SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
ORPHAN MEDICAL, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
[COMPANY LOGO]
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
April 29, 2004
To Our Stockholders:
You are cordially invited to attend the 2004 Annual Meeting of the Stockholders
of Orphan Medical, Inc. (the "Company") which will be held at 3:30 p.m. (Central
Standard Time) on Tuesday, June 15, 2004 at the Radisson Plaza Hotel, 35 South
7th Street, Minneapolis, Minnesota 55402.
At the Annual Meeting of the Stockholders you will be asked to: (i) elect six
directors to the Company's Board of Directors, (ii) approve the 2004 Stock
Incentive Plan, and (iii) approve the selection of Ernst & Young LLP as the
Company's independent public accountants for the fiscal year ending December 31,
2004.
Please read the enclosed Notice of Annual Meeting and Proxy Statement which
describes the business to come before the meeting. Please mark, sign and return
the accompanying Proxy Card promptly in the enclosed postage-paid envelope, or
follow the instructions on the proxy card for voting via telephone or through
the Internet. We hope you will be able to attend the meeting on June 15, 2004.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE MARK, SIGN AND
RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. FOR ALTERNATIVE VOTING METHODS, PLEASE
REFER TO THE INFORMATION UNDER THE CAPTIONS "VOTE BY PHONE" AND "VOTE BY
INTERNET" ON THE PROXY CARD.
Sincerely,
/s/ John Howell Bullion
JOHN HOWELL BULLION
Chief Executive Officer
[COMPANY LOGO]
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
TELEPHONE (952) 513-6900
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 15, 2004
The Annual Meeting of Stockholders of Orphan Medical, Inc. (the "Company") will
be held at 3:30 p.m. (Central Standard Time) on Tuesday, June 15, 2004 at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402, for the
following purposes:
1. To elect six directors to serve until the next Annual Meeting of
Stockholders;
2. To approve the Orphan Medical Inc. 2004 Stock Incentive Plan
3. To approve the selection of Ernst & Young LLP as the independent public
accountants of the Company for the fiscal year ending December 31, 2004;
and
4. To consider and act upon any other business that may properly come
before the meeting or any adjournment thereof. The Board of Directors of
the Company has designated the close of business on April 23, 2004 as
the record date for the determination of stockholders entitled to notice
of and to vote at the meeting or any adjournments thereof. Only
stockholders of record of the Company's Common Stock and Senior
Convertible Preferred Stock at the close of business on that date will
be entitled to vote.
You are cordially invited to attend the meeting. If you do not expect to be
present at the meeting, please fill in, sign, date and mail the enclosed proxy
card as promptly as possible or submit your proxy by voting by telephone or
through the Internet by no later than 12:00 p.m. (Central Standard Time) on June
14, 2004 (as directed on your proxy card). If you choose to return the proxy
card by mail, we have enclosed an envelope addressed to the Company for which no
postage is required if mailed in the United States.
By Order of the Board of Directors
/s/ John Howell Bullion
John Howell Bullion
Chairman of the Board, Chief Executive
Officer and Secretary
Minnetonka, Minnesota
April 29, 2004
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 15, 2004
GENERAL
This Proxy Statement is furnished in connection with the solicitation
of the enclosed proxy by the Board of Directors of Orphan Medical, Inc. (the
"Company") for use at the Annual Meeting of Stockholders (the "Annual Meeting")
to be held at 3:30 p.m. (Central Standard Time) on Tuesday, June 15, 2004 at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402, and at
any adjournments thereof, for the purposes set forth in the Notice of Annual
Meeting of Stockholders. The cost of soliciting proxies, including the cost of
preparing and mailing the Notice of Annual Meeting of Stockholders and this
Proxy Statement, is being paid by the Company. In addition, we will, upon the
request of brokers, dealers, banks, voting trustees and their nominees who are
holders of record of shares of our common stock on the record date specified
below, bear their reasonable expenses for mailing copies of this material to the
beneficial owners of these shares.
We have retained Wells Fargo Shareowner Services to provide
consultation and administrative assistance in connection with the solicitation
of proxies for a fee estimated to be $7,000 in prior year plus out-of-pocket
expenses. In addition, officers and other regular employees of the Company may
solicit proxies in person, by telephone or by facsimile, but will receive no
extra compensation for these services. This Proxy Statement and the form of
proxy enclosed are being mailed to stockholders with the Company's Annual Report
to Stockholders commencing on or about May 3, 2004.
The only matters the Board of Directors knows will be presented are
those stated in Proposals 1, 2 and 3 of this Proxy Statement. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF PROPOSALS 1, 2 AND 3.
Should any other matter properly come before the meeting, it is intended that
the persons named in the enclosed proxy will have authority to vote such proxy
in accordance with their judgment on such matter.
VOTING RIGHTS AND PROCEDURES
Common Stock and Senior Convertible Preferred Stock stockholders
(collectively, the "stockholders") of record at the close of business on April
23, 2004 will be entitled to vote at the Annual Meeting or any adjournments
thereof. As of that date, a total of 10,811,596 shares of such Common Stock and
8,706 shares of Senior Convertible Preferred Stock were outstanding
(collectively, the "Voting Stock"), each share of Common Stock being entitled to
one vote and each share of Senior Convertible Preferred Stock being entitled to
voted on an "as converted" basis. On April 23, 2004, the Company's Senior
Convertible Preferred Stock was convertible into an aggregate of 1,069,533
shares of Common Stock, which approximates 122.850 shares of Common Stock for
each share of Senior Convertible Preferred Stock. There is no cumulative voting.
If a stockholder returns a proxy withholding authority to vote the proxy with
respect to a nominee for director, then the shares of the Voting Stock covered
by such proxy shall be deemed present at the Annual Meeting for purposes of
determining a quorum and for purposes of calculating the vote with respect to
such nominee, but shall not be deemed to have been voted for such nominee. If a
stockholder abstains from voting as to any matter, then the shares held by such
stockholder shall be deemed present at the meeting for purposes of determining a
quorum and for purposes of calculating the vote with respect to such matter, but
shall not be deemed to have been voted in favor of such matter. If a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on such
matter, then the shares covered by such non-vote shall be deemed present at the
Annual Meeting for purposes of determining a quorum, but shall not be deemed to
be present and entitled to vote at the Annual Meeting for purposes of
calculating the vote with respect to such matter.
Stockholders can vote their shares by toll-free telephone call or
through the Internet as an alternative to completing the enclosed proxy card and
mailing it to the Company. The procedures for telephone and Internet voting are
described on the proxy card. The telephone and Internet voting procedures are
designed to verify stockholders' identities, allow stockholders to give voting
instructions and confirm that their instructions have been recorded properly.
Stockholders who vote through the Internet should be aware that they may incur
costs to access the Internet, such as usage charges from telephone companies or
Internet service providers, and that these costs must be borne by the
stockholder. Stockholders who vote by telephone or through the Internet need not
return a proxy card by mail.
1
Shares of the Company's Common Stock and Senior Convertible Preferred
Stock represented by proxies in the form solicited will be voted in the manner
directed by a stockholder. If no direction is given, the proxy will be voted for
the election of the nominees for director named in this Proxy Statement, for
approval of the 2004 Orphan Medical, Inc. Stock Incentive Plan and for approval
of the selection of Ernst & Young LLP as the Company's independent public
accountants. So far as management of the Company is aware, no matters other than
those described in this Proxy Statement will be acted upon at the Annual
Meeting. In the event that any other matters properly come before the Annual
Meeting and call for a vote of stockholders, the persons named as proxies in the
enclosed form of proxy will vote in accordance with their best judgment on these
matters. Whether a stockholder submits a proxy by mail, telephone or the
Internet, a stockholder may revoke a proxy at any time before it is voted by:
(i) delivering to any officer of the Company a written notice of termination of
the proxy's authority, (ii) filing with an officer of the Company another proxy
bearing a later date or (iii) appearing and voting at the Annual Meeting.
2
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
STOCK OWNERSHIP
The table on the following page sets forth, as of March 1, 2004, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person who, to the knowledge of the Company, owned
beneficially more than five percent of such stock, (ii) each director, (iii)
each executive officer named in the "Summary Compensation Table" below, and (iv)
all directors and executive officers as a group. Unless otherwise noted, the
shares listed in the table below are subject to sole voting and investment power
of the indicated person.
Beneficial ownership is determined and presented in the table on the following
page in accordance with rules of the Securities and Exchange Commission, and
includes general voting power and/or investment power with respect to the
securities. Shares of the Company's Common Stock subject to options currently
exercisable or exercisable within 60 days of March 1, 2004, are deemed to be
outstanding for purposes of computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of any
other person. With respect to UBS Capital II LLC, the percentage of ownership
calculation is based on Common Shares outstanding as of March 1, 2004, plus
1,069,533 shares of Common Stock, which represents 8,706 shares of Senior
Convertible Preferred Stock owned by UBS Capital II LLC on an as converted
basis.
Amount and
Nature of Percentage of
Beneficial Common Stock
Name and Address of Beneficial Owner Ownership Outstanding
--------------------------------------------------------------------------------
Alta Partners II, Inc. (1) 1,212,121 11.27%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
OrbiMed Advisors LLC (2) 1,617,302 15.04
767 Third Avenue - 6th Floor
New York, NY 10017-2023
UBS Capital II LLC (3) 1,250,406 10.42
299 Park Avenue
New York, NY 10171-0026
Galleon Group (4) 882,358 8.21
135 East 57th Street, 16th Floor
New York, NY 10022-2050
John Howell Bullion (5) 594,362 5.30
William Houghton, M.D. (6) 190,341 1.74
Mark D. Perrin (7) 62,750 *
Timothy G. McGrath (8) 65,739 *
Farah Champsi (9) 13,000 *
Michael Greene (10) 28,000 *
Thomas King (11) 13,000 *
Julius A. Vida, Ph.D. (12) 28,000 *
William M. Wardell, M.D., Ph.D. (13) 59,500 *
All directors and executive officers as
a group (11 persons) (14) 1,214,158 10.28
-----------------------------
* Less than one percent.
(1) Alta Partners II, Inc. serves as the management advisory company of various
funds which hold shares of the Company's Common Stock. In this capacity,
Alta Partners II, Inc. is affiliated with Alta BioPharma Partners II, L.P.,
Alta Embarcadero BioPharma Partners II, LLC, Alta BioPharma Management
Partners II, LLC, Alta Partners II, Inc. and Jean Deleage, Alix Marduel and
Farah Champsi. The beneficial ownership information is based on a schedule
13D filed by Alta Partners on December 17, 2001.
(2) OrbiMed Advisors LLC has shared voting and dispositive power with respect
to 1,617,302 shares of the Company's Common Stock. The number of shares
beneficially owned is based on a schedule 13G filed by OrbiMed Advisors on
February 14, 2003.
3
(3) UBS Capital II LLC has sole voting and investment power with respect to:
8,706 shares of Senior Convertible Preferred Stock, which is convertible
into 1,069,533 shares of Common Stock, and 180,873 shares of unregistered
Common Stock. The shares of Senior Preferred Convertible Stock vote on an
as-converted basis. In addition, UBS Capital owns (i) 3,677 shares of
non-voting Series B Convertible Preferred Stock, which is convertible into
565,692 shares of Common Stock, (ii) a warrant to purchase up to 2,050
shares of non-voting Series C Convertible Preferred Stock or 315,385 shares
of Series D Non-Voting Convertible Preferred Stock or any combination
thereof up to a maximum aggregate purchase price of $2,050,000 and (iii) a
warrant to purchase up to 282,353 shares of Series D Non-Voting Convertible
Preferred Stock.
(4) Based on a schedule 13F filed by Galleon Group LP on February 6, 2004.
(5) Includes 466,650 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(6) Includes 175,370 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(7) Includes 62,750 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(8) Includes 63,635 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(9) Includes 13,000 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004. Ms. Champsi is affiliated
with Alta Partners II, Inc. and she disclaims beneficial ownership of any
shares of Common Stock beneficially owned by Alta Partners II, Inc. and its
affiliates.
(10) Includes 28,000 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(11) Includes 13,000 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(12) Includes 28,000 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(13) Includes 58,000 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2004.
(14) Includes 1,054,765 shares that may be acquired within 60 days of March 1,
2004 through the exercise of options by all executive officers and
directors as a group.
4
PROPOSAL 1:
ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
The business and affairs of the Company are managed under the direction
of its Board of Directors, which is presently comprised of six members. Six
directors have been nominated for election to the Company's Board of Directors
at the Annual Meeting, to hold office until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified. Dr. W.
Leigh Thompson resigned as a director of the Company in July 2002. This
resignation created a vacancy on the Board of Directors that the Board of
Directors has determined not to fill at this time. The Board of Directors is
continuing to look for a qualified and appropriate Director to fill this
vacancy. Proxies cannot be voted for more than the six persons.
The Company's incumbent directors, John Howell Bullion, Farah M.
Champsi, Michael Greene, Thomas B. King, Julius A. Vida, Ph.D. and William M.
Wardell, M.D., Ph.D., have been nominated for election at the Annual Meeting.
Each of Messrs. Bullion, Greene, King and Drs. Vida, Wardell and Ms. Champsi
have indicated a willingness to serve, but in case any of them is not a
candidate at the Annual Meeting, the persons named as proxies in the enclosed
form of proxy may vote for a substitute nominee in their discretion. Information
concerning the director nominees is set forth below.
JOHN HOWELL BULLION. Mr. Bullion has served as a Director of the
Company since 1994. Mr. Bullion, 52, has been Chief Executive Officer of the
Company since June 1994 and Chairman of the Board of Directors since December
30, 1998. Mr. Bullion is a co-founder of Chronimed Inc., the company from which
Orphan Medical, Inc. was spun off in 1994. Prior to joining the Company, Mr.
Bullion served as President of Bluestem Partners, an investment and consulting
company, President of Dahl & Associates, a soil and ground water remediation
company and President of Concurrent Knowledge Systems, Inc., a software
development company. Mr. Bullion also served as partner and Vice President with
First Bank System Venture Capital Company for seven years.
MICHAEL GREENE. Mr. Greene, 41, has served as a Director of the Company
since August 1998. Mr. Greene is a founding partner of UBS Capital Americas,
LLC, a private investment fund. Prior to the formation of UBS Capital Americas,
LLC in 1999, Mr. Greene was a partner at UBS Capital LLC, a predecessor entity
to UBS Capital Americas, LLC since 1993. Mr. Greene was a senior member of Union
Bank of Switzerland's Leverage Finance Group from 1990 to 1992. Mr. Greene is
a graduate of the College of Holy Cross and earned an M.B.A. from the Harvard
University Graduate School of Business Administration. Mr. Greene also serves as
a Director for TravelCenters of America, Inc., Affordable Residential
Communities, Inc., and several private companies.
JULIUS A. VIDA, PH.D. Dr. Vida, 75, has been a Director of the Company
since October 1998. Dr. Vida is the President of Vida International
Pharmaceutical Consultants, which was founded in 1993. Dr. Vida also serves as a
director for Medarex, Inc., Spectrum Pharmaceuticals, Inc. and YM Bioscience,
Inc. (Canada). Past employment includes over 15 years experience with Bristol
Myers Squibb Co., last serving as Vice President, Business Development,
Licensing and Strategic Planning from 1991 to 1993. Dr. Vida earned his Ph.D.
from the Carnegie Institute of Technology and his M.B.A. from Columbia
University.
WILLIAM M. WARDELL, M.D., PH.D. Dr. Wardell, 65, has been a Director of
the Company since August 1995. Since June 2000, Dr. Wardell has been the
President of Wardell Associates International, a pharmaceutical consulting firm.
Dr. Wardell previously served as President of Wardell Associates International
from January 1995 to January 1996. From January 1996 to June 2000, Dr. Wardell
served as Senior Scientific Officer for Covance, Inc. (formerly
Corning-Besselaar), a contract research organization. Dr. Wardell also serves as
a director for PharMetrics, Inc. and PhytoCeutica, Inc. Prior to 1995, Dr.
Wardell served as President of Protein Engineering Corporation, a privately held
biotechnology company. Prior to joining Protein Engineering Corporation, Dr.
Wardell was Senior Vice President of the Parke-Davis Pharmaceutical Research
Division of Warner Lambert Company. From 1983 to 1991, Dr. Wardell was Vice
President/Medical Director of Boehringer Ingelheim Pharmaceuticals, Inc. and was
a member of Boehringer Ingelheim's International Steering and Medical
Committees, which had responsibility for worldwide research, development,
clinical and regulatory programs. Prior to entering the pharmaceutical industry,
Dr. Wardell was Associate Professor of Pharmacology and Toxiology and Assistant
Professor of Medicine at the University of Rochester Medical Center. Dr. Wardell
has also been a Commissioner of the Pharmaceutical Manufacturers Association's
Commission on Drugs for Rare Diseases, and a Vice President and Board member of
the American Society for Clinical Pharmacology and Therapeutics.
THOMAS B. KING. Mr. King, 49, has been a Director of the Company since
February 26, 2002. Since 2003, Mr King has served as President, CEO, and
Director of Alexza MDC, a privately-held biopharmaceutical company developing
products with faster onset of therapeutic effect. From 2002 - 2003, Mr. King was
President, CEO and a Director of Cognetix, Inc., and held similar positions with
Anesta Corp. from January 1994 until 2001, when Anesta was acquired by Cephalon,
Inc. He was employed by Somatogen, Inc. from 1990 to 1994 as Vice President of
Marketing and Business Development. He was Director of the Cardiovascular
Business Unit at Abbott Laboratories from 1988 to 1989, and held various
marketing and business development positions at Anaquest, a division of BOC
HealthCare, from 1982 to 1987. Mr. King received an undergraduate degree in
chemistry from McPherson College in 1977 and an MBA in finance and marketing
from the University of Kansas in 1982. Mr. King also serves as a member of the
Board of Directors of ProQuest Pharmaceuticals, Inc.
5
FARAH H. CHAMPSI. Ms. Champsi, 42, has been a Director of the Company
since December 7, 2001. Ms. Champsi is a managing director of Alta Partners, a
venture capital firm located in San Francisco, California since May, 2000. Ms.
Champsi was an investment banker at Robertson Stephens & Company, between May
1987 and December 1999, where she was elected a general partner in 1992 and the
head of life sciences investment banking in 1995. She holds an M.B.A. from
Stanford University and a B.A. from Smith College. Ms. Champsi serves on the
board of Cytokinetics, Incorporated., Renovis, Inc. and Myocor, Inc.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
present and entitled to vote at the Annual Meeting is necessary to elect the
nominees for director. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF MESSRS. BULLION, GREENE AND KING AND DRS. VIDA AND WARDELL AND MS. CHAMPSI.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $10,000 annually
for serving on the Board of Directors. In addition, directors who are not
employees receive $1,000 for each meeting, $500 for each telephone meeting and
$250 for committee meetings. Directors are also reimbursed for out-of-pocket
expenses incurred in attending Board of Directors' and committee meetings.
In addition, pursuant to the Company's 1994 Stock Option Plan (the
"Stock Plan"), each new non-employee director receives an option to purchase
25,000 shares of Company common stock on the date of such director's initial
election to the Board of Directors. Each option has an exercise price equal to
the fair market value of the Company's Common Stock on the date of grant, with
5,000 shares vesting immediately and the remaining 20,000 shares vesting over a
four-year period in 5,000 share increments. Each option has a term of ten years.
Upon re-election to the Board, each non-employee director is entitled to receive
an option to purchase 5,000 shares with 1,000 shares vesting immediately and the
remaining 4,000 shares vesting over a four year period in 1,000 share
increments. Each option has a term of ten years. In fiscal 2002, Ms. Champsi and
Mr. King received an option to purchase 25,000 shares upon being named to the
Company's Board of Directors. Upon re-election to the Board of Directors in May
2002, all non-employee directors received an option to purchase 5,000 shares of
the Company's common stock.
SHAREHOLDER COMMUNICATIONS WITH BOARD
The Board of Directors has implemented a process by which our
shareholders may send written communications to the Board's attention. Any
shareholder desiring to communicate with our Board, or one or more of our
directors, may send a letter addressed to the Orphan Medical Inc. Board of
Directors c/o Orphan Medical Inc. Corporate Secretary, 13911 Ridgedale Drive,
#250, Minnetonka, MN. The Corporate Secretary has been instructed by the Board
to promptly forward all communications so received to the full Board or the
individual Board members specifically addressed in the communication.
NOMINATIONS
Our Nominating Committee is the standing committee responsible for
determining the slate of director nominees for election by shareholders, which
the committee recommends for consideration by the Board. A copy of our
Nominating Committee Charter is available on our corporate website at
www.orphan.com. All director nominees approved by the Board and all individuals
appointed to fill vacancies created between our annual meetings of shareholders
are required to stand for election by our shareholders at the next annual
meeting.
Our Nominating Committee has the options to utilize the services of a
third-party search firm to assist in the identification and evaluation of Board
member candidates. No such third-party search firm was utilized in 2003.
Our Nominating Committee determines the required selection criteria and
qualifications of director nominees based upon the needs of the Company at the
time nominees are considered. Minimum criteria for director nominees are set
forth in [our Corporate Nominating Principles]. A candidate must possess the
ability to apply good business judgment and must be in a position to properly
exercise his or her duties of loyalty and care. Candidates should also exhibit
proven leadership capabilities, high integrity and experience with a high level
of responsibilities within their chosen fields, and have the ability to quickly
grasp complex principles of business, finance and communications technologies.
In general, candidates will be preferred who hold an established executive level
position in business, finance, law, education, research or government. The
Nominating Committee will consider these criteria for nominees identified by the
Committee, by shareholders, or through some other source. When current Board
members are considered for nomination for reelection, the Nominating Committee
also takes into consideration their prior Orphan Medical Inc. Board
contributions, performance and meeting attendance records.
The Nominating Committee will consider qualified candidates for
possible nomination that are submitted by our shareholders. Shareholders wishing
to make such a submission may do so by sending the following information to the
Nominating Committee c/o Corporate Secretary at the address listed above: (1)
name of the candidate and a brief biographical sketch and resume; (2) contact
information for the candidate and a document evidencing the candidate's
willingness to serve as a director if elected; and (3) a signed statement as to
the submitting shareholder's current status as a shareholder and the number of
shares currently held.
6
The Nominating Committee conducts a process of making a preliminary
assessment of each proposed nominee based upon the resume and biographical
information, an indication of the individual's willingness to serve and other
background information. This information is evaluated against the criteria set
forth above and the specific needs of the Company at that time. Based upon a
preliminary assessment of the candidate(s), those who appear best suited to meet
the needs of the Company may be invited to participate in a series of
interviews, which are used as a further means of evaluating potential
candidates. On the basis of information learned during this process, the
Nominating Committee determines which nominee(s) to recommend to the Board to
submit for election at the next annual meeting. The Nominating Committee uses
the same process for evaluating all nominees, regardless of the original source
of the nomination.
No candidates for director nominations were submitted to the Nominating
Committee by any shareholder in connection with the 2004 annual meeting. Any
shareholders desiring to present a nomination for consideration by the
Nominating Committee prior to our 2005 annual meeting must do so prior to
December 31, 2004 in order to provide adequate time to duly consider the nominee
and comply with our bylaws.
MEETING ATTENDANCE
Each of our directors is expected to make a reasonable effort to attend
all meetings of the Board, applicable committee meetings and our annual meeting
of shareholders. One of our directors attended our 2003 annual meeting.
During fiscal 2003, the Board of Directors held 10 meetings. Each
director attended at least 75% of the aggregate of the total number of meetings
of the Board plus the total number of meetings of all committees of the Board on
which he or she served.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Audit Committee consists of Mr. Greene, Dr. Vida and Ms. Champsi,
each of whom the Board of Directors has determined to be "independent" as
defined by the rules of the National Association of Securities Dealers' listing
standards. The Board of Directors has determined that Mr. Greene is an audit
committee financial expert as defined in the applicable securities laws and
regulations. The Audit Committee's function is to review and make
recommendations to the Board of Directors with respect to certain financial and
accounting matters. The Audit Committee met 4 times during 2003. The Board of
Directors approved a written audit committee charter, a copy of which is
attached as Appendix A
The Compensation Committee consists of Dr. Wardell, Mr. King and Ms.
Champsi. The Compensation Committee's function is to review and make certain
determinations with respect to matters concerning the compensation of employees,
officers and directors. The Compensation Committee met 1 time during 2003.
The Regulatory Oversight Committee consists of Dr. Wardell and, prior
to his resignation in July 2002, also consisted of Dr. W. Leigh Thompson. The
Regulatory Oversight Committee's function is to keep the Board informed on
matters pertaining to regulatory compliance. The Regulatory Oversight Committee
met 1 time during 2003.
The Nominating Committee consists of Dr. Wardell, Mr. King and Ms.
Champsi. The Committee is responsible for determining the slate of director
nominees for election by shareholders, which the committee recommends for
consideration by the Board. The Nominating Committee Charter was approved by and
the members of the Nominating Committee were appointed by the Board of Directors
in 2004; therefore, the Nominating Committee did not meet in 2003.
The Board of Directors has also established an Advisory Board
consisting of eight individuals that advise the Company with respect to the
planning or execution of its product acquisition and development programs. Each
of the members of the Advisory Board has development or marketing expertise with
respect to products under development by the Company. Members of the Advisory
Board provide services to the Company on a nonexclusive basis and do not meet on
a formal or regular basis. The Company consults with one or more members of the
Advisory Board from time to time by means of meetings or telephone conference
calls.
ETHICS POLICY
We have adopted a Ethics Policy that applies to our Chief Executive
Officer, Chief Financial Officer, and all other employees. A copy of our Ethics
Policy will be furnished free of charge to any person who submits a written
request for it. Such request should be sent to Orphan Medical, Inc., 13911
Ridgedale Drive, Suite 250, Minnetonka, Minnesota 55305, Attention: Chief
Financial Officer.
7
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE
COMPENSATION PHILOSOPHY
The Compensation Committee determines the policies for and structure
and amount of all compensation for the Board of Directors and the executive
officers of the Company, including the Chief Executive Officer. The Compensation
Committee is composed entirely of directors who are not employees of the
Company. The Compensation Committee's primary objectives are to:
o Provide compensation that will attract, retain and motivate
high-caliber executives;
o Motivate officers to achieve important Company performance goals; and
o Align the interests of the executive officers with those of the
Company's stockholders.
The Company has a "pay for performance" compensation program designed
to motivate and reward executives for attaining financial and strategic
objectives essential to the Company's success and continued growth while at the
same time allowing the Company to attract, retain and motivate high-caliber
executives. The Company's practice is to work with the Compensation Committee to
establish annual Company financial performance targets and individual
performance goals for each executive officer at the outset of each year, and to
pay bonuses based on performance against these pre-established targets and
goals. Base salaries for the Company's executive officers are generally average
in comparison to executive officer salaries paid by comparable peer companies.
Through the bonus program, the Company's executive officers have an opportunity
to earn above average compensation as compared to comparable peer companies.
An additional aspect of the Company's compensation program is the use
of stock options. Through the use of stock based incentives, the Company
believes that an executive officer's interests will be aligned with the
long-term interests of the Company's stockholders. Executive officers are,
thereby, given an incentive to not only meet their annual performance
objectives, but also to achieve longer term strategic goals.
The following discussion describes the key components of the
compensation program. The Compensation Committee retains the right to consider
factors other than those described below in setting executive compensation
levels for individual officers.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The key components of the Company's compensation program for its
executive officers are (a) base salary, (b) annual cash bonus compensation and
(c) long-term incentive compensation in the form of stock options.
BASE SALARY
The Chief Executive Officer annually reviews the base salary of each
executive officer and makes recommendations to the Compensation Committee
regarding the base salaries for the executive officers (other than the Chief
Executive Officer). In determining base salaries, the Compensation Committee
takes into account individual experience and performance, performance during the
preceding 12 months, salary levels for similar positions at comparable peer
companies and other issues particular to the Company. Salaries for the Company's
executive officers are generally at the mid-point of the range when compared to
salaries paid by comparable peer companies.
ANNUAL CASH BONUS COMPENSATION
The Compensation Committee did not award cash bonuses to any executive
officers and did award cash bonuses to non-executive officer employees in
recognition of achieving predetermined Company financial and operational
objectives in fiscal 2003, which generally included optimization of revenues and
gross margins and minimizing operational losses, and achieving individual
performance goals. Executive officers were entitled to receive a cash bonus for
achievement of either the Company's financial and performance objectives or
achievement of personal performance goals, or a combination of both.
8
LONG TERM INCENTIVE PROGRAM
Stock options are granted to executive officers under the Company's
1994 Stock Option Plan (the "Stock Plan"). The purposes of the Stock Plan are to
attract, retain and motivate personnel capable of assuring the future success of
the Company by affording them an opportunity to acquire an ownership interest in
the Company and to align executive officer compensation directly with the
creation of stockholder value.
The Stock Plan authorizes the Compensation Committee to grant stock
options to executives and other key employees. When making option grant
determinations, the Compensation Committee considers the recommendation of the
Chief Executive Officer, an individual's performance and the Company's overall
performance, as well as option grants to executives made by comparable peer
companies. When determining the size of an option grant, the Compensation
Committee takes into account a number of factors, including levels of options
granted by comparable peer companies and the number of options already
outstanding or previously granted.
The Compensation Committee's policy is to not grant stock options
annually, but to review each individual's performance and option position on an
annual basis. All of the Company's outstanding stock options were granted at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options granted under the Stock Plan have a term of ten years for
incentive stock options and 15 years for nonqualified stock options, and
generally vest ratably over a four-year period. Executive officers will only
benefit from stock options if, at the time the options are exercised, the price
of the Common Stock has appreciated over its price on the date of the stock
option grant.
In fiscal 2003, Mr. Bullion was granted an option to purchase 35,000
shares at $10.46 per share and an option to purchase 35,000 shares at $8.90 per
share; Dr. Houghton was granted an option to purchase 25,000 shares at $10.46
per share and an option to purchase 25,000 at $8.90 per share; Mr. Perrin was
granted an option to purchase 25,000 shares at $10.46 per share and an option to
purchase 25,000 shares at $8.90 per share; Mr. McGrath was granted an option to
purchase 12,000 shares at $10.46 per share and an option to purchase 12,000
shares at $8.90 per share.
The Company is seeking stockholder approval of a new stock incentive
plan. See "Proposal 2: Approval of 2004 Orphan Medical, Inc. Stock Incentive
Plan" in this Proxy Statement.
CHIEF EXECUTIVE OFFICER COMPENSATION
BASE SALARY AND ANNUAL BONUS COMPENSATION
Effective October 29, 1999, Mr. John Bullion, Chief Executive Officer,
entered into an employment agreement with the Company that provides for an
annual base salary of $200,000 in fiscal 2001 and 2002. In February 2002, the
Compensation Committee increased Mr. Bullion's 2002 annual base salary to
$225,000. Effective January 1, 2003, Mr. Bullion's salary was increased to
$275,000.
Mr. Bullion's annual base salary and annual bonus compensation are set
by the Compensation Committee, taking into account such factors as the Company's
financial performance, Mr. Bullion's leadership within the Company, his
performance with respect to personal performance goals, his pay in relation to
the pay of chief executive officers at comparable peer companies and the
Compensation Committee's overall compensation philosophy.
The Compensation Committee did not award Mr. Bullion a cash bonus for
his performance in fiscal 2003.
STOCK OPTION AWARDS
In fiscal 2003, the Compensation Committee approved option grants to
Mr. Bullion to purchase 70,000 shares of common stock.
Farah H. Champsi (Chairperson)
William M. Wardell, M.D., Ph.D.
Thomas B. King
Members of the Compensation Committee
9
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for
the three fiscal years ended December 31, 2003, awarded to or earned by the
Chief Executive Officer and all other executive officers of the Company.
Long-Term
Annual Compensation
Compensation Awards
---------------------- ------------
Securities All Other
Fiscal Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options # ($) (4)
--------------------------- -------- ---------- --------- ------------ ------------
John Howell Bullion 2003 275,000 99,397(1) - 884
Chairman of the Board, Chief 2002 220,655 - 803
Executive Officer and 2001 200,000 109,635(2) 29,833 500
Secretary -
William Houghton, M.D. 2003 295,000 - - 8,884
Executive Vice President, 2002 281,551 112,621 - 2,102
Chief Scientific and Chief 2001 256,938 128,131 17,700 7,688(5)
Medical Officer
Mark D Perrin (3) 2003 270,000 - - 884
Executive Vice President and 2002 154,277 61,784 125,000 397
Chief Commercial Officer
Timothy G. McGrath 2003 180,000 - - 869
Vice President and Chief 2002 161,042 56,365 - 444
Financial Officer 2001 142,917 27,592 6,600 419
(1) Includes cash bonus paid top named executive for performance for the
fiscal year ended December 31, 2002.
(2) Includes $60,000 cash bonus paid to named executive officer for his
performance in the fiscal year ending December 31, 2000.
(3) Mr. Perrin joined the Company on May 21, 2002.
(4) Except as indicated below, includes amounts paid for group term life
insurance paid for each executive, ($288 for Mr. Bullion and Mr.
Perrin, and $273 for Mr. McGrath) and disability insurance paid for
each executive, ($320 for Mr. Bullion and Mr. McGrath and $187 for Mr.
Perrin) for the fiscal year ending December 31, 2003. Also includes
amounts paid for group term life and disability insurance paid for Mr.
Bullion and Mr. McGrath for the fiscal years ended December 31, 2002
and 2001. Also includes amounts paid for group term life insurance and
disability insurance paid for Mr. Perrin for the fiscal year ended
December 31, 2002.
(5) Includes disability insurance ($596), group term life insurance
($288), and travel expenses per the terms of employment for the year
ended December 31, 2003. Includes disability insurance, group term
life insurance and travel expenses per terms of employment for the
year ended December 31, 2002. Includes group term life insurance,
disability insurance, and travel expenses paid per terms of employment
for the fiscal year ended December 31, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock
options to each of the executive officers named in the Summary Compensation
Table during fiscal 2003. The percentage of total options set forth below is
based on an aggregate of 525,925 options granted to employees during fiscal
2003. All options were granted with an exercise price equal to the closing price
of the Company's common stock on the Nasdaq National Market on the date of
grant. Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts representing hypothetical gains are those that
could be achieved for the options if exercised at the end of the option term.
The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission based on the
fair market value of the stock at the time of option grant, and do not represent
our estimate or projection of the future stock price.
10
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
EFFECTIVE
GRANT EXPIRATION % OF EXERCISE VALUE VALUE
DATE DATE TOTAL (A) PRICE @ 5% @ 10%
-----------------------------------------------------------------------------------------------
Bullion (1) 2/12/2003 2/12/2013 35,000 6.60% $10.4600 230,238 583,469
(2) 6/9/2003 6/9/2013 35,000 6.60% $8.9000 195,901 496,451
Houghton (1) 2/12/2003 2/12/2013 25,000 4.72% $10.4600 164,456 416,764
(2) 6/9/2003 6/9/2013 25,000 4.72% $8.9000 139,929 354,608
Perrin (1) 2/12/2003 2/12/2013 25,000 4.72% $10.4600 164,456 416,764
(2) 6/9/2003 6/9/2013 25,000 4.72% $8.9000 139,929 354,608
McGrath (1) 2/12/2003 2/12/2013 12,000 2.26% $10.4600 78,939 200,047
(2) 6/9/2003 6/9/2013 12,000 2.26% $8.9000 67,166 170,212
----------------------- -----------------------------
Totals 194,000 36.61% 1,181,014 2,992,921
-----------------------------
(1) All such options were granted February 12, 2003 under the Company's 1994
Stock Plan. All options vest 20% on the grant date and 20% on each of the
following four anniversaries of the grant date and are exercisable in full after
the end of four years of continued employment. In the event the Company would
consolidate with, merge into, or transfer all or substantially all of its assets
to another corporation, then all options granted under this plan become
immediately exercisable. The option exercise price is not adjustable over the
10-year term of the options except due to stock splits and similar occurrences
affecting all outstanding stock.
(2) All such options were granted June 9, 2003 under the Company's 1994 Stock
Plan. All options vest 100% on the first anniversary of the grant date. In the
event the Company would consolidate with, merge into, or transfer all or
substantially all of its assets to another corporation, then all options granted
under this plan become immediately exercisable. The option exercise price is not
adjustable over the 10-year term of the options except due to stock splits and
similar occurrences affecting all outstanding stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table summarizes stock option exercises in 2003 by the
executive officers named in the "Summary Compensation Table" above and the value
of options held by such persons at December 31, 2003.
Number of options held at Value of options held at
Shares Acquired on Value Realized December 31, 2003 December 31, 2003
Exercise ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
(1)
John Howell Bullion 0 0 466,650/97,183 $2,104,643/$62,077
William Houghton 0 0 175,730/79,580 442,538/53,100
Mark Perrin 0 0 62,750/131,000 37,308/86,730
Timothy McGrath 0 0 63,635/32,940 159,856/13,500
-----------------------------
(1) "Value" is based upon the difference between the per share option exercise
price and the last sale price per share of the Common Stock on December 31,
2003, which was $10.25.
EMPLOYMENT AGREEMENTS
An employment agreement between the Company and John Howell Bullion,
Chief Executive Officer, was executed on October 29, 1999. The agreement
commenced October 20, 1999 and continues for a three-year period. At the end of
the three-year period, the agreement will automatically renew for successive
two-year periods, unless terminated by either party in accordance with the terms
of the agreement. The employment agreement automatically terminates upon the
mutual agreement of the parties, upon Mr. Bullion's death, or if Mr. Bullion is
disabled for a continuous nine-month period. Mr. Bullion's employment agreement
provides for an annual base salary of $180,000 for the calendar year 2000 and
$200,000 for calendar years 2001 and 2002. In February 2002, the Compensation
Committee increased Mr. Bullion's 2002 annual base salary to $225,000, and
effective January 1, 2003, the Compensation Committee increased Mr. Bullion's
2003 annual base salary to $275,000. Mr. Bullion may terminate his employment
11
at any time upon 90 days written notice to the Company, in which case he will
receive his base salary and accrued vacation and sick pay through the date of
termination.
The Company may terminate Mr. Bullion's employment at any time for good
cause. The employment agreement defines good cause as willful and continued
failure by Mr. Bullion to substantially perform his duties, or willful
misconduct by Mr. Bullion that is materially injurious to the Company. If the
Company terminates Mr. Bullion for cause, Mr. Bullion will receive his base
salary and accrued vacation and sick pay through the date of termination. If the
Company terminates Mr. Bullion without cause, the employment agreement provides
that Mr. Bullion will receive one year's salary, a bonus equal to the average
bonus paid to him in the most recent two fiscal years, all accrued vacation and
sick pay. In addition, upon a termination without cause, all of Mr. Bullion's
unvested options will immediately vest and he will be entitled to participate in
the Company's benefit plans for a two year period, which includes continued
payment by the Company of Mr. Bullion's health, life and disability insurance
premiums for that period. The employment agreement provides that Mr. Bullion may
treat a material change in his position, duties or location of employment as a
termination by the Company without cause. Mr. Bullion may also treat termination
of his employment upon one year's advance notice by the Company as a termination
without cause.
The employment agreement also provides for payments to Mr. Bullion if
the Company terminates him within 120 days of the effective date of a change in
control of the Company. In such event, Mr. Bullion will receive two years' base
salary, all accrued vacation and sick pay as of the date of termination and the
Company will continue to pay his health, life and disability insurance premiums
for two years. The Company may offset severance payments to Mr. Bullion by
amounts Mr. Bullion receives from other full-time employment during the two
year-period following his termination.
CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into agreements with its executive officers
providing for the payment of certain benefits to the officers if their
employment terminates following a "change in control" of the Company. The
agreements provide for payment of benefits if an officer's employment is
terminated within the 12 months following a change in control if the officer was
terminated without cause, required to relocate or required to accept less pay or
less responsibility. The formula and payout for the benefits under the change in
control agreement is the highest annual salary and incentive payment within the
last two years divided by 12 multiplied by the following number of months for
the officers: Dr. Houghton, 18 months; Mr. Perrin, 18 months; and Mr. McGrath,
12 months.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total return on the Company's
Common Stock for the last five fiscal years with the cumulative total return of
the NASDAQ Total Return Index (U.S. Companies) and the NASDAQ Pharmaceutical
Stock Index for the same period. The graph assumes the investment of $100 on
December 31, 1998, in the Company's Common Stock, the NASDAQ Total Return Index
and the NASDAQ Pharmaceutical Stock Index and reinvestment of all dividends.
[LINE GRAPH]
NASDAQ Stock Market NASDAQ Pharmaceutical
Orphan Medical, Inc. Total Return Index Total Return Index
------------------------------------------------------------------------------
12/31/1998 100.00 100.00 100.00
12/31/1999 66.94 185.43 188.55
12/29/2000 272.29 111.83 235.19
12/31/2001 93.10 88.71 200.45
12/31/2002 66.92 61.33 129.52
12/31/2003 116.48 91.70 189.85
12
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information as of December 31, 2003
relating to equity compensation plans of the Company pursuant to which grants of
options, restricted stock, or other rights to acquire shares may be granted from
time to time. As of December 31, 2003, the Company had no equity compensation
plans that were not approved by security holders.
(c) Number of
securities remaining
(a) Number of available for future
securities to be issuance under
issued upon exercise (b) Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected
Plan Category and rights warrants and rights in column (a))
-------------------------- ------------------------ ------------------------- ------------------------
Equity Compensation
plans approved by
security holders......... 2,131,796 $8.14 833,382
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, executive officers and persons
who beneficially own more than 10% of a class of the Voting Stock of the
Company, to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of the Company's Voting
Stock and other equity securities. Executive officers, directors and
greater-than-10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file.
The Company is required to disclose in this Proxy Statement any
delinquent filing of such reports and any failure to file such reports during
fiscal year 2003. Based solely upon a review of the forms filed by the Company's
executive officers, directors and greater-than-10% stockholders, and written
representations from such reporting persons, the Company believes that during
the fiscal year ended December 31, 2003 all Section 16(a) filing requirements
applicable to its executive officers, directors and greater-than-10%
stockholders were filed on a timely basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee members are Dr. Wardell, Mr. King and Ms.
Champsi. No member of the compensation committee during the 2003 fiscal year was
an officer or employee of the Company, nor formerly an officer of the Company.
13
PROPOSAL 2:
APPROVAL OF 2004 ORPHAN MEDICAL, INC. STOCK INCENTIVE PLAN
The Company believes that stock options are an important element of
compensation in attracting and retaining executives, other key employees and
outside directors, and in motivating and retaining skilled management personnel
and outside directors. Generally, the consideration to be received by the
Company for awards under the 2004 Stock Incentive Plan ("Stock Incentive Plan")
will be the participants' past, present or expected future contributions to the
success of the Company. The Stock Incentive Plan was adopted by the Board of
Directors of the Company (the "Board") on April 27, 2004 and provides for the
issuance of 2,250,000 shares of the Company's Common Stock. The Stock Incentive
Plan is attached as Appendix B.
The April 27, 2004 adoption of the Stock Incentive Plan by the Board is
subject to approval by the Company's stockholders at the Annual Meeting. If the
stockholders fail to approve the amendment at the Annual Meeting, the Company
believes it will be constrained in its ability to attract and retain executives,
other key employees and outside directors, and in motivating and retaining
skilled management personnel and outside directors necessary for the Company's
success. Except for annual option grants to non-employee directors, the number
of options that will be granted to individual participants under the amended
Stock Incentive Plan is not determinable, as the Compensation Committee will
make such determinations in its sole discretion.
SUMMARY OF THE STOCK INCENTIVE PLAN
The Stock Incentive Plan provides for the grant of options to purchase
shares of Common Stock, stock appreciation rights, and restricted stock,
performance awards, dividend equivalents, and other stock awards to any
director, full-time or part-time employee of, any consultant or any independent
contractor providing services to the Company. Incentive stock options shall only
be granted to full-time or part-time employees of the Company. Options granted
under the Stock Incentive Plan to full or part-time employees may qualify as
incentive stock options under the Internal Revenue Code (the "Code") or may be
non-incentive stock options. Options granted to persons who are not full-time or
part-time employees of the Company may not qualify as incentive stock options
under the Code.
The Stock Incentive Plan is administered by the Compensation Committee,
which is comprised solely of non-employee directors selected by the Board. The
Compensation Committee has the authority to: (i) designate participants;
(ii) determine the type or types of awards to be granted to each participant
under the Stock Incentive Plan; (iii) determine the number of shares to be
covered by (or the method by which payments or other rights are to be determined
in connection with) each award; (iv) determine the terms and conditions of any
award or award agreement; (v) amend the terms and conditions of any award or
award agreement and accelerate the exercisability of any option or waive any
restrictions relating to any award; (vi) determine whether, to what extent and
under what circumstances awards may be exercised in cash, shares, other
securities, other awards or other property, or canceled, forfeited or suspended;
(vii) determine whether, to what extent and under what circumstances cash,
shares, other securities, other awards, other property and other amounts payable
with respect to an award under the Stock Incentive Plan shall be deferred either
automatically or at the election of the holder thereof or the Compensation
Committee; (viii) interpret and administer the Stock Incentive Plan and any
instrument or agreement, including an award agreement, relating to the Stock
Incentive Plan; (ix) establish, amend, suspend or waive such rules and
regulations and appoint such agents as it shall deem appropriate for the proper
administration of the Stock Incentive Plan; and (x) make any other determination
and take any other action that the Compensation Committee deems necessary or
desirable for the administration of the Stock Incentive Plan. All designations,
determinations, interpretations and other decisions under or with respect to the
Stock Incentive Plan or any award shall be within the sole discretion of the
Compensation Committee, may be made at any time and shall be final, conclusive
and binding upon any eligible person and any holder or beneficiary of any award,
subject to the exclusive authority of the Board of Directors to amend or
terminate the Stock Incentive Plan. The Stock Incentive Plan terminates on April
27, 2014, and no options may be granted after that date.
The exercise price of an incentive option granted under the Stock
Incentive Plan may not be less than the fair market value of the Common Stock on
the date the option is granted. If a proposed optionee owns more than 10% of the
Company's Common Stock, any incentive stock option granted to such optionee must
have an exercise price not less than 110% of the then fair market value. The
exercise price of any non-incentive stock option granted under the Stock
Incentive Plan is determined by the Compensation Committee. The term of each
incentive stock option is determined by the Compensation Committee, but may not
exceed 10 years from the date of grant. A person who has been granted an option
under the Stock Incentive Plan may be granted additional options, but to the
extent the aggregate fair market value (determined at the time the option is
granted) of the Common Stock with respect to which incentive stock options are
exercisable for the first time by such person during any calendar year exceeds
$100,000, such options will be treated as options that do not qualify as
incentive stock options. Options granted under the Stock Incentive Plan are not
transferable except in limited circumstances. Options that qualify as incentive
stock options may be transferred only upon the death of the option holder,
either by will or by the laws of intestate succession. Options that do not
qualify as incentive stock options may be transferred to the option holder's
blood or adoptive children, or upon the death of the option holder, either by
will or the laws of intestate succession.
14
The Board may amend or discontinue the Stock Incentive Plan or any
portion thereof at anytime. However, the Board may not thereby alter or impair
any outstanding option without the consent of the holder of the option. The
Board may amend the Stock Incentive Plan to increase the number of shares of
Common Stock that will be available for issuance under the Stock Incentive Plan,
and make certain other amendments to the Stock Incentive Plan, only with
stockholder approval. Options outstanding at the time the Stock Incentive Plan
is terminated will continue to be exercisable in accordance with their
respective terms.
FEDERAL INCOME TAX CONSEQUENCES
This discussion sets forth only general federal tax principles
affecting options which may be granted under the Stock Incentive Plan. Special
rules may apply to option holders who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended.
Under current federal income tax law, there are no federal income tax
consequences to the Company or the option holder upon the granting of an option.
An option holder who exercises an incentive stock option will not
recognize income at the time of exercise for purposes of the regular income tax
(although such option holder will realize income at such time for purposes of
the alternative minimum tax in an amount equal to the amount by which the fair
market value of the Common Stock received by the option holder exceeds the
option price paid). The Company will not be entitled to a tax deduction at the
time of exercise of an incentive stock option. If the option holder holds shares
of Common Stock received upon exercise of an incentive stock option for at least
one year after exercise and two years from the date the incentive stock option
was granted, then upon the sale of such shares the option holder will recognize
long-term capital gain and no tax deduction will be allowed to the Company. If
the option holder sells or otherwise disposes of shares of Common Stock received
upon exercise of an incentive stock option before such holding period is
satisfied, then the option holder will recognize ordinary income at the time of
the disposition in an amount equal to the lesser of (1) the difference between
the option price and the fair market value of the shares at the time the option
was exercised, and (2) the difference between the option price and the amount
realized upon the disposition of the shares. The option holder will recognize
short-term or long-term capital gain, depending upon whether the holding period
for such shares is less or more than one year, to the extent of any excess of
the amount realized upon the disposition of the shares over the fair market
value of the shares at the time of exercise of the option. Subject to the
general rules concerning deductibility of compensation, the Company will be
allowed a tax deduction in the amount that, and for its taxable year in which,
the option holder recognizes ordinary income under the foregoing rules.
Upon the exercise of an option which does not qualify as an incentive
stock option, the option holder generally will recognize ordinary income equal
to the difference between the exercise price and the fair market value of the
shares on the date of exercise. Subject to the general rules concerning
deductibility of compensation, the Company will be allowed a tax deduction in
the amount that, and for its taxable year in which, the option holder recognizes
ordinary income upon the exercise of a non-incentive stock option. The Stock
Incentive Plan provides that, at the discretion of the Compensation Committee,
an option holder may exercise an option by tendering shares of Common Stock
owned by the option holder in payment of the exercise price. In that case
generally no gain or loss will be recognized by the option holder with respect
to the tendered shares, provided that if the tendered shares were acquired upon
exercise of an incentive stock option, the option holder has held the tendered
shares for the holding period required by the incentive stock option rules. In
the case of an incentive stock option, no income will be recognized by the
option holder upon the receipt of shares of Common Stock as a result of such an
exercise. In the case of a non-incentive stock option, the option holder will
recognize ordinary income as a result of such an exercise in an amount equal to
the fair market value of that number of shares equal to the excess of the number
of shares received upon exercise of the option over the number of shares
tendered by the option holder.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
represented at the Annual Meeting is required for approval of the 2004 Stock
Incentive Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
2004 ORPHAN MEDICAL, INC. STOCK INCENTIVE PLAN.
15
PROPOSAL 3:
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee has appointed Ernst & Young LLP as independent
public accountants for the Company for the fiscal year ending December 31, 2004.
A proposal to approve the appointment of Ernst & Young LLP will be presented at
the Annual Meeting. Ernst & Young LLP has audited the Company's financial
statements for the fiscal year ended December 31, 2003, and for all prior years.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they desire to do so
and will be available to answer appropriate questions from stockholders. If the
appointment of Ernst & Young LLP is not approved by the stockholders, the Audit
Committee is not obligated to appoint other independent public accountants, but
the Audit Committee will give consideration to such unfavorable vote.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
represented at the Annual Meeting is required for approval of appointment of
Ernst & Young LLP as the Company's independent public accountants. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
16
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors is composed of
the following non-employee directors: Mr. Greene, Dr. Vida and Ms. Champsi. All
of the members of the Audit Committee are independent for purposes of the Nasdaq
listing requirements. The Audit Committee operates under a written charter
adopted by the Board of Directors, a copy of which has been attached to this
Proxy Statement as Appendix A. The Audit Committee approves the appointment of
the Company's independent accountants.
Management is responsible for the Company's internal controls and the
financial reporting process. The Company's independent accountants are
responsible for performing an independent audit of the Company's financial
statements in accordance with generally accepted auditing standards and to issue
a report on the Company's financial statements. The Audit Committee's
responsibility is to monitor and oversee these processes. In this context, the
Audit Committee has met and held discussions with management and the independent
accountants. Management represented to the Audit Committee that the Company's
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, and the Audit Committee has reviewed and
discussed the consolidated financial statements with management and the
independent accountants. The Audit Committee discussed with the independent
accountants matters required to be discussed by Statement on Auditing Standards
No. 61 (Communications with Audit Committees).
The Company's independent accountants also provided to the Audit
Committee the written disclosure required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees), and the Audit
Committee discussed with the independent accountants the accounting firm's
independence. The Committee also considered whether non-audit services provided
by the independent accountants during the last fiscal year were compatible with
maintaining the independent accountants' independence. Based upon the Audit
Committee's discussion with management and the independent accountants and the
Audit Committee's review of the representation of management and the report of
the independent accountants to the Audit Committee, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2003 filed with the Securities and Exchange Commission.
Michael Greene (Chairperson)
Julius A. Vida, Ph.D.
Farah H. Champsi
Members of the Audit Committee
17
AUDIT FEES
Audit fees billed or expected to be billed to the Company by Ernst &
Young LLP for the audit of the Company's financial statements, for reviews of
the Company's financial statements included in the Company's quarterly reports
on Form 10-Q for the fiscal years ended December 31, 2003 and December 31, 2002,
were $144,900 and $75,000, respectively, and review of Securities and Exchange
Commission filings, including consents.
AUDIT-RELATED FEES
The audit-related fees billed or expected to be billed to the Company
by Ernst & Young LLP for audit services related to financing activities for the
fiscal years ended December 31, 2003 and December 31, 2002, were $16,000 and $0,
respectively.
TAX FEES
The tax fees billed or expected to be billed to the Company by Ernst &
Young LLP for tax return preparation for the fiscal years ended December 31,
2003 and December 31, 2002, were $37,068 and $19,450, respectively.
ALL OTHER FEES
There were no fees billed or expected to be billed to the Company by
Ernst & Young LLP for all other non-audit services provided during the fiscal
years ended December 31, 2003 and December 31, 2002.
The Audit Committee has reviewed the fees charged to the Company for
these audit-related, tax, and other services and has determined that the
provision of non-audit services for which these fees were charged are compatible
with maintaining the independence of Ernst & Young LLP as the Company's
independent public accountants.
PRE-APPROVAL POLICY
All decisions regarding selection of independent accounting firms and
approval of accounting services and fees are made by our Audit Committee in
accordance with the provisions of the Sarbanes-Oxley Act of 2002 and related SEC
rules. There are no exceptions to the policy of securing prior approval by our
Audit Committee for any service provided by our independent accounting firm.
Less than 50% of the hours expended on Ernst & Young LLP's engagement
to audit the Company's financial statements for the fiscal year ended December
31, 2003 were attributed to work performed by persons other than Ernst & Young
LLP's full-time, permanent employees.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no services provided by Ernst & Young LLP for the design and
implementation of financial information systems during the last fiscal year.
SOLICITATION OF PROXIES
All of the expenses involved in preparing, assembling and mailing this
Proxy Statement and the material enclosed herewith will be paid by the Company.
The Company may reimburse banks, brokerage firms, and other custodians, nominees
and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to beneficial owners of the Company's Common Stock. Although proxies
are being solicited primarily by mail, officers and regular employees of the
Company who will receive no extra compensation for their services, may solicit
such proxies in person, by telephone or facsimile.
STOCKHOLDER PROPOSALS FOR THE 2004 ANNUAL MEETING
Any stockholder proposals intended for the Company's Annual Meeting of
Stockholders to be held in 2005 that are requested to be included in the
Company's Proxy Statement must be received at the principal executive offices of
the Company, 13911 Ridgedale Drive, Suite 250, Minnetonka, Minnesota 55305 on or
before the close of business on December 10, 2004.
Any other stockholder proposals to be presented at the Company's Annual
Meeting to be held in 2005 must be received at the principal executive offices
of the Company by the close of business on February 23, 2005.
18
OTHER MATTERS
The Board of Directors does not know of any other business to be
presented for consideration at the Annual Meeting. If any other business does
properly come before the Annual Meeting, the persons named as proxies in the
enclosed proxy will vote in accordance with their best judgment as to the best
interests of the Company.
/s/ John Howell Bullion
John Howell Bullion
Chief Executive Officer and Secretary
Dated: April 29, 2004
19
APPENDIX A
ORPHAN MEDICAL, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
FORWARD
The Audit Committee has an oversight responsibility with regard to the Company's
financial control and reporting system and serves in an advisory capacity in
that regard to the Board of Directors. The Board of Directors' charge to the
Audit Committee should be defined in reasonably specific terms. Generally this
is accomplished through a Board resolution which provides the Committee with a
charter. A charter can provide guidance to the Committee as it strives to gain
reasonable assurance that
o management is properly discharging its responsibility for the
Company's financial statements,
o the financial statements have been prepared in accordance with
generally accepted accounting principles,
o the system of internal accounting controls is adequate, and
o management has devised and implemented a program for
compliance with the Foreign Corrupt Practices Act.
The primary concerns of the Audit Committee are that internal accounting and
administrative controls are adequate to ensure that --
o assets are safeguarded
o transactions are authorized
o transactions are properly recorded
The Audit Committee Charter should be reviewed by corporate counsel and approved
by the Board of Directors. The Charter should be reviewed periodically and
modified as necessary.
ORPHAN MEDICAL, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. Composition
A. Audit Committee members will be recommended by the Chairman of
the Board and will be designated by the Board of Directors.
B. The Audit Committee will be comprised of a minimum of three
Directors.
C. Audit Committee members will be non-employee Directors.
D. Audit Committee members will be free from any relationship
which would interfere with the exercise of their independent
judgment as members.
E. Audit Committee members will serve until the Board of
Directors shall designate their successors.
A-1
F. The Audit Committee Chairman will be recommended by the
Chairman of the Board and will be designated by the Board of
Directors.
G. Audit Committee membership should include, if possible,
individuals with varied backgrounds and occupations.
H. Audit Committee continuity should be achieved, if possible,
through staggered appointments.
II. Authorization
A. Regarding the Company's financial statements and the external
audit of same, the Audit Committee is authorized:
1. To review and make recommendations to the Board of
Directors with respect to the engagement or re-engagement of the
independent public accounting firm to audit the financial statements
for the then current fiscal year and to provide such other
audit-related services as the Audit Committee believes desirable.
2. To discuss and approve the overall scope of the external
audit for the then current fiscal year.
3. To discuss and, when appropriate, approve the external
audit fees to be charged.
4. To discuss the results of the external audit.
5. To discuss the management report of the independent public
accounting firm regarding the external audit and the response by
management thereto.
6. To discuss the method of evaluation by the independent
public accounting firm of the adequacy and effectiveness of the
accounting procedures and internal accounting controls of the Company.
7. To review the audited annual financial statements of the
Company.
8. To review the financial statements included in any
securities offering.
9. To review the quarterly financial statements of the
Company.
10. To establish procedures which ensure that the Audit
Committee is advised on a timely basis of any breakdown in internal
accounting controls or management fraud.
NOTE: The current procedure calls for the Company's Chief
Financial Officer to inform the Committee in writing of any material
breakdown in internal accounting controls or any management fraud as
soon as he/she is aware of same.
11. To review significant transactions, contracts and other
agreements that have a material affect on the financial statements.
12. To discuss recent Financial Accounting Standards Board,
Securities and Exchange Commission, or other regulatory pronouncements
which might affect the Company's financial statements.
B. The Audit Committee is authorized to review the engagement of an
independent public accounting firm to provide non-audit services, including the
terms of the engagement, the cost thereof and, if such firm has been retained to
provide audit services, whether such non-audit
A-2
services will, in the opinion of the Audit Committee, adversely affect the
independence of the independent public accounting firm in carrying out its audit
assignments as included in "A" above.
C. The Audit Committee is authorized to review the accounting policies,
procedures and principles adopted or continued by the management of the Company
which, in the opinion of management, will conform to the standards required:
1. for the purpose of maintaining or establishing the books,
records, accounts and internal accounting controls of the Company in
compliance with Section 102 of the Foreign Corrupt Practices Act of
1977, as codified in Section 13(b)(2) of the Securities Exchange Act of
1934, and
2. for the purposes of preventing or detecting:
a. any improper or illegal disbursement of
Company funds or property of value, or
b. the making of any arrangement on behalf of
the Company which may provide for or result
in the improper or illegal disbursement of
funds or property of value, in order that
the Company shall be in compliance with
Section 103(a) of the Foreign Corrupt
Practices Act of 1977, as codified in
Section 30A of the Securities Exchange Act
of 1934.
D. The Audit Committee is authorized to review the overall scope of the
Internal Audit program and to receive and discuss all internal audit reports.
The Committee is also authorized to review the overall adequacy of the function
and the competence of the personnel engaged in such function. This may include
reviewing staffing requirements, budgetary matters and continuing professional
development. The Committee must approve the hiring or termination of the Chief
Internal Auditor.
E. The Audit Committee is authorized to encourage access to the
Committee by a representative of the independent public accounting firm
(generally the engagement partner), by the internal audit function (generally
the Director of Internal Audit of the Company), and by the Chief Financial
Officer of the Company. Generally this is accomplished through private sessions
with each of these persons. In addition, the Audit Committee may have a private
executive session.
NOTE: By providing the independent public accounting firm a
communication channel independent of management, the Audit Committee enhances
the independence of that firm.
F. The Audit Committee is authorized to conduct investigations relating
to financial affairs, records, accounts and reports as the Audit Committee may
in its discretion deem desirable, or as the Board of Directors may from time to
time request. Such investigations may include the need for internal staff
support and/or external support including accountants, attorneys and
consultants.
G. The Audit Committee is authorized to discuss the quality and depth
of staffing in the accounting and financial departments of the Company.
H. The Audit Committee must be advised by management when the Company
is seeking a second opinion on a significant accounting/financial reporting
issue.
I. The Audit Committee is authorized to annually review the program
which monitors compliance with the Company's Business Conduct policy.
J. The Audit Committee is authorized to review and approve all proposed
transactions between the Company and members of the Board of Directors or
management.
K. The Audit Committee is authorized to verbally report its findings to
the Board of Directors and will maintain minutes of each Committee meeting.
A-3
APPENDIX B
================================================================================
ORPHAN MEDICAL, INC.
2004 STOCK INCENTIVE PLAN
APRIL 26, 2004
================================================================================
TABLE OF CONTENTS
SECTION 1. PURPOSE.....................................................1
SECTION 2. DEFINITIONS.................................................1
SECTION 3. ADMINISTRATION..............................................3
(a) Power and Authority of the Committee........................3
(b) Power and Authority of the Board............................3
SECTION 4. SHARES AVAILABLE FOR AWARDS.................................4
(a) Shares Available............................................4
(b) Accounting for Awards.......................................4
(c) Adjustments.................................................4
(d) Award Limitations Under the Plan............................4
SECTION 5. ELIGIBILITY.................................................5
SECTION 6. AWARDS......................................................5
(a) Options.....................................................5
(b) Stock Appreciation Rights...................................7
(c) Restricted Stock and Restricted Stock Units.................7
(d) Performance Awards..........................................8
(e) Dividend Equivalents........................................8
(f) Other Stock Grants..........................................8
(g) Other Stock-Based Awards....................................8
(h) General.....................................................9
SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS.....................10
(a) Amendments to the Plan.....................................10
(b) Amendments to Awards.......................................11
(c) Correction of Defects, Omissions and Inconsistencies.......11
SECTION 8. INCOME TAX WITHHOLDING.....................................11
SECTION 9. GENERAL PROVISIONS.........................................11
(a) No Rights to Awards........................................11
(b) Award Agreements...........................................11
(c) Plan Provisions Control....................................11
(d) No Rights of Stockholders..................................12
(e) No Limit on Other Compensation Arrangements................12
(f) No Right to Employment.....................................12
(g) Governing Law..............................................12
(h) Severability...............................................12
(i) No Trust or Fund Created...................................13
(j) Other Benefits.............................................13
ii
(k) No Fractional Shares.......................................13
(l) Headings...................................................13
(m) Section 16 Compliance; Section 162(m) Administration.......13
(n) Conditions Precedent to Issuance of Shares.................13
SECTION 10. EFFECTIVE DATE OF THE PLAN.................................14
SECTION 11. TERM OF THE PLAN...........................................14
iii
ORPHAN MEDICAL, INC.
2004 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE
The purpose of the Plan is to promote the interests of the Company and
its stockholders by aiding the Company in attracting and retaining employees,
officers, consultants, independent contractors and directors capable of assuring
the future success of the Company, to offer such persons incentives to put forth
maximum efforts for the success of the Company's business and to afford such
persons an opportunity to acquire a proprietary interest in the Company.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean (i) any entity that, directly or indirectly
through one or more intermediaries, is controlled by the Company and (ii) any
entity in which the Company has a significant equity interest, in each case as
determined by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted
Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other
Stock Grant or Other Stock-Based Award granted under the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or
other instrument or document evidencing any Award granted under the Plan. Each
Award Agreement shall be subject to the applicable terms and conditions of the
Plan and any other terms and conditions (not inconsistent with the Plan)
determined by the Committee.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any regulations promulgated thereunder.
(f) "Committee" shall mean a committee of Directors designated by the
Board to administer the Plan, which shall initially be the Company's
compensation committee. The Committee shall be comprised of not less than such
number of Directors as shall be required to permit Awards granted under the Plan
to qualify under Rule 16b-3 and Section 162(m) of the Code, and each member of
the Committee shall be a "Non-Employee Director."
(g) "Company" shall mean Orphan Medical, Inc., a Delaware corporation,
and any successor corporation.
(h) "Director" shall mean a member of the Board, including any
Non-Employee Director.
(i) "Dividend Equivalent" shall mean any right granted under Section
6(e) of the Plan.
1
(j) "Eligible Person" shall mean any employee, officer, consultant,
independent contractor or director providing services to the Company or any
Affiliate who the Committee determines to be an Eligible Person.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair market
value of such property determined by such methods or procedures as shall be
established from time to time by the Committee. Notwithstanding the foregoing
and unless otherwise determined by the Committee, the Fair Market Value of a
Share as of a given date shall be, if the Shares are then listed on the Nasdaq
National Market, the average of the high and low sales price of one Share as
reported on the Nasdaq National Market on such date or, if the Nasdaq National
Market is not open for trading on such date, on the most recent preceding date
when it is open for trading.
(m) "Incentive Stock Option" shall mean an option granted under Section
6(a) of the Plan that is intended to qualify as an "incentive stock option" in
accordance with the terms of Section 422 of the Code or any successor provision.
(n) "Non-Employee Director" shall mean any Director who is not also an
employee of the Company or an Affiliate within the meaning of Rule 16b-3 and an
"outside director" within the meaning of Section 162(m) of the Code.
(o) "Non-Qualified Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is not an Incentive Stock Option.
(p) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.
(q) "Other Stock Grant" shall mean any right granted under Section 6(f)
of the Plan.
(r) "Other Stock-Based Award" shall mean any right granted under
Section 6(g) of the Plan.
(s) "Participant" shall mean an Eligible Person designated to be
granted an Award under the Plan.
(t) "Performance Award" shall mean any right granted under Section 6(d)
of the Plan.
(u) "Person" shall mean any individual or entity, including a
corporation, partnership, limited liability company, association, joint venture
or trust.
(v) "Plan" shall mean the Orphan Medical, Inc. 2004 Stock Incentive
Plan, as amended from time to time, the provisions of which are set forth
herein.
(w) "Reload Option" shall mean any Option granted under Section 6(a)(v)
of the Plan.
(x) "Restricted Stock" shall mean any Share granted under Section 6(c)
of the Plan.
2
(y) "Restricted Stock Unit" shall mean any unit granted under Section
6(c) of the Plan evidencing the right to receive a Share (or a cash payment
equal to the Fair Market Value of a Share) at some future date.
(z) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation.
(aa) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(bb) "Share" or "Shares" shall mean a share or shares of common stock,
$0.01 par value per share, of the Company or such other securities or property
as may become subject to Awards pursuant to an adjustment made under Section
4(c) of the Plan.
(cc) "Stock Appreciation Right" shall mean any right granted under
Section 6(b) of the Plan.
SECTION 3. ADMINISTRATION
(a) Power and Authority of the Committee. The Plan shall be
administered by the Committee. Subject to the express provisions of the Plan and
to applicable law, the Committee shall have full power and authority to: (i)
designate Participants; (ii) determine the type or types of Awards to be granted
to each Participant under the Plan; (iii) determine the number of Shares to be
covered by (or the method by which payments or other rights are to be determined
in connection with) each Award; (iv) determine the terms and conditions of any
Award or Award Agreement; (v) amend the terms and conditions of any Award or
Award Agreement and accelerate the exercisability of any Option or waive any
restrictions relating to any Award; (vi) determine whether, to what extent and
under what circumstances Awards may be exercised in cash, Shares, other
securities, other Awards or other property, or canceled, forfeited or suspended;
(vii) determine whether, to what extent and under what circumstances cash,
Shares, other securities, other Awards, other property and other amounts payable
with respect to an Award under the Plan shall be deferred either automatically
or at the election of the holder thereof or the Committee; (viii) interpret and
administer the Plan and any instrument or agreement, including an Award
Agreement, relating to the Plan; (ix) establish, amend, suspend or waive such
rules and regulations and appoint such agents as it shall deem appropriate for
the proper administration of the Plan; and (x) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan. Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive and binding
upon any Eligible Person and any holder or beneficiary of any Award.
(b) Power and Authority of the Board. Notwithstanding anything to the
contrary contained herein, the Board may, at any time and from time to time,
without any further action of the Committee, exercise the powers and duties of
the Committee under the Plan.
3
SECTION 4. SHARES AVAILABLE FOR AWARDS
(a) Shares Available. Subject to adjustment as provided in Section 4(c)
of the Plan, the aggregate number of Shares that may be issued under the Plan
shall be 2,250,000. Shares to be issued under the Plan may be either authorized
but unissued Shares or Shares re-acquired and held in treasury. Notwithstanding
the foregoing, (i) the number of Shares available for granting Incentive Stock
Options under the Plan shall not 2,250,000, subject to adjustment as provided in
Section 4(c) of the Plan and subject to the provisions of Section 422 or 424 of
the Code or any successor provision and (ii) the number of Shares available for
granting Restricted Stock and Restricted Stock Units shall not exceed 2,250,000
subject to adjustment as provided in Section 4(c) of the Plan.
(b) Accounting for Awards. For purposes of this Section 4, if an Award
entitles the holder thereof to receive or purchase Shares, the number of Shares
covered by such Award or to which such Award relates shall be counted on the
date of grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan. Any Shares that are used by a Participant as
full or partial payment to the Company of the purchase price relating to an
Award, including Shares tendered in connection with the grant of a Reload
Option, or in connection with the satisfaction of tax obligations relating to an
Award, shall again be available for granting Awards (other than Incentive Stock
Options) under the Plan. In addition, if any Shares covered by an Award or to
which an Award relates are not purchased or are forfeited, or if an Award
otherwise terminates without delivery of any Shares, then the number of Shares
counted against the aggregate number of Shares available under the Plan with
respect to such Award, to the extent of any such forfeiture or termination,
shall again be available for granting Awards under the Plan.
(c) Adjustments. In the event that the Committee shall determine that
any dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company
or other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number and type of Shares (or
other securities or other property) that thereafter may be made the subject of
Awards, (ii) the number and type of Shares (or other securities or other
property) subject to outstanding Awards and (iii) the purchase price or exercise
price with respect to any Award; PROVIDED, HOWEVER, that the number of Shares
covered by any Award or to which such Award relates shall always be a whole
number.
(d) Award Limitations Under the Plan. No Eligible Person may be granted
any Award or Awards under the Plan, the value of which Award or Awards is based
solely on an increase in the value of the Shares after the date of grant of such
Award or Awards, for more
4
than [NUMBER OF SHARES TO BE DETERMINED](1) Shares (subject to adjustment as
provided for in Section 4(c) of the Plan), in the aggregate in any taxable year.
The foregoing annual limitation specifically includes the grant of any Award or
Awards representing "qualified performance-based compensation" within the
meaning of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Any Eligible Person shall be eligible to be designated a Participant.
In determining which Eligible Persons shall receive an Award and the terms of
any Award, the Committee may take into account the nature of the services
rendered by the respective Eligible Persons, their present and potential
contributions to the success of the Company or such other factors as the
Committee, in its discretion, shall deem relevant. Notwithstanding the
foregoing, an Incentive Stock Option may only be granted to full-time or
part-time employees (which term as used herein includes, without limitation,
officers and directors who are also employees), and an Incentive Stock Option
shall not be granted to an employee of an Affiliate unless such Affiliate is
also a "subsidiary corporation" of the Company within the meaning of Section
424(f) of the Code or any successor provision.
SECTION 6. AWARDS
(a) Options. The Committee is hereby authorized to grant Options to
Eligible Persons with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine:
(i) Exercise Price. The purchase price per Share purchasable
under an Option shall be determined by the Committee; PROVIDED,
HOWEVER, that such purchase price shall not be less than 100% of the
Fair Market Value of a Share on the date of grant of such Option.
(ii) Option Term. The term of each Option shall be fixed by
the Committee at the time of grant.
(iii) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part and the method or methods by which, and the form or
forms (including, without limitation, cash, Shares, other securities,
other Awards or other property, or any combination thereof, having a
Fair Market Value on the exercise date equal to the applicable exercise
price) in which, payment of the exercise price with respect thereto may
be made or deemed to have been made.
(iv) Incentive Stock Options. Notwithstanding anything in the
Plan to the contrary, the following additional provisions shall apply
to the grant of stock options which are intended to qualify as
Incentive Stock Options, PROVIDED, HOWEVER, that in the event the Plan
fails to be approved by the stockholders of the Company within one year
-------------------------
(1) This provision is required to ensure that grants may be considered
"qualified performance-based compensation" under Section 162(m) of the
Code.
5
of its adoption by the Board as required in Section 10, such Incentive
Stock Options shall be deemed to be Non-Qualified Stock Options issued
under the Plan:
(A) The Committee will not grant Incentive Stock
Options in which the aggregate Fair Market Value (determined
as of the time the option is granted) of the Shares with
respect to which Incentive Stock Options are exercisable for
the first time by any Participant during any calendar year
(under this Plan and all other plans of the Company and its
Affiliates) shall exceed $100,000.
(B) All Incentive Stock Options must be granted
within ten years from the earlier of the date on which this
Plan was adopted by the Board or the date this Plan was
approved by the stockholders of the Company.
(C) Unless sooner exercised, all Incentive Stock
Options shall expire and no longer be exercisable no later
than 10 years after the date of grant; PROVIDED, HOWEVER, that
in the case of a grant of an Incentive Stock Option to a
Participant who, at the time such Option is granted, owns
(within the meaning of Section 422 of the Code) stock
possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of its Affiliate, such
Incentive Stock Option shall expire and no longer be
exercisable no later than 5 years from the date of grant.
(D) The purchase price per Share for an Incentive
Stock Option shall be not less than 100% of the Fair Market
Value of a Share on the date of grant of the Incentive Stock
Option; PROVIDED, HOWEVER, that, in the case of the grant of
an Incentive Stock Option to a Participant who, at the time
such Option is granted, owns (within the meaning of Section
422 of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company
or of its Affiliate, the purchase price per Share purchasable
under an Incentive Stock Option shall be not less than 110% of
the Fair Market Value of a Share on the date of grant of the
Inventive Stock Option.
(E) Any Incentive Stock Option authorized under the
Plan shall contain such other provisions as the Committee
shall deem advisable, but shall in all events be consistent
with and contain all provisions required in order to qualify
the Option as an Incentive Stock Option.
(v) Reload Options. The Committee may grant Reload Options,
separately or together with another Option and subject to the terms and
conditions established by the Committee, pursuant to which the
Participant would be granted a new Non-Qualified Stock Option when the
payment of the exercise price of a previously granted option for common
stock is made by the delivery of Shares owned by the Participant
pursuant to Section 6(a)(iii) hereof or the relevant provisions of
another plan of the Company, when Shares are tendered or withheld as
payment of the amount to be withheld under applicable income tax laws
in connection with the exercise of an Option, which new Non-Qualified
Stock Option would be a Non-Qualified Stock Option to purchase the
number of Shares not exceeding the sum of (A) the number of Shares so
provided as
6
consideration upon the exercise of the previously granted option to
which such Reload Option relates and (B) the number of Shares, if any,
tendered or withheld as payment of the amount to be withheld under
applicable tax laws in connection with the exercise of the option to
which such Reload Option relates pursuant to the relevant provisions of
the plan or agreement relating to such option. Reload Options may be
granted with respect to options previously granted under the Plan or
any other stock option plan of the Company or any Affiliate or may be
granted in connection with any option granted under the Plan or any
other stock option plan of the Company or any Affiliate at the time of
such grant. Such Reload Options shall have a per share exercise price
equal to the Fair Market Value of one Share as of the date of grant of
the new Non-Qualified Stock Option. Any Reload Option shall be subject
to availability of sufficient Shares for grant under the Plan. Shares
surrendered as part or all of the exercise price of the Non-Qualified
Stock Option to which it relates that have been owned by the optionee
less than six months will not be counted for purposes of determining
the number of Shares that may be purchased pursuant to a Reload Option.
(b) Stock Appreciation Rights. The Committee is hereby authorized to
grant Stock Appreciation Rights to Eligible Persons subject to the terms of the
Plan. Each Stock Appreciation Right granted under the Plan shall confer on the
holder upon exercise the right to receive, as determined by the Committee, cash
or a number of Shares equal to the excess of (a) the Fair Market Value of one
Share on the date of exercise (or, if the Committee shall so determine, at any
time during a specified period before or after the date of exercise) over (b)
the grant price of the Stock Appreciation Right as determined by the Committee,
which grant price shall not be less than 100% of the Fair Market Value of one
Share on the date of grant of the Stock Appreciation Right. Subject to the terms
of the Plan, the grant price, term, methods of exercise, dates of exercise,
methods of settlement and any other terms and conditions (including conditions
or restrictions on the exercise thereof) of any Stock Appreciation Right shall
be as determined by the Committee.
(c) Restricted Stock and Restricted Stock Units. The Committee is
hereby authorized to grant Restricted Stock and Restricted Stock Units to
Eligible Persons with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock and Restricted
Stock Units shall be subject to such restrictions as the Committee may
impose (including, without limitation, a restriction on or prohibition
against the right to receive any dividend or other right or property
with respect thereto), which restrictions may lapse separately or in
combination at such time or times, in such installments or otherwise as
the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under
the Plan shall be evidenced by the issuance of a stock certificate or
certificates, which shall be held by the Company. Such certificate or
certificates shall be registered in the name of the Participant and
shall bear an appropriate legend referring to the applicable Award
Agreement and possible forfeiture of such shares of Restricted Stock.
7
(iii) Forfeiture. Except as otherwise determined by the
Committee, upon a Participant's termination of employment (as
determined under criteria established by the Committee) during the
applicable restriction period, all applicable Shares of Restricted
Stock and Restricted Stock Units at such time subject to restriction
shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER,
that the Committee may, when it finds that a waiver would be in the
best interest of the Company, waive in whole or in part any or all
remaining restrictions with respect to Shares of Restricted Stock or
Restricted Stock Units.
(d) Performance Awards. The Committee is hereby authorized to grant
Performance Awards to Eligible Persons subject to the terms of the Plan. A
Performance Award granted under the Plan (i) may be denominated or payable in
cash, Shares (including, without limitation, Restricted Stock and Restricted
Stock Units), other securities, other Awards or other property and (ii) shall
confer on the holder thereof the right to receive payments, in whole or in part,
upon the achievement of such performance goals during such performance periods
as the Committee shall establish. Subject to the terms of the Plan, the
performance goals to be achieved during any performance period, the length of
any performance period, the amount of any Performance Award granted, the amount
of any payment or transfer to be made pursuant to any Performance Award and any
other terms and conditions of any Performance Award shall be determined by the
Committee.
(e) Dividend Equivalents. The Committee is hereby authorized to grant
Dividend Equivalents to Eligible Persons under which the Participant shall be
entitled to receive payments (in cash, Shares, other securities, other Awards or
other property as determined in the discretion of the Committee) equivalent to
the amount of cash dividends paid by the Company to holders of Shares with
respect to a number of Shares determined by the Committee. Subject to the terms
of the Plan, such Dividend Equivalents may have such terms and conditions as the
Committee shall determine.
(f) Other Stock Grants. The Committee is hereby authorized, subject to
the terms of the Plan, to grant to Eligible Persons Shares without restrictions
thereon as are deemed by the Committee to be consistent with the purpose of the
Plan.
(g) Other Stock-Based Awards. The Committee is hereby authorized to
grant to Eligible Persons, subject to the terms of the Plan, such other Awards
that are denominated or payable in, valued in whole or in part by reference to,
or otherwise based on or related to, Shares (including, without limitation,
securities convertible into Shares), as are deemed by the Committee to be
consistent with the purpose of the Plan. Shares or other securities delivered
pursuant to a purchase right granted under this Section 6(g) shall be purchased
for such consideration, which may be paid by such method or methods and in such
form or forms (including, without limitation, cash, Shares, promissory notes
other securities, other Awards or other property or any combination thereof), as
the Committee shall determine, the value of which consideration, as established
by the Committee, shall not be less than 100% of the Fair Market Value of such
Shares or other securities as of the date such purchase right is granted.
8
(h) General Consideration for Awards. Awards may be granted for no
cash consideration or for any cash or other consideration as determined by the
Committee and required by applicable law.
(ii) Awards May Be Granted Separately or Together. Awards may,
in the discretion of the Committee, be granted either alone or in
addition to, in tandem with or in substitution for any other Award or
any award granted under any plan of the Company or any Affiliate.
Awards granted in addition to or in tandem with other Awards or in
addition to or in tandem with awards granted under any such other plan
of the Company or any Affiliate may be granted either at the same time
as or at a different time from the grant of such other Awards or
awards.
(iii) Forms of Payment under Awards. Subject to the terms of
the Plan, payments or transfers to be made by the Company or an
Affiliate upon the grant, exercise or payment of an Award may be made
in such form or forms as the Committee shall determine (including,
without limitation, cash, Shares, promissory notes (PROVIDED, HOWEVER,
that the acceptance of such promissory notes does not conflict with
Section 402 of the Sarbanes-Oxley Act of 2004), other securities, other
Awards or other property or any combination thereof), and may be made
in a single payment or transfer, in installments or on a deferred
basis, in each case in accordance with rules and procedures established
by the Committee. Such rules and procedures may include, without
limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting
of Dividend Equivalents with respect to installment or deferred
payments.
(iv) Limits on Transfer of Awards. No Award (other than Other
Stock Grants) and no right under any such Award shall be transferable
by a Participant otherwise than by will or by the laws of descent and
distribution and the Company shall not be required to recognize any
attempted assignment of such rights by any Participant; PROVIDED,
HOWEVER, that, if so determined by the Committee, a Participant may, in
the manner established by the Committee, designate a beneficiary or
beneficiaries to exercise the rights of the Participant and receive any
property distributable with respect to any Award upon the death of the
Participant; PROVIDED, FURTHER, that, if so determined by the
Committee, a Participant may transfer a Non-Qualified Stock Option to
any Family Member (as such term is defined in the General Instructions
to Form S-8 (or successor to such Instructions or such Form)) at any
time that such Participant holds such Option, PROVIDED that the
Participant may not receive any consideration for such transfer, the
Family Member may not make any subsequent transfers other than by will
or by the laws of descent and distribution and the Company receives
written notice of such transfer, PROVIDED, FURTHER, that, if so
determined by the Committee and except in the case of an Incentive
Stock Option, Awards may be transferable as determined by the
Committee. Except as otherwise determined by the Committee, each Award
(other than an Incentive Stock Option) or right under any such Award
shall be exercisable during the Participant's lifetime only by the
Participant or, if permissible under applicable law, by the
Participant's guardian or legal representative. Except as otherwise
determined by the Committee, no Award (other than an Incentive Stock
Option) or right under any such Award may be pledged, alienated,
attached or otherwise encumbered, and any purported
9
pledge, alienation, attachment or other encumbrance thereof shall be
void and unenforceable against the Company or any Affiliate.
(v) Term of Awards. Subject to Section 6(a)(iv)(C), the term
of each Award shall be for such period as may be determined by the
Committee.
(vi) Restrictions; Securities Exchange Listing. All Shares or
other securities delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the Plan,
applicable federal or state securities laws and regulatory
requirements, and the Committee may direct appropriate stop transfer
orders and cause other legends to be placed on the certificates for
such Shares or other securities to reflect such restrictions. If the
Shares or other securities are traded on a securities exchange, the
Company shall not be required to deliver any Shares or other securities
covered by an Award unless and until such Shares or other securities
have been admitted for trading on such securities exchange.
(vii) Prohibition on Option Repricing. Except as provided in
Section 4(c) hereof, no Option may be amended to reduce its initial
exercise price and no Option shall be canceled and replaced with an
Option or Options having a lower exercise price, without the approval
of the stockholders of the Company or unless there would be no material
adverse effect on the Company's financial statements as prepared in
accordance with Generally Accepted Accounting Principles.
SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue or terminate the Plan at any time; PROVIDED, HOWEVER, that,
notwithstanding any other provision of the Plan or any Award Agreement, without
the approval of the stockholders of the Company, no such amendment, alteration,
suspension, discontinuation or termination shall be made that, absent such
approval:
(i) violates the rules or regulations of the National
Association of Securities Dealers, Inc. or any other securities
exchange that are applicable to the Company;
(ii) causes the Company to be unable, under the Code, to grant
Incentive Stock Options under the Plan;
(iii) increases the number of shares authorized under the Plan
as specified in Section 4(a);
(iv) permits the award of Options or Stock Appreciation Rights
at a price less than 100% of the Fair Market Value of a Share on the
date of grant of such Option or Stock Appreciation Right, as prohibited
by Sections 6(a)(i) and 6(b)(ii) of the Plan or the repricing of
Options or Stock Appreciation Rights, as prohibited by Section 3(a)(v)
of the Plan; or
10
(v) would prevent the grant of Options or Stock Appreciation
Rights that would qualify under Section 162(m) of the Code.
(b) Amendments to Awards. The Committee may waive any conditions of or
rights of the Company under any outstanding Award, prospectively or
retroactively. Except as otherwise provided herein or in an Award Agreement, the
Committee may not amend, alter, suspend, discontinue or terminate any
outstanding Award, prospectively or retroactively, if such action would
adversely affect the rights of the holder of such Award, without the consent of
the Participant or holder or beneficiary thereof.
(c) Correction of Defects, Omissions and Inconsistencies. The Committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.
SECTION 8. INCOME TAX WITHHOLDING
In order to comply with all applicable federal, state or local income
tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal, state or local payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of a Participant, are withheld or collected from such
Participant. In order to assist a Participant in paying all or a portion of the
federal, state and local taxes to be withheld or collected upon exercise or
receipt of (or the lapse of restrictions relating to) an Award, the Committee,
in its discretion and subject to such additional terms and conditions as it may
adopt, may permit the Participant to satisfy such tax obligation by (i) electing
to have the Company withhold a portion of the Shares otherwise to be delivered
upon exercise or receipt of (or the lapse of restrictions relating to) such
Award with a Fair Market Value equal to the amount of such taxes, but only to
the extent of the minimum amount required to be withheld under applicable laws
or regulations or (ii) delivering to the Company Shares other than Shares
issuable upon exercise or receipt of (or the lapse of restrictions relating to)
such Award with a Fair Market Value equal to the amount of such taxes. The
election, if any, must be made on or before the date that the amount of tax to
be withheld is determined.
SECTION 9. GENERAL PROVISIONS
(a) No Rights to Awards. No Eligible Person or other Person shall have
any claim to be granted any Award under the Plan, and there is no obligation for
uniformity of treatment of Eligible Persons or holders or beneficiaries of
Awards under the Plan. The terms and conditions of Awards need not be the same
with respect to any Participant or with respect to different Participants.
(b) Award Agreements. No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have been
duly executed on behalf of the Company and, if requested by the Company, signed
by the Participant.
(c) Plan Provisions Control. In the event that any provision of an
Award Agreement conflicts with or is inconsistent in any respect with the terms
of the Plan as set forth herein or subsequently amended, the terms of the Plan
shall control.
11
(d) No Rights of Stockholders. Except with respect to Shares of
Restricted Stock as to which the Participant has been granted the right to vote,
neither a Participant nor the Participant's legal representative shall be, or
have any of the rights and privileges of, a stockholder of the Company with
respect to any Shares issuable to such Participant upon the exercise or payment
of any Award, in whole or in part, unless and until such Shares have been issued
in the name of such Participant or such Participant's legal representative
without restrictions thereto.
(e) No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other or additional compensation arrangements, and such arrangements
may be either generally applicable or applicable only in specific cases.
(f) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ, or us
giving a director of the Company or an Affiliate the right to continue as a
director or an Affiliate of the Company or any Affiliate, nor will it affect in
any way the right of the Company or an Affiliate to terminate such employment at
any time, with or without cause. In addition, the Company or an Affiliate may at
any time dismiss a Participant from employment, or terminate the term of a
director of the Company or an Affiliate, free from any liability or any claim
under the Plan or any Award, unless otherwise expressly provided in the Plan or
in any Award Agreement. Nothing in this Plan shall confer on any person any
legal or equitable right against the Company or any Affiliate, directly or
indirectly, or give rise to any cause of action at law or in equity against the
Company or an Affiliate. The Awards granted hereunder shall not form any part of
the wages or salary of any Eligible Person for purposes of severance pay or
termination indemnities, irrespective of the reason for termination of
employment. Under no circumstances shall any person ceasing to be an employee of
the Company or any Affiliate be entitled to any compensation for any loss of any
right or benefit under the Plan which such employee might otherwise have enjoyed
but for termination of employment, whether such compensation is claimed by way
of damages for wrongful or unfair dismissal, breach of contract or otherwise. By
participating in the Plan, each Participant shall be deemed to have accepted all
the conditions of the Plan and the terms and conditions of any rules and
regulations adopted by the Committee and shall be fully bound thereby.
(g) Governing Law. The validity, construction and effect of the Plan or
any Award, and any rules and regulations relating to the Plan or any Award,
shall be determined in accordance with the internal laws, and not the law of
conflicts, of the State of Delaware.
(h) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or would disqualify the Plan or any Award under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended without, in
the determination of the Committee, materially altering the purpose or intent of
the Plan or the Award, such provision shall be stricken as to such jurisdiction
or Award, and the remainder of the Plan or any such Award shall remain in full
force and effect.
12
(i) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and an Eligible
Person or any other Person. To the extent that any Person acquires a right to
receive payments from the Company or any Affiliate pursuant to an Award, such
right shall be no greater than the right of any unsecured general creditor of
the Company or any Affiliate.
(j) Other Benefits. No compensation or benefit awarded to or realized
by any Participant under the Plan shall be included for the purpose of computing
such Participant's compensation under any compensation-based retirement,
disability, or similar plan of the Company unless required by law or otherwise
provided by such other plan.
(k) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash shall be paid in lieu of any fractional Shares or whether such
fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.
(l) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(m) Section 16 Compliance; Section 162(m) Administration. The Plan is
intended to comply in all respects with Rule 16b-3 or any successor provision,
as in effect from time to time, and in all events the Plan shall be construed in
accordance with the requirements of Rule 16b-3. If any Plan provision does not
comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall
be deemed inoperative. The Board of Directors, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan with respect to persons who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Eligible Persons. With respect to
Options and Stock Appreciation Rights, the Company intends to have the Plan
administered in accordance with the requirements for the award of "qualified
performance-based compensation" within the meaning of Section 162(m) of the
Code.
(n) Conditions Precedent to Issuance of Shares. Shares shall not be
issued pursuant to the exercise or payment of the purchase price relating to an
Award unless such exercise or payment and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, the requirements of any applicable Stock
Exchange and the Delaware General Corporation Law. As a condition to the
exercise or payment of the purchase price relating to such Award, the Company
may require that the person exercising or paying the purchase price represent
and warrant that the Shares are being purchased only for investment and without
any present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation and warranty is required by law.
13
SECTION 10. EFFECTIVE DATE OF THE PLAN
The Plan shall be effective upon its adoption by the Board, PROVIDED,
HOWEVER, that in the event the Plan is not approved by the stockholders of the
Company within one year thereafter, the Plan will be terminated and all Awards
granted under the Plan will be terminated and deemed null and void, PROVIDED,
HOWEVER, that with respect to any Shares (including Shares of Restricted Stock)
issued under the Plan prior to such termination, the Plan shall be deemed to be
effective.
SECTION 11. TERM OF THE PLAN
No Award shall be granted under the Plan after ten years from earlier
of date of adoption of Plan by Board or date of stockholder approval or any
earlier date of discontinuation or termination established pursuant to Section
7(a) of the Plan. However, unless otherwise expressly provided in the Plan or in
an applicable Award Agreement, any Award theretofore granted may extend beyond
such date, and the authority of the Committee provided for hereunder with
respect to the Plan and any Awards, and the authority of the Board to amend the
Plan, shall extend beyond the termination of the Plan.
14
[ORPHAN MEDICAL LOGO]
ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, JUNE 15, 2004
3:30 P.M. (CENTRAL STANDARD TIME)
RADISSON PLAZA HOTEL
35 SOUTH 7TH STREET
MINNEAPOLIS, MN 55402
[ORPHAN MEDICAL LOGO] PROXY
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON JUNE 15, 2004.
The undersigned, having duly received the Notice of Annual Meeting of
Stockholders and Proxy Statement dated May 6, 2004, revoking all prior proxies,
hereby appoints John Howell Bullion and Timothy G. McGrath, and each of them,
with the power to appoint a substitute, to vote all shares the undersigned is
entitled to vote at the Annual Meeting of Stockholders of Orphan Medical, Inc,
(the "Company") to be held at 3:30 p.m. (Central Standard Time) on Tuesday, June
15, 2004 at the Radisson Plaza Hotel, 35 South 7th Street, Minneapolis,
Minnesota 55402, and at all adjournments thereof, as specified below on each
matter referred to, and, in their discretion, upon any other matters which may
be brought before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY BY MAIL, BY
TELEPHONE OR THE INTERNET AS DESCRIBED ON THE REVERSE SIDE.
SEE REVERSE FOR VOTING INSTRUCTIONS.
-------------------
COMPANY #
-------------------
THERE ARE THREE WAYS TO VOTE YOUR PROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-650-1965 -- QUICK *** EASY *** IMMEDIATE
o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 12:00 p.m. (CT) on June 14, 2004.
o Please have your proxy card and the last four digits of your Social
Security Number available. Follow the simple instructions the voice
provides you.
VOTE BY INTERNET -- HTTP://WWW.EPROXY.COM/ORPH/ -- QUICK *** EASY *** IMMEDIATE
o Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on June 14, 2004.
o Please have your proxy card and the last four digits of your Social
Security Number available. Follow the simple instructions to obtain your
records and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Orphan Medical, Inc., c/o Shareowner
Services(sm), P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
PLEASE DETACH HERE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
1. Election of 01 John Howell Bullion 04 William M. Wardell, M.D., Ph.D. [ ] Vote FOR [ ] Vote WITHHELD
directors: 02 Michael Greene 05 Farah H. Champsi all nominees from all nominees
03 Julius A. Vida, Ph.D 06 Thomas B. King (except as marked)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
2. Proposal to approve the Company's 2004 Stock Incentive Plan and authorize
the issuance of 2,250,000 shares under the plan. [ ] For [ ] Against [ ] Abstain
3. Proposal to approve the appointment of Ernst & Young LLP as independent
public accountants for the fiscal year ending December 31, 2004. [ ] For [ ] Against [ ] Abstain
4. To vote with discretionary authority on any other business as may properly
come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below:
Date
-------------------------------
Signature(s) in Box
Please sign exactly as your name(s)
appear on the Proxy. When shares
are held by joint tenants, both
must sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title of such. If a
corporation, please sign full
corporate name by President or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.