereof or exchangeable for other
capital stock (except for Series D Preferred Stock upon conversion as provided
herein) or indebtedness of the Corporation or other property. The Series C
Preferred Stock shall not be subject to the operation of a purchase, retirement
or sinking fund.
SECTION 10. NO VOTING RIGHTS. The holders of Series C Preferred
Stock shall not have voting rights except as specifically provided in this
Certificate of Designation or as otherwise required by law.
SECTION 11. OUTSTANDING SHARES. For purposes of this Certificate of
Designation, all shares of Series C Preferred Stock shall be deemed outstanding
except for (a) shares of Series C 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 Series C
33
<PAGE>
Preferred Stock for conversion pursuant to Section 7, all shares of Series C
Preferred Stock which have been converted into Series D Preferred 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 Series C Preferred Stock which
have been called for redemption, provided that funds necessary for such
redemption are available therefor and have been irrevocably deposited or set
aside for such purpose.
SECTION 12. STATUS OF SERIES C PREFERRED STOCK UPON RETIREMENT.
Shares of Series C 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 Series C
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 Series C Preferred Stock and/or the cancellation of
this Certificate of Designations.
ARTICLE III
SERIES D NON-VOTING PREFERRED STOCK
Unless otherwise indicated, all capitalized terms used in this
Article III shall have the meanings assigned to such terms in Article I of this
Certificate of Designation.
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of such series
shall be designated as "Series D Non-Voting Preferred Stock" (the "Series D
Preferred Stock"), and the number of authorized shares constituting the Series D
Preferred Stock shall be 1,500,000.
SECTION 2. PAR VALUE; NO PREEMPTIVE RIGHTS. The Series D Preferred
Stock shall have a par value of $0.01 per share. As provided in Article V of the
Corporation's Articles of Incorporation, holders of Series D 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 Series D Preferred Stock shall rank on an equal
basis with all of the Corporation's Common Stock, and shall be fully
subordinated to all other classes of the Corporation's preferred stock, 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. NO VOTING RIGHTS; OTHER RIGHTS, PREFERENCES AND
PRIVILEGES. The Series D Preferred Stock shall not have voting rights. Except as
provided in the preceding sentence, each share of Series D Preferred Stock shall
have all of the same rights, preferences and privileges as each share of the
Corporation's Common Stock as set forth in the Corporation's Articles of
Incorporation. If the Corporation at any time subdivides (by any stock split,
stock dividend, recapitalization or otherwise) or combines (by reverse stock
split or otherwise) one or more classes of outstanding shares of the
Corporation's Common Stock into a greater or lesser number of shares, the
Corporation shall also subdivide or combine, as applicable, the outstanding
shares of the Series D Preferred Stock. 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 the 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 as an "Common Organic Change". Prior
to the consummation of any Common Organic Change, the Corporation shall make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Series D Preferred Stock then outstanding) to insure that each
of the holders of the Series D 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 or receivable by a
Permitted Investor (as defined in Section 5 hereof) upon the conversion of such
holder's Series D Preferred
34
<PAGE>
Stock, such shares of stock, securities or assets as such holder would have
received in connection with such Common Organic Change if such holder had
converted its Series D Preferred Stock immediately prior to such Common Organic
Change, or applicable record date thereon. 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 the
consolidation or merger or the entity purchasing such assets assumes by written
instrument (in form and substance satisfactory to the holders of a majority of
the Series D Preferred Stock then outstanding), the obligation to deliver to
each such holder such shares of stock, securities or assets, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
SECTION 5. CONVERSION AND RECONVERSION.
(a) Upon the transfer of any shares of Series D Preferred Stock
to a Permitted Investor (as defined below), the shares of Series D Preferred
Stock so transferred shall automatically be converted into shares of the
Corporation's Common Stock, and any warrant or option to purchase shares of
Series D Preferred Stock so transferred shall automatically be converted into a
warrant or option to purchase shares of the Corporation's Common Stock (each a
"Transfer Conversion") without any action on the part of the transferor or
Permitted Investor. The conversion rate applicable to a Transfer Conversion
shall be one share of Common Stock for each share of Series D Preferred Stock so
transferred.
(i) For purposes of this Section 5, the term "Permitted
Investor" means a Person that is not (a) the Beneficial Owner,
directly or indirectly, of ten percent (10%) or more of the
Corporation's outstanding capital stock or other securities
entitled to vote, or has or shares the power to dispose of, or
direct the disposition of, such capital stock or securities,
(b) a Person that directly or indirectly controls, is
controlled by, or is under common control with, the
Corporation (an "Affiliate"), or (c) any corporation or
organization of which the Corporation is an officer or
partner, is the Beneficial Owner, directly or indirectly, of
ten percent (10%) or more of the Corporation's outstanding
capital stock or other securities entitled to vote (an
"Associate").
(ii) A Person shall not be considered a Beneficial Owner
for purposes of this Section 5 if such Person was not a
Beneficial Owner of ten percent (10%) or more of the
Corporation's outstanding capital stock or other securities
entitled to vote, or has or shares the power to dispose of, or
direct the disposition of, such capital stock or securities
immediately prior to a repurchase of shares, recapitalization
of the Corporation or similar action and became a Beneficial
Owner as defined in Section 5(a)(iii) solely as a result of
such share repurchase, recapitalization or similar action
unless, (i) the repurchase, recapitalization, conversion, or
similar action was proposed by or on behalf of, or pursuant
to, any agreement, arrangement, relationship, understanding,
or otherwise (whether or not in writing) with, the Person or
is an Affiliate or Associate of the Person, or (ii) the Person
thereafter acquires a beneficial ownership, directly or
indirectly, of the Corporation's outstanding shares entitled
to vote and, immediately after such acquisition, is the
Beneficial Owner, directly or indirectly, of ten percent (10%)
or more of the Corporation's outstanding capital stock or
other shares entitled to vote.
(iii) "Beneficial Owner" for purposes of this Section 5
means a Person who, directly or indirectly through any written
or oral agreement, arrangement, relationship, understanding,
or otherwise, has or shares the power to vote, or direct the
voting of, shares or securities of the Corporation entitled to
vote, or has or shares the power to dispose of, or direct the
disposition of, such shares of securities; provided, that a
Person shall not be deemed the beneficial owner of shares or
securities of the Corporation (a) tendered pursuant to a
tender offer or exchange offer made by the Person or any of
such Person's Affiliates or Associates until the tendered
shares or securities are accepted for purchase or exchange,
(b) if such beneficial ownership arises solely from a
revocable proxy given in response to a proxy solicitation
required to be made and made in accordance with the applicable
rules and regulations under the Securities Exchange Act of
1934, as amended (the "Securities Exchange Act"), and is not
then reportable under the Securities Exchange Act, or, if the
Company is not subject to the Securities Exchange Act,
35
<PAGE>
would have been required to be made and would not have been
reportable even if the Company had been subject to the
Securities and Exchange Act.
(iv) "Affiliate" shall have the meaning assigned to that
term in Section 5(a)(i) hereof.
(v) "Associate" shall have the meaning assigned to that
term in Section 5(a)(i) hereof.
(vi) "Person" means any individual, partnership, limited
liability company, association, corporation, estate, trust or
other entity.
(b) In the event shares of Series D Preferred Stock transferred
to a Permitted Investor and converted into shares of Common Stock in a Transfer
Conversion are re-acquired, in whole or in part prior to July 23, 2002, by a
person who is not a Permitted Investor, the shares of Common Stock into which
the shares of Series D Preferred Stock were converted upon a Transfer Conversion
shall automatically be converted into shares of Series D Preferred Stock at a
conversion rate of one share of Series D Preferred Stock for each share of
Common Stock.
6. SERIES D PREFERRED STOCK IS CONVERTIBLE SECURITY. Shares of
Series D Preferred Stock constitute "convertible securities" under Section 8 of
the Certificate of Designation relating to the Senior Convertible Preferred
Stock.
[REMAINING PORTION OF THIS PAGE INTENTIONALLY LEFT BLANK]
36
<PAGE>
IN WITNESS WHEREOF, Orphan Medical, Inc. has caused this certificate
to be signed by John Howell Bullion, its Chief Executive Officer, this 2nd day
of August, 1999.
ORPHAN MEDICAL, INC.
By /s/ John Howell Bullion
John Howell Bullion
Chief Executive Officer
37
EXHIBIT 4.1
FORM OF WARRANT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS WARRANT
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) AN OPINION OF
COUNSEL SATISFACTORY TO ISSUER THAT SUCH SALE, TRANSFER OR OTHER DISPOSITION MAY
LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS OR (ii) SUCH REGISTRATION.
ORPHAN MEDICAL, INC.
WARRANT
TO PURCHASE
SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK
OR
SERIES D NON-VOTING PREFERRED STOCK
For value received, UBS Capital II LLC, its successors or assigns
("Holder"), is entitled to purchase from Orphan Medical, Inc., a Minnesota
corporation (the "Company"), up to (i) 2,050 fully paid and nonassessable shares
of the Company's Series C Convertible Preferred Stock, par value $0.01 per share
(the "Series C Preferred Stock"), or such greater or lesser number of shares of
Series C Preferred Stock as may be determined by application of the
anti-dilution provisions of this warrant (the "Warrant"); (ii) up to 315,385
fully paid and nonassessable shares of the Company's Series D Non-Voting
Preferred Stock, $0.01 par value per share (the "Series D Preferred Stock"), or
such greater or lesser number of Series D Preferred Stock as may be determined
by application of the anti-dilution provisions of this Warrant, at the warrant
exercise price set forth in Section 2 hereof; or (iii) any combination of Series
C Preferred Stock and Series D Preferred Stock, provided that the combined
purchase price for the shares does not exceed $2,050,000.
38
<PAGE>
This Warrant is subject to the following terms and conditions:
1. Exercise. The rights represented by this Warrant may be exercised
by the Holder, in whole or in part, by written election, in the form set forth
below, by the surrender of this Warrant (properly endorsed if required) at the
principal office of the Company, by payment to it by cash, certified check or
bank draft of the applicable warrant exercise price for the shares of Series C
Preferred Stock or Series D Preferred Stock to be purchased and by delivery of
the applicable Warrant Exercise form attached hereto or similar documents
acceptable to the Company demonstrating that the sale of the shares to be
purchased is exempt from registration under the Securities Act of 1933, as
amended, and any state securities law.
The Series C Preferred Stock or Series D Preferred Stock
purchased hereunder shall be deemed to be issued as of the close of business on
the date on which this Warrant has been exercised by payment to the Company of
the applicable warrant exercise price. Certificates for the shares of stock so
purchased, bearing an appropriate restrictive legend, shall be delivered to the
Holder within 15 days after the rights represented by this Warrant shall have
been so exercised, and, unless this Warrant has expired, a new warrant
representing the number of shares, if any, with respect to which this Warrant
has not been exercised shall also be delivered to the Holder hereof within such
time. No fractional shares shall be issued upon the exercise of this Warrant.
This Warrant shall be exercised in accordance with the provisions of Sections
9(b) and 9(c) hereof.
2. Warrant Exercise Price. The per share exercise price for the
shares represented by this Warrant shall be $1,000 for the Series C Preferred
Stock (the "Series C Warrant Exercise Price") and $6.50 for the Series D
Preferred Stock, as adjusted pursuant to Section 5 hereof (the "Series D Warrant
Exercise Price").
3. Expiration Date. The rights represented by this Warrant may be
exercised by holder at any time or from time to time after July 23, 2002 or upon
the liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, whichever is earlier, and prior to August 2, 2006. The Company has
the right to require the Holder to exercise this Warrant, in whole or in part,
any time after July 23, 2002 in the event the last sale price of Company's
common stock is equal to or greater than $13 per share for the ten (10)
consecutive trading days immediately preceding the date the Company gives the
Holder notice of the Company's election to require the exercise of all or a part
of this Warrant (the "Notice Date"). The portion of this Warrant required by the
Company to be exercised will expire on the 30th day following the Notice Date
unless exercised by the Holder on or before such 30th day.
4. Shares. All shares that may be issued upon the exercise of the
rights represented by this Warrant shall, upon issuance, be duly authorized and
issued, fully paid and nonassessable shares. During the period within which the
rights represented by this Warrant may be exercised, the Company shall at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of its Series C Preferred
39
<PAGE>
Stock, Series D Preferred Stock, shares of common stock in the case of a
Transfer Conversion (as that term is defined in Section 7(b) hereof), to provide
for the exercise of the rights represented by this Warrant.
5. Adjustment. The Series D Warrant Exercise Price for the Series D
Preferred Stock issuable upon exercise of this Warrant or issuable upon a
Transfer Conversion, shall be subject to adjustment from time to time as
hereinafter provided in this Section 5:
(a) If the Company at any time divides the outstanding
shares of its common stock into a greater number of shares (whether
pursuant to a stock split, stock dividend or otherwise), and
conversely, if the outstanding shares of its common stock are
combined into a smaller number of shares, the Series D Warrant
Exercise Price in effect immediately prior to such division or
combination of the Company's common stock shall be proportionately
adjusted to reflect the reduction or increase in the value of each
such common share.
(b) If any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the
Company with another corporation, the sale of all or substantially
all of its assets to another corporation or a Change of Control
shall be effected in such a way that holders of the Company's common
stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for such common stock, then, as a
condition of such reorganization, reclassification, consolidation,
merger or sale, the Holder shall have the right, at its option, to
(i) purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the shares of
the Series D Preferred Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights
represented hereby, such shares of Series D Preferred Stock or other
securities as would have been issued or delivered to the Holder if
Holder had exercised this Warrant and had received such shares of
Series D Preferred Stock immediately prior to such reorganization,
reclassification, consolidation, merger or sale; or (ii) purchase
and receive upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of the Series D
Preferred Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby,
such assets as would have been issued or delivered to the Holder if
Holder had exercised this Warrant and had received such shares of
Series D Preferred Stock immediately prior to such reorganization,
reclassification, consolidation, merger or sale; or (iii) purchase
and receive upon the basis and upon the terms and conditions
specified in this Warrant, a warrant to purchase shares of stock or
other securities as would have been issued or delivered to the
Holder if Holder had exercised this Warrant and had received shares
of Series D Preferred Stock immediately prior to such
reorganization, reclassification, consolidation, merger or sale.
With respect to (i), (ii) and (iii) above, in the case of a Change
of Control (as defined herein), the Holder shall receive, at its
option, the securities, assets or warrants described above as if it
had not only exercised this Warrant, but had also participated in
the transaction that resulted in the Change of Control. In the event
such a Change of Control resulted from a tender offer or the
issuance
40
<PAGE>
of additional securities by the Company, the Holder shall receive
from the Company, at its option, an amount equal to the excess of
the aggregate offer price over the aggregate Series D Warrant
Exercise Price, as the case may be. For purposes of the preceding
sentence, the term "aggregate offer price" means the amount that
would be paid to the Holder in connection with the Change of Control
if the Holder had exercised this Warrant for shares of Series D
Preferred Stock. For purposes of this Warrant, the term "Change of
Control" means any sale or issuance or series of related sales or
issuances of the Company's voting securities (or securities
convertible into or exchangeable for voting securities) which
results in any person or group of affiliated persons (i) owning more
than 50% of the Company's voting securities outstanding at the time
of such sale or issuances, or (ii) having the ability to elect a
majority of the Company's Board of Directors.
The Company shall not effect any such consolidation,
merger or sale unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed to the
Holder at the last address of the Holder appearing on the books of
the Company the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to purchase. Further
adjustment to the Series D Warrant Exercise Price shall be made for
successive recapitalizations, reclassifications, consolidations,
mergers, sale of assets or Changes of Control as shall be
appropriate under the circumstances.
(c) If and whenever the Company shall (1) issue or sell
any shares of its common stock for a consideration per share less
than the Series D Warrant Exercise Price in effect immediately prior
to the time of such issuance or sale, (2) issue or sell any
warrants, options or other rights to acquire shares of its common
stock at a purchase price less than the Series D Warrant Purchase
Price in effect immediately prior to the time of such issuance or
sale, (3) amend the terms of any existing warrants, options or other
rights to acquire shares of common stock, or otherwise adjust the
purchase price for shares of common stock issuable upon the exercise
of such warrants, options or other rights to acquire shares of
common stock, such that the purchase price for such shares of common
stock is less than the Series D Warrant Exercise Price in effect
immediately prior to the time of such amendment or adjustment, or
(4) issue or sell any other securities that are convertible into
shares of its common stock for a purchase or exchange price less
than the Series D Warrant Exercise Price in effect immediately prior
to the time of such issuance or sale (except for Permitted Issuances
(as that term is defined in Article I Section 8 of the Company's
Certificate of Designation for Series B Convertible Preferred
Stock)), then, upon such issuance or sale, the Series D Warrant
Exercise Price shall be reduced to the price at which such shares of
common stock are being issued or sold by the Company or the price at
which such other securities are exercisable or convertible into
shares of the Company's common stock. For purposes of this Warrant,
the term "consideration per share" for which common stock is issued
or issuable shall mean (1) with respect to the issuance, grant or
sale of options or warrants to purchase shares of common stock, an
amount determined by dividing (i) the total amount, if any,
41
<PAGE>
received or receivable by the Corporation as consideration for the
granting or sale of such options or warrants, plus the minimum
aggregate amount of additional consideration payable to the
Corporation upon exercise of all such options and warrants, 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 and warrants or upon the
conversion or exchange of all such convertible securities issuable
upon the exercise of such options, and (2) with respect to the
issuance, grant or sale of common stock of the Company or securities
directly or indirectly exercisable or convertible into shares of
common stock, an amount 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.
(d) If the Company takes any other action, or if any
other event occurs, which does not come within the scope of the
provisions of Section 5(a), 5(b) or 5(c), but which should result in
an adjustment in the Series D Warrant Exercise Price and/or the
number of shares subject to this Warrant in order to fairly protect
the purchase rights of the Holder, an appropriate adjustment in such
purchase rights shall be made by the Company.
(e) Upon each adjustment of the Series D Warrant
Exercise Price, the Holder shall thereafter be entitled to purchase,
at the Series D Warrant Exercise Price resulting from such
adjustment, the number of shares of Series D Preferred Stock
obtained by multiplying the Series D Warrant Exercise Price in
effect immediately prior to such adjustment by the number of shares
of Series D Preferred Stock purchasable pursuant hereto immediately
prior to such adjustment and dividing the product thereof by the
Series D Warrant Exercise Price resulting from such adjustment.
(f) Upon any adjustment of the Series D Warrant Exercise
Price, the Company shall give written notice thereof to the Holder
stating the Series D Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of
shares of Series D Preferred Stock purchasable at such price upon
the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is
based.
6. Rights as Shareholder. This Warrant shall not entitle the Holder
to any voting rights or other rights except as provided in the Stock Purchase
Agreement dated as of August 2, 1999, by and between the Company and UBS Capital
II LLC (the "Stock Purchase Agreement").
7. Transfer.
42
<PAGE>
(a) This Warrant and all rights hereunder are
transferable, in whole or in part, at the principal office of the
Company by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant properly endorsed. The
bearer of this Warrant, when endorsed, may be treated by the Company
and all other persons dealing with this Warrant as the absolute
owner hereof for any purpose and as the person entitled to exercise
the rights represented by this Warrant, or to the transfer hereof on
the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company
may treat the registered owner hereof as the owner for all purposes.
(b) In the event this Warrant and all rights hereunder
are transferred, in whole or in part, to a Permitted Investor, any
rights to purchase shares of Series D Preferred Stock pursuant to
the exercise of this Warrant, or any transferred portion thereof
will automatically be converted into a right to purchase shares of
the Company's common stock (a "Transfer Conversion"). The conversion
rate applicable to a Transfer Conversion shall be one share of
common stock for each share of Series D Preferred Stock.
(c) For purposes of Section 7(b), the following
definitions apply:
(i) "Permitted Investor" means a Person that is
not (a) the Beneficial Owner, directly or indirectly, of
ten percent (10%) or more of the Company's outstanding
stock or other securities entitled to vote, or has or
shares the power to dispose of, or direct the
disposition of, such stock or securities, (b) a Person
that directly or indirectly controls, is controlled by,
or is under common control with, the Company (an
"Affiliate"), or (c) any corporation or organization of
which the Company is an officer or partner, is the
Beneficial Owner, directly or indirectly, of ten percent
(10%) or more of the Company's outstanding stock or
other securities entitled to vote (an "Associate").
(A) A Person shall not be considered a
Beneficial Owner for purposes of Section 7(c)(i)
if such Person was not a Beneficial Owner of ten
percent (10%) or more of the Company's outstanding
stock or other securities entitled to vote, or has
or shares the power to dispose of, or direct the
disposition of, such stock or securities
immediately prior to a repurchase of shares,
recapitalization of the Company or similar action
and became a Beneficial Owner as defined in
Section 7(c)(ii) solely as a result of such share
repurchase, recapitalization or similar action
unless, (i) the repurchase, recapitalization,
conversion, or similar action was proposed by or
on behalf of, or pursuant to, any agreement,
arrangement, relationship, understanding, or
otherwise (whether or not in writing) with, the
Person or is an Affiliate or Associate of the
Person, or (ii) the Person thereafter acquires a
beneficial ownership, directly or indirectly, of
the Company's outstanding shares entitled to vote
and, immediately after such acquisition, is the
Beneficial Owner,
43
<PAGE>
directly or indirectly, of ten percent (10%) or
more of the Company's outstanding stock or other
shares entitled to vote.
(ii) "Beneficial Owner" means a Person who,
directly or indirectly through any written or oral
agreement, arrangement, relationship, understanding, or
otherwise, has or shares the power to vote, or direct
the voting of, shares or securities of the Company
entitled to vote, or has or shares the power to dispose
of, or direct the disposition of, such shares of
securities; provided, that a Person shall not be deemed
the beneficial owner of shares or securities of the
Company (a) tendered pursuant to a tender offer or
exchange offer made by the Person or any of such
Person's Affiliates or Associates until the tendered
shares or securities are accepted for purchase or
exchange, (b) if such beneficial ownership arises solely
from a revocable proxy given in response to a proxy
solicitation required to be made and made in accordance
with the applicable rules and regulations under the
Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), and is not then reportable
under the Securities Exchange Act, or, if the Company is
not subject to the Securities Exchange Act, would have
been required to be made and would not have been
reportable even if the Company had been subject to the
Securities and Exchange Act.
(iii) "Affiliate" shall have the meaning assigned
to that term in Section 7(c)(i) hereof.
(iv) "Associate" shall have the meaning assigned
to that term in Section 7(c)(i) hereof.
(v) "Person" means any individual, partnership,
limited liability company, association, corporation,
estate, trust or other entity.
(d) In the event this Warrant and all rights hereunder,
are re-acquired, in whole or in part, by Investor (as defined in the
Stock Purchase Agreement") prior to July 23, 2002, the shares of
common stock into which the shares of Series D Preferred Stock were
converted upon a Transfer Conversion shall automatically be
converted into shares of Series D Preferred Stock at a conversion
rate of one share of Series D Preferred Stock for each share of
common stock.
8. Notices. All demands and notices to be given hereunder shall be
delivered or sent by first class mail, postage prepaid; in the case of the
Company, addressed to its corporate headquarters, 13911 Ridgedale Drive,
Minnetonka, Minnesota, 55305, until a new address shall have been substituted by
like notice; and in the case of Holder, addressed to Holder at the address
written below, until a new address shall have been substituted by like notice,
with a copy to:
Nancy Fuchs, Esq.
44
<PAGE>
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022
Facsimile: (212) 836-8689
9. Additional Right to Convert Warrant.
(a) The holder of this Warrant shall have the right to
require the Company to convert this Warrant (the "Conversion Right")
at any time after it is exercisable, but prior to its expiration,
into shares of Series D Preferred Stock as provided for in this
Section 9. Upon exercise of the Conversion Right, the Company shall
deliver to the Holder (without payment by the Holder of any Series D
Warrant Exercise Price) that number of shares of Company's Series D
Preferred Stock, as the case may be, equal to the result obtained by
multiplying (i) the number of shares with respect to which the
Warrant is being exercised by (ii) the quotient obtained by dividing
(x) the value of the Warrant at the time the Conversion Right is
exercised (determined by subtracting the aggregate Series D Warrant
Exercise Price for the warrant shares in effect immediately prior to
the exercise of the Conversion Right from the aggregate fair market
value for the warrant shares immediately prior to the exercise of
the Conversion Right) by (y) the aggregate fair market value for the
warrant shares immediately prior to the exercise of the Conversion
Right.
(b) The Conversion Right may be exercised by the Holder,
at any time or from time to time, prior to its expiration, on any
business day by delivering written notice to the Company (the
"Conversion Notice") at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares with
respect to which the Warrant is being exercised and (ii) a place and
date not less than one or more than 20 business days from the date
of the Conversion Notice for the closing of such purchase.
(c) At any closing under Section 9(b) hereof, (i) Holder
will surrender the Warrant and (ii) the Company will deliver to
Holder a certificate or certificates for the number of shares of the
Company's Series D Preferred Stock (or common stock, as the case may
be under Section 7(b) hereof) issuable upon such conversion,
together with cash, in lieu of any fraction of a share, and (iii)
the Company will deliver to Holder a new warrant representing the
number of shares, if any, with respect to which the Warrant shall
not have been exercised.
(d) Fair market value for a warrant share as of a
particular date (the "Determination Date") shall mean:
(i) The average of the closing bid or last sale
prices of the Company's common stock, respectively,
reported for the ten (10) business days immediately
preceding the Determination Date if the Company's common
stock is reported on the New York Stock Exchange
Composite Tape, or, if the Company's common stock is not
listed or admitted to trading on such exchange, on the
principal national securities
45
<PAGE>
exchange on which the Company's 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.
(ii) If the Company's common stock is not admitted
for quotation on the NASDAQ National Market System, then
the average of the high bid and low asked prices
reported for the ten (10) business days immediately
preceding the Determination Date 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 Company's common stock for
the ten (10) day period immediately preceding the
Determination Date, the average of the bid and asked
prices for such ten (10) day period as furnished by any
New York Stock Exchange member firm selected from time
to time by the Company for such purpose.
(iii) If no bid and asked prices can be obtained
from any firm identified in Section 9(d)(ii), then the
value of one share of the Company's common stock on such
date as determined by the mutual agreement of the
Company and the holders of the right to purchase a
majority of the shares issuable under this Warrant, or,
if no such agreement can be reached within 30 days from
such date, then as determined by an independent
appraiser mutually acceptable to the parties.
(e) Holder of this Warrant shall have the right to pay
for all or any portion of the Series C Warrant Exercise Price or
Series D Warrant Exercise Price for shares of Series C Preferred
Stock or Series D Preferred Stock purchased hereunder by
cancellation of all or any part of the Company's obligation to
Holder under the terms of that certain Promissory Note dated as of
August 2, 1999, in the face amount of $2,050,000.
(f) Holder of this Warrant shall have the right, at any
time on or after the date of this Warrant, to receive securities,
assets or cash in the event of a liquidation, dissolution or winding
up of the Company (each such event a "Liquidity Event"). The amount
of such securities, assets or cash Holder shall be entitled to
receive under this Section 9(f) shall be an amount equal to the
difference between the Series D Warrant Exercise Price and the
amount of consideration Holder would have received if Holder had
exercised this Warrant for shares of Series D Preferred Stock.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed and delivered by a duly authorized officer.
Dated: August 2, 1999
ORPHAN MEDICAL, INC.
46
<PAGE>
By /s/ John Howell Bullion
--------------------------------------
John Howell Bullion
Chief Executive Officer
[Name and Address of Holder]
47
<PAGE>
WARRANT EXERCISE
(To be signed only upon exercise of this warrant)
The undersigned, the Holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase right represented by such warrant
for, and to purchase thereunder, __________ shares of Series C Preferred Stock,
or __________ shares of Series D Preferred Stock of Orphan Medical, Inc., to
which such warrant relates and herewith makes payment of $__________ therefor in
cash, certified check or bank draft and requests that the certificates for such
shares be issued in the name of, and be delivered to ____________________, whose
address is set forth below the signature of the undersigned.
Dated:
---------------------------
Signature
If shares are to be issued other than to Holder: Social Security or other Tax
Identification No.
Please print present name and address
48
<PAGE>
WARRANT ASSIGNMENT
(To be signed only upon transfer of this warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________ the right represented by the foregoing Warrant to
purchase the shares of Series C Preferred Stock or Series D Preferred Stock of
Orphan Medical, Inc. and appoints ____________________ attorney to transfer such
right on the books of Orphan Medical, Inc. with full power of substitution in
the premises.
Dated:
---------------------------
Signature
Social Security or other Tax
Identification No.
-----------------------------------------
Please print present name and complete address
49
EXHIBIT 4.2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS WARRANT
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) AN OPINION OF
COUNSEL SATISFACTORY TO ISSUER THAT SUCH SALE, TRANSFER OR OTHER DISPOSITION MAY
LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS OR (ii) SUCH REGISTRATION.
ORPHAN MEDICAL, INC.
WARRANT
TO PURCHASE
SHARES OF
SERIES D NON-VOTING PREFERRED STOCK
For value received, UBS Capital II LLC, its successors or assigns
("Holder"), is entitled to purchase from Orphan Medical, Inc., a Minnesota
corporation (the "Company"), up to 282,353 fully paid and nonassessable shares
of the Company's Series D Non-Voting Preferred Stock, $0.01 par value per share
(the "Series D Preferred Stock"), or such greater or lesser number of Series D
Preferred Stock as may be determined by application of the anti-dilution
provisions of this Warrant, at the warrant exercise price set forth in Section 2
hereof.
This Warrant is subject to the following terms and conditions:
1. Exercise. The rights represented by this Warrant may be exercised
by the Holder, in whole or in part, by written election, in the form set forth
below, by the surrender of this Warrant (properly endorsed if required) at the
principal office of the Company, by payment to it by cash, certified check or
bank draft of the Warrant Exercise Price (as defined in Section 2 hereof) for
the shares of Series D Preferred Stock to be purchased and by delivery of the
Warrant Exercise form attached hereto or similar documents acceptable to the
Company demonstrating that the sale of the shares to be purchased is exempt from
registration under the Securities Act of 1933, as amended, and any state
securities law.
50
<PAGE>
The Series D Preferred Stock purchased hereunder shall be deemed
to be issued as of the close of business on the date on which this Warrant has
been exercised by payment to the Company of the Warrant Exercise Price.
Certificates for the shares of stock so purchased, bearing an appropriate
restrictive legend, shall be delivered to the Holder within 15 days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new warrant representing the number of shares, if
any, with respect to which this Warrant has not been exercised shall also be
delivered to the Holder hereof within such time. No fractional shares shall be
issued upon the exercise of this Warrant. This Warrant shall be exercised in
accordance with the provisions of Sections 9(b) and 9(c) hereof.
2. Warrant Exercise Price. The per share exercise price for the
shares represented by this Warrant (the Warrant Exercise Price") shall be $4.25,
as adjusted pursuant to Section 5 hereof.
3. Expiration Date. The rights represented by this Warrant may be
exercised by holder at any time or from time to time after July 23, 2002 or upon
the liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, whichever is earlier, and prior to August 2, 2006. The Company has
the right to require the Holder to exercise this Warrant, in whole or in part,
any time after July 23, 2002 in the event the last sale price of Company's
common stock is equal to or greater than $13 per share for the ten (10)
consecutive trading days immediately preceding the date the Company gives the
Holder notice of the Company's election to require the exercise of all or a part
of this Warrant (the "Notice Date"). The portion of this Warrant required by the
Company to be exercised will expire on the 30th day following the Notice Date
unless exercised by the Holder on or before such 30th day.
4. Shares. All shares that may be issued upon the exercise of the
rights represented by this Warrant shall, upon issuance, be duly authorized and
issued, fully paid and nonassessable shares. During the period within which the
rights represented by this Warrant may be exercised, the Company shall at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Warrant a sufficient
number of shares of its Series D Preferred Stock and shares of common stock in
the case of a Transfer Conversion (as that term is defined in Section 7(b)
hereof), to provide for the exercise of the rights represented by this Warrant.
5. Adjustment. The Warrant Exercise Price for the Series D Preferred
Stock issuable upon exercise of this Warrant or issuable upon a Transfer
Conversion, shall be subject to adjustment from time to time as hereinafter
provided in this Section 5:
(a) If the Company at any time divides the outstanding
shares of its common stock into a greater number of shares (whether
pursuant to a stock split, stock dividend or otherwise), and
conversely, if the outstanding shares of its common stock are
combined into a smaller number of shares, the Warrant Exercise Price
for the Series D Preferred Stock in effect immediately prior to such
division or combination of the Company's common stock
51
<PAGE>
shall be proportionately adjusted to reflect the reduction or
increase in the value of each such common share.
(b) If any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the
Company with another corporation, the sale of all or substantially
all of its assets to another corporation or a Change of Control
shall be effected in such a way that holders of the Company's common
stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for such common stock, then, as a
condition of such reorganization, reclassification, consolidation,
merger or sale, the Holder shall have the right, at its option, to
(i) purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the shares of
the Series D Preferred Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights
represented hereby, such shares of Series D Preferred Stock or other
securities as would have been issued or delivered to the Holder if
Holder had exercised this Warrant and had received such shares of
Series D Preferred Stock immediately prior to such reorganization,
reclassification, consolidation, merger or sale; or (ii) purchase
and receive upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of the Series D
Preferred Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby,
such assets as would have been issued or delivered to the Holder if
Holder had exercised this Warrant and had received such shares of
Series D Preferred Stock immediately prior to such reorganization,
reclassification, consolidation, merger or sale; or (iii) purchase
and receive upon the basis and upon the terms and conditions
specified in this Warrant, a warrant to purchase shares of stock or
other securities as would have been issued or delivered to the
Holder if Holder had exercised this Warrant and had received shares
of Series D Preferred Stock immediately prior to such
reorganization, reclassification, consolidation, merger or sale.
With respect to (i), (ii) and (iii) above, in the case of a Change
of Control (as defined herein), the Holder shall receive, at its
option, the securities, assets or warrants described above as if it
had not only exercised this Warrant, but had also participated in
the transaction that resulted in the Change of Control. In the event
such a Change of Control resulted from a tender offer or the
issuance of additional securities by the Company, the Holder shall
receive from the Company, at its option, an amount equal to the
excess of the aggregate offer price over the aggregate Warrant
Exercise Price, as the case may be. For purposes of the preceding
sentence, the term "aggregate offer price" means the amount that
would be paid to the Holder in connection with the Change of Control
if the Holder had exercised this Warrant for shares of Series D
Preferred Stock. For purposes of this Warrant, the term "Change of
Control" means any sale or issuance or series of related sales or
issuances of the Company's voting securities (or securities
convertible into or exchangeable for voting securities) which
results in any person or group of affiliated persons (i) owning more
than 50% of the Company's voting securities outstanding at the time
of such sale or issuances, or (ii) having the ability to elect a
majority of the Company's Board of Directors.
52
<PAGE>
The Company shall not effect any such consolidation,
merger or sale unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed to the
Holder at the last address of the Holder appearing on the books of
the Company the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to purchase. Further
adjustment to the Warrant Exercise Price shall be made for
successive recapitalizations, reclassifications, consolidations,
mergers, sale of assets or Changes of Control as shall be
appropriate under the circumstances.
(c) If and whenever the Company shall (1) issue or sell
any shares of its common stock for a consideration per share less
than the Warrant Exercise Price in effect immediately prior to the
time of such issuance or sale, (2) issue or sell any warrants,
options or other rights to acquire shares of its common stock at a
purchase price less than the Warrant Purchase Price in effect
immediately prior to the time of such issuance or sale, (3) amend
the terms of any existing warrants, options or other rights to
acquire shares of common stock, or otherwise adjust the purchase
price for shares of common stock issuable upon the exercise of such
warrants, options or other rights to acquire shares of common stock,
such that the purchase price for such shares of common stock is less
than the Warrant Exercise Price in effect immediately prior to the
time of such amendment or adjustment, or (4) issue or sell any other
securities that are convertible into shares of its common stock for
a purchase or exchange price less than the Warrant Exercise Price in
effect immediately prior to the time of such issuance or sale
(except for Permitted Issuances (as that term is defined in Article
I Section 8 of the Company's Certificate of Designation for Series B
Convertible Preferred Stock)), then, upon such issuance or sale, the
Warrant Exercise Price shall be reduced to the price at which such
shares of common stock are being issued or sold by the Company or
the price at which such other securities are exercisable or
convertible into shares of the Company's common stock. For purposes
of this Warrant, the term "consideration per share" for which common
stock is issued or issuable shall mean (1) with respect to the
issuance, grant or sale of options or warrants to purchase shares of
common stock, an amount 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 or warrants, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon exercise of all such options and warrants, 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 and warrants or upon the
conversion or exchange of all such convertible securities issuable
upon the exercise of such options, and (2) with respect to the
issuance, grant or sale of common stock of the Company or securities
directly or indirectly exercisable or convertible into shares of
common stock, an amount determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the
issue or
53
<PAGE>
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.
(d) If the Company takes any other action, or if any
other event occurs, which does not come within the scope of the
provisions of Section 5(a), 5(b) or 5(c), but which should result in
an adjustment in the Warrant Exercise Price and/or the number of
shares subject to this Warrant in order to fairly protect the
purchase rights of the Holder, an appropriate adjustment in such
purchase rights shall be made by the Company.
(e) Upon each adjustment of the Warrant Exercise Price,
the Holder shall thereafter be entitled to purchase, at the Warrant
Exercise Price resulting from such adjustment, the number of shares
of Series D Preferred Stock obtained by multiplying the Warrant
Exercise Price in effect immediately prior to such adjustment by the
number of shares of Series D Preferred Stock purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Exercise Price resulting from such
adjustment.
(f) Upon any adjustment of the Warrant Exercise Price,
the Company shall give written notice thereof to the Holder stating
the Warrant Exercise Price resulting from such adjustment and the
increase or decrease, if any, in the number of shares of Series D
Preferred Stock purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
6. Rights as Shareholder. This Warrant shall not entitle the Holder
to any voting rights or other rights except as provided in the Stock Purchase
Agreement dated as of August 2, 1999, by and between the Company and UBS Capital
II LLC (the "Stock Purchase Agreement").
7. Transfer.
(a) This Warrant and all rights hereunder are
transferable, in whole or in part, at the principal office of the
Company by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant properly endorsed. The
bearer of this Warrant, when endorsed, may be treated by the Company
and all other persons dealing with this Warrant as the absolute
owner hereof for any purpose and as the person entitled to exercise
the rights represented by this Warrant, or to the transfer hereof on
the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company
may treat the registered owner hereof as the owner for all purposes.
(b) In the event this Warrant and all rights hereunder
are transferred, in whole or in part, to a Permitted Investor, any
rights to purchase shares of Series D Preferred Stock
54
<PAGE>
pursuant to the exercise of this Warrant, or any transferred portion
thereof will automatically be converted into a right to purchase
shares of the Company's common stock (a "Transfer Conversion"). The
conversion rate applicable to a Transfer Conversion shall be one
share of common stock for each share of Series D Preferred Stock.
(c) For purposes of Section 7(b), the following
definitions apply:
(i) "Permitted Investor" means a Person that is
not (a) the Beneficial Owner, directly or indirectly, of
ten percent (10%) or more of the Company's outstanding
stock or other securities entitled to vote, or has or
shares the power to dispose of, or direct the
disposition of, such stock or securities, (b) a Person
that directly or indirectly controls, is controlled by,
or is under common control with, the Company (an
"Affiliate"), or (c) any corporation or organization of
which the Company is an officer or partner, is the
Beneficial Owner, directly or indirectly, of ten percent
(10%) or more of the Company's outstanding stock or
other securities entitled to vote (an "Associate").
(A) A Person shall not be considered a
Beneficial Owner for purposes of Section 7(c)(i)
if such Person was not a Beneficial Owner of ten
percent (10%) or more of the Company's outstanding
stock or other securities entitled to vote, or has
or shares the power to dispose of, or direct the
disposition of, such stock or securities
immediately prior to a repurchase of shares,
recapitalization of the Company or similar action
and became a Beneficial Owner as defined in
Section 7(c)(ii) solely as a result of such share
repurchase, recapitalization or similar action
unless, (i) the repurchase, recapitalization,
conversion, or similar action was proposed by or
on behalf of, or pursuant to, any agreement,
arrangement, relationship, understanding, or
otherwise (whether or not in writing) with, the
Person or is an Affiliate or Associate of the
Person, or (ii) the Person thereafter acquires a
beneficial ownership, directly or indirectly, of
the Company's outstanding shares entitled to vote
and, immediately after such acquisition, is the
Beneficial Owner, directly or indirectly, of ten
percent (10%) or more of the Company's outstanding
stock or other shares entitled to vote.
(ii) "Beneficial Owner" means a Person who,
directly or indirectly through any written or oral
agreement, arrangement, relationship, understanding, or
otherwise, has or shares the power to vote, or direct
the voting of, shares or securities of the Company
entitled to vote, or has or shares the power to dispose
of, or direct the disposition of, such shares of
securities; provided, that a Person shall not be deemed
the beneficial owner of shares or securities of the
Company (a) tendered pursuant to a tender offer or
exchange offer made by the Person or any of such
Person's Affiliates or Associates until the tendered
shares or securities are accepted for purchase or
55
<PAGE>
exchange, (b) if such beneficial ownership arises solely
from a revocable proxy given in response to a proxy
solicitation required to be made and made in accordance
with the applicable rules and regulations under the
Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), and is not then reportable
under the Securities Exchange Act, or, if the Company is
not subject to the Securities Exchange Act, would have
been required to be made and would not have been
reportable even if the Company had been subject to the
Securities and Exchange Act.
(iii) "Affiliate" shall have the meaning assigned
to that term in Section 7(c)(i) hereof.
(iv) "Associate" shall have the meaning assigned
to that term in Section 7(c)(i) hereof.
(v) "Person" means any individual, partnership,
limited liability company, association, corporation,
estate, trust or other entity.
(d) In the event this Warrant and all rights hereunder,
are re-acquired, in whole or in part, by Investor (as defined in the
Stock Purchase Agreement") prior to July 23, 2002, the shares of
common stock into which the shares of Series D Preferred Stock were
converted upon a Transfer Conversion shall automatically be
converted into shares of Series D Preferred Stock at a conversion
rate of one share of Series D Preferred Stock for each share of
common stock.
8. Notices. All demands and notices to be given hereunder shall be
delivered or sent by first class mail, postage prepaid; in the case of the
Company, addressed to its corporate headquarters, 13911 Ridgedale Drive,
Minnetonka, Minnesota, 55305, until a new address shall have been substituted by
like notice; and in the case of Holder, addressed to Holder at the address
written below, until a new address shall have been substituted by like notice,
with a copy to:
Nancy Fuchs, Esq.
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022
Facsimile: (212) 836-8689
9. Additional Right to Convert Warrant.
(a) The holder of this Warrant shall have the right to
require the Company to convert this Warrant (the "Conversion Right")
at any time after it is exercisable, but prior to its expiration,
into shares of Series D Preferred Stock as provided for in this
Section 9. Upon exercise of the Conversion Right, the Company shall
deliver to the Holder (without payment
56
<PAGE>
by the Holder of any Warrant Exercise Price) that number of shares
of Company's Series D Preferred Stock, as the case may be, equal to
the result obtained by multiplying (i) the number of shares with
respect to which the Warrant is being exercised by (ii) the quotient
obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the
aggregate Warrant Exercise Price for the warrant shares in effect
immediately prior to the exercise of the Conversion Right from the
aggregate fair market value for the warrant shares immediately prior
to the exercise of the Conversion Right) by (y) the aggregate fair
market value for the warrant shares immediately prior to the
exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder,
at any time or from time to time, prior to its expiration, on any
business day by delivering written notice to the Company (the
"Conversion Notice") at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares with
respect to which the Warrant is being exercised and (ii) a place and
date not less than one or more than 20 business days from the date
of the Conversion Notice for the closing of such purchase.
(c) At any closing under Section 9(b) hereof, (i) Holder
will surrender the Warrant and (ii) the Company will deliver to
Holder a certificate or certificates for the number of shares of the
Company's Series D Preferred Stock (or common stock, as the case may
be under Section 7(b) hereof) issuable upon such conversion,
together with cash, in lieu of any fraction of a share, and (iii)
the Company will deliver to Holder a new warrant representing the
number of shares, if any, with respect to which the Warrant shall
not have been exercised.
(d) Fair market value for a warrant share as of a
particular date (the "Determination Date") shall mean:
(i) The average of the closing bid or last sale
prices of the Company's common stock, respectively,
reported for the ten (10) business days immediately
preceding the Determination Date if the Company's common
stock is reported on the New York Stock Exchange
Composite Tape, or, if the Company's common stock is not
listed or admitted to trading on such exchange, on the
principal national securities exchange on which the
Company's 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.
(ii) If the Company's common stock is not admitted
for quotation on the NASDAQ National Market System, then
the average of the high bid and low asked prices
reported for the ten (10) business days immediately
preceding the Determination Date 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
57
<PAGE>
Company's common stock for the ten (10) day period
immediately preceding the Determination Date, the
average of the bid and asked prices for such ten (10)
day period as furnished by any New York Stock Exchange
member firm selected from time to time by the Company
for such purpose.
(iii) If no bid and asked prices can be obtained
from any firm identified in Section 9(d)(ii), then the
value of one share of the Company's common stock on such
date as determined by the mutual agreement of the
Company and the holders of the right to purchase a
majority of the shares issuable under this Warrant, or,
if no such agreement can be reached within 30 days from
such date, then as determined by an independent
appraiser mutually acceptable to the parties.
(e) Holder of this Warrant shall have the right to pay
for all or any portion of the Series C Warrant Exercise Price or
Series D Warrant Exercise Price for shares of Series C Preferred
Stock or Series D Preferred Stock purchased hereunder by
cancellation of all or any part of the Company's obligation to
Holder under the terms of that certain Promissory Note dated as of
August 2, 1999, in the face amount of $2,050,000.
(f) Holder of this Warrant shall have the right, at any
time on or after the date of this Warrant, to receive securities,
assets or cash in the event of a liquidation, dissolution or winding
up of the Company (each such event a "Liquidity Event"). The amount
of such securities, assets or cash Holder shall be entitled to
receive under this Section 9(f) shall be an amount equal to the
difference between the Series D Warrant Exercise Price and the
amount of consideration Holder would have received if Holder had
exercised this Warrant for shares of Series D Preferred Stock.
[REMAINING PORTION OF THIS PAGE INTENTIONALLY LEFT BLANK]
58
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed and delivered by a duly authorized officer.
Dated: August 2, 1999
ORPHAN MEDICAL, INC.
By /s/ John Howell Bullion
--------------------------------------
John Howell Bullion
Chief Executive Officer
[Name and Address of Holder]
59
<PAGE>
WARRANT EXERCISE
(To be signed only upon exercise of this warrant)
The undersigned, the Holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase right represented by such warrant
for, and to purchase thereunder, __________ shares of Series D Preferred Stock
of Orphan Medical, Inc., to which such warrant relates and herewith makes
payment of $__________ therefor in cash, certified check or bank draft and
requests that the certificates for such shares be issued in the name of, and be
delivered to ____________________, whose address is set forth below the
signature of the undersigned.
Dated:
------------------------
Signature
If shares are to be issued other than to Holder: Social Security or other Tax
Identification No.
Please print present name and address
60
<PAGE>
WARRANT ASSIGNMENT
(To be signed only upon transfer of this warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________ the right represented by the foregoing Warrant to
purchase the shares of Series D Preferred Stock of Orphan Medical, Inc. and
appoints ____________________ attorney to transfer such right on the books of
Orphan Medical, Inc. with full power of substitution in the premises.
Dated:
------------------------
Signature
Social Security or other Tax
Identification No.
-----------------------------------------
Please print present name and complete address
61
EXHIBIT 10.1
ORPHAN MEDICAL, INC.
STOCK PURCHASE AGREEMENT
Agreement, made and entered into as of the 2nd day of August, 1999,
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 proposes to authorize,
issue and sell an aggregate of 2,950 shares of Series B Convertible Preferred
Stock, par value $0.01 per share (the "Series B Preferred Stock"), which shall
be issued pursuant to and shall be entitled to such 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 Closing Date (as that term is defined in Section 3 hereof),
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 Series B Convertible Preferred
Stock to be sold pursuant to this agreement and all shares of Series B
Convertible Preferred Stock issued in exchange or substitution therefor.
2. Sale and Purchase of Preferred Shares.
(a) 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 Closing Date (as that term is defined in Section 3
hereof), the number of Preferred Shares set forth opposite its name on
Schedule 1. Preferred Shares acquired by the Investors on the Closing Date
shall be accompanied by stock purchase warrants (the "Warrants") which
will give Investors the right to purchase that number of shares of either
Series C Convertible Preferred Stock, $0.01 par value (the "Series C
Preferred Stock") or Series D Non-Voting Preferred Stock, par value $0.01
per share (the "Series D Preferred Stock") as is designated on Schedule 1
after each Investor's name. The purchase price of Preferred Shares
acquired by the Investors on the Closing Date shall be $1,000 per share,
and there shall be no additional payment for the Warrants.
(b) The Warrants shall be evidenced by an instrument in the
identical form of the attached Exhibit B. Upon exercise of the Warrants,
the Series C Preferred Stock or Series D Preferred Stock, as the case may
be, shall be issued pursuant to, and shall be entitled to, such rights and
benefits as are set forth in Exhibit A.
62
<PAGE>
3. Closing. The closing of the transactions contemplated by 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 August 2, 1999 (the "Closing Date") or at such other place or different
time or day as may be mutually acceptable to the Investors and the Company.
At the closing, the Company will deliver to each Investor a
certificate or other instrument, dated such Closing Date, representing the
Preferred Shares purchased by such Investor on such Closing Date and will also
deliver an instrument in the form attached hereto as Exhibit B evidencing the
Warrants to which each such Investor is entitled, 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 and Warrants being purchased
by such Investor.
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 and Warrants 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 C:
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 (i) the
Preferred Shares, (ii) the shares of its common stock into which the Preferred
Shares are convertible (the "Conversion Shares"), (iii) the Warrants, (iv) the
shares of Series C Preferred Stock issuable upon exercise of the Warrants, (v)
the shares of Series D Preferred Stock issuable upon exercise of the Warrants,
(vi) the shares of Series D Stock issuable upon conversion of the Series C
Preferred Stock (the "Series D Conversion Shares"), (vii) the common stock
issuable upon conversion of the Series D Preferred Stock issuable upon exercise
of the Warrants in the event of a Transfer Conversion (as that term is defined
in Section 7 of Exhibit B)(the "Transfer 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. If any entity is listed on Exhibit C
and the Company owns a controlling interest in such entity, each of the
representations and warranties set forth in this Article 4 are
63
<PAGE>
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
D are (a) a balance sheet, as at December 31, 1998 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, 1999 for the Company, together with the related statements
of operations and cash flows 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 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, 1998 and June 30, 1999
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 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. The Company has not received notice that any of the
Company's tax returns has been audited by governmental authorities. The Company
does not have any tax liabilities except those reflected on Exhibit D or those
incurred in the ordinary course of business since December 31, 1998.
4.7 Changes, Dividends, etc. Except for the transactions
contemplated by this agreement, since December 31, 1998, the Company has not:
(i) incurred any debts, obligations or liabilities, absolute, accrued or
contingent and whether due or to become due,
64
<PAGE>
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) except for distributions made with respect to the Senior
Convertible Preferred Stock (as that term is defined in Section 4.15(a) hereof),
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 upon exercise of warrants or options that were outstanding as of
December 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 of its 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 and adjustments and bonuses made in the
ordinary course of business consistent with industry custom and practices; 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 December 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 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.
65
<PAGE>
4.9 Title to Properties and Encumbrances. Except as otherwise
set forth in Exhibit D and the SEC Documents, and except for properties and
assets disposed of in the ordinary course of business since December 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 December 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 D, (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 have been kept in good 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, Warrants, Conversion Shares, Series C
Preferred Stock, Series D Preferred Stock, Series D Conversion Shares and
Transfer 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
Warrants, when issued pursuant to the terms of this agreement, will be binding
obligations of the Company in accordance with their terms. 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. The shares of Series C Preferred Stock issuable upon exercise of
the Warrants, the shares of Series D Preferred Stock issuable upon exercise of
the Warrants, the Series D
66
<PAGE>
Conversion Shares and the Transfer Conversion Shares have been reserved for
issuance and when issued upon exercise of the Warrants or any conversion rights
thereunder 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,
the Warrants, the Conversion Shares, the Series C Preferred Stock, the Series D
Preferred Stock, the Series D Conversion Shares or the Transfer 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, the Warrants 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, the Warrants, the Conversion Shares, the Series C Preferred
Stock, the Series D Preferred Stock, the Series D Conversion Shares and the
Transfer 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").
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"),
67
<PAGE>
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. Except as set forth on Exhibit
C, 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 Riverside Bank.
68
<PAGE>
(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, 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 ss. 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
69
<PAGE>
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 ss. 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 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
(a) At the date hereof, the authorized capital stock of the Company
consists of 25,000,000 shares, of which 14,000 shares are designated as Senior
Convertible Preferred
70
<PAGE>
Stock, $0.01 par value (the "Senior Convertible Preferred Stock"). As of the
date hereof, 6,588,707 shares of undesignated capital stock, $.01 par value (the
"Common Stock") are issued and outstanding and 8,088 shares of Senior
Convertible Preferred Stock are issued and outstanding. 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 C, the SEC Documents (as that
term is defined in paragraph 4.8 hereof) 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 or the Warrants 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 that such issuance and sale does
constitute such an event under the anti-dilution provisions of the Company's
Senior Convertible Preferred Stock. Except for the Senior Convertible Preferred
Stock and the warrants that, as of June 30, 1999, entitled holders to purchase
an aggregate of 206,725 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 "Steichen 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 registered in accordance with
the Securities Act or 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.
(b) Upon consummation of the transactions contemplated herein, the
authorized capital stock of the Company shall consist of 25,000,000 shares, of
which 14,000 shares are designated as Senior Convertible Preferred Stock, 5,000
shares are designated as Series B Convertible Preferred Stock, 4,000 shares are
designated as Series C Convertible Preferred Stock, 1,500,000 shares are
designated as Series D Non-Voting Preferred Stock and 6,588,707 shares are
Common Stock.
71
<PAGE>
(c) Upon consummation of the transactions contemplated herein, the
Company shall have reserved a sufficient number of its shares of undesignated
capital stock for issuance as Conversion Shares and Transfer Conversion Shares.
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 D or the notes thereto. 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 and the
Warrants have been duly authorized by all necessary corporate action on behalf
of the Company, has been duly executed and 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 and shareholder
action necessary to the authorization, creation, issuance and delivery of the
Preferred Shares, the Warrants, the Conversion Shares, the Series C Preferred
Stock, the Series D Preferred Stock, the Series D Conversion Shares and the
Transfer Conversion Shares has been taken by the Company, or will be taken by
the Company on or prior to the Closing Date.
4.18 Brokers or Finders. 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.
72
<PAGE>
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 December 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.
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.
73
<PAGE>
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.
4.27. Issuance of Additional Equity Securities. The issuance of
the Preferred Shares, the Conversion Shares, the Series C Preferred Stock, the
Series D Preferred
74
<PAGE>
Stock, the Series D Conversion Shares and the Transfer Conversion Shares as
contemplated by this agreement, does not require the approval of the any of the
Company's shareholders under state or federal law or regulations, or Nasdaq
Marketplace Rules.
5. Representations of the Investors. Each Investor represents for
itself that:
5.1 Investment Intent. The Preferred Shares and Warrants 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 and Warrants 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. Such Investor further
understands that the Preferred Shares and Warrants 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. 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
75
<PAGE>
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 and Warrants which each Investor has
agreed to purchase is subject to the fulfillment prior to or on the 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 closing date with the same effect as though made on and as of the
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 Closing Date.
6.3 Certificate of Officer.
(a) The Company shall have delivered to the Investors a
certificate, dated the 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.
(b) The Company shall have delivered to the Investors a
certificate, dated the Closing Date, executed by the Chief Executive
Officer of the Company and certifying as to the adjusted conversion
price for the Senior Convertible Preferred Stock calculated in
accordance with Section 8 of the Company's Certificate of
Designation of Senior Convertible Preferred Stock.
6.4 Opinion of Intellectual Property. The Company shall have
delivered to each Investor an opinion, satisfactory to each of the Investors, of
Schwegman,
76
<PAGE>
Lundberg, Woessmer & Kluth, P.A., intellectual property counsel for the Company,
dated the closing date substantially in the form attached hereto as Exhibit E
hereto.
6.5 Issuance of the Warrants. The Company shall have issued the
Warrants to the Investors.
6.6 Execution of the Promissory Note. The Company shall have
executed and delivered to Investors that certain Promissory Note of even date
herewith in the face amount of $2,050,000 along with stock purchase warrants
which will give Investors the right to purchase 282,353 shares of Series D
Preferred Stock.
6.7 Legal Opinion. The Investors shall have received an
originally executed opinion of Dorsey & Whitney LLP, counsel for the Company,
dated as of the Closing Date, in the form attached as Exhibit F.
6.8 Necessary Consents. On or before the 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.
6.9 No Material Adverse Effect. Since December 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.
6.10 Certificate of Designation. On or prior to the 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.
6.11 Payment of Fees and Expenses. The Company shall have paid
on or before the Closing Date, 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 $35,000.
6.12 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 or the Warrants on
the Closing Date.
6.13 Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates,
77
<PAGE>
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. Conditions of Company's Obligations. The Company's obligation to
issue the Preferred Shares and the Warrants is subject to fulfillment prior to
or on the Closing Date of the following condition:
7.1 Execution of Waiver. Investors shall have executed and
delivered to the Company a Waiver in the form attached hereto as Exhibit G
waiving the Company's compliance with Section 7.1 of that certain Stock Purchase
Agreement dated as of July 23, 1998 by and between the Company and the investors
whose names are set forth on schedule 1 attached thereto.
8. Affirmative Covenants of the Company. The Company covenants and
agrees as follows:
8.1. 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
8.1(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
78
<PAGE>
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 8.1(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 8.1(a) and Section 8.1(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 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
(g) 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.
8.2 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
79
<PAGE>
material adverse effect on the business, operations, financial condition,
prospects or results of operation of the Company.
9. Negative Covenants of the Company.
9.1 Sale of Preferred Stock. Without the prior written consent
of the Investors identified on Schedule 1 attached hereto, the Company shall not
(i) issue, grant or sell any shares of Series B Preferred Stock or Series C
Preferred Stock or warrants, options or other rights to purchase shares of
Series B Convertible Preferred Stock or Series C Preferred Stock, at a price per
share less than $1,000; or (ii) issue any shares of the Company's preferred
stock having rights and preferences equal to or senior in rank to the rights and
preferences of the Preferred Shares, the Series C Preferred Stock or the Series
D Preferred Stock.
10. Conversion of Preferred Shares.
10.1 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 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.
10.2 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 10.1 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 shares of its capital
stock for the purpose of issuance upon the exercise of such conversion
privilege.
10.3 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.
80
<PAGE>
11. 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.
12. Registration Rights. The Company acknowledges and agrees that
the Investors shall have the registration rights set forth on Exhibit H.
13. Restriction on Transfer of Shares.
13.1 Restrictions. The Preferred Shares, the Warrants, the
Conversion Shares, Series C Preferred Stock, Series D Preferred Stock, Series D
Conversion Shares and the Transfer 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.
13.2 Legend. Each certificate representing Preferred Shares
shall be endorsed with the following legend:
"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 and
all applicable state securities laws or (ii) such
registration."
Upon the conversion of any Preferred Shares, or upon exercise of any Warrant,
unless the Company receives an opinion of counsel satisfactory to the Company to
the effect that a transfer of the Conversion Shares, Series C Preferred Stock,
Series D Preferred Stock, Series D Conversion Shares or the Transfer Conversion
Shares, as the case may be, may be made without registration or further
restriction on transfer, or unless such Conversion Shares, Series C Preferred
Stock, Series D Preferred Stock, Series D Conversion Shares or Transfer
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.
13.3 Removal of Legend. Any legend endorsed on a certificate
evidencing a security pursuant to section 13.2 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
81
<PAGE>
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 13.2.
14. Miscellaneous.
14.1 No Waivers; Cumulative Remedies. No failure or delay on the
part of the Investors, or any other holder of any Preferred 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.
14.2 Amendments; Waiver and Consents. This agreement may be
amended or modified, and the obligations of the Company and the rights of the
holders of Preferred Shares purchased 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.
14.3 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 14.2.
14.4 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 $35,000, 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 refinancing or restructuring
of the arrangements provided hereunder in the nature of a "work-out" or pursuant
to any insolvency or bankruptcy proceedings.
82
<PAGE>
14.5 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 Preferred 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, with a copy to:
Nancy Fuchs, Esq.
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022
Facsimile: (212) 836-8689
(b) if to the Company at 13911 Ridgedale Drive, Minnetonka,
Minnesota 55305. Attention: Chief Executive Officer; or at such
other address as the Company may specify by written notice to the
Investors.
14.6 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 attached to the Preferred Shares, the Warrants, the
Conversion Shares, Series C Preferred Stock, Series D Preferred
Stock, Series D Conversion Shares and Transfer Conversion Shares, as
applicable, upon transfer of such shares in accordance with Section
5.1 and Section 13 hereof.
(c) 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.
14.7 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.
14.8 Complete Agreement. This agreement and other exhibits and
schedules hereto contain the complete agreement between the parties and
supersede any prior
83
<PAGE>
understandings, agreements or representations by or between the parties, written
or oral, which may have related to the subject matter hereof in any way.
14.9 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.
14.10 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.
[REMAINING PORTION OF THIS PAGE INTENTIONALLY LEFT BLANK]
84
<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 /s/ John Howell Bullion
--------------------------------------
John Howell Bullion
Chief Executive Officer
UBS CAPITAL II LLC
By /s/ Michael Greene
--------------------------------------
By
--------------------------------------
85
<PAGE>
Schedule 1
Shares of Series C
Convertible Preferred
Stock and Series D Preferred
Preferred Shares Stock Subject to
Investor to be Purchased Warrants
- -------- --------------- --------
UBS Capital II LLC 2,950 2,050 (Series C)
OR
315,385 (Series D)
86
<PAGE>
EXHIBIT H
REGISTRATION RIGHTS PROVISIONS
Capitalized terms used herein have the meanings set forth in Section 8 hereof.
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 (i) Registrable Shares and (ii) shares of stock being registered at
the request of holders of the Company's Senior Convertible Preferred Stock,
requested to be registered by the holders of such securities; and second, pro
rata on the basis of the number of Registrable Shares and shares of Senior
Convertible Preferred Stock 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.
87
<PAGE>
(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.
(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
88
<PAGE>
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 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 Piggyback
Registration shall be reduced
89
<PAGE>
(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
90
<PAGE>
SEC of any stop order suspending the effectiveness of such Registration
Statement or the initiation of any proceedings for that 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;
91
<PAGE>
(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;
(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,
92
<PAGE>
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 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
93
<PAGE>
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, (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
94
<PAGE>
employees of each 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;
95
<PAGE>
(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 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
96
<PAGE>
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 G, 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.
"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.
97
<PAGE>
"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.
"Promissory Note" means that Promissory Note dated as of August 2,
1999 in the face amount of $2,050,000 in favor of UBS Capital II LLC.
"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 directly or
indirectly issued or issuable upon conversion of the Shares or issued as
dividends on the Shares; (ii) shares of Common Stock issued as payment of
interest on the Promissory Note and (iii) any shares of Common Stock issued or
issuable with respect to the shares of Common Stock referred to in clauses (i)
and (ii) above upon any stock split, 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
98
<PAGE>
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.
"Senior Convertible Preferred Stock" means share of the Company's
Senior Convertible Preferred Stock, par value $0.01 per share.
"Shares" means the shares of the Company's Series B Convertible
Preferred Stock, par value $.01 per share, Series C Convertible Preferred Stock,
par value $.01 per share, Series D Non-Voting Preferred Stock, par value $.01
per share, and any securities (other than Common Stock) into which such shares
may hereafter be changed, issued or issuable pursuant to the Stock Purchase
Agreement or upon the exercise of any warrant, option or other conversion right
entitling the holder thereof to receive shares of stock.
"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 August 2, 1999, 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.
Unless otherwise stated other capitalized terms contained herein
have the meanings set forth in the Stock 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.
99
<PAGE>
(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 G
shall be given in accordance with Section 15.5 of the Stock Purchase Agreement.
(d) Stock Purchase Agreement. This Exhibit G is deemed a part of the
Stock Purchase Agreement.
100
PROMISSORY NOTE
---------------
$2,050,000 New York, New York
Initial Maximum Principal Amount August 2, 1999
(without accrued and capitalized interest)
FOR VALUE RECEIVED, ORPHAN MEDICAL INC., a Minnesota
corporation (together with its permitted successors and assigns, the
"BORROWER"), hereby promises to pay to the order of UBS CAPITAL II LLC (together
with its successors and assigns, the "PAYEE"), at the offices of Union Bank of
Switzerland, New York Branch located at 299 Park Avenue, New York, New York
10171-0026, or at such other place as the Payee or any holder hereof may from
time to time designate, on August 2, 2002 (the "STATED MATURITY DATE"), or
earlier as hereinafter referred to, the principal sum of TWO MILLION AND FIFTY
THOUSAND DOLLARS ($2,050,000), or such portion thereof as shall have been
advanced and be outstanding hereunder, and to pay interest, as provided herein,
on the unpaid portion of said principal sum from the date any such portion is
advanced in accordance with the terms hereof until such principal amount shall
be paid in full. All payments in respect of this Note shall be made in lawful
money of the United States of America and in immediately available funds, except
as expressly provided below.
The Borrower may request an advance hereunder, in an amount
not less than $500,000, to be advanced on any day that the Payee is open for
business in New York City, New York (a "BUSINESS DAY"). All advances hereunder
shall be made on telephonic notice by the Borrower, given not later than 11:00
a.m. (New York City time) five days prior to the requested date of the advance,
confirmed in writing (which notice shall be irrevocable), and shall specify the
date and amount of the requested advance. The Payee, subject to the conditions
set forth in Exhibit A hereto, shall make available the amount of the requested
advance in immediately available funds at such account in the United States as
directed in writing by the Borrower. Amounts, once borrowed and repaid, may not
be reborrowed.
Interest on this Note shall accrue at the rate of 7.5% per
annum and be payable on March 15th and September 15th of each year and on the
date that this Note becomes due and payable; PROVIDED, HOWEVER, that
notwithstanding the foregoing, interest on outstanding principal and interest
shall accrue at the rate of 9.5% per annum (the "DEFAULT RATE") while any Event
of Default hereunder is continuing and shall be payable upon demand. Unless the
Borrower elects in writing to the Payee to make payment of interest on this Note
in cash to the Payee, accrued interest that is due and payable hereunder shall
automatically, on the applicable due date with respect to such interest, be
added to the outstanding principal amount due and owing on this Note
("CAPITALIZED INTEREST") and then be deemed paid hereunder. Interest shall be
calculated on the actual number of days elapsed in a year of 360 days.
This Note may be prepaid, without premium, in whole or in part
at any time, in each case, together with accrued and unpaid interest through the
date of prepayment on the amount being prepaid. Amounts, once borrowed and
repaid, may not be reborrowed.
101
<PAGE>
The records of the Payee shall be, absent manifest error,
conclusive evidence of the advances and accrued and capitalized interest thereon
and of all payments made in respect thereof.
On the Stated Maturity Date, so long as (x) no Event of
Default (as defined below) is continuing, and (y) the Common Stock is regularly
being traded on the NASDAQ National Market System or on another recognized
national stock exchange, the Borrower, at its option, may elect to pay all (but
not less than all) amounts of interest then due and owing under this Note
(including all Capitalized Interest) by tendering to the Payee on the Stated
Maturity Date the Conversion Shares, free and clear of any lien, security
interest or other charge or encumbrance of any nature whatsoever and free and
clear of any contractual restrictions on sale and resale. Upon receipt by the
Payee of the Conversion Shares in compliance with the terms set forth above,
amounts of interest (and no other amounts) due and owing under this Note up to
the Market Value of the Conversion Shares shall be deemed to have been paid
hereunder.
For the purpose of the immediately prior paragraph, the
following terms have the meanings set forth below:
"COMMON STOCK" shall mean the Borrower's common
stock, $.01 par value per share.
"CONVERSION SHARES" shall mean at least that number
of shares of the Common Stock with an aggregate Market Value at least
equal to all (but not less than all) amounts of interest then due and
owing under this Note (including all Capitalized Interest).
"MARKET VALUE" shall mean the average of the last
reported sale price, or in the 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 a national securities exchange, or if the Common
Stock is not listed on a national securities exchange, on the NASDAQ
National Market System for the 30 trading days preceding the Stated
Maturity Date.
The Borrower hereby makes the representations and warranties,
and hereby agrees to perform and observe the covenants, set forth in Exhibits B
and C, respectively, hereto.
This Borrower is issuing this Note simultaneously with the
issuance of a detachable, convertible warrant convertible into 282,353 shares of
Series D Non-Voting Preferred Stock of the Borrower (the "WARRANT"). The
obligations under this Note are and shall be in full force and effect whether or
not the Warrant may be or has been exercised in accordance with its terms. This
Note is being issued with "original issue discount" or "OID" as such terms are
described in Section 1273 of the Internal Revenue Code of 1986 (the "Code"). The
following information is provided in accordance with the requirements of Section
1275-3 (b) of the Treasury Regulations: The issue price of this Note is
$1,968,000; the Note is being issued with $82,000 of OID; and the yield to
maturity of the Note is 9.05%. All of the terms used in the preceding sentence
have the meanings given them in Sections 1271 through 1275 of the Code or in the
Treasury Regulations issued thereunder.
102
<PAGE>
The Payee may utilize as payment, from time to time at its
sole and absolute election, and the Borrower shall accept as payment, such
amount as designated by the Payee from that amount then outstanding under this
Note, in partial or total consideration for payment of any amount then payable
to the Borrower under the Warrant or the other warrant issued to Payee on the
date hereof which is convertible into either 2,600 shares of Series C
Convertible Preferred Stock or 400,000 shares of Series D Non-Voting Preferred
Stock (the "Convertible Warrant") pursuant to the terms contained therein.
Amounts so designated by the Payee from time to time as payment under the
Warrant or the Convertible Warrant (once credited by the Borrower as being paid
under the Warrant or the Convertible Warrant) shall be deemed as a prepayment by
the Borrower of the identical amount then outstanding under this Note.
The Payee or any other holder of this Note may declare all
indebtedness evidenced by this Note to be immediately due and payable upon the
happening of any of the following events (each, an "EVENT OF DEFAULT"): (1) the
failure of the Borrower to make any payment due hereunder on the date due and
payable, (2) a default by the Borrower in the payment or performance of any
material obligation, term, condition or event of default of any other agreement
between the Borrower and the Payee (or any of its affiliates), (3) any
representation or warranty on Exhibits A or B made or deemed made by the
Borrower in or in connection with this Note or any advance hereunder shall prove
to have been false or misleading in any material respect when so made, or deemed
made; (4) the Borrower shall fail to observe or perform any covenant, condition
or agreement contained herein and such failure shall not have been remedied
within 10 days following the Borrower having obtained actual knowledge thereof;
(5) judgments or orders for payment of money (other than judgments or orders in
respect of which adequate insurance is maintained for the payment thereof) in
excess of $50,000 in the aggregate against the Borrower remains unpaid, unstayed
on appeal, undischarged, unbonded or undismissed for a period of 45 days of
more, (6) the filing by or against the Borrower of a request or petition for
liquidation, reorganization, arrangement, adjustment of debts, adjudication as a
bankrupt, relief as a debtor or other relief under the bankruptcy, insolvency or
similar laws of the United States or any state or territory thereof or any
foreign jurisdiction, now or hereafter in effect; (7) the making of any general
assignment by the Borrower for the benefit of creditors; (8) the appointment of
a receiver or trustee for the Borrower or for any substantial assets of the
Borrower, including, without limitation, the appointment of, or taking
possession by, a "custodian", as defined in the Federal Bankruptcy Code; (9)
nonpayment by the Borrower when due, whether by acceleration, demand or
otherwise, of any indebtedness for borrowed money in an amount not less than
$250,000 owing to any party other than the Payee, or the occurrence of any event
which could result in acceleration of the time for payment of any such
indebtedness; (10) the Borrower shall (or shall enter into any agreement that
contemplates that the Borrower shall) consolidate or merge with or into any
other person or convey or transfer its properties and assets substantially as an
entirety to any person, or enter into any transaction or series of transactions
that would result in the occurrence of any "Liquidity Event" or "Change of
Control" (each of such terms as defined in the Warrant) under the Warrant; or
(11) the occurrence of any event or change that has caused or evidences, either
in any case, or in the aggregate, a material adverse change in the business,
assets, operations, prospects or condition (financial or otherwise) of the
Borrower.
During the continuation of any Event of Default, (i) interest
on all amounts outstanding hereunder shall accrue interest at the Default Rate;
and (ii) the Payee may exercise any
103
<PAGE>
remedies and take any other appropriate action to protect and enforce its rights
and remedies as is provided for under applicable law.
No failure by the Payee to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise by the Payee of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right or remedy. The rights and remedies of the Payee as herein specified
are cumulative and not exclusive of any other rights or remedies which the Payee
may have under law or otherwise.
The Borrower waives diligence, demand, presentment, protest
and notice of any kind, and assents to extensions of the time of payment,
release, surrender or substitution of security, or forbearance or other
indulgence, without notice.
The Borrower agrees to pay, in addition to unpaid principal
and interest, all costs and expenses (including attorneys' fees) incurred in
connection with this Note, including, without limitation, in attempting or
effecting collection hereunder, or in any renegotiating, work-out or
restructuring of this Note.
This Note shall inure to the benefit of and be binding upon
the parties hereto and their respective permitted successors and assigns. The
Payee may assign this Note to any other person, firm or corporation. The
Borrower may not assign its rights or obligations hereunder or any interest
herein without the prior written consent of the Payee.
This Note may not be changed, modified or terminated orally,
but only by an agreement in writing signed by the Borrower and the Payee or any
holder hereof.
THE BORROWER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE ARISING OUT OF,
CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN
OR AMONG THEM IN CONNECTION WITH THIS AGREEMENT AND INSTEAD ANY SUCH ACTION OR
PROCEEDING WILL BE TRIED BY BENCH TRIAL WITHOUT A JURY.
THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED
TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN OR AMONG THEM SHALL BE
RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK (IT
BEING UNDERSTOOD THAT APPEALS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING
MAY BE HEARD IN AN APPEALS COURT OUTSIDE OF THE CITY OF NEW YORK), UNLESS NO
SUCH COURT HAS ADEQUATE JURISDICTION, AND EACH PARTY HERETO CONSENTS TO THE
JURISDICTION OF THE STATE AND FEDERAL COURTS IN THE CITY OF NEW YORK IN ANY SUCH
ACTION OR PROCEEDING AND IRREVOCABLY WAIVES ANY OBJECTION, WHETHER BASED ON
INCONVENIENT FORUM, IMPROPER VENUE OR OTHERWISE TO SUCH ACTION OR PROCEEDING
BEING HEARD IN SUCH COURT.
[CONTINUED ON NEXT PAGE]
104
<PAGE>
THIS NOTE AND THE VALIDITY HEREOF AND THE RIGHTS AND
OBLIGATIONS HEREUNDER SHALL, IN A MANNER CONSISTENT WITH SECTION 5-1401 OF THE
GENERAL OBLIGATION LAW OF THE STATE OF NEW YORK, BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY
CONFLICTS OF LAWS PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION OF THE
LAWS OF ANY OTHER JURISDICTION.
ORPHAN MEDICAL INC.
By: /s/ John Howell Bullion
-------------------------------------
Name: John Howell Bullion
Title: Chairman and Chief Executive
Officer
105
<PAGE>
Exhibit A
Conditions Precedent to Advances
In connection with each request for an advance under the
Note,(and by the Borrower's acceptance of the proceeds of each such advance) the
Borrower hereby represents and warrants to the Payee on and as the date of such
advance that:
1. Each of the representations and warranties set
forth on Exhibit B hereto are true and correct in all material respects
(unless any such representation or warranty speaks as of a particular
date, in which case it shall be deemed repeated as of such date);
2. No Event of Default is continuing;
3. There has been no material adverse change in (i)
the business, property, operations or condition (financial or
otherwise) or prospects of the Borrower or (ii) the ability of the
Borrower to perform its obligations hereunder or under the Warrant; and
4. The total aggregate principal amount of all
advances made under the Note (without regard to prepayments thereon)
does not exceed $2,600,000.
106
<PAGE>
Exhibit B
Representations and Warranties
The Borrower hereby represents and warrants to the Payee that,
except as disclosed in the attached Schedule B:
1. Organization, Standing, etc. The Borrower 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 Borrower has the requisite corporate
power and authority to issue the Note and the Warrant and to otherwise
perform its obligations under this Note.
2. Governing Instruments. The copies of the Articles
of Incorporation and bylaws of the Borrower which have been delivered
to legal counsel for the Payee prior to the execution of this Note are
true and complete copies of the duly and legally adopted Articles of
Incorporation and bylaws of the Borrower in effect as of the date of
this agreement.
3. Qualification. The Borrower 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. Compliance With Applicable Laws and Other
Instruments. The business and operations of the Borrower 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 Note or the Warrant nor the consummation of the
transactions contemplated hereby or the Warrant 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 Borrower pursuant to, any
agreement or other instrument to which the Borrower 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 Borrower. The Borrower 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 Borrower is not subject to any restriction which would
prohibit it from entering into or performing its obligations under this
Note or the Warrant.
5. No Consents. The Borrower is not required to
obtain the consent of any other party or any consent, license,
approval, exemption or authorization from, or registration, filing or
declaration with, any commission, board, agency, court or governmental
authority in connection with the execution, delivery, performance,
validity or enforceability of this Note or the Warrant, except such as
have been obtained.
107
<PAGE>
6. Outstanding Debt. Other than this Note, the
Borrower 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
Schedule B. The Borrower 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.
7. Corporate Acts and Proceedings. This Note and the
Warrant each has been duly authorized by all necessary corporate action
on behalf of the Borrower, has been duly executed and delivered by
authorized officers of the Borrower, and is a valid and binding
agreement on the part of the Borrower that is enforceable against the
Borrower 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. Simultaneously with the execution hereof, the Borrower shall
have reserved a sufficient number of its shares of undesignated capital
stock for issuance as Conversion Shares. All corporate and shareholder
action necessary to the authorization, creation, issuance and delivery
of the Conversion Shares has been taken by the Company.
8. Investment Company. The Borrower is not an
"investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as
amended.
9. Margin Stock. The Borrower does not own and has no
intention of acquiring any "margin stock" as defined in Regulation G
(12 CFR Part 207) of the Board of Governors of the Federal Reserve
System (herein called "MARGIN STOCK"). None of the advances made
hereunder will be used, directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of purchasing or carrying
any margin stock or for the purpose of maintaining, reducing or
retiring any indebtedness which was originally incurred to purchase or
carry any stock that is currently a margin stock or for any other
purpose which might constitute this transaction a "purpose credit"
within the meaning of such Regulation G. Neither the Payee nor any
agent acting on its behalf has taken or will take any action which
might cause this Indenture or the Notes to violate Regulation G,
Regulation T or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Securities Exchange Act of
1934, as amended, in each case as in effect now or as the same may
hereafter be in effect, nor will the Borrower at any time acquire or
hold any margin stock at any time during the term of this Note.
10. Brokers or Finders. No person, firm or
corporation has or will have, as a result of any act or omission of the
Borrower, any right, interest or valid claim against the Borrower or
any Investor for any commission, fee or other compensation as a finder
or broker in connection with the transactions contemplated by this Note
or the Warrant. The Borrower will indemnify and hold each of the Payee
harmless against any and all liability with
108
<PAGE>
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 Note.
11. 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 Borrower, threatened against the Borrower, or its properties or
business, and the Borrower 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 Borrower is not in default with respect to any
judgment, order or decree of any court or any governmental agency or
instrumentality. The Borrower has not been threatened with any action
or proceeding under any business or zoning ordinance, law or
regulation.
12. Accuracy of Representations and Warranties. The
representations and warranties of the Borrower contained in the Stock
Purchase Agreement with the investors named therein, dated as of August
__, 1999, are true and correct.
109
<PAGE>
Exhibit C
Covenants
The Borrower hereby covenants and agrees, so long as any
amounts remain outstanding under the Note, that:
1. Maintenance of Existence. The Borrower shall keep
in full effect its existence, rights and franchises as a corporation,
under the laws of the State of Minnesota and will obtain and preserve
its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Note and the Warrants.
The Borrower shall at all times operate in accordance with its
certificate of formation.
2. Compliance with Law. The Borrower shall comply in
all material respects with all applicable laws, rules, regulations and
orders of any governmental authority, and preserve and maintain its
corporate existence, rights, franchises, qualifications and privileges,
except to the extent that the failure so to comply with such laws,
rules and regulations or the failure so to preserve and maintain such
existence, rights, franchises, qualifications and privileges would not
adversely affect the ability of the Borrower to perform its obligations
under this Note or the Warrant.
3. Books and Records. The Borrower shall keep its
books and accounts in accordance with generally accepted accounting
principles consistently applied.
4. Payment of Taxes. The Borrower shall pay all
taxes, assessments, and governmental charges or levies imposed on it or
upon its income or profits or upon any of its assets, provided that the
payment of any such tax, assessment, charge or levy shall not be
required so long as the amount, applicability or validity thereof shall
be contested in good faith by appropriate proceedings and the Borrower
shall have set aside on its books adequate reserves in respect thereof
(segregated to the extent required by GAAP).
5. Intellectual Property. The Borrower shall protect
and maintain in full force and effect (x) its "orphan drug producer"
designation under applicable federal law and regulation, and (y) each
of the following intellectual property owned, used, or licensed by the
Borrower as licensee or licensor:
(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");
110
<PAGE>
(4) all know-how, trade secrets,
confidential information, customer lists, software,
technical information, data, process technology,
plans, drawings, and blue prints (collectively,
"TRADE SECRETS").
6. Negative Covenants. The Borrower shall not:
(a) sell, assign (by operation of law or
otherwise), transfer, exchange or lease any of its assets
except in the ordinary course of business;
(b) pledge, mortgage or otherwise dispose of
any of its assets or create or suffer to exist any lien,
security interest or other charge or encumbrance upon or with
respect to any part of its assets, tangible or intangible,
except in the ordinary course of business and not in
connection with a securitization or the incurrence of
indebtedness for borrowed money;
(c) incur any debts, obligations or
liabilities, absolute, accrued or contingent, including lease
obligations, whether due or to become due, except current
liabilities that do not rank superior to the indebtedness
under the Notes and are incurred in the ordinary course of
business that (individually or in the aggregate) and that will
not materially and adversely affect the business, properties
or prospects of the Borrower;
(d) make any change in the character of its
business that could materially adversely affect the ability of
the Borrower to perform its obligations under this Note or the
Warrant;
(e) pay any obligation or liability other
than, or discharged or satisfied any lien, security interest
or other charge or encumbrance other than those securing,
current liabilities, in each case in the ordinary course of
business;
(f) declare or make any payment to or
distribution to its shareholders as such, or purchased or
redeemed any of its shares of capital stock, or obligate
itself to do so;
(g) issue or sell any shares of capital
stock or other securities (other than shares issued upon
exercise of warrants or options that were outstanding as of
August __, 1999) or grant any options, warrants, or other
purchase rights with respect thereto other than those in favor
of the Payee, except as otherwise permitted by the Stock
Purchase Agreement dated as of the date hereof between the
Borrower and the Payee;
(h) make 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;
111
<PAGE>
(i) increase the compensation payable, or to
become payable, to any of its directors or employees, or made
any bonus payment or similar arrangement with any of its
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
(j) agree to do any of the foregoing.
112
Exhibit 99
Page 1 of 13
ORPHAN MEDICAL, INC.
CAUTIONARY STATEMENTS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF RISKS, INCLUDING
AMONG OTHERS, RISKS ASSOCIATED WITH COMPANIES THAT OPERATE IN THE PHARMACEUTICAL
INDUSTRY. THESE RISKS ARE SUBSTANTIAL AND INHERENT IN OUR OPERATIONS AND
INDUSTRY. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE
RISKS, TOGETHER WITH THE INFORMATION IN THE REST OF THIS PROSPECTUS, BEFORE
BUYING SHARES OF COMMON STOCK.
WE HAVE A HISTORY OF LOSSES, WHICH WE EXPECT TO CONTINUE.
We have been unprofitable since our inception in January 1993. We
expect operating losses in 1999 because anticipated gross profits from product
revenues will not offset our operating expenses and additional 1999 spending to
advance the development of Xyrem. The amount of these losses may vary
significantly from year-to-year and quarter-to-quarter. Our actual losses will
depend on, among other factors, the timing of product development, regulatory
approval, and market demand for our FDA approved products. We cannot assure you
that we will ever generate sufficient product revenues or achieve profitability.
WE CANNOT BE SURE THAT FUTURE CAPITAL WILL BE AVAILABLE TO MEET OUR EXPECTED
CAPITAL REQUIREMENTS.
We expect spending for research and development, and sales and
marketing to increase significantly. We estimate our future capital requirements
to be:
* $4.0 million of capital durinG 1999 to fully implement our
current business plan, including the Xyrem development plan,
to meet additional sales and marketing requirements related to
Busulfex, which we commenced shipping in February 1999, and to
maintain our Nasdaq National Market listing.
* $6.5 million during the next two fiscal years in research and
development for the products we currently market and to
advance the development of Xyrem.
* Additional capital would be required if we were to undertake
developments of any additional products.
Adequate funds for our operations and continued development, whether from
financial markets or from other sources, may not be available when needed on
acceptable terms, or at all. If we cannot obtain additional capital, we would
have to delay or scale back some or all of our development plans for Xyrem,
reduce personnel and general office support spending, and sell or license one or
more of our approved products.
LIMITATIONS TO SOURCES OF ADDITIONAL CAPITAL - RESTRICTIONS, COVENANTS AND
RIGHTS RELATED TO SENIOR CONVERTIBLE PREFERRED STOCK.
On July 23, 1998, we completed the sale to UBS Capital of a private
placement of $7.5 million of Senior Convertible Preferred Stock. On August 2,
1999, we completed an additional sale to UBS Capital of a private placement of
$2.95 million of Series B Convertible Preferred Stock. In conjunction with the
issuance of the preferred shares, we agreed to several restrictions and
covenants, and granted certain voting and other rights to the
113
<PAGE>
Exhibit 99
Page 2 of 13
holders of the preferred shares. One of the most important of these restrictions
is that we cannot incur additional indebtedness, except for indebtedness secured
solely by our trade receivables, until we have profitable operations, subject to
certain limitations. Another important restriction is that, without the approval
of a majority of the preferred stockholders, we cannot issue additional equity
securities unless the selling price per share exceeds the then conversion price
of the outstanding convertible preferred stock or the sale of equity is
accomplished in a public offering. The present conversion plan is $8.14 per
share for the Senior Convertible Preferred Stock and $6.50 for the Series B
Convertible Preferred Stock. These restrictions could make it more difficult and
more costly for us to obtain additional capital. We cannot assure you that
additional sources of capital will be available to us and, if available, on
terms acceptable to us.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - LOSS OF NASDAQ NATIONAL MARKET LISTING AND FAILURE TO QUALIFY FOR NASDAQ
SMALL CAP MARKET LISTING.
There is a risk that the market value and the liquidity of the public
float for our common stock could be adversely affected in the event we no longer
meet Nasdaq's requirements for continued listing on the National Market. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in our 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 September 30, 1999, our net
tangible assets equaled $4.4 million and our market capitalization was
approximately $44.5 million (based on the last sale price of $6.75 and 6,588,707
registered shares outstanding as of September 30, 1999). Net tangible assets are
defined as total assets less the sum of total liabilities and intangible assets.
Market capitalization is defined as total outstanding shares multiplied by the
last sales price quoted by Nasdaq. Should we fail in the future to satisfy at
least one of the aforementioned Nasdaq listing requirements, our common stock
would no longer qualify for listing on the Nasdaq National Market, but would
qualify for quotation on the Nasdaq Small Cap Market as long as our net tangible
assets exceed $2.0 million. Our ability to raise additional capital and the
market value of our 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 our business, our prospects and our shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE.
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:
* announcements by us or our competitors of new product
developments or clinical testing results;
* governmental approvals, regulations or actions;
* developments or disputes relating to patents or proprietary
rights;
* public concern over the safety of therapies;
* fluctuations in financial performance from period to period;
and
* small float or number of shares of our stock available for
sale.
These and other factors and events may have a significant impact on our
business and on the market price of the common stock.
THERE IS A LIMITED MARKET FOR OUR PRODUCTS.
114
<PAGE>
Exhibit 99
Page 3 of 13
Most orphan drugs have a potential United States market of less than
$25 million annually and many address annual markets of less than $1 million. We
cannot assure you that sales of our products will be adequate to make Orphan
profitable even if the products are accepted by medical specialists and used by
patients.
WE RELY ON THE LIMITED PROTECTION OF THE ORPHAN DRUG ACT.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition." The Orphan Drug Act
generally defines "rare disease or condition" as one that affects populations of
fewer than 200,000 people in the United States. The Orphan Drug Act provides us
with certain limited protections for our products.
The first level of limited protection is orphan drug designation, which
must be requested before submitting a new drug application (referred to in the
industry as an " NDA"). After the FDA grants orphan drug designation, it
publishes the generic identity of the therapeutic agent and the potential orphan
use specified in the request. Orphan drug designation does not constitute FDA
approval. In addition, orphan drug designation does not convey any advantage in,
or shorten the duration of, the regulatory approval process.
The second level of limited protection is orphan drug status. The
Orphan Drug Act confers orphan drug status upon the first company to receive FDA
approval to market the designated drug for the designated indication. FDA
approval also results in United States marketing exclusivity for a period of
seven years, subject to certain limitations. Although obtaining FDA approval to
market a product with orphan drug status can be advantageous, we cannot assure
you that the scope of protection or the level of marketing exclusivity will
remain in effect in the future. In addition, orphan drug status does not provide
any marketing exclusivity in foreign markets. Although certain foreign countries
provide development and marketing benefits for orphan drugs, we cannot assure
you that such benefits can be obtained or, if obtained, will be of material
value to us. The FDA has granted us orphan drug status for Antizol, Elliotts B
Solution, Cystadane, Sucraid, and Busulfex.
We have obtained orphan drug designation for Xyrem and plan to submit
an NDA for approval next year. Sodium oxybate is the generic identity of the
therapeutic agent for Xyrem. Despite orphan drug designation for Xyrem, another
pharmaceutical company still may attempt to develop sodium oxybate for the same
designated indication as Xyrem or may seek approval of an NDA for their drug
prior to the approval of an NDA for Xyrem. If the FDA first approves another
sponsor's NDA for sodium oxybate and for the same indication as Xyrem, that
sponsor will be entitled to exclusive marketing rights. In that case, the FDA
would refrain for seven years from approving our application to market Xyrem. We
are aware that the FDA has granted Teva (formerly Biocraft) orphan drug
designation for the use of sodium oxybate to treat the symptoms of narcolepsy,
however, we have obtained the exclusive right to use Teva's data in our NDA
submission. We cannot assure you that the FDA will approve Xyrem first for the
designated indication. We also cannot assure you that the FDA will not grant
orphan drug designation and marketing approval to other competing products prior
to approving our NDA for Xyrem.
Even if the FDA approves an NDA for a drug with an orphan drug
designation, the FDA may still approve the same drug for a different indication,
or a molecular variation of the same drug for the same indication. We are aware
that the FDA granted to Sparta Pharmaceutical, which has been acquired by
SuperGen Inc., orphan drug designation for an intravenous busulfan for a closely
related indication. If the FDA approves an NDA for Sparta's drug, Sparta could
seek orphan drug status. In addition, the FDA does not restrict doctors from
prescribing an
115
<PAGE>
Exhibit 99
Page 4 of 13
approved drug for uses not approved by the FDA for that drug. Thus, a doctor
could prescribe another company's drug for indications for which our product has
received FDA approval and orphan drug status. Significant "off label" use, that
is, prescribing approved drugs for unapproved uses, could adversely affect the
marketing potential of any of our products that have received orphan drug status
and NDA approval.
The possible amendment of the Orphan Drug Act by Congress has been the
subject of frequent discussion. Although Congress has made no significant
changes to the Orphan Drug Act 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. We cannot assure you that the Orphan Drug Act will remain in
effect in its current form. The precise scope of protection that orphan drug
designation and marketing approval may afford in the future is unknown. We
cannot assure you that the current level of exclusivity will remain in effect.
THE FDA AND FOREIGN REGULATORY AUTHORITIES MUST APPROVE OUR PRODUCTS FOR SALE.
Government regulation in the United States and abroad is a significant
factor in the testing, production and marketing of our current and future
products. Each product must undergo an extensive regulatory approval process
conducted by the United States Food and Drug Administration and by comparable
agencies in other countries. We cannot market any medicine we may develop as a
prescription product in any jurisdiction, including foreign countries, in which
the product does not receive regulatory approval. The approval process can take
many years and requires the expenditure of substantial resources.
We depend on external laboratories and medical institutions to conduct
our 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 is subject to varying interpretations that could delay, limit
or prevent regulatory approval. In addition, changes in FDA policy for drug
approval during the period of development and in the requirements for regulatory
review of each submitted NDA could result in additional delays or outright
rejection.
We cannot assure you that the FDA or any foreign regulatory authority
will approve any product we develop in a timely manner, or at all. Generally,
the FDA and foreign regulatory authorities approve only a very small percentage
of newly discovered pharmaceutical compounds that enter pre-clinical
development. Moreover, even if the FDA approves a product, it may place
commercially unacceptable limitations on the uses, or "indications," for which a
product may be marketed. This would result in additional cost and delay for
further studies to provide additional data on safety or effectiveness.
WE MAY BE SUBJECT TO DEA AND STATE REGULATION OF CONTROLLED SUBSTANCES.
We have petitioned the FDA to make gamma hydroxy butyrate (GHB), the
active ingredient in Xyrem, a controlled substance prior to approval of a
marketing application for Xyrem. We expect the FDA to designate Xyrem as a
controlled substance. If this happens, the Drug Enforcement Agency as well as
the FDA will regulate Xyrem's manufacture and distribution. Orphan Medical
supports government regulation of Xyrem as a controlled substance because abuse
of GHB has occurred in the past.
Abuse of GHB has occurred from sources other than Orphan Medical
product. We are not aware of any diversion of Xyrem leading to any abuse. We
have put systems into place to minimize the potential of any such diversion.
However, we cannot assure you that diversion will not occur.
116
<PAGE>
Exhibit 99
Page 5 of 13
There are five "Schedules" or levels of control that the DEA can assign
to controlled substances. Each schedule relates to a relative level for
potential misuse of a drug. Schedule I is the most restrictive; drugs in this
schedule have very high potential for misuse and no approved medical use.
Heroin, for example, is a Schedule I controlled substance. Schedule II
controlled substances, such as morphine, also have a high potential for misuse
and a high level of potential for physical and chemical dependence. However,
Schedule II drugs have demonstrated and approved medical uses. Drugs in Schedule
IV, such as benzodiazepines or valium, pose less danger of abuse than Schedule
III drugs and have accepted medical value. The DEA imposes more strict measures
on the manufacture and distribution of Schedule III controlled substances than
it does for Schedule IV controlled substances.
We believe that Xyrem is most appropriately categorized as a Schedule
III controlled substance. This may be more restrictive than what Xyrem would
receive based on scientific information about the drug and on comparisons with
other similar drugs. The requirements of Schedule III, however, may help reduce
the risk that Xyrem could be misused. We believe that we can successfully market
Xyrem under a Schedule III categorization. If the DEA imposes a more restrictive
Schedule on Xyrem, the expense required to complete development and to market
Xyrem could be prohibitively high.
The United States House of Representatives has approved HR 2130 by a
margin of 423 to 1. HR 2130 would make GHB, and hence Xyrem, a Schedule I
controlled substance with exemptions for products studied under FDA approved
Investigational New Drug applications. Upon approval of an NDA by the FDA, Xyrem
would become a Schedule III controlled substance with Schedule I penalties for
illicit use. A bill with almost identical provisions has been introduced in the
Senate (S 1561). We cannot assure you that the Senate bill will be approved,
that the House and Senate bills will be combined into a final, unified piece of
legislation or that the President will sign a final bill into law.
In addition, individual states can regulate controlled substances at
the same level as or more restrictively than the DEA. While every effort will be
made to ensure that regulation by the states is consistent with DEA assigned
scheduling, we cannot assure you that state regulation will not impede
development or marketing efforts related to Xyrem.
FDA APPROVAL DOES NOT GUARANTEE FINANCIAL SUCCESS.
Six of our products have been approved for marketing by regulatory
authorities in the United States or elsewhere. Even if we obtain FDA approval to
market Xyrem, we cannot assure you that Xyrem or our other products will be
commercially successful or achieve the expected financial results. We may
encounter unanticipated problems relating to the development, manufacturing,
distribution and marketing of our products. Some of these problems may be beyond
our financial and technical capacity to solve. The failure to adequately address
any such problems could have a material adverse effect on our business and our
prospects.
We cannot completely insulate our drug development portfolio from
potential failures. Some products that we have selected for development will not
produce the results expected during clinical trials or receive FDA approval.
Drugs approved by the FDA may fail to generate product sales of an acceptable
level. We have discontinued the development of eleven products from our
portfolio since inception: L-Cycloserine in 1994, Glucaric Acid in 1996, and
nine other products in 1997. We discontinued the nine products in 1997 in order
to focus our development efforts on those products that fit within three
selected strategic therapeutic market segments:
117
<PAGE>
Exhibit 99
Page 6 of 13
Antidote, Oncology Support, and Sleep Disorders. In December 1998, we sold our
rights to colloidal bismuth subcitrate for $750,000, and are evaluating the
potential value of our rights in other discontinued products. Depending on
available financing, we may continue to develop one or more of the discontinued
products. We cannot assure you that we will continue development on all other
proposed products or that we will continue marketing all FDA approved products.
SIGNIFICANT GOVERNMENT REGULATION CONTINUES ONCE A PRODUCT IS APPROVED FOR SALE.
The FDA's Division of Drug Marketing, Advertising and Communication
must approve marketing claims, which are the basis for a product's labeling,
advertising and promotion. We cannot be sure that the FDA's division will
approve our proposed marketing claims. The failure of the FDA's division to
approve our proposed marketing claims could have a material adverse effect on
our business and prospects.
The FDA also requires post-marketing adverse event surveillance
programs to monitor the product's side effects. If the surveillance program
indicates unsafe side effects, the FDA may withdraw marketing approval of the
product.
The FDA also regulates the manufacturing process for an approved drug.
The FDA may impose restrictions or sanctions upon the subsequent discovery of
previously unknown problems with a product or manufacturer. One possible
sanction is requiring the withdrawal of such product from the market. The FDA
must approve any change in manufacturer and most changes in the manufacturing
process prior to implementation. Obtaining the FDA's approval for a change in
manufacturing procedures or change in manufacturers is a lengthy and costly
process and could cause production delays and loss of sales, which would have a
material adverse effect on our business and our prospects.
Certain foreign countries regulate the sales price of a product after
marketing approval is granted. We cannot be sure that we can sell our products
at satisfactory prices in foreign markets even if marketing approval is granted
by foreign regulatory authorities.
WE RELY ON OTHERS FOR PRODUCT DEVELOPMENT OPPORTUNITIES.
We do not engage in research to identify new pharmaceutical compounds.
Instead, we have adopted a license and acquisition strategy to build our product
portfolio. This strategy for growth requires us to identify and acquire
potential pharmaceutical products targeted at niche markets within selected
strategic therapeutic market segments. These products usually require further
development and approval by regulatory bodies before they can be marketed. We
cannot assure you that any such products can be successfully developed, approved
or marketed. We must rely upon the willingness of others to sell or license
pharmaceutical product opportunities to us. Other companies, including those
with substantially greater resources, compete with us to acquire such products.
We cannot assure you that we will be able to acquire rights to additional
products on acceptable terms, if at all. Our failure to acquire or license new
pharmaceutical products within a selected strategic therapeutic market segment
or to promote and market commercially successful products within an existing
strategic therapeutic market segment could have a material adverse effect on our
business and our prospects.
We have contractual production rights to certain compounds through
various license agreements. Generally, the licensor can terminate these
agreements:
118
<PAGE>
Exhibit 99
Page 7 of 13
* for cause upon short notice;
* if we become insolvent or bankrupt;
* if we do not apply specified minimum resources and efforts to
develop the compound under license; or
* if we do not achieve certain minimum royalty payments.
We cannot assure you we can meet all specified requirements and avoid
termination of any license agreements. We cannot assure you that if any
agreement is terminated, we will be able to enter into similar agreements on
terms as favorable as those contained in our existing license agreements.
WE DEPEND ON OTHERS TO MANUFACTURE AND SUPPLY THE PRODUCTS WE MARKET.
We do not have and do not intend to establish any internal product
testing, synthesis of bulk drug substance, or manufacturing capability for drug
product. Accordingly, we depend on others to supply and manufacture the
components incorporated into all of our finished drug products. The inability to
contract for these purposes on acceptable terms could adversely affect our
ability to develop and market our products. Failure by parties with whom we
contract to perform adequately their responsibilities may delay the submission
of products for regulatory approval, impair our ability to deliver our products
on a timely basis or otherwise adversely affect our business and our prospects.
The loss of a supply or manufacturing contractor could materially adversely
affect our business and our prospects.
The loss of either a bulk drug supplier or drug product manufacturer
would require us to obtain regulatory clearance in the form of a "pre approval
submission" and incur validation and other costs associated with the transfer of
the bulk drug or drug product manufacturing process. We believe that it could
take as long as one year for the FDA to approve such a submission. Because our
products are targeted to relatively small markets and our manufacturing
production runs are small by industry standards, we have not incurred the added
costs to certify and maintain secondary sources of supply for bulk drug
substance or backup drug product manufacturers. Should we lose either a bulk
drug supplier or a drug product manufacturer, we could run out of salable
product to meet marketing demands or investigational product for use in clinical
trials, while we wait for the FDA to approve a new bulk drug supplier or drug
product manufacturer. We cannot assure you that the change of a bulk drug
supplier or drug product manufacturer and the transfer of the processes to
another third party will be approved by the FDA, and if approved, in a timely
manner. The loss of or the change of a bulk drug supplier or a drug product
manufacturer could have a material adverse effect on our business and prospects.
BULK DRUG SUPPLY
Bulk drug substance is the active chemical compound used in the
manufacture of our drug products. We depend substantially on Ash Stevens, Inc.
for the supply of bulk drug substance used in Busulfex, Antizol, and
Antizol-Vet. If we were to lose Ash Stevens as a supplier, we would be required
to identify a new supplier for the bulk drug substance used in products that
provided approximately 90% of 1998 total revenues and are expected to generate
over 90% of 1999 total revenues. We depend substantially on Lonza, Inc. for the
supply of bulk drug substance used in Xyrem. If we were to lose Lonza as a
supplier, we would be required to identify a new supplier before an NDA is
submitted for Xyrem. We also cannot assure you that our bulk drug supply
arrangements with
119
<PAGE>
Exhibit 99
Page 8 of 13
Ash Stevens and Lonza might not change in the future. We cannot assure you that
any change would not adversely affect production of Busulfex, Antizol,
Antizol-Vet, or Xyrem.
DRUG PRODUCT MANUFACTURE
From bulk drug substance, drug product manufacturers formulate a
finished drug product and package the product for sale or for use in clinical
trials. We depend substantially on an affiliate of Boehringer Ingelheim for drug
product manufacturing of Busulfex, Antizol, and Antizol-Vet. If we were to lose
Boehringer as a manufacturer, we would be required to identify a new
manufacturer for drug products that provided approximately 90% of 1998 total
revenues and are expected to generate over 90% of 1999 total revenues. We have
identified GlobalPharm as the drug product manufacturer for Xyrem and expect to
contract with this company. Currently, however, we do not have a contract with
GlobalPharm. If we do not contract with GlobalPharm, we would be required to
identify a new drug product manufacturer before an NDA is submitted for Xyrem.
We cannot assure you that our drug product manufacturing arrangements with
Boehringer and GlobalPharm might not change in the future. We cannot assure you
that any change would not adversely affect production of Busulfex, Antizol,
Antizol-Vet, or Xyrem.
WE CANNOT CONTROL OUR CONTRACTORS' COMPLIANCE WITH APPLICABLE REGULATIONS.
FDA regulations require good manufacturing practices to which bulk drug
suppliers and manufacturers are subject. Foreign regulatory authorities impose
similar rules and regulations. Our supply and manufacturing contractors must
comply with these regulatory requirements. Failure by our contractors to comply
with the FDA's good manufacturing practices or applicable foreign requirements
could result in significant time delays in or an inability to commercialize or
continue to market a product. Either result could have a material adverse effect
on our business and prospects. Failure to comply with good marketing practices
or other applicable legal requirements can lead to federal seizure of violative
products, injunctive actions brought by the federal government, or potential
criminal and civil liability for our company, our officers, or our employees. We
cannot assure you that we will be able to maintain relationships either
domestically or abroad with contractors whose facilities and procedures comply
or will continue to comply with the FDA's good manufacturing practices or
applicable foreign requirements.
WE DEPEND UPON OTHERS FOR DISTRIBUTION.
We have an exclusive agreement with Cardinal Health, Inc. to provide a
variety of services to support the effective distribution of our products.
Cardinal will provide integrated distribution and operations services to process
and support transactions between us and our wholesalers, specialty distributors,
and direct customers. Cardinal also will provide reimbursement management,
patient assistance and information hotline services, and specialty distribution
and marketing services to physician practices. Busulfex, Cystadane, Elliotts B
Solution, Antizol, Antizol-Vet, and Sucraid are currently distributed by
Cardinal. Cardinal also will distribute our proposed products should those
products receive marketing clearance from the FDA. We will substantially depend
upon Cardinal's ability to successfully distribute Busulfex, Elliotts B
Solution, Antizol, Antizol-Vet, and Sucraid and all of our proposed products
that receive marketing clearance from the FDA.
Chronimed Inc. is the principal distributor, on a non-exclusive basis,
in the United States for Cystadane. Chronimed distributes this product directly
to patients through its mail order pharmacy. We substantially depend upon
Chronimed's ability to successfully distribute Cystadane directly to patients in
the United States.
120
<PAGE>
Exhibit 99
Page 9 of 13
We cannot assure you that other distribution companies would be
available or continue to be available on commercially acceptable terms. The loss
of a distributor or failure to renew agreements with an existing distributor
would have a material adverse effect on our business and prospects.
WE RELY ON FOREIGN MARKETING ALLIANCES AND HAVE NO ASSURANCE OF FOREIGN
LICENSEES.
Our strategy to exploit foreign markets is to license foreign marketing
and distribution rights after an NDA is submitted in the United States. We
consider Europe, Japan, and Canada our most attractive foreign markets. Our
current foreign developments are:
* EUROPE. We have licensed the marketing and distribution rights
for Busulfex, Antizol, Cystadane and Sucraid in Europe. If our
licensees are unsuccessful in their distribution efforts, we
may find it difficult to contract with other distributors for
these products within Europe. Distribution of Busulfex,
Cystadane and Sucraid is limited to "named patient" or
"emergency use" basis until full regulatory approval is
obtained. Antizol was approved in the United Kingdom in June
1999. Distribution of Antizol in the other countries in which
it is licensed will continue under "named patient" or
"emergency use" basis until the mutual recognition approvals
are obtained in the other countries of Europe in the year
2000. We do not expect such "emergency use" distribution to
result in material revenues.
* AUSTRALIA AND NEW ZEALAND. We have licensed marketing and
distribution rights for Cystadane and Sucraid in Australia and
New Zealand, but sales of these products have not been
material. We do not expect sales to increase in the near
future to the point that they become material.
* ISRAEL. We have licensed marketing and distribution rights for
Antizol, Busulfex, Cystadane, Elliotts B Solution and Sucraid
in Israel. Cystadane and Elliotts B Solution are formally
registered. Distribution of Busulfex in Israel is limited to a
"named patient" or "emergency use" basis until full regulatory
approval is obtained. We do not expect such "emergency use"
distribution to result in material revenues. We expect
registration, approval and normal distribution of Busulfex to
commence later in 1999.
* CANADA. We have licensed marketing and distribution rights for
Antizol in Canada. Preparations for formal registration are
underway.
* CENTRAL AMERICA. We have licensed marketing and distribution
rights for Elliotts B Solution in Central America, but sales
have not been material. We do not expect sales to increase in
the near future to the point that they become material.
We depend on our foreign licensees for the regulatory registration of
our products in foreign countries. We cannot be sure that our licensees can
obtain such registration. In addition, we cannot be sure that we will be able to
negotiate commercially acceptable license agreements for our other products or
in additional foreign countries. Furthermore, we cannot assure you that these
companies will be successful in marketing and selling our products in their
respective territories.
OUR PRODUCTS MIGHT BE RECALLED.
121
<PAGE>
Exhibit 99
Page 10 of 13
A product may be recalled at our discretion or at the discretion of the
FDA, the U.S. Federal Trade Commission, or other government agencies having
regulatory authority for product sales. A recall may occur due to disputed
labeling claims, manufacturing issues, quality defects, or other reasons. We
cannot assure you that a product recall will not occur. We do not carry any
insurance to cover the risk of a potential product recall. Any product recall
could have a material adverse effect on our business and prospects.
WE FACE LIMITS ON PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The flexibility of prices that we can charge for our products depends
on government regulation, both in the United States and abroad, and on other
third parties. One important factor is the extent to which reimbursement for our
products will be available to patients 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. We are uncertain as to the pricing flexibility we
will have with respect to, and if we will be reimbursed for, newly approved
health care products.
In the United States, we expect continuing federal and state proposals
to implement government control of the pricing and profitability of prescription
pharmaceuticals. Cost controls, if mandated by a government agency, could
decrease the price we receive for our products or products we may develop in the
future. We may not be able to recover our development costs, which could be
substantial. We may not be able to realize an appropriate profit margin. This
could have a material adverse effect on our business. Furthermore, federal and
state regulations govern or influence reimbursement of health care providers for
medical treatment of certain patients. We cannot assure you 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 our business and prospects.
Certain private health insurers and third-party payors may attempt to
control costs further by selecting exclusive providers of pharmaceuticals. If
such arrangements are made with our competitors, these insurers and third-party
payors would not reimburse patients who purchase our competing products. This
would diminish the market for our products and could have a material adverse
effect on our business and prospects.
PATENTS AND OTHER PROPRIETARY RIGHTS ARE SIGNIFICANT FACTORS IN THE
PHARMACEUTICAL INDUSTRY.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal, technical and factual questions. Our success
depends, in part, on our ability:
* to enjoy, obtain and enforce protection for our products under
United States and foreign patent laws and other intellectual
property laws;
* to preserve the confidentiality of our trade secrets; and
* to operate without infringing the proprietary rights of third
parties.
We evaluate the desirability of seeking patent or other forms of
protection for our products in foreign markets based on the expected costs and
relative benefits of attaining such protection. We cannot assure you that any
patents will be issued from any applications or that any issued patents will
afford us adequate protection or competitive advantage. We cannot assure you
that any issued patents will not be challenged, invalidated, infringed
122
<PAGE>
Exhibit 99
Page 11 of 13
or circumvented. Parties not affiliated with us have obtained or may obtain
United States or foreign patents or possess or may possess proprietary rights
relating to our products. We cannot assure you that patents now in existence or
later issued to others will not adversely affect the development or
commercialization of our products.
We believe that the active ingredients or compounds in our FDA approved
and proposed products, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet,
Xyrem and Sucraid, are in the public domain and presently are not subject to
patent protection in the United States. However, we have filed patent
applications with respect to our Xyrem product. United States patents issued to
the licensor covers our formulation and use of Busulfex. We are pursuing
additional patent applications in foreign countries with respect to Busulfex. We
could, however, incur substantial costs asserting any infringement claims that
we may have against others.
We seek to protect our proprietary information and technology, in part,
through confidentiality agreements and inventors' rights agreements with our
employees. We cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach, or that our trade secrets will
not otherwise be disclosed to or discovered by our competitors.
We also cannot assure you that our planned activities will not infringe
patents owned by others. We could incur substantial costs in defending
infringement suits brought against us. We also could incur substantial costs in
connection with any suits relating to matters for which we have agreed to
indemnify our licensors or distributors. An adverse outcome in any such
litigation could have a material adverse effect on our business and prospects.
In addition, we often must obtain licenses under patents or other proprietary
rights of third parties. We cannot assure you that we can obtain any such
licenses on acceptable terms, if at all. If we cannot obtain required licenses
on acceptable terms, we could encounter substantial difficulties in developing,
manufacturing or marketing one or more of our products.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
Competition in the pharmaceutical industry is intense. Potential
competitors in the United States are numerous and include pharmaceutical,
chemical and biotechnology companies. Many of these companies have substantially
greater capital resources, marketing experience, research and development staffs
and facilities than we do. We seek to limit potential sources of competition by
developing products that are eligible for orphan drug designation and NDA
approval or other forms of protection. We cannot assure you, however, that our
competitors will not succeed in developing similar technologies and products
more rapidly than we can. Similarly, we cannot assure you that these competing
technologies and products will not be more effective than any of those that we
have developed or are currently developing.
WE EXPECT RAPID TECHNOLOGICAL CHANGE TO BE CONSTANT IN OUR INDUSTRY.
The pharmaceutical industry has experienced rapid and significant
technological change. We expect that pharmaceutical technology will continue to
develop rapidly, and our future success will depend, in large part, on our
ability to develop and maintain a competitive position. Technological
development by others may result in our products becoming obsolete before they
are marketed or before we recover 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 our products, which
would adversely affect our business and our prospects.
123
<PAGE>
Exhibit 99
Page 12 of 13
WE FACE SUBSTANTIAL PRODUCT LIABILITY AND INSURANCE RISKS.
Testing and selling health care products entails the inherent risk of
product liability claims. The cost of product liability insurance coverage has
increased. Substantial increases in insurance premium costs in many cases have
rendered coverage economically impractical. We currently carry product liability
coverage in the aggregate amount of $10 million for all claims made in any
policy year. Although to date we have not been the subject of any product
liability or other claims, we cannot assure you that we will be able to maintain
product liability insurance on acceptable terms or that our insurance will
provide adequate coverage against potential claims. A successful uninsured
product liability or other claim against us could have a material adverse effect
on our business and prospects.
IMPACT OF YEAR 2000 READINESS ISSUE.
We have assessed and continue to assess the impact of the so called
"Year 2000 Readiness Issue" on our 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.
The Year 2000 Readiness Issue also relates to the ability to properly exchange
time/date data between such products. Systems that are not year 2000 compliant
might recognize the year 2000 as the year 1900, or not recognize a year at all.
This inability to recognize or properly treat the year 2000 may cause our
systems, or the systems used by our suppliers, distributors, customers or
regulatory agencies such as the FDA, to process critical financial and
operational information incorrectly, or not at all.
124
<PAGE>
Exhibit 99
Page 13 of 13
Our information technology systems consist of computer hardware systems
and software applications supplied by third parties. Our strategy has been to
replace our information technology systems with current technology, which is
both year 2000 compliant and more efficient. We have also purchased and
implemented financial and operational software upgrades that are year 2000
compliant. For the nine months ended September 30, 1999, our information
technology system purchases have not been material. Our information technology
systems are year 2000 compliant.
Our assessment of internal systems includes a review of non-information
technology systems. This assessment includes a review of our internal equipment
and facilities. Based upon this review, we believe that our processes and
equipment are year 2000 compliant.
We have identified third parties, with which we have material
relationships, including suppliers, distributors and other key vendors of
materials and services. These parties or organizations have confirmed that they
have implemented Year 2000 Readiness Programs. We have not developed a
contingency plan to provide for continuity of business operations in the event
material third parties experience a disruption of service due to the Year 2000
Readiness Issue. Potential problems include, but are not limited to, loss of
electricity, loss of communications (data and voice), and loss of transportation
services. However, even if all material third parties confirm that they are or
expect to be year 2000 compliant by December 31, 1999, we cannot state with
certainty that such parties will be compliant. Failure of third party systems on
which we rely could significantly disrupt our ability to transact business with
our customers and suppliers. It is impossible to assess fully the potential
consequences in the event service interruptions from suppliers occur or in the
event that there are disruptions in such infrastructure areas as utilities,
communications, transportation, banking and government.
125
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEETS OF ORPHAN MEDICAL, INC. AS OF SEPTEMBER 30, 1999 AND
THE RELATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,895,765
<SECURITIES> 2,797,894
<RECEIVABLES> 863,936
<ALLOWANCES> 85,000
<INVENTORY> 413,659
<CURRENT-ASSETS> 6,954,295
<PP&E> 590,025
<DEPRECIATION> 334,862
<TOTAL-ASSETS> 7,209,458
<CURRENT-LIABILITIES> 2,836,706
<BONDS> 0
0
110
<COMMON> 65,927
<OTHER-SE> 4,306,715
<TOTAL-LIABILITY-AND-EQUITY> 7,209,458
<SALES> 4,353,947
<TOTAL-REVENUES> 4,353,947
<CGS> 739,938
<TOTAL-COSTS> 739,938
<OTHER-EXPENSES> 8,091,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (223,465)
<INCOME-PRETAX> (4,253,787)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,253,787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,253,787)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
