-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OEOJOLt4kr8s7JkFiH8PKdL6zi5mOkPy3npmqlDk2p3CoZqPuGa595MupxcpdRoq PdmIlb3jsl88mPUQc4KZ4A== 0000950123-99-007897.txt : 19990823 0000950123-99-007897.hdr.sgml : 19990823 ACCESSION NUMBER: 0000950123-99-007897 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990820 GROUP MEMBERS: UBS AG GROUP MEMBERS: UBS CAPITAL HOLDINGS LLC GROUP MEMBERS: UBS CAPITAL II LLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ORPHAN MEDICAL INC CENTRAL INDEX KEY: 0000929548 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411784594 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: SEC FILE NUMBER: 005-45345 FILM NUMBER: 99697011 BUSINESS ADDRESS: STREET 1: 13911 RIDGEDALE DR STE 475 CITY: MINNETONKA STATE: MN ZIP: 55305 BUSINESS PHONE: 6125411868 MAIL ADDRESS: STREET 1: 13911 RIGEDALE DR STREET 2: STE 475 CITY: MINNETONKA STATE: MN ZIP: 55305 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: UBS CAPITAL II LLC CENTRAL INDEX KEY: 0001066156 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133699851 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 299 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10171 BUSINESS PHONE: 2128214329 MAIL ADDRESS: STREET 1: 299 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10171 SC 13D/A 1 AMENDED SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. 1) ORPHAN MEDICAL, INC. (Name of Issuer) COMMON STOCK (Title of Class of Securities) 687303 10 7 (FOR COMMON STOCK ISSUED UPON CONVERSION) (CUSIP Number) MICHAEL GREENE PARTNER UBS CAPITAL II LLC 299 PARK AVENUE NEW YORK, NEW YORK 10171 (212) 821-6380 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) COPIES TO: NANCY E. FUCHS, ESQ. KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP 425 PARK AVENUE NEW YORK, NEW YORK 10022 (212) 836-8000 AUGUST 2, 1999 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [ ]. Note: Schedules filed in paper format shall include a signed original and five copies of this schedule, including all exhibits. See Section 13d-7(b) for other parties to whom copies are to be sent. Page 1 of 14 pages. 2 SCHEDULE 13D CUSIP NO. 687303 10 7 (FOR COMMON PAGE 2 OF 14 PAGES STOCK ISSUED UPON CONVERSION) 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS UBS Capital II LLC 13-3699851 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a) / / (b) / / 3 SEC USE ONLY 4 SOURCE OF FUNDS (SEE INSTRUCTIONS) AF 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware NUMBER OF SOLE VOTING POWER SHARES BENEFICIALLY 7 UBS Capital II LLC owns 8,088 shares of Senior OWNED BY Convertible Preferred Stock (convertible into EACH approximately 993,612* shares of Common Stock) and REPORTING 2,950 shares of Series B Convertible Preferred Stock PERSON (convertible into approximately 453,846** shares of WITH Common Stock). SHARED VOTING POWER 8 -0- SOLE DISPOSITIVE POWER 9 UBS Capital II LLC owns 8,088 shares of Senior Convertible Preferred Stock (convertible into approximately 993,612* shares of Common Stock) and 2,950 shares of Series B Convertible Preferred Stock (convertible into approximately 453,846** shares of Common Stock). SHARED DISPOSITIVE POWER 10 -0- AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 UBS Capital II LLC owns 8,088 shares of Senior Convertible Preferred Stock (convertible into approximately 993,612* shares of Common Stock) and 2,950 shares of Series B Convertible Preferred Stock (convertible into approximately 453,846** shares of Common Stock). 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS) / / PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 UBS Capital II LLC owns 100% of issued and outstanding Senior Convertible Preferred Stock and Series B Convertible Preferred Stock (convertible into an aggregate of 18.0% of Common Stock of Issuer as of August 2, 1999). 14 TYPE OF REPORTING PERSON (SEE INSTRUCTIONS) OO * Assuming conversion price of $8.14 per share, the adjusted conversion price. ** Assuming conversion price of $6.50 per share, the initial conversion price. Page 2 of 14 pages. 3 SCHEDULE 13D CUSIP NO. 687303 10 7 (FOR COMMON PAGE 3 OF 14 PAGES STOCK ISSUED UPON CONVERSION) 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS 2 UBS Capital Holdings LLC 13-3952898 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) / / (SEE INSTRUCTIONS) (b) / / 3 SEC USE ONLY 4 SOURCE OF FUNDS (SEE INSTRUCTIONS) AF 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware NUMBER OF SOLE VOTING POWER SHARES 7 BENEFICIALLY -0- OWNED BY EACH SHARED VOTING POWER REPORTING 8 PERSON -0- WITH SOLE DISPOSITIVE POWER 9 -0- SHARED DISPOSITIVE POWER 10 -0- AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 UBS Capital II LLC owns 8,088 shares of Senior Convertible Preferred Stock (convertible into approximately 993,612* shares of Common Stock ) and 2,950 shares of Series B Convertible Preferred Stock (convertible into approximately 453,846** shares of Common Stock); UBS Capital Holding LLC, by virtue of the fact that it owns 100% of UBS Capital II LLC, beneficially owns all such shares. 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS) / / PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 UBS Capital II LLC owns 100% of issued and outstanding Senior Convertible Preferred Stock and Series B Convertible Preferred Stock (convertible into an aggregate of 18.0% of Common Stock of Issuer as of August 2, 1999). UBS Capital Holdings LLC beneficially owns all such stock owned by UBS Capital II LLC. 14 TYPE OF REPORTING PERSON (SEE INSTRUCTIONS) OO * Assuming conversion price of $8.14 per share, the adjusted conversion price. ** Assuming conversion price of $6.50 per share, the initial conversion price Page 3 of 14 pages. 4 SCHEDULE 13D CUSIP NO. 687303 10 7 (FOR COMMON PAGE 4 OF 14 PAGES STOCK ISSUED UPON CONVERSION) 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS UBS AG 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a) / / (b) / / 3 SEC USE ONLY 4 SOURCE OF FUNDS (SEE INSTRUCTIONS) AF 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION SWITZERLAND NUMBER OF SOLE VOTING POWER SHARES 7 UBS AG holds 950 shares of Common Stock for its BENEFICIALLY customers of which it has voting power. OWNED BY EACH SHARED VOTING POWER REPORTING 8 -0- PERSON WITH SOLE DISPOSITIVE POWER 9 UBS AG holds 950 shares of Common Stock for its customers of which it does not have dispositive power. 10 SHARED DISPOSITIVE POWER -0- AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 UBS Capital II LLC owns 8,088 shares of Senior Convertible Preferred Stock (convertible into approximately 993,612* shares of Common Stock) and 2,950 shares of Series B Convertible Preferred Stock (convertible into approximately 453,846** shares of Common Stock); UBS Capital Holding LLC, by virtue of the fact that it owns 100% of UBS Capital II LLC, beneficially owns all such shares. UBS AG, by virtue of the fact that it owns 100% of UBS Capital Holding LLC, beneficially owns all such shares, and in addition UBS AG holds 950 shares of Common Stock for its customers, of which it has voting power but not dispositive power. 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS) / / PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 UBS Capital II LLC owns 100% of issued and outstanding Senior Convertible Preferred Stock and Series B Convertible Preferred Stock (convertible into an aggregate of 18.0% of Common Stock of Issuer as of August 2, 1999. UBS Capital Holdings LLC beneficially owns all such stock owned by UBS Capital II LLC; UBS AG owns all such stock owned by UBS Capital Holdings LLC plus beneficially owns an additional 950 shares of Common Stock of the Issuer, representing an aggregate 18.0% of the Common Stock of the issuer as of August 2, 1999. 14 TYPE OF REPORTING PERSON (SEE INSTRUCTIONS) CO - -------- * Assuming conversion price of $8.14 per share, the adjusted conversion price. ** Assuming conversion price of $6.50 per share, the initial conversion price. Page 4 of 14 pages. 5 The statement on Schedule 13D relating to Orphan Medical, Inc., a Minnesota Corporation (the "Company") is hereby amended in its entirety to read as follows: ITEM 1. SECURITY AND ISSUER This Statement relates to shares of Common Stock ("Common Stock") of the Company. UBS Capital II LLC, a Delaware limited liability company ("UBS") is the beneficial owner of (a) shares of Senior Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock") which are convertible into shares of Common Stock of the Company, and (b) shares of Series B Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"). The address of the Company's principal executive office is: 13911 Ridgedale Drive, Suite 475, Minnetonka, Minnesota 55305. ITEM 2. IDENTITY AND BACKGROUND (a) This Statement constitutes the filing on Schedule 13D by UBS, with respect to the (i) Stock Purchase Agreement (the "Purchase Agreement," a copy of which is attached hereto as Exhibit 1), dated as of July 23, 1998 between the Company and UBS, pursuant to which, subject to certain terms and conditions, the Company agreed to issue and sell to UBS, and UBS agreed to purchase, 7,500 shares of Preferred Stock and (ii) Stock Purchase Agreement (the "B Purchase Agreement", a copy of which is attached hereto as Exhibit 2) dated as of August 2, 1999 between the Company and UBS, pursuant to which, among other things and subject to certain terms and conditions, the Company agreed to issue and sell to UBS, and UBS agreed to purchase, 2,950 shares of Series B Preferred Stock. A list of the members, directors and executive officers of UBS appears on Exhibit 3 hereto. UBS is a wholly-owned subsidiary of UBS Capital Holdings LLC, a Delaware limited liability company ("Holdings"). Holdings is a wholly-owned subsidiary of UBS AG, a Swiss banking corporation ("UBS AG"). UBS AG is principally engaged in the general banking business and Holdings is a holding company. A list of the members, directors and executive officers of Holdings and UBS AG appears on Exhibit 1 attached hereto. (b) The address of the principal business office of UBS, Holdings and UBS AG are as follows: Reporting Person Address UBS Capital II LLC 299 Park Avenue New York, New York 10171 Page 5 of 14 pages. 6 UBS Capital Holdings LLC 299 Park Avenue New York, New York 10171 UBS AG Bahnhofstrasse 45 8021 Zurich The address of each of the directors and executive officers of each of UBS, Holdings and UBS AG are set forth on Exhibit 1 attached hereto. (c) The present principal occupation or employment of each of the members, directors and executive officers of each of UBS, Holdings and UBS AG are set forth on Exhibit 1 attached hereto. (d) During the past five years, neither UBS, Holdings nor UBS AG nor, to the knowledge of UBS, Holdings or UBS AG, any of the members, executive officers or directors of UBS, Holdings or UBS AG, has been convicted in a criminal proceeding (excluding traffic violations and similar misdemeanors). (e) During the past five years, neither UBS, Holdings nor UBS AG nor, to the knowledge of UBS, Holdings or UBS AG, any of the members, executive officers or directors of UBS, Holdings or UBS AG, has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal and state securities laws or finding any violation with respect to such laws. (f) Each of UBS and Holdings is a Delaware limited liability company. To the knowledge of UBS, Holdings and UBS AG, each member, executive officer and director of UBS and Holdings is a citizen of the United States. UBS AG is a corporation formed under the laws of Switzerland. To the knowledge of UBS, Holdings and UBS AG, none of the executive officers and directors of UBS AG, except Gary Brinson, a member of the group executive board of UBS AG, are citizens of the United States. ITEM 3. SOURCE AND AMOUNT OF FUNDS Pursuant to the Purchase Agreement, on July 23, 1998 UBS paid to the Company $7,500,000 as sole consideration for the purchase of the 7,500 shares of Preferred Stock. Pursuant to the B Purchase Agreement, on August 2, 1999 UBS paid to the Company $2,950,000 as sole consideration for the purchase of the 2,950 shares of Series B Preferred Stock. UBS obtained funds for each such purpose from UBS AG-Stamford Branch. Page 6 of 14 pages. 7 ITEM 4. PURPOSE OF TRANSACTION UBS purchased 7,500 shares of Preferred Stock and 2,950 shares of Series B Preferred Stock for investment purposes. (a) UBS possesses a right of first refusal to acquire additional securities, as well as registration rights. Furthermore, the Company may, at its election, pay dividends on the shares of Preferred Stock in cash, additional shares of Preferred Stock or shares of Common Stock. As of August 2, 1999, the Company had paid dividends on the shares of Preferred Stock in additional shares of Preferred Stock totaling 588 shares of Preferred Stock. In addition, the Company may, at its election, pay dividends on the shares of Series B Preferred Stock in cash or additional shares of Series B Preferred Stock. In connection with the purchase of the Series B Preferred Stock, the Company issued to UBS a warrant (the "Warrant" a copy of which is attached hereto as Exhibit 4) to purchase either (i) 2,050 shares of Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), which are convertible into shares of Series D Non-Voting Preferred Stock, par value $.01 per share (the "Series D Preferred Stock") or (ii) 315,385 shares of Series D Preferred Stock. The purchase of the shares of Series B Preferred Stock was conditioned on a loan (the "Loan") from UBS to the Company in the amount of $2,050,000. In connection with the Loan, the Company issued to UBS a warrant (the "Financing Warrant", a copy of which is attached hereto as Exhibit 5) to purchase 282,353 shares of the Series D Preferred Stock. In general, neither the Warrant nor the Financing Warrant are exercisable before July 23, 2002. (b) Not applicable. (c) Not applicable. (d) In connection with the Purchase Agreement, in July 1998 the Board of Directors increased the number of directors by one director, which director shall be elected by the holders of the Preferred Stock. (e) Pursuant to the Company's Charter, so long as greater than 20% of the initially issued shares of Preferred Stock are outstanding, the Company may not pay dividends (other than dividends in Common Stock or any other class of stock junior to the Preferred Stock) on the Common Stock or any other class of stock junior to the Preferred Stock. Pursuant to the Company's Charter, so long as greater than 20% of the initially issued shares of Series B Preferred Stock are outstanding, the Company may not pay dividends (other than dividends in Common Stock or any other class of stock junior to the Series B Preferred Stock) on the Common Stock or any other class of stock junior to the Series B Preferred Stock. Pursuant to the Company's Charter, so long as greater than 20% of the initially issued shares of Series C Preferred Stock are outstanding, the Company may not pay dividends (other than dividends in Common Stock or any other class of stock junior to the Series C Preferred Stock) on the Common Stock or any other class of stock junior to the Series C Preferred Stock. Page 7 of 14 pages. 8 (f) Not applicable. (g) Pursuant to the terms of the Company's Charter, without the consent of the holders of the Preferred Stock, the Company may not issue equity securities or accord voting rights with respect to shares acquired in a "control share acquisition" (as defined in the Minnesota Business Corporation Act). Pursuant to the terms of the Purchase Agreement, UBS has a right of first refusal with respect to equity issuances by the Company. (h) Not applicable. (i) Not applicable. (j) Not applicable. ITEM 5. INTEREST IN SECURITIES OF ISSUER (a) UBS is the beneficial owner of 8,088 shares of Preferred Stock, which is convertible into an aggregate of approximately 993,612* shares of the Company's Common Stock, and 2,950 shares of Series B Preferred Stock, which is convertible into an aggregate of approximately 453,846** shares of the Company's Common Stock or on an aggregate basis approximately 18% of the issued and outstanding shares of Common Stock as of August 2, 1999. Pursuant to the terms of the Charter, the conversion price of the Preferred Stock had initially been equal to the lesser of (i) 10% above the 20-day average bid price immediately prior to July 23, 1998 and (ii) 10% above the 20-day average bid price immediately prior to October 21, 1998, but in no event was the initial conversion price to be less than $8.50 per share. In accordance with the initial terms of the Preferred Stock in connection with the sale of the Series B Preferred Stock, the conversion price on the Preferred Stock was reduced from its initial conversion price of $8.50 per share to $8.14 per share. Pursuant to the terms of the Charter, the conversion price of the Series B Preferred Stock shall initially be $6.50 per share. By virtue of the fact that Holdings owns 100% of UBS, Holdings is the beneficial owner of all such stock. By virtue of the fact that UBS AG owns 100% of Holdings, UBS AG is the beneficial owner of all such stock. In addition, UBS AG holds 950 shares of Common Stock of the Company of which it is the beneficial owner by virtue of the fact that UBS AG has voting power over such Common Stock. Holdings disclaims beneficial ownership of any equity securities of the Company. UBS AG disclaims beneficial ownership of any equity securities of the Company other than * Assuming conversion price of $8.14 per share, the adjusted conversion price. ** Assuming conversion price of $6.50 per shares, the initial conversion price. Page 8 of 14 pages. 9 indirect beneficial ownership of 950 shares of Common Stock held on behalf of its customers of which UBS AG has voting power. (b) UBS has the sole power to vote the 8,088 shares of Preferred Stock and 2,950 sharers of Series B Preferred Stock under the circumstances described in the Certificates of Designation (attached hereto as Exhibits 6 and 7 hereof). (c) None. (d) Not Applicable. (e) Not Applicable. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER To the knowledge of UBS, Holdings and UBS AG, on the date hereof, except as set forth herein or in the Exhibits filed herewith or incorporated by reference, neither UBS, Holdings nor UBS AG nor any of the members, directors or executive officers of UBS, Holdings nor UBS AG has any contracts, arrangements, understandings or relationships (legal or otherwise) with any person with respect to any securities of the Company, including, but not limited to, transfer or voting of any securities of the Company, finder's fee, joint ventures, loan or option arrangements, puts or calls, guarantees or profits, division of profits or loss or the giving or withholding of proxies. ITEM 7. MATERIALS TO BE FILED AS EXHIBITS Exhibit 1 Stock Purchase Agreement dated as of July 23, 1998 between Orphan Medical, Inc. and UBS Capital II LLC (incorporated by reference to Exhibit 10.48 filed with Form 10-Q of Orphan Medical, Inc. filed on July 31, 1998). Exhibit 2 Stock Purchase Agreement dated as of August 2, 1999 between Orphan Medical, Inc. and UBS Capital II LLC. Exhibit 3 Information relating to the members of the Board of Managers, Directors, and Executive Officers of UBS Capital II LLC, UBS Capital Holdings LLC and UBS AG. Page 9 of 14 pages. 10 Exhibit 4 Warrant to Purchase Shares of Series C Convertible Preferred Stock or Series D Non-Voting Preferred Stock dated August 2, 1999. Exhibit 5 Warrant to Purchase Shares of Series D Non-Voting Preferred Stock dated August 2, 1999. Exhibit 6 Certificate of Designation of Orphan Medical, Inc. (incorporated by reference to Exhibit 3.11 filed with Form 10-Q of Orphan Medical, Inc. filed on July 30, 1998). Exhibit 7 Certificate of Designation of Orphan Medical, Inc. Exhibit 8 Joint Filing Agreement dated July 31, 1998, by and among UBS Capital II LLC, UBS Capital Holdings LLC and UBS AG (incorporated by reference to Exhibit 3 filed with Schedule 13D relating to Orphan Medical, Inc., on August 3, 1998). Exhibit 9 Power of Attorney by UBS AG dated May 26, 1998, authorizing Robert C. Dinerstein, Louis Eber, Janet Zimmer, Robert Mills, Stephen Anikewich, Joan Hoffman, Thomas R. Toothaker and Stuart Sindell (incorporated by reference to Exhibit 13 filed with Schedule 13D relating to Common Stock of Peoples Telephone Company, Inc. filed by UBS Capital II LLC , UBS Capital Holdings LLC and UBS AG on July 17, 1998). Page 10 of 14 pages. 11 Signature After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this Statement is true, complete and correct. UBS CAPITAL II LLC By:/s/ Michael Greene Michael Greene Partner By:/s/ Marc Unger Marc Unger Chief Financial Officer Page 11 of 14 pages. 12 Signature After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this Statement is true, complete and correct. UBS CAPITAL HOLDINGS LLC By:/s/ Michael Greene Michael Greene President By:/s/ Marc Unger Marc Unger Chief Financial Officer Page 12 of 14 pages. 13 Signature After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this Statement is true, complete and correct. UBS AG Dated: August 20, 1999 By:/s/ Sandra Ward Costin Sandra Ward Costin Authorized Signatory Dated: August 20, 1999 By:/s/ Louis Eber Louis R. Eber Authorized Signatory Page 13 of 14 pages. 14 EXHIBIT INDEX
Exhibit 2 Stock Purchase Agreement dated as of August 2, 1999 between Orphan Medical, Inc. and UBS Capital II LLC. Exhibit 3 Information relating to the members of the Board of Managers, Directors, and Executive Officers of UBS Capital II LLC, UBS Capital Holdings LLC and UBS AG. Exhibit 4 Warrant to Purchase Shares of Series C Convertible Preferred Stock or Series D Non-Voting Preferred Stock dated August 2, 1999. Exhibit 5 Warrant to Purchase Shares of Series D Non-Voting Preferred Stock dated August 2, 1999. Exhibit 7 Certificate of Designation of Orphan Medical, Inc.
Page 14 of 14 pages. EX-99.2 2 STOCK PURCHASE AGREEMENT 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. 2 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 -2- 3 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, -3- 4 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 -4- 5 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. 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 -5- 6 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 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"); -6- 7 (4) all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, drawings, and blue prints (collectively, "Trade Secrets"), in each case owned, used, or licensed by the Company as licensee or licensor. (b) Agreements--The SEC Documents contain a complete and accurate list and summary description, including any royalties paid or received by the Company, of all material contracts and agreements relating to the Intellectual Property Assets to which the Company is a party or by which the Company is bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $50,000 under which the Company is the licensee. There is no outstanding and, to the Company's knowledge, no threatened dispute or disagreement with respect to any such agreement. (c) Know-How Necessary to Conduct the Company's Business (1) To the Company's knowledge, the Intellectual Property Assets are all those necessary for the operation of the Company's business as it is currently conducted. The Company either owns or has licensed sufficient rights to each of the Intellectual Property Assets, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party, except for royalties described in the SEC Documents, all of the Intellectual Property Assets. (2) The Company has a policy that requires all current employees of the Company to execute written contracts with the Company that assign to the Company all rights to any inventions, improvements, discoveries, or information relating to the business of the Company, and all of the Company's former and current employees have executed such a contract. No employee of the Company has entered into any contract or agreement that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than the Company. (d) Patents (1) The SEC Documents contain a complete and accurate list and summary description of all Patents. 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 -7- 8 described in the SEC Documents and for security interests in favor of Riverside Bank. (2) To the Company's knowledge, all of the Patents licensed to or used by the Company, are currently in compliance with formal legal requirements (including payment of filing, 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. -8- 9 (5) To the Company's knowledge, no Mark is infringed or has been challenged or threatened in any way. To the Company's knowledge, none of the Marks used by the Company infringes or is alleged to infringe any trade name, trademark, or service mark of any third party. (6) All products and materials containing a Mark marking in compliance with 15 United States Code 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 -9- 10 (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 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. -10- 11 (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. -11- 12 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. -12- 13 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 -13- 14 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 -14- 15 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, -15- 16 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, -16- 17 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 -17- 18 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 (e) Within a reasonable time, such other information about the property, financial condition and operations of the Company and its Subsidiaries as the Investors may from time to time reasonably request. 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 -18- 19 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 -19- 20 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. 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, -20- 21 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 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. -21- 22 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. 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. -22- 23 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 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. -23- 24 [REMAINING PORTION OF THIS PAGE INTENTIONALLY LEFT BLANK] -24- 25 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 ------------------------- Michael Greene By: /s/ Charlie Santos-Buch ------------------------- Charlie Santos-Buch -25- 26 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)
-26- 27 EXHIBIT H REGISTRATION RIGHTS -34- 28 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 29 pursuant to this Section 1 within a period of six (6) months after the effective date of any other Demand Registration. (b) The Company, within 45 days of the date on which the Company receives a Demand Notice given by Holders in accordance with Section 1(a) hereof, shall file with the SEC, and the Company shall thereafter use its best efforts to cause to be declared effective within 90 days following the date the Company receives such Demand Notice, a Registration Statement on the appropriate form for the registration and sale, in accordance with the intended method or methods of distribution requested by the Holders, of the total number of Registrable Shares specified by the Holders in such Demand Notice (a "Demand Registration"). (c) The Company shall use commercially reasonable efforts to keep each Registration Statement filed pursuant to this Section 1 continuously effective and usable for the resale of the Registrable Shares covered thereby for a period of 270 days from the date on which the SEC declares such Registration Statement effective, as such period may be extended pursuant to this Section 1, or in the case of a Shelf Registration, for a period of two years from the date that the SEC declares such "shelf" Registration Statement effective, or if shorter, until all the Registrable Shares covered by such Registration Statement have been sold pursuant to such Registration Statement. (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 30 shall (A) to the extent permitted by agreements with other security holders of the Company, concurrently prohibit sales by such other security holders under registration statements covering securities held by such other security holders and (B) in accordance with the Company's policies from time to time in effect, forbid purchases and sales in the open market by senior executives of the Company. (e) The Demanding Holders may, at any time prior to the effective date of the Registration Statement relating to a Demand Registration, revoke such request by providing a written notice to the Company revoking such request. In the event of such revocation, the Demanding Holders shall reimburse the Company for all of its out-of-pocket expenses incurred in connection with the preparation, filing and processing of the Registration Statement, unless (i) there has been a material adverse change in the business, assets, properties, condition (financial or other), results of operations or prospects of the Company and its Subsidiaries, since the time of the Demand Notice, (ii) such revocation was based on the Company's failure to comply in any material respect with its obligations hereunder or (iii) the Demanding Holders choose to count the Demand Registration as one of the Demand Registrations to which the Demanding Holders are entitled pursuant to the penultimate sentence of Section 1(a). 2. Piggyback Registration. (a) Right to Piggyback. If at any time the Company proposes to file a registration statement under the Securities Act with respect to a public offering of securities of the same type as the Registrable Shares for its own account (other than a registration statement (i) on Form S-8 or any successor form thereto, (ii) filed solely in connection with a dividend reinvestment plan or employee benefit plan covering officers or directors of the Company or its Affiliates or (iii) on Form S-4 or any successor form thereto, in connection with a merger, acquisition or similar corporate transaction) or for the account of any holder of securities of the same type as the Registrable Shares, then the Company shall give written notice of such proposed filing to the Holders at least 30 days before the anticipated filing date. Such notice shall offer the Holders the opportunity to register such number of Registrable Shares as they may request (a "Piggyback Registration"). Subject to Section 2(b) hereof, the Company shall include in each such Piggyback Registration all Registrable Shares with respect to which the Company has received written requests for inclusion therein within 20 days after notice has been given to the Holders. Each Holder shall 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 31 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 (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 32 any Prospectus supplement or post-effective amendment has been filed, and, with respect to such Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC for amendments or supplements to such Registration Statement or the related Prospectus or for additional information regarding such Holders, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that 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 33 reference and file any other required document so that, as thereafter delivered to the purchaser of the Registrable Shares being sold thereunder (including upon the termination of any Delay Period), such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (h) use its best efforts to cause all Registrable Shares covered by such Registration Statement to be listed on each securities exchange, if any, on which similar securities issued by the Company are then listed or quoted and, if no such securities are so listed, to be listed on the Nasdaq Stock Market and, if listed on the Nasdaq Stock Market, use its best efforts to secure designation of all such Registrable Shares covered by such registration statement as "NASDAQ Securities" within the meaning of Rule 11Aa2-1 promulgated under the Exchange Act or, failing that, to secure Nasdaq Stock Market authorization for such Registrable Shares; (i) on or before the effective date of such Registration Statement, provide the transfer agent of the Company for the Registrable Shares with printed certificates for the Registrable Shares covered by such Registration Statement, which are in a form eligible for deposit with The Depository Trust Company; (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 34 (k) if such offering is an underwritten offering, enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other appropriate and reasonable actions requested by the Holders of a majority of the Registrable Shares being sold in connection therewith (including those reasonably requested by the managing underwriters) in order to expedite or facilitate the disposition of such Registrable Shares, and in such connection, (i) use commercially reasonable efforts to obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters and counsel to the Holders of the Registrable Shares being sold), addressed to each selling Holder of Registrable Shares covered by such Registration Statement and each of the underwriters as to the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such counsel and underwriters, (ii) use commercially reasonable efforts to obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling holder of Registrable Shares covered by the Registration Statement (unless such accountants shall be prohibited from so addressing such letters by applicable standards of the accounting profession) and each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, (iii) if requested and if an underwriting agreement is entered into, provide indemnification provisions and procedures reasonably requested by such underwriters. The above shall be done at each closing under such underwriting or similar agreement, or as and to the extent required thereunder. The Company may require each Holder of Registrable Shares covered by a Registration Statement to furnish, within a period not less than 20 days from the date of receipt of such request, such information regarding such Holder and such Holder's intended method of disposition of such Registrable Shares as it may from time to time reasonably request in writing. If any such information is not furnished within such period, the Company may exclude such Holder's Registrable Shares from such Registration Statement. Each Holder of Registrable Shares covered by a Registration Statement agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(c)(v) hereof, that such Holder shall forthwith discontinue disposition of any Registrable Shares covered by such Registration Statement or the related Prospectus until receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(g) hereof, or until such Holder is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amended or 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 35 covered by a Registration Statement further agrees not to utilize any material other than the applicable current preliminary prospectus or Prospectus in connection with the offering of such Registrable Shares. 4. Registration Expenses. Whether or not any Registration Statement is filed or becomes effective but subject to Section 1(e), the Company shall pay all costs, fees and expenses incident to the Company's performance of or compliance with this Agreement, including (i) all registration and filing fees, including National Association of Securities Dealers filing fees, (ii) all fees and expenses of compliance with securities or Blue Sky laws, including reasonable fees and disbursements of counsel in connection therewith, (iii) printing expenses (including expenses of printing certificates for Registrable Shares and of printing prospectuses if the printing of prospectuses is requested by the Holders or the managing underwriter, if any), (iv) messenger, telephone and delivery expenses, (v) fees and disbursements of counsel for the Company, (vi) fees and disbursements of all independent certified public accountants of the Company (including expenses of any "cold comfort" letters required in connection with this Agreement) and all other persons retained by the Company in connection with such Registration Statement, (vii) fees and disbursements of one counsel, other than the Company's counsel, representing all of the Holders of Registrable Shares being registered, selected by a Majority-in-Interest of Holders of the Registrable Shares being registered, or in the event of a Demand Registration, selected by the Demanding Holders and reasonably satisfactory to a Majority-in-Interest of Holders of the Registrable Shares being registered other than the Demanding Holders, (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. 36 (c) Each Holder participating in a Registration shall promptly supply in writing such information as the Demanding Holders, the Company or the underwriters reasonably request. 6. Indemnification. (a) Indemnification by the Company. The Company shall indemnify and hold harmless, to the full extent permitted by law, each Holder of Registrable Shares whose Registrable Shares are covered by a Registration Statement or Prospectus, the officers, directors and agents and employees of each 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 37 indemnification or contribution pursuant hereto; provided, however, that the delay or failure to so notify the indemnifying party shall not relieve the indemnifying party from any obligation or liability except to the extent that the indemnifying party has been prejudiced by such delay or failure. The indemnifying party shall have the right, exercisable by giving written notice to an indemnified party promptly after the receipt of written notice from such indemnified party of such claim or proceeding, to assume, at the indemnifying party's expense, the defense of any such claim or proceeding, with counsel reasonably satisfactory to such indemnified party; provided, however, that (i) an indemnified party shall have the right to employ separate counsel in any such claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless: (1) the indemnifying party agrees to pay such fees and expenses; (2) the indemnifying party fails promptly to assume the defense of such claim or proceeding or fails to employ counsel reasonably satisfactory to such indemnified party; or (3) the named parties to any proceeding (including impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it that are inconsistent with those available to the indemnifying party or that a conflict of interest is likely to exist among such indemnified party and any other indemnified parties (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party); and (ii) subject to clause (3) above, the indemnifying party shall not, in connection with any one such claim or proceeding or separate but substantially similar or related claims or proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one firm of attorneys (together with appropriate local counsel) at any time for all of the indemnified parties, or for fees and expenses that are not reasonable. Whether or not such defense is assumed by the indemnifying party, such indemnified party shall not be subject to any liability for any settlement made without its consent. The indemnifying party shall not consent to entry of any judgment or enter into any settlement unless (i) there is no finding or admission of any violation of any 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 38 party, on the other hand, shall be determined by reference to, among other things, whether any action in question, including any untrue statement of a material fact or omission or alleged omission to state a material fact, has been taken by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent any such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any legal or other fees or expenses incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the two immediately preceding sentences. Notwithstanding the provisions of this Section 6(d), an indemnifying party that is a Holder shall not be required to contribute any amount which is in excess of the amount by which the total proceeds (net of all underwriting discounts and commissions) received by such Holder from the sale of the Registrable Shares sold by such Holder in the applicable offering exceed the amount of any damages that such indemnifying party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 7. Granting of Registration Rights. The Company shall not grant any registration rights inconsistent with those granted hereunder or that give any security holder a position with respect to cut-backs that are superior to the Holders' position as granted herein, without the consent of a Majority-in-Interest of the Holders of the Registrable Shares (voting together as a single class). 8. Definitions. As used in this Exhibit 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. 39 "Effectiveness Period" shall have the meaning set forth in Section 1(d) hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. "Holders" means UBS Capital II LLC and any other holder of Registrable Shares or securities exercisable for Registrable Shares. "Interruption Period" shall have the meaning set forth in Section 3(k) hereof. "Majority-in-Interest" of any group of Holders means holders of more than 50% of the Registrable Shares held by such Holders or issuable to such Holders upon conversion of Shares. "person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Piggyback Registration" shall have the meaning set forth in Section 2 hereof. "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 40 purchaser of such shares of Common Stock shall have received an opinion of counsel for the seller, which shall be in form and content reasonably satisfactory to the Company and the seller and purchaser and their respective counsel, to the effect that such shares of Common Stock in the hands of the purchaser are freely transferable without restriction or registration under the Securities Act in any public or private transaction. "Registration" means registration under the Securities Act of an offering of Registrable Shares pursuant to a Demand Registration or a Piggyback Registration. "Registration Statement" means any registration statement under the Securities Act of the Company that covers any of the Registrable Shares pursuant to the provisions of this Agreement, including the related Prospectus, all amendments and supplements to such registration statement, including pre- and post-effective amendments, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "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. 41 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. (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. EX-99.3 3 INFO RELATING TO BOARD OF MANAGERS 1 EXHIBIT 3 UBS CAPITAL II LLC The names and titles of the members of the board of managers and executive officers of UBS Capital II LLC and their business addresses and principal occupations are set forth below. The business addresses of the each of the following are at UBS Capital II LLC, 299 Park Avenue, New York, New York 10171. Justin S. Maccarone President George Duarte Partner Michael Greene Partner and Member of Board of Managers Charles Delaney Partner Robert C. Dinerstein VP, Secretary and Member of Board of Managers James Breckenridge Principal Marc Unger Principal, Chief Financial Officer and Member of Board of Managers Hyunja Laskin Principal Charles W. Moore Principal Sandra Costin Assistant Secretary
2 UBS CAPITAL HOLDINGS, LLC The names and titles of the members of the board of managers and executive officers of UBS Capital II LLC and their business addresses and principal occupations are set forth below. The business addresses of the each of the following are at UBS Capital Holdings LLC, 299 Park Avenue, New York, New York 10171. Michael Greene President and Member of Board of Managers Robert C. Dinerstein Managing Director, Secretary and Member of Board of Managers Marc Unger Chief Financial Officer, Treasurer and Member of Board of Managers Sandra Costin Assistant Secretary 3 UBS AG The names and titles of the members of the Group Executive Board, directors and executive officers of UBS AG and their business addresses and principal occupations are set forth below. DIRECTORS Name of Director Nationality Address - ---------------- ----------- ------- Alberto Togni Swiss UBS AG Aeschenplatz 6 4002 Basle Alex Krauer Swiss Novaris AG Schwarzwaldallee 215 P.O. Box 4002 Basle Markus Kundig Swiss P.O. Box 4463 6304 Zug Peter Bockli Swiss Bockli Thomann & Parmer St. Jakobs-Strasse 41 P.O. Box 2342 4002 Basle Rolf Arthur Meyer Swiss Ciba Spezialitatenchemise AG P.O. Box 4002 Basle Hans Peter Ming Swiss Sika Finanz AG Zugerstrasse 50 6341 Baar Andreas Peter Reinhart Swiss Gebruder Volkart Holding AG P.O. Box 343 8401 Winterthur Eric Honegger Swiss SAir Group 8058 Zurich-Airport 4 That the names, nationalities and addresses of other responsible persons of the Company are as follows: Position in the Company/Name Nationality Address - ---------------------------- ----------- ------- Chairman of the Board: Alex Krauer Swiss Novartis AG Schwarzwaldallee 215 P.O. Box 4002 Basle Vice Chairman: Alberto Togni Swiss UBS AG Aeschenplatz 6 4002 Basle Chief Executive Officer: Marcel Ospel Swiss UBS AG Aeschenplatz 6 4002 Basle Members of the Group Executive Board: Stephan Haeringer Swiss UBS AG Bahnhofstrasse 45 8021 Zurich Gary Brinson American Brinson 209 South La Salle Street Chicago, IL 60604-1295 Rodolfo Bogni Italian UBS AG Aeschenplatz 6 4002 Basle Markus Granziol Swiss UBS AG Bahnhofstrasse 45 8021 Zurich 5 Position in the Company/Name Nationality Address Peter De Weck Swiss UBS AG Bahnhofstrasse 45 8021 Zurich Luqman Arnold Swiss UBS AG Aeschenplatz 6 4002 Basle Corporate Secretary: Gertrud Erismann Swiss UBS AG Bahnhofstrasse 45 8021 Zurich Treasurer: Luqman Arnold Swiss UBS AG Aeschenplatz 6 4002 Basle EX-99.4 4 WARRANT TO PURCHASE SHARES 1 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. 2 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 2 3 Series C Preferred 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 3 4 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 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 4 5 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 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. 5 6 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 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, 6 7 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 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. 7 8 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 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 8 9 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 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 9 10 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. By: /s/ John Howell Bullion ----------------------- John Howell Bullion Chief Executive Officer [Name and Address of Holder] 10 11 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 11 12 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 12 EX-99.5 5 WARRANT TO PURCHASE SHARES 1 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. 2 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 2 3 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 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 3 4 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 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 4 5 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 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, 5 6 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, 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 6 7 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. Kaye, Scholer, Fierman, Hays & Handler, LLP 425 Park Avenue New York, NY 10022 7 8 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 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 8 9 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. [REMAINING PORTION OF THIS PAGE INTENTIONALLY LEFT BLANK] 9 10 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] 10 11 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 11 12 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 12 EX-99.7 6 CERTIFICATE OF DESIGNATION 1 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 2 "Series C Preferred Stock") and is subordinated to the Corporation's Senior Convertible Preferred Stock, par value $0.01 per share (the "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 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 2 3 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. (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 3 4 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 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 4 5 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 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 5 6 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 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) 6 7 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. (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 7 8 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 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 8 9 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 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 9 10 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. 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 10 11 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. (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 11 12 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). (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 12 13 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 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. 13 14 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 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. 14 15 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 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 15 16 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 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 16 17 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 17 18 representing Series C 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 18 19 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 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 19 20 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. (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] 20 21 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 21 -----END PRIVACY-ENHANCED MESSAGE-----