-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uri0bCDHaI/K8bJuIjpNBr/9Xf1pFhbkYKgY+ZQ/ea0rm37TsEZWG76oBzXMPP5N yXYZ5fsZ0CHH3rrpFcBqvQ== 0000891618-96-000352.txt : 19960510 0000891618-96-000352.hdr.sgml : 19960510 ACCESSION NUMBER: 0000891618-96-000352 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19960509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORIAN CORP CENTRAL INDEX KEY: 0000822117 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03399 FILM NUMBER: 96558765 BUSINESS ADDRESS: STREET 1: 10260 BUBB ROAD CITY: CUPERTINO STATE: CA ZIP: 95014-4166 BUSINESS PHONE: 4082526800 S-1 1 FORM S-1 FOR NORIAN CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NORIAN CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 3842 77-0147561 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
10260 BUBB ROAD CUPERTINO, CALIFORNIA 95014-4166 (408) 252-6800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) BRENT R. CONSTANTZ PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF SCIENTIST NORIAN CORPORATION 10260 BUBB ROAD CUPERTINO, CALIFORNIA 95014-4166 (408) 252-6800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: STEVEN E. BOCHNER, ESQ. MICHAEL W. HALL, ESQ. NEVAN C. ELAM, ESQ. ROBERT V. W. ZIPP, ESQ. CARMEN C. CHANG, ESQ. LAUREL H. FINCH, ESQ. WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP, PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION 650 PAGE MILL ROAD 2800 SAND HILL ROAD PALO ALTO, CALIFORNIA 94304 MENLO PARK, CALIFORNIA 94025 (415) 493-9300 (415) 854-4488
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- Common Stock, no par value...... 3,450,000 shares $14.00 $48,300,000 $16,655.18 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 NORIAN CORPORATION CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION OF CAPTION IN PROSPECTUS ------------------------------------------- ------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Forepart of Registration Statement; Outside Front Cover Page; Additional Information 2. Inside Front and Outside Back Cover Pages of Prospectus........................ Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges......... Prospectus Summary; Risk Factors 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Outside Front Cover Page; Underwriting 6. Dilution................................... Dilution 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Outside and Inside Front Cover Pages; Underwriting; Outside Back Cover Page 9. Description of Securities to be Registered................................. Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock; Shares Eligible for Future Sale 10. Interests of Named Experts and Counsel..... Legal Matters 11. Information with Respect to the Registrant................................. Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; The Company; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements; Outside and Inside Back Cover Pages 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion May 9, 1996 3,000,000 SHARES LOGO COMMON STOCK ------------------ All of the shares of Common Stock offered hereby are being sold by Norian Corporation ("Norian" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol NORI. ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- PRICE PROCEEDS TO TO PUBLIC UNDERWRITING COMPANY(2) DISCOUNTS AND COMMISSIONS(1) - ----------------------------------------------------------------------------------------------- Per Share................................ $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)................................. $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses of the offering estimated at $900,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about June , 1996. ALEX. BROWN & SONS ROBERTSON, STEPHENS & COMPANY INCORPORATED THE DATE OF THIS PROSPECTUS IS JUNE , 1996. 4 INSIDE FRONT COVER Photo One Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver bone. A compression fracture of the upper tibia forces a fragment of the knee joint surface downward, crushing the porous cancellous bone beneath it. Photo Two Computer-enhanced cutaway depiction of reduced tibial plateau fracture in cadaver bone. Surgical intervention restores the bone fragments to their proper positions, but leaves a void in the cancellous bone beneath the joint surface. Photo Three Computer-enhanced cutaway depiction of the insertion of Norian SRS into a cancellous bone void secured with three orthopaedic screws in cadaver bone. Norian SRS may be used to fill this void in the crushed cancellous bone. Orthopaedic screws are used, as in this example, if the fracture has broken the hard cortical bone on the side of the tibia. Photo Four Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver bone treated with Norian SRS and orthopaedic screws. The Company believes that the use of Norian SRS may provide direct structural support to the fracture site, improve the fixation of screws and other orthopaedic hardware and reduce the amount of orthopaedic hardware required for an optimal outcome. Photo Five Computed-enhanced cutaway depiction of healed tibial plateau fracture in cadaver bone with majority of Norian SRS replaced by natural bone. The Company believes that Norian SRS will help to maintain proper alignment of the joint surface throughout the healing process, resulting in improved long-term functionality of the knee. Over time, Norian SRS appears to be replaced with natural bone. Photo Six Cancellous man Computer-generated depiction of human skeleton with regions of cancellous bone highlighted. Norian SRS is an injectable, moldable and biocompatible cancellous bone fixation and replacement material. Cancellous bone comprises approximately 20% of the human skeleton and is found principally in the spine and at the ends of long bones near joints. Norian SRS is an investigational device and has not been approved by the FDA for marketing in the United States. Norian SRS cannot be sold commercially in the United States unless and until such FDA approval is obtained, and FDA approvals may not be received for several years, if at all. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Norian(R), the Norian logo, CrystalCoat(R), SRS(R) and Norian SRS(R) are trademarks of the Company. Trademarks of others are also referred to in this Prospectus. 5 PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Norian develops, manufactures and markets Norian Skeletal Repair System ("Norian SRS"), a proprietary bone fixation and replacement material designed for use in regions of structurally compromised cancellous bone such as the wrist, hip, knee and spine. Norian SRS is inserted into bone defects as a paste, either through minimally invasive injection or in an open surgical procedure. The material sets within 10 minutes of application and continues to cure over 12 hours to achieve its ultimate strength. The Company believes that Norian SRS provides direct structural support to compromised cancellous bone and can withstand compressive mechanical force soon after a procedure and over time. Additionally, Norian SRS may reduce the need for orthopaedic hardware in weakened cancellous bone. Norian SRS cures into a crystalline structure similar to the mineral phase of natural bone and appears to be replaced by natural bone over time. Fractures in cancellous bone tend to be complex, highly variable and difficult to repair with currently available treatment methods. These problems are compounded when cancellous bone is weakened by osteoporosis. The Company believes that Norian SRS overcomes the shortcomings of currently available treatment methods for cancellous bone fractures. The Company believes that one of the principal benefits of Norian SRS is to provide direct structural support to fractures, thereby reducing the risk of loss of anatomical positioning during the healing process and improving post-operative function and long-term outcome for the patient. In addition, Norian SRS may decrease the overall treatment cost by reducing the extent of rehabilitation required following fracture fixation and immobilization. The orthopaedic trauma market is the second largest segment of the orthopaedic industry, representing approximately 19% of the industry's $2.2 billion estimated 1995 sales in the United States. This market includes over six million fractures in the United States every year. The Company's strategy is to establish Norian SRS as the leading cancellous bone fixation and replacement product to be used independently or in conjunction with conventional fixation devices. Key elements of the Company's strategy include seeking regulatory approvals in the United States and in other selected countries and demonstrating clinical utility and cost-effectiveness by conducting clinical trials of the use of Norian SRS in selected applications. Following receipt of regulatory approvals, the Company intends to focus on providing extensive physician education and training, seeking reimbursement from third-party payors and establishing a direct sales force in the United States and a direct sales force or a network of distributors in foreign markets. The Company intends to seek regulatory approval of Norian SRS as a cancellous bone cement. Under an Investigational Device Exemption ("IDE") approved by the United States Food and Drug Administration ("FDA"), the Company is conducting a randomized, multi-center clinical trial of the use of Norian SRS in the treatment of wrist fractures in up to 324 patients. This study is designed to demonstrate the safety and efficacy of Norian SRS in its ability to maintain the anatomical alignment of cancellous bone fragments and to improve functional outcomes such as grip strength and range of motion. The Company expects to use the data from this trial to support a pre-market approval ("PMA") application to market Norian SRS in the United States and to demonstrate its cost-effectiveness to third-party payors for purposes of reimbursement. As of April 30, 1996, 196 patients had been enrolled in the study. The Company is also seeking to obtain the right to affix to Norian SRS the "CE" mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. The CE mark will allow the Company to market the product in all of the member countries of the European Union ("EU"). In addition, the Company has test-marketed Norian SRS in the Netherlands since 1994, where the product is approved for commercial sale. In April 1996, the Company and Mochida Pharmaceutical Co., Ltd. ("Mochida") entered into a collaborative agreement for the exclusive marketing and distribution of Norian SRS in Japan for use in certain applications (the "Mochida Transaction"). The agreement provides for payments by Mochida to Norian of up to a total of $15.0 million, consisting of a $7.0 million equity investment completed in April 1996 and $8.0 million in non-refundable payments based on achievement of time-related, clinical and regulatory milestones, of which $2.0 million was received upon execution of the contract. Mochida will be responsible for performing clinical development in accordance with the Company's protocols and obtaining government approval for Norian SRS in Japan. The Company will be responsible for manufacturing and supplying the product to Mochida. The agreement has an initial term ending on the earlier of 10 years from the date of regulatory approval to commence commercial sales of Norian SRS in Japan or 15 years from the date of the agreement. 3 6 THE OFFERING Common Stock offered hereby...................... 3,000,000 shares Common Stock to be outstanding after the 12,368,641 shares(1) offering....................................... Use of proceeds.................................. To fund expansion of manufacturing, marketing and sales activities, clinical trials of Norian SRS, research and development activities and general corporate purposes. Proposed Nasdaq National Market symbol........... NORI
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (In thousands, except per share amounts)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Contract revenue............................. $ 444 $ 210 $ 150 $ 38 $ 38 Operating expenses: Research and development................... 2,564 3,104 4,556 974 1,850 Contract revenue costs..................... 224 36 -- -- -- General and administrative................. 1,255 1,491 2,165 571 681 Net loss..................................... $(3,277) $(4,158) $(5,858) $(1,465) $(2,284) Pro forma net loss per share(2).............. $ (0.71) $ (0.26) Pro forma weighted average shares used to compute pro forma net loss per share(2).... 8,197 8,811
MARCH 31, 1996 ------------------------------------------- ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- BALANCE SHEET DATA: Cash, cash equivalents and securities available-for-sale...................................... $15,342 $ 22,342 $ 57,712 Total assets.............................................. 18,146 25,146 60,516 Deficit accumulated during development stage.............. (24,234) (24,234) (24,234) Total shareholders' equity................................ 16,671 23,671 59,041
- --------------- (1) Excludes (i) 576,624 shares of Common Stock issuable upon exercise of options outstanding under the Company's stock option plans and (ii) 423,540 shares of Common Stock issuable upon exercise of outstanding warrants. See "Management -- Executive Compensation," "Certain Transactions," "Description of Capital Stock" and Notes 8 and 13 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements for information concerning calculation of pro forma net loss per share. (3) Pro forma to give effect to the receipt by the Company of a $7.0 million equity investment in connection with the Mochida Transaction. (4) Adjusted to give effect to the estimated net proceeds of this offering based upon an assumed initial public offering price of $13.00 per share. See "Use of Proceeds." ------------------ Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Except as set forth in the financial statements and as otherwise noted, all information in this Prospectus has been adjusted to give effect to (i) the conversion of all of the outstanding shares of Preferred Stock into Common Stock and (ii) a one-for-eight reverse split of the outstanding shares of Common Stock and Preferred Stock, each of which will occur prior to or upon the completion of this offering. See "Capitalization" and "Description of Capital Stock." 4 7 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. The Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. Lack of Regulatory Approvals. The Company's product, Norian SRS, has not been approved for sale in the United States. To market Norian SRS in the United States, the Company must obtain approval from the FDA. In the United States, the Company intends to file a PMA application seeking labeling for usage of Norian SRS as a cancellous bone cement in regions of cancellous bone throughout the body. There can be no assurance that the FDA will act favorably or quickly on the Company's planned PMA application, and significant difficulties and costs may be encountered by the Company in its efforts to obtain such approval that would delay or preclude the Company from selling its products in the United States. Furthermore, there can be no assurance that the FDA will not request additional data, require the Company to conduct further clinical and non-clinical studies, or require supplements to the Company's PMA application, causing the Company to incur substantial cost and delay. In addition, if PMA approval is obtained, there can be no assurance that such approval will not significantly restrict the anatomic sites or types of procedures for which Norian SRS can be used. Failure to obtain PMA approval or restrictions on the anatomic sites and types of procedures for which Norian SRS may be used would substantially limit the Company's ability to market Norian SRS in the United States, which would have a material adverse effect on the Company's business, financial condition and results of operations. To market Norian SRS in Europe and certain other foreign countries, the Company and its distributors and agents must obtain regulatory approvals and otherwise comply with extensive regulations regarding safety and quality. These regulations, including the time required for regulatory review, vary from country to country. Prior to mid-1998, medical device companies selling products in the EU must comply with the applicable regulations of the various countries in effect on December 31, 1994. The EU has promulgated rules which require that medical products receive the right to affix the CE mark by mid-1998. Failure to receive the right to affix the CE mark will prohibit the Company from selling Norian SRS in the member countries of the EU after mid-1998. The Company, with its Japanese partner, Mochida, intends to file applications for Japanese regulatory approval from the Ministry of Health and Welfare ("MHW") and plans to commence clinical trials to support regulatory and reimbursement approval in Japan. There can be no assurance that the Company will obtain regulatory approvals in such countries, that any regulatory approval would not include restrictions on the anatomic sites and types of procedures for which Norian SRS can be used, or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. Delays in the receipt of approvals to market the Company's products, failure to receive these approvals, or future loss of previously received approvals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Extensive Government Regulation" and "Business -- Government Regulation." Dependence Upon Norian SRS. The Company is dependent upon the success of Norian SRS, its sole product, which will require further development and regulatory and reimbursement approvals before it can be marketed in the United States or in other nations. The Company has never sold Norian SRS in the United States, and there can be no assurance that the Company's development efforts will be successful or that Norian SRS or any other product developed by the Company will be safe or effective, approved by regulatory authorities, capable of being manufactured in commercial quantities at acceptable costs, or successfully marketed. The Company expects that Norian SRS, if commercialized, will account for substantially all of the Company's revenues for the foreseeable future. Furthermore, because Norian SRS currently represents the Company's sole 5 8 product focus, if Norian SRS is not successfully commercialized, the Company's business, financial condition and results of operations would be materially and adversely affected. New Technology; Uncertainty of Market Acceptance. Norian SRS is based on new technology which has not been previously used to treat bone fractures and must compete with more established orthopaedic treatments currently accepted as the standards of care. Market acceptance of Norian SRS will largely depend on the Company's ability to demonstrate the relative safety, clinical efficacy, cost-effectiveness and ease of use of its products. The use of Norian SRS will depend on physician awareness, concerted sales efforts by the Company and its distributors and the availability and extent of third-party reimbursement. The Company believes that recommendations and endorsements by physicians will be essential for market acceptance of Norian SRS, and there can be no assurance that any such recommendations or endorsements will be obtained. Physicians will not use Norian SRS unless they determine, based on clinical data and other factors, that the use of Norian SRS is an attractive alternative or complement to other means of repairing damaged cancellous bone. Such determinations will depend, in part, on the ability of Norian SRS to aid in the proper alignment of bone during healing, and to reduce the time to ambulation and the length of hospital stays associated with certain cancellous bone fractures. Acceptance among physicians will also depend upon the Company's ability to train, and the rate of training of, orthopaedic surgeons in the use of Norian SRS and the willingness of such physicians to learn these new techniques. There can be no assurance that Norian SRS will be accepted in the market in preference to other competing therapies or to therapies that may subsequently be developed. Lack of market acceptance by physicians would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Physician Education and Training" and "-- Product Marketing." Limited Clinical Trials. To date, the Company has conducted significant clinical trials only for use of Norian SRS in treatment of certain wrist (distal radius) fractures, from which the Company has only limited follow-up data. The Company intends to initiate clinical studies for the use of Norian SRS in the treatment of certain hip (intertrochanteric) and knee (tibial plateau) fractures and for spinal reconstruction. Accordingly, there can be no assurance that Norian SRS will prove safe and efficacious for use in any application, or that the Company will obtain regulatory approval to market Norian SRS, that Norian SRS will achieve market acceptance, or that adequate third-party reimbursement will be available, for any application. Failure to demonstrate safety and efficacy, obtain regulatory approval for commercial sales, achieve market acceptance or gain third-party reimbursement for use of Norian SRS could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Clinical Applications," " -- Physician Education and Training," " -- Government Regulation" and " -- Third-Party Reimbursement." Uncertainty Related to Third-Party Reimbursement. The Company's products will generally be purchased by hospitals or practicing physicians, which then bill various third-party payors, such as governmental programs, managed care organizations, such as health maintenance organizations, and other private health insurers. Successful sales of Norian SRS in the United States and other markets will depend on the availability of adequate reimbursement from third-party payors. There is significant uncertainty concerning third-party reimbursement for the use of any medical device incorporating new technology. Even if the Company receives approval of a PMA application for Norian SRS for orthopaedic uses, third-party payors may nevertheless deny reimbursement or reimburse at a low price if they conclude, on the basis of clinical, economic and other data, that its use is not cost-effective, or if the product is used for an unapproved indication. Furthermore, third-party payors are increasingly challenging the need to perform medical procedures, as well as limiting reimbursement coverage for medical devices, and in many instances are pressuring medical suppliers to lower their prices. There can be no assurance that use of Norian SRS will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that payors' reimbursement policies will not adversely affect the Company's ability to sell its products on a profitable basis. The market for the Company's products could also be adversely affected by recent federal legislation that reduces reimbursements under the cost pass-through system for the Medicare 6 9 program. In addition, an increasing emphasis on managed care in the United States has increased, and will continue to increase, the pressure on medical device pricing. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals would have a material adverse effect on the Company's business, financial condition and results of operations. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors and/or changes in governmental and private third-party payors' policies toward reimbursement for procedures employing the Company's products would also have a material adverse effect on the Company's business, financial condition and results of operations. Member countries of the EU operate various combinations of centrally-financed health care systems and private health insurance systems. The relative importance of such government and private systems varies from country to country. Medical devices are most commonly sold to hospitals or health care facilities at a price set by negotiation between the buyer and the seller. The choice of devices is subject to constraints imposed by the availability of funds within the purchasing institution. A contract to purchase products may result from an individual initiative or as a result of a public invitation and a competitive bidding process. In either case, the purchaser pays the supplier and payment terms can vary widely throughout the EU. In Japan, at the end of the regulatory approval process, the MHW makes a determination of the unit reimbursement price of the product. The MHW can set the reimbursement level for Norian SRS at its discretion, and there can be no assurance that the Company and its partner, Mochida, will be able to obtain regulatory approval in Japan or if such approval is granted that the Company will obtain a favorable per unit reimbursement price. See "Business -- Third-Party Reimbursement." History of Losses; Lack of Product Revenues; Uncertainty of Future Results. The Company is a development stage enterprise and has incurred net losses since its inception. At March 31, 1996, the Company's accumulated deficit was approximately $24.2 million. Net losses for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1996 were approximately $4.2 million, $5.9 million and $2.3 million, respectively. The Company expects to incur substantial operating losses at least until it begins significant marketing activities, which remain subject to FDA approval in the United States and the approval of international regulatory agencies. Further, the Company's expenses are expected to increase relative to prior years as the Company prepares for expanded multi-center clinical trials, manufacturing and international marketing of Norian SRS, while expanding its research and development activities. Even if the Company receives approval for use of Norian SRS in the United States and abroad, there can be no assurance that the Company will ever generate substantial revenues or achieve profitability. The Company's results of operations will depend upon numerous factors, including the need for and timing of regulatory approval, market acceptance by physicians of Norian SRS, third-party reimbursement policies and the Company's ability to manufacture Norian SRS efficiently and competitively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Physician Education and Training" and "-- Product Marketing." Dependence on Patents and Proprietary Rights. The Company holds 13 United States patents, two of which cover the current formulation of Norian SRS and five of which cover other formulations of calcium phosphate cements that may be used in future products or to prevent third parties from developing similar technology. In addition, the Company has four patents on CrystalCoat and two patents on Healos, both of which are biomaterials developed by the Company and licensed exclusively to third parties for certain applications. The Company also holds patents relating to Norian SRS in 13 European nations and in Canada. Additionally, the Company has seven United States and several foreign applications pending. There can be no assurance that pending patent applications will be allowed or that any of the Company's patents will provide protection for the Company's products. The Company expects to continue to file additional patent applications to 7 10 protect its proprietary technologies. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the measures taken by the Company to protect its proprietary technology will prevent misappropriation of such technology, and such protections may not preclude competitors from developing products similar to the Company's products. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. The failure of the Company to protect its proprietary information would have a material adverse effect on the Company's business, financial condition and results of operations. While the Company believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communications from third parties asserting that the Company's products infringe, or may infringe, the proprietary rights of such third parties. The Company is aware of one Japanese patent and several Japanese patent applications filed by a Japanese corporation which claim ratio compositions comprising two of the components of Norian SRS. The formulation of Norian SRS currently in clinical and commercial use by the Company in countries other than Japan may have a ratio of these two components that falls within the range claimed by such patent and patent applications. In addition, the Company is aware that another Japanese corporation has filed a patent application in Japan, and several counterpart applications in countries outside the United States, that include a composition of matter claim covering one of the components of Norian SRS. If a patent including this claim were to issue, Norian SRS, in its current formulation, may be deemed to infringe such patent. There can be no assurance that the Japanese entities or other entities will not bring a claim of patent infringement against the Company or that the Company's product will not be determined to be infringing. Any such claims, including meritless claims, could result in costly, time-consuming litigation and diversion of technical and management personnel. In the event any third party were to make a valid claim and a license were not made available on commercially reasonable terms, or if the Company were unable to develop non-infringing alternative technology, the Company's business, financial condition and results of operations would be materially and adversely affected. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. There can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings declared by the United States Patent and Trademark Office ("USPTO") to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings and related legal and administrative proceedings are both costly and time consuming. Litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition to patents, the Company relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through appropriate confidentiality and proprietary information agreements. The agreements generally provide that all inventions conceived of by the individual in the course of rendering services to the Company, shall be the exclusive property of the Company. 8 11 However, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance that proprietary information or confidentiality agreements with employees, consultants and others will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to, or independently developed by, competitors. See "Business -- Patents and Proprietary Information." Extensive Government Regulation. The Company's products and its manufacturing activities for Norian SRS are subject to extensive regulation by the FDA and, in some instances, by foreign and state governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the clinical testing, manufacture, labeling, sale, distribution and promotion of medical devices. Before a new device can be introduced into the market, the manufacturer must obtain market clearance through either the 510(k) premarket notification process under Section 510(k) of the FDC Act or the lengthier PMA application process under Section 515 of the FDC Act. Noncompliance with applicable requirements, including good manufacturing practices ("GMP"), can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The Company believes that an FDA-approved PMA application will be required to market Norian SRS in the United States. The Company is currently conducting clinical studies of Norian SRS pursuant to an FDA-approved IDE to collect data necessary to support a PMA application. Although the Company plans to pursue approval for use of Norian SRS as a cancellous bone cement at any anatomic site where cancellous bone exists, only wrist fractures are currently being studied in the United States under the Company's FDA-approved IDE. The Company plans to provide clinical data of the safety and effectiveness of Norian SRS as a cancellous bone cement for anatomic sites other than the wrist with data from clinical trials being conducted in the United States and abroad. The FDA often analyzes data from foreign clinical studies more critically, and there can be no assurance that the Company's foreign clinical data will be accepted as part of the Company's PMA application. On two occasions, the Company has expanded the number of sites at which it is conducting its clinical studies in the United States due to slow enrollment of patients at existing sites. There can be no assurance that the Company will be successful in enrolling sufficient numbers of patients to complete its clinical studies. Moreover, there can be no assurance that data from any completed domestic or foreign clinical studies will demonstrate the safety and effectiveness of Norian SRS or that such data will otherwise be adequate to support approval of a PMA application. In addition, if PMA approval is obtained, there can be no assurance that such approval will not significantly restrict the anatomic sites and types of procedures for which Norian SRS can be used. Failure to obtain approval of a PMA application or restrictions on the anatomic sites and types of procedures for which Norian SRS can be used would have a material adverse effect on the Company's business, financial condition and results of operations. Any products manufactured or distributed by the Company pursuant to FDA approvals will be subject to extensive regulation by the FDA, and the FDA's enforcement policy strictly prohibits the promotion of products for any uses other than those for which approval was obtained. New governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Furthermore, if approval of a PMA application is obtained, modifications to the approved product may require a PMA supplement or may require the submission of a new PMA application. There can be no assurance that approval of any necessary PMA supplements or new PMA applications could be obtained in a timely manner, if at all. In addition, the Company's manufacturing facilities are subject to periodic inspections by state and federal agencies, including the FDA and the California State Department of Health Services ("CDHS"). Delays in obtaining any necessary 9 12 approvals, failure to obtain approvals, or the loss of previously obtained approvals would have a material adverse effect on the Company's business, financial condition and results of operations. The introduction of the Company's products in foreign markets will also subject the Company to foreign regulatory clearances which may impose additional substantial costs and burdens. International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements and import restrictions on devices. In addition, each country has its own tariff regulations, duties and tax requirements. The approval by the foreign government authorities is unpredictable and uncertain, and no assurance can be given that the necessary approvals or clearances will be granted on a timely basis or at all. Delays in receipt of, or failure to receive, such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on the business, financial condition and results of operations of the Company. The EU has promulgated rules which require that medical products receive the right to affix the CE mark by mid-1998. Prior to mid-1998, medical device companies selling products in the EU must comply with the applicable regulations of the various countries in effect on December 31, 1994. Failure to receive the right to affix the CE mark will prohibit the Company from selling its products in member countries of the EU. Unexpected delays or problems could occur, and there can be no assurance that the Company will be successful in meeting certification requirements. See "Business -- Government Regulation." Limited Manufacturing Experience. The Company has limited experience in manufacturing Norian SRS and currently manufactures the product in limited quantities for United States clinical trials, international clinical trials and limited international test-marketing. While the Company believes that it has the manufacturing capacity necessary to support the limited quantities of Norian SRS currently being produced, it will need additional resources to commence full-scale production of Norian SRS for commercial sales. The Company does not have experience in manufacturing its products in commercial quantities. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. Furthermore, the Company is dependent upon its Cupertino, California facility as the only site for the manufacture of Norian SRS. Difficulties encountered by Norian in its manufacturing scale-up would have a material adverse effect on its business, financial condition and results of operations, and there can be no assurance that such difficulties will not occur. See "Business -- Manufacturing." Intense Competition; Uncertainty of Technological Change. The market for musculoskeletal disease and injury treatments is characterized by extensive research efforts and rapid technological change. The Company faces intense competition in that market from other medical device and pharmaceutical companies. Many of these competitors have substantially greater financial, manufacturing, marketing and technical resources than the Company. Furthermore, the medical device industry has experienced consolidation and competitors could acquire companies or technologies that could limit the Company's ability to compete. There can be no assurance that the Company's current and future competitors will not develop or market technologies and products that are more effective or commercially attractive than the Company's current or future products, thereby rendering the Company's technologies and products obsolete, or that such competitors will not succeed in obtaining regulatory approval and introducing or commercializing any such products prior to the Company. See "Business -- Competition." Dependence Upon International Operations and Sales. All of the Company's product sales to date are from controlled test-marketing in the Netherlands, and the Company anticipates that substantially all of its revenues will be derived from international sales until such time, if ever, that its products are approved for sale in the United States. Part of the Company's strategy will be to rely on third-party distributors and corporate partners for sales and marketing of Norian SRS in international markets. Sales through distributors and corporate partners are subject to several risks, 10 13 including the risk of financial instability of distributors and corporate partners and the risk that such parties will not effectively promote the Company's products. In Japan, the Company will be relying on Mochida for its sales and marketing, regulatory compliance and reimbursement functions and may rely on similar corporate partners in other nations for these functions. Because Norian SRS is based on a new technology for the treatment of orthopaedic trauma, suitable distributors and corporate partners with relevant expertise may be difficult to engage. The inability to engage suitable distributors or corporate partners on acceptable terms or the loss or termination of any distribution or corporate partner relationships could have a material adverse effect on the Company's international sales efforts. In addition, distributor agreements could require the Company to repurchase unsold inventory from former distributors to comply with local laws applicable to distribution relationships, provisions of distribution agreements or negotiated settlements entered into with such distributors. A number of risks are inherent in international operations and transactions. International sales and operations may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, fluctuations in international currency exchange rates, difficulties in obtaining export licenses, constraints on its ability to maintain or increase prices and competition. Any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that Norian SRS or any future product will be successfully commercialized in any international market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Physician Education and Training" and "-- Product Marketing." Limited Sales and Marketing Experience. The Company has limited experience in marketing and selling its products and does not have experience in marketing and selling its products in commercial quantities. Establishing a marketing and sales capability sufficient to support sales in commercial quantities will require significant resources, and there can be no assurance that the Company will be able to recruit and retain qualified marketing personnel or contract sales representatives or that future sales efforts of the Company will be successful. The Company's sales and marketing strategy will depend on the success of physician education and training programs. There can be no assurance that the Company will be successful in establishing such programs or that these programs will be an effective sales channel for the Company's products. If the physician training and education programs do not result in the adoption of Norian SRS by a significant percentage of orthopaedic trauma surgeons, the Company's business, financial condition and results of operations would be materially and adversely impacted. Furthermore, there is no established sales organization for marketing the Company's products in the United States, and there can be no assurance that the Company will be successful in establishing such a sales organization. The failure to establish and maintain an effective distribution channel for the Company's products, or to retain qualified sales personnel to support commercial sales of the Company's products, would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Physician Education and Training" and "-- Product Marketing." Management of Growth. Upon receipt of domestic and foreign regulatory approvals, the Company may experience a period of rapid growth and an expansion in the number of its employees, the scope and complexity of its operating and financial systems, and its geographic area of operations. Such growth would result in new and increased responsibilities for management and place a significant strain upon the Company's management, operating and financial systems and resources. The Company also believes that it must develop greater marketing, sales and client support capabilities in order to secure new customer contracts at a rate necessary to sustain desired growth and effectively serve the evolving needs of the Company's present and future customers. The failure of the Company to address these needs in a satisfactory fashion would inhibit the Company's ability to exploit market opportunities and would have a material adverse effect on its business, financial condition and results of operations. See "Business -- Employees" and "Management." 11 14 Risk of Inadequate Funding. The Company plans to continue to spend substantial funds for clinical trials in support of regulatory and reimbursements approvals, expansion of sales and marketing activities, research and development and establishment of commercial scale manufacturing capabilities. The Company may be required to spend greater-than-anticipated funds if unforeseen difficulties arise in the course of clinical trials of Norian SRS, in connection with obtaining necessary regulatory and reimbursement approvals in the United States or internationally or in other aspects of the Company's business. Although the Company believes that the proceeds from this offering, together with the Company's current cash balances and cash generated from the future sale of products, will be sufficient to meet the Company's currently estimated operating and capital requirements at least through the end of 1997, there can be no assurance that the Company will not require additional financing during this period. The Company's future liquidity and capital requirements will depend upon numerous factors, including the progress of the Company's clinical trials, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities, the extent to which the Company's products gain market acceptance, the acquisition and defense of intellectual property rights and competitive developments. Any additional required financing may not be available on satisfactory terms, if at all. Future equity financings may result in dilution to the holders of the Common Stock, and future debt financing may result in certain financial and operational restrictions. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Dependence on Key Personnel and Advisors. The Company relies on its key personnel and scientific advisors to assist the Company in formulating and implementing its product research, development and commercialization strategies. In addition, all of such advisors are employed by other companies and institutions and may have commitments to, or consulting or advisory contracts with, other entities that limit their availability to the Company. The Company's future success will depend, in part, upon its ability to attract and retain highly qualified personnel. The Company is headquartered in the San Francisco Bay Area, which is characterized by intense competition for personnel with the specialized skills necessary to enable the Company to compete in the medical device industry. The Company competes for such personnel with other companies, academic institutions, government entities and other organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Loss of, or the inability to hire, key personnel or advisors could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management." Product Liability; Availability of Insurance. Use of the Company's products entails the risk of product liability claims. Although the Company maintains product liability insurance, there can be no assurance that the coverage limits of the Company's insurance policies will be adequate or that insurance will continue to be available on commercially reasonable terms or at all. To date, the Company has not experienced any product liability claims. In addition, whether or not successful, any litigation brought against the Company could divert management's attention and time and result in significant expenditures, which could have a material adverse effect on the Company's business, financial condition and results of operations. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company currently has no earthquake insurance coverage. There can be no assurance that such insurance, or other liability insurance, will be available in the future on favorable terms or at all. See "Business -- Product Liability and Insurance." No Prior Public Trading Market. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if one does develop, that it will be maintained. The initial public offering price, which will be established by negotiations between the Company and the Underwriters, may not be indicative of prices that will prevail in the trading market. See "Underwriting." 12 15 Possible Volatility of Stock Price. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Common Stock. In addition, the market price of the shares of Common Stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the Common Stock. Possible Anti-Takeover Effects. Certain provisions of the Company's Articles of Incorporation and Bylaws, each as amended, may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock without any vote or further action by the shareholders, provide for a classified board of directors and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for shareholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, the Company has granted to Howmedica, Inc., a division of Pfizer Pharmaceuticals, Inc. and a shareholder of the Company ("Howmedica"), a non-exclusive right of first negotiation with respect to transactions involving the sale of the Company, whether through merger, stock exchange or sale of all, or substantially all, of its assets. If the Company's Board of Directors decides to begin discussions with any third party regarding a sale of the Company, the Company is required to notify Howmedica in writing and to negotiate with Howmedica for a period of 60 days. The Company is not prohibited from negotiating concurrently with other parties regarding similar transactions during this 60-day period. If the Company and Howmedica fail to reach a written agreement in principle during the 60-day period, or if Howmedica consents to the early termination of such 60-day period, the Company will be free to complete the sale of the Company to any third party without further obligation to Howmedica. This right of first negotiation expires on the earliest to occur of: (i) the termination of the license agreement between the Company and Howmedica, pursuant to which Howmedica was granted an exclusive license to manufacture, market and sell CrystalCoat (the "CrystalCoat License"); (ii) the occurrence of an event that would cause the CrystalCoat License to become non-exclusive; or (iii) the completion of a sale of the Company, whether by merger, share exchange or sale of all, or substantially all, of the Company's assets. This right of first negotiation may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, the Company in a negotiated transaction, and may also impair the Company's ability to respond to a hostile takeover attempt. See "Management" and "Description of Capital Stock." Effect of Shares Eligible for Future Sale. Sales of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could materially and adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. Upon the completion of this offering, the Company will have 12,368,641 shares of Common Stock outstanding, of which the 3,000,000 shares offered hereby will be freely tradable (unless held by affiliates of the Company) and the remaining 9,368,641 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The 3,000,000 shares offered hereby, as well as an additional 28,989 shares, will be available for immediate sale in the public market. Beginning 90 days after the date of this Prospectus, an additional 69,603 shares of Common Stock (excluding 46,810 shares subject to 13 16 outstanding vested options which, if exercised, would be included) will be available for sale in the public market, subject to compliance with Rules 144 and 701. Beginning 120 days and 180 days after the date of this Prospectus, an additional 50,694 and 5,286,002 shares of Common Stock (excluding approximately 146,146 shares subject to outstanding vested options which, if exercised, would be included) will be available for sale in the public market subject to compliance with Rule 144. The remaining approximately 3,933,353 shares held by existing shareholders will become eligible for public resale at various times over a period of less than two years following the completion of this offering, subject in some cases to compliance with Rule 144. The holders of 9,434,527 of the shares of Common Stock outstanding immediately following the completion of this offering (including 423,540 shares subject to outstanding, exercisable warrants) will be entitled to registration rights with respect to such shares. The number of shares sold in the public market could increase if registration rights are exercised. See "Shares Eligible for Future Sale." Dilution. The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will therefore incur immediate and substantial net tangible book value dilution. See "Dilution." 14 17 THE COMPANY Norian Corporation was incorporated in California on March 17, 1987. Unless the context otherwise requires, references in this Prospectus to "Norian" and the "Company" refer to Norian Corporation, a California corporation. The Company's principal executive offices are located at 10260 Bubb Road, Cupertino, California 95014-4166. Its telephone number is (408) 252-6800. USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share are estimated to be $35,370,000 ($40,810,500 if the over-allotment option is exercised in full), after deducting the underwriting discount and the estimated expenses of the offering. The Company expects to use approximately $13.0 million of the net proceeds of this offering to fund the expansion of manufacturing, marketing and sales activities, approximately $4.2 million to fund clinical trials of Norian SRS in the United States and abroad, and approximately $1.5 million to fund future research and development activities. The balance of the net proceeds, approximately $16.7 million, will be used for general corporate purposes. Although the Company may use a portion of the net proceeds for the licensing or acquisition of new products or technologies from others, the Company currently has no such specific plans or commitments. Expenditures may vary significantly depending upon numerous factors, including the progress of the Company's clinical trials, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities, the extent to which the Company's products gain market acceptance and competition. Pending such uses, the Company intends to invest the net proceeds of this offering in short-term, interest bearing, investment grade securities. DIVIDEND POLICY Norian has never declared nor paid dividends on its capital stock. The Company currently intends to retain any future earnings for funding growth and, therefore, does not intend to pay any cash dividends in the foreseeable future. 15 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 (i) on an actual basis; (ii) on a pro forma basis after giving effect to a $7.0 million equity investment in connection with the Mochida Transaction and the conversion of all of the outstanding shares of Preferred Stock into Common Stock upon completion of this offering; and (iii) as adjusted to give effect to the receipt by the Company of the net proceeds from the sale of 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses:
MARCH 31, 1996 ------------------------------------- ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Shareholders' equity(1): Convertible preferred stock: 9,000,000 shares authorized, 8,331,439 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and as adjusted.................................................... $40,622 $ -- $ -- ------- ------- ------- Preferred stock: no shares authorized, issued or outstanding, actual and pro forma; 5,000,000 shares authorized, none issued or outstanding, as adjusted.......................... -- -- -- Common stock: 10,400,000 shares authorized, actual; 75,000,000 shares authorized, pro forma and as adjusted; 671,564 shares issued and outstanding, actual; 9,353,003 shares issued and outstanding, pro forma; and 12,353,003 shares issued and outstanding, as adjusted(2).... 1,257 48,879 84,249 Deferred compensation......................................... (933) (933) (933) Unrealized loss on securities available-for-sale, net......... (41) (41) (41) Deficit accumulated during development stage.................. (24,234) (24,234) (24,234) ------- ------- ------- Total shareholders' equity.................................. 16,671 23,671 59,041 ------- ------- ------- Total capitalization...................................... $16,671 $23,671 $59,041 ======= ======= =======
- --------------- (1) The Company does not have any long-term or short-term debt. See Notes 5 and 13 of Notes to Consolidated Financial Statements. (2) Excludes (i) 453,137 shares of Common Stock issuable upon exercise of options outstanding at March 31, 1996, (ii) 139,125 shares of Common Stock issuable upon exercise of options granted after March 31, 1996 and (iii) 423,540 shares of Common Stock issuable upon exercise of warrants outstanding at March 31, 1996. See "Management -- Executive Compensation," "Certain Transactions," "Description of Capital Stock" and Notes 8 and 13 of Notes to Consolidated Financial Statements. 16 19 DILUTION The pro forma net tangible book value of the Company's Common Stock as of March 31, 1996, was $23,671,000 or approximately $2.53 per share. Pro forma net tangible book value per share represents the amount of the Company's shareholders' equity, less intangible assets, divided by 9,353,003 shares of Common Stock outstanding after giving effect to the Mochida Transaction and the conversion of all of the outstanding shares of Preferred Stock into Common Stock. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after completion of this offering. After giving effect to the sale of the 3,000,000 shares of Common Stock in this offering at an assumed initial public offering price of $13.00 per share, and after deducting underwriting discounts and commission and estimated offering expenses payable by the Company, the Company's pro forma net tangible book value at March 31, 1996, would have been $59,041,000, or $4.78 per share. This represents an immediate increase in pro forma net tangible book value of $2.25 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $8.22 per share to new investors purchasing Common Stock in this offering, as illustrated in the following table: Assumed public offering price per share................................... $13.00 Pro forma net tangible book value per share at March 31, 1996........... $2.53 Increase per share attributable to new investors........................ 2.25 ------- Pro forma net tangible book value per share after the offering............ 4.78 ------- Pro forma net tangible book value dilution per share to new investors..... $ 8.22 =======
The following table sets forth, on a pro forma basis as of March 31, 1996, the difference between the existing shareholders and the purchasers of shares in the offering (at an assumed price of $13.00 per share) with respect to the number of shares purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ----------- ------- ------------- Existing shareholders..................... 9,353,003 75.7% $49,033,034 55.7% $ 5.24 New investors............................. 3,000,000 24.3 39,000,000 44.3 $ 13.00 --------- --- ----------- --- Total............................ 12,353,003 100.0% $88,033,034 100.0% ========= === =========== ===
The foregoing computations assume no exercise of stock options or warrants outstanding at March 31, 1996. At March 31, 1996, there were outstanding stock options to purchase 453,137 shares of Common Stock and options to purchase an additional 139,125 shares of Common Stock were granted after March 31, 1996. In addition, at March 31, 1996, 423,540 shares of Common Stock were issuable upon exercise of outstanding warrants. To the extent these stock options and warrants are exercised, there will be further dilution to purchasers in this offering. See "Management -- Executive Compensation," "Certain Transactions" and "Description of Capital Stock." 17 20 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 are derived from the audited financial statements of the Company. The financial data set forth below for the three months ended March 31, 1995 and 1996 are derived from unaudited financial statements of the Company. The financial statements of the Company as of December 31, 1994 and 1995 and for each of the years in the three-year period ended December 31, 1995, together with the notes thereto and the related report of KPMG Peat Marwick LLP, independent auditors, are included elsewhere in this Prospectus. The selected consolidated financial data set forth below as of and for the three months ended March 31, 1995 and 1996, and for the period from March 17, 1987 (inception) to March 31, 1996 were derived from unaudited consolidated financial statements, which are included elsewhere in this Prospectus, and include, in the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at that date and results of operations for those periods. The results for the three months ended March 31, 1996 are not necessarily indicative of the results for any future period. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
MARCH 17, THREE MONTHS ENDED 1987 (INCEPTION) YEAR ENDED DECEMBER 31, MARCH 31, THROUGH MARCH 31, ----------------------------------------------- ------------------- 1996 1991 1992 1993 1994 1995 1995 1996 ----------------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Contract revenue.................... $ 2,354 $ 594 $ 578 $ 444 $ 210 $ 150 $ 38 $ 38 Operating expenses: Research and development.......... 19,703 2,130 2,289 2,564 3,104 4,556 974 1,850 Contract revenue costs............ 466 4 202 224 36 -- -- -- General and administrative........ 8,378 654 695 1,255 1,491 2,165 571 681 -------- ------- ------- ------- ------- ------- ------- ------- Loss from operations................ (26,193) (2,194) (2,608) (3,599) (4,421) (6,571) (1,507) (2,493) Interest income, net................ 1,997 29 151 329 279 720 45 217 Other income (expense), net......... (10) -- -- (4) (8) 2 1 (6) -------- ------- ------- ------- ------- ------- ------- ------- Loss before income taxes............ (24,206) (2,165) (2,457) (3,274) (4,150) (5,849) (1,461) (2,282) Income tax expense.................. 28 -- -- 3 8 9 4 2 -------- ------- ------- ------- ------- ------- ------- ------- Net loss............................ $ (24,234) $(2,165) $(2,457) $(3,277) $(4,158) $(5,858) $(1,465) $(2,284) ======== ======= ======= ======= ======= ======= ======= ======= Pro forma net loss per share (1).... $ (0.71) $ (0.26) Pro forma weighted average shares used in computing pro forma net loss per share (1)................ 8,197 8,811
DECEMBER 31, MARCH 31, 1996 ------------------------------------------------------- ------------------------ 1991 1992 1993 1994 1995 ACTUAL PRO FORMA(2) ------- -------- -------- -------- -------- -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and securities available-for-sale....................... $ 1,387 $ 12,647 $ 9,497 $ 4,796 $ 17,157 $ 15,342 $ 22,342 Total assets............................... 1,788 12,909 9,821 6,949 19,798 18,146 25,146 Deficit accumulated during development stage.................................... (6,200) (8,657) (11,934) (16,092) (21,950) (24,234) (24,234) Total shareholders' equity................. 1,251 12,558 9,321 5,182 18,759 16,671 23,671
- --------------- (1) See Note 1 to the Consolidated Financial Statements for information concerning calculation of pro forma net loss per share. (2) Pro forma to give effect to the receipt by the Company of a $7.0 million equity investment in connection with the Mochida Transaction and the conversion of all of the outstanding shares of Preferred Stock into Common Stock. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its incorporation on March 17, 1987, the Company has been engaged in the design, development, preclinical and clinical testing and, more recently, the manufacturing and test-marketing of Norian SRS. Norian SRS is an injectable, moldable and biocompatible cancellous bone fixation and replacement material designed to overcome the shortcomings of currently available fracture treatment methods by providing direct structural support to regions of compromised cancellous bone. The Company has received regulatory approval for commercial sale of Norian SRS in the Netherlands, where it has test-marketed the product. The Company is currently seeking to obtain the right to affix the CE mark to Norian SRS to permit the Company to market the product in the member countries of the EU. Commercial sales and use of the product in the member countries of the EU will be partially dependent on country-specific reimbursement approvals and compliance with certain other country-specific regulations. In February 1995, the Company commenced a randomized, multi-center clinical trial of the use of Norian SRS in the treatment of wrist fractures in up to 324 patients. Norian expects to submit an IDE supplement for a randomized, multi-center hip fracture trial which will involve the use of Norian SRS in conjunction with orthopaedic hardware. Following commencement of this study, the Company anticipates performing clinical trials on fractures of the tibia, just below the knee, and spinal reconstructions, in addition to considering other potential clinical trials. Currently, the Company plans to conduct a substantial portion of these trials in Europe. The Company anticipates that its operating losses will continue for at least the next two years as it spends substantial resources in funding clinical trials in support of regulatory approvals, and continues to expand research and development, marketing and sales, manufacturing and administrative functions. To date, the Company has received a majority of its revenues from research and development payments, royalties and contract revenue. Since the Company's inception, product sales have been minimal and revenues generated from the Company's test-marketing are treated as cost recovery instead of revenue in the Company's financial statements. The Company anticipates that its results of operations will fluctuate on a quarterly basis for the foreseeable future due to several factors, including actions relating to regulatory and reimbursement matters, progress of clinical trials, the extent to which the Company's products gain market acceptance, introduction of alternative means for treatment of bone fractures, defects and certain other skeletal deficiencies, and competitive developments. RESULTS OF OPERATIONS Three months ended March 31, 1996 and 1995 Research and development costs were $1.9 million for the three months ended March 31, 1996, compared to $974,000 for the comparable period in 1995, representing an increase of $876,000. This increase is primarily attributable to costs associated with the rate of clinical trial enrollment, product development and preclinical and clinical activities. The Company believes that research and development costs will increase in future periods as clinical trials of Norian SRS expand and as the Company develops additional products. General and administrative expenses were $681,000 for the three months ended March 31, 1996, compared to $571,000 for the three months ended March 31, 1995, representing an increase of $110,000. The increase in expenses is associated with additions to personnel in both the United States and Europe, compensation relating to stock option grants and increased business development costs. The Company anticipates that general and administrative expenses will increase as the Company expands clinical trials and begins commercialization in Europe. 19 22 Net interest and other income was $211,000 for the three months ended March 31, 1996, compared to $46,000 for the three months ended March 31, 1995, representing an increase of $165,000. This increase is attributable to the Company's investment of the proceeds received in an equity financing completed in 1995. Years Ended December 31, 1995, 1994 and 1993 Contract revenue was $150,000 for the year ended December 31, 1995, compared to $210,000 for the year ended December 31, 1994, and $444,000 for the year ended December 31, 1993, representing decreases of $60,000 from 1994 to 1995 and $234,000 from 1993 to 1994. The successive decreases are primarily attributable to the expiration in 1994 of a research and development contract. Research and development costs were $4.6 million for the year ended December 31, 1995, compared to $3.1 million for the year ended December 31, 1994, and $2.6 million for the year ended December 31, 1993, representing increases of $1.5 million from 1994 to 1995 and $540,000 from 1993 to 1994. The increased spending in 1995 is primarily attributable to costs associated with the initiation of clinical trials. The increases for both years are also attributable to product development, preclinical activities, relocation and expansion of facilities and the addition of personnel to support increased clinical activities. General and administrative expenses were $2.2 million for the year ended December 31, 1995, compared to $1.5 million for the year ended December 31, 1994, and $1.3 million for the year ended December 31, 1993, representing increases of $674,000 from 1994 to 1995 and $236,000 from 1993 to 1994. The increased costs are associated with personnel increases and additional facility costs. Net interest and other income was $722,000 for the year ended December 31, 1995, compared to $271,000 for the year ended December 31, 1994, and $325,000 for the year ended December 31, 1993, representing an increase of $451,000 for the period from 1994 to 1995 and a decrease of $54,000 for the period from 1993 to 1994. The increase from 1994 to 1995 is attributable to the investment of the proceeds from the equity financing completed in 1995, and the decrease from 1993 to 1994 is attributable to a reduction of cash available for investment during that period. INCOME TAXES The Company has not generated any net income to date and therefore has not paid any federal income taxes since its inception. The income tax expense recognized by the Company is primarily attributable to the operations of Norian B.V., a wholly-owned Dutch subsidiary. Under a service contract with the Company, Norian B.V. has generated income before taxes of $15,000, $18,000 and $6,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances, in amounts equal to the net deferred assets as of December 31, 1995, 1994 and 1993, have been established in each period to reflect these uncertainties. At December 31, 1995, the Company had federal and state net operating loss carryforwards of approximately $13.2 million and $6.9 million, respectively, and federal and state research credit carryforwards of approximately $450,000 and $230,000, respectively. The federal net operating loss and research credit carryforwards expire from 2004 through 2010, if not utilized. The state net operating loss and research credit carryforwards expire from 1996 through 2000, if not utilized. The Company has experienced "changes in ownership" as defined in Section 382 of the Internal Revenue Code as amended. As a result, Federal net operating loss and credit carryforwards are subject to an annual limitation. Future changes in ownership of the Company may further reduce the Company's ability to utilize net operating loss and credit carryforwards. The annual limitation may result in the expiration of net operating loss and research credit carryforwards before full utilization. 20 23 SUBSEQUENT EVENTS In April 1996, the Company entered into an exclusive clinical development and marketing agreement for Japan with Mochida. The agreement provides for payments by Mochida to Norian for up to a total of $15.0 million, consisting of a $7.0 million equity investment completed in April 1996, and $8.0 million in non-refundable payments based on achievement of time-related, clinical and regulatory milestones, of which $2.0 million was received upon execution of the contract. Mochida will work in collaboration with the Company to conduct clinical trials and obtain regulatory reimbursement approvals from the MHW in Japan. Mochida will also be responsible for training and educating surgeons in Japan in the use of Norian SRS under guidelines and standards prescribed by the Company. The Company will be responsible for manufacturing and supplying the product to Mochida. See "Business -- Physician Education and Training" and "-- Product Marketing." LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through the private sale of equity securities and, to a lesser extent, through the licensing of technology, leasing of capital equipment and research and development contracts. From inception through March 31, 1996, the Company raised $40.8 million from private equity financings and stock option exercises. In April 1996, the Company raised an additional $7.0 million from a private equity financing associated with the Mochida Transaction. The agreement has an initial term ending on the earlier of 10 years from the date of regulatory approval to commence commercial sales of Norian SRS in Japan or 15 years from the date of the agreement. In the period from inception to March 31, 1996, the Company used a total of $21.9 million to fund its operations. During the three months ended March 31, 1996 and 1995, and the years ended December 31, 1995 and 1994, the Company used cash to fund operations of $1.8 million, $2.5 million, $6.3 million and $3.1 million, respectively. The changes in cash used in operations were the result of costs associated with increased research and development activities, international marketing activities and increased general and administrative expenses necessary to support increased operations. The Company's expenditures for equipment and leasehold improvements for the period from inception to March 31, 1996 were approximately $3.0 million. The Company anticipates that its operating losses will continue for at least the next two years as a result of funding clinical trials in support of regulatory approvals, and the expansion of research and development, marketing and sales, and general and administrative activities. To support these expanded activities, the Company anticipates expanding its facilities both in the United States and Europe through 1997. In addition, the Company may use a portion of the net proceeds to acquire or license technology, products or businesses related to the Company's current business, although no such acquisitions or licenses are currently being negotiated or planned and no portion of the net proceeds has been allocated to specific acquisitions. Although the Company believes that the proceeds from this offering together with current cash balances and revenue from the future sales of product will be sufficient to meet the Company's currently projected operating and capital requirements at least through 1997, there can be no assurance that the Company will not require earlier additional financing. Moreover, there can be no assurance that additional financing, if required, will be available on satisfactory terms, or at all. In any event, in the future, the Company may attempt to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. The Company's future liquidity and capital requirements will depend on numerous factors including progress of the Company's clinical trials, actions relating to regulatory and reimbursement matters, costs and timing of expansion of marketing, sales, manufacturing and product development activities, the extent to which the Company's products gain market acceptance and competitive developments. 21 24 BUSINESS THE COMPANY Norian develops, manufactures and markets Norian SRS, a proprietary bone fixation and replacement material designed for use in regions of structurally compromised cancellous bone such as the wrist, hip, knee and spine. Norian SRS is inserted into bone defects as a paste, either through minimally invasive injection or in an open surgical procedure. The material sets within 10 minutes of application and continues to cure over 12 hours to achieve its ultimate strength. The Company believes that Norian SRS provides direct structural support to compromised cancellous bone and can withstand compressive mechanical force soon after a procedure and over time. Additionally, Norian SRS may reduce the need for orthopaedic hardware in weakened cancellous bone. Norian SRS cures into a crystalline structure similar to the mineral phase of natural bone and appears to be replaced by natural bone over time. Fractures in cancellous bone tend to be complex, highly variable and difficult to repair with currently available treatment methods. These problems are compounded when cancellous bone is weakened by osteoporosis. The Company believes that Norian SRS overcomes the shortcomings of currently available treatment methods for cancellous bone fractures. The Company believes one of the principal benefits of Norian SRS is to provide direct structural support to fractures, thereby reducing the risk of loss of anatomical positioning during the healing processes and improving post-operative function and long-term outcome for the patient. In addition, Norian SRS may decrease the overall treatment cost by reducing the extent of rehabilitation required following fracture fixation and immobilization. The Company intends to seek regulatory approval of Norian SRS as a cancellous bone cement. Under an IDE approved by the FDA, the Company is conducting a randomized, multi-center clinical trial of the use of Norian SRS in the treatment of wrist fractures in up to 324 patients. This study is designed to demonstrate the safety and efficacy of Norian SRS in its ability to maintain the anatomical alignment of cancellous bone fragments and to improve functional outcomes such as grip strength and range of motion. The Company expects to use the data from this trial to support a PMA application to market Norian SRS in the United States and to demonstrate its cost-effectiveness to third-party payors for purposes of reimbursement. As of April 30, 1996, 196 patients had been enrolled in the study. The Company is also seeking to obtain the right to affix to Norian SRS the CE mark, which will allow the Company to market the product in most European nations. In addition, the Company has test-marketed Norian SRS in the Netherlands since 1994, where the product is approved for commercial sale. OVERVIEW Background The human skeleton is composed of two types of bone tissue: cortical and cancellous bone. Cortical bone, which makes up approximately 80% of the human skeleton, is dense, generally tubular in shape and is primarily subject to significant bending and twisting forces. Cortical bone is found primarily in the mid-sections of the long bones such as the tibia in the lower leg and the radius in the forearm. Cancellous bone, which constitutes approximately 20% of the human skeleton, is less dense than cortical bone, is primarily subject to compressive forces and is situated principally in the spine and at the ends of long bones near joints, including areas such as the wrist, knee and hip. In order to repair microscopic stress fractures resulting from the repetitive forces acting on the skeleton and to adapt to changes in routine mechanical loading on the skeleton, all bone tissue is subject to perpetual remodeling, which is a complex process involving a coupled process of bone removal and replacement. At the beginning of a remodeling cycle, osteoclasts erode away bone in targeted areas. In the next phase of the cycle, osteoblasts fill in the osteoclast-created cavities with 22 25 collagen which then mineralizes over several months to become mature bone. Osteoporosis is a bone disorder found primarily in people over the age of 65 which results from an imbalance in the remodeling process. Osteoporosis is characterized by a decrease in bone mass and deterioration of bone structure, which may lead to fractures as a result of bone fragility, particularly in cancellous bone. Cancellous Bone Repair The orthopaedic trauma market is the second largest segment of the United States orthopaedic industry, representing approximately 19% of the $2.2 billion estimated 1995 sales in the United States. This market includes over six million fractures in the United States every year. The majority of these occur in the cortical portion of long bones, for which current treatment methods are generally effective, even in patients with osteoporosis. However, fractures in regions of cancellous bone tend to be highly variable and difficult to repair with currently available treatment methods. The objectives of treatment are to restore the fractured bone to its anatomic position and to regain mobility in the shortest possible time, with the least expense. The first step in achieving these objectives is to realign the fractured bone by manipulation, or "reduction." Depending on the complexity of the fracture, reduction may be achieved by manual manipulation, traction or through a surgical procedure. Once reduction has been achieved, the fractured bone must be immobilized through fixation to maintain proper alignment and to allow proper healing. Current fixation techniques include casting, external fixators and internal fixation with orthopaedic hardware. Maintaining reduction with hardware is often difficult because hardware tends to dislodge from porous cancellous bone. In addition, reduction of crushed cancellous bone often leaves significant voids. Current void filling materials, such as bone grafts and synthetic bone graft material, provide a scaffolding for new bone growth, but do not provide sufficient structural support for immobilization of the fracture site. When immobilization of the fracture fragments is not maintained, reduction is lost and the bone heals out of alignment resulting in "malunion." With current treatment methods, cancellous bone fractures often heal in some degree of malunion creating varying levels of compromised patient function. Fractures in osteoporotic bone are even more susceptible to loss of reduction and healing in malunion. Additionally, if a fracture involving a joint heals in malunion, there is increased potential for additional complications, such as arthritis. There are also significant costs related to the extent of rehabilitation necessary for orthopaedic trauma patients. The time required for rehabilitation can vary greatly and is generally related to the duration of immobilization. Long periods of immobilization may be required for proper fracture healing and are generally followed by extensive rehabilitation which is often a significant portion of the cost associated with fracture treatment. While an accelerated rehabilitation schedule may decrease the length of immobilization and overall treatment costs, it may also lead to an increased risk of loss of reduction resulting in malunion. Therefore, a need exists for a treatment that provides direct structural support to compromised cancellous bone, permitting an earlier return to functionality and improving long-term patient outcomes. THE NORIAN SRS SOLUTION Norian SRS is an injectable, moldable and biocompatible cancellous bone fixation and replacement material designed to overcome the shortcomings of currently available fracture treatment methods. By providing structural support directly to the fracture site, the Company believes that the use of Norian SRS will decrease the risk of a loss of reduction and contribute to improved long-term patient outcomes. Norian SRS is supplied as a kit containing a sterile calcium and phosphate source powder and a liquid solution that are mixed together to form a paste. Norian SRS has a five minute working time during which it can be inserted into compromised cancellous bone during an open surgical procedure or by percutaneous injection. Norian SRS is radiopaque, permitting the surgeon to confirm its proper placement by monitoring the procedure using an x-ray fluoroscope. Approxi- 23 26 mately 10 minutes after insertion, Norian SRS sets into a hard, ceramic-like material without damaging surrounding tissue. Within 12 hours, Norian SRS cures, assumes a crystallographic structure that mimics the mineral phase of bone, and attains its ultimate physical strength, which can support greater compressive loads than natural cancellous bone. During the setting and curing process, the volume of Norian SRS remains unchanged, thus maintaining integral contact with the surrounding host bone. As a result of its chemical and crystallographic similarity to host bone, Norian SRS appears to be gradually replaced by natural bone through the remodeling process. The key benefits of Norian SRS are: - Provides Structural Support. The Company believes that Norian SRS provides direct structural support to compromised cancellous bone and can withstand compressive mechanical force soon after a procedure. As a result, treatment with Norian SRS may facilitate load bearing earlier in the healing process and provide structural support over time. In certain cases, orthopaedic hardware may be combined with Norian SRS to optimally stabilize the damaged area. - Improves Patient Outcomes. The Company believes that Norian SRS improves the maintenance of reduction during the healing process and facilitates the rapid return to mobility, thereby improving the long-term functionality of the patient. Rapid return to mobility is particularly important for the elderly, because extensive periods of immobility may lead to additional complications, such as pneumonia and circulatory problems. - Remodels into Natural Bone. Norian SRS mimics the mineral phase of bone, and animal studies indicate that Norian SRS is gradually replaced by natural bone over time. Radiographic evidence from humans treated with Norian SRS is consistent with the remodeling process observed in the animal studies. Moreover, Norian SRS is non-toxic, does not appear to cause inflammation in surrounding tissue, does not generate heat and has passed the applicable medical device safety and toxicity tests. - Simplifies Fracture Fixation. Norian SRS is a moldable paste that may be injected or manually inserted into a fracture void, assuming the shape of the void while hardening without shrinkage. In certain unstable fractures, Norian SRS can be injected percutaneously, reducing the need for invasive open surgical procedures to implant, and subsequently remove, orthopaedic hardware. NORIAN'S STRATEGY Norian's strategy is to establish Norian SRS as the leading cancellous bone fixation and replacement product to be used independently or in conjunction with conventional fixation devices. The principal elements of the Company's strategy are: - Seek Regulatory Approvals in Targeted Markets. The Company seeks to obtain required regulatory approvals initially in countries with large potential markets that have favorable regulatory environments. Currently, the Company is seeking to obtain the right to affix the CE mark on Norian SRS to market the product in Europe. In the United States, the Company intends to file a PMA application seeking labeling for usage of Norian SRS in areas of cancellous bone throughout the body. There can be no assurance that the FDA will approve the Company's product or that it will grant labeling for all uses requested by the Company. The Company plans to conduct clinical trials of the use of Norian SRS for various applications and to support an application to the FDA for label expansion, if necessary. The Company, with its Japanese partner, Mochida, intends to file applications for Japanese regulatory approval from the MHW and plans to conduct clinical trials to support reimbursement approval in Japan. - Demonstrate Clinical Utility. The Company intends to use data collected from clinical trials to demonstrate to physicians and health care payors the anticipated clinical advantages of 24 27 Norian SRS compared to current treatment methods. The Company believes that Norian SRS may decrease time to patient mobility and increase short- and long-term functionality resulting in improved patient outcomes. - Establish Physician Education and Training. Physician education is an accepted method of introducing new surgical methods and products for orthopaedic procedures. Accordingly, Norian believes that ongoing physician education and training will be a critical element in the adoption of Norian SRS as the preferred treatment for damaged cancellous bone. The Company intends to conduct training sessions led by highly respected orthopaedic trauma surgeons in targeted markets. Additionally, the Company plans to provide supplemental physician education through peer-reviewed publications regarding the Company's clinical trials. - Implement Focused Product Distribution. Norian SRS will be marketed primarily to orthopaedic surgeons. If and when FDA approval is received, the Company plans to market Norian SRS in the United States through a direct network of product specialists. Upon required regulatory approval in Europe, the Company plans to market Norian SRS through a combination of a direct European sales force and, in certain countries, through distributors. In Japan, upon required regulatory approval, the Company plans to market Norian SRS through its collaboration with Mochida. - Seek Reimbursement by Third-Party Payors. The Company intends to use data collected in its clinical studies to demonstrate the cost-effectiveness of Norian SRS and to establish third-party reimbursement. In Europe and the United States, the Company will focus its efforts on obtaining reimbursement from a broad range of third-party payors, including private entities such as insurance carriers and governmental entities. In Japan, the Company will seek reimbursement approval from the MHW in collaboration with Mochida. - Access New Market Opportunities. The Company believes that several additional applications for both human and animal bone may be candidates for Norian SRS. The Company intends to explore other applications for its technology in which improved patient outcomes and reduced medical costs can be demonstrated. The Company may pursue these other applications independently or in collaboration with third parties. CLINICAL APPLICATIONS Initially, the Company is focusing on the development of four clinical applications for the use of Norian SRS: the wrist, the hip, the knee and the spine. In the United States, the Company intends to file a PMA application seeking labeling for usage of Norian SRS in regions of cancellous bone throughout the body. However, there can be no assurance that the FDA will approve the product or that any approval will not restrict the anatomic sites and types of procedures for which Norian SRS may be used. The Company intends to use data from clinical trials to support regulatory filings, reimbursement approvals and marketing efforts in the United States. Wrist Fractures In 1994, there were approximately 700,000 fractures of the wrist, or distal radius, in the United States. Stable wrist fractures are those that maintain anatomic alignment after reduction. These fractures are generally treated by closed reduction, placed in a cast for six weeks and are usually followed by rehabilitative physical therapy. However, a significant number of these fractures become unstable following reduction and casting, frequently resulting in a loss of reduction which necessitates further clinical intervention. Unstable wrist fractures are those that cannot maintain reduction and require pinning with casting, external fixator frames, or an open surgical procedure to implant hardware. Furthermore, unstable fractures generally require extended periods of immobilization, resulting in the need for long-term rehabilitation to regain function. 25 28 The Company believes that the use of Norian SRS will provide direct structural support at the fracture site for unstable wrist fractures. Norian SRS may be inserted into bone voids to counter the compressive forces across the wrist and to maintain anatomic alignment of the bone fragments. This may result in a lower incidence of malunion and improved functional outcome for the patient. Moreover, the Company believes that because the application of Norian SRS maintains reduction, patients may begin rehabilitative therapy earlier in the healing process. The Company began a randomized, multi-center distal radius fracture trial involving up to 324 patients under an FDA-approved IDE in February 1995. The primary clinical endpoints of this study will be measured by radiographic analysis of the fracture site and functional outcomes such as grip strength and range of motion. As of April 30, 1996, the Company had enrolled 196 patients in this trial. Hip Fractures The fracture of the intertrochanteric region of the upper femur is one of the most devastating injuries that can affect the elderly. There are approximately 150,000 intertrochanteric fractures each year in the United States, occurring primarily in osteoporotic patients over the age of 70. Intertrochanteric fractures are commonly treated with specialized orthopaedic hardware known as sliding hip screws. Although surgery may be initially successful, many patients develop impaired functional outcomes when osteoporotic bone collapses along the fracture site or when the hardware loses fixation. Between 14% and 36% of all intertrochanteric fracture patients die of complications within the first year following the fracture. By placing Norian SRS into the voids left by crushed cancellous bone and into the areas surrounding the hardware, the Company believes that the material will improve hardware fixation and enhance structural support. The Company believes that this will allow the patient to achieve mobility, maintain proper positioning of the hip during healing and begin earlier rehabilitation. Post-operative ambulation and the ability to commence rehabilitation early in the healing process are critical to the survival of an individual suffering a hip fracture. In 1995, the Company began feasibility studies in two sites in Europe of the use of Norian SRS in the treatment of hip fractures in 45 patients, 12 of whom suffered from intertrochanteric fractures. Based on preliminary information obtained from these studies, the Company believes that Norian SRS may be used in the treatment of intertrochanteric fractures. The Company intends to conduct clinical trials to demonstrate a significant reduction in time to mobility for patients with intertrochanteric fractures treated with Norian SRS as compared to those treated solely with current treatment methods. Tibial Plateau Fractures Each year in the United States there are approximately 55,000 tibial plateau fractures, which are fractures of the bone just below the knee. Tibial plateau fractures are particularly challenging to the orthopaedic surgeon because of their variety and complexity. These fractures depress portions of the joint surfaces crushing underlying areas of cancellous bone which the surgeon must then elevate. The process of elevating tibial plateau fractures results in a void in the area below the joint surface. The current method of treatment generally involves filling these voids with bone grafts or bone substitutes. As a result of the inability of bone grafts and bone substitutes to provide immediate and direct structural support, orthopaedic hardware is required to maintain proper alignment. In addition, the patient is usually immobilized for up to 12 weeks because even minor compressive loads can destroy anatomic alignment of the joint surface resulting in pain and some loss of function for the patient. Additionally, there is an increased risk that the patient will develop arthritis of the knee and may eventually require a total knee replacement. Norian SRS may be used to fill the voids remaining after the surgical elevation of the tibial plateau surface. The Company believes that Norian SRS may provide sufficient structural support for 26 29 the tibial plateau surface, thereby limiting the need for extended immobilization and facilitating an expedited recovery as well as a more functional joint. Additionally, depending upon the fracture pattern, the use of Norian SRS may reduce the need for internal fixation hardware, thereby limiting the need for multiple invasive surgical procedures. The Company has obtained all of its clinical experience regarding the use of Norian SRS in tibial plateau fractures from 25 test-market cases in the Netherlands. The Company intends to conduct a multi-center clinical trial to evaluate the use of Norian SRS in the treatment of tibial plateau fractures. The Company has drafted protocols for these clinical trials which are currently under review by clinical investigators. Spinal Reconstructions The Company believes that there is a potentially broad range of uses for Norian SRS in disorders of the spine as a result of the prominence of cancellous bone in spinal vertebrae. In a limited number of test-market cases in the Netherlands, Norian SRS has been used in spinal reconstructions to improve the fixation of cancellous bone screws in the spine to achieve optimal structural support. The Company is currently exploring other potential applications, such as the use of Norian SRS in spinal surgery on osteoporotic patients. Generally, surgeons avoid invasive spinal procedures on elderly osteoporotic patients because of the possibility of severe complications and uncertain outcomes. Based on cadaver studies, the Company believes that Norian SRS may increase the feasibility of such procedures and result in more predictable outcomes by securing conventional orthopaedic hardware in osteoporotic bone in the spine or by providing a minimally invasive procedure through injection of Norian SRS to restore the anatomy of crushed vertebral bodies. The Company is currently identifying potential clinical trials to verify the benefits of Norian SRS in spinal applications. The Company plans to use data from these clinical trials to illustrate the viability of successful spinal surgery on osteoporotic patients with the use of Norian SRS. Other Potential Applications Several additional potential applications of Norian SRS are currently being evaluated by the Company, some of which have been or continue to be the subject of limited clinical studies, pre-clinical studies and limited test-marketing experiences. Norian SRS has been used in the treatment of femoral neck hip fractures in 29 patients. The Company believes that Norian SRS can eliminate the need for complicated procedures in the repair of femoral neck fractures as well as improve the success rate of femoral neck fractures repaired by orthopaedic hardware when Norian SRS is used to augment such hardware. Norian SRS has been used in the treatment of five patients with fractures of the calcaneus, the heel of the foot. Repair of the calcaneus requires decompression of the fractured bone which often results in a void that the Company believes could be filled with Norian SRS to reestablish compressive load capacity. Avascular necrosis is a disorder that occurs when cancellous bone is deprived of its blood supply and usually results in localized bone death. The Company believes that Norian SRS could be used to fill a region of avascular necrosis-afflicted bone to reinforce surrounding viable bone. The Company also believes that there are applications for Norian SRS in total joint replacements, including filling all gaps between the replacement and host bone with Norian SRS to reduce the possibility of slippage and pain. The Company also believes that Norian SRS may be used in the repair of the anterior cruciate ligament in the knee by replacing the conventional method of tendon grafting to reconstruct the ligament. Additionally, the Company is evaluating other potential uses of Norian SRS in areas of cancellous bone such as in fractures of the shoulder, ankle, hand and foot. Norian SRS may also have important uses in a variety of non-orthopaedic bone filling and stabilization procedures for oral and maxillofacial surgery, neurosurgery, craniofacial surgery, certain dental applications and certain veterinary applications. The Company has discussed potential business relationships with collaborators in these fields. However, no definitive agreements have 27 30 been reached and there can be no assurance that the Company will enter into any of these markets or that it will be successful in penetrating any such markets. PHYSICIAN EDUCATION AND TRAINING Physician education and training is an accepted method of introducing new surgical methods and products for orthopaedic procedures. The Company believes that physician acceptance is a critical element in the successful introduction of Norian SRS into the marketplace and therefore plans to establish an extensive education and training program for physicians. These programs will address product attributes and the appropriate clinical applications developed by the Company and will be conducted initially by both domestic and international clinical investigators. The Company will focus these initial training efforts on highly respected opinion leaders in the orthopaedic community and on orthopaedic surgeons with high volume practices or residency programs. Other objectives of these programs may include the penetration of new geographical markets or the introduction of new clinical applications. Mochida will manage similar training and education programs for surgeons in Japan. PRODUCT MARKETING Following the initial surgeon training, the Company also intends to provide technical support to orthopaedic surgeons in operative procedures. To provide this logistical support and reinforcement at the time of surgery, the Company intends to hire product specialists who will be located in major markets and will manage the distribution of Norian SRS in their regions. In certain European regions where the Company determines a direct product specialist is appropriate and most effective, it will implement the same strategy. These experienced orthopaedic trauma representatives will complete the Norian training program to qualify to assist at the clinician education programs and conduct in-service training for relevant hospital personnel. Outside the United States, in regions in which the Company relies on a third-party distributor or corporate partner, the Company expects to ensure maintenance of an equivalent standard of education, training and support services. In April 1996, the Company and Mochida entered into a collaborative agreement for the exclusive marketing and distribution of Norian SRS in Japan for use in certain applications. The agreement provides for payments by Mochida to Norian of up to a total of $15.0 million, consisting of a $7.0 million equity investment completed in April 1996, and $8.0 million in non-refundable payments based on achievement of time-related, clinical and regulatory milestones, of which $2.0 million was received upon execution of the contract. Mochida will be responsible for performing clinical development in accordance with the Company's protocols and obtaining government approval for Norian SRS in Japan. The Company will be responsible for manufacturing and supplying the product to Mochida. The agreement has an initial term ending on the earlier of 10 years from the date of regulatory approval to commence commercial sales of Norian SRS in Japan or 15 years from the date of the agreement. RESEARCH AND DEVELOPMENT The Company maintains facilities for chemical and analytical research staffed by leading researchers in the field of calcium phosphate material development. The Company supports a staff of scientists who evaluate product applications, conduct biomechanical and animal research, develop surgical techniques and design and manage clinical trials. The Company's current research and development efforts are primarily focused on identifying and developing new clinical applications using an internal system to evaluate, research and prioritize specific Norian SRS application ideas to ensure that any potential application is consistent with the Company's strategy. The Company is currently refining the Norian SRS packaging, mixing and delivery system initially for European commercialization following receipt of the right to affix the CE mark and any other regulatory approvals. As of April 30, 1996, the Company had 24 employees engaged in research and development activities. For the three months ended March 31, 1996, and for the years ended 28 31 December 31, 1995, 1994 and 1993, the Company has expended approximately $1.9 million, $4.6 million, $3.1 million and $2.6 million on research and development, respectively. SCIENTIFIC ADVISORY BOARD Norian's Scientific Advisory Board ("SAB") is composed of leaders in orthopaedic and basic science. SAB members advise the Company's management on product application development and future research plans. SAB members also work with management to design, conduct and evaluate specific research protocols. SAB members provide additional review of the Company's clinical trial results and regulatory submissions. The SAB convenes at least once a year. Certain SAB members also consult with the Company on a more frequent basis.
NAME POSITION - --------------------------------- --------------------------------------------------------- Thomas W. Bauer, M.D., Ph.D. Staff Pathologist and Member, Departments of Pathology and Orthopaedic Surgery, Cleveland Clinic Foundation, Cleveland, Ohio David C. Baylink, M.D. Professor of Orthopaedic and Oral Surgery and Biochemistry, Loma Linda University; Chief of Mineral Metabolism, Jerry L. Pettis Memorial Veterans Hospital, Loma Linda, California Dennis R. Carter, Ph.D. Professor of Mechanical Engineering and Chairman, Biomechanical Engineering Division, Stanford University; Associate Director, Rehabilitation Research and Development Center, Veterans Affairs Medical Center, Palo Alto, California Thomas A. Einhorn, M.D. Attending Orthopaedic Surgeon; Professor of Orthopaedics and Director of Orthopaedic Research, Mount Sinai School of Medicine, New York, New York Steven A. Goldstein, Ph.D. Professor of Surgery and Director of Orthopaedic Research, University of Michigan; Professor of Mechanical Engineering and Applied Mechanics, Appointment as Professor of Bioengineering and Research Scientist, Institute of Gerontology; Assistant Dean for Research and Graduate Studies, University of Michigan Medical School John Ross, Ph.D. Professor of Chemistry, Stanford University; Member, National Academy of Sciences
In addition to the SAB, the Company also utilizes the consulting services of four practicing orthopaedic surgeons who act as medical directors in their respective areas of clinical expertise which coincide with the Company's first four clinical applications. MANUFACTURING The Company manufactures Norian SRS at its facility in Cupertino, California for clinical trials and for test-marketing in the Netherlands in accordance with FDA GMP regulations for medical devices. The Company intends to obtain ISO 9000 series quality certification in order to fulfill the quality system requirements for the CE mark. Accordingly, all manufacturing processes are defined by change-controlled documentation consisting of written specifications and procedures. These encompass the entire manufacturing process, from procurement of parts and raw materials from vendors through maintenance of post-distribution product tracking, complaint handling and reporting. Formal review and approval by research and development, quality assurance, manufacturing, and other functional groups, as appropriate, is required for the initial release of controlled documentation and for changes to released documentation. The Company's manufacturing facilities are subject to GMP inspections by CDHS. Norian was inspected by the CDHS in 1995 and was issued a California state license as a result of that inspection. There can be no assurance that future inspections of the Company's facilities will not reveal violations of applicable manufacturing standards. Any such violation could result in the suspension of the Company's manufacturing operations which would materially and adversely affect 29 32 the Company's business, financial condition and results of operations. Norian is also subject to certain federal, state and local regulations regarding safety, environmental protection and hazardous materials controls. To date, the Company has limited manufacturing experience, which has consisted of producing single lots of Norian SRS for clinical trials and test-marketing in the Netherlands. The Company holds an 801(e) foreign export approval from the FDA to provide for the shipping of Norian SRS to the Netherlands. Currently, the Company does not have the experience nor the equipment necessary to manufacture its products in commercial volumes. No assurance can be given that the Company will be successful in developing such manufacturing capability, and even if such manufacturing capability is developed, no assurance can be given that it will be successfully implemented by the Company. PATENTS AND PROPRIETARY INFORMATION The Company holds 13 United States patents, two of which cover the current formulation of Norian SRS, and five of which cover other formulations of calcium phosphate cements that may be used in future products or to prevent third parties from developing similar technology. In addition, the Company has four patents on CrystalCoat and two patents on Healos, both of which are biomaterials developed by the Company and licensed exclusively to third parties for certain applications. The Company has also obtained patents on Norian SRS in 13 European countries and in Canada. Additionally, the Company has seven United States and several foreign applications pending. There can be no assurance that pending patent applications will be allowed or that any of the Company's patents will provide protection for the Company's products. The Company expects to continue to file additional patent applications to protect its proprietary technologies. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the measures taken by the Company to protect its proprietary technology will prevent misappropriation of such technology, and such protections may not preclude competitors from developing products similar to the Company's products. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. The failure of the Company to protect its proprietary information would have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to continue to file patent applications where it believes it is appropriate to protect its proprietary technologies. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary technology will prevent misappropriation of such technology, and such protections may not preclude competitors from developing products with functionality or features similar to the Company's products. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. The failure of the Company to protect its proprietary information would have a material adverse effect on the Company's business, financial condition and results of operations. While the Company believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communications from third parties asserting that the Company's products infringe, or may infringe, the proprietary rights of such third parties. In Japan, the Company is aware of a patent and several patent applications filed by a Japanese corporation which claim ratio compositions comprising two of the components of Norian SRS. Although the claimed composition does not contain the other components of Norian SRS, the specific formulation of Norian SRS currently in clinical and commercial use by the Company in countries other than Japan may have a ratio of those two components that fall within the range claimed by such patent and patent applications. In addition, 30 33 the Company is aware that a Japanese corporation has filed a patent application in Japan, and several counterpart applications in countries outside the United States, that include a composition of matter claim covering one of the components of Norian SRS. If a patent including this claim were to issue, Norian SRS, in its current formulation, may be deemed to infringe such patent. The Company believes that this composition of matter claim may be found to be overly broad or anticipated by prior art and that, as a result, a patent including this claim may not issue, or if a patent issues, such claim may not be enforceable. There can be no assurance that the Japanese entity or another entity will not bring a claim of patent infringement against the Company or that the Company's product will not be determined to be infringing. Any such claims, including meritless claims, could result in costly, time-consuming litigation and diversion of technical and management personnel. In the event any third party were to make a valid claim and a license were not made available on commercially reasonable terms, or if the Company were unable to develop non-infringing alternative technology, the Company's business, financial condition and results of operations could be materially adversely affected. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. There can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings declared by the USPTO to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings and related legal and administrative proceedings are both costly and time consuming. Litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition to patents, the Company relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through appropriate confidentiality and proprietary information agreements. The agreements generally provide that all inventions conceived of by the individual in the course of rendering services to the Company, shall be the exclusive property of the Company; however, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance that proprietary information or confidentiality agreements with employees, consultants and others will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to, or independently developed by, competitors. GOVERNMENT REGULATION United States The medical devices to be marketed and manufactured by the Company are subject to extensive regulation by the FDA. Pursuant to the FDA Act and the regulations promulgated thereunder, the FDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, 31 34 injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by the Company. In the United States, medical devices are classified into one of three classes (Class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Under FDA regulations, Class I devices are subject to general controls (for example, labeling, premarket notification and adherence to GMPs) and Class II devices are subject to general and special controls (for example, performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (for example, life-sustaining, life- supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices). Before a new device can be introduced into the market, the manufacturer must generally obtain marketing clearance through either a 510(k) notification or a PMA application. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for a PMA. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information or data are needed before a substantial equivalence determination can be made. A request for additional data may require that clinical studies of the device's safety and efficacy be performed. Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues an order finding the device to be "substantially equivalent" to a predicate device. The FDA has recently been requiring a more rigorous demonstration of substantial equivalence than it has in the past. It generally takes from four to twelve months from the date of submission to obtain a 510(k) clearance, but may take longer. A "not substantially equivalent" determination, or a request for additional information, could delay the market introduction of new products that fall into this category and could have a material adverse effect on the Company's business, financial condition and results of operations. For any of the Company's products that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or efficacy of the device that constitute a major change to the intended use of the device will require new 510(k) submissions. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device, or if it is a Class III device for which FDA has called for PMA applications. A PMA application must be supported by valid scientific evidence which typically includes extensive data, including human clinical trial data, to demonstrate the safety and effectiveness of the device. The PMA application must also contain the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and training methods. Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA application. An FDA review of a PMA application generally takes one to two years from the date the PMA application is accepted for filing, but may take significantly longer. The review time is often significantly extended by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, will likely be convened to review and evaluate the application and 32 35 provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendations of the advisory panel. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable GMP requirements. If the FDA's evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an "approvable letter," which usually contains a number of conditions which must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA application approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities are not favorable, the FDA will deny approval of the PMA application or issue a "not approvable letter." The FDA may also determine that additional clinical trials are necessary, in which case PMA approval may be delayed for several years while additional clinical trials are conducted and submitted in an amendment to the PMA application. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Modifications to a device that is the subject of an approved PMA application, its labeling, or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA application often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA application. There can be no assurance that the Company will be able to obtain necessary regulatory approvals on a timely basis, or at all, and delays in receipt of or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operation. If human clinical trials of a device are required in connection with either a 510(k) notification or a PMA application, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) is required to file an IDE application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is reviewed and approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs, but not the FDA. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to and approved by the FDA before a sponsor or an investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. The Company believes that an FDA-approved PMA application will be required to market Norian SRS in the United States. The Company is currently conducting clinical studies of Norian SRS pursuant to an FDA-approved IDE to collect data necessary to support a PMA application. Although the Company plans to pursue approval for use of Norian SRS as cancellous bone cement at any anatomic site where cancellous bone exists, only wrist fractures are currently being studied in the United States under the Company's FDA-approved IDE. The Company plans to provide clinical data of the safety and effectiveness of Norian SRS as a cancellous bone cement for anatomic sites other than the wrist with data from clinical trials being conducted in the United States and abroad. The FDA analyzes data from foreign clinical studies more critically, and there can be no assurance that the Company's foreign clinical data will be accepted as part of the Company's PMA application. 33 36 On two occasions the Company has expanded the number of sites at which it is conducting its clinical studies in the United States due to slow enrollment of patients at existing sites. There can be no assurance that the Company will be successful in enrolling sufficient numbers of patients to complete its clinical studies. Moreover, there can be no assurance that data from any completed domestic or foreign clinical studies will demonstrate the safety and effectiveness of Norian SRS or that such data will otherwise be adequate to support approval of a PMA application. In addition, if approval of a PMA application is obtained, there can be no assurance that such approval will not significantly restrict the anatomic sites and types of procedures for which Norian SRS can be used. Failure to obtain approval of a PMA application or restrictions on the anatomic sites and types of procedures for which Norian SRS can be used would have a material adverse effect on the Company's business, financial condition and results of operations. Any products manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to extensive regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register their establishments and list their devices with the FDA and certain state agencies, and are subject to periodic inspections by the FDA and certain state agencies, including the CDHS. The FDC Act requires devices to be manufactured in accordance with GMP regulations which impose certain procedural and documentation requirements upon the Company with respect to manufacturing and quality assurance activities. The FDA has proposed changes to the GMP regulations including design documentation requirements which, if finalized, would likely increase the cost of complying with GMP requirements. Labeling and promotion activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses. The Company and its products are also subject to a variety of state laws and regulations in those states or localities where its products are or will be marketed. Any applicable state or local regulations may hinder the Company's ability to market its products in those states or localities. Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations now or in the future or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business. The Company's products are subject to extensive regulation by the FDA and other foreign and domestic regulatory authorities. Changes in existing requirements or adoption of new requirements or policies could adversely affect the ability of the Company to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not be required to incur significant costs to comply with laws and regulations in the future or that laws or regulations will not have a material adverse effect upon the Company's business, financial condition and results of operations. International Exports of products that have market clearance from FDA do not require FDA export approval. However, some foreign countries require manufacturers to provide an FDA certificate for products for export ("CPE") which requires the device manufacturer to certify to the FDA that the product has been granted premarket clearance in the United States and that the manufacturing facilities appeared to be in compliance with the GMPs at the time of the last GMP inspection. The FDA will refuse to issue a CPE if significant outstanding GMP violations exist. The introduction of the Company's products in foreign markets will also subject the Company to foreign regulatory clearances which may impose additional substantial costs and burdens. Interna- 34 37 tional sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements and import restrictions on devices. In addition, each country has its own tariff regulations, duties and tax requirements. The approval by the FDA and foreign government authorities is unpredictable and uncertain, and no assurance can be given that the necessary approvals or clearances will be granted on a timely basis or at all. Delays in receipt of, or failure to receive, such approvals or clearances, or the loss of any previously received approvals or clearances could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company is in the process of implementing policies and procedures which are intended to allow the Company to receive ISO 9000 series certification of its processes. ISO 9000 series certification is one of the quality systems satisfying the CE mark certification requirements. Failure to receive the right to affix the CE mark will prohibit the Company from selling its products in member countries of the EU after mid-1998. There can be no assurance that the Company will be successful in meeting certification requirements. THIRD-PARTY REIMBURSEMENT The majority of Medicare expenditures in 1993 were attributable to inpatient hospital care. Medicare inpatient reimbursement was changed from a cost-based retrospective system to a prospective reimbursement system in 1983. Rates are set in advance, fixed for a specific fiscal period, constitute full institutional payment for the designated service and generally do not vary with hospital treatment costs. When the cost of providing service differs from the payment rate, the hospital makes a profit or experiences a shortfall. In the United States, health care providers, such as hospitals and physicians that purchase medical devices for treatment of their patients, generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices. Private insurance plans are central to new product acceptance. Successful sales of Norian SRS in the United States and other markets will depend on the availability of adequate reimbursement from third-party payors. There is significant uncertainty concerning third-party reimbursement for the use of any medical device incorporating new technology. Even if the Company receives approval of a PMA application for Norian SRS for orthopaedic uses, third-party payors may nevertheless deny reimbursement or reimburse at a low price if they conclude that using it is not cost-effective, not medically necessary, or is used for an unapproved indication. Furthermore, third-party payors are increasingly challenging the need to perform medical procedures, or limiting reimbursement for those that are performed. There can be no assurance that use of Norian SRS will be considered cost-effective or medically necessary by third-party payors, that reimbursement will be available or, if available, that payors' reimbursement policies will not adversely affect the Company's ability to sell its products on a profitable basis. The market for the Company's products could also be adversely affected by recent federal legislation that reduces reimbursement under the cost pass-through system for the Medicare program. In addition, an increasing emphasis on managed care in the United States has and will continue to increase the pressure on medical device pricing. The Company cannot predict whether legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business. The announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals or efforts could have a material adverse effect on the Company's business, financial condition and results of operations. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors and/or changes in governmental and private third-party payors' policies toward reimbursement for procedures employing the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. Member countries of the EU operate various combinations of centrally-financed health care systems and private health insurance systems. The relative importance of government and private 35 38 systems varies from country to country. The choice of devices is subject to constraints imposed by the availability of funds within the purchasing institution. Medical devices are most commonly sold to hospitals or health care facilities at a price set by negotiation between the buyer and the seller. A contract to purchase products may result from an individual initiative or as a result of a public invitation and a competitive bidding process. In either case, the purchaser pays the supplier. Payment terms can vary widely throughout the EU. In Japan, at the end of the regulatory process, the MHW makes a determination of the per unit sales price of the product. The MHW can set the reimbursement level for Norian SRS at its discretion and there can be no assurance that the Company will be able to obtain regulatory approval in Japan or if such approval is granted that the Company will obtain a favorable per unit sales price. Through the patient informed consent process, the Company receives full access to the United States clinical trial patient's hospital discharge financial record and other medical financial information. By comparing the cost outcomes of treated patients, and control patients, the Company expects to substantiate the claim that Norian SRS provides overall reduction in costs which outweighs the incremental added cost of the product. COMPETITION The Company competes with a number of manufacturers of bone fixation and replacement devices. Products that are competitive with Norian SRS include casts, splints, external fixators, internal fixators, bone grafts, bone graft substitutes and bone cement. Most of the Company's competitors have significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than any which are being developed by the Company or which would render the Company's products obsolete or noncompetitive. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. Any product developed by the Company that receives regulatory approval will have to compete for market acceptance and market share. The Company believes that the primary competitive factors in the market for bone fixation and replacement devices include clinical need and efficacy, relative cost for the episode of care and ease of use. Another important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete clinical testing and regulatory approval processes and supply commercial quantities of the product to the market is expected to be an important competitive factor. PRODUCT LIABILITY AND INSURANCE The Company's business involves the risk of product liability claims. The Company has not experienced any product liability claims to date. Although the Company maintains product liability insurance with coverage limits of $1.0 million per occurrence and an annual aggregate maximum of $1.0 million, and general commercial liability insurance with an additional $3.0 million umbrella coverage per occurrence and an annual aggregate maximum of $3.0 million, there can be no assurance that product liability claims will not exceed such insurance coverage limits, which could have a material adverse effect on the Company, or that such insurance will continue to be available on commercially reasonable terms, if at all. EMPLOYEES As of April 30, 1996, the Company had 52 full-time employees, of which 24 persons were engaged in research and development activities, nine persons in manufacturing and facilities, four persons in quality assurance and regulatory affairs, seven persons in sales and marketing and eight 36 39 persons in general and administrative functions. No employees are covered by collective bargaining agreements, and the Company believes it maintains good relations with its employees. FACILITIES AND OPERATIONS The Company leases a 20,100-square foot facility in Cupertino, California. The facility is leased through December 1999, with an option to renew for an additional five-year term. The Cupertino facility contains research, development, manufacturing, marketing and administrative space. In addition, the Company leases approximately 950 square feet of office space in Naarden, Netherlands under a lease expiring February 2000, and 900 square feet of office space in Bedale, United Kingdom under a lease that terminates at the Company's option, on three months' notice. The Company is currently negotiating the lease of additional office space in Cupertino, California to accommodate expanded marketing and administrative functions, although no definitive agreement has been reached. 37 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages as of March 31, 1996 are as follows:
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ Brent R. Constantz, Ph.D.................. 37 President and Chief Executive Officer, Chief Scientist and Director Claude O. Pering.......................... 50 Executive Vice President, Operations Marc E. Faerber........................... 41 Vice President, Finance and Chief Financial Officer F. Lee Fagot.............................. 49 Vice President, Marketing and Business Development Albert M. Jackson......................... 63 Vice President, Quality Assurance and Regulatory Affairs John Little, Ph.D......................... 50 Vice President, Europe Robert D. Poser, D.V.M.................... 42 Vice President, Research and Development Susanne T. Smith, R.N., M.S............... 46 Vice President, Clinical Affairs Costa G. Sevastopoulos, Ph.D.(1)(2)....... 53 Chairman of the Board Jon N. Gilbert(1)......................... 33 Director Peter Barton Hutt, Esq.(1)................ 62 Director Harry B. Skinner, M.D., Ph.D.(2).......... 54 Director Hansjorg Wyss(2).......................... 60 Director
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Dr. Constantz founded the Company in 1987 and has been a member of the Board of Directors since that time. Dr. Constantz served as the Chairman of the Company from its inception until September 1993. He was elected President and Chief Executive Officer of the Company in March 1994. Following the completion of certain performance milestones, the Board of Directors intends to re-elect Dr. Constantz to the position of Chairman of the Company. Dr. Constantz conducted post-doctoral research on isotope geochemistry at the United States Geological Survey and studied protein-crystal interactions in biomineralization as a Fulbright Scholar at the Weizmann Institute of Science in Israel. Dr. Constantz holds a B.A. in Aquatic Biology/Geological Sciences from the University of California, Santa Barbara, and an M.S. and a Ph.D. in Earth Sciences from the University of California, Santa Cruz. Mr. Pering joined the Company in February 1996 as Executive Vice President, Operations. From 1990 to 1996, he was Vice President and Chief Operating Officer of Ace Medical Company, a manufacturer and marketer of orthopaedic trauma devices. He holds a B.S. in Chemistry, Biology and Psychology from Drury College. Mr. Faerber joined the Company in April 1994 as Vice President, Finance and Chief Financial Officer. From 1990 to 1994, he was International and Corporate Controller at Collagen Corporation, a medical device company. He holds a B.S. in Business Administration from Providence College, Rhode Island and is a Certified Public Accountant. Mr. Fagot joined the Company in January 1995 as Vice President, Marketing and Business Development. From 1986 to 1995, Mr. Fagot held several marketing and general management positions with domestic and international divisions of Johnson & Johnson. Mr. Fagot received a B.B.A. in Business Management from North Texas State University. 38 41 Mr. Jackson joined the Company in December 1992 as Vice President, Quality Assurance and Regulatory Affairs. Mr. Jackson was Vice President, Quality Assurance and Regulatory Affairs for Oximetrix, Inc. ("Oximetrix"), a medical device company, from 1975 to 1985, when Oximetrix was acquired by Abbott Laboratories, Inc. ("Abbott"), a medical device and pharmaceutical company. He remained with Abbott until 1992. Mr. Jackson has over 26 years of professional experience in the medical device field. Dr. Little joined the Company in February 1996 as Vice President, Europe. From 1994 to 1995 Dr. Little was Vice President, Sales and Marketing of the CMW division of DePuy International, Ltd., a subsidiary of Boehringer Mannheim, a pharmaceutical and health care products company. Dr. Little received a B.Sc. in Zoology from the University of London, an M.Tech. in Applied Immunology from Brunel University, London, and a Ph.D. in Biochemistry from the University of the Witwatersrand in Johannesburg, South Africa. Dr. Poser joined the Company in January 1993 as the Director of Orthopaedic Research, and was promoted to Vice President of Research and Development in January 1996. Dr. Poser was Head of Experimental Surgery at the Harrington Arthritis Research Center in Phoenix, Arizona from 1989 to 1993. Dr. Poser received a B.S. in Biology from East Carolina University and a D.V.M. from the University of Georgia. Ms. Smith joined the Company in March 1993 as Director of Clinical Research, and was promoted to Vice President, Clinical Affairs in January 1996. From 1992 to 1993, Ms. Smith was Manager of Clinical Research at Triton Diagnostics, Inc., an in vitro cancer diagnostic company, and, from 1990 to 1992, she was Director of Clinical Research at Target Therapeutics, Inc., a neurovascular microcatheter and guidewire company. She holds a B.S. in Nursing from Marymount College of Virginia and an M.S. in Administration from George Mason University. Dr. Sevastopoulos has been a director of the Company since April 1988 and was elected Chairman of the Board in March 1994. He was a general partner of Delphi BioVentures L.P. from 1988 to 1994. Dr. Sevastopoulos is currently self-employed as a private investor and consultant and is also the Chairman of the Board of Metra Biosystems, Inc. He received a B.S. in Physics from the University of Athens, Greece, an M.S. in Electrical Engineering from the California Institute of Technology, an M.B.A. from INSEAD, France, and a Ph.D. in Molecular Biology from the University of California at Berkeley. Mr. Gilbert has served as a director of the Company since April 1995. He is a general partner of Frazier & Company L.P., a private equity firm specializing in health care, which he joined at its inception in 1991. Mr. Gilbert, a Certified Public Accountant, holds a B.A. in Accounting from the University of Washington and an M.B.A. from Dartmouth College. Mr. Hutt has served as a director of the Company since May 1994. Mr. Hutt was Chief Counsel for the FDA from 1971 to 1975 and was responsible for FDA policy relating to the Medical Device Amendments of 1976. Since leaving the FDA in 1975, Mr. Hutt has been a partner with the Washington, D.C. law firm of Covington & Burling, where he specializes in FDA law. Mr. Hutt is a member of the Institute of Medicine of the National Academy of Sciences, and an advisory board member of the Center for the Study of Drug Development at Tufts University. Mr. Hutt teaches a course on food and drug law at Harvard Law School during the winter term. He also serves as a director of Cell Genesys, Inc., Emisphere Technologies, Inc., IDEC Pharmaceuticals Corporation, Interneuron Pharmaceuticals, Inc. and Vivus, Inc. He holds a B.A. in Political Science and Economics from Yale University, an LL.B. from Harvard University, and an LL.M. from New York University under a fellowship from the Food and Drug Law Institute. Dr. Skinner has served as a director of the Company since April 1988. He has been the Chairman of the Department of Orthopaedic Surgery at the College of Medicine at the University of California, Irvine since 1994. He was a professor at the University of California, San Francisco from 1983 to 1994. He is a fellow of the American College of Surgeons and of the American Academy of 39 42 Orthopaedic Surgeons. He has served as the User Vice-Chairman of the F4 Committee of the American Society of Testing Materials dealing with medical devices. In addition, he was the Chairperson of the Medical Device Committee of the American College of Surgeons. He holds a B.S. in Ceramic Engineering from Alfred University, an M.D. from Medical University of South Carolina, and a Ph.D. in Material Science and Engineering from the University of California at Berkeley. Mr. Wyss has been a director of the Company since September 1995. Mr. Wyss is a trustee and board member of the Association for the Study of Internal Fixation ("AO"), and has been Chairman and Chief Executive Officer of SYNTHES (USA), a leading orthopaedic trauma company, since 1977. Mr. Wyss also serves as a director of BE Aerospace, Inc. and Applied Extrusion Technology, Inc. Mr. Wyss holds a B.A. and an M.S. degree in Civil and Structural Engineering from the Swiss Federal Institute of Technology in Zurich, Switzerland, and an M.B.A. from Harvard University. Currently all directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. The Board of Directors has approved an amendment to the Company's Articles of Incorporation which provides that upon the effective date of offering, as long as the Company is a "Listed Company" as defined in Section 301.5 of the California Corporations Code of 1968, as amended, the Board of Directors will be divided into two classes. Each class of directors will consist of three directors, who will serve staggered two-year terms. The Board of Directors has a Compensation Committee, which establishes compensation policies and is responsible for determining the cash and equity compensation for executive officers, and an Audit Committee, which is responsible for reviewing the scope of the work performed by the Company's independent auditors. Officers are elected by and serve at the discretion of the Board of Directors. There are no family relationships among the directors or officers of the Company. EXECUTIVE COMPENSATION The following table sets forth certain information for the year ended December 31, 1995, with respect to the compensation of the Company's Chief Executive Officer and each of the other four most highly compensated executive officers of the Company whose salary and bonus for such fiscal year were in excess of $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------ ---------------------- SECURITIES SALARY UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION ($) BONUS ($) OPTIONS(#) COMPENSATION ($) - ----------------------------------- -------- --------- ------------ ---------------- Brent R. Constantz, Ph.D........... $160,000 $30,000 37,500 $ 6,192(1) President, Chief Executive Officer and Chief Scientist Marc E. Faerber.................... 110,000 10,000 12,500 -- Vice President, Finance and Chief Financial Officer F. Lee Fagot....................... 115,000 -- 31,250 50,000(2) Vice President, Marketing and Business Development Albert J. Jackson.................. 117,000 5,000 6,250 -- Vice President, Quality Assurance and Regulatory Affairs Robert D. Poser, D.V.M............. 114,128 2,500 8,750 -- Vice President, Research and Development
- --------------- (1) Reflects an automobile allowance paid to Dr. Constantz. (2) Reflects relocation expenses paid to Mr. Fagot. 40 43 The following table sets forth certain information for the year ended December 31, 1995, with respect to grants of stock options to Named Executive Officers. The Company has not granted any stock appreciation rights to Named Executive Officers. OPTION GRANTS IN THE LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL -------------------------------------------------- REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL ANNUAL RATES OF SECURITIES OPTIONS STOCK PRICE UNDERLYING GRANTED TO APPRECIATION FOR OPTIONS EMPLOYEES EXERCISE OPTION TERM(3) GRANTED IN FISCAL PRICE EXPIRATION ----------------- NAME (#)(1) YEAR 1995 ($/SH)(2) DATE 5% ($) 10% ($) - ------------------------------ ---------- ---------- ----------- ---------- ------- ------- Brent R. Constantz, Ph.D.(4).................... 37,500 28.0% $2.00 9/26/00 $20,721 $45,788 Marc E. Faerber(5)............ 12,500 9.3 2.00 9/26/00 6,907 15,263 F. Lee Fagot.................. 31,250 23.4 2.00 1/31/00 17,268 38,157 Albert M. Jackson(6).......... 6,250 4.7 2.00 9/26/00 3,454 7,631 Robert D. Poser, D.V.M.(7).... 3,750 2.8 2.00 1/31/00 2,072 4,579 5,000 3.7 2.00 12/04/00 2,763 6,105
- --------------- (1) These options were granted under the Company's 1988 Stock Option Plan and vest at the rate of 1/48th per month beginning on the grant date. (2) The exercise price equals the fair market value of the Common Stock on the date of grant and is to be paid in cash. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares. (3) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance that the actual stock price appreciation over the five-year option term will be at the assumed 5% or 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. (4) On January 30, 1996, the Company granted Dr. Constantz an option to purchase 37,500 shares of Common Stock at an exercise price of $2.00 per share. (5) On January 30, 1996, the Company granted Mr. Faerber an option to purchase 6,250 shares of Common Stock at an exercise price of $2.00 per share, and on May 2, 1996, the Company granted Mr. Faerber an option to purchase 10,000 shares of Common Stock at an exercise price of $9.60 per share. (6) On January 30, 1996, the Company granted Mr. Jackson an option to purchase 6,250 shares of Common Stock at an exercise price of $2.00 per share, and on May 2, 1996, the Company granted Mr. Jackson an option to purchase 10,000 shares of Common Stock at an exercise price of $9.60 per share. (7) On January 30, 1996, the Company granted Dr. Poser an option to purchase 2,500 shares of Common Stock at an exercise price of $2.00 per share, and on May 2, 1996, the Company granted Dr. Poser an option to purchase 10,000 shares of Common Stock at an exercise price of $9.60 per share. The following table sets forth information for the Named Executive Officers regarding the value of unexercised options held as of December 31, 1995. No options were exercised by the Named Executive Officers during the fiscal year ended December 31, 1995. 41 44 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1995(#) DECEMBER 31, 1995(1)($) (EXERCISABLE/ (EXERCISABLE/ NAME UNEXERCISABLE) UNEXERCISABLE) - --------------------------------------- --------------------------- --------------------------- Brent R. Constantz, Ph.D............... 20,312/ 4,688 $ 21,124/$4,876 2,344/35,156 --/ -- Marc E. Faerber........................ 7,812/10,938 6,250/ 8,750 781/11,719 --/ -- F. Lee Fagot(2)........................ --/31,250 --/ -- Albert M. Jackson(3)................... 7,708/ 2,292 8,016/ 2,384 1,302/ 1,198 1,042/ 958 391/ 5,859 --/ -- Robert D. Poser, D.V.M................. 9,115/ 3,385 9,480/ 3,520 1,797/ 1,953 1,438/ 1,562 859/ 2,891 --/ -- --/ 5,000 --/ --
- --------------- (1) Calculated by determining the difference between the fair market value of the securities underlying the option at December 31, 1995 ($2.00 per share as determined by the Board of Directors) and the exercise price of the option. (2) Includes options to purchase 8,463 shares, which Mr. Fagot exercised on March 11, 1996. (3) Includes options to purchase 9,973 shares, which Mr. Jackson exercised on March 5, 1996. DIRECTOR COMPENSATION From October 1993 to December 1995, Dr. Skinner received $700 per month for his service as a director, and, effective January 1996, this monthly stipend was increased to $1,500 per month. In January 1996, the Company also began paying Dr. Sevastopoulos $1,500 per month for his service as the Chairman of the Board of Directors. From time to time, certain directors who are not employees of the Company have received grants of nonstatutory stock options to purchase shares of Common Stock under the 1988 Incentive Stock Option Plan. On January 30, 1996, Drs. Sevastopoulos and Skinner each received 6,250 shares of Common Stock for their service as Chairman of the Board of Directors and as a director, respectively. During 1995 and through March 31, 1996, Mr. Hutt received options to purchase 12,500 shares of Common Stock for his services as a director. Each of the options granted to Drs. Sevastopoulos and Skinner and Mr. Hutt has an exercise price of $2.00 per share. On April 28, 1996, Drs. Sevastopoulos and Skinner and Messrs. Gilbert, Hutt and Wyss each received options to purchase 10,000 shares of Common Stock, all at an exercise price of $9.60 per share, for their service as directors. Under the 1996 Director Option Plan, non-employee directors who first join the Board after this offering will receive options to purchase 10,000 shares of Common Stock, and all non-employee directors will receive annual grants of options to purchase 2,000 shares of Common Stock. See "Stock Plans -- 1988 Stock Option Plan" and "-- 1996 Director Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS During the year ended December 31, 1995, Drs. Constantz and Sevastopoulos and Peter Gleason served as the Compensation Committee of the Company's Board of Directors. Dr. Constantz, who served as President, Chief Executive Officer and Chief Scientist during 1995, resigned as a member of the Compensation Committee in April 1996. Mr. Gleason resigned from the Board of Directors and the Compensation Committee in April 1996. The current members of the Compensation Committee are Drs. Sevastopoulos and Skinner and Mr. Wyss. Dr. Sevastopoulos 42 45 served as Norian's President and Chief Executive Officer from November 1988 to May 1989. See "Management" and "Certain Transactions." STOCK PLANS 1988 Stock Option Plan. As of March 31, 1996, 279,654 shares of Common Stock had been acquired on the exercise of options granted under the Company's 1988 Stock Option Plan (the "1988 Plan"), 453,137 shares of Common Stock were subject to outstanding options, and 142,194 shares were available under the 1988 Plan for issuance on the exercise of options granted in the future. Since March 31, 1996, options to purchase an additional 139,125 shares of Common Stock have been granted under the 1988 Plan, and 15,638 shares of Common Stock have been issued on the exercise of options outstanding at March 31, 1996. Options granted under the 1988 Plan before the effective date of the 1996 Plan will remain outstanding in accordance with their terms, but no further grants will be made under the 1988 Plan after the effective date of this offering. 1996 Stock Plan. The Company's 1996 Stock Plan (the "1996 Plan") was adopted by the Board of Directors in April 1996, and will be submitted for approval by the Company's shareholders in May 1996. The 1996 Plan will serve as the successor equity incentive program to the Company's 1988 Plan upon completion of this offering. The Company has reserved 1,000,000 shares of Common Stock for issuance under the 1996 Plan, plus an automatic increase on each anniversary of the effective date of the 1996 Plan equal to the lesser of 500,000 shares, two percent of the outstanding shares on such date, or an amount determined by the Board. The 1996 Plan provides for the grant of stock options and stock purchase rights to employees (including directors who are employees) and consultants of the Company or any parent or subsidiary of the Company. Incentive stock options (as defined under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")) may be granted only to employees. No person will be eligible to receive an option under the 1996 Plan covering more than 100,000 shares in any fiscal year of the Company, other than new employees of the Company, who will be eligible to receive options covering up to a maximum of 400,000 shares in the calendar year in which they begin employment with the Company. The 1996 Plan will be administered by the Compensation Committee which will have the discretion to determine the terms of options and stock purchase rights (including the exercise price and the vesting schedule), subject to certain statutory limitations and other limitations in the 1996 Plan. In the event of a merger or sale of all or substantially all of the assets of the Company, outstanding options and stock purchase rights under the 1996 Plan may be assumed or substituted for by the successor corporation (if any). In the event such successor corporation refuses to assume or substitute such options or stock purchase rights, the vesting of such awards will accelerate in full immediately prior to such transaction. The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate by its terms in June 2006, unless sooner terminated by the Board. 1996 Director Option Plan. The Company's 1996 Director Option Plan (the "Director Plan") was adopted by the Board in April 1996, and will be submitted for approval by the shareholders in May 1996. The Director Plan will become effective upon completion of this offering. A total of 200,000 shares have been reserved for issuance under the Director Plan, plus an annual increase to be added on each anniversary of the effective date of the Director Plan equal to 0.5% of the outstanding shares as of such date, or a lesser amount determined by the Board. Only non-employee directors are eligible to participate in the Director Plan. Each non-employee director who first becomes a director after this offering will automatically be granted a nonstatutory option to purchase 10,000 shares of Common Stock. In addition, each non-employee director (including such directors who first were elected before this offering) will be granted an automatic option to purchase 2,000 shares on June 30 of each year, commencing in 1997; provided that he is then a non-employee director; and provided, further, that such director has served on the 43 46 Board during the preceding six months. The per share exercise price of options granted under the Director Plan will be equal to the fair market value of the Common Stock on the date of grant. The initial option grant to non-employee directors will vest at a rate of 1/48th per month over four years following the date of grant, so long as the non-employee director continues to serve as a director on such dates. Each subsequent option grant will vest at a rate of 1/12th per month over the next year following the date of grant, so long as the non-employee director continues to serve as a director on such date. In the event of a merger or sale of all or substantially all of the assets of the Company, options granted under the Director Plan may be assumed or substituted for by the successor corporation (if any). If assumed or substituted, an option will continue to vest as provided under the Director Plan for so long as the non-employee director continues to serve as a director of the successor corporation. If the director is terminated as a director of the successor corporation, other than upon a voluntary termination or termination for cause (as defined in the Director Plan), such option will become fully exercisable as of the date of such termination. If the successor corporation does not assume or substitute the option, the option will become exercisable in full immediately prior to such transaction. The Board may amend or terminate the Director Plan at any time, provided, however, that the provisions regarding the grant of options under the Director Plan may be amended only once in any six-month period, other than to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended. If not terminated earlier, the Director Plan will terminate by its terms in June 2006. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board in April 1996, and will be submitted for approval by the shareholders in May 1996. A total of 300,000 shares of Common Stock has been authorized for issuance under the Purchase Plan, plus an annual increase to be added on each anniversary date of the effective date of the Purchase Plan equal to the lesser of 150,000 shares, one percent of the outstanding shares on such date, or an amount determined by the Board. As of the date of this Prospectus, no shares have been issued under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be administered by the Board or by a committee appointed by the Board. Any employee who is employed by the Company or any designated subsidiary of the Company for at least 20 hours per week and for at least five months in any calendar year will be eligible to participate in the Purchase Plan. Under the Purchase Plan, the Company will withhold a specified percentage (not to exceed 15%) of the compensation paid to each participant, and the amount withheld will be used to purchase Common Stock from the Company on the last day of each purchase period. The price at which Common Stock will be purchased under the Purchase Plan will be equal to 85% of the fair market value of the Common Stock on the first day of the applicable offering period, or the last day of the applicable purchase period, whichever is lower. The length of each offering period and each purchase period will be determined by the Board or the Compensation Committee, but no offering period will exceed 27 months in duration. Unless the Board or the Compensation Committee determines otherwise, offering periods will be divided into consecutive purchase periods of approximately six months. The first offering period and the first purchase period will begin on the effective date of this Prospectus. New offering periods will begin approximately every six months thereafter. Employees may end their participation in an offering period at any time, and participation ends automatically on termination of employment with the Company. The maximum number of shares that a participant may purchase during any purchase period will be equal to $12,500 divided by the fair market value of the shares on the first day of the applicable offering period. In addition, no participant may purchase shares under the Purchase Plan to the extent that such participant would own five percent or more of the total combined voting power or value of all classes of the capital stock of the Company or any subsidiary, or to the extent that such participant's right to purchase the 44 47 stock under all employee stock purchase plans of the Company accrues at a rate that exceeds $25,000 worth of stock during any calendar year. In the event of a merger or sale of all or substantially all of the Company's assets, purchase periods then in progress will be shortened and will end on a new exercise date, at which time all options will automatically be exercised. The Board may amend or terminate the Purchase Plan at any time. The Purchase Plan will terminate by its terms in June 2006. SECTION 401(K) PLAN In April 1994, the Company adopted the Norian Corporation Retirement Savings Plan (the "401(k) Plan"), covering the Company's full-time employees located in the United States. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($9,500 in 1996) and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. The Company has not made any contributions to the 401(k) Plan. The 401(k) Plan is intended to qualify under Section 401(k) of the Code, such that contributions to the 401(k) Plan by employees or by the Company, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) Plan, and such that contributions by the Company, if any, will be deductible by the Company. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION The Company's Articles of Incorporation eliminate the personal liability of its directors for monetary damages arising from a breach of their fiduciary duties in certain circumstances to the fullest extent permitted by law and authorize the Company to indemnify its directors and officers to the fullest extent permitted by law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Bylaws of the Company provide for the indemnification of the Company's officers and directors against certain liabilities and expenses relating to lawsuits and other proceedings in which they may become involved. Sections 204(a)(10) and (11) and Section 317 of the California Corporations Code also provide for indemnification of a corporation's directors and officers under certain circumstances. The Company currently carries indemnity insurance pursuant to which its directors and officers are insured under certain circumstances against certain liabilities or losses, including liabilities under the Securities Act. The Company has entered into indemnity agreements with certain directors and executive officers. These agreements, among other things, indemnify the directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement payments incurred by such person in any action, including any action by or in the right of the Company, in connection with the good faith performance of his or her duties as a director or officer. The indemnification agreements also provide for the advance payment by the Company of defense expenses incurred by the director or officer; however, the affected director or officer must undertake to repay such amounts advanced if it is ultimately determined that such director or officer is not entitled to be indemnified. At present, there is no pending litigation involving a director or officer of the Company in which indemnification is required or permitted, and the Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 45 48 CERTAIN TRANSACTIONS In April, June and September 1995, the Company issued and sold an aggregate of 3,529,516 shares of Series D Preferred Stock at a purchase price of $5.60 per share. Upon consummation of this offering, these shares will convert into 3,529,516 shares of Common Stock. In connection with this transaction, warrants to purchase an aggregate of 357,386 shares of Series D Preferred Stock at an exercise price of $6.44 per share were issued to Frazier Securities, L.P., the placement agent for the transaction. The purchasers of the Series D Preferred Stock and the holders of such warrants include, among others, the following directors, entities affiliated with directors and holders of more than five percent of the Common Stock of the Company.
WARRANTS TO AGGREGATE PURCHASE SHARES OF SERIES D PURCHASE SERIES D NAME PREFERRED STOCK PRICE PREFERRED STOCK - -------------------------------------------- ------------------ ---------- --------------- DIRECTORS Jon N. Gilbert(1)......................... 535,714 $3,000,000 357,386 Hansjorg Wyss(2).......................... 714,285 4,000,000 ENTITIES AFFILIATED WITH DIRECTORS Frazier Healthcare Investments, L.P.(1)... 535,714 3,000,000 357,386 The Amy Wyss 1995 Irrevocable Trust(2).... 714,285 4,000,000 OTHER 5% SHAREHOLDERS J.P. Morgan Investment Corporation........ 142,771 799,518 Technology Venture Investors IV........... 107,279 600,763 Norwest Equity Partners, IV............... 68,937 386,050
- --------------- (1) Jon N. Gilbert, a director of the Company, is a member of Frazier Management, L.L.C., which is affiliated with Frazier Securities, L.P. and Frazier Healthcare Investments, L.P. Mr. Gilbert may be deemed to have an indirect material interest in the shares held by Frazier Healthcare Investments L.P. and Frazier Securities L.P. However, Mr. Gilbert does not believe he has a material interest in the transactions. (2) Consists of 714,285 shares sold to The Amy Wyss 1995 Irrevocable Trust. Amy Wyss is the adult daughter of Hansjorg Wyss, a director of the Company. Mr. Wyss disclaims any material interest in the transaction. Contingent upon the completion of this offering and shareholder approval of an amendment to the Company's Bylaws that will authorize the Board of Directors independently to make loans or guarantee the obligations of any officer of the Company, on March 12, 1996, the Board of Directors approved a loan of up to $500,000 to Brent R. Constantz, President, Chief Executive Officer and Chief Scientist of the Company, to be secured by shares of Common Stock held by Dr. Constantz. The loan is intended to be used to finance the purchase of a primary residence. The terms and conditions of the loan will be determined upon funding of the loan. Peter Barton Hutt, a director of the Company, is a partner in the law firm of Covington & Burling, which provides international regulatory counsel to the Company. The Company paid fees to Covington & Burling of approximately $7,000 in the aggregate over the three years ended December 31, 1995. Dr. Sevastopoulos and Dr. Skinner each have a consulting agreement with the Company. See "Management -- Director Compensation." 46 49 PRINCIPAL SHAREHOLDERS The following table sets forth information known to the Company with respect to the beneficial ownership of its Common Stock as of March 31, 1996, and as adjusted to reflect the sale of Common Stock offered hereby, for (i) each person who is known by the Company to own beneficially more than five percent of the Common Stock, (ii) each of the Company's directors, (iii) each Named Executive Officer and (iv) all directors and executive officers as a group.
PERCENT OF TOTAL --------------------- SHARES PERCENT PERCENT BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1) OFFERING OFFERING - ----------------------------------------------------------- ------------ -------- -------- Frazier Healthcare Investments, L.P.(2).................... 893,100 9.54% 7.23% Frazier & Company L.P. Two Union Square 601 Union Street, Suite 2110 Seattle, WA 98101 Jon N. Gilbert(3).......................................... 893,308 9.54 7.23 Frazier & Company L.P. Two Union Square 601 Union Street, Suite 2110 Seattle, WA 98101 Technology Venture Investors(4)............................ 752,814 8.36 6.27 2480 Sand Hill Road, Suite 101 Menlo Park, CA 94025 The Amy Wyss 1995 Irrevocable Trust(5)..................... 714,285 7.93 5.95 SYNTHES (USA) 1690 Russell Road P.O. Box 1766 Paoli, PA 19301 J.P. Morgan Investment Corporation......................... 680,271 7.56 5.67 60 Wall Street New York, NY 10260 Norwest Equity Partners, IV................................ 483,758 5.37 4.00 A Minnesota Limited Partnership c/o George J. Still, Jr. 3000 Sand Hill Road Building 3, Suite 105 Menlo Park, CA 94025-7112 Costa G. Sevastopoulos, Ph.D.(6)........................... 442,098 4.91 3.70 Brent R. Constantz, Ph.D.(7)............................... 282,291 3.12 2.35 Harry B. Skinner, M.D., Ph.D.(8)........................... 63,229 * * Robert D. Poser, D.V.M.(9)................................. 14,505 * * Marc E. Faerber(10)........................................ 12,369 * * Peter Barton Hutt, Esq.(11)................................ 12,317 * * Albert J. Jackson(12)...................................... 11,875 * * F. Lee Fagot(13)........................................... 10,416 * * Hansjorg Wyss(14).......................................... 208 * * All directors and executive officers as a group (13 persons)(15)............................................. 1,753,003 18.57 14.09
- --------------- * Less than one percent (1) Except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants exercisable within 60 days of March 31, 1996 are deemed outstanding for computing the percentage of the person or entity holding such options but are not deemed outstanding for computing the percentage of any other person. 47 50 (2) Consists of 535,714 shares held by Frazier Healthcare Investments, L.P. and warrants to purchase 357,386 shares held by Frazier Securities, L.P. (3) Consists of 535,714 shares held by Frazier Healthcare Investments, L.P., warrants to purchase 357,386 shares held by Frazier Securities, L.P. and 208 shares issuable under stock options held by Mr. Gilbert exercisable within 60 days of March 31, 1996. Mr. Gilbert is a member of Frazier Management, L.L.C., which is affiliated with Frazier Securities, L.P. and Frazier Healthcare Investments L.P. Therefore, Mr. Gilbert may be deemed to be a beneficial owner of the shares held by Frazier Healthcare Investments, L.P. and the warrants held by Frazier Securities, L.P. Nonetheless, Mr. Gilbert disclaims beneficial ownership of the shares held by Frazier Healthcare Investments, L.P., and the warrants held by Frazier Securities, L.P., except to the extent of his pecuniary interest. Voting and investment power is shared among all of the above-mentioned entities. (4) Includes 78,125 shares held by Technology Venture Investors IV, L.P., 7,686 shares held by TVI Management-3, L.P., 400,439 shares held by Technology Venture Investors-3, L.P., and 266,564 shares held by Technology Venture Investors IV, L.P., as nominee for Technology Venture Investors-4, L.P., TVI Partners-4, L.P., and TVI Affiliates-4, L.P. (5) Amy Wyss is the adult daughter of Hansjorg Wyss, a director of the Company, and Mr. Wyss disclaims beneficial ownership of shares held by the trust. (6) Includes 729 shares issuable under stock options held by Dr. Sevastopoulos exercisable within 60 days of March 31, 1996. Also includes 348,923 shares held by Delphi Ventures, L.P., 1,237 shares held by Delphi BioInvestments, L.P., 485 shares held by Delphi BioInvestments II, L.P., and 87,390 shares held by Delphi Ventures II, L.P. Because Dr. Sevastopoulos is a limited partner of Delphi Management Partners and Delphi Management Partners II, which are general partners of these limited partnerships, he may be deemed to be a beneficial owner of such shares. Dr. Sevastopoulos disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interest in Delphi Management Partners and Delphi Management Partners II. (7) Includes 32,291 shares issuable under stock options held by Dr. Constantz exercisable within 60 days of March 31, 1996. (8) Includes 729 shares issuable under stock options held by Dr. Skinner exercisable within 60 days of March 31, 1996. (9) Consists of 14,505 shares issuable under stock options held by Dr. Poser exercisable within 60 days of March 31, 1996. (10) Consists of 12,369 shares issuable under stock options held by Mr. Faerber exercisable within 60 days of March 31, 1996. (11) Consists of 12,317 shares issuable under stock options held by Mr. Hutt exercisable within 60 days of March 31, 1996. (12) Includes 1,771 shares issuable under stock options held by Mr. Jackson exercisable within 60 days of March 31, 1996. (13) Includes 1,953 shares issuable under stock options held by Mr. Fagot exercisable within 60 days of March 31, 1996. (14) Consists of 208 shares issuable under stock options held by Mr. Wyss exercisable within 60 days of March 31, 1996. (15) Includes 78,278 shares issuable under stock options held by such directors and executive officers exercisable within 60 days of March 31, 1996, and warrants to purchase 357,386 shares held by Frazier Securities, L.P., which may be deemed beneficially owned by Mr. Gilbert. 48 51 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company will consist of 75,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, after giving effect to the restatement of the Company's Articles of Incorporation and the completion of this offering. The following summaries of certain provisions of the Common Stock and Preferred Stock do not purport to be complete, are subject to, and qualified in their entirety by, the provisions of the Company's Seventh Amended and Restated Articles of Incorporation, which is included as an exhibit to the Registration Statement of which this Prospectus forms a part, and by applicable law. COMMON STOCK As of March 31, 1996, there were 9,003,003 shares of Common Stock outstanding assuming the conversion of all of the outstanding shares of Preferred Stock into Common Stock, which were held of record by 199 shareholders. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be issued upon the closing of this offering will be fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without action by the shareholders, to designate and issue Preferred Stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the Common Stock. It is not possible to state the actual effect of the issuance of any shares of Preferred Stock upon the rights of holders of the Common Stock until the Board of Directors determines the specific rights of the holders of such Preferred Stock. However, the effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock and delaying or preventing a change in control of the Company without further action by the shareholders. The Company has no present plans to issue any shares of Preferred Stock. REGISTRATION RIGHTS The holders of 9,434,527 shares of Common Stock or their transferees (including 423,540 shares subject to outstanding and exercisable warrants) are entitled to certain rights with respect to the registration of such shares under the Securities Act. Subject to certain limitations, the holders of at least 25% of the Common Stock issued on the conversion of the Company's Series D Preferred Stock or at least 40% of the Common Stock issued on the conversion of all Preferred Stock and on the exercise of all warrants, may require, on two occasions beginning six months after the date of this Prospectus, that the Company use its best efforts to register the resale of shares of Common Stock. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of securities with registration rights are entitled to include their shares of Common Stock in the registration, subject to the underwriters' right to limit the number of shares included in the offering. In addition, certain shareholders may also require the Company to register the resale of all or a portion of their shares on Form S-3 when the Company becomes eligible to use such form; provided that, among other limitations, the proposed aggregate selling price (net of any underwriters' discounts or commissions) is at least $1.0 million; and provided further, that approximately 357,386 shares underlying outstanding warrants with registra- 49 52 tion rights are not subject to such limitations. All registration expenses must be borne by the Company and all selling expenses relating to the sale of the securities with registration rights must be borne by the holders of the securities being registered. CERTAIN CHANGE OF CONTROL PROVISIONS The Company's Seventh Amended and Restated Articles of Incorporation will provide that, upon the completion of this offering, the Board of Directors will be divided into two classes, with each class serving a staggered two-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as the classification of the Board of Directors generally increases the difficulty of replacing a majority of the directors. The Seventh Amended and Restated Articles of Incorporation and Bylaws do not provide for cumulative voting in the election of directors. The authorization of undesignated Preferred Stock makes it possible for the Board of Directors to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of the Company. In addition, the Company has granted to Howmedica a non-exclusive right of first negotiation with respect to transactions involving the sale of the Company, whether through merger, stock exchange or sale of all, or substantially all, of its assets. If the Company's Board of Directors decides to begin discussions with any third party regarding a sale of the Company, the Company is required to notify Howmedica in writing and to negotiate with Howmedica for a period of 60 days. The Company is not prohibited from negotiating concurrently with other parties regarding similar transactions during this 60-day period. If the Company and Howmedica fail to reach a written agreement in principle during the 60-day period, or if Howmedica consents to the early termination of such 60-day period, the Company will be free to complete the sale of the Company to any third party without further obligation to Howmedica. This right of first negotiation expires on the earliest to occur of: (i) the termination of the CrystalCoat License; (ii) the occurrence of an event that would cause the CrystalCoat License to become non-exclusive; or (iii) the completion of a sale of the Company, whether by merger, share exchange or sale of all, or substantially all, of the Company's assets. This right of first negotiation may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, the Company in a negotiated transaction, and may also impair the Company's ability to respond to a hostile takeover attempt. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is the American Stock Transfer and Trust Company. Its telephone number is (212) 936-5100. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time and the ability of the Company to raise equity capital in the future. Upon the completion of this offering, the Company will have 12,368,641 shares of Common Stock outstanding. Of these shares, the 3,000,000 shares sold in this offering will be freely tradable without restriction under the Securities Act. The remaining 9,368,641 shares of the Common Stock will be restricted securities within the meaning of the Securities Act. Shareholders of the Company, holding in the aggregate 9,210,311 shares of Common Stock, have entered into lock-up agreements under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of Common Stock, 50 53 options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into Common Stock owned by them for a period of either 120 days or 180 days after the date of this Prospectus, without the prior written consent of the Representatives of the Underwriters or, in certain cases, the Company. The Company has entered into a similar agreement, except that the Company may grant options and issue stock under its current stock purchase plans and pursuant to other currently outstanding options. As of March 31, 1996, 453,137 shares were subject to outstanding options, 342,623 of which would be subject to lock-up agreements if issued. After the completion of this offering, the Company intends to file a Registration Statement on Form S-8 covering shares issuable under the Company's 1988 Stock Plan (including shares subject to then outstanding options), the 1996 Stock Plan, the Director Plan and the Purchase Plan, thus permitting the resale of such shares in the public market without restriction under the Securities Act after expiration of the applicable agreements. On the date of this Prospectus, the 3,000,000 shares offered hereby, as well as an additional 28,989 shares, will be available for sale in the public market. Beginning 90 days after the date of this Prospectus, an additional 69,603 shares of Common Stock (excluding approximately 46,810 shares subject to outstanding vested options which, if exercised, would be included) will be available for sale in the public market subject to the requirements of Rules 144 or 701. Upon expiration of the lock-up agreements, beginning 120 days and 180 days after the date of this Prospectus, an additional 50,694 and 5,286,002 shares of Common Stock, respectively (excluding approximately 146,146 shares subject to outstanding vested options which, if exercised, would be included), will become eligible for immediate public resale subject to compliance with Rule 144. The remaining approximately 3,933,353 shares held by existing shareholders will become eligible for public resale at various times over a period of less than two years following the completion of this offering, subject to compliance with Rule 144. The holders of 9,434,527 shares of Common Stock outstanding immediately following the completion of this offering (including 423,540 shares subject to outstanding, exercisable warrants) will be entitled to registration rights with respect to such shares upon the release of lock-up agreements. The number of shares sold in the public market could increase if such rights are exercised. See "Description of Capital Stock -- Registration Rights." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years (including the holding period of any prior owner, except an affiliate) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 123,700 shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701, persons who purchase shares upon exercise of options granted prior to the effective date of this offering are entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of nonaffiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. The Securities and Exchange Commission has recently proposed reducing the initial Rule 144 holding period to one year and the Rule 144(k) holding period to two years. There can be no assurance as to when or whether such rule changes will be enacted. If enacted, such modification will have a material effect on the time when shares of the Common Stock become eligible for resale. 51 54 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated and Robertson, Stephens & Company LLC, have severally agreed to purchase from the Company the following respective number of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- --------- Alex. Brown & Sons Incorporated.................................................. Robertson, Stephens & Company LLC................................................ --------- Total............................................................................ 3,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of Common Stock offered hereby, if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 3,000,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 3,000,000 shares are being offered. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Shareholders of the Company, holding in the aggregate 8,767,842 shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any of such shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives of the Underwriters. The Company has entered into a similar agreement, except that it may issue, and grant options to purchase, shares of Common Stock under its current stock option and purchase plans and pursuant to other currently outstanding options and warrants. See "Shares Eligible for Future Sale." In 1992, the Company engaged Alex. Brown & Sons Incorporated, one of the Representatives of the Underwriters, as agent for the private placement of 2,601,037 shares of Series D Preferred Stock. Alex. Brown & Sons Incorporated was granted a warrant to purchase 66,154 shares of Common Stock 52 55 at an exercise price of $9.20 per share as consideration for this service. This warrant expires in August 1997. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock has been determined by negotiation between the Company and the Representatives of the Underwriters. Among the factors considered in such negotiations were prevailing market conditions, estimates of the business potential of the Company, the present state of the Company's development, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company and the Representatives of the Underwriters believed to be comparable to the Company, and other factors deemed relevant. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California ("WSGR"). Certain legal matters will be passed upon for the Underwriters by Venture Law Group, A Professional Corporation, Menlo Park, California. As of the date of this Prospectus, certain members of WSGR, and investment partnerships of which such persons are partners beneficially own an aggregate of 15,402 shares of the Company's Common Stock. Steven E. Bochner, Assistant Secretary of the Company, is a member of WSGR. EXPERTS The consolidated financial statements of the Company as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the principal office of the Securities and Exchange Commission in Washington, D.C., and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees. The Company intends to furnish to its shareholders annual reports containing audited financial statements examined by independent auditors and quarterly reports containing interim unaudited financial information for the first three quarters of each fiscal year. 53 56 NORIAN CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Shareholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 57 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Norian Corporation: We have audited the accompanying consolidated balance sheets of Norian Corporation and subsidiaries (a development stage enterprise) as of December 31, 1994 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norian Corporation and subsidiaries (a development stage enterprise) as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. San Francisco, California February 2, 1996, except as to Note 13 to the consolidated financial statements which is as of May 7, 1996 F-2 58 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
DECEMBER 31, --------------------- 1994 1995 -------- -------- MARCH 31, PRO FORMA 1996 MARCH 31, ----------- 1996 (NOTE 1) (UNAUDITED) ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................... $ 4,796 $ 6,355 $ 4,433 $ 11,433 Securities available-for-sale (Note 2)....... -- 10,802 10,909 10,909 Other current assets......................... 317 363 498 498 -------- -------- -------- -------- Total current assets.................. 5,113 17,520 15,840 22,840 Property and equipment, net (Note 3)........... 1,799 2,250 2,276 2,276 Lease deposits and other assets................ 37 28 30 30 -------- -------- -------- -------- $ 6,949 $ 19,798 $ 18,146 $ 25,146 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 1,612 $ 400 $ 734 $ 734 Accrued expenses (Note 4).................... 155 639 741 741 -------- -------- -------- -------- Total current liabilities............. 1,767 1,039 1,475 1,475 -------- -------- -------- -------- Commitments and contingencies (Notes 5, 9 and 13) Shareholders' equity: Convertible preferred stock, no par value; 9,000,000 shares authorized (no shares pro forma); 4,801,923 shares issued and outstanding as of December 31, 1994; 8,331,439 shares issued and outstanding as of December 31, 1995 and March 31, 1996 (-0-shares pro forma); aggregate liquidation value of $41,817 as of March 31, 1996 (Note 6).......................... 21,145 40,622 40,622 -- Common stock, no par value; 10,400,000 shares authorized (75,000,000 shares pro forma); 598,587, 613,644, and 671,564 shares issued and outstanding as of December 31, 1994 and 1995, and March 31, 1996, respectively (9,353,003 shares pro forma)............... 129 143 1,257 48,879 Deferred compensation (Note 8)............... -- -- (933) (933) Unrealized loss on securities available-for-sale, net.................... -- (56) (41) (41) Deficit accumulated during the development stage...................................... (16,092) (21,950) (24,234) (24,234) -------- -------- -------- -------- Total shareholders' equity............ 5,182 18,759 16,671 23,671 -------- -------- -------- -------- $ 6,949 $ 19,798 $ 18,146 $ 25,146 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 59 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------- ---------------------- 1993 1994 1995 1995 1996 ------- ------- --------- --------- --------- PERIOD FROM MARCH 17, 1987 (INCEPTION) THROUGH MARCH 31, 1996 -------------- (UNAUDITED) (UNAUDITED) Contract revenue (Note 9)..... $ 2,354 $ 444 $ 210 $ 150 $ 38 $ 38 Operating expenses: Research and development.... 19,703 2,564 3,104 4,556 974 1,850 Contract revenue costs...... 466 224 36 -- -- -- General and administrative............ 8,378 1,255 1,491 2,165 571 681 -------- -------- -------- --------- -------- --------- Total operating expenses...... 28,547 4,043 4,631 6,721 1,545 2,531 -------- -------- -------- --------- -------- --------- Loss from operations.......... (26,193) (3,599) (4,421) (6,571) (1,507) (2,493) Other income (expense): Interest income............. 2,258 344 282 720 45 217 Interest expense............ (261) (15) (3) -- -- -- Other income (expense), net....................... (10) (4) (8) 2 1 (6) -------- -------- -------- --------- -------- --------- Loss before income taxes...... (24,206) (3,274) (4,150) (5,849) (1,461) (2,282) Income tax expense (Note 10).. 28 3 8 9 4 2 -------- -------- -------- --------- -------- --------- Net loss...................... $(24,234) $(3,277) $(4,158) $(5,858) $(1,465) $(2,284) ======== ======== ======== ========= ======== ========= Pro forma information (unaudited) (Note 1): Pro forma net loss per share..................... $(0.71) $(0.26) Pro forma weighted average shares used to compute pro forma net loss per share..................... 8,197,105 8,811,258
See accompanying notes to consolidated financial statements. F-4 60 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data)
UNREALIZED DEFICIT CONVERTIBLE LOSS ON ACCUMULATED PREFERRED STOCK COMMON STOCK DEFERRED SECURITIES DURING THE TOTAL -------------------- -------------------- COMPEN- AVAILABLE- DEVELOPMENT SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT SATION FOR-SALE, NET STAGE EQUITY ---------- ------- ---------- ------- -------- ------------- ----------- ------------- Balances as of March 17, 1987 (inception)................. -- $ -- -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock... -- -- 481,045 39 -- -- -- 39 Sales and conversion of notes payable to Series A preferred stock, net of offering costs of $26.... 612,865 1,445 -- -- -- -- -- 1,445 Sale of Series B preferred stock, net of offering costs of $38............. 1,254,688 3,977 -- -- -- -- -- 3,977 Sale of Series C preferred stock, net of offering costs of $19............. 333,333 1,981 -- -- -- -- -- 1,981 Sale and conversion of notes payable to Series D preferred stock, net of offering costs of $820... 2,601,037 13,745 -- -- -- -- -- 13,745 Founder capital contribution............. -- -- (62,500) -- -- -- -- -- Issuance of common stock under stock option plan..................... -- -- 71,562 30 -- -- -- 30 Repurchase of shares....... -- -- (26,635) (2 ) -- -- -- (2) Net loss from inception to December 31, 1992........ -- -- -- -- -- -- (8,657) (8,657) ---------- ------ ---------- ------- ------ ---- ------- ------- Balances as of December 31, 1992....................... 4,801,923 21,148 463,472 67 -- -- (8,657) 12,558 Additional offering costs related to 1992 sale of Series D preferred stock.................... -- (3 ) -- -- -- -- -- (3) Issuance of common stock under stock option plan.... -- -- 99,763 43 -- -- -- 43 Net loss................... -- -- -- -- -- -- (3,277) (3,277) ---------- ------ ---------- ------- ------ ---- ------- ------- Balances as of December 31, 1993....................... 4,801,923 21,145 563,235 110 -- -- (11,934) 9,321 Issuance of common stock under stock option plan..................... -- -- 35,352 19 -- -- -- 19 Net loss................... -- -- -- -- -- -- (4,158) (4,158) ---------- ------ ---------- ------- ------ ---- ------- ------- Balances as of December 31, 1994....................... 4,801,923 21,145 598,587 129 -- -- (16,092) 5,182 Sale of Series D convertible preferred stock, net of offering costs of $289............ 3,529,516 19,477 -- -- -- -- -- 19,477 Issuance of common stock under stock option plan..................... -- -- 15,057 14 -- -- -- 14 Unrealized loss on securities available-for-sale, net...................... -- -- -- -- -- (56) -- (56) Net loss................... -- -- -- -- -- -- (5,858) (5,858) ---------- ------ ---------- ------- ------ ---- ------- ------- Balances as of December 31, 1995....................... 8,331,439 40,622 613,644 143 -- (56) (21,950) 18,759 Issuance of common stock under stock option plan (unaudited).............. -- -- 57,920 73 -- -- -- 73 Deferred compensation related to granting of stock options (unaudited).............. -- -- -- 1,041 (1,041) -- -- -- Amortization of deferred compensation (unaudited).............. -- -- -- -- 108 -- -- 108 Unrealized gain on securities available- for-sale, net (unaudited).............. -- -- -- -- -- 15 -- 15 Net loss (unaudited)....... -- -- -- -- -- -- (2,284) (2,284) ---------- ------ ---------- ------- ------ ---- ------- ------- Balances as of March 31, 1996 (unaudited)................ 8,331,439 $40,622 671,564 $1,257 $ (933) $ (41) $ (24,234) $16,671 ========== ====== ========== ======= ====== ==== ======= ======= Pro forma balances as of March 31, 1996 (unaudited) (Note 1)................... -- $ -- 9,353,003 $48,879 $ (933) $ (41) $ (24,234) $23,671 ========== ====== ========== ======= ====== ==== ======= =======
See accompanying notes to consolidated financial statements. F-5 61 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- PERIOD FROM MARCH 17, 1987 (INCEPTION) THROUGH MARCH 31, 1996 -------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................... $(24,234) $ (3,277) $ (4,158) $ (5,858) $(1,465) $(2,284) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................. 1,310 126 115 354 98 112 Compensation expense attributable to stock option grants................................ 108 -- -- -- -- 108 Changes in operating assets and liabilities: Other current assets......................... (528) 15 (317) (37) 66 (137) Accounts payable and accrued expenses........ 1,475 256 1,323 (728) (1,239) 436 Deferred revenue............................. -- (7) (17) -- -- -- ------- ------- ------- -------- ------- ------- Net cash used in operating activities...... (21,869) (2,887) (3,054) (6,269) (2,540) (1,765) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments......................... (21,095) -- -- (17,277) -- (3,818) Proceeds from maturities of investments.......... 10,145 -- -- 6,419 -- 3,726 Purchases of property and equipment.............. (3,002) (201) (1,627) (805) (148) (138) ------- ------- ------- -------- ------- ------- Net cash used in investing activities...... (13,952) (201) (1,627) (11,663) (148) (230) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of convertible preferred stock, net of offering costs................... 39,565 (3) -- 19,477 -- -- Payments of convertible notes payable............ (19) -- -- -- -- -- Payment of capital lease obligations............. (559) (102) (39) -- -- -- Proceeds from sales of common stock, net of repurchases.................................... 191 43 19 14 2 73 Proceeds from convertible notes payable.......... 1,076 -- -- -- -- -- ------- ------- ------- -------- ------- ------- Net cash provided by (used in) financing activities............................... 40,254 (62) (20) 19,491 2 73 ------- ------- ------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents...................................... 4,433 (3,150) (4,701) 1,559 (2,686) (1,922) Cash and cash equivalents at the beginning of year/period...................................... -- 12,647 9,497 4,796 4,796 6,355 ------- ------- ------- -------- ------- ------- Cash and cash equivalents at end of year/period.... $ 4,433 $ 9,497 $ 4,796 $ 6,355 $ 2,110 $ 4,433 ======= ======= ======= ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest........................... $ 261 $ 15 $ 3 $ -- $ -- $ -- NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of equipment under capital leases.... 559 -- -- -- -- -- Conversion of notes payable into convertible preferred stock................................ 1,057 -- -- -- -- -- Technology rights exchanged for common stock..... 25 -- -- -- -- -- Unrealized loss on securities available-for-sale, net............................................ (41) -- -- (56) -- (41)
See accompanying notes to consolidated financial statements. F-6 62 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Norian Corporation (the "Company" or "Norian") was incorporated on March 17, 1987 (inception) to engage in the development, manufacture and marketing of Norian Skeletal Repair System ("Norian SRS"), a proprietary bone replacement material designed for use in structurally compromised cancellous bone, which occurs near joints at the end of long bones and the spine. The Company is in the development stage and is engaged in research and development activities. The Company is conducting clinical studies in the United States and Europe. In March 1996, the Company opened its Bedale, England office, the Company's European headquarters. Basis of Presentation The accompanying consolidated financial statements include the financial statements of Norian and its subsidiaries, Norian B.V., a company incorporated under the laws of the Netherlands, and Norian Limited, a company incorporated under the laws of the United Kingdom. All intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information The consolidated financial statements and related notes for the three months ended March 31, 1995 and 1996, are unaudited, but include all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation. The results of operations for the three months ended March 31, 1995 and 1996 are not necessarily indicative of operating results to be expected for any future period. Property and Equipment Purchased property and equipment are stated at cost less accumulated depreciation which is provided using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Assets recorded under capital leases and leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. Deferred Compensation The Company records deferred compensation for the difference between the exercise price and the deemed fair market value for financial reporting purposes of stock options granted. The compensation expense related to such grants is amortized over the vesting period of the related stock options. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability method of accounting for income taxes that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. F-7 63 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are recognized for deductible temporary differences, with a valuation allowance established against the resulting assets to the extent it is more likely than not that the related tax benefit will not be realized. Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of money market mutual funds at December 31, 1994 and 1995 and at March 31, 1996. Investments The Company accounts for its investments under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under the provisions of SFAS No. 115, the Company has classified its investments as "available-for-sale." Such investments are recorded at fair value and unrealized gains and losses, which are considered to be temporary, are recorded as a separate component of equity until realized. Interest income is recorded using an effective interest rate, with associated premium or discount amortized to "investment income." The cost of securities sold is based upon the specific identification method. The Company classifies all investments in its available-for-sale portfolio as current assets. As of December 31, 1994, the Company had no investments. As of December 31, 1995 and March 31, 1996, securities available-for-sale consisted of corporate bonds. Revenue Recognition Norian has entered into development and license agreements to apply the Company's coating technology to a customer's orthopaedic products. Revenue on development contracts has been recognized based upon costs incurred and achievement of specified milestones. Costs of performance under development contracts are included in contract revenue costs in the accompanying consolidated statements of operations. Deferred revenue represents payments received in advance of revenue recognized on the aforementioned contracts. Advance royalties received, which may be offset only against future royalties, if any, are recognized as revenue. Foreign Currency Translation The functional currency of Norian B.V. and Norian Limited is the U.S. dollar. Assets and liabilities of Norian B.V. and Norian Limited are translated at current exchange rates, and the related revenues and expenses are translated at average exchange rates in effect during the period. The resulting translation adjustment is recorded in other (income) expense in the accompanying consolidated statements of operations. F-8 64 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Pro Forma Financial Information Pro forma financial information gives effect to the following transactions as if they occurred on March 31, 1996: - The conversion of 8,331,439 shares of Series A, B, C, and D convertible preferred stock outstanding as of March 31, 1996 into 8,331,439 shares of common stock upon the closing of the Company's initial public offering ("IPO"). - The receipt of $7,000,000 of cash proceeds from an equity investment made by an investor in April 1996 (the "Mochida Transaction") in exchange for 350,000 shares of the Company's Series D Preferred Stock to be converted into 350,000 shares of Common Stock upon the closing of the Company's IPO (Note 13). Pro Forma Net Loss Per Share The Company's historical capital structure is not indicative of its prospective structure due to the anticipated conversion of all shares of convertible preferred stock into common stock concurrent with the closing of the Company's anticipated public offering. Accordingly, historical net loss per share amounts are not considered meaningful and have not been presented herein. Pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 83, common stock issued for consideration below the assumed IPO price and stock options granted and warrants issued with exercise prices below the IPO price during the 12-month period preceding the date of the initial filing of the registration statement, even when antidilutive, have been included in the calculation of common equivalent shares, using the treasury stock method based on the assumed IPO price, as if they were outstanding for all periods presented. Furthermore, common equivalent shares from convertible preferred stock that will be converted upon the completion of the Company's IPO are included using the "as if converted" method. Also, the Mochida Transaction was assumed to have occurred on March 31, 1996 and accordingly had a minimal effect on pro forma net loss per share for the three months ended March 31, 1996. (2) SECURITIES AVAILABLE-FOR-SALE The Company owned no investments during 1993 and 1994. There were no sales of investments during 1995 and the three-months ended March 31, 1996. F-9 65 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) The following is a summary of the securities available-for-sale, all of which are invested in corporate bonds (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------- ---------- ---------- ------- Maturing within one year...................... $ 9,039 $ 16 $(75) $ 8,980 Maturing within one to two years.............. 1,819 4 (1) 1,822 ------- --- ---- ------- Total as of December 31, 1995................. $10,858 $ 20 $(76) $10,802 ======= === ==== ======= Maturing within one year...................... $ 9,926 $ 19 $(54) $ 9,891 Maturing within one to two years.............. 1,024 -- (6) 1,018 ------- --- ---- ------- Total as of March 31, 1996.................... $10,950 $ 19 $(60) $10,909 ======= === ==== =======
(3) PROPERTY AND EQUIPMENT A summary of property and equipment follows (in thousands):
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------ ------ --------- Machinery and equipment...................................... $1,118 $1,591 $ 1,664 Furniture and fixtures....................................... 208 382 415 Leasehold improvements....................................... 1,185 1,340 1,371 ------ ------ ------ 2,511 3,313 3,451 Less accumulated depreciation and amortization............... 712 1,063 1,175 ------ ------ ------ Property and equipment, net.................................. $1,799 $2,250 $ 2,276 ====== ====== ======
(4) ACCRUED EXPENSES A summary of accrued expenses follows (in thousands):
DECEMBER 31, ------------- MARCH 31, 1994 1995 1996 ---- ---- --------- Accrued compensation............................................. $147 $290 $ 248 Accrued preclinical costs........................................ -- 95 117 Accrued clinical trial costs..................................... 8 246 372 Other............................................................ -- 8 4 ---- ---- ---- Total accrued expenses........................................... $155 $639 $ 741 ==== ==== ====
F-10 66 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) (5) LEASE COMMITMENTS The Company leases its facilities under operating leases that expire within two to four years. Future minimum lease payments relating to these noncancelable leases as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ---------------- OPERATING LEASES -------------- (IN THOUSANDS) 1996...................................................................... $253 1997...................................................................... 241 1998...................................................................... 243 1999...................................................................... 247 ------ Total minimum lease payments................................................. $984 =============
Rent expense for the years ended December 31, 1993, 1994, and 1995, was approximately $118,000, $129,000, and $265,000, respectively, and $63,000 and $68,000 for the three months ended March 31, 1995 and 1996, respectively. (6) CONVERTIBLE PREFERRED STOCK The Company is authorized to issue 9,000,000 shares of no par value convertible preferred stock. As of March 31, 1996, 26,562 shares remained undesignated. A summary of preferred stock follows:
DECEMBER 31, -------------------- MARCH 31, 1994 1995 1996 -------- -------- --------- (IN THOUSANDS) Series A: 625,000 shares designated; 612,865 shares issued and outstanding as of December 31, 1994 and 1995 and March 31, 1996; aggregate liquidation value of $1,471,000 as of March 31, 1996..................................... $ 1,445 $ 1,445 $ 1,445 Series B: 1,254,688 shares designated; 1,254,688 shares issued and outstanding as of December 31, 1994 and 1995 and March 31, 1996; aggregate liquidation value of $4,015,000 as of March 31, 1996.......................... 3,977 3,977 3,977 Series C: 343,750 shares designated; 333,333 shares issued and outstanding as of December 31, 1994 and 1995 and March 31, 1996; aggregate liquidation value of $2,000,000 as of March 31, 1996..................................... 1,981 1,981 1,981 Series D: 6,750,000 shares designated; 2,601,037 issued and outstanding as of December 31, 1994; 6,130,553 shares issued and outstanding as of December 31, 1995 and March 31, 1996; aggregate liquidation value of $34,331,000 as of March 31, 1996........................................ 13,742 33,219 33,219 ------ ------ ------ $ 21,145 $ 40,622 $40,622 ====== ====== ======
During 1995, the Company sold 3,529,516 shares of Series D convertible preferred stock at $5.60 per share and issued warrants to purchase an additional 357,386 shares of Series D convertible preferred stock at an exercise price of $6.44 per share. F-11 67 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) The rights, preferences, and privileges of convertible preferred stock shareholders are as follows: - Series A, B, C, and D convertible preferred stock shareholders are entitled to noncumulative annual dividends, if declared by the Board of Directors, of $0.24, $0.32, $0.60, and $0.56 per share, respectively, payable in preference to common stock dividends. If dividends are declared or paid on the common stock in any year, Series D convertible preferred stock shareholders would be entitled to preferential, cumulative dividend rights prior to and in preference to any dividends paid on the common stock. - Series D convertible preferred stock shareholders have a liquidation preference of $5.60 per share plus all declared and unpaid dividends over the other holders of convertible preferred stock and common stock. Thereafter, the shareholders of Series A, B, and C convertible preferred stock have a liquidation preference of $2.40, $3.20, and $6.00 per share, respectively, plus all declared and unpaid dividends. Thereafter, the shareholders of Series A, B, C, and D convertible preferred stock and common stock participate equally in the proceeds from liquidation. A merger, consolidation, or sale of all or substantially all of the Company's assets will be considered a liquidation of the Company if the per share consideration received by the shareholders of convertible preferred stock is less than $12.00 or in which existing shareholders retain 50% or less of the voting equity of the surviving or successor corporation. - Each share of Series A, B, C, and D convertible preferred stock is convertible at any time at the option of the holder into one share of common stock. Conversion of the convertible preferred stock is automatic at the time of an IPO of not less than $10,000,000 at an effective offering price of not less than $12.00 per share. Series A, B, C, and D convertible preferred stock are protected by certain antidilution provisions. Each share of convertible preferred stock votes equally with shares of common stock on an "as if converted" basis. (See Note 13.) - Convertible preferred stock shareholders have the right of first refusal with respect to certain future issuances of convertible preferred stock or common stock and have certain demand and other registration rights. Convertible Preferred Stock Warrants In conjunction with the 1995 Series D convertible preferred stock offering, the Company issued warrants for the purchase of 357,386 shares of the Company's Series D convertible preferred stock at an exercise price of $6.44 per share with certain demand and other registration rights. The warrants expire at various intervals: a warrant for 200,100 shares expires in April 2002; a warrant for 30,268 shares expires in June 2002; and a warrant for 127,018 shares expires in September 2002. To the extent that the preferred warrants have not been exercised, such warrants will automatically become exercisable to acquire an equivalent number of shares of common stock upon closing of an IPO. (7) COMMON STOCK At inception, the founder of the Company was issued 312,500 shares of common stock valued at $25,000 for technology rights to various synthetic bone technologies assigned to the Company. Subsequently, 62,500 of these shares were assigned to the Company. F-12 68 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Common Stock Warrant In conjunction with the 1992 Series D convertible preferred stock offering, the Company issued a warrant for the purchase of 66,154 shares of the Company's common stock at an exercise price of $9.20 per share with certain demand and other registration rights. The warrant expires in August 1997 and is subject to certain antidilution provisions. (8) STOCK OPTION PLANS 1988 Stock Option Plan (the "1988 Plan") The Company has reserved 875,000 shares of common stock for issuance under its 1988 Plan which provides for stock options to be granted to employees (including consultants, officers, and directors) at exercise prices not less than 100% and 85% of the fair market value for incentive and nonqualified stock options, respectively, as determined by the Board of Directors (the "Board"), at the grant date. All options have a term not greater than 10 years from the date of grant. The Board shall determine the time, or times during the term, when the options may be exercised and the number of shares for which an option can be granted. Options generally vest ratably over a four-year period. The following table summarizes option activity for the years ended December 31, 1993, 1994 and 1995, and for the three months ended March 31, 1996:
TOTAL STOCK OPTIONS PRICE PER SHARE ----------- --------------- Balance as of December 31, 1992................................. 268,721 $0.40 -- 0.96 Granted............................................... 78,063 0.96 -- 1.20 Exercised............................................. (99,763) 0.40 -- 0.96 Canceled.............................................. (29,237) 0.40 -- 0.96 ----------- --------------- Balance as of December 31, 1993................................. 217,784 0.40 -- 1.20 Granted............................................... 88,375 1.20 -- 2.00 Exercised............................................. (35,352) 0.40 -- 1.20 Canceled.............................................. (80,094) 0.40 -- 1.20 ----------- --------------- Balance as of December 31, 1994................................. 190,713 0.40 -- 2.00 Granted............................................... 164,000 2.00 Exercised............................................. (15,057) 0.40 -- 2.00 Canceled.............................................. (474) 0.96 -- 2.00 ----------- --------------- Balance as of December 31, 1995................................. 339,182 0.40 -- 2.00 Granted............................................... 172,625 2.00 -- 2.80 Exercised............................................. (57,920) 0.64 -- 2.00 Canceled.............................................. (750) 2.00 ----------- --------------- Balance as of March 31, 1996.................................... 453,137 0.40 -- 2.80 ===========
F-13 69 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Options for 129,836 shares are exercisable as of December 31, 1995 (102,537 shares as of March 31, 1996). Options for 314,069 shares are available for grant as of December 31, 1995 (142,194 shares as of March 31, 1996). Deferred compensation of $1,041,000 was recorded in the first quarter of 1996 representing the difference between the exercise price and the deemed fair market value for financial reporting purposes related to certain stock option grants. Compensation expense related to these option grants is being amortized over the related vesting period. As of March 31, 1996, $108,000 was amortized. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments such as common stock, except for employee stock ownership plans. SFAS No. 123 establishes a new method of accounting for stock-based compensation arrangements with employees which is fair value based. SFAS No. 123 encourages (but does not require) employers to adopt the new method in place of the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees. Companies may continue to apply the accounting provisions of APB No. 25 in determining net income; however, they must apply the disclosure requirements of SFAS No. 123. If the Company were to adopt the fair value-based method of SFAS No. 123, a higher compensation cost would result for stock option plans. The Company plans to continue to use its current accounting practice under APB No. 25. (9) DEVELOPMENT AND LICENSE AGREEMENTS The Company has various development agreements with a convertible preferred stock shareholder (the "Preferred Shareholder") for the application of existing coating technology to certain orthopaedic products. During 1992, the Company entered into two service agreements, totaling $238,000, with the Preferred Shareholder. The Company recognized $238,000 relating to these agreements as contract revenue during the period from March 17, 1987 through March 31, 1996. In 1992, the Company entered into two development agreements totaling $650,000 with the Preferred Shareholder. During 1994, the development agreement was canceled by the Preferred Shareholder under the terms of the agreement and no further payments will be received. Amounts received under the development agreements are contractually considered advance royalties, which the customer is entitled to offset against future royalty obligations under a related license agreement. The Company recognized $231,000, $60,000, and $-0- related to these agreements as contract revenue during the years ended December 31, 1993, 1994, and 1995, respectively, and $450,000 during the period from March 17, 1987 through March 31, 1996. In 1992, the Company entered into a license agreement with the Preferred Shareholder that provides annual nonrefundable advance royalty payments to the Company of $150,000 until regulatory approval is received for a product developed under this agreement or until termination by either party in accordance with the provisions of the agreement. Under the agreement, the Company granted the Preferred Shareholder exclusive rights to certain patents and related technology for development of orthopaedic products. The customer is entitled to offset advance royalty payments only against future royalty obligations under the license agreement. The Company recognized F-14 70 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) revenue of $162,000, $150,000, and $150,000 under the license agreement during the years ended December 31, 1993, 1994 and 1995, respectively. The Company recognized revenue of $38,000 and $38,000 under the license agreement during the three months ended March 31, 1995 and 1996, respectively, and $2,354,000 during the period from March 17, 1987 through March 31, 1996. During 1992, the Company completed a development agreement with the Preferred Shareholder. Under this agreement, the Company recognized revenue and received payments in the amount of $1,000,000 for the period from March 17, 1987 (inception) to March 31, 1996. Such amounts are considered advance royalties and may be offset only against future royalty obligations under a related licensing agreement. (10) INCOME TAXES The income tax expense recognized by the Company is primarily attributable to the operations of Norian B.V. Under a service contract with the Company, Norian B.V. has generated income before taxes of $6,000, $18,000 and $15,000 for the years ended December 31, 1993, 1994, and 1995, respectively. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% of pretax losses as a result of the following (in thousands):
DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Computed "expected" tax benefit............................. $(1,114) $(1,414) $(1,994) Meals and entertainment expenses, and officers' life insurance not deductible for income taxes................. 2 4 11 State tax expense, net of federal income tax benefit........ 1 1 1 Foreign taxes............................................... 2 7 8 Losses and credits for which no benefit has been recognized................................................ 1,112 1,410 1,983 ------- ------- ------- Income tax expense.......................................... $ 3 $ 8 $ 9 ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of deferred tax assets is presented below (in thousands):
DECEMBER 31, ----------------- 1994 1995 ------ ------ Deferred tax assets: Deferred research and development expenditures......................... $2,888 $2,999 Research credit carryover.............................................. 404 602 Net operating loss carryover........................................... 3,597 4,835 Other.................................................................. -- 88 ------ ------ Deferred tax assets.................................................... 6,889 8,524 Less valuation allowance............................................... 6,889 8,524 ------ ------ Net deferred tax assets................................................ $ -- $ -- ====== ======
F-15 71 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) The net change in the total valuation allowance for the years ended December 31, 1993, 1994, and 1995 was an increase of $1,301,000, $1,688,000, and $1,635,000, respectively. As of December 31, 1995, the Company has a net operating loss carryover for federal and state income tax purposes of approximately $13,200,000 and $6,900,000, respectively, and federal and state research credit carryforwards of approximately $450,000 and $230,000, respectively. The federal net operating losses and research credit carryforwards expire from 2004 to 2010. The state net operating losses and research credit carryforwards expire from 1996 to 2000. The difference between the federal and state loss carryforwards result primarily from a 50% limitation on state loss carryforwards. The difference between the total net operating loss carryover as of December 31, 1995, and the accumulated deficit relates primarily to research and development expenditures that have been capitalized for income tax reporting purposes. The Company has had "changes in ownership" as described in the Internal Revenue Code, Section 382. As a result, federal net operating loss and credit carryforwards are subject to an annual limitation. Future "changes in ownership," as defined, of the Company may further reduce the Company's ability to utilize net operating loss and credit carryforwards. (11) SECTION 401(K) PLAN In April 1994, the Company adopted the Norian Corporation Retirement Savings Plan (the "401(k) Plan") covering the Company's full-time employees located in the United States. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($9,500 in 1996) and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. The Company has not made any contributions to the 401(k) Plan. (12) RELATED PARTY TRANSACTIONS A director of the Company is a partner of a law firm, which provides international regulatory counsel to the Company. The Company paid minimal fees to the law firm in the three years ended December 31, 1995. From October 1993 to December 1995, one director received $700 per month for his service as a director, and, effective January 1996, this monthly stipend was increased to $1,500 per month. In January 1996, the Company also began paying another Board member $1,500 per month for his service as the Chairman of the Board of Directors. From time to time, certain directors who are not employees of the company have received grants of nonstatutory stock options to purchase shares of the Company's common stock under the 1988 Plan (Note 8). (13) SUBSEQUENT EVENTS On March 12, 1996 the Board of Directors approved, subject to shareholder approval and effective upon closing of the Company's proposed IPO, a loan of up to $500,000 to the President of the Company, the terms and conditions of which will be determined upon funding of the loan, to be secured by shares of the Company's common stock held by the President. F-16 72 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) In April 1996, the Company and Mochida Pharmaceutical Co., Ltd. ("Mochida") entered into a collaborative agreement for the exclusive marketing and distribution of Norian SRS in Japan for use in certain applications. Mochida paid the Company $2.0 million upon execution of the contract and additional payments are payable upon achievement of certain milestones. In addition, in connection with the collaboration, Mochida made a $7.0 million equity investment in the Company in exchange for 350,000 shares of the Company's Series D convertible preferred stock. Mochida will be responsible for performing clinical development in accordance with the Company's protocols and obtaining government approval for Norian SRS in Japan. The Company will be responsible for manufacturing and supplying the product to Mochida. The agreement has an initial term of the greater of 10 years from the date of regulatory approval in Japan or 15 years from the date of the agreement. Mochida has a right of first refusal as to any term extension. On April 22, 1996, the Board authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. On April 22, 1996, the Board of Directors approved, contingent upon shareholder approval and effective upon the closing of the Company's proposed IPO, the following resolutions: - An one-for-eight reverse split of the Company's common and preferred stock. All references in the accompanying financial statements to the number of shares of common stock and per share amounts have been retroactively restated to reflect this stock split. - An amendment to the Company's Articles of Incorporation to increase the number of authorized shares of common stock to 75,000,000 at no par value. - An amendment to the Articles of Incorporation to create a new class of preferred stock, consisting of 5,000,000 shares, and to grant the Board of Directors the authority to issue the preferred stock in such series and with such rights, preferences and privileges as the Board shall determine without further shareholder approval. On April 28, 1996 and May 2, 1996, the Company granted options to purchase 53,125 and 86,000 shares, respectively, of the Company's common stock under the 1988 Plan at an exercise price of $9.60 per share, vesting over four years and expiring ten years from the date of grant. On May 7, 1996, the Board of Directors approved a resolution, subject to shareholder approval, to amend the Articles of Incorporation to provide for the automatic conversion of the convertible preferred stock at the time of an IPO of not less than $10,000,000 at an effective offering price of not less than $10.00 per share. On April 28, 1996, the Board of Directors adopted the following stock option and stock purchase plans subject to shareholder approval: 1996 Stock Option Plan (the "1996 Plan") The 1996 Plan will serve as the successor equity incentive program to the Company's 1988 Plan beginning on the effective date of the Company's IPO. The Company has reserved 1,000,000 shares of the Company's common stock for issuance under the 1996 Plan, plus an annual increase to be added on each anniversary of the effective date of the plan equal to the lesser of 500,000 shares, two percent of the outstanding common shares on such date, or a lesser amount determined by the F-17 73 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Board. The 1996 Plan provides for the grant of stock options and stock purchase rights to employees (including directors who are employees) and consultants of the Company or any parent or subsidiary of the Company. No person will be eligible to receive an option under the 1996 Plan covering more than 100,000 shares in any fiscal year of the Company; other than new employees of the Company, who will be eligible to receive options covering up to a maximum of 400,000 shares in the calendar year in which they begin employment with the Company. The terms of options and stock purchase rights will be determined by the Company's Compensation Committee. The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate by its terms in June 2006 unless sooner terminated by the Board. 1996 Director Option Plan (the "Director Plan") A total of 200,000 shares have been reserved for issuance under the Director Plan, plus an annual increase to be added on each anniversary of the effective date of the Director Plan equal to 0.5% of the outstanding common shares as of such date or a lesser amount determined by the Board. The Director Plan will become effective beginning on the effective date of the Registration Statement. Only non-employee directors are eligible to participate in the Director Plan. Each non-employee who becomes a director will automatically be granted a nonstatutory option to purchase 10,000 shares of common stock on the date he or she first becomes a non-employee director. In addition, each non-employee director will automatically be granted an option to purchase 2,000 shares in June of each year, provided he or she is then a non-employee director and if, as of such date, he or she has served on the Board for at least the preceding six months. The per share exercise price of options granted under the Director Plan will be equal to the fair market value of the common stock on the date of grant. The initial option grant to non-employee directors will vest 1/48th per month over four years following the date of grant, provided the non-employee director continues to serve as a director on such dates. Each subsequent option grant will vest 1/12th per month over the next year following the date of grant, provided the non-employee director continues to serve as a director on such date. The Board may amend or terminate the Director Pan at any time. The Director Plan will terminate by its terms in June 2006. 1996 Employee Stock Purchase Plan (the "Purchase Plan") A total of 300,000 shares of common stock have been authorized for issuance under the Purchase Plan, plus an annual increase to be added on each anniversary date of the Purchase Plan equal to the lesser of 150,000 shares, one percent of the outstanding common shares on such date, or a lesser amount determined by the Board. Any employee who is customarily employed for at least 20 hours per week and for at least five months in any calendar year by the Company or any designated subsidiary of the Company will be eligible to participate in the Purchase Plan. Under the Purchase Plan, eligible participants can elect to have withheld a specific percentage (not to exceed 15%) of the compensation paid to each participant, and the amount withheld will be used to purchase common stock from the Company on the last day of each purchase period. The price at which common stock will be purchased under the F-18 74 NORIAN CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED) (Information for the three months ended March 31, 1995 and 1996 and for the period from March 17, 1987 (inception) through March 31, 1996 is unaudited.) Purchase Plan will be equal to 85% of the fair market value of the common stock on the first day of the applicable offering period, or the last day of the applicable purchase period, whichever is lower. The length of each offering period and each purchase period will be determined by the Board or the Compensation Committee, but no offering period will exceed 27 months in duration. Unless the Board or the Compensation Committee determines otherwise, offering periods will be divided into consecutive purchase periods of approximately six months. The first offering period and the first purchase period will begin on the effective date of the Company's IPO. New offering periods will begin approximately every six months thereafter. Employees may end their participation in an offering period at any time, and participation ends automatically on termination of employment with the Company. The maximum number of shares that a participant may purchase during any purchase period will be equal to $12,500 divided by the fair market value of the shares on the first day of the applicable offering period. In addition, no participant may purchase shares under the Purchase Plan to the extent that such participant would own five percent or more of the total combined voting power or value of all classes of the capital stock of the Company or any subsidiary, or to the extent that such participant's right to purchase the stock under all employee stock purchase plans of the Company accrues at a rate that exceeds $25,000 worth of stock during any calendar year. The Board may amend or terminate the Purchase Plan at any time. The Purchase Plan will terminate by its terms in June 2006. F-19 75 INSIDE BACK COVER Photo Top Left Computer-enhanced cutaway depiction of distal radius fracture in cadaver bone treated with Norian SRS. DISTAL RADIUS FRACTURE Photo Top Right Computer-enhanced cutaway depiction of vertebral body crush fracture in cadaver bone treated with Norian SRS. VERTEBRAL BODY CRUSH FRACTURE Photo Lower Left Computer-enhanced cutaway depiction of intertrochanteric hip fracture in cadaver bone treated with Norian SRS and a sliding hip screw. INTERTROCHANTERIC HIP FRACTURE Photo Lower Right Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver bone treated with Norian SRS. TIBIAL PLATEAU FRACTURE Norian SRS is an investigational device and has not been approved by the FDA for marketing in the United States. Norian SRS cannot be sold commercially in the United States unless and until such FDA approval is obtained, and FDA approvals may not be received for several years, if at all. 76 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 The Company........................... 15 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial Data................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business.............................. 22 Management............................ 38 Certain Transactions.................. 46 Principal Shareholders................ 47 Description of Capital Stock.......... 49 Shares Eligible for Future Sale....... 50 Underwriting.......................... 52 Legal Matters......................... 53 Experts............................... 53 Additional Information................ 53 Index to Consolidated Financial Statements.......................... F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,000,000 SHARES LOGO COMMON STOCK ------------------- PROSPECTUS ------------------- ALEX. BROWN & SONS INCORPORATED ROBERTSON, STEPHENS & COMPANY June , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
SEC registration fee.................................................. $ 16,655.18 NASD filing fee....................................................... 5,330.00 Nasdaq National Market listing fee.................................... 50,000.00 Printing and engraving costs.......................................... 150,000.00 Legal fees and expenses............................................... 250,000.00 Accounting fees and expenses.......................................... 180,000.00 Blue Sky fees and expenses............................................ 15,000.00 Transfer Agent and Registrar fees..................................... 15,000.00 Director's and Officer's Prospectus Liability Insurance............... 150,000.00 Miscellaneous expenses................................................ 68,014.82 -------- Total....................................................... $900,000.00 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation eliminate the personal liability of its directors and officers for monetary damages arising from a breach of their fiduciary duties in certain circumstances to the fullest extent permitted by law and authorize the Company to indemnify its directors and officers to the fullest extent permitted by law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Bylaws of the Company provide for the indemnification of the Company's officers and directors against certain liabilities and expenses relating to lawsuits and other proceedings in which they may become involved. Section 204(a)(10) and (11) and Section 317 of the California Corporations Code also provide for indemnification of a corporation's directors and officers under certain circumstances. The Bylaws of the Company contain provisions covering indemnification of corporate directors and officers against certain liabilities and expenses incurred as a result of proceedings involving such persons in their capacities as directors and officers, including proceedings under the Securities Act or the Exchange Act. The Company currently provides indemnity insurance pursuant to which its directors and officers are indemnified or insured under certain circumstances against certain liabilities or losses, including liabilities under the Securities Act. The Company has entered into indemnity agreements with certain of its respective directors and officers, which provide for the indemnification of the affected officer or director for certain expenses (including attorneys fees), judgments, fines, settlements and other amounts incurred by such person in any action, including any action by or in the right of the Company in connection with the good faith performance of his or her duties as a director or officer. The indemnification agreements also provide for the advance payment by the Company of expenses incurred in defending any proceeding to which the director or officer may be a party, provided that the affected director or officer undertakes to repay all amounts advanced for defense of the proceeding if it shall be ultimately determined that such director or officer is not entitled to be indemnified in accordance with Sections 204(a)(10) and (11) and Section 317 of the California Corporations Code. II-1 78 The Company understands that the staff of the Commission is of the opinion that statutory, charter and contractual provisions as are described above have no effect on claims arising under the federal securities laws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since March 1993 the registrant has issued and sold the following unregistered securities: 1. From March 31, 1993 to May 8, 1996, the Registrant issued and sold 221,460 shares of Common Stock to employees and consultants at prices ranging from $0.40 to $2.80 per share pursuant to the Registrant's 1988 Stock Plan. 2. From April 13, 1995 to September 14, 1995, the Registrant issued and sold 3,529,516 shares of Series D Preferred Stock to a total of 97 investors for an aggregate purchase price of $19,765,287.99. 3. On April 16, 1996, the Registrant issued and sold 350,000 shares of Series D Preferred Stock to Mochida for an aggregate purchase price of $7,000,000. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends where affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS. (a) Exhibits 1.1 Form of Underwriting Agreement. 3.1 Sixth Amended and Restated Articles of Incorporation of the Registrant, as currently in effect. 3.2* Seventh Amended and Restated Articles of Incorporation of the Registrant to be filed after the closing of the offering made under this Registration Statement. 3.4 Bylaws of the Registrant, as currently in effect. 3.5* Bylaws of the Registrant, as in effect immediately following the closing of the offering made under this Registration Statement. 4.1 Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P. C. 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers. 10.2 1988 Stock Plan and form of Stock Option Agreement thereunder. 10.3 1996 Stock Plan and form of Stock Option Agreement thereunder. 10.4 1996 Director Option Plan and form of Stock Option Agreement thereunder. 10.5 1996 Employee Stock Purchase Plan and forms of agreements thereunder. 10.6 Series C Preferred Stock Purchase Agreement dated August 9, 1990, between the Registrant and Pfizer Hospital Products Group, Ltd.
II-2 79 10.7** Exclusive Marketing Agreement dated April 16, 1996, between the Registrant and Mochida Pharmaceutical Co., Ltd. 10.8 Series D Preferred Stock Purchase Agreement dated April 16, 1996, between the Registrant and certain holders of the Registrant's securities. 10.9 Modification Agreement dated April 16, 1996, between the Registrant and certain holders of the Registrant's securities. 10.10* Lease dated July 22, 1994, as amended October 3, 1994, between Registrant and Renault & Handley Employee Investment Company for the facility located at 10260 Bubb Road, Cupertino, California. 11.1 Calculation of pro forma net loss per share. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP (see page II-5). 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4).
- --------------- * To be filed by amendment. ** Confidential treatment requested for certain portions. (b) Financial Statement Schedules None. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified n the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 80 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CUPERTINO, STATE OF CALIFORNIA, ON THE 8TH DAY OF MAY, 1996. NORIAN CORPORATION By: /s/ BRENT R. CONSTANTZ ------------------------------------ Brent R. Constantz (President, Chief Executive Officer and Chief Scientist) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brent R. Constantz and Marc E. Faerber and each of them his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES SET FORTH BELOW ON THE 8TH DAY OF MAY, 1996:
SIGNATURE TITLE - --------------------------------------------- --------------------------------------- /s/ BRENT R. President, Chief Executive Officer and CONSTANTZ Chief Scientist - --------------------------------------------- (Brent R. Constantz) /s/ MARC E. Vice President, Finance and Chief FAERBER Financial Officer (Principal - --------------------------------------------- Financial and Accounting Officer) (Marc E. Faerber) /s/ PETER BARTON HUTT Director - --------------------------------------------- (Peter Barton Hutt) /s/ JON N. Director GILBERT - --------------------------------------------- (Jon N. Gilbert) /s/ COSTA G. SEVASTOPOULOS Director - --------------------------------------------- (Costa G. Sevastopoulos) /s/ HARRY B. Director SKINNER - --------------------------------------------- (Harry B. Skinner) /s/ HANSJORG Director WYSS - --------------------------------------------- (Hansjorg Wyss)
II-4 EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 [ NUMBER] SHARES NORIAN CORPORATION COMMON STOCK (NO PAR VALUE) UNDERWRITING AGREEMENT June , 1996 ALEX. BROWN & SONS INCORPORATED ROBERTSON, STEPHENS & COMPANY As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Ladies/Gentlemen: Norian Corporation, a California corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of [NUMBER] shares (the "Firm Shares") of the Company's common stock, no par value per share (the "Common Stock"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to [NUMBER] additional shares of the Company's Common Stock (the "Option Shares") as set forth below. If the firms listed in Schedule I hereto include only the Representatives, then the terms, "Underwriters" and "Representatives," as used herein, shall each be deemed to refer to such firms. As Representatives, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." 2 In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company represents and warrants as follows: (i) A registration statement on Form S-1 (File No. 33- ) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. The Company has complied with the conditions for the use of Form S-1. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses contained therein and the exhibits, financial statements and schedules, as finally amended and revised through the date hereof, have heretofore been delivered by the Company to you. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. If the Company files a registration statement to register a portion of the Shares and relies on Rule 462(b) for such registration statement to become effective upon filing with the Commission (the "Rule 462 Registration Statement"), then any reference to the "Registration Statement" shall be deemed to refer both to the registration statement referenced above (File No. 33-____) and to the Rule 462 Registration Statement, both as amended from time to time. The form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, has the power and authority to own its properties and conduct its business as described in the Registration Statement, and is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company. (iii) Other than Norian B.V., a corporation organized and existing under the laws of The Netherlands, and Norian Ltd., a corporation organized and existing under the laws of the United Kingdom, both of which are wholly owned subsidiaries of the Company (each of which is a "Subsidiary" and, collectively, the "Subsidiaries"), the Company has no -2- 3 subsidiaries. Each Subsidiary has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, has the power and authority to own its properties and conduct its business as described in the Registration Statement, and is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, condition (financial or otherwise), results of operations, or prospects of the Company. All of the issued and outstanding shares of the capital stock of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and are owned by the Company, free and clear of any security interests, claims, liens, pledges, equities or other encumbrances of any kind. (iv) The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus as of the date stated therein; the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and non-assessable and have been issued in compliance with all applicable federal and state securities laws; the Shares to be sold by the Company have been duly authorized and, when issued hereunder, will be validly issued, fully paid and non-assessable and will have been issued in compliance with all federal and state securities laws; no shareholder of the Company has any right pursuant to any agreement which has not been waived to require the Company to register the sale of any shares owned by such shareholder under the Act in the public offering contemplated hereby; the public offering contemplated hereby will cause a conversion of the outstanding shares of the Company's preferred stock, no par value per share ("Preferred Stock") into Common Stock pursuant to the Company's articles of incorporation and agreements between the Company and such shareholders; all necessary and proper corporate proceedings have been taken in order validly to authorize and issue such Common Stock and no further approval or authority of the shareholders or the board of directors of the Company is required for the sale of the Shares to be sold by the Company as contemplated hereby. (v) The Shares conform with the statements concerning them in the Registration Statement in all material respects. Except as specifically disclosed in the Registration Statement and the consolidated financial statements of the Company and the related notes thereto, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments, to issue or sell, shares of its capital stock or the capital stock of any of the Subsidiaries or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option, stock purchase and other stock-based plans (collectively, the "Stock Plans"), and of the options or other rights granted and exercised thereunder, set forth in the Prospectus, are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. (vi) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Shares, nor instituted or, to the knowledge of the Company, threatened instituting proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendment or supplements thereto will contain, all statements which are required to be stated therein by, and in -3- 4 all respects conforms or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto contains or will contain, as the case may be, any untrue statement of a material fact, or omits or will omit, as the case may be, to state any material fact required to be stated therein or necessary to make the statements therein, as the case may be, not misleading. Neither the Prospectus, nor any supplement thereto, contains or will contain, as the case may be, any untrue statement of a material fact, or omits or will omit, as the case may be, any material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, however, the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use therein. (vii) The consolidated financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the consolidated financial position and results of operations of the Company and the Subsidiaries, at the indicated dates and for the indicated periods. Such consolidated financial statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data and schedules included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (viii) There is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before any court or regulatory, governmental or administrative agency or body which might result in any material adverse change in the business, condition (financial or otherwise), results of operations, or prospects of the Company and the Subsidiaries, taken as a whole, except as set forth in the Registration Statement. Neither the Company nor any Subsidiary is a party or subject to the provisions of any injunction, judgment, order, decree of any court, or any regulatory, administrative or governmental body or agency. (ix) Each of the Company and the Subsidiaries has good and marketable title to all of the properties and assets owned by it, reflected in either the consolidated financial statements or as described in the Registration Statement, and is subject to no security interest, claim, lien, pledge, equity, mortgage, or other encumbrance of any kind, except those reflected in such consolidated financial statements or as described in the Registration Statement and except for such encumbrances that, individually or in the aggregate, would not have a material adverse effect on the business, condition (financial or otherwise), results of operations, or prospects of the Company and the Subsidiaries, taken as a whole. Each of the Company and the Subsidiaries occupies its leased properties under valid and binding leases conforming to the descriptions thereof set forth in the Registration Statement. -4- 5 (x) Each of the Company and the Subsidiaries has filed all foreign, federal, state and local income tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by it. There is no tax deficiency which has been, or might reasonably be expected to be, asserted or threatened against the Company or any Subsidiary that could have a material adverse effect on the Company and the Subsidiaries, taken as a whole. Each of the Company and the Subsidiaries has paid all sales, user and transfer taxes applicable to it and its business and operations which were or are due. Neither the Company nor any Subsidiary has received any notice or deficiency or claim for payment from any governmental or regulatory body with respect to such sales, user or transfer taxes. (xi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, as amended or supplemented, (i) there has not been any material adverse change or development involving a prospective material adverse change in or affecting the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, (ii) there has not been any transaction entered into by the Company or any Subsidiary, other than transactions in the ordinary course or transactions specifically described in the Registration Statement and the Prospectus, as amended or supplemented, (iii) neither the Company nor any Subsidiary has sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, not covered by insurance, (iv) the Company has not paid or declared any dividends or other distribution with respect to its capital stock, except as described in the Registration Statement and the Prospectus, (v) neither the Company nor any Subsidiary is in default in the payment of principal of, or interest on, any outstanding debt obligations, and (vi) there has not been any change in the capital stock (other than the sale of the Shares, the conversion of the Preferred Stock into Common Stock or the exercise of outstanding stock options pursuant to a Stock Plan described in the Registration Statement and the Prospectus) or increase in indebtedness of the Company or any Subsidiary. Neither the Company nor any Subsidiary has any material contingent obligation that is not disclosed in the Registration Statement (or contained in the consolidated financial statements or related notes thereto), as amended or supplemented. (xii) Neither the Company nor any Subsidiary is in violation or default under any provision of its articles of incorporation, bylaws (or comparable organizational or governing documents), or any of its agreements, leases, licenses, contracts, franchises, mortgages, permits, deeds of trust, indentures or other instruments or obligations to which the Company or any Subsidiary is a party or by which any of them or any of their properties is or may be bound or affected, except for any such violation or default that would not have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (xiii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not: (A) conflict with or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or with the giving of notice or the passage of time or both, a default under, any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to -5- 6 which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their property is or may be bound or affected, except for any breach, violation or default that would not have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or (B) violate any provision of the articles of incorporation or bylaws of the Company, or comparable organizational or governing documents of either Subsidiary, or (C) violate any injunction, judgment, order, decree, statute, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory, administrative or governmental body or agency having jurisdiction over the Company, either of the Subsidiaries, or any of their property. (xiv) The Company has the legal right, corporate power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid, legal and binding obligation of the Company. (xv) Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional action as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or that may be necessary to qualify the offer and sale of the Shares under state securities or blue sky laws) has been obtained or made and each is in full force and effect. (xvi) Except as otherwise expressly described in the Registration Statement, each of the Company and the Subsidiaries owns or possesses adequate and sufficient rights to use all patents, patent rights, copyrights, trademarks and trademark rights, inventions, trade secrets, tradenames, licenses or royalty arrangements, service marks, know-how or proprietary techniques, including processes or substances, or rights thereto of others, and governmental, regulatory or administrative authorizations, orders, permits, certificates and consents necessary for the conduct of the business of the Company and the Subsidiaries, except if the failure so to possess would not have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. The Company is not aware of any material pending or threatened action, suit, proceeding or claim by others, either domestically or internationally, that the Company or any Subsidiary is violating any patents, patent rights, copyrights, trademarks or trademark rights, inventions, trade secrets, tradenames, licenses or royalty arrangements, service marks, know-how or proprietary techniques including processes or substances, or rights thereto of others, or governmental, regulatory or administrative authorizations, orders, permits, certificates and consents; except as otherwise expressly described in the Registration Statement, the Company is not aware of any rights of third parties to, or any infringement of, any of the Company's or either of the Subsidiaries' patents, patent rights, copyrights, trademarks or trademark rights, inventions, trade secrets, tradenames, licenses or royalty arrangements, service marks, know-how or proprietary techniques, including processes and substances, or rights thereto of others, which could have a material adverse effect on the business, condition (financial or otherwise), results of -6- 7 operations or prospects of the Company and the Subsidiaries, taken as a whole. The Company is not aware of any pending or threatened material action, suit, proceeding or claim by others challenging the validity or scope of any of such patents, patent rights, copyrights, trademarks or trademark rights, inventions, trade secrets, tradenames, licenses or royalty arrangements, service marks, know-how or proprietary techniques, including processes or substances, or rights thereto of others. (xvii) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. (xviii) Each of the Company and the Subsidiaries is conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state, federal and foreign laws and regulations relating to (i) the preclinical and clinical development, manufacture, marketing, promotion, distribution, sale, or use of medical devices and (ii) the protection of human health and safety, the environment, hazardous or toxic substances or wastes, pollutants, or contaminants, except if the failure so to comply would not have a material adverse effect on the business, condition (financial or otherwise), results of operations, or prospects of the Company and the Subsidiaries, taken as a whole. (xix) Neither the Company nor any of the Subsidiaries has directly or indirectly, at any time during the past five years (i) made any unlawful contribution to any candidate for public office or failed to disclose fully any contribution in violation of laws, or (ii) made any payment to any federal, state or local governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (xx) Each of the Company and the Subsidiaries maintains insurance of the types and in the amounts that are customary for companies in its business, including, but not limited to, products liability insurance, general liability insurance, and insurance governing all real and personal property owned or leased by it against theft, damage, destruction, acts of vandalism and all other risk customarily insured against, all of which insurance is in full force and effect. (xxi) KPMG Peat Marwick, LLP, who has certified the consolidated financial statements filed with the Commission as part of the Registration Statement, is an independent public accounting firm as required by the Act and the Rules and Regulations. (xxii) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. -7- 8 (xxiii) Prior to the Closing Date, the Shares will be duly authorized for listing on the National Market System of the National Association of Securities Dealers Automatic Quotation System ("NASDAQ") upon official notice of issuance. (xxiv) Neither the Company nor any of the Subsidiaries has made or offered to make any payment to any foreign official, foreign political party or candidate for foreign political office for the purpose of (A) influencing any act in such person's official capacity, (B) inducing such person to act or refrain from acting in violation of his or her lawful duty, or (C) inducing such person to influence a decision of a foreign government or entity, in order to assist the Company in retaining or obtaining business. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than three business days thereafter as you and the Company shall agree upon in writing, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part but only once and at any time upon written notice given within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). -8- 9 If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price of $ per share (the "Initial Public Offering Price") and to certain dealers at a price that represents a concession not in excess of $ per share, and that any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ per share to any Underwriter and certain other dealers. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy, or which is not in compliance with the Rules and Regulations, or to which the Representatives shall have reasonably objected in writing. (ii) The Company will advise the Representatives promptly of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to -9- 10 prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose; provided, however, that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto, including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, but without exhibits, and of all amendments thereto, as the Representatives may reasonably request. (v) If during the period in which a Prospectus is required by law to be delivered by an Underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus, as amended or supplemented, will not, in light of the circumstances when it is so delivered, be misleading, or so that the Prospectus, as amended or supplemented, will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. -10- 11 (vii) The Company will, for a period of five years after the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company will deliver to the Representatives similar reports with respect to any significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale or other disposition of any Common Stock of the Company will be made for a period of 180 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Representatives except that the Company may, without such consent, issue shares (i) upon the exercise of options outstanding on the date of this Agreement issued pursuant to the Stock Plans, and (ii) in any transaction in which the shares issued are not eligible for sale in the public market during such 180-day period. (ix) The Company will use its best efforts to include the Shares on the Nasdaq National Market and to maintain such inclusion for a period of three years after the date hereto or until such earlier date as the Shares shall be listed on another national securities exchange approved by the Representatives. (x) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" and will timely file a Form SR as required under the Securities Act regarding the use of proceeds from the sale of the Shares. (xi) For a period of 180 days after the commencement of the public offering of the Shares, the Company will not modify or waive any provision in any agreement between the Company and any of its directors, officers, shareholders or option holders, which provision or agreement restricts the ability to sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Master Agreement Among Underwriters, the Master Selected -11- 12 Dealers Agreement, the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the Invitation Letter, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses incident to securing any required review by the NASD of the terms of the sale of the Shares; the listing fee of the Nasdaq National Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under state securities or blue sky laws. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under state securities or blue sky laws), except that, if this Agreement shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 6 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform such undertaking or to satisfy any condition of this Agreement or to comply with any of the terms hereof on the Company's part to be performed, unless such failure to perform said undertaking or to satisfy said condition or to comply with said terms is due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, has full corporate power and authority to own its properties and conduct its business as described in the Prospectus, and is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification, except if the failure so to qualify would not -12- 13 have a material adverse effect upon the business, condition (financial or otherwise), results of operations or prospects of the Company. (ii) Other than Norian B.V., a corporation organized and existing under the laws of The Netherlands, and Norian Ltd., a corporation organized and existing under the laws of the United Kingdom, both of which are wholly owned subsidiaries of the Company (each of which is a "Subsidiary" and, collectively, the "Subsidiaries"), the Company has no subsidiaries. Each Subsidiary has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, has the power and authority to own its properties and conduct its business as described in the Registration Statement, and is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, condition (financial or otherwise), results of operations, or prospects of the Company. All of the issued and outstanding shares of the capital stock of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and are owned by the Company, free and clear of any security interests, claims, liens, pledges, equities or other encumbrances of any kind. (iii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus, as of the dates stated therein, and such counsel shall specify the shares of Common Stock issued and outstanding as of the date of such opinion; the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; the Shares (including the Firm Shares and Option Shares, if any) to be sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated by this Agreement, will be validly issued, fully paid and non-assessable; no liens, encumbrances, preemptive or similar rights of shareholders set forth in the Company's Articles of Incorporation, or similar contractual rights to purchase, exist with respect to any of the Shares or the issue and sale thereof; and, to the knowledge of such counsel, no registration rights exist with respect to the capital stock of the Company which have not been satisfied or waived in connection with the offering of the Shares; and no further approval or authority of the shareholders or the Board of Directors of the Company is required for the sale of the Shares to be sold by the Company as contemplated hereby. (iv) The authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus, and the certificates evidencing the Shares are in due and proper form under the California General Corporation Law. (v) Except as specifically disclosed in the Registration Statement and the consolidated financial statements of the Company, and the related notes thereto, to such counsel's knowledge, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or the capital stock of any of the Subsidiaries or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans set -13- 14 forth in the Prospectus are accurate summaries and fairly present in all material respects the information required to be shown with respect to such plans and rights. (vi) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act and nothing has come to such counsel's attention to lead it to believe that such proceedings are contemplated; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (vii) The Registration Statement and the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the Rules and Regulations thereunder (except that such counsel need express no opinion as to financial statements, notes thereto and related schedules and other financial information and statistical data included therein). (viii) The statements (A) in the Prospectus under the caption "Management -- Employee Benefit Plans," "Certain Transactions," "Principal Shareholders," "Description of Capital Stock" and "Shares Eligible for Future Sale" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of documents, proceedings, or matters of law, fairly present the information called for with respect to such documents, proceedings, and matters of law and fairly summarize the matters referred to therein in all material respects. (ix) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are described in the Registration Statement or the Prospectus are accurately described in all material respects. (x) To such counsel's knowledge, there is no legal action, suit or proceeding pending or threatened against the Company or any Subsidiary of a character required to be disclosed in the Prospectus pursuant to the Act or the Rules and Regulations; to such counsel's knowledge, neither the Company nor any Subsidiary is a party to or subject to the provisions of, any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or agency which could have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (xi) To such counsel's knowledge, the execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not: (a) violate any of the provisions of the articles of incorporation or bylaws of the Company or comparable organizational or governing documents of either Subsidiary; (b) to such counsel's knowledge, violate any statute, injunction, judgment, order, decree, rule or regulation of any court or any governmental, regulatory or administrative body or agency having jurisdiction over the Company, either of the Subsidiaries, or any of their property (other than as -14- 15 may be required by the NASD with respect to compensation of underwriters or as required by state securities or blue sky laws as to which such counsel need express no opinion); and (c) conflict with, or result in the breach or violation of, any of the terms or provisions of, or constitute, either by itself or with the giving of notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their property is or may be bound or affected, except if such breach, violation or default would not have a material adverse effect on the business, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (xii) The Company has the corporate power and authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. (xiii) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (other than as may be required by the NASD with respect to compensation of the Underwriters or as required by state securities and blue sky laws as to which such counsel need express no opinion), except such as have been obtained or made and are in full force and effect, specifying the same. (xiv) The Company will not, upon the consummation of the transactions contemplated hereby, be an "investment company," or a "promoter" or "principal underwriter" or a "registered investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (xv) The Shares have been duly authorized for listing on the National Market System of the National Association of Securities Dealers Automatic Quotation System, subject to official notice of issuance. In rendering such opinions, such counsel may rely as to matters governed by laws other than the laws of the State of California and the federal laws of the United States, on local counsel in such jurisdictions, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which causes them to believe that the Registration Statement, or any amendment thereto, at the time the Registration Statement or amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the -15- 16 circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, notes thereto and related schedules and the other financial information and statistical data included therein). With respect to such statement, such counsel may state that their belief is based upon the procedures set forth in their opinion, but is without independent check and verification. (c) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Hogan & Hartson, L.L.P., special regulatory counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that the statements in the Prospectus under the captions "Risk Factors-Lack of Regulatory Approvals," "Risk Factors-Extensive Government Regulation," "Risk Factors - Limitations on Third-Party Reimbursement," "Business-Government Regulation--United States," and "Business-Third Party Reimbursement," insofar as such statements purport to summarize applicable provisions of the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder, and Title XVIII of the Social Security Act, as amended, and the regulations promulgated thereunder, have been reviewed by such counsel and are accurate summaries in all material respects of the provisions purported to be summarized under such captions in the Prospectus. In addition, such counsel shall state that, although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the statements made under the captions "Risk Factors-Lack of Regulatory Approvals," "Risk Factors-Extensive Government Regulation," "Risk Factors-Limitations on Third-Party Reimbursement," "Business-Government Regulation--United States," and "Business-Third Party Reimbursement" in the Registration Statement and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading, or that at the Closing Date or the Option Closing Date, as the case may be, the statements made under the captions "Risk Factors-Lack of Regulatory Approvals," "Risk Factors-Extensive Government Regulation," "Risk Factors-Limitations on Third-Party Reimbursement," "Business-Government Regulation--United States," and "Business-Third Party Reimbursement" in the Registration Statement and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may state that they have not independently verified nor do they take any responsibility for nor are they addressing in any way any advents of fact, any statements concerning state or foreign law or any legal conclusions or statements of belief attributable to the Company. (d) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Covington & Burling, special international regulatory counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, to the effect that the statements in the Registration Statement and the Prospectus under the captions "Risk Factors-Lack of Regulatory Approvals," -16- 17 "Risk Factors Extensive Government Regulation," "Risk Factors-Limitations on Third-Party Reimbursements," "Business-Third Party Reimbursement" and "Business-Government Regulation--International," insofar as such statements purport to summarize applicable provisions of international regulatory requirements, have been reviewed by such counsel and are accurate summaries in all material respects of the provisions purported to be summarized under such captions in the Registration Statement and the Prospectus. In addition, such counsel shall state that, although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the statements made under the captions "Risk Factors-Lack of Regulatory Approvals," "Risk Factors-Extensive Government Regulation," "Risk Factors-Limitations on Third-Party Reimbursement," "Business-Government Regulation--International," and "Business-Third Party Reimbursement" in the Registration Statement and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading, or that at the Closing Date or the Option Closing Date, as the case may be, the statements made under the captions "Risk Factors-Lack of Regulatory Approvals," "Risk Factors-Extensive Government Regulation," "Risk Factors-Limitations on Third-Party Reimbursement," "Business-Government Regulation--International," and "Business-Third Party Reimbursement" in the Registration Statement and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may state that they have not independently verified nor do they take any responsibility for nor are they addressing in any way any advents of fact, any statements concerning state or foreign law or any legal conclusions or statements of belief attributable to the Company. (e) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Flehr, Hohbach, Test et al., special patent counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The statements in the Registration Statement under the captions "Risk Factors-Potential Patent Infringement in Japan," "Risk Factors - Dependence on Patents and Proprietary Rights," and "Business-Patents and Proprietary Rights" and other statements in the Registration Statement and Prospectus that discuss patents, patent rights and other proprietary rights, to the extent that they constitute matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, are accurate and complete statements or summaries of the matters therein set forth. (ii) Such counsel is not aware of any patent, patent right or other proprietary right of others which would prevent the conduct of the business of the Company now being or currently proposed to be conducted by the Company as described in the Prospectus; and -17- 18 such counsel is not aware of any rights of third parties to, or any infringement by third parties of, any of the Company's patents, patent rights or other proprietary rights. (iii) To such counsel's knowledge, there is no pending or threatened action, suit, proceeding or claim by others, domestic or international, that the Company is violating any patents, patent rights, or other proprietary rights of others; or otherwise challenging the validity or scope of any such patents, patent rights, and other proprietary rights thereto of others. In addition, such counsel shall state that, although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the description of the Company's patents, patent rights and other proprietary rights matters and the statements made under the captions "Risk Factors-Potential Patent Infringement in Japan," "Risk Factors-Reliance on Patents and Protection of Proprietary Rights," and "Business-Patents and Proprietary Rights" in the Registration Statements and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or the Option Closing Date, as the case may be, the description of the patent, patent rights and other proprietary rights, situation of the Company and the statements made under the captions "Risk Factors-Potential Patent Infringement in Japan," "Risk Factors-Reliance on Patents and Protection of Proprietary Rights," and "Business-Patents and Proprietary Rights" in the Registration Statement and Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. (f) The Representatives shall have received from Venture Law Group, A Professional Corporation, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, covering the matters referred to in paragraphs 6(b)(i), (vi), (vii) (but only as to the statements under the captions "Description of Capital Stock" and "Underwriting," and (xi) (but only as to the second sentence thereof) of paragraph 6(a) above and with regard to the second paragraph following subparagraph (xii) of paragraph 6(a) above. (g) The Representatives shall have received at or prior to the Closing Date from Venture Law Group, A Professional Corporation, a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the state securities or blue sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (h) The Representatives shall have received on the effective date of the Registration Statement, the Closing Date or the Option Closing Date, as the case may be, a signed letter from KPMG Peat Marwick LLP, dated the effective date of the Registration Statement, the Closing Date or the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such -18- 19 firm and dated and delivered to the Representatives on the date hereof, that nothing has come to their attention during the period from the date five days prior to the date hereof, to a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in their letter dated the date hereof if it were required to be dated and delivered on the Closing Date or the Option Closing Date, as the case may be. All such letters shall be in form and substance satisfactory to the Representatives. (i) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them as an officer of the Company severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and, to his knowledge, no proceedings for such purpose have been taken or are contemplated by the Commission. (ii) He does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be. (iii) He has carefully examined the Registration Statement and the Prospectus and, to his knowledge, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, to his knowledge, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (j) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties contained herein and related matters as the Representatives may reasonably have requested. (k) The Firm Shares and Option Shares, if any, have been approved for listing on the Nasdaq National Market. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Venture Law Group, A Professional Corporation, counsel for the Underwriters. -19- 20 If any of the conditions herein above provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that (i) the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission, made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use therein (which the parties hereto agree is limited solely to that information contained on the cover page of the Preliminary Prospectus or Prospectus or in the section thereof entitled "Underwriting"); and (ii) that the Company shall not be liable to any Underwriter with respect to any Preliminary Prospectus to the extent that any loss, claim, damage or liability of such Underwriter results from the fact that such Underwriter sold Shares to a person to whom there was not given or sent, at or prior to the written confirmation of such sale, a copy of the Prospectus or of the Prospectus as then amended or supplemented in any case where such delivery is required by the Act if the Company has previously furnished copies thereof to such Underwriter and the loss, claim, damage or liability of such Underwriter results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus which was -20- 21 corrected in the Prospectus (or the Prospectus as amended or supplemented). This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use therein (which the parties hereto agree is limited solely to that information contained on the cover page of the Preliminary Prospectus or Prospectus or in the section thereof entitled "Underwriting"). This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the -21- 22 indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them (based on advice of counsel to the indemnified party). It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Sections 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages, or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits `received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the -22- 23 provisions of this Subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, including any document incorporated by reference therein, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your best efforts to procure within 24 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 24 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the nondefaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. -23- 24 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telegraphed and confirmed as follows: if to the Underwriters to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: Syndicate; and if to the Company, to Norian Corporation, 10260 Bubb Road, Cupertino, CA 95014, Attention: Brent R. Constanz. 11. TERMINATION. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 A.M., Baltimore time, on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the business, condition (financial or otherwise), results of operations, or management of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency after the date hereof or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make the offering or delivery of the Shares impracticable, (iii) suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or number of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities, or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement may also be terminated by you, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. -24- 25 13. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. -25- 26 If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, NORIAN CORPORATION By: ------------------------------------- Brent R. Constanz President and Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED ROBERTSON, STEPHENS & COMPANY As Representatives of the several Underwriters listed on Schedule I By: ALEX. BROWN & SONS INCORPORATED By ------------------------------------- Authorized Officer -26- 27 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased - ----------- --------------- Alex. Brown & Sons Incorporated Robertson, Stephens & Company
-27- EX-3.1 3 SIXTH AMENDED AND RESTATED ARTICLES 1 EXHIBIT 3.1 SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NORIAN CORPORATION Brent R. Constantz and Steven E. Bochner certify that: 1. They are the President and Assistant Secretary, respectively, of Norian Corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as follows: I The name of this corporation is Norian Corporation. II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III This corporation is authorized to issue two classes of stock, designated "Common Stock" and "Preferred Stock". The total number of shares which this corporation is authorized to issue is 160,800,000. The number of shares of Common Stock which this corporation is authorized to issue is 86,000,000. The number of shares of Preferred Stock which this corporation is authorized to issue is 74,800,000. 5,000,000 shares of Preferred Stock shall be designated Series A Preferred Stock, 10,037,500 shares of Preferred Stock shall be designated Series B Preferred Stock, 2,750,000 shares of Preferred Stock shall be designated Series C Preferred Stock, and 56,800,000 shares of Preferred Stock shall be designated Series D Preferred Stock, which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock shall have the rights, preferences, and restrictions as follows: 2 Section 1. (a) General Definitions. For purposes of these Restated Articles of Incorporation, the following definitions shall apply: A. "Series A Preferred" shall refer to the Series A Preferred Stock. B. "Series B Preferred" shall refer to the Series B Preferred Stock. C. "Series C Preferred" shall refer to the Series C Preferred Stock. D. "Series D Preferred" shall refer to the Series D Preferred Stock. E. "Preferred" shall refer to the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred. F. "Common" shall mean all Common Stock. G. "Subsidiary" shall mean any corporation at least 50% of whose outstanding voting shares shall at the time be owned by this corporation or by one or more of such subsidiaries. H. "Original Issue Date" shall mean the date on which a share of Series D Preferred is first issued by the corporation in 1995. I. "Board" shall mean the Board of Directors of this corporation. Section 2. Dividend Rights of Preferred. The holders of the Series A Preferred, Series B Preferred, Series C Preferred, and Series D Preferred shall be entitled to receive, out of any funds legally available therefor, dividends in an amount equal to $.03 per annum for each share of Series A Preferred held by them, $.04 per annum for each share of Series B held by them, $.075 per annum for each share of Series C held by them, and $.070 per annum for each share of Series D held by them respectively, payable in preference and priority to any payment of any dividend on Common when and as declared by the Board. After payment of such dividends, any additional dividends declared shall be distributed among all holders of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and all holders of Common in proportion to the number of shares of Common which would be held by each such holder if all shares of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred were converted into Common at the then effective Series A Conversion Price, Series B Conversion Price, Series C Conversion Price, and Series D Conversion Price respectively (as defined in Section 4(a) below). The right to such dividends on the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall not be cumulative, and no right shall accrue to holders of Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year; provided, however, that in the event dividends are declared or paid on the Common in any year, each holder of the Series D Preferred purchased pursuant to the -2- 3 Series D Preferred Stock Purchase Agreement dated August 5, 1992 (the "1992 Series D Preferred) shall be entitled to receive, prior and in preference to any such dividends on the Common, a dividend payment equal to the aggregate amount which would have been accumulated by the holder of the 1992 Series D Preferred had the dividend rights of the 1992 Series D Preferred been cumulative since the date of issuance of the first share of 1992 Series D Preferred; each holder of the Series D Preferred purchased pursuant to the Series D Preferred Stock Purchase Agreement dated April 13, 1995 as amended on June 5, 1995 (the "1995 Series D Preferred) shall be entitled to receive, prior and in preference to any such dividends on the Common, a dividend payment equal to the aggregate amount which would have been accumulated by the holder of the 1995 Series D Preferred had the dividend rights of the 1995 Series D Preferred been cumulative since the date of issuance and each holder of the Series D Preferred purchased pursuant to the Series D Preferred Stock Purchase Agreement dated April 16, 1996 (the "1996 Series D Preferred) shall be entitled to receive, prior and in preference to any such dividends on the Common, a dividend payment equal to the aggregate amount which would have been accumulated by the holder of the 1996 Series D Preferred had the dividend rights of the 1996 Series D Preferred been cumulative since the date of issuance. If no dividends are declared or paid on the Common, no rights to any dividends shall accrue to the holder of the Series D Preferred for the purposes of this Section 2, Section 3 or otherwise. In the event that the corporation shall have declared but unpaid dividends outstanding immediately prior to, and in the event of, a conversion of the Preferred (as provided in Section 4 hereof), the corporation shall, at the option of the holder, pay in cash to the holder(s) of the Preferred subject to conversion the full amount of any such dividends or allow such dividends to be converted into Common in accordance with, and pursuant to the terms specified in, Section 4 hereof. Section 3. Liquidation Preference; Mergers. (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of the Series D Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of any other series of Preferred or the holders of the Common by reason of their ownership thereof, the amount of $.70 per share for each share of Series D Preferred then held by them and, in addition, an amount equal to all declared but unpaid dividends on the Series D Preferred. If upon occurrence of such event the assets and funds thus distributed among the holders of the Series D Preferred shall be insuffi cient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the corporation legally available for distribution shall be distributed among the holders of the Series D Preferred pro rata based on the number of shares held. (b) After payment has been made to the holders of the Series D Preferred of the full amounts to which they shall be entitled as aforesaid, the holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common by reason of their ownership thereof the amount of (i) $.30 per share for each share of Series A Preferred then held by them, (ii) $.40 per share for each share of Series B Preferred then held by them and (iii) $.75 for each share of Series C -3- 4 Preferred then held by them and, in addition, an amount equal to all declared but unpaid dividends on the Preferred. If upon the occurrence of such event the assets and funds thus distributed to the holders of the Preferred as aforesaid shall be insufficient to permit the payment to such holders of their full preferential amount as set forth in this paragraph (b), then the entire assets and funds of the corporation legally available for distribution shall be distributed among the holders of the Preferred with each such holder being entitled to receive a fraction of the amount so available for distribution, based on the ratio that the aggregate liquidation preferences of the Series A, Series B and Series C Preferred held by such holder as set forth in this paragraph (b) bears to the aggregate liquidation preferences of shares of Series A, Series B and Series C Preferred held by all such holders of Preferred as set forth in this paragraph (b). (c) After payment has been made to the holders of the Preferred of the full amounts to which they shall be entitled as aforesaid, the holders of the Preferred shall participate on a pro rata basis based on the number of Common equivalent shares held by a holder in the distribution of all remaining assets of the corporation legally available for distribution, with the outstanding shares of the Preferred treated as though they had been converted into the appropriate number of shares of Common pursuant to Section 4 hereof as of the date of such distribution. (d) For purposes of this Section 3, a merger, consolidation or sale of all or substantially all of the assets of the corporation with and into any other corporation or corporations or the merger or consolidation of any other corporation or corporations into the corporation, in which consolidation or merger the shareholders of the corporation will receive distributions in cash or securities of another corporation or corporations as a result of such consolidation or merger, or sale of all or substantially all of the assets of the corporation, shall be treated as a liquidation, dissolution or winding-up of the corporation in accordance with Sections 3(a), 3(b) and 3(c) above; provided, however, that, notwithstanding the foregoing, such merger, consolidation or sale of assets shall not be treated as a liquidation, dissolution or winding up if (i) the per share consideration to be received by a holder of Preferred pursuant to any of the above-mentioned transactions (without reference to the provisions of Sections 3(a), 3(b) and 3(c) above) is in the form of cash and/or securities, which securities are publicly traded on the New York or American Stock Exchange or quoted on the NASDAQ National Market System, and have a fair market value on a fully distributed basis of at least $1.50 per share, in which event such merger, consolidation or sale of all or substantially all of the assets, the corporation shall be treated as set forth in Section 3(e) below, or (ii) the shareholders of this corporation immediately prior to the merger, consolidation or sale of assets continue to hold, or receive by virtue of their equity interest in the corporation, hold greater than 50% of the voting equity securities of the successor or surviving corporation immediately after such merger, consolidation or sale of assets. (e) In the event of a merger, consolidation or sale of all or substantially all of the assets of the corporation which is not treated as a liquidation, dissolution or winding-up pursuant to Section 3(d) above with respect to the outstanding series of Preferred, the consideration to be paid by the acquiring corporation or entity in such transaction shall be distributed among the holders of the Preferred and Common on a pro rata basis based on the number of Common equivalent shares held by a holder, with the outstanding shares of Preferred treated as though they had been converted into the appropriate number of shares of Common pursuant to Section 4 hereof as of the date of such distribution. -4- 5 Section 4. Conversion. The holders of the Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time, into such number of fully paid and nonassessable shares of Common as is determined by dividing $.30 (the "Series A Original Purchase Price") by the then applicable Series A Conversion Price, determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common shall be deliverable upon conversion (the "Series A Conversion Price") shall initially be $.30 per share of Common. Such initial Series A Conversion Price shall be subject to adjustment as hereinafter provided. Each share of Series B Preferred shall be convertible, at the option of the holder thereof, at any time, into such number of fully paid and nonassessable shares of Common as is determined by dividing $.40 (the "Original Series B Purchase Price") by the then applicable Series B Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common shall be deliverable upon conversion (the "Series B Conversion Price") shall initially be $.40 per share of Common. Such initial Series B Conversion Price shall be subject to adjustment as hereinafter provided. Each share of Series C Preferred shall be convertible, at the option of the holder thereof, at any time, into such number of fully paid and nonassessable shares of Common as is determined by dividing $.75 (the "Original Series C Purchase Price") by the then applicable Series C Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common shall be deliverable upon conversion (the "Series C Conversion Price") shall initially be $.75 per share of Common. Such initial Series C Conversion Price shall be subject to adjustment as hereinafter provided. Each share of Series D Preferred shall be convertible, at the option of the holder thereof, at any time, into such number of fully paid and nonassessable shares of Common as is determined by dividing $.70 (the "Series D Original Purchase Price") by the then applicable Series D Conversion Price, determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common shall be deliverable upon conversion (the "Series D Conversion Price") shall initially be $.70 per share of Common. Such initial Series D Conversion Price shall be subject to adjustment as hereinafter provided. Each share of the Preferred shall automatically be converted into shares of Common at the then effective Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable, immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common for the account of the corporation to the public yielding gross proceeds of not less than $10,000,000 at a price per share (determined without regard to underwriter commissions and expenses) of not less than $1.50 (as adjusted for stock splits, reverse stock splits and the like effected after the Original Issue Date). In the event of such an offering as described -5- 6 above, the person(s) entitled to receive the Common issuable upon such conversion of the Preferred shall not be deemed to have converted such Preferred until immediately prior to the closing of such underwritten public offering. Notwithstanding the above, in the event of a public offering as described above, no share of Series D Preferred shall be automatically converted in accordance with the above unless prior thereto or concurrently therewith all other shares of Preferred are so converted. (b) Mechanics of Conversion. No fractional shares of Common shall be issued upon conversion of the Preferred. In lieu of any fractional share to which a holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the then effective Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable. Before any holder of the Preferred shall be entitled to convert the same into full shares of Common, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred, and shall give written notice to the corporation at such office that (i) he elects to convert the same and (ii) whether the holder elects, pursuant to Section 2 hereof, to receive declared but unpaid dividends on the Preferred proposed to be converted in cash, or to convert such dividends into shares of Common at the then effective Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable, provided, however, that in the event of an automatic conversion pursuant to Section 4(a), the outstanding shares of Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent, and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred are either delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of the Preferred, a certificate or certificates for the number of shares of Common to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into a fractional share of Common, and any declared but unpaid dividends on the converted Preferred which the holder elected to receive in cash. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred to be converted, and the person or persons entitled to receive the shares of Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common on such date. (c) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 4(c), the following definitions shall apply: (1) 'Options' shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common or Convertible Securities. -6- 7 (2) 'Convertible Securities' shall mean any evidences of indebtedness, shares (other than Common, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred) or other securities directly or indirectly convertible into or exchangeable for Common. (3) 'Additional Shares of Common' shall mean all shares of Common issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by the corporation after the Original Issue Date, other than: (A) shares of Common Stock issued or issuable upon conversion of shares of Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred; (B) up to 4,762,652 shares of Common issued or issuable to directors, officers or employees of, or consultants to, the corporation or to members of the corporation's Scientific Advisory Board pursuant to a stock grant, option plan or purchase plan or other employee stock incentive program (collectively, the "Plans") approved by the Board, in an amount not to exceed 4,762,652 shares; (C) shares of Common issued or issuable as a dividend or distribution on Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred; (D) up to 529,234 shares of Common issued or issuable upon the exercise of the warrant dated August 4, 1992 held by Alex. Brown & Sons Incorporated. (E) up to 28,571,429 shares of Series D Preferred including shares of Common issued or issuable upon the conversion thereof, pursuant to the terms of that certain Series D Preferred Stock Purchase Agreement dated April 13, 1995, as amended; (F) up to 2,800,000 shares of Series D Preferred including shares of Common issued or issuable upon the conversion thereof, pursuant to the terms of that certain Series D Preferred Stock Purchase Agreement dated April 16, 1996; (G) up to 2,859,087 shares of Series D Preferred issued or issuable upon the exercise of certain Warrants held by Frazier Investment Securities, L.P. issued in connection with the offer and sale of the Company's 1995 Series D Preferred; or (H) shares of Common Stock issued or issuable by way of dividend or other distribution on shares of Common excluded from the definition of Additional Shares of Common by the foregoing clauses (A), (B), (E) or this clause (G) or on shares of Common so excluded. (ii) No Adjustment of Conversion Price. No adjustment in the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price of a particular share of Preferred shall be made in respect of the issuance of Additional Shares of Common unless the consideration per share for an Additional Share of Common issued or deemed to be issued by the corporation is less than the applicable Series A Conversion Price, Series B Conversion -7- 8 Price, Series C Conversion Price or Series D Conversion Price in effect on the date of, and immediately prior to, such issue for such share of Preferred. (iii) Deemed Issue of Additional Shares of Common. (1) Options and Convertible Securities. In the event the corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(c)(vi) hereof) of such Additional Shares of Common would be less than the applicable Series A Conversion Price or Series B Conversion Price or Series C Conversion Price or Series D Conversion Price for such share of Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common are deemed to be issued: (A) no further adjustment in the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the corporation, or decrease in the number of shares of Common issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if; (I) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received -8- 9 by the corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the corporation upon such conversion or exchange, and (II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price to an amount which exceeds the lower of (i) the applic able Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price on the original adjustment date, or (ii) the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price shall be made until the expiration or exercise of all such Options, however such adjustment shall be made if shares of Preferred are converted during such period. (2) Stock Dividends. In the event the corporation at any time or from time to time after the Original Issue Date shall declare or pay any dividend on the Common payable in Common, then Additional Shares of Common shall be deemed to have been issued immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend. (iv) Adjustment of Conversion Price. In the event this corporation shall issue at any time after the Original Issue Date Additional Shares of Common (including Additional Shares of Common deemed to be issued pursuant to Section 4(c)(iii)) without consideration or for a consideration per share less than the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price by a fraction, the numerator of which shall be the number -9- 10 of shares of Common outstanding immediately prior to such issue plus the number of shares of Common which the aggregate consideration received by the corporation for the total number of Additional Shares of Common so issued would purchase at such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price; and the denominator of which shall be the number of shares of Common outstanding immediately prior to such issue plus the number of such Additional Shares of Common so issued; and provided further that, for the purposes of this Section (iv), all shares of Common (a) issuable upon conversion of all outstanding Series A Preferred, Series B Preferred, Series C Preferred, and Series D Preferred, (b) issuable upon conversion of all outstanding Convertible Securities, and (c) issuable upon exercise of all outstanding Options bearing an exercise price which is lower than the price at which the Additional Shares of Common were issued (or deemed to be issued), shall be deemed to be outstanding, and immediately after any Additional Shares of Common are deemed issued pursuant to Section (iii), such Additional Shares of Common shall be deemed to be outstanding. In the event of the issuance of Additional Shares of Common which results in an adjustment to the Series C Conversion Price, the Series D Conversion Price shall be subject to adjustment (in addition to any adjustment provided above) such that the number of shares of Common issuable upon conversion of the Series D Preferred after giving effect to such issuance of Additional Shares of Common shall represent the same percentage equity interest in the Company as if the Series C Conversion Price in effect immediately prior to such issuance of Additional Shares of Common had been equal to the Series D Conversion Price in effect immediately prior to such issuance of Additional Shares of Common. The purpose and intent of the foregoing sentence is to ensure that the percentage equity interest of the holders of Series D Preferred is not reduced by virtue of the fact that the Series C Conversion Price is greater than the Series D Conversion Price. (v) Determination of Consideration. For purposes of this Section 4(c), the consideration received by the corporation for the issue of any Additional Shares of Common shall be computed as follows: (1) Cash and Property: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by the Board in the good faith exercise of its reasonable business judgment; provided, however, that if within 10 days of such determination holders of a majority of the outstanding shares of Preferred advise the Board of Directors in writing that such holders object to such determination, then the fair value of such property shall be determined pursuant to the appraisal of an independent appraiser mutually acceptable to the Board and such holders; and (C) in the event Additional Shares of Common are issued together with other shares or securities or other assets of the corporation for consideration which covers both, be the -10- 11 proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (2) Options and Convertible Securities. The consideration per share received by the corporation for Additional Shares of Common deemed to have been issued pursuant to Section 4(c)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjust ment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustments for Subdivisions, Combinations, or Consolidations of Common. In the event the outstanding shares of Common Stock shall be subdivided (by stock split, stock dividend, or otherwise) at any time after the Original Issue Date, into a greater number of shares of Common Stock, the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (vii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Preferred shall be changed at any time after the Original Issue Date into the same or a different number of shares of any other class or classes of stock or other securities or property, whether by capital reorganization, reclassification and otherwise (other than a subdivision or combination of shares provided for above), the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or other securities or property equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred immediately before that change and, in any such case, appropriate adjustment (as determined by the Board) shall be made in -11- 12 the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the Preferred, to the end that the provisions set forth herein (including provisions with respect to change in and other adjustments of the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred. (d) No Impairment. The corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the applicable conversion rights of the holders of the Preferred, as set forth in this Section 4, against impairment. (e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the applicable Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price pursuant to this Section 4, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such series of Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the applicable Conversion Price for such series of Preferred at the time in effect, and (iii) the number of shares of Common and the amount, if any, of other property which at the time would be received upon the conversion of such series of Preferred. (f) Notices of Record Date. In the event that this corporation shall propose at any time: (i) to declare any dividend or distribution upon the Common, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of the Common outstanding; or (iv) to merge or consolidate with or into any other corporation, the result of which is that this corporation is not the surviving corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; -12- 13 then, in connection with each such event, this corporation shall send to the holders of the Preferred: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common shall be entitled to exchange their Common for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of the Preferred shares at the address for each such holder as shown on the books of this corporation. (g) The corporation shall at all times keep a sufficient number of shares of Common Stock authorized to allow the conversion of Preferred as set forth in this Section 4. Section 5. Voting Rights. Except as otherwise required by law, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of the Preferred shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred could be converted at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of stock of the Company having general voting power and not separately as a class. Holders of Common Stock and Preferred shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation. Fractional votes by the holders of Preferred shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred held by each holder could be converted) be rounded to the nearest whole number. Section 6. Series D Preferred Protective Provisions. In addition to the other rights provided by law, so long as at least 500,000 shares of Series D Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative consent or written vote of the holders of not less than a majority of such outstanding shares of Series D Preferred voting, as a single class, approve: (i) any increase in the authorized number of shares of Series D Preferred; (ii) the authorization or issuance of any new series or class of stock senior to or on a parity with the Series D Preferred with respect to the payment of dividends or the distribution of assets on liquidation, and increases in the authorized shares of any such class or series; -13- 14 (iii) any amendment to the Articles of Incorporation that adversely affects the rights of the Series D Preferred (including, without limitation, the liquidation preference of the Series D Preferred); and (iv) issue any dividends or distributions on, or repurchases of, junior securities, other than pursuant to this corporation's employee stock purchase agreements or other employee benefit plans. Section 7. Covenants. In addition to any other rights provided by law, so long as at least 10% of the Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than 66 2/3% of such outstanding shares of Preferred: (a) amend or repeal any provision of, or add any provision to, this corporation's articles of incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any Preferred; (b) authorize or issue shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred, or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred; (c) reclassify any Common into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred; (d) increase the authorized number of shares of Preferred; or (e) effect any sale or other conveyance of all or substantially all of the assets of the corporation, or any consolidation or merger involving the corporation that results in the exchange of outstanding shares of this corporation for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (except for a merger or consolidation in which the shareholders of this corporation do not receive cash or securities and after the consummation of which the shareholders of this corporation own more than five-sixths of the voting power of the surviving or acquiring corporation or parent party). Section 8. Status of Converted Stock. In the event any shares of Preferred shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the corporation and the articles of incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. Section 9. Consent for Certain Repurchases of Common Stock Deemed to be Distributions. Each holder of Preferred shall be deemed to have consented, for purposes of Section 502, 503 and 506 -14- 15 of the California Corporations Code, to distributions made by the corporation in connection with the repurchase of shares of Common issued to or held by employees or consultants upon termination of their employment or services or pursuant to agreements providing for the right of said repurchase between the corporation and such persons. IV Section 1. Limitation of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. Section 3. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article IV shall not adversely affect any right of indemnification or limitation of liability of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification. 3. The foregoing amendment and restatement of articles of incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of articles of incorporation has been duly approved by the required vote of Shareholders in accordance with Sections 902 and 903 of the Corporations Code. The total number of outstanding shares of the corporation is 5,373,739 shares of Common Stock, 4,902,919 shares of Series A Preferred, 10,037,500 shares of Series B Preferred, 2,666,666 shares of Series C Preferred and 49,044,423 shares of Series D Preferred. The number of shares voting in favor of the Amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock voting as a class, more than 50% of the outstanding shares of Series A Preferred, Series B Preferred, and Series C Preferred, voting as separate classes, more than 50% of the Series D Preferred Stock and not less than 66 2/3% of the outstanding Preferred Stock voting as a single class. -15- 16 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: April 10, 1996. ------------------------ Brent R. Constantz, President ------------------------ Steven E. Bochner, Assistant Secretary EX-3.4 4 BYLAWS OF NORIAN CORPORATION 1 EXHIBIT 3.4 BYLAWS OF NORIAN CORPORATION 2 BYLAWS OF NORIAN CORPORATION TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES.............................................................................. 1 1.1 PRINCIPAL OFFICE......................................................................... 1 1.2 OTHER OFFICES............................................................................ 1 ARTICLE II - MEETINGS OF SHAREHOLDERS...................................................................... 1 2.1 PLACE OF MEETINGS........................................................................ 1 2.2 ANNUAL MEETING........................................................................... 1 2.3 SPECIAL MEETING.......................................................................... 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS......................................................... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............................................. 3 2.6 QUORUM................................................................................... 4 2.7 ADJOURNED MEETING; NOTICE................................................................ 4 2.8 VOTING................................................................................... 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT........................................ 5 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............................................................................... 6 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS.............................................................................. 7 2.12 PROXIES.................................................................................. 7 2.13 INSPECTORS OF ELECTION................................................................... 8 ARTICLE III - DIRECTORS.................................................................................... 9 3.1 POWERS................................................................................... 9 3.2 NUMBER OF DIRECTORS...................................................................... 9 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................................................. 9 3.4 RESIGNATION AND VACANCIES................................................................ 10 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................................................. 10 3.6 REGULAR MEETINGS......................................................................... 11 3.7 SPECIAL MEETINGS; NOTICE................................................................. 11 3.8 QUORUM................................................................................... 11 3.9 WAIVER OF NOTICE......................................................................... 12 3.10 ADJOURNMENT.............................................................................. 12 3.11 NOTICE OF ADJOURNMENT.................................................................... 12 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........................................ 12 3.13 FEES AND COMPENSATION OF DIRECTORS....................................................... 12 3.14 APPROVAL OF LOANS TO OFFICERS............................................................ 13
-i- 3 TABLE OF CONTENTS (Continued)
Page ---- ARTICLE IV - COMMITTEES.................................................................................... 13 4.1 COMMITTEES OF DIRECTORS.................................................................. 13 4.2 MEETINGS AND ACTION OF COMMITTEES........................................................ 14 ARTICLE V - OFFICERS....................................................................................... 14 5.1 OFFICERS................................................................................. 14 5.2 ELECTION OF OFFICERS..................................................................... 15 5.3 SUBORDINATE OFFICERS..................................................................... 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS...................................................... 15 5.5 VACANCIES IN OFFICES..................................................................... 15 5.6 CHAIRMAN OF THE BOARD.................................................................... 15 5.7 PRESIDENT................................................................................ 16 5.8 VICE PRESIDENTS.......................................................................... 16 5.9 SECRETARY................................................................................ 16 5.10 CHIEF FINANCIAL OFFICER.................................................................. 17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.............................................................. 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................................................ 17 6.2 INDEMNIFICATION OF OTHERS................................................................ 18 ARTICLE VII - RECORDS AND REPORTS.......................................................................... 18 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER............................................. 18 7.2 MAINTENANCE AND INSPECTION OF BYLAWS..................................................... 19 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.................................................................................. 19 7.4 INSPECTION BY DIRECTORS.................................................................. 20 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.................................................... 20 7.6 FINANCIAL STATEMENTS..................................................................... 20 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........................................... 21 ARTICLE VIII - GENERAL MATTERS............................................................................. 21 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING................................................................................... 21 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................................................ 22 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED....................................... 22 8.4 CERTIFICATES FOR SHARES.................................................................. 22
-ii- 4 TABLE OF CONTENTS (Continued)
Page ---- 8.5 LOST CERTIFICATES........................................................................ 23 8.6 CONSTRUCTION; DEFINITIONS................................................................ 23 ARTICLE IX - AMENDMENTS.................................................................................... 23 9.1 AMENDMENT BY SHAREHOLDERS................................................................ 23 9.2 AMENDMENT BY DIRECTORS................................................................... 23
-iii- 5 BYLAWS OF NORIAN CORPORATION ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of shareholders shall be held each year within 180 days from the end of the corporation's fiscal year as determined by the Board of Directors or such other time as the Board of Directors may designate. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 6 2.3 SPECIAL MEETING A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. -2- 7 If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving -3- 8 the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by -4- 9 ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or -5- 10 by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number -6- 11 of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, -7- 12 shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be -8- 13 appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed -9- 14 without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolu- -10- 15 tion declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records -11- 16 of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT -12- 17 A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, - -------- * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. -13- 18 (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. -14- 19 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS -15- 20 The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer -16- 21 of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or non-existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of -17- 22 the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. -18- 23 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder -19- 24 by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. -20- 25 Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the cor- -21- 26 poration makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more -22- 27 than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the share- -23- 28 holder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the autho- -24- 29 rized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -25- 30 CERTIFICATE OF ADOPTION OF BYLAWS OF NORIAN CORPORATION Adoption by Incorporator The undersigned person appointed in the Articles of Incorporation to act as the Incorporator of Norian Corporation hereby adopts the foregoing bylaws, comprising twenty-four (24) pages, as the Bylaws of the corporation. Executed this 21st day of April 1987. ------------------------------- Steven E. Bochner, Incorporator Certificate by Secretary of Adoption by Incorporator The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Norian Corporation and that the foregoing Bylaws, comprising twenty-four (24) pages, were adopted as the Bylaws of the corporation on April 21, 1987, by the person appointed in the Articles of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 21st day of April 21, 1987. ------------------------------- Brent Constantz, Secretary -26- 31 CERTIFICATE OF AMENDMENT OF BYLAWS OF NORIAN CORPORATION The undersigned, being the Assistant Secretary of Norian Corporation, hereby certifies that Section 6 of Article VI of the Bylaws of this corporation was amended on March __, 1988, by the Board of Directors to provide in its entirety as follows: ARTICLE VI Section 6. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS. 6.1 Indemnification of Directors and Officers The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification of Others The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 32 6.3 Payment of Expenses in Advance Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 6. 6.4 Indemnity Not Exclusive The indemnification provided by this Section 6 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 Insurance Indemnification The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 6. 6.6 Conflicts No indemnification or advance shall be made under this Section 6, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 33 Dated: March __, 1988 --------------------- Assistant Secretary -3- 34 CERTIFICATE OF AMENDMENT OF BYLAWS OF NORIAN CORPORATION The undersigned, being the Assistant Secretary of Norian Corporation, hereby certifies that Section 3.2 of Article III of the Bylaws of this corporation was amended on April 18, 1988, by the Board of Directors to provide in its entirety as follows: ARTICLE III Section 3.2 NUMBER OF DIRECTORS 3.2 The number of directors of the corporation shall be not less than four (4) nor more than seven (7). The exact number of directors shall be six (4) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote of written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16- 2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). This Certificate of Amendment of Bylaws shall be effective as of this 18th day of April, 1988. ---------------------- Assistant Secretary 35 CERTIFICATE OF AMENDMENT OF BYLAWS OF NORIAN CORPORATION The undersigned, being the Assistant Secretary of Norian Corporation, hereby certifies that Section 3.2 of Article III of the Bylaws of this corporation was amended on July 28, 1992 by the Board of Directors to provide in its entirety as follows: "ARTICLE III Section 3.2 NUMBER OF DIRECTORS 3.2 The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be six (6) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote of written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than six (6) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1)." This Certificate of Amendment of Bylaws shall be effective as of this 28th day of August, 1992. ----------------------- Steven E. Bochner Assistant Secretary 36 CERTIFICATE OF AMENDMENT OF BYLAWS OF NORIAN CORPORATION The undersigned, being the Assistant Secretary of Norian Corporation, hereby certifies that Section 3.2 of Article III of the Bylaws of this corporation was amended on March 29, 1994 by the Board of Directors to provide in its entirety as follows: "ARTICLE III Section 3.2 NUMBER OF DIRECTORS 3.2 The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote of written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than six (6) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1)." This Certificate of Amendment of Bylaws shall be effective as of this 29th day of March, 1994. ------------------------- Steven E. Bochner Assistant Secretary 37 CERTIFICATE OF AMENDMENT OF BYLAWS OF NORIAN CORPORATION The undersigned, being the Assistant Secretary of Norian Corporation, hereby certifies that Section 3.2 of Article III of the Bylaws of this corporation was amended on September 26, 1995 by the Board of Directors to provide in its entirety as follows: "ARTICLE III Section 3.2 NUMBER OF DIRECTORS 3.2 The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be nine (9) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote of written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than six (6) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1)." This Certificate of Amendment of Bylaws shall be effective as of this 26th day of September, 1995. ---------------------- Steven E. Bochner Assistant Secretary EX-4.1 5 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 [CERTIFICATE GRAPHIC] NUMBER [NORIAN LOGO] SHARES NORI INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING THE STATE OF CALIFORNIA TO RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS, IF ANY CUSIP THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, WITHOUT PAR VALUE, OF NORIAN CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [NORIAN CORPORATION Stamp] /s/ /s/ CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE - -------------------------------------------------- AMERICAN BANK NOTE COMPANY APRIL 30, 1996 3504 ATLANTIC AVENUE SUITE 12 043644fc LONG BEACH, CA 90807 (310) 989-2333 600-19X NEW (FAX) (310) 426-7450 - -------------------------------------------------- 2 A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares and upon the holders thereof as established, from time to time, by the Articles of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon written request and without charge from the Secretary of the Corporation at its corporate headquarters. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- .........................Custodian......................... (Cust.) (Minor) Under Uniform gifts to Minors Act ....................................................... (State) UNIF TRF MIN ACT -- ...................Custodian (until age...................) (Cust.) ....................................under Uniform Transfers (Minor) to Minors Act.............................................. (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ................ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ----------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ----------------------------- X ---------------------------------- X ---------------------------------- NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By ------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17AG-15. - -------------------------------------------------- AMERICAN BANK NOTE COMPANY APRIL 30, 1996 3504 ATLANTIC AVENUE SUITE 12 043644bk LONG BEACH, CA 90807 (310) 989-2333 NEW (FAX) (310) 426-7450 - -------------------------------------------------- EX-10.1 6 INDENNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this _____ day of ____________, 19__ by and between Norian Corporation, a California corporation (the "Company"), and ____________ ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company, or (ii) with respect to any criminal 2 action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company and its shareholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee's duty to the Company and its shareholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. 2. EXPENSES; INDEMNIFICATION PROCEDURE. (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Com pany. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. -2- 3 (c) Procedure. Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Articles of Incorporation or By-laws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the -3- 4 conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its By-laws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered proceeding. 4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 5. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. -4- 5 6. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors' and officers' liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or main tain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 7. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under the California General Corporation Law. (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 317 of the California General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or -5- 6 (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Company; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. EFFECTIVENESS OF AGREEMENT. To the extent that the indemnification permitted under the terms of certain provisions of this Agreement exceeds the scope of the indemnification provided for in the California General Corporation Law, such provisions shall not be effective unless and until the Company's Articles of Incorporation authorize such additional rights of indemnification. In all other respects, the balance of this Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 10. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes -6- 7 duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. 11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. -7- 8 16. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. NORIAN CORPORATION By: --------------------------------- Title: ------------------------------ AGREED TO AND ACCEPTED: INDEMNITEE: - ----------------------------------- (Signature) - ----------------------------------- (Type Name) - ----------------------------------- - ----------------------------------- (address) -8- EX-10.2 7 1988 STOCK OPTION AGREEMENT 1 EXHIBIT 10.2 NORIAN CORPORATION 1988 STOCK OPTION PLAN (AS AMENDED THROUGH JANUARY 1995) 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business. Options granted hereunder may be either "incentive stock options," as defined in Section 422A of the Internal Revenue Code of 1986 or "nonstatutory stock options," at the discretion of the Board and as reflected in the terms of the written option agreement. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. (b) "Common Stock" shall mean the Common Stock of the Company. (c) "Company" shall mean Norian Corporation, a California corporation. (d) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. (e) "Consultant" shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. (f) "Continuous Status as an Employee or Consultant" shall, for the purposes of this Plan and the Options granted and shares issued hereunder only, mean the absence of any interruption 2 or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave (including leave on account of disability or military leave, provided that such sick leave or military leave is for a period of not more than 90 days, except as may otherwise be approved by the Board and specified in writing by the Company, or any other leave of absence approved by the Board and specified in writing by the Company, subject to any conditions of such approval. In the event that at the end of such leave the Employee or Consultant does not resume his service to the Company, his employment or relationship with the Company (and his Continuous Status as an Employee or Consultant) shall be deemed to have terminated as of the end of the leave period. (g) "Employee" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (h) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986. (i) "Option" shall mean a stock option granted pursuant to the Plan. (j) "Optioned Stock" shall mean the Common Stock subject to an Option. (k) "Optionee" shall mean an Employee who receives an Option. (l) "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of 1986. (m) "Plan" shall mean this 1987 Stock Option Plan. (n) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. (o) "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 425(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of shares which may be optioned under the Plan is 7,000,000 shares of Common -2- 3 Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. However, any shares sold under the Plan and subsequently repurchased by the Company shall not be available for new issuance pursuant to the Plan. 4. Administration of the Plan. (a) Procedure. The Plan shall be administered by the Board of Directors of the Company. (i) Subject to subparagraph (ii), the Board of Directors may appoint a Committee consisting of not less than two members of the Board of Directors or one or more officers of the Company to administer the Plan on behalf of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. From time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. Members of the Board who either are eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him. (ii) Notwithstanding the foregoing subparagraph (i), if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, from the effective date of such registration until six months after the termination of such registration, any grants of Options to directors shall only be made by the Board of Directors; provided, however, that if a majority of the Board of Directors is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year, any grants of -3- 4 Options to directors must be made by, or only in accordance with the recommendation of, a Committee consisting of three or more persons, who may but need not be directors or employees of the Company, appointed by the Board of Directors and having full authority to act in the matter, none of whom is eligible to participate in this Plan or any other stock option or other stock plan-of the Company or any of its affiliates, or has been eligible at any time within the preceding year. Any Committee administering the Plan with respect to grants to officers who are not also directors shall conform to the requirements of the preceding sentence. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Incentive Stock Options, in accordance with Section 422A of the Internal Revenue Code of 1986 or "non-statutory stock options"; (ii) to determine, upon review of relevant information and in accordance with Section 7(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 7(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. -4- 5 5. Eligibility. (a) Options may be granted only to Employees or Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. (b) No Incentive Stock Option may be granted to an Employee which, when aggregated with all other incentive stock options granted to such Employee by the Company or any Parent or Subs~diary, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the Option covering such Share) in excess of $100,000 becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. (c) Section 5(b) of the Plan shall apply only to an Incentive Stock Option evidenced by an "Incentive Stock Option Agreement" which sets forth the intention of the Company and the Optionee that such Option shall qualify as an incentive stock option. Section 5(b) of the Plan shall not apply to any Option evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the intention of the Company and the Optionee that such Option shall be a nonstatutory stock option. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment or consulting relationship at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 12 of the Plan. 7. Exercise Price and Consideration. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of any Incentive Stock Option -5- 6 (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of a Non-Statutory Stock Option (A) granted to a person who at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of the grant. (B) granted to any person, the per Share exercise price shall be no less than 85% of the fair market value per Share on the date of grant. (iii) In the case of any Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (b) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the last reported bid and asked prices of the Common Stock on the last trading day immediately preceding the date of grant (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) System), or, in the event the Common Stock is listed on a stock exchange or quoted on the NASDAQ National Market System, the fair market value per Share shall be the reported closing price on such exchange or in the NASDAQ National Market on the last trading day immediately prior to the date of grant. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other shares of Common Stock having a fair -6- 7 market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under Sections 408 and 409 of the California General Corporations Law. In making its determination as to. the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company, (Section 315(b) of the California General Corporation Law). 8. Options. (a) Term of Option. The term of each Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. The term of each Option that is not an Incentive Stock Option shall be five (5) years and one (1) day from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. (b) Exercise of Option. (i) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable and shall vest at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 7(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. -7- 8 Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Any Shares issued and sold pursuant to the Plan and repurchased by the Company shall not be available for reissuance under the Plan. (ii) Termination of Status as an Employee. If an Optionee's Continuous Status as an Employee terminates, the Optionee may, but only within one (1) month (or such other period of time not exceeding three (3) months as is determined by the Board and is specified in writing by the Company) after the date he ceases to be an Employee (as the case may be) of the Company (but in no event later than ten years from the date of grant of the Option), exercise his Option to the extent that (A) the Option was vested and (B) he was entitled to exercise it, at the date of such termination. To the extent that the Option was not vested or he was not entitled to exercise the Option, at the date of such termination, or if he does not exercise such Option within the time specified herein, the Option shall terminate. (iii) Disability. Notwithstanding the provisions of Section 8(b) (ii) above, in the event of termination of Continuous Status as an Employee as a result of an Optionee's disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986), the Optionee may, but only within three (3) months (or such other period of time not less then three (3) months nor more than twelve (12) months, as determined by the Board and specified in writing by the Company) from the date of termination (but in no event later than ten years from the date of grant of the Option), exercise his Option to the extent that (A) the Option was vested and (B) the Optionee was entitled to exercise it, at the date of such termination. To the extent that the Option was not vested or the Optionee was not entitled to exercise the Option, at the date of such termination, or if the Optionee does not exercise such Option within the time specified herein, the Option shall terminate. (iv) Death of Optionee. Notwithstanding the provisions of Section 8(b) (ii) above, in the event of (A) the death of an Optionee during the term of his Option, where such Optionee is at the time of his death an Employee of the Company and such Optionee shall at the date of death have been in Continuous Status as an Employee since the date of grant of the Option, or (B) the death of an Optionee within thirty (30) days after the termination of such Optionee's Continuous Status as an Employee then the Option may be exercised at any time within six (6) months (or such other period of time not less than six (6) months nor more -8- 9 than twelve (12) months as determined by the Board and specified in writing by the Company) following the date of death (but in no event later than ten years from the date of grant of the Option), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that (A) the Option was vested as of the date of termination, and (8) the Optionee was entitled to exercise it at the date of termination. 9. Non-Transferability of Options. Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee only by such Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option shall terminate immediately prior to the consummation of such proposed action. In the event of a merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. If, in such event, the Option is -9- 10 not assumed or substituted, the Option shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger, the option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its Parent, the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon the exercise of the Option, for each share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of common stock in the merger. 11. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 12. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the holders of a majority of the outstanding shares of the Company entitled to vote: (i) any increase in the number of Shares subject to the Plan, other than in connection with an adjustment under Section 10 of the Plan; (ii) any material change in the designation of the class of employees or consultants eligible to be granted Options; or (iii) if the Company has a class of equity security registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to participants under the Plan. -10- 11 (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 12(a) of the Plan is made subsequent to the first registration of any class of equity security by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 16(a) of the Plan. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Board and the Optionee which agreement must be in writing and signed by the Company and the Optionee. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise 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 is required by any of the aforementioned relevant provisions of law. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. Option Agreements. Options shall be evidenced by written option agreements in such form as the Board shall approve. -11- 12 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. If and in the event that the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, the approval of such shareholders of the Company shall be: (a) (1) solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, or (2) solicited after the Company has furnished in writing to the holders entitled to vote substantially the same information concerning the Plan as that which would be required by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (b) obtained at or prior to the first annual meeting of shareholders held subsequent to the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act. If such shareholder approval is obtained by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company. 17. Information to Optionees. The Company shall provide to each Optionee during the period for which such person has one or more Options outstanding, copies of all annual reports and other information provided to all Shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties to the Company assure their access to equivalent information. -12- 13 NORIAN CORPORATION INCENTIVE STOCK OPTION AGREEMENT Name of Optionee: ----------------------------------------------------- Date of Grant: -------------------------------------------------------- Number of Option Shares: ---------------------------------------------- Exercise Price: ------------------------------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of ____________, 198__. NORIAN CORPORATION a California corporation By: -------------------------------- Title: ----------------------------- Optionee acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan, this Option and the Investment Representation Statement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, fully understands all provisions of the Option and the Investment Representation Statement, and specifically acknowledges that the vesting of shares hereunder is earned only by continuing employment at the will of the Company (and not through the act of being hired, being granted this option or acquiring shares pursuant to this Option). Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. ------------------------------------ Optionee 14 Norian Corporation, a California corporation (the "Company"), has granted to the person whose name is written on the first page hereof (the "Optionee"), an option to purchase the number of shares of Common Stock stated on the first page hereof, at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the 1988 Incentive Stock Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended to qualify as an Incentive Stock Option as defined in Section 422A of the Internal Revenue Code of 1986 (the "Code"). 2. Exercise Price. The exercise price for each share of Common Stock is as stated on the first page hereof, which price is not less than the fair market value per share of the Common Stock on the date of grant. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) Right to Exercise. (a) Subject to subsections 3(i)(b), (c), (d) and (e) below, this Option shall be exercisable cumulatively beginning one year from __________ (the "Commencement Date"), and those shares eligible for exercise shall be a portion of the Shares subject to the Option which is a fraction of 100% of the Shares, the numerator of which shall be a number equal to the total number of calendar months elapsed from the Commencement Date, and the denominator of which shall be 48. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsections 3(i)(d) and (e). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (e) In no event may this Option become exercisable at a time or times which, when this Option is aggregated with all other incentive stock options granted to Optionee by the Company or any Parent or Subsidiary, would result in Shares having an aggre- 15 gate fair market value (determined for each Share as of the date of grant of the option covering such share) in excess of $100,000 becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached hereto as Exhibit A, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 5. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; or (ii) check. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regula- -2- 16 tion G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of Optionee's Continuous Status as an Employee, he may, but only within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board) after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise this Option at the date of such termination, or if he does not exercise this Option within the time specified herein, the Option shall terminate. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, in the event of termination of Optionee's Continuous Status as an Employee as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board) from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option and while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee twelve (12) months after the date of death, subject to the limitations contained in Section 3(i)(e) above; or (ii) within thirty (30) days (or such other time not exceeding three (3) months as is determined by the Board) after the termination of Optionee's Continuous Status as an Employee, the -3- 17 Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may not be exercised more than five (5) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 12. Early Disposition of Stock. Optionee understands that if he disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to him, he will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount generally measured by the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of the exercise or the fair market value of the Shares at the date of disposition. The amount of such ordinary income may be measured differently if Optionee is an officer, director or 10% shareholder of the Company, or if the Shares were subject to a substantial risk of forfeiture at the time they were transferred to Optionee. Optionee hereby agrees to notify the Company in writing within 30 days after the date of any such disposition. Optionee understands that if he disposes of such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain. DATE OF GRANT: ------------------- NORIAN CORPORATION a California corporation By: --------------------------------- Brent Constantz, President -4- 18 OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL. Optionee acknowledges receipt of a copy of the Plan and certain information related thereto and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: -------------------- ------------------------------------ Optionee -5- 19 NORIAN CORPORATION NONSTATUTORY STOCK OPTION AGREEMENT Name of Optionee: ------------------------------------------------------ Date of Grant: --------------------------------------------------------- Number of Option Shares: ----------------------------------------------- Exercise Price: -------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of , 198 . NORIAN CORPORATION a California corporation By: --------------------------------- Title: ------------------------------ Optionee acknowledges receipt of a copy of the Plan, which is annexed hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan, this Option and the Purchase Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, fully understands all provisions of the Option and the Purchase Agreement, and specifically acknowledges that the vesting of shares hereunder is earned only by continuing employment at the will of the Company (and not through the act of being hired, being granted this option or acquiring shares pursuant to this Option). Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. ------------------------------------ Optionee 20 Norian Corporation, a California corporation (the "Company"), has granted to the person whose name is written on the first page hereof (the "Optionee"), an option to purchase the number of shares (the "Shares") of Common Stock of the Company stated on the first page hereof, at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the 1988 Stock Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. NATURE OF THE OPTION. This Option is intended by the Company and the Optionee to be a nonstatutory stock option, and does not qualify for any special tax benefits to the Optionee. This Option is not an Incentive Stock Option and is not subject to Section 5(b) of the Plan. 2. EXERCISE PRICE. The exercise price for each share of Common Stock is as stated on the first page hereof. 3. TERM OF OPTION. This Option may not be exercised more than five (5) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. This Option shall terminate following termination of Optionee's Continuous Status as an Employee or Consultant, in accordance with Section 8(b) of the Plan. 4. EXERCISE OF OPTION. This Option shall be exercisable during its term, subject to the provisions of Section 8 of the Plan, as follows: (i) VESTING. For so long as the Optionee shall maintain Continuous Status as an Employee or Consultant of the Company, this Option shall vest cumulatively as follows: 1/4 of the Shares subject to the Option shall vest on the first anniversary of the date of grant of this option and 1/48 of the Shares subject to the Option shall vest each month thereafter. (ii) RIGHT TO EXERCISE. This Option shall be exercisable at any time during its term, in whole or in part, and whether or not the shares as to which the Option is exercised have vested under the above vesting schedule; provided, however, that the Optionee (and Optionee's spouse, if any) shall execute, as a condition to any exercise of this Option, a Restricted Stock Purchase Agreement in the form attached hereto as Attachment 1 (the "Purchase Agreement"). The Optionee's right to exercise this Option shall not be limited by the grant of any incentive stock option (as defined in Section 422A of the Internal Revenue Code of 1986 (the "Code")) either before or after the granting of this Option to Optionee. -2- 21 (iii) METHOD OF EXERCISE. This Option shall be exercisable by delivery to the Company of a duly executed Purchase Agreement, accompanied by payment of the exercise price. The Purchase Agreement and exercise price shall be delivered in person or by certified mail to the President of the Company, and this Option shall be deemed to be exercised on receipt of the same. 5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Board: (i) cash; (ii) check; (iii) execution and delivery of a promissory note (the "Note") in the form attached to the Purchase Agreement as Exhibit A and in the amount of the exercise price, together with the execution and delivery of an escrow agreement (the "Escrow Agreement") in the form attached to the Purchase Agreement as Exhibit E securing the amount of the Note by a pledge of the Shares purchased by the Note; or, (iv) surrender of other shares of Common Stock of the Company of a value equal to the exercise price of the Shares as to which the Option is being exercised. 6. RESTRICTIONS ON EXERCISE. (a) This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board or any requirements of any stock exchange upon which the Shares may then be listed. (b) The Option may only be exercised in accordance with the provisions of the Plan and the provisions of the Purchase Agreement attached hereto as Exhibit A. The Purchase Agreement contains certain restrictions on transfer of the shares that may be acquired on exercise of this Option. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of -3- 22 Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. TAX CONSIDERATIONS. Certain federal tax consequences of any exercise of this Option or the sale of Shares acquired thereby are summarized in the Purchase Agreement. 9. AMENDMENT. Neither this Option Agreement nor any term or provision hereof may be modified, amended or waived except by a written instrument signed by the party against whom enforcement of any such modification, amendment or waiver is sought. 10. GOVERNING LAW. This Option Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of California. VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTING AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). THIS OPTION, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT OR CONSULTING RELATIONSHIP FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL. -4- 23 NORIAN CORPORATION NONSTATUTORY STOCK OPTION AGREEMENT (Consultant Optionees) Name of Optionee: ----------------------------------------------------- Date of Grant: -------------------------------------------------------- Number of Option Shares: ---------------------------------------------- Exercise Price: ------------------------------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of ____________, 198__. NORIAN CORPORATION a California corporation By: --------------------------------- Title: ------------------------------ Optionee acknowledges receipt of a copy of the Plan, which is annexed hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan, this Option and the Investment Representation Statement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, fully understands all provisions of the Option and the Investment Representation Statement, and specifically acknowledges that the vesting of shares hereunder is earned only by continuing employment at the will of the Company (and not through the act of being hired, being granted this option or acquiring shares pursuant to this Option). Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. ------------------------------------ Optionee 24 Norian Corporation, a California corporation (the "Company"), has granted to the person whose name is written on the first page hereof (the "Optionee"), an option to purchase the number of shares (the "Shares") of Common Stock of the Company stated on the first page hereof, at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the 1988 Stock Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended by the Company and the Optionee to be a nonstatutory stock option, and does not qualify for any special tax benefits to the Optionee. This Option is not an Incentive Stock Option and is not subject to Section 5(b) of the Plan. 2. Exercise Price. The exercise price for each share of Common Stock is as stated on the first page hereof. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. (a) Subject to subsections 3(i)(b), (c) and (d) below, this Option shall be exercisable cumulatively beginning one year from _________ (the "Commencement Date"), and those shares eligible for exercise shall be a portion of the Shares subject to the Option which is a fraction of 100% of the Shares, the numerator of which shall be a number equal to the total number of calendar months elapsed from the Commencement Date, and the denominator of which shall be 48. (b) This Option may not be exercised for a fraction of a share. (c) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to 25 the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached hereto as Exhibit A, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 5. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; or (ii) check. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. -2- 26 8. Term of Option. This Option may not be exercised more than five (5) years and one (1) day from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. Taxation Upon Exercise of Option. Optionee understands that, upon exercise of this Option, he will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the shares over the exercise price. The Company will be required to withhold tax from Optionee's current compensation with respect to such income; to the extent that Optionee's current compensation is insufficient to satisfy the withholding tax liability, the Company may require the Optionee to make a cash payment to cover such liability as a condition to exercise of this Option. Upon a resale of such shares by the Optionee, any difference between the sale price and the fair market value of the shares on the date of exercise of the Option will be treated as capital gain or loss. DATE OF GRANT: ------------------- NORIAN CORPORATION a California corporation By: --------------------------------- Brent Constantz, President OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL. Optionee acknowledges receipt of a copy of the Plan and certain information related thereto and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the -3- 27 Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: ------------------ ------------------------------------ Optionee -4- EX-10.3 8 1996 STOCK PLAN 1 EXHIBIT 10.3 NORIAN CORPORATION 1996 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means Norian Corporation, a California corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services. The term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (i) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship with the Company, any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the 2 case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. A leave of absence approved by the Company shall include sick leave, military leave, or any other personal leave approved by an authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- 3 (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means an Employee or Consultant who holds an outstanding Option or Stock Purchase Right. (x) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1996 Stock Plan. (z) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 below. (aa) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. -3- 4 (dd) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan shall be 1,000,000 Shares plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i) 500,000 Shares, (ii) two percent of the outstanding Shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan. In addition, Shares of Restricted Stock that are repurchased by the Company at their original purchase price, shall become available for future grant or sale under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option or Stock Purchase Right grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in a manner complying with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities -4- 5 are to be made. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made. (iii) Administration With Respect to Other Persons. With respect to Option or Stock Purchase Right grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof, are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; -5- 6 (vii) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xii) to institute an Option Exchange Program; (xiii) to determine the terms and restrictions applicable to Options and Stock Purchase Rights and any Restricted Stock; and (xiv) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option or Stock Purchase Right may be granted additional Options or Stock Purchase Rights. 6. Limitations. (a) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall -6- 7 be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. If an Option is granted hereunder that is part Incentive Stock Option and part Nonstatutory Stock Option due to becoming first exercisable in any calendar year in excess of $100,000, the Incentive Stock Option portion of such Option shall become exercisable first in such calendar year, and the Nonstatutory Stock Option portion shall commence becoming exercisable once the $100,000 limit has been reached. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 100,000 Shares. (ii) In connection with his or her initial employment, an Employee may be granted Options to purchase up to an additional 400,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all -7- 8 classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; -8- 9 (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full pay- ment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. Upon termination of an Optionee's Continuous Status as an Employee or Consultant, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Notice of Grant to the extent that he or she is entitled to exercise it on the date of termination (but -9- 10 in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for three (3) months following the Optionee's termination. In the case of an Incentive Stock Option, such period of time for exercise shall not exceed three (3) months from the date of termination. If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status from Consultant to Employee or Employee to Consultant, the Optionee's Continuous Status as an Employee or Consultant shall not automatically terminate solely as a result of such change in status. In such event, an Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option three months and one day following such change of status. (c) Disability of Optionee. Upon termination of an Optionee's Continuous Status as an Employee or Consultant as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months from the date of termination, but only to the extent that the Optionee is entitled to exercise it on the date of termination (and in no event later than the expiration of the term of the Option as set forth in the Notice of Grant). If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. Upon the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee would have been entitled to exercise the Option on the date of death. If, at the time of death, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If the Optionee's estate or the person who acquires the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. (f) Rule 16b-3. Options granted to individuals subject to Section 16 of the Exchange Act ("Insiders") must comply with the applicable provisions of Rule 16b-3 and shall contain -10- 11 such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer, which shall in no event exceed six (6) months from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Rule 16b-3. Stock Purchase Rights granted to Insiders, and Shares purchased by Insiders in connection with Stock Purchase Rights, shall be subject to any restrictions applicable thereto in compliance with Rule 16b-3. An Insider may only purchase Shares pursuant to the grant of a Stock Purchase Right, and may only sell Shares purchased pursuant to the grant of a Stock Purchase Right, during such time or times as are permitted by Rule 16b-3. (d) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (e) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. An Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. -11- 12 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option or Stock Purchase Right is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of -12- 13 Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regula- tions promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. -13- 14 (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise 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 is required. 17. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option or Stock Purchase Right exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option or Stock Purchase Right shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 15(b) of the Plan. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws and the rules of any stock exchange upon which the Common Stock is listed. -14- 15 NORIAN CORPORATION 1996 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number ------------------------------- Date of Grant ------------------------------- Vesting Commencement Date ------------------------------- Exercise Price per Share $ ------------------------------ Total Number of Shares Granted ------------------------------- Total Exercise Price $ ------------------------------ Type of Option: Incentive Stock Option --- Nonstatutory Stock Option --- Term/Expiration Date: ------------------------------- Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter. 16 Termination Period: This Option may be exercised for 90 days after termination of the Optionee's employment or consulting relationship with the Company. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In the event of the Optionee's change in status from Employee to Consultant or Consultant to Employee, this Option Agreement shall remain in effect. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange -2- 17 or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. -3- 18 (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax and state income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax or state income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee undergoes a change of status from Employee to Consultant, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. -4- 19 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by California law except for that body of law pertaining to conflict of laws. 8. NO GUARANTEE OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. -5- 20 Optionee's and the signature of the Company's representative below indicate that Optionee and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: NORIAN CORPORATION - ---------------------------------- By: Signature --------------------------------- - ---------------------------------- Title: Print Name ------------------------------ - ---------------------------------- Residence Address - ---------------------------------- -6- 21 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. ------------------------------------ Spouse of Optionee 22 EXHIBIT A NORIAN CORPORATION 1996 STOCK PLAN EXERCISE NOTICE Norian Corporation 10260 Bubb Road Cupertino, CA 95014-4166 Attention: Secretary 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Norian Corporation (the "Company") under and pursuant to the 1996 Stock Plan (the "Plan") and the Stock Option Agreement dated ________________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all 23 prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: PURCHASER: NORIAN CORPORATION By: - ---------------------------------- --------------------------------- Signature Its: - ---------------------------------- -------------------------------- Print Name Address: Address: - ---------------------------------- 10260 Bubb Road Cupertino, CA 95014-4166 - ---------------------------------- -2- EX-10.4 9 1996 DIRECTOR OPTION PLAN 1 EXHIBIT 10.4 NORIAN CORPORATION 1996 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1996 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means Norian Corporation, a California corporation. (e) "Director" means a member of the Board. (f) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; 2 (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (i) "Inside Director" means a Director who is an Employee. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means a Director who holds an Option. (m) "Outside Director" means a Director who is not an Employee. (n) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 1996 Director Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 200,000 Shares plus an annual increase to be added on each anniversary date of the adoption of the Plan, equal to (i) 1/2 percent of the outstanding Shares as of such date or (ii) a lesser amount determined by the Board (collectively, the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. (a) Procedure for Grants. The provisions set forth in this Section 4(a) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director who is not a Director as of the effective date of this Plan shall be automatically granted an Option to purchase 10,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. (iii) Each Outside Director shall be automatically granted an Option to purchase 2,000 Shares (a "Subsequent Option") on June 30 of each year provided he or she is then an Outside Director and if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the First Option. In the event that the date of grant of the First Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the First Option. (D) subject to Section 10 hereof, the First Option shall become exercisable as to 1/48 of the Shares subject to the First Option on each monthly anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. -3- 4 (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100%. of the Fair Market Value per Share on the date of grant of the Subsequent Option. In the event that the date of grant of the Subsequent Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the Subsequent Option. (D) subject to Section 10 hereof, the Subsequent Option shall become exercisable as to 1/12 of the Shares subject to the Subsequent Option on each monthly anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or (v) any combination of the foregoing methods of payment. -4- 5 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify Plan transactions, and other transactions by Outside Directors that otherwise could be matched with Plan transactions, for the maximum exemption from Section 16 of the Exchange Act. (c) Termination of Continuous Status as a Director. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. -5- 6 (d) Disability of Optionee. In the event Optionee's status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (e) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. -6- 7 (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(c) through (e) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). 11. Amendment and Termination of the Plan. (a) Amendment and Termination. Except as set forth in Section 4, the Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. -7- 8 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated there- under, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise 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 is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the granting of an Option hereunder. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law. -8- EX-10.5 10 1996 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.5 NORIAN CORPORATION 1996 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1996 Employee Stock Purchase Plan of Norian Corporation. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Committee" shall mean a committee designated by the Board in accordance with Section 13 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board and any references herein to the Committee shall be construed as references to the Board. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Common Stock" shall mean the Common Stock of the Company. (e) "Company" shall mean Norian Corporation and any Designated Subsidiary of the Company. (f) "Compensation" shall mean all base straight time gross earnings, including commissions, incentive bonuses and performance bonuses. (g) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (h) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's 2 right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the 91st day of such leave. (i) "Enrollment Date" shall mean the first day of each Offering Period. (j) "Exercise Date" shall mean the last trading day of each Purchase Period. (k) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Committee. (4) For purposes of the Enrollment Date under the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final Prospectus included within the Registration Statement filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock. (l) "Offering Period" shall mean the period beginning with the date an option is granted under the Plan and ending with the date determined by the Committee. During the term of the Plan, the duration of each Offering Period shall be determined from time to time by the Committee, provided that no Offering Period may exceed twenty-seven (27) months in duration. If determined by the Committee, an Offering Period may include one or more Purchase Periods. The first Offering Period shall begin on the effective date of the Company's initial public offering of its Common Stock that is registered with the Securities and Exchange Commission and shall end on the last Trading Day on or before June 30, 1998. (m) "Plan" shall mean this Employee Stock Purchase Plan. (n) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. -2- 3 (o) "Purchase Period" shall mean a period commencing on an Enrollment Date or on the day after an Exercise Date and which is of such duration as the Committee shall determine. (p) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (q) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (r) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee (as defined in Section 2(g)), who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering and Purchase Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods, each of which shall be of such duration (not to exceed 27 months) as the Committee shall determine from time to time in its discretion, and each of which shall consist of such number of Purchase Periods as the Committee shall determine from time to time in its discretion. The Plan shall continue until terminated in accordance with Section 19 hereof. The first Offering Period shall begin on the effective date of the Company's initial public offering of its Common Stock that is registered with the Securities and Exchange Commission and shall end on the last Trading Day on or before August 1, 1998. The first Offering Period shall consist of four (4) Purchase Periods, the first commencing on the effective date of the Company's initial registered public offering, as aforesaid, and ending on the last Trading Day on or before February 1, 1996. The Committee shall have the power to change the duration of Offering Periods (including the commencement dates thereof) at any time or from time to time, provided that (except as the shareholders may otherwise approve) any such change shall be effected only with respect to Offering Periods commencing at least five (5) days following the date on which the change is announced. -3- 4 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office not later than two (2) weeks prior to the applicable Enrollment Date. Eligible employees who begin employment with the Company within two weeks of an Enrollment Date may file a subscription agreement with the Company's payroll office up to one day prior to the applicable Enrollment Date. With respect to the first Enrollment Date, eligible Employees may file a subscription agreement up to one day prior to the Enrollment Date. An eligible Employee may participate in only one Offering Period at a time. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and will be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Committee may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at such time during any Purchase Period which is scheduled to end during the current calendar year (the "Current Purchase Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Purchase Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Purchase Period equal $21,250. Payroll deductions shall recommence at the rate provided in such -4- 5 participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but will not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than a number of shares determined by dividing $12,500 by the Fair Market Value of a share of the Company's Common Stock on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares will be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the Participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the Participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the shares shall be credited to an account in the participant's name with a brokerage firm selected by the Committee to hold the shares in its street name. -5- 6 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account will be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) Upon a participant's ceasing to be an Employee (as defined in Section 2(g) hereof), for any reason, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option will be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 14 hereof, and such participant's option will be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. (c) A participant's withdrawal from an Offering Period shall not have any effect on his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company, or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) Subject to Section 18, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 300,000 shares plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i) 150,000 shares, (ii) one percent of the outstanding shares on such date or (iii) a lesser amount determined by the Board. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. -6- 7 (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. (a) Administrative Body. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its Committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its Committee shall, to the full extent permitted by law, be final and binding upon all parties. (b) Rule 16b-3 Limitations. Notwithstanding the provisions of Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, the Plan shall be only administered by such a body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be afforded to any committee or person that is not "disinterested" as that term is used in Rule 16b-3. 14. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, -7- 8 transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Periods will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Purchase Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and the Offering Period then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Committee shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. -8- 9 19. Amendment or Termination. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Committee on any Exercise Date if the Committee determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 18 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Committee shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Committee determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise 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 is required by any of the aforementioned applicable provisions of law. -9- 10 22. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19 hereof. 23. Automatic Transfer to Low Price Offering Period. To the extent permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- 11 EXHIBIT A NORIAN CORPORATION 1996 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate Date of Change:_____________ _____ Change of Beneficiary 1. _______________________ hereby elects to participate in the Norian Corporation 1996 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to pur chase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to [ ]%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete "Norian Corporation 1996 Employee Stock Purchase Plan." I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to obtaining shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and spouse only):____ _______________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes -1- 12 as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF MY SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)______________________________________________ (First) (Middle) (Last) _______________________________ ___________________________ Relationship ___________________________ (Address) -2- 13 Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ ____________________________________ Signature of Employee ____________________________________ Spouse's Signature (If beneficiary other than spouse) -3- 14 EXHIBIT B NORIAN CORPORATION 1996 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Norian Corporation 1996 Employee Stock Purchase Plan which began on ____________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned under stands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ___________________________________ ___________________________________ ___________________________________ Signature: ___________________________________ Date:______________________________ -4- EX-10.6 11 SERIES C PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.6 NORIAN CORPORATION 1025 Terra Bella Avenue Mountain View, California 94043 ------------------------------------------- SERIES C PREFERRED STOCK PURCHASE AGREEMENT August 9, 1990 ------------------------------------------- 2 TABLE OF CONTENTS
Page ---- SECTION 1 - Authorization and Sale of Preferred Stock .................. 1 1.1 Authorization ................................................ 1 1.2 Sale of Series C Preferred ................................... 1 SECTION 2 - Closing Dates; Delivery .................................... 1 2.1 Location of Closing .......................................... 1 2.2 First Closing ................................................ 1 2.3 Second Closing ............................................... 1 2.4 Delivery ..................................................... 2 SECTION 3 - Representations and Warranties of the Company .............. 2 3.1 Organization and Standing; Articles and By-Laws .............. 2 3.2 Corporate Power .............................................. 3 3.3 Subsidiaries ................................................. 3 3.4 Capitalization ............................................... 3 3.5 Authorization ................................................ 4 3.6 Material Contracts and Commitments ........................... 4 3.7 Title to Properties and Assets; Liens, etc ................... 4 3.8 Compliance With Other Instruments, None Burdensome, etc .............................................. 5 3.9 Litigation, etc .............................................. 5 3.10 Employees .................................................... 5 3.11 Registration Rights .......................................... 6 3.12 Governmental Consent, etc .................................... 6 3.13 Offering ..................................................... 6 3.14 Brokers or Finders; Other Offers ............................. 6 3.15 Patents, Trademarks, Licenses ................................ 6 3.16 Financial Statements ......................................... 7 3.17 Agreements with Principals ................................... 7 3.18 Minute Books ................................................. 7 3.19 Disclosure ................................................... 8 SECTION 4 - Representations and Warranties of the Purchaser ............ 8 4.1 Accredited Investor .......................................... 8 4.2 Investment ................................................... 8 4.3 Rule 144 ..................................................... 8 4.4 No Public Market ............................................. 9 4.5 Access to Data ............................................... 9 4.6 Authorization ................................................ 9 4.7 Brokers or Finders ........................................... 9
-i- 3 TABLE OF CONTENTS (continued)
Page ---- SECTION 5 - Conditions to Closing of Purchaser ......................... 9 5.1 First Closing ................................................ 9 5.2 Second Closing ............................................... 11 SECTION 6 - Conditions to Closing of Company ........................... 11 6.1 First Closing ................................................ 11 6.2 Second Closing ............................................... 12 SECTION 7 - Affirmative Covenants of the Company ....................... 13 7.1 Financial Information ........................................ 13 7.2 Termination of Covenants ..................................... 14 7.3 Transfer of Information Rights ............................... 14 7.4 Proprietary Information Agreements ........................... 14 7.5 Key Man Insurance ............................................ 14 7.6 Board of Directors ........................................... 14 SECTION 8 - Restrictions on Transferability of Securities; Compliance With Securities Act; Registration Rights ..................................................... 15 8.1 Restrictions on Transferability .............................. 15 8.2 Certain Definitions .......................................... 15 8.3 Restrictive Legend ........................................... 16 8.4 Notice of Proposed Transfers ................................. 17 8.5 Requested Registration ....................................... 18 8.6 Company Registration ......................................... 21 8.7 Registration on Form S-3 ..................................... 22 8.8 Expenses of Registration ..................................... 23 8.9 Registration Procedures ...................................... 24 8.10 Indemnification .............................................. 24 8.11 Information by Holder ........................................ 27 8.12 Rule 144 Reporting ........................................... 27 8.13 Transfer of Registration Rights .............................. 27 8.14 Lockup Agreement ............................................. 28 SECTION 9 - Right of First Refusal ..................................... 28 9.1 Right of First Refusal ....................................... 28 SECTION 10 - Right of First Negotiation ................................ 30 10.1 Right of First Negotiation ................................... 30 10.2 Termination of Rights ........................................ 31 SECTION 11 - Miscellaneous ............................................. 31 11.1 Governing Law ................................................ 31
-ii- 4 TABLE OF CONTENTS (continued)
Page ---- 11.2 Survival ..................................................... 31 11.3 Successors and Assigns ....................................... 31 11.4 Entire Agreement; Amendment .................................. 31 11.5 Notices, etc ................................................. 32 11.6 Delays or Omissions .......................................... 32 11.7 California Corporate Securities Law .......................... 33 11.8 Expenses ..................................................... 33 11.9 Counterparts ................................................. 33 11.10 Severability ................................................. 33 11.11 Titles and Subtitles ......................................... 33
EXHIBITS A. Form of Amended and Restated Articles of Incorporation B. Exceptions to Representations and Warranties C. Form of Proprietary Information Agreement D. Form of Compliance Certificate E. Form of Opinion of Counsel F. Form of Modification Agreement G. Development Agreement H. License Agreement I. Standstill Agreement -iii- 5 NORIAN CORPORATION SERIES C PREFERRED STOCK PURCHASE AGREEMENT This Agreement is made as of August 9, 1990 among Norian Corporation, a California corporation (the "Company"), and Pfizer Hospital Products Group, Inc. (the "Purchaser"). SECTION 1 AUTHORIZATION AND SALE OF PREFERRED STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to 2,750,000 shares (the "Shares") of its Series C Preferred Stock ("Series C Preferred"), having the rights, privileges and preferences as set forth in the Company's Second Amended and Restated Articles of Incorporation (the "Restated Articles") in the form attached to this Agreement as Exhibit A. 1.2 SALE OF SERIES C PREFERRED. Subject to the terms and conditions hereof, the Company will issue and sell to Purchaser and the Purchaser will buy from the Company the total number of shares of Series C Preferred specified in Sections 2.2 and 2.3 below, at a price per share as specified in Sections 2.2 and 2.3 below. SECTION 2 CLOSING DATES; DELIVERY 2.1 LOCATION OF CLOSING. The closing of the purchase and sale of the Series C Preferred hereunder shall be held at the offices of Wilson, Sonsini, Goodrich & Rosati, Two Palo Alto Square, Palo Alto, California. 2.2 FIRST CLOSING. The First Closing shall occur at 11:00 a.m., local time, on August 9, 1990 (the "First Closing") or as such other time and place upon which the Company and the Purchaser shall agree (the "First Closing Date"). At the First Closing, the Purchaser shall purchase 1,333,333 shares of Series C Preferred, at a price of $.75 per share. 2.3 SECOND CLOSING. The Second Closing may occur at such time as Purchaser and the Company may agree (the "Second Closing Date"), provided however, that Purchaser and Company agree as set forth below. Purchaser may elect at any time to purchase additional shares of Preferred with an aggregate purchase price of $1,000,000 within two years after the First Closing. The purchase price of such shares shall be $1.125 per share. Such additional shares of Preferred shall have the same rights, preferences and privileges as the Series C Preferred and shall be on a parity with 6 respect to such series; provided, however, that the dividend, liquidation and conversion price provisions shall be adjusted to reflect the per share purchase price of such additional shares of Preferred. In the event that the Purchaser does not elect to purchase the additional shares of Preferred within one year after the First Closing as provided above, the Company shall have the right commencing the day following the first anniversary date of the First Closing to require the Purchaser to purchase an additional 1,333,333 shares of Series C Preferred at a price of $.75 per share, and the Purchaser shall be required, and hereby agrees, to purchase such additional shares of Series C Preferred. The Purchaser's rights and obligations as set forth herein shall not terminate in the event of termination of either the License Agreement or the Development Agreement (as defined below). The Company's right to require the Purchaser to purchase the additional shares of Series C Preferred shall expire in the event the Company does not provide the Purchaser with notice of its election to require the purchase of the additional shares of Preferred within six (6) months after the first anniversary date of the First Closing. The Purchaser agrees to use its best efforts to consummate the sale of the additional shares of Series C Preferred pursuant to this Section 2.3 within forty-five (45) days of the Company's notice. All rights under this Section 2.3 shall expire upon the first purchase and sale of additional shares of Preferred pursuant to this Section 2.3, whether at the election of the Purchaser or the Company. 2.4 DELIVERY. At each Closing, the Company will deliver to Purchaser a certificate or certificates registered in Purchaser's name representing the number of Shares set forth in Section 2.2 and 2.3 above to be purchased by such Purchaser at the Closing, against payment of the purchase price therefor, by check payable to the Company or wire transfer per the Company's instructions. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Exceptions to Representations and Warranties attached hereto as Exhibit B (the "Schedule of Exceptions"), the Company represents and warrants to the Purchasers as follows: 3.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has the requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed -2- 7 to be conducted. The Company is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse effect on the Company's business as now conducted or as proposed to be conducted. 3.2 CORPORATE POWER. The Company has all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Series C Preferred, and to carry out and perform its obligations under the terms of this Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, of which 3,355,677 shares are issued and outstanding immediately prior to the Closing and 17,787,500 shares of Preferred Stock, 5,000,000 of which are designated as Series A Preferred Stock (the "Series A Preferred") and 4,902,919 of which are issued and outstanding immediately prior to the Closing, 10,037,500 of which are designated Series B Preferred, 10,037,500 of which are outstanding immediately prior to the Closing and 2,750,000 shares of Preferred Stock shall be designated Series C Preferred Stock, none of which are outstanding immediately prior to the Closing. The Company has reserved 2,000,000 shares of its Common Stock for issuance under plans or arrangements approved by the Board of Directors to employees, officers, or directors of, or consultants to, the Company. There are currently 1,586,112 shares of Common Stock issuable upon the exercise of outstanding options which were granted, subject to vesting restrictions, to employees, consultants, directors and members of the Scientific Advisory Board of the Company pursuant to the Company's 1988 Stock Option Plan. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Company has reserved 2,750,000 shares of Series C Preferred for issuance hereunder and an appropriate number of shares of Common Stock as may be deemed necessary for issuance upon conversion of the Series A Preferred, Series B Preferred and Series C Preferred. The Series C Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Articles. Except as set forth herein and in the Schedule of Exceptions, there are no options, warrants or other rights to purchase any of the Company's authorized and unissued capital stock. -3- 8 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Series C Preferred (and the Common Stock issuable upon conversion of the Series C Preferred), and the performance of all of the Company's obligations hereunder has been taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except as the indemnification provisions of Section 8.10 hereof may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Series C Preferred, when issued in compliance with the provisions of this Agreement and the Restated Articles, will be validly issued, fully paid and non-assessable, and will have the rights, preferences and privileges described in the Restated Articles. The Common Stock issuable upon conversion of the Series C Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Restated Articles, will be validly issued, fully paid and nonassessable; and the Series C Preferred and such Common Stock will be free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Series C Preferred and the Common Stock issuable upon conversion of the Series C Preferred may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein. The Series C Preferred and Common Stock issuable upon conversion of the Series C Preferred is not subject to any preemptive rights or rights of first refusal which have not been waived. 3.6 MATERIAL CONTRACTS AND COMMITMENTS. Except as set forth on the Schedule of Exceptions attached hereto as Exhibit B, there are no material contracts, agreements and instruments to which the Company is a party. The agreements referred to above are valid, binding and in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms. Brent Constantz has transferred to the Company his proprietary rights to the technology to modulate the growth and morphology of crystals in a manner similar to the processes of skeletal growth, together with all other proprietary rights and technology and intellectual property necessary for the conduct of the business of the Company as proposed. 3.7 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to the proprietary technology which was transferred to the Company by Brent Constantz. The Company has good and marketable title to its other properties and assets and -4- 9 has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company and which have not arisen otherwise than in the ordinary course of business. 3.8 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of its Articles of Incorporation or By-Laws. The Company is not in violation in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or decree, and to the best of its knowledge is not in violation of any order, statute, rule or regulation applicable to the Company in which such violation would materially and adversely affect the Company. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Series C Preferred and the Common Stock issuable upon conversion of the Series C Preferred, have not resulted and will not result in any material violation of, or conflict with, or constitute a material default under any of the foregoing nor result in the creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. There is no such violation or default which materially and adversely affects the business of the Company or any of its properties or assets. 3.9 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any threat thereof or basis therefor). The Company is not currently subject to any judgment, writ, decree or order of any court or governmental agency. The Company has no current plans to initiate any litigation or dispute resolution proceedings against any third parties. 3.10 EMPLOYEES. Each employee of the Company has executed a proprietary information agreement, the form of which is attached hereto as Exhibit D. To the best of the Company's knowledge and after due investigation, no employee of the Company is or is now expected to be in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or any other party because of the nature of the business conducted or proposed to be conducted by the Company. To the best of the Company's knowledge, there is no pending or threatened action, suit, proceeding or claim with respect to any contract or agreement referred to in the preceding sentence (nor to the best of the Company's knowledge, is there any threat thereof or basis -5- 10 therefor). To the best of the Company's knowledge and after due investigation, its employees have not improperly used and are not making or expected to make improper use of any confidential information, trade secrets or intellectual property of others including, without limitation, those of any former employer, and, to the best of the Company's knowledge, there is no pending or threatened action, suit, proceeding or claim with respect to the foregoing. 3.11 REGISTRATION RIGHTS. Except as set forth in this Agreement, the Company is not under any contractual obligation to register (as defined in Section 8.2 below) any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.12 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Series C Preferred (and the Common Stock issuable upon conversion of the Series C Preferred), or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Articles in the office of the California Secretary of State (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Series C Preferred (and the Common Stock issuable upon conversion of the Series C Preferred) under the California Corporate Securities Law of 1968, as amended, and other applicable state securities laws, which filings and qualifications, if required, will be accomplished in a timely manner. 3.13 OFFERING. Subject to the accuracy of the Purchaser's representations in Section 4 hereof, the offer, sale and issuance of the Series C Preferred to be issued in conformity with the terms of this Agreement, and the issuance of the Common Stock to be issued upon conversion of the Series C Preferred, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). 3.14 BROKERS OR FINDERS; OTHER OFFERS. Neither the Company nor the Purchaser has incurred, or will incur, directly or indirectly, as a result of any action taken by the Company (assuming that no unilateral action is taken by the Purchaser), any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 3.15 PATENTS, TRADEMARKS, LICENSES. Except as disclosed in the Schedule of Exceptions the Company has sufficient title and ownership of patents, copyrights, trademarks, trade secrets, and -6- 11 all other proprietary rights needed to conduct its business as proposed to be conducted. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, copyrights, trademarks, trade secrets or proprietary rights and processes of any other person or entity. There are no pending infringement claims regarding any third party's patents, copyrights, trademarks, trade secrets or proprietary rights and processes against the Company nor, to the best of the Company's knowledge, is there any threat thereof or basis therefor. To the best of the Company's knowledge, the Company is not infringing upon or otherwise acting adversely to, and will not, by conducting its business as presently conducted, infringe upon or otherwise act adversely to, the right or claimed right of any other person with respect to any of the foregoing. The Company is not aware of any violation by a third party of any of its patents, copyrights, trademarks, trade secrets or other proprietary rights. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of its proprietary information. 3.16 FINANCIAL STATEMENTS. Purchaser has been furnished copies of (i) the Company's audited balance sheet as of February 28, 1990 and the Company's audited income statement and statement of changes in financial position for the twelve-month period ended February 28, 1990 and (ii) the Company's unaudited balance sheet as of May 31, 1990 and the Company's unaudited income statement and statement of changes in financial position for the three month period ended May 31, 1990 (collectively the "Financial Statements"). The Financial Statements are prepared in accordance with generally accepted accounting principles and fairly represent the financial position of the Company as of their respective dates and the results of its operations for the periods then ended. 3.17 AGREEMENTS WITH PRINCIPALS. Except for agreements explicitly contemplated hereby and restricted stock purchase agreements between the Company and several employees of the Company: (i) there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors or affiliates, and (ii) no officer, director or affiliate is indebted to the Company nor is the Company indebted to any of them. 3.18 MINUTE BOOKS. The minute books of the Company provided to counsel for the Purchaser for review contain a complete summary of all meetings of and actions by directors and shareholders of the Company from the time of its incorporation to the date of such review and reflect all transactions referred to in such minutes accurately in all material respects. -7- 12 3.19 DISCLOSURE. To the best of the Company's knowledge, this Agreement with the Exhibits hereto and the Company's disclosures to Purchaser when taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or made by the Company not misleading in light of the circumstances under which they were made. Any financial projections disclosed were prepared in good faith; however, the Company does not warrant that it will achieve any financial projections. Any assumptions used for projections are materially correct and unchanged as of the date hereof, provided, however, that no warranty or representation is given as to opinions, forecasts, or other non-factual matters. The Company has provided the Purchaser with all the information which such Purchaser has requested for deciding whether to purchase the Shares and all information which the Company believes is reasonably necessary to enable the Purchaser to make such decision. SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company with respect to the purchase of the Shares as follows: 4.1 ACCREDITED INVESTOR. It is an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act. 4.2 INVESTMENT. It is acquiring the Series C Preferred and the underlying securities for investment for its own account, not as a nominee or agent and not with the view to, or for resale in connection with, any distribution thereof. It understands that the securities to be purchased and the underlying securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed herein. 4.3 RULE 144. It acknowledges that the Series C Preferred and the underlying securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the Company's securities, the availability of certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, -8- 13 the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 4.4 NO PUBLIC MARKET. It understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company's securities. 4.5 ACCESS TO DATA. It has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. It has also had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. It understands that such discussions, as well as any written information issued by the Company were intended to describe certain aspects of the Company's business and prospects but were not an exhaustive description. The foregoing, however, does not limit or modify the representations and warranties of Section 3 herein or the right of the Purchasers to rely thereon. 4.6 AUTHORIZATION. This Agreement when executed and delivered by such Purchaser will constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, except as the indemnification provisions of Section 8.10 hereof may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.7 BROKERS OR FINDERS. Except as disclosed in the Schedule of Exceptions, neither the Company nor the Purchaser has incurred, directly or indirectly, as a result of any action taken by the Purchaser (assuming that no unilateral action is taken by the Company), any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. -9- 14 SECTION 5 CONDITIONS TO CLOSING OF PURCHASER 5.1 FIRST CLOSING. The Purchaser's obligations to purchase the Shares at the First Closing are, at the option of the Purchaser, subject to the fulfillment of the following conditions: (a) Representations and Warranties Correct. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the First Closing Date. (b) Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the First Closing Date shall have been performed or complied with in all material respects. (c) Compliance Certificate. The Company shall have delivered to the Purchaser a certificate of the Company in the form of Exhibit D hereto, executed by the Chief Financial Officer of the Company, dated the First Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Sections 5.1(a) and 5.1(b) of this Agreement. (d) State Securities Laws. The Company shall have obtained all necessary state securities law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series C Preferred and the Common Stock issuable upon conversion of the Series C Preferred. (e) Restated Articles of Incorporation. The Restated Articles shall have been filed with the California Secretary of State. (f) Legal Matters. All material matters of a legal nature which pertain to this Agreement, and the transactions contemplated hereby, shall have been reasonably approved by counsel to the Purchaser. (g) Opinion of Counsel. The Company shall have delivered to the Purchaser an opinion of counsel in the form attached hereto as Exhibit E. (h) Modification Agreement. Concurrently with the First Closing, all persons with both registration rights and rights of first refusal prior to the Closing will execute a Modification Agreement attached hereto as Exhibit F (the "Modification -10- 15 Agreement") agreeing to, among other things, the provisions of Sections 8, 9 and 11.4 hereof. (i) Development Agreement. The Company and Purchaser shall have executed a Development Agreement substantially in the form of Exhibit G. (j) License Agreement. The Company and the Purchaser shall have executed a License Agreement in substantially the form of Exhibit H. 5.2 SECOND CLOSING. The Purchaser's obligations to purchase the Shares at the Second Closing are, at the option of the Purchaser, subject only to the fulfillment of the following conditions: (a) Representations and Warranties at First Closing Date. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the First Closing Date. (b) Representations and Warranties at Second Closing. The representations and warranties made by the Company in the following Sections (or portions thereof) shall be true and correct in all material respects as of the Second Closing Date: 3.1, 3.2, 3.5, 3.12, 3.13, the third sentence of Section 3.6, the first sentence of Section 3.7 and the first and third sentences of Section 3.8. (c) Compliance Certificate. The Company shall have delivered to Purchaser a certificate of the Company executed by the Chief Financial Officer of the Company, dated the Second Closing Date, and certifying to the fulfillment of the conditions specified in Sections 5.2(a) and 5.2(b). (d) No Bankruptcy Proceedings. As of the Second Closing, the Company shall not have (i) ceased the conduct of its business, (ii) had appointed a receiver, custodian, trustee or liquidator for a substantial portion of its assets for the purpose of satisfying creditor claims, (iii) made a general assignment for the benefit of its creditors, (iv) be the subject of a voluntary case under the United Stated Bankruptcy Code; or (v) have pending a voluntary or involuntary petition under any law pertaining to the bankruptcy or insolvency of the Company for the purposes of satisfying creditor claims; provided that if an involuntary petition against the Company as described in clause (v) is dismissed within ninety (90) days after the Second Closing Date, such condition shall be deemed to be satisfied. -11- 16 SECTION 6 CONDITIONS TO CLOSING OF COMPANY 6.1 FIRST CLOSING. The Company's obligation to sell and issue the Shares at the First Closing Date is, at the option of the Company, subject to the fulfillment as of the First Closing Date of the following conditions: (a) Representations. The representations made by the Purchaser in Section 4 hereof shall be true and correct when made, and shall be true and correct on the First Closing Date. (b) State Securities Laws. The Company shall have obtained all necessary state securities law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series C Preferred and the Common Stock issuable upon conversion of the Series C Preferred. (c) Restated Articles of Incorporation. The Restated Articles shall have been filed with the California Secretary of State. (d) Legal Matters. All material matters of a legal nature which pertain to this Agreement, and the transactions contemplated hereby, shall have been reasonably approved by counsel to the Company. (e) Modification Agreement. Concurrently with the Closing, all persons with both registration rights and rights of first refusal prior to the Closing will execute the Modification Agreement attached hereto as Exhibit F agreeing to, among other things, the provisions of Sections 8, 9 and 11.4 hereof. (f) Development Agreement. The Company and Purchaser shall have executed a Development Agreement substantially in the form of Exhibit G. (g) License Agreement. The Company and the Purchaser shall have executed a License Agreement in substantially the form of Exhibit H. (h) Standstill Agreement. The Company and the Purchaser shall have executed a Standstill Agreement in substantially the form of Exhibit I. 6.2 SECOND CLOSING. The Company's obligation to sell and issue the Shares at the Second Closing Date is, at the option of -12- 17 the Company, subject to the fulfillment as of the Second Closing Date of the following conditions: (a) First Closing. The First Closing shall have occurred. (b) Representations. The representations made by the Purchaser in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Second Closing Date. (c) State Securities Laws. The Company shall have obtained all necessary state securities law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series C Preferred and the Common Stock issuable upon conversion of the Series C Preferred. (d) Legal Matters. All material matters of a legal nature which pertain to this Agreement, and the transactions contemplated hereby, shall have been reasonably approved by counsel to the Company. SECTION 7 AFFIRMATIVE COVENANTS OF THE COMPANY The Company hereby covenants and agrees as follows: 7.1 FINANCIAL INFORMATION. The Company will mail the following reports to the Purchaser for so long as (i) Purchaser is a holder of any shares of Series C Preferred or Common Stock issued upon conversion of the Series C Preferred with respect to subparagraph (a) and (b) below, and (ii) Purchaser is a holder of at least 500,000 shares of Series C Preferred and/or Common Stock issued upon conversion of the Series C Preferred with respect to subparagraph (c) below: (a) As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of changes in financial position of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and audited by independent public accountants of national standing selected by the Company. -13- 18 (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company and in any event within 45 days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and consolidated statements of changes in financial condition of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles (other than for accompanying notes), subject to changes resulting from year-end audit adjustments, all in reasonable detail and signed by the principal financial or accounting officer of the Company. (c) As soon as practicable after the end of each month, and in any event within 30 days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such month, and consolidated statements of income for such month, prepared in accordance with generally accepted accounting principles (other than for accompanying notes), subject to changes resulting from year-end audit adjustments, all in reasonable detail and signed by the principal financial or accounting officer of the Company and, as soon as available after the end of each fiscal year, an annual budget for the next succeeding fiscal year. 7.2 TERMINATION OF COVENANTS. The covenants set forth in Section 7.1 shall terminate and be of no further force or effect at the closing of a firm commitment underwritten public offering of the Company's capital stock pursuant to an effective registration statement under the Securities Act. 7.3 TRANSFER OF INFORMATION RIGHTS. The rights to cause the Company to provide information as described in Section 7.1 above may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Series C Preferred or Common Stock issued upon conversion of such Series C Preferred, provided that such assignee or transferee (i) acquires at least 50,000 shares of such securities or all such securities held by such transferror, or (ii) receives such securities pursuant to a distribution to beneficial owners without consideration. 7.4 PROPRIETARY INFORMATION AGREEMENTS. All employees of and consultants to the Company having access to the Company's proprietary and confidential information shall execute proprietary information agreements with the Company containing substantive provisions substantially similar to those set forth in Exhibit C hereto. 7.5 KEY MAN INSURANCE. The Company shall maintain a key-man insurance policy on the life of Brent Constantz, with the Company -14- 19 designated as beneficiary, in the amount of $1,000,000. In addition, the Company shall maintain a key-man life insurance policy on the life of Donald Caddes, in such amount as the Board of Directors of the Company determines it is appropriate. 7.6 BOARD OF DIRECTORS. Subject to Section 10.2 as long as Purchaser continues to hold at least 80% of the total Series C Preferred Stock purchased at the First Closing, and the Second Closing, Purchaser shall be entitled to elect a member of the Board of Directors of the Company, which member shall be reasonably acceptable to the Company. In the event that the Board member is not present at a board meeting or if Purchaser chooses not to elect a member of the Board of Directors, Purchaser shall be entitled to receive notice of such meetings and to have a representative of Purchaser observe such meetings, which observer shall be reasonably acceptable to the Company. Purchaser acknowledges that the rights granted herein shall be subject to the Board's fiduciary obligations relating to confidentiality and conflicts of interest. SECTION 8 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT; REGISTRATION RIGHTS 8.1 RESTRICTIONS ON TRANSFERABILITY. The Series A Preferred, Series B Preferred, and Series C Preferred and the Conversion Stock (as defined below) shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Section 8, which conditions are intended to ensure compliance with the provisions of the Securities Act. Purchaser will cause any proposed purchaser, assignee, transferee, or pledgee of the Series C Preferred or the Conversion Stock held by a Purchaser to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 8. 8.2 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Conversion Stock" means the Common Stock issued or issuable pursuant to conversion of the Series A Preferred, the Series B Preferred, and the Series C Preferred. "Holder" shall mean any holder of Registrable Securities and any person holding Registrable Securities to whom the rights -15- 20 under this Section 8 have been transferred in accordance with Section 8.13 hereof. "Initiating Holders" shall mean any Holders who in the aggregate are Holders of at least 40% of the Registrable Securities. "Registrable Securities" means (i) the Conversion Stock; and (ii) any Common Stock of the Company issued or issuable in respect of the Conversion Stock or other securities issued or issuable pursuant to the conversion of the Series A Preferred, Series B Preferred, or Series C Preferred upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to such securities; provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) transferred without concurrent transfer of registration rights pursuant to Section 8.13. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 8.5, 8.6 and 8.7 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company and exclusive of underwriting discounts and commissions and exclusive of legal fees and expenses for counsel to the Holders). "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 8.3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders. -16- 21 8.3 RESTRICTIVE LEGEND. Each certificate representing (i) the Series A Preferred, Series B Preferred and Series C Preferred, (ii) the Conversion Stock and (iii) any other securities issued in respect of the Series A Preferred, Series B Preferred, Series C Preferred or the Conversion Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 8.4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER COMPLIES WITH THE PROVISIONS OF RULE 144 UNDER THE ACT IN THE OPINION OF COUNSEL TO THE COMPANY OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. Each Purchaser and Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Series A Preferred, Series B Preferred, Series C Preferred or the Conversion Stock in order to implement the restrictions on transfer established in this Section 8. Any legend endorsed on a certificate as described above shall be removed and the Company shall issue a certificate without such legend to the holder of such security if such security is registered under the Securities Act or if a notification under Regulation A of the Securities Act is in effect with respect thereto, or if such security may be sold under Rule 144(k) of the Commission under the Securities Act. 8.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 8.4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to -17- 22 the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, except in the case of (i) a transfer not involving a change in beneficial ownership, (ii) a transfer which complies with the provisions of Rule 144 under the Securities Act in the opinion of counsel to the Company, or (iii) in transactions involving the distribution without consideration of Restricted Securities by any of the Purchasers to any of its partners, retired partners, or to the estate of any of its partners or retired partners, or to such holder's spouse, siblings, spouse of such siblings, ancestors and descendants and any trust established solely for such holder's benefit or for the benefit of such holder's spouse, siblings, ancestors and/or descendants, at such holder's expense by either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 8.3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and the Company such legend is not required in order to establish compliance with any provision of the Securities Act. 8.5 REQUESTED REGISTRATION. (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to such Initiating Holders' Registrable Securities where the reasonably anticipated aggregate offering price to the public, net of underwriting discounts and commissions, would exceed $2,500,000, the Company shall: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue -18- 23 sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; Provided, however, that the Company shall not be obligated to file a registration statement to effect any such registration, qualification or compliance pursuant to this Section 8.5: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) Prior to six months after the effective date of the Company's first registered public offering of its stock; (C) Starting on a date sixty (60) days prior to and ending on a date six months immediately following the effective date of any registration statement pertaining to the securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) After (i) the Company has effected two such registrations pursuant to this Section 8.5 and (ii) such registrations have been declared or ordered effective; or (E) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 8.5 shall be deferred for a period not to exceed 120 days from the date of receipt of written request from the Initiating Holders. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable -19- 24 Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event that the Initiating Holders specify that a registration pursuant to Section 8.5 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 8.5(a)(i). In such event, the right of any Holder to registration pursuant to Section 8.5 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 8.5, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter of nationally recognized standing selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 8.5, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all holders of Registrable Securities who have elected to participate in such offering and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 120 days after the effective date of such registration, or such other shorter period of time as the underwriters may permit. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation then imposed by the underwriters), then the Company shall offer to all Holders, if any, whose shares have been excluded from the registration by the terms of this paragraph, the right to include additional Registrable Securities in the same proportion used in determining the underwriter limita- -20- 25 tion in this Section 8.5(b) up to the limitation then imposed by the Underwriters. 8.6 COMPANY REGISTRATION. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Commission Rule 145 transaction or (iii) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 15 days after receipt of such written notice from the Company, by any Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 8.6(a)(i). In such event the right of any Holder to registration pursuant to Section 8.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. If the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. Any such exclusion shall apply pro rata to all Holders, but the foregoing shall not be interpreted to require any cutback in the number of shares to be sold by the Company in such an offering. Notwithstanding the above, in the event of an offering other than the Company's initial public offering, the number of Registrable Securities included in such offering shall not be reduced to less than 30% of the shares to be offered in such offering. -21- 26 The Company shall advise all Holders and other holders distributing their securities through such underwriting of any such limitation, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders and such other holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders and such other holders at the time of filing the registration statement. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 120 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation then imposed by the underwriters), then the Company shall offer to all Holders, if any, whose shares have been excluded from the registration by the terms of this paragraph, the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section up to the limitation then imposed by the Underwriters. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 8.6 prior to the effectiveness of such registration whether or not any Holder elected to include securities in such registration. 8.7 REGISTRATION ON FORM S-3. (a) If a Holder or Holders request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than two registrations pursuant to this Section 8.7. The substantive provisions of Section 8.5(b) shall be applicable to each registration initiated under this Section 8.7. The Company shall give notice to all Holders of Registrable Securities of the -22- 27 receipt of a request for registration pursuant to this Section 8.7 and shall provide a reasonable opportunity for other Holders to participate in the registration. (b) Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement pursuant to this Section 8.7: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) if the Company, within ten (10) days of the receipt of the request of the initiating Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within ninety (90) days of receipt of such request (other than with respect to a registration statement relating to a Rule 145 transaction or an offering solely to employees); (iii) starting with a date sixty (60) days prior to, and ending on a date six months immediately following, the effective date of any registration statement pertaining to the securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (iv) if the shares proposed to be sold can be sold pursuant to Rule 144 within a three month period of the date of the request for a registration under this Section 8.7; or (v) if the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 120 days from the receipt of the request to file such registration by such Holder. 8.8 EXPENSES OF REGISTRATION. (a) All Registration Expenses incurred in connection with all registrations pursuant to Sections 8.5 and 8.6 shall be borne by the Company. Unless otherwise stated, all Selling -23- 28 Expenses relating to securities registered on behalf of the Holders and all other Registration Expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. In the event that the Company elects to register Registrable Securities under Section 8.5 on a Form S-3, all Registration Expenses incurred in connection with such registration shall be borne by the Company. (b) All Registration Expenses and Selling Expenses incurred in connection with a registration pursuant to Section 8.7 shall be borne pro rata by the Holder or Holders participating in the registration according to the number of Registrable Securities included in such registration. 8.9 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 8, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof, including any stop order or other proceeding initiated with respect to such offering. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least 120 days or until the distribution described in the Registration Statement has been completed, whichever first occurs; and (b) Furnish to the Holders participating in such registration such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders may reasonably request. 8.10 INDEMNIFICATION. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 8, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or -24- 29 based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any state securities law or any rule or regulation promulgated thereunder applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by any Holder, controlling person or underwriter and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or -25- 30 any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited in an amount equal to the initial public offering price of the shares sold by such Holder, unless such liability arises out of or is based on willful conduct by such Holder. (c) Each party entitled to indemnification under this Section 8.10 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnifying Party shall have the option to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No claim may be settled without the consent of the Indemnifying Party (which consent shall not be unreasonably withheld). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. -26- 31 8.11 INFORMATION BY HOLDER. Each Holder holding Registrable Securities included in any registration shall furnish to the Company such information regarding such Registrable Securities held by them and the distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 8. 8.12 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); and (c) So long as a Purchaser owns any Restricted Securities, to furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 8.13 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted Purchasers under Sections 8.5, 8.6 and 8.7 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by a Purchaser provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, (ii) such assignee or transferee acquires at least 50,000 shares of Registrable Securi- -27- 32 ties, (iii) written notice is promptly given to the Company and (iv) such transferee agrees to be bound by the provisions of this Section 8. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any constituent partner of a Purchaser or to such Purchaser's spouse, siblings, spouse of such siblings, ancestors and descendants and any trust established solely for such Purchaser's benefit or for the benefit of such Purchaser's spouse, siblings, ancestors and/or descendants, without compliance with item (ii) above, provided written notice thereof is promptly given to the Company. 8.14 LOCKUP AGREEMENT. Each holder of Registrable Securities and each transferee pursuant to Section 8 hereof agrees, in connection with any registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriter, as the case may be, for such period of time (not to exceed 120 days) from the effective date of such registration as the Company or the underwriters may specify. The holders of Registrable Securities agree that the Company may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of this Section 8.14. SECTION 9 RIGHT OF FIRST REFUSAL 9.1 RIGHT OF FIRST REFUSAL. The Company hereby grants to each holder of Series A Preferred, Series B Preferred and Series C Preferred (collectively, the "Rights Holders") the right of first refusal to purchase, pro rata, a portion of "New Securities" (as defined in this Section 9.1) that the Company may, from time to time, propose to sell and issue. Each Rights Holder's pro rata share, for purposes of this right of first refusal, is the ratio of (X) the number of shares of Common Stock owned or issuable upon the conversion of the Series A Preferred, Series B Preferred and/or Series C Preferred owned by such Rights Holder immediately after the last Closing pursuant to this Agreement to (Y) the total number of shares of Common Stock outstanding or issuable upon the conversion of all outstanding Series A Preferred, Series B Preferred and Series C Preferred immediately after the last Closing pursuant to this Agreement, provided, however, that notwithstanding any other provision of this Section 9.1, in no event shall this right of first refusal permit a Purchaser to purchase a number of shares which would result in such Purchaser's percentage equity interest in the Company after such issuance of New Securities being in -28- 33 excess of the percentage equity interest of the Purchaser in the Company immediately after the last Closing pursuant to this Agreement. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any Common Stock and Preferred Stock of the Company whether or not authorized on the date hereof, and rights, options, or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into said Common Stock or Preferred Stock; provided, however, that "New Securities" does not include the following: (i) up to 2,000,000 shares of Common Stock, or options to purchase shares of Common Stock, issued or granted to officers, directors, employees, consultants and Scientific Advisory Board members of the Company pursuant to stock and option plans or arrangements approved by the Board of Directors; (ii) shares of Common Stock issuable upon conversion of any of the Company's Series A Preferred, Series B Preferred or Series C Preferred; (iii) securities of the Company offered to the public pursuant to a registration statement filed under the Securities Act; (iv) securities of the Company issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such other corporation; (v) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or recapitalization by the Company; or (vi) the shares of Series C Preferred issued pursuant to this Agreement. (b) In the event that the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Each Rights Holder shall have ten (10) business days from the date such notice is given to agree to purchase its pro rata share of such New Securities at the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. -29- 34 (c) In the event that the Rights Holders' aggregate pro rata exercised portion is less than the amount of New Securities proposed to be issued in the notice referred to above, the Company shall have sixty (60) days thereafter to sell (or enter into an agreement pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within thirty (30) days from the date of such agreement) with the New Securities respecting which the Rights Holders' rights were not exercised at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within such sixty (60) day period (or sold and issued New Securities in accordance with the foregoing within thirty (30) days from the date of such agreement), the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Rights Holders in the manner provided above. (d) The right of first refusal granted under this Agreement shall expire upon the closing of the Company's initial public offering pursuant to a registration statement filed and declared effective under the Securities Act. (e) This right of first refusal is nonassignable. (f) This right of first refusal shall not apply to Rights Holders who no longer own any shares of Series A Preferred, Series B Preferred, Series C Preferred or Common Stock issuable upon conversion thereof as of the date of the notice referred to above. SECTION 10 RIGHT OF FIRST NEGOTIATION 10.1 RIGHT OF FIRST NEGOTIATION. In the event the Board of Directors of the Company shall decide to commence discussions with any party with respect to the sale of the Company whether through merger, stock exchange or sale of all or substantially all of its assets (a "Transaction"), the Company shall promptly provide Purchaser with notice of such decision in writing and shall negotiate with Purchaser with respect to such Transaction for a period not to exceed 60 days from the date of notice to Purchaser, provided, however, that during such period the Company shall not be precluded from concurrently negotiating with respect to such Transaction with any third party. In the event that Purchaser and the Company do not reach a written agreement in principle (subject to necessary corporate approvals) with respect to the major terms of such Transaction within such 60 day period, or in the event a Transaction is not consummated within 60 days from the date a written -30- 35 agreement in principle is reached, the Company shall be free to consummate any Transaction it deems appropriate without further obligation or notice to Purchaser. 10.2 TERMINATION OF RIGHTS. The rights provided in Sections 7.6 and 10.1 hereof shall terminate (i) in the event Purchaser does not purchase the additional shares of Preferred Stock (whether at the election of the Purchaser or the Company) pursuant to Section 2.3 above (ii) in the event the exclusive license granted by the Company pursuant to the License Agreement becomes non-exclusive, (iii) upon termination of the License Agreement, or (iv) upon the consummation of a Transaction (as defined in Section 10.1). SECTION 11 MISCELLANEOUS 11.1 GOVERNING LAW. This Agreement shall be governed in all respects by the internal laws of the State of California. 11.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. 11.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto, provided, however, that the rights of a Purchaser to purchase the Series C Preferred shall not be assignable without the consent of the Company. 11.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that (i) holders of a majority of the Common Stock issued or issuable upon conversion of the Series C Preferred may, with the Company's prior written consent, waive, modify or amend on behalf of all such holders, any provisions hereof other than the provisions of Sections 8, 9 and clause (ii) of this Section 11.4 hereof, and (ii) holders of a majority of the Common Stock issued or issuable upon conversion of the Series A Preferred, -31- 36 Series B Preferred and Series C Preferred may, with the Company's prior written consent, waive, modify or amend on behalf of all such holders, the provisions of Sections 8, 9 and clause (ii) of this Section 11.4 hereof. 11.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to Purchaser, at Purchaser's address set forth on the cover page of this Agreement, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, at its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished in writing to the Purchaser. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 11.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party to this Agreement (including said party's successors and assigns as defined in Section 10.3) upon any breach or default of any other party to this Agreement (including said party's successors and assigns as defined in Section 10.3) under this Agreement, shall impair any such right, power or remedy of such party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. -32- 37 11.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 11.8 EXPENSES. The Company and Purchaser each shall bear its own expenses incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 11.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 11.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 11.11 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. -33- 38 The foregoing agreement is hereby executed as of the date first above written. "COMPANY" NORIAN CORPORATION, a California corporation By: ________________________________ Donald E. Caddes, President "PURCHASER" PFIZER HOSPITAL PRODUCTS GROUP, INC. ____________________________________ (Signature) ____________________________________ (Print name and title of signatory, if applicable) -34- EX-10.7 12 EXCLUSIVE MARKETING AGREEMENT 1 EXHIBIT 10.7 EXCLUSIVE MARKETING AGREEMENT 2 EXCLUSIVE MARKETING AGREEMENT This EXCLUSIVE MARKETING AGREEMENT (the "Agreement"), effective as of April 15, 1996 (the "Effective Date"), is made by and between Norian Corporation, a California corporation having offices at 10260 Bubb Road, Cupertino, California 95014-4166 ("Norian"), and Mochida Pharmaceutical Co., Ltd., a corporation organized under the laws of Japan having offices at 7, Yotsuya 1-chome, Shinjuku-ku, Tokyo 160, Japan ("Mochida"). BACKGROUND A. Norian is developing certain cementing biomaterials and related delivery systems. B. Norian and Mochida desire that Mochida perform clinical development activities in Japan with respect to such biomaterials and related delivery systems. C. Norian desires to grant Mochida the exclusive right to market, sell and distribute such biomaterials and related delivery systems in Japan and Mochida desires to accept such grant, on the terms and conditions set forth below. NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS 1.1 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with Mochida or Norian. An entity shall be regarded as in control of another entity for purposes of this definition if it owns or controls more than fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). 1.2 "Cementing" shall mean the hardening of a biomaterial in situ. 1.3 "Clinical Development" shall mean all clinical trials, preclinical studies and all other activities reasonably required to obtain and maintain all governmental approvals required to market a Product for use within the Field in Japan. 1.4 "Delivery/Nonbiomaterial Components" shall mean, collectively and individually, components selected by Norian for incorporation into the Products, which in each case were developed for use in the mixing or local delivery of the biomaterial component of Products, including without limitation mixers, injection guns, delivery nozzles, and delivery needles. 3 1.5 "Education Programs" shall mean programs conducted by surgeons directed toward other surgeons to educate such other surgeons in orthopaedic science and surgical principles specific to the clinical attributes of the Products. 1.6 "Europe" shall mean those countries which are members of the European Union. 1.7 "Field" shall mean all applications other than veterinary, dental, and periodontal applications. As used herein, it is understood that "dental" and "periodontal" applications shall include without limitation all procedures in the oral cavity or performed by dentists, dental implantologists, periodontists, or similar specialists. 1.8 "Joint Development Committee" shall have the meaning set forth in the provisions of Article 2 below. 1.9 "Marketing Approval Application" shall mean any application with a governmental regulatory agency for authority to market a Product within Japan, including without limitation an import approval application ("yunyu shonin shinsei"), import license application ("yunyu kyoka shinsei"), or other similar application or filing. 1.10 "Net Sales" shall mean the total amounts invoiced by Mochida or its Affiliates to third parties upon sales of the Products, less the following reasonable and customary deductions to the extent applicable to such invoiced amounts: (i) trade and cash discounts; (ii) amounts for claims, allowances or credits for Product returns; (iii) prepaid freight and sales taxes, in each case if charged separately on the invoice and paid by the customer. A "sale" shall include a transfer or other disposition for consideration other than cash, in which case such consideration shall be valued at the fair market value thereof. 1.11 "New Products" shall mean new Norian calcium phosphate Cementing biomaterials other than the Products; provided that Norian has the right to grant the rights set forth herein to Mochida with respect to such biomaterials, and further provided that such biomaterials are specifically intended by Norian for use within the Field. 1.12 "Norian Applications" shall mean any and all applications of a Product for which Norian elects to conduct clinical development or otherwise promote or distribute such Product in any country of North America or Europe, or for which Norian has developed Education Programs and/or Training Programs, from time to time during the term of this Agreement. The Norian Applications existing as of the Effective Date include those applications set forth in Exhibit E. 1.13 "North America" shall mean the United States, Canada, and Mexico. 1.14 "Production Costs" with respect to units of a Product shall mean Norian's fully burdened direct and indirect costs associated with the manufacture and/or preparation of such Product, including without limitation the costs of facilities, equipment, management time, general and administrative expenses, inventory costs, other overhead, materials and validation studies, and packaging and labeling -2- 4 costs, calculated in accordance with cost accounting procedures generally accepted in the United States, and with respect to units or portions acquired from a non-Affiliate vendor, the amounts paid to the vendor plus costs associated with acquisition from such vendor, in each case including without limitation freight, insurance, shipping, packaging and other similar costs associated with acquiring such portions or units for delivery to Mochida's destination point. Production Costs shall also include royalties or other consideration payable to non-Affiliate third parties with respect to the manufacture, sale or use of Products. 1.15 "Products" shall mean, collectively and individually, Norian's calcium phosphate Cementing biomaterials and Delivery/Nonbiomaterial Components known collectively within Norian as the Norian Skeletal Repair System (SRS), in each case as defined in Norian's Investigational Device Exemption filed with the U.S. Food and Drug Administration prior to the Effective Date and supplements thereto, or a Pre-Market Approval (PMA) received from the FDA with respect to the foregoing Investigational Device Exemption and supplements to such PMA, to the extent such biomaterials and Delivery/Nonbiomaterial Components are specifically intended for use within the Field and with respect to technology acquired by Norian after the Effective Date, to the extent Norian has the right to include the same hereunder. It is understood that Products, and/or any component thereof, may be changed, substituted or added to by Norian to the extent such changes do not require modifications or changes to a Market Approval Application for a Product approved by the Ministry of Health and Welfare in Japan to market and distribute such Product in Japan, upon ninety (90) days prior written notice to Mochida. If a change to a Product requires modifications or changes to a Market Approval Application for such Product approved by the Ministry of Health and Welfare in Japan, the Joint Development Committee shall consult in good faith and determine a reasonable transition period with respect to implementation of such Product change in Japan. 1.16 "Reimbursement Price" shall mean the reimbursement price assigned by the Ministry of Health and Welfare for the Products or, prior to establishment of a reimbursement price by the Ministry of Health and Welfare, the provisional price established by competent authorities on a prefecture-by-prefecture basis in Japan for the Products. It is understood and agreed that if no such reimbursement price or provisional price is established for the Products, or if the actual Net Sales price of a Product is higher than such reimbursement price or provisional price, then the "Reimbursement Price" shall be the Net Sales price charged for the Products. 1.17 "Subdistributor" shall mean, with respect to a particular Product, a third party, including a wholesaler, who has obtained through Mochida directly or indirectly the right to distribute, but not to actively promote or market such Product. 1.18 "Training Programs" shall mean programs conducted by Mochida in specific technical aspects relating to surgical techniques and procedures specific to the use of the Products, which training is provided to all product managers, clinical trial teams, medical representatives and medical professionals, and other participants in Clinical Development or commercialization of the Products, both within and outside of Mochida. -3- 5 ARTICLE 2 JOINT DEVELOPMENT COMMITTEE 2.1 Joint Development Committee. Mochida and Norian shall establish a joint development committee to oversee, review and coordinate the conduct of Clinical Development of Products and to review and approve research programs, if any, with respect to the Products ("Joint Development Committee"). 2.2 Membership. The Joint Development Committee shall be comprised of an equal number of representatives from each of Mochida and Norian, selected by such party. The exact number of such representatives shall be three (3) for Mochida and three (3) for Norian. Each of Norian and Mochida shall at all times have at least one representative on the Joint Development Committee at the Vice President level or above for Norian and at the Managing Director level or above for Mochida. Subject to the foregoing provisions of this Section 2.2, Norian and Mochida each may replace its Joint Development Committee representatives at any time, with prior written notice to the other parties. 2.3 Joint Development Committee Meetings. During the term of this Agreement, the Joint Development Committee shall meet quarterly during the first year of this Agreement and every six months thereafter, or as otherwise agreed by the parties, at such locations as the parties agree. At its meetings, the Joint Development Committee will monitor the Clinical Development of the Products. With the consent of Norian and Mochida, other representatives of Norian or Mochida may attend Joint Development Committee meetings as non-voting observers. Norian's lead representative shall chair meetings of the Joint Development Committee and shall be responsible for preparing the meeting agendas and minutes. Such minutes shall be deemed accepted and effective if and when authorized representatives of each party have signed the same. Each party shall bear its own personnel and travel costs and expenses relating to Joint Development Committee meetings. 2.4 Decision Making. Decisions of the Joint Development Committee shall be made by majority approval. ARTICLE 3 CLINICAL DEVELOPMENT 3.1 Clinical Development. Mochida shall be responsible for conducting all Clinical Development with respect to Products, [CONFIDENTIAL INFORMATION REDACTED], in accordance with protocols supplied by Norian, or if the Joint Development Committee mutually approves an alternative or supplemental protocol, in accordance with such alternative or supplemental protocols. Accordingly, it is understood that all protocols used in Clinical Development of Products or Norian Applications shall be Japanese translations of those supplied by Norian (translated at Mochida's expense) modified to the extent required to comply with Japanese laws and regulations, it being understood that Norian shall not unreasonably withhold its consent to modifications to the Norian protocols which incorporate additional end points or accommodate adopted standards of the Japanese Orthopaedic -4- 6 Association. If Mochida desires to pursue Clinical Development of one or more applications of Products other than the Norian Applications, Mochida shall submit the proposed application to the Joint Development Committee for review and approval, and if the Joint Development Committee mutually approves the incorporation of such application under the Clinical Development, the protocols used in Clinical Development of such application shall be prepared by Mochida and submitted to the Joint Development Committee for review and approval prior to initiation of any such Clinical Development and submission of product registration plans and applications for marketing approval for Products with any health regulatory agency. Norian shall be consulted and informed with respect to Clinical Development through its representatives on the Joint Development Committee. It is understood and agreed that except as otherwise expressly agreed in writing, [CONFIDENTIAL INFORMATION REDACTED] pre-clinical or clinical studies or other portions of the Clinical Development. Norian shall supply Mochida with Products for use in clinical trials in accordance with the Japanese Pharmaceutical Affairs Law and Good Clinical Practice (GCP) standards prevailing in Japan, to the extent Mochida communicates such legal and standards requirements to Norian in writing in advance. 3.2 Regulatory Filings. (a) Mochida shall prepare and file all regulatory documents in Mochida's name with respect to Products. Norian shall have the right to obtain copies directly from Mochida of, and to reference or authorize third parties to reference, for any purpose, any and all regulatory filings made by Mochida with respect to Products. (b) All product registration plans and applications for marketing approvals (including Marketing Approval Applications filed with the Ministry of Health and Welfare, and similar applications, including applications for pricing approval and governmental reimbursement authorization, to be filed in Japan) for Products shall be submitted to the Joint Development Committee for review and approval by the Joint Development Committee prior to filing of such registrations with any health regulatory agency. (c) Upon Norian's written request, Norian may visit the clinical trial sites at which Mochida is conducting Clinical Development to review the Clinical Development activities being performed at such clinical trial site, including without limitation the clinical data and other documents relating to the performance of the Clinical Development. Mochida agrees not to conduct any clinical testing involving the Products except in accordance with protocols described in Section 3.1 above. ARTICLE 4 MILESTONE PAYMENTS 4.1 Initial Fee. Mochida shall make a nonrefundable and noncreditable payment to Norian in the amount of Two Million Dollars ($2,000,000) within ten (10) days after the Effective Date. -5- 7 4.2 Product Milestones. Mochida shall make the following payments to Norian upon the first occurrence of each milestone specified below:
PRODUCT MILESTONES PAYMENT 1. [CONFIDENTIAL INFORMATION REDACTED] FOR A PRODUCT IN U.S.$2,000,000 JAPAN, [CONFIDENTIAL INFORMATION REDACTED]. 2. [CONFIDENTIAL INFORMATION REDACTED] FOR A PRODUCT U.S.$2,000,000 IN JAPAN, [CONFIDENTIAL INFORMATION REDACTED]. 3. [CONFIDENTIAL INFORMATION REDACTED] IN JAPAN, U.S.$2,000,000 [CONFIDENTIAL INFORMATION REDACTED].
4.3 Other. Norian and Mochida agree to promptly notify the other in writing of its achievement of any milestone. If at the time a particular milestone is achieved under Section 4.2, above, any prior milestones under Section 4.2 have not been achieved with respect to a Product, the payments for such prior milestones shall then be due. The payments set forth in Section 4.2 above shall each be due and payable within fifteen (15) days after the occurrence of the milestone event. If the parties do not agree upon the definition or achievement of a particular milestone set forth above, the matter shall be settled by arbitration pursuant to Section 20.2 below. It is understood that milestones shall be payable on achievement of milestones for Products incorporating biomaterial and not for milestones achieved solely for nonbiomaterial components of Products. ARTICLE 5 RECORDKEEPING; PUBLICATION 5.1 Records. Mochida shall maintain records of the Clinical Development (or cause such records to be maintained) in sufficient detail and in good scientific manner as will properly reflect all work done and results achieved in the performance of the Clinical Development (including all data in the form required under any applicable governmental regulations). Subject to confidentiality provisions reasonably acceptable to Mochida and Norian, upon Norian's request, Mochida shall allow Norian to have prompt access to all records, materials and data generated with respect to each Product during Mochida's normal business hours at times mutually agreed upon by Norian and Mochida and in a reasonable manner. The parties will endeavor to minimize disruption of Mochida's normal business activities to the extent reasonably practicable. 5.2 Reports. Mochida shall periodically provide the Joint Development Committee with a written report summarizing the progress of the Clinical Development performed by Mochida with respect to each Product and application of the Product for which Mochida is conducting Clinical Development -6- 8 during the preceding calendar half-year. Unless otherwise agreed, such reports shall be due semi-annually, by March 1 and September 1 of each calendar year. ARTICLE 6 USE OF PRECLINICAL AND CLINICAL DATA 6.1 Exchange. Norian shall have access to any preclinical and/or clinical data acquired and/or produced by or for Mochida with respect to Products. Norian shall provide to Mochida such preclinical and clinical data set forth in Exhibit F that Norian possesses and has the right to disclose to Mochida which relates to the usefulness or disadvantage or side-effects of the Products, to the extent such data is reasonably necessary or useful in obtaining governmental approval to market Products in Japan. Norian shall maintain the preclinical and/or clinical data in Exhibit F in good scientific manner as will properly reflect all work done and results achieved in Norian's prelinical studies and clinical trials with respect to the Products, and Mochida shall maintain all preclinical and/or clinical data relating to the Products in the same manner. Subject to the provisions of Section 15 below, Norian shall allow Mochida to have prompt access to the materials set forth in Exhibit F during Norian's normal business hours at times mutually agreed upon by Norian and Mochida and in a reasonable manner. The parties will endeavor to minimize disruption of Norian's normal business activities to the extent reasonably practicable. Upon Mochida's written request, Norian further shall provide to Mochida reprints of articles published by Norian's clinical investigators pertaining to the Products. To the extent required for Mochida to obtain governmental approval to market Products in Japan, Norian shall make its manufacturing facilities for the Products available for inspection by the Ministry of Health and Welfare upon reasonable written notice and during Norian's normal business hours subject to confidentiality provisions reasonably acceptable to the parties. Mochida will provide to Norian access to and copies of all Market Approval Applications and other regulatory and governmental filings made with respect to clinical trials and marketing approval in Japan (including without limitation pricing approvals) with respect to each Product, together with the underlying preclinical and clinical data, promptly after submission to the Ministry of Health and Welfare and shall provide to Norian copies of all correspondence with the Ministry of Health and Welfare with respect to the Products promptly after receipt or submission thereof. 6.2 Disclosure. Norian may use, reference and provide copies of regulatory and governmental filings, clinical data and/or preclinical data ("Data") made, developed or acquired by Mochida in accordance with this Agreement relating to the Products, to third parties as is reasonably necessary or useful for commercialization of any and all products outside Japan or as required by law. Mochida will only use, reference and disclose Data relating to the Products to third parties as required to obtain governmental approval to market and distribute Products in Japan, or as required by law, and in each case subject to Section 6.3 and Article 15 below. In all agreements with third parties or Affiliates involving the development of Data for a Product, Mochida shall require that such third parties and Affiliates provide Norian access to all such Data. Norian will use good faith efforts during the term of the Clinical Development to make available to Mochida for use with Products comparable Data generated by Norian alone or jointly with others in developing Products within the Field outside Japan. If Norian does not -7- 9 obtain from a third party that is commercializing a Product outside Japan the right to permit Mochida to use such comparable Data generated by the third party for such Products for the purpose of obtaining governmental approval in Japan to market and distribute the Products, Norian shall not disclose to such third party the Data developed by Mochida under the Clinical Development hereunder for such Product. 6.3 Review of Publication. As soon as is practicable prior to the oral public disclosure, and prior to the submission to any outside person for public dissemination of a manuscript describing the scientific data with respect to Products generated in any stage of the Clinical Development, in each case to the extent the contents of the oral disclosure or manuscript have not been previously disclosed pursuant to this Section 6.3 before such proposed disclosure, Mochida shall disclose to Norian the disclosure or manuscript to be made or submitted, and shall allow Norian at least thirty (30) days to determine whether such disclosure or manuscript contains subject matter for which patent protection should be sought prior to publication or which Norian reasonably believes should be modified to avoid (i) disclosure of information of a confidential or proprietary nature, or (ii) regulatory or other similar problems. 6.3.1 Publication Rights. After the expiration of thirty (30) days from the date of mailing such disclosure or manuscript, unless Mochida has received the written notice specified below, Mochida shall be free to submit such manuscript for publication or to orally disclose or publish the disclosed research results in any manner consistent with academic standards. 6.3.2 Delay of Publication. Prior to the expiration of the thirty (30) day period specified in Section 6.3 above, Norian may notify Mochida in writing of its determination that such oral presentation or manuscript contains confidential or objectionable material or material that consists of patentable subject matter for which patent protection should be sought. If so notified, Mochida shall withhold its proposed public disclosure and the parties shall mutually consult in good faith to determine the best course of action to take in order to modify the disclosure or to obtain patent protection. After resolution of the confidentiality, regulatory or other issues, including without limitation the filing of a patent application, to both parties' reasonable satisfaction Mochida shall be free to submit the manuscript and/or make its public oral disclosure. ARTICLE 7 MARKETING AND DISTRIBUTION RIGHTS 7.1 Appointment. Subject to the terms and conditions of this Agreement, including without limitation the payment by Mochida to Norian of all of the milestone payments set forth in Article 4, Norian hereby grants to Mochida, the exclusive right under Norian's patents and know-how to market, sell and distribute directly or indirectly the Products in Japan solely for use within the Field. Mochida agrees not to market, promote or distribute any Product for use outside the Field or outside Japan, or for an application other than a Norian Application for which Norian and Mochida then have a Training Program and an Education Program in place in Japan. Mochida further agrees not to provide Products to any third party if Mochida knows or has reason to believe that Products provided to such third party -8- 10 have been sold for use or used outside the Field or outside Japan or by personnel other than surgeons who have attended Education Programs in the Norian Applications. Mochida may authorize Subdistributors to market, sell or distribute any Product in accordance with this Section 7.1, provided that Mochida provides Norian with prior written notice of the identity of the Subdistributors, uses best efforts to ensure that such Subdistributors comply with the provisions of this Agreement and ensures that a Mochida medical representative supervises the activities of each Subdistributor. 7.2 Exclusivity of Efforts. Neither [CONFIDENTIAL INFORMATION REDACTED] nor their [CONFIDENTIAL INFORMATION REDACTED] shall directly or indirectly develop, market, sell or otherwise distribute any [CONFIDENTIAL INFORMATION REDACTED] materials, technologies or products, or any other [CONFIDENTIAL INFORMATION REDACTED], technologies or products, other than the Products. In addition, except for the Products, Mochida shall not appoint or license any third party to develop, market, sell or otherwise distribute any [CONFIDENTIAL INFORMATION REDACTED] materials, technologies or products or any other [CONFIDENTIAL INFORMATION REDACTED], technologies or products. 7.3 No Rights Beyond Products. Nothing in this Agreement shall be deemed to grant to Mochida rights in products or technology other than the Products; nor shall any provision of this Agreement be deemed to restrict Norian's right to exploit Products, or patents or any other intellectual property rights, outside the Field, outside Japan or in products other than Products. 7.4 Sale Conveys No Right to Manufacture or Modify. The Products are offered for sale and are sold by Norian subject in every case to the condition that such sale does not convey any license, expressly or by implication, to manufacture, modify, duplicate or otherwise copy or reproduce any of the Products. 7.5 Conflicts of Interest. Mochida acknowledges that the price for Products to be paid hereunder by Mochida to Norian will depend upon Reimbursement Prices. Accordingly, Mochida agrees that neither Mochida nor any of its Affiliates shall [CONFIDENTIAL INFORMATION REDACTED] a Product to a greater degree than Mochida or such Affiliate generally [CONFIDENTIAL INFORMATION REDACTED] of other products or services of Mochida or such Affiliate to a third party. It is understood that the foregoing sentence shall apply to negotiation of Reimbursement Prices as well as Net Sales prices of Products. ARTICLE 8 TERMS OF SALE 8.1 Terms and Conditions. All Product purchases hereunder shall be subject to the terms and conditions of this Agreement. Nothing contained in any purchase order submitted pursuant to this Agreement shall in any way modify or add any terms or conditions to said purchases, unless otherwise agreed in writing by the parties. 8.2 Product Supply. Subject to the terms and conditions of this Article 8, Norian shall supply Mochida with all Mochida's commercial requirements for Products in Japan during the term of this Agreement in accordance with Good Manufacturing Practices as defined in the regulations promulgated -9- 11 under the U.S. Food and Drug Administration Food and Cosmetics Act for medical devices, and Mochida shall exclusively purchase all such commercial requirements from Norian. 8.3 Forecasts. At least one hundred eighty (180) days prior to the first commercial sale of a Product in Japan, and at least sixty (60) days prior to the first day of each calendar quarter for two (2) years after first commercial sale of a Product, Mochida shall provide to Norian a good faith rolling twelve (12) month forecast showing Mochida's prospective requirements for the Products and anticipated purchase order submittal dates for the next four (4) calendar quarters, in a format reasonably specified by Norian. Such forecasts shall commence on the first day of the calendar quarter following submission of the forecast to Norian. Thereafter, on a calendar monthly basis, by the fifth (5th) day of each calendar month, Mochida shall provide to Norian a good faith rolling twelve (12) month forecast showing Mochida's prospective requirements for the Products and anticipated purchase order submittal dates for the next twelve (12) months, which forecasts shall commence on the first day of the calendar month following submission of the forecast to Norian (the foregoing forecasts referred to collectively herein as "Forecasts"). Such Forecasts are for Norian's planning purposes only and shall not constitute a binding obligation upon Norian or Mochida. In the event that Mochida believes, in good faith, that the information provided in any Forecast is no longer accurate, Mochida will promptly notify Norian and provide Norian with a revised Forecast. 8.4 Order and Acceptance. Mochida shall place its firm order with Norian for Product requirements at least ninety (90) days in advance of the start of each calendar quarter for Products to be shipped in such calendar quarter, and Norian shall supply such requirements in accordance with its normal practices and lead times then in effect. All orders for Products submitted by Mochida shall be initiated by the office at Mochida's address for notice hereunder. All orders shall be by means of signed written purchase orders by Mochida to Norian, sent to Norian at Norian's address for notice hereunder and requesting a delivery date during the term of this Agreement. Orders may initially be placed by telephone, provided that a signed confirming purchase order is received in writing (which may include telecopy transmission) by Norian within five (5) days after a telephone order is placed. Norian shall notify Mochida within twenty-one (21) days from receipt of a purchase order of its acceptance or rejection of such purchase order. Mochida may cancel or reschedule purchase orders for Products only with Norian's prior written approval. 8.5 Invoicing. Norian shall submit an invoice to Mochida upon shipment of Product ordered by Mochida. All invoices shall be sent to Mochida's address for notices hereunder, and each such invoice shall state Mochida's aggregate and unit transfer price for Products in a given shipment, plus any insurance, taxes or other costs incident to the purchase or shipment initially paid by Norian but to be borne by Mochida hereunder. 8.6 Shipping. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for shipment in Norian's standard shipping cartons, marked for shipment to the destination point indicated in Mochida's purchase order, and delivered to Mochida to such destination point. The carrier shall be selected by agreement between Norian and Mochida, provided that in the event no such agreement is reached Norian shall select the carrier. All insurance, as well as any special packaging -10- 12 expenses, shall be paid by [CONFIDENTIAL INFORMATION REDACTED]. Freight and other shipping expenses for Products shipped in accordance with Norian's standard shipping practices by surface to Mochida's warehouse in Tokyo or such other location as the parties agree shall be paid by Norian. In the event Mochida selects a carrier other than in accordance with Norian's standard shipping practices, Mochida shall bear any incremental increase in cost. Risk of loss and title shall pass to Mochida upon delivery to Mochida or its designee in Japan. Mochida shall also bear all applicable taxes, duties, and similar charges that may be assessed against the Products or the transfer price thereof after delivery to the carrier at Norian's shipping location. All shipments and all shipping and other charges shall be deemed correct unless Norian receives from Mochida, no later than fifteen (15) days after Mochida's receipt of a given shipment, a written notice specifying the shipment, the purchase order number, and the exact nature of the discrepancy between the order and the shipment or the exact nature of the discrepancy in the shipping or other charges, as applicable. 8.7 Product Returns. Except as set forth in Article 11 below, Mochida may return Products only with Norian's prior written approval. Products returned to Norian other than under Article 11 shall be returned F.O.B. the destination point designated by Norian and shall be subject to a restocking fee in an amount equal to [CONFIDENTIAL INFORMATION REDACTED] of the sum of (i) the transfer price paid by Mochida to Norian for such Products computed in accordance with Exhibit A, and (ii) all freight, customs duties, taxes and other charges incurred by Norian in shipping the Products to Mochida. ARTICLE 9 TRANSFER PRICES; EQUITY; PAYMENTS; BOOKS AND RECORDS 9.1 Prices. The difference between Mochida's transfer price and Mochida's price to its customers shall be Mochida's sole remuneration for the sale of the Products. The transfer price to Mochida for each of the Products shall be as set forth in Exhibit A. 9.2 Payment Terms. Mochida shall make payments to Norian under this Agreement by wire transfer in [CONFIDENTIAL INFORMATION REDACTED] in immediately available funds to a bank designated by Norian. Payment for Product supplied hereunder shall be made [CONFIDENTIAL INFORMATION REDACTED] after the date of invoice or date of shipment, whichever is later. Any payments due hereunder which are not paid on the date such payments are due shall bear interest at the lesser of [CONFIDENTIAL INFORMATION REDACTED] per month or the [CONFIDENTIAL INFORMATION REDACTED] rate permitted by California law, calculated on the number of days such payment is delinquent. This Section 9.2 shall in no way limit any other remedies available to Norian. 9.3 Equity. On the Effective Date or within two (2) days thereafter, Mochida shall purchase U.S. Seven Million Dollars ($7,000,000) of Norian's Series D Preferred Stock, at a price equal to Two Dollars and Fifty Cents ($2.50) per share, all per the terms and conditions set forth in the Preferred Stock Purchase Agreement attached hereto as Exhibit D. -11- 13 9.4 Taxes. 9.4.1 Any and all amounts payable hereunder do not include any government taxes (including without limitation sales, use, excise, and value added taxes) or duties imposed by any Japanese governmental agency that are applicable to the export, import, or purchase of the Products (other than taxes on the net income of Norian), and Mochida shall bear all such taxes and duties. When Norian has the legal obligation to collect and/or pay such taxes, the appropriate amount shall be added to Mochida's invoice and paid by Mochida, unless Mochida provides Norian with a valid tax exemption certificate authorized by the appropriate taxing authority. 9.4.2 All payments by Mochida specified hereunder (including those under Article 4 above) are expressed as [CONFIDENTIAL INFORMATION REDACTED] and shall be made free and clear of, and without reduction for, any [CONFIDENTIAL INFORMATION REDACTED]. Any such [CONFIDENTIAL INFORMATION REDACTED] on payments to Norian shall be the sole responsibility of Mochida. Mochida shall provide Norian with official receipts issued by the appropriate [CONFIDENTIAL INFORMATION REDACTED] or such other evidence as is reasonably requested by Norian to establish that such [CONFIDENTIAL INFORMATION REDACTED] have been paid. If Norian uses a [CONFIDENTIAL INFORMATION REDACTED] received by Norian as a result of the payment of [CONFIDENTIAL INFORMATION REDACTED] by Mochida and thereby reduces the amount of [CONFIDENTIAL INFORMATION REDACTED] that Norian otherwise would have paid, Norian shall refund to Mochida the amount of such [CONFIDENTIAL INFORMATION REDACTED] with respect to such [CONFIDENTIAL INFORMATION REDACTED]. 9.5 Third Party Royalties. If during the term of this Agreement Norian enters into a royalty-bearing license or agreement or a license or agreement requiring payment of license fees or other payments for the license or other acquisition of rights to new technologies applicable to the manufacture, sale or use of Products, and after consultation with Mochida, Mochida does not agree to pay any such amounts applicable to the manufacture, sale or use of Products, within thirty (30) days after a written request by Norian, Norian at its option may exclude from this Agreement the subject matter covered by such license or agreement, and in such event the same shall not be within the Products for any purposes of this Agreement. The provisions of this Section 9.5 shall not limit the obligations of the parties under Section 13.3. 9.6 Currency Conversion. If any currency conversion shall be required in connection with the calculation of amounts payable under this Agreement, other than transfer prices of Products or components thereof pursuant to Exhibit A, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan for the [CONFIDENTIAL INFORMATION REDACTED] to which such payment pertains. With respect to any currency conversion required in connection with calculation of transfer prices of Products or components thereof pursuant to Exhibit A attached hereto, such conversion for the first year from the date of issuance of the Reimbursement Price for such Product or component thereof, shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan -12- 14 [CONFIDENTIAL INFORMATION REDACTED]. Thereafter, such transfer price in United States Dollars shall be [CONFIDENTIAL INFORMATION REDACTED] by using the selling exchange rate for conversion of the foreign currency into U.S. Dollars quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan, on the day of [CONFIDENTIAL INFORMATION REDACTED] of the date of issuance of the Reimbursement Price for such Product or component thereof. 9.7 Records; Inspection. Mochida shall keep complete, true and accurate books of account and records for the purpose of determining the amounts payable under Articles 4, 8 and 9. Such books and records shall be kept at the principal place of business of Mochida for at least five (5) years following the end of the calendar quarter to which they pertain. Such records will be open for inspection during such five (5) year period by a certified public accountant, or if not a certified public accountant, then a representative or agent of Norian reasonably acceptable to Mochida, for the purpose of verifying the amounts payable by Mochida under Articles 4, 8 and 9. Such inspections may be made no more than once each calendar year, at reasonable times mutually agreed upon by Norian and Mochida. Norian's representative or agent will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Inspections conducted under this Section 9.7 shall be at the expense of Norian, unless a variation or error producing an underpayment in amounts payable exceeding five percent (5%) of the amount paid for any period covered by the inspection is established in the course of any such inspection, whereupon all costs relating to the inspection for such period and any unpaid amounts that are discovered will be paid by Mochida, together with interest on such unpaid amounts at the rate specified in Section 9.2 above. The parties will endeavor to minimize disruption of Mochida's normal business activities to the extent reasonably practicable. ARTICLE 10 DUE DILIGENCE 10.1 General. Mochida shall use its best efforts to conduct as expeditiously as possible all Clinical Development for Products for each Norian Application and to launch Products in Japan as soon as possible after regulatory approval to market such Products in Japan have been obtained, and to maximize sales of Products in Japan for all Norian Applications. 10.2 Milestones; Particular Applications. Without limiting Section 10.1 above: (a) Mochida shall use its best efforts to achieve the following milestones within the times to complete set forth below: -13- 15 Table 1
Time to Complete Milestone from the Effective Date ------------------------------------------------- ----------------------------------- 1. [CONFIDENTIAL INFORMATION REDACTED] for a Product [CONFIDENTIAL INFORMATION REDACTED] in Japan 2. [CONFIDENTIAL INFORMATION REDACTED] for a Product [CONFIDENTIAL INFORMATION REDACTED] in Japan 3. [CONFIDENTIAL INFORMATION REDACTED] a Product in [CONFIDENTIAL INFORMATION REDACTED] Japan
(b) On a Product-by-Product basis, if at any time Mochida is not using [CONFIDENTIAL INFORMATION REDACTED] to conduct Clinical Development or marketing, promotion and distribution of a Product in all of the Norian Applications for such Product, Norian may notify Mochida in writing ("Application Notice") ofits intent to terminate Mochida's rights with respect to those Norian Applications for which Mochida is not conducting Clinical Development or marketing, promotion and distribution activities ("Notified Applications"). Norian will consider in good faith whether Mochida's decision not to pursue Clinical Development or other marketing and distribution activities within the Notified Applications is justified taking into account specific regulatory and/or market conditions substantially different from those in the United States or Japanese pricing conditions, which in each case make commercialization of the Notified Applications infeasible in Japan. If Norian determines that such decision is not justified, notwithstanding the provisions of Section 7.1 above, if Mochida does not commence Clinical Development or marketing, promotion and distribution of each of such Products in the Notified Applications immediately after receipt of the Application Notice, and thereafter use its continuing best efforts with respect to such Clinical Development, marketing, promotion and distribution, Norian may terminate Mochida's rights to such Products with respect to the Notified Applications effective upon written notice, and thereafter Norian may proceed to conduct clinical development, and to manufacture, market, distribute and/or sell the Products in such Notified Applications itself or through third parties in Japan. 10.3 Training and Education Programs. Mochida shall provide, at Mochida's cost and expense, Education Programs and Training Programs in accordance with the schedule set forth in Exhibit B. Each Training Program and Education Program shall incorporate the training modules and education modules developed by Norian for use outside Japan, and the scope and content of each such Training Program and Education Program shall be presented in full detail at the Joint Development Committee and in the Business Plan (as defined in Section 12.8). Mochida shall be responsible for fully implementing and utilizing Education Programs and Training Programs to generate maximum demand for the Products in Japan, which Education Programs and Training Programs shall include training of medical representatives in all Norian Applications. 10.4 New Products Option. Norian agrees to notify Mochida of each planned New Product that Norian proposes to be commercialized in Japan ("New Product Notice"). Mochida shall have an option, on a New Product-by-New Product basis, to include such New Product under this Agreement -14- 16 ("Option"), exercisable by written notice to Norian delivered to Norian during the ninety (90) day period immediately following Norian's delivery of the New Product Notice to Mochida ("Option Period"). If Mochida exercises the Option within the Option Period, the New Product described in the New Product Notice shall be deemed a Product for all purposes of this Agreement and Mochida shall commence human clinical trials on the New Product within twelve (12) months after the date of Mochida's exercise notice and use its best efforts to complete Clinical Development of such New Product for all Norian Applications therefor, as expeditiously as possible. If Mochida exercises the Option for a New Product, Mochida shall pay to Norian reasonable milestone payments to be mutually agreed upon, taking into account the investment by Norian in developing such New Product, the level of innovation embodied therein and other similar factors. If Mochida does not exercise the Option during the Option Period, Norian may proceed to commercialize all or any part of the New Product itself or through third parties in Japan, with no further obligation to Mochida under this Section 10.4. ARTICLE 11 PRODUCT WARRANTY 11.1 Product Warranty. Norian warrants to Mochida that at the time of delivery to Mochida the Products purchased by Mochida shall conform to packaging and labeling specifications agreed upon by the parties and the specifications for the Products set forth in the Marketing Approval Application for such Product approved by the Ministry of Health and Welfare. This warranty is contingent upon proper use of Products in the application for which they were intended as indicated in the Product label claims, and Norian makes no warranty (express, implied, or statutory) for Products that are modified (except as expressly contemplated herein) or subjected to accident, misuse, neglect, unauthorized repair, or improper testing or storage. 11.2 Exclusive Remedy. In the event that any Product purchased by Mochida from Norian fails to conform to the warranty set forth in Section 11.1 above or is recalled pursuant to Section 12.6.2, Norian's sole and exclusive liability and Mochida's exclusive remedy shall be, at Norian's sole election, to repair or replace the Product, or component thereof, or credit Mochida's account for the net amount actually paid for any such Product, or component thereof, provided that (i) Mochida promptly notifies Norian in writing that such Product failed to conform and furnishes a detailed explanation of any alleged nonconformity and requests a return material authorization number; (ii) such Product is returned to Norian by Mochida F.O.B. the address designated by Norian during the warranty period with the return material authorization number affixed prominently to the outside packaging; and (iii) the claimed nonconformities actually exist and were not caused by accident, misuse, neglect, alteration, repair or improper testing or storage. If such Product fails to so conform, Norian will reimburse Mochida for shipment charges for return of the nonconforming Product. 11.3 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES PROVIDED IN SECTION 11.1 ABOVE AND SECTION 14.1 BELOW, NORIAN GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY COMMUNICATION WITH MOCHIDA OR THE CUSTOMER, OR OTHERWISE, REGARDING -15- 17 THE PRODUCTS OR VALIDITY OF NORIAN TECHNOLOGY, AND NORIAN SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF FITNESS FOR ANY PURPOSE, MERCHANTABILITY, AND NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. NORIAN NEITHER ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME ANY OTHER LIABILITIES ARISING OUT OF OR IN CONNECTION WITH THE SALE OR USE OF ANY NORIAN PRODUCT. ARTICLE 12 COMMERCIALIZATION 12.1 Advertising and Promotions. Mochida shall list the Products in its catalogs and make such Products available to its customers. Mochida shall vigorously advertise and promote the Products and shall transmit Product information and promotional materials to its customers, in order to maximize Product sales in Japan. Such advertising and promotion shall include, but shall not be limited to, trade show displays, training workshops, educational seminars and other activities related to promoting Products. 12.2 Materials. Norian shall provide to Mochida samples of Norian's promotional, educational and training materials for the Products in English. Mochida shall translate Norian's promotional and educational materials into Japanese, at Mochida's expense, and copy, use and distribute such materials in Japanese in Japan. Mochida shall provide to Norian samples of all promotional, advertising, exhibition, training and educational materials prepared by or on behalf of Mochida and relating to the Products, for purposes of review and approval by Norian (in Japanese and English), at least four (4) weeks prior to the date of intended commercial release of such materials or commencement of such programs. Norian shall make its best efforts to provide to Mochida, within ten (10) business days after receipt of such materials, any and all comments and suggestions relating to such materials. 12.3 Product Packaging and Labeling. Mochida shall not repackage or relabel Products supplied to Mochida by Norian hereunder without the prior written consent of Norian. 12.4 Inventory. Mochida shall maintain a quantity of each Product at all times during the term of this Agreement as necessary in order to meet the demand and service level requirements of Mochida's customers and potential customers. Mochida shall provide to Norian, at Mochida's expense, Product inventory levels and sales data as reasonably requested by Norian. 12.5 Market Research. Mochida shall assist Norian in assessing customer requirements for the Products, including modifications and improvements thereto, in terms of quality, design, functional capability, and other features. Mochida shall advise Norian on market conditions as reasonably requested by Norian. -16- 18 12.6 Other Reporting. 12.6.1 Mochida shall provide, at Mochida's expense, within thirty (30) days after publication, copies of any and all articles, manuscripts, abstracts or other literature relating to the Products generated by investigators or others in Japan in each case to the extent reasonably available to Mochida. 12.6.2 Pursuant to the FDA's Medical Device Reporting (MDR) Regulations, Norian may be required to report to the FDA information that reasonably suggests that a Product may have caused or contributed to the death or serious injury or has malfunctioned and that the device would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Each of Norian and Mochida agree to supply to the other any such information promptly after becoming aware of it so that each of Norian and Mochida can comply with governmental reporting requirements. It is understood and agreed that reporting to Norian shall be within twenty-four (24) hours to enable Norian to comply with FDA reporting requirements. In the event that Norian is required by any regulatory agency to recall the Products or if Norian voluntarily initiates a recall of the Products, Mochida shall cooperate with and assist Norian in locating and retrieving if necessary, the recalled Products from Mochida's customers. Mochida shall maintain records of sales of Products to wholesalers and Subdistributors by lot number, and shall procure wholesalers and Subdistributors to maintain such records of sales of Products to end users, that is hospitals and physicians. Upon Norian's request, Mochida shall provide Norian with access to such records in the event of a Product recall or other quality related issue. Mochida shall be responsible for obtaining all records of Mochida and its Subdistributors' sales to end users in the event of a Product recall or other quality related issue. During the time that the Products are commercially marketed, distributed, or sold by Mochida, Mochida also shall promptly forward all Product complaints which it received to Norian. Mochida shall make available to Norian for inspection Mochida's process and records for adverse event and other regulatory reporting purposes at mutually agreed upon times and further shall ensure that Mochida's processes comply with all applicable laws and regulations in (i) the United States to the extent known to Mochida through Norian or which reasonably should be known to Mochida, and (ii) Japan. 12.7 Business Obligations. Any and all obligations associated with Mochida's business shall remain the sole responsibility of Mochida. Any and all sales and other agreements between Mochida and its customers are and shall remain Mochida's exclusive responsibility and shall have no affect on Mochida's obligations pursuant to this Agreement. 12.8 Annual Operating and Marketing Plans. Mochida shall develop annual operating and marketing plans for the Products (collectively, the "Business Plan") which shall include without limitation [CONFIDENTIAL INFORMATION REDACTED] personnel and customers which conform with the requirements of Section 10.3 above and 12.9 below. For each year during the term of this Agreement, the Business Plan shall be provided to Norian for review and approval by Norian not later than September 30 of such year. Mochida shall comply with the Business Plan, and shall appoint a product manager who shall be exclusively responsible for management of the Business Plan and for ensuring that Mochida complies with such Business Plan. -17- 19 12.9 Customer Support. Mochida shall maintain knowledgeable support personnel to provide instructions to customers in the use of the Products. Without limiting the provisions of Section 10.3, Mochida agrees that such support personnel, that is medical representatives, product managers and product specialists, will, at Mochida's expense attend a hands-on sales training session relating to the Products in a location to be designated by Mochida, and observe the use of the Products in applicable surgical applications to improve the clinical knowledge of such personnel relating to the Products. Mochida shall be fully responsible for any and all technical support of Mochida's customers, that is surgeons, nurses, and hospital technical support staff. It is understood and agreed that as part of worldwide development of Products, Norian may contact Japanese users of the Products and will keep Mochida reasonably informed of such activity. 12.10 Norian Training. Norian shall provide basic training relating to use and application of the Products once per year free of charge for product managers, product specialists, clinical trial teams, and medical representatives, and other medical professionals and participants in Clinical Development for all Norian Applications free of charge at times to be mutually agreed upon by the parties, provided that such training shall be provided to surgeon clinical trialists up to [CONFIDENTIAL INFORMATION REDACTED] per year during the [CONFIDENTIAL INFORMATION REDACTED] of this Agreement and thereafter [CONFIDENTIAL INFORMATION REDACTED] (collectively "Basic Training"), and Mochida will ensure that such personnel both within and outside Mochida attend such training. Mochida will also ensure that all product managers, product specialists, clinical trial teams, and medical representatives, and other medical professionals and participants in Clinical Development attend Norian training specific to use of the Products in Norian Applications introduced from time to time during the term of this Agreement. Additional training may be provided by Norian to Mochida upon Mochida's request, which request shall not be unreasonably denied. Training in excess of the Basic Training first described above or that is provided at a location other than Norian's facilities in Cupertino, California shall be provided [CONFIDENTIAL INFORMATION REDACTED] the Basic Training or at Norian's facility in Cupertino, California, respectively. In addition, all expenses incurred by Mochida's personnel in connection with all training including without limitation travel and lodging expenses shall be borne by Mochida. All training set forth in this Section 12.10 shall be conducted at facilities mutually agreed upon by the parties. 12.11 Sales and Inventory Reports. Mochida shall provide to Norian semi-annual sales and inventory reports setting forth Mochida's sales and inventory of Products, on a Product-by-Product basis, during the prior six (6) month period. Such sales and inventory reports shall be submitted to Norian by June 30 and December 31 of each calendar year. 12.12 Marketing Committee. Upon submission of a Marketing Approval Application for the first Product, the parties shall establish a steering committee to oversee, review and coordinate Product launch in Japan, marketing activities in Japan with respect to the Products, and Training Programs ("Marketing Committee"). The Marketing Committee shall be comprised of an equal number of representatives from Mochida and Norian [CONFIDENTIAL INFORMATION REDACTED], selected by such party with at least one representative from Mochida at the Director level or above and at least one representative from Norian at the Vice President level or above. Each party may replace its -18- 20 Marketing Committee representatives at any time, with prior written notice to the other party. The Marketing Committee shall meet at times and locations to be mutually agreed, provided that the Marketing Committee shall meet no less frequently than once every six (6) months. ARTICLE 13 INTELLECTUAL PROPERTY 13.1 License. In consideration of the rights granted to Mochida under Section 7.1, Mochida grants to Norian the rights set forth in this Section 13.1. As used herein, "Mochida Intellectual Property Rights" shall mean all inventions, discoveries, know-how, information, and data and all patent rights and other intellectual property rights therein, made, conceived or reduced to practice by Mochida, alone or jointly with Norian or a third party in connection with the Clinical Development, or otherwise relating to or including Cementing biomaterial, a Product or any part thereof, or the manufacture or use of any of the foregoing. Mochida hereby grants to Norian [CONFIDENTIAL INFORMATION REDACTED], with the right to [CONFIDENTIAL INFORMATION REDACTED], under Mochida Intellectual Property Rights to manufacture, use and sell all products or components; practice any method or process; and otherwise exploit the Mochida Intellectual Property Rights; provided that such license shall be [CONFIDENTIAL INFORMATION REDACTED] with respect to the manufacture, use or sale of products, the practice of methods or processes and other exploitation of the Mochida Intellectual Property Rights outside Japan. Mochida promptly shall disclose to Norian all inventions and patent rights within the Mochida Intellectual Property Rights, and upon Norian's request shall disclose all know-how and information within the Mochida Intellectual Property Rights, including without limitation know-how and information reasonably required or useful for Norian to manufacture the Products. Subject to Mochida's use of best efforts to obtain from third parties the rights under Mochida Intellectual Property Rights made, conceived, or reduced to practice by Mochida jointly with third parties sufficient for Mochida to grant to Norian the rights and licenses set forth above, it is understood that the foregoing license under Mochida Intellectual Property Rights made, conceived or reduced to practice by Mochida jointly with third parties shall be limited to the extent that Mochida has the right to grant to Norian the rights and licenses set forth above. Upon Norian's request and at Norian's expense, Mochida further agrees to, and to cause its employees, agents and consultants to, sign, execute and acknowledge such documents and perform such acts as may be reasonably necessary for Norian to perfect Norian's rights in Mochida Intellectual Property Rights and obtain, enforce and defend all intellectual property rights worldwide in Mochida Intellectual Property Rights. At Mochida's option and election, Mochida may assign to Norian, [CONFIDENTIAL INFORMATION REDACTED], all or any part of the Mochida Intellectual Property Rights, in which event Norian's obligation to keep Mochida reasonably informed and consult with Mochida with respect to prosecution and maintenance of the Mochida Intellectual Property assigned to Norian shall terminate. 13.2 Prosecution; Cooperation. Norian shall have the exclusive right to pursue patent or other intellectual property protection for Mochida Intellectual Property Rights, and to enforce and defend such Mochida Intellectual Property Rights, in countries outside Japan at [CONFIDENTIAL INFORMATION REDACTED] and without accounting to Mochida, and Mochida agrees to take all reasonable action to -19- 21 cooperate fully with Norian in this regard. Norian and Mochida each shall keep the other reasonably informed as to the status of patent matters pertaining to the Mochida Intellectual Property Rights, and shall each cooperate with and assist the other in connection with such activities, at the other party's request and expense, and shall use good faith efforts to consult with each other regarding the prosecution and maintenance of the Mochida Intellectual Property Rights as is reasonably appropriate. 13.3 Defense of Third Party Infringement Claims. 13.3.1 If the manufacture, preparation, sale or use of any Product pursuant to this Agreement results in a claim, suit or proceeding brought by a third party against Mochida or Norian alleging infringement of such third party's Japanese patents (including utility models), or if the use of Norian's Marks (as defined in Section 18.6 below) in accordance with this Agreement results in such claim alleging infringement of such third party's trademark rights in Japan (collectively, "Actions"), such party shall promptly notify the other parties hereto in writing. The party subject to such Action shall have the exclusive right to defend and control the defense of any such Action using counsel of its own choice, and the Action, subject to Section 16.1, [CONFIDENTIAL INFORMATION REDACTED]. The party subject to the Action agrees to keep the other parties hereto reasonably informed of all material developments in connection with any such Action. 13.3.2 If such an Action is brought against Mochida, and Norian agrees in writing or a court of competent jurisdiction has determined, that the Product or Mark infringes the third party intellectual property rights that are the subject of such Action, then Mochida shall have the right to deduct up to [CONFIDENTIAL INFORMATION REDACTED] of the amounts actually paid by Mochida to the third party bringing such Action from the transfer prices set forth in Exhibit A paid by Mochida for such Product, provided that in no event shall the transfer price for the Product be reduced by more than [CONFIDENTIAL INFORMATION REDACTED]. The foregoing right of offset shall be Mochida's exclusive remedy and Norian's sole liability to Mochida or its Subdistributors with respect to infringement of third party intellectual property rights by the Products, or the manufacture, sale or use thereof. 13.4 Enforcement. Subject to the provisions of this Section 13.4, in the event that Norian or Mochida reasonably believes that any Norian patents necessary for the manufacture, use or sale of a Product is infringed or misappropriated by a third party or is subject to a declaratory judgment action arising from such infringement in Japan, in each case with respect to the manufacture, sale or use of a product in Japan, Norian or Mochida (respectively) shall promptly notify the other party hereto, and Mochida shall cooperate with Norian and provide to Norian full information with respect to third party infringement or misappropriation. [CONFIDENTIAL INFORMATION REDACTED] (for purposes of this Section 13.4, an "Enforcement Action"). The parties shall consult with one another concerning the possibility of initiating an Enforcement Action, it being understood that the decision whether to initiate an Enforcement Action shall be made [CONFIDENTIAL INFORMATION REDACTED] [CONFIDENTIAL INFORMATION REDACTED] of the costs and expenses (including attorneys' and professional fees) of such Enforcement Action under this -20- 22 Section 13.4. Any recovery received as a result of any Enforcement Action to enforce Norian patents pursuant to this Section 13.4 shall be used first to reimburse Norian for the costs and expenses (including attorneys' and professional fees) incurred in connection with such Enforcement Action, and the remainder of the recovery shall be shared equally between Norian and Mochida; provided, however, if the Enforcement Action applies outside the Field or Norian initiates the Enforcement Action and does not request that Mochida pay the costs and expenses thereof, Norian shall retain one hundred percent (100%) of the amounts recovered in such Enforcement Action. ARTICLE 14 REPRESENTATIONS AND WARRANTIES 14.1 Norian Warranties. Norian warrants and represents to Mochida that (i) it has the full right and authority to enter into this Agreement and grant the rights granted herein; (ii) it has not previously granted and will not grant any rights in conflict with the rights granted herein; and (iii) to Norian's knowledge and belief, there are no existing or threatened actions, suits or claims pending against it with respect to its right to enter into and perform its obligations under this Agreement. Notwithstanding the foregoing, Mochida acknowledges that Norian may obtain Delivery/Nonbiomaterial Components included within the Products from third party suppliers, and the rights granted under this Agreement with respect to such Delivery/Nonbiomaterial Components shall be limited to the extent that Norian has the right to grant the same to Mochida. 14.2 Mochida Warranties. Mochida warrants and represents to Norian that (i) Mochida has the full right and authority to enter into this Agreement and grant the rights granted herein; (ii) Mochida has not previously granted and will not grant any rights in conflict with the rights granted herein; and (iii) to Mochida's knowledge and belief, there are no existing or threatened actions, suits or claims pending against it with respect to its right to enter into and perform its obligations under this Agreement. 14.3 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 11.1 AND THIS ARTICLE 14, NORIAN AND MOCHIDA EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CLINICAL DEVELOPMENT, THE PRODUCTS AND NORIAN INTELLECTUAL PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF NORIAN TECHNOLOGY, PATENTED OR UNPATENTED, AND NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ARTICLE 15 CONFIDENTIALITY 15.1 Confidential Information. Except as expressly provided herein, the parties agree that, for the term of this Agreement and for seven (7) years thereafter, the receiving party shall not publish or -21- 23 otherwise disclose and shall not use for any purpose any information furnished to it by the other party hereto pursuant to this Agreement which if disclosed in tangible form is marked "Confidential" or with other similar designation to indicate its confidential or proprietary nature, or if disclosed orally is confirmed as confidential or proprietary by the party disclosing such information at the time of such disclosure ("Confidential Information"). Notwithstanding the foregoing, it is understood and agreed that Confidential Information shall not include information that, in each case as demonstrated by written documentation: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; or (d) was subsequently lawfully disclosed to the receiving party by a person other than a party hereto or developed by the receiving party without reference to any information or materials disclosed by the disclosing party. 15.2 Permitted Disclosures. Notwithstanding the provisions of Section 15.1 above, each party hereto may disclose the other's Confidential Information to the extent such disclosure is reasonably necessary, in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations, submitting information to tax or other governmental authorities, or conducting clinical trials, provided that if a party is required to make any such disclosure of another party hereto's Confidential Information, to the extent it may legally do so, it will give reasonable advance written notice to the latter party of such disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information prior to its disclosure (whether through protective orders or otherwise). If the party whose Confidential Information is to be disclosed has not filed a patent application with respect to such Confidential Information, it may require the other party to delay the proposed disclosure (to the extent the disclosing party may legally do so), for up to ninety (90) days after receipt of written notice from the disclosing party of its intent to disclose, to allow for the filing of such an application. ARTICLE 16 INDEMNIFICATION 16.1 Indemnification of Norian. Mochida shall indemnify each of Norian and the directors, officers, and employees of Norian and the licensors, successors and assigns of any of the foregoing (the "Norian Indemnitees"), and hold each Norian Indemnitee harmless from and against any and all liabilities, -22- 24 damages, settlements, claims, actions, suits, penalties, fines, costs or expenses (including, without limitation, reasonable attorneys' fees and other expenses of litigation) (any of the foregoing, a "Claim") incurred by any Norian Indemnitee, arising from or occurring as a result of (a) claims relating to any Products used, sold or otherwise distributed by Mochida, or Subdistributors of Mochida except to the extent such claim is covered under Section 16.2 below or is caused by the gross negligence or willful misconduct of a Norian Indemnitee; (b) subject to Section 13.3.1 above, infringement claims brought in Japan by third parties with respect to Norian's manufacture or supply of Products hereunder, except to the extent caused by Norian's willful infringement of a third party intellectual property right, which third party intellectual property right Mochida was not aware of and should not reasonably have been aware of at the time the cause of action arose; or (c) the gross negligence or willful misconduct of Mochida. 16.2 Indemnification of Mochida. Norian shall indemnify each of Mochida and the directors, officers, and employees of Mochida and the successors and assigns of any of the foregoing (the "Mochida Indemnitees"), and hold each Mochida Indemnitee harmless from and against any and all liabilities, damages, settlements, claims, actions, suits, penalties, fines, costs or expenses (including, without limitation, reasonable attorneys' fees and other expenses of litigation) (any of the foregoing, a "Claim") incurred by any Mochida Indemnitee, arising from or occurring as a result of a claim brought by a third party caused by a failure by Norian to manufacture the Product in accordance with the specifications for such Product set forth in the packaging and labeling specifications agreed upon by the parties pursuant to Section 11.1 and the Marketing Approval Application for such Product, or the gross negligence or willful misconduct of Norian, except to the extent such claim is covered under Section 16.1 above or is caused by the gross negligence of willful misconduct of Mochida. 16.3 Procedure. A party (the "Indemnitee") that intends to claim indemnification under this Article 16 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its directors, officers, employees, agents, licensors, successors or assigns intends to claim such indemnification, and, except for matters described in Section 16.1(b) above, the Indemnitor shall have sole control of the defense and/or settlement thereof. The indemnity agreement in this Article 16 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 16 but the omission so to deliver written notice to the Indemnitor shall not relieve the Indemnitor of any liability that it may have to any Indemnitee otherwise than under this Article 16. The Indemnitee under this Article 16, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives and provide full information in the investigation of any Claim covered by this indemnification. The foregoing sentence shall also apply with respect to each party's cooperation and assistance in the event a third party claim is brought against the other party arising out of the manufacture, use, or sale of the Products which claim is not included within the indemnification obligations of such other party, provided that such cooperation or assistance would not, in such other party's judgment, be prejudicial to its ability to defend itself against a claim brought against such other party by the same third party. -23- 25 ARTICLE 17 TERM AND TERMINATION 17.1 Term. This Agreement shall become effective as of the Effective Date and, unless earlier terminated pursuant to the other provisions of this Article 17, shall continue in full force and effect for a period of ten (10) years after approval of the first Marketing Approval Application by the Japanese Ministry of Health and Welfare for the first biomaterial component of a Product, but in no event more than fifteen (15) years after the Effective Date ("Initial Term"), unless earlier terminated in accordance with this Article 17. This Agreement may be renewed for up to an additional five (5) year period by mutual written agreement of the parties prior to the expiration of the Initial Term. Unless the parties so agree to extend this Agreement, this Agreement shall expire at the end of the Initial Term. 17.2 Termination for Cause. Either Norian or Mochida may terminate this Agreement by written notice stating each party's intent to terminate in the event the other shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for sixty (60) days after written notice thereof was provided to the breaching party by the non-breaching party. 17.3 Termination for Serious Adverse Events. In the event a Product causes death or serious injury resulting in a requirement by the Ministry of Health and Welfare to cease Clinical Development of the Products ("Serious Event"), Mochida shall notify Norian promptly and thereafter Mochida and Norian shall consult with one another to determine the cause of the Serious Event and the appropriate course of action. If the parties do not agree upon an acceptable course of action during the sixty (60) days following a Serious Event, either party may terminate this Agreement during the sixty (60) days thereafter upon thirty (30) days prior written notice. 17.4 Effect of Breach or Termination. 17.4.1 Accrued Obligations. In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Norian or Mochida. Termination of this Agreement for any reason, however, shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. Subject to any liability for damages by reason of a breach of this Agreement by Norian, Norian may retain any amounts paid to it prior to the effective date of any termination of this Agreement. 17.4.2 Other Rights on Termination. Upon expiration or any termination of this Agreement, other than termination of this Agreement by Mochida for Norian's breach pursuant to Section 17.2 Mochida shall transfer ownership of any and all preclinical and/or clinical data made by or -24- 26 for Mochida and of all product registrations of any kind with respect to Products and applications therefor, including without limitation Marketing Approval Applications, Reimbursement Price approvals, and any other governmental approvals, registrations and the like to Norian, at Mochida's cost and expense and shall execute such documents and perform such acts as may be necessary, useful, or convenient to perfect such transfer. It is understood that Norian may use and disclose the foregoing for any purpose. 17.4.3 Repurchase of Inventory. As soon as reasonably practicable but no later than thirty (30) days after the effective date of termination of this Agreement, Mochida shall provide Norian a complete inventory of Products in Mochida's possession, or in transit to Mochida from Norian or otherwise in Mochida's control. At such time, Norian may inspect Mochida's Product inventory and audit Mochida's records in the manner provided hereinabove. If Norian terminates this Agreement pursuant to Section 17.2 for Mochida's breach, then Norian, in Norian's sole discretion, may purchase or instruct Mochida to destroy, and Mochida shall sell to Norian or destroy and provide to Norian written certification of destruction, respectively, all or any part of Mochida's inventory of Products in Mochida's possession on the effective date of such termination. If Mochida terminates this Agreement pursuant to Section 17.2 for Norian's breach or Mochida terminates this Agreement pursuant to Section 17.3, Norian shall purchase and Mochida shall sell to Norian those Products in Mochida's inventory of Products existing on the effective date of such termination that Mochida purchased from Norian within the three (3) month period prior to the effective date of termination and that are in good and resaleable condition in their original packaging. All other units of Products existing in inventory shall be destroyed by Mochida, and Mochida shall provide written certification of destruction to Norian. The price of repurchased inventory, whether this Agreement is terminated by Norian or Mochida, shall be the net price actually paid by Mochida (i.e., net of any prior Mochida price adjustment, credits or other allowances) plus any shipping insurance, customs duties, or taxes (other than taxes paid with respect to Mochida's net income) actually paid by Mochida with respect to such repurchased Products. Products purchased from Mochida by Norian pursuant to this Section 17.4.3 shall be shipped promptly by Mochida, at Norian's expense, to a location specified by Norian. 17.5 Return of Materials. All trademarks, marks, trade names, patents, copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales and promotional aids of every kind relating to the Products and received from or owned by Norian shall remain the property of Norian. Within thirty (30) days after the effective date of termination of this Agreement, Mochida shall destroy all tangible items bearing, containing, or contained in, any of the foregoing, in its possession or control and provide written certification of such destruction, or prepare such tangible items for shipment to Norian, as Norian may direct, at Norian's expense. Mochida shall not make or retain any copies of any Confidential Information of Norian which may have been entrusted to it. Effective upon the termination of this Agreement, Mochida shall cease to use all trademarks and trade names of Norian. During the term of this Agreement and after any termination or expiration of this Agreement, Norian shall have the right to continue to use and disclose for any purpose customer lists, customer data and other customer information and any and all clinical trial results and other data relating to the Products, which is or was provided or required to be provided by Mochida to Norian pursuant to this Agreement. -25- 27 17.6 No Renewal, Extension or Waiver. Acceptance of any order from, or sale or license of, any Product to Mochida after the effective date of termination of this Agreement shall not be construed as a renewal or extension hereof, or as a waiver of termination of this Agreement. 17.7 Survival. Articles 1, 15, 16, 19, 20, and 21; Sections 5.1, 6.2, 7.4, 9.7, 12.6.2, 13.1, 13.2, 17.4, 17.5, 17.6 and 17.7; and the second sentence of Section 3.2(a) shall survive expiration or termination of this Agreement for any reason. In addition, in the event this Agreement is terminated by Norian, pursuant to Section 17.2, the provisions of Section 7.2 shall survive for a period of five (5) years. ARTICLE 18 TRADEMARKS 18.1 Marks. During the term of this Agreement, Mochida shall have the right and agrees to, advertise and promote the Products in Japan under Norian's trademarks and trade names identified on Exhibit C as modified by Norian pursuant to this Section 18.1 ("Marks"). Norian reserves the right to modify Marks or substitute alternative marks for any or all of the Marks at any time upon thirty (30) days prior written notice, provided that Norian shall not modify the Marks unreasonably after the filing of the Marketing Approval Application. The rights granted under this Section 18.1 shall automatically terminate on termination or expiration of this Agreement. Norian shall endeavor to register the Marks with the Japanese Patent Office as trademarks in the appropriate classes and maintain the registrations of such Marks, and Mochida shall cooperate and upon Norian's request, provide full information and reasonable assistance to Norian in registering and maintaining the Marks, including without limitation providing evidence of use of the Marks as reasonably required to renew registrations or defend actions for cancellations. 18.2 Use. Mochida shall not remove, modify, or obscure Marks affixed to Products without the prior written consent of Norian. Except as set forth in this Section 18.2, nothing contained in this Agreement shall grant to Mochida any right, title or interest in or to Marks whether or not specifically recognized or perfected under applicable laws of Japan, and Mochida irrevocably assigns to Norian all such right, title and interest, if any, in any Marks. At no time during or after the term of this Agreement shall Mochida challenge or assist others to challenge Marks or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to Marks. All representations of Marks that Mochida intends to use shall first be submitted to Norian for approval (which shall not be unreasonably withheld) of design, color, and other details or shall be exact copies of those used by Norian. In addition, Mochida shall fully comply with all reasonable guidelines, if any, communicated by Norian concerning the use of Marks. -26- 28 ARTICLE 19 LIMITATION OF LIABILITY EXCEPT FOR LIABILITY ARISING UNDER SECTION 16.2, NORIAN'S LIABILITY ARISING OUT OF THIS AGREEMENT, THE TERMINATION THEREOF, AND/OR SALE OF THE PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY MOCHIDA FOR THE PRODUCT. IN NO EVENT SHALL NORIAN BE LIABLE TO MOCHIDA OR ANY OTHER ENTITY FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS, LOST PROFITS, OR ANY OTHER SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THESE LIMITATIONS SHALL APPLY WHETHER OR NOT NORIAN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN. ARTICLE 20 DISPUTE RESOLUTION 20.1 Disputes. If the Joint Development Committee, or Norian and Mochida, are unable to resolve any dispute between them, either Norian or Mochida may, by written notice to the other, have such dispute referred to the chief executive officers (or equivalent) of Norian and Mochida, for attempted resolution by good faith negotiations within twenty-one (21) days after such notice is received. Unless otherwise mutually agreed, the negotiations between the designated officers shall be conducted by telephone, with three (3) days and times within the period stated above offered by the designated officers of Mochida to the designated officer of Norian for consideration. 20.2 Arbitration. Any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to alleged breach or to termination of this Agreement, shall be settled by final, binding arbitration in the manner described in this Section 20.2. The arbitration shall be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association then in effect ("Rules"). Notwithstanding those rules, the following provisions shall apply to the arbitration hereunder: 20.2.1 Arbitrators. The arbitration shall be conducted by a panel of three (3) arbitrators ("the Panel"). Each party shall have the right to appoint one (1) member of the Panel, with the third member to be mutually agreed by the two (2) Panel members appointed by the parties or appointed in accordance with the rules of the American Arbitration Association. The arbitrators shall be persons in the medical device industry with experience in the matters in dispute. 20.2.2 Proceedings. The parties and the arbitrators shall use their best efforts to complete the arbitration within one (1) year after the appointment of the Panel under Section 20.2.1 above, unless a party can demonstrate to the Panel that the complexity of the issues or other reasons warrant the -27- 29 extension of the time table. In such case, the Panel may extend such time table as reasonably required. Notwithstanding the foregoing, any arbitration of whether a milestone payment is due under Section 4.2 above shall be completed and a decision reached within sixty (60) days after the appointment of the Panel. The Panel shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions, except that the interpretation of and enforcement of this Article 20 shall be governed by the U.S. Federal Arbitration Act. The proceeding shall take place in the city and county of San Francisco, California. The fees of the Panel shall be paid by the losing party which party shall be designated by the Panel. If the Panel is unable to designate a losing party, it shall so state and the fees shall be shared equally between the parties. ARTICLE 21 MISCELLANEOUS 21.1 Governing Law. This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with, the laws of the State of California, without reference to conflicts of laws principles and without regard to the 1980 Convention on the International Sale of Goods. 21.2 Review by Fair Trade Commission. Mochida agrees to file this Agreement, if required, with the Japan Fair Trade Commission (the "JFTC"), and shall provide to Norian English translations of all notifications filed in connection with this Agreement promptly after such filing. If the JFTC advises or recommends the amendment or deletion of any terms and conditions of, or any addition to, this Agreement, Mochida shall immediately inform Norian of such advice or recommendation and the parties shall negotiate in good faith to modify this Agreement in accordance with such advice or recommendation. Notwithstanding the provisions of Section 21.9, if within thirty (30) days after receipt of a written recommendation from the JFTC, the parties do not reach agreement, either party may terminate this Agreement without incurring any further liability or obligation. 21.3 Force Majeure. Nonperformance of any party (except for payment obligations) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, delay or failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the gross negligence or willful misconduct of the nonperforming party. 21.4 No Implied Waivers; Rights Cumulative. No failure on the part of Norian or Mochida to exercise and no delay in exercising any right under this Agreement, or provided by statute or at law or in equity or otherwise, shall impair, prejudice or constitute a waiver of any such right, nor shall any partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. 21.5 Independent Contractors. Nothing contained in this Agreement is intended implicitly, or is to be construed, to constitute Norian or Mochida as partners in the legal sense. No party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the -28- 30 name of any other party or to bind any other party to any contract, agreement or undertaking with any third party. 21.6 Notices. All notices, requests and other communications hereunder shall be in writing and shall be personally delivered or sent by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other parties hereto: Mochida: __________________________________ __________________________________ Attn: _________________________ with a copy to: __________________________________ __________________________________ __________________________________ __________________________________ Attn: General Counsel Norian: Norian Corporation 10260 Bubb Road Cupertino, California 95014-4166 Attn: _________________________ with a copy to: Wilson, Sonsini, Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Kenneth A. Clark, Esq. 21.7 Assignment. This Agreement shall not be assignable by either party to any third party hereto without the written consent of the other party hereto; except that either party may assign this Agreement without the other party's consent to an entity that acquires all or substantially all of the business or assets of the assigning party, in each case whether by merger, acquisition, or otherwise. 21.8 Modification. No amendment or modification of any provision of this Agreement shall be effective unless in writing signed by all parties hereto. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by all parties. -29- 31 21.9 Severability. If any provision hereof should be held invalid, illegal or unenforceable in any jurisdiction, all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible. Such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. The provisions of this Section 21.9 shall be subject to the provisions of Section 21.2. 21.10 Publicity. Each of the parties hereto agrees not to disclose to any third party the financial terms of this Agreement without the prior written consent of the other party hereto, except to advisors, investors and others on a need-to-know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law. Notwithstanding the foregoing, the parties shall agree upon a press release to announce the execution of this Agreement, together with a corresponding Question & Answer outline for use in responding to inquiries about the Agreement; thereafter, Mochida and Norian may each disclose to third parties the information contained in such press release and Question & Answer outline without the need for further approval by the other. From time to time during the term of this Agreement, upon Norian's request, the parties shall agree upon additional press releases. 21.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together, shall constitute one and the same instrument. 21.12 Headings. Headings used herein are for convenience only and shall not in any way affect the construction of or be taken into consideration in interpreting this Agreement. 21.13 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of Norian and Mochida are subject to prior compliance with United States export regulations and such other United States laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States. Norian and Mochida shall cooperate with each other and shall provide assistance to the other as reasonably necessary to obtain any required approvals. 21.14 No Implied Licenses. Except as expressly provided herein, no party hereto grants to any other party hereto any rights or licenses under such party's patent rights, trade secrets or other intellectual property rights. 21.15 Entire Agreement. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement with respect to the subject matter hereof, and supersedes all prior or contemporaneous understandings or agreements, whether written or oral, between Norian and Mochida with respect to such subject matter. -30- 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered effective as of the Effective Date. NORIAN CORPORATION MOCHIDA PHARMACEUTICAL CO. LTD. By: ________________________________ By: _______________________________ Name: ______________________________ Name: _____________________________ Title: _____________________________ Title: ____________________________ -31- 33 EXHIBIT A Transfer Prices 1. The price to Mochida for Products intended for commercial sale shall be equal to the prices set forth in this paragraph 1 below: a. Durable components of the Products such as mixers and injection guns ("Durable Components"): [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price, but in the event that a Reimbursement Price is not obtained, then the transfer price set forth in Section 1(d) below shall apply. b. Consumable components of the Products such as delivery nozzles, needles, and other single-use components of the Products, but excluding Biomaterial Components ("Consumable Components"): [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price, but in the event that a Reimbursement Price is not obtained, then the transfer price set forth in Section 1(d) below shall apply. c. Biomaterial components of the Products ("Biomaterial Components"): i. Until the earlier of (i) [CONFIDENTIAL INFORMATION REDACTED] after approval of a Marketing Approval Application in Japan, or (ii) such time as [CONFIDENTIAL INFORMATION REDACTED] exceed either [CONFIDENTIAL INFORMATION REDACTED] in any given one year period after the date of first commercial sale of the first Product, [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price. ii. Thereafter, the transfer price shall be [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price up to or equaling the threshold for the amount of annual Net Sales calculated as set forth below, and if the amount of annual Net Sales exceeds any of the threshold levels calculated as set forth below, then the transfer price for Products exceeding the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price: 1. If the Reimbursement Price for 10cc of Biomaterial Components is less than [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED]. 2. If the Reimbursement Price for 10cc of Biomaterial Components is more than [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED]. 34 3. If the Reimbursement Price for 10cc of Biomaterial Components is between [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be calculated in accordance with the following formula: [CONFIDENTIAL INFORMATION REDACTED], where [CONFIDENTIALITY INFORMATION REDACTED] iii. In the event that a Reimbursement Price is not obtained for Biomaterial Components, the transfer price set forth in Section 1(d) below shall apply to sales of Biomaterial Components to Mochida, and notwithstanding the foregoing provisions of this Section 1(c) set forth above, in no event shall the transfer price for Biomaterial Components be less than [CONFIDENTIAL INFORMATION REDACTED] for 5cc of Biomaterial Components, [CONFIDENTIAL INFORMATION REDACTED] for 10cc of Biomaterial Components, and [CONFIDENTIAL INFORMATION REDACTED] for 20cc of Biomaterial Components; provided that upon either party's request, the parties shall negotiate in good faith as mutually agreed a reduction in the foregoing fixed prices in the event Norian's Production Costs for the Biomaterial Components materially decrease. d. Notwithstanding the prices set forth in Paragraphs 1(a), 1(b) and 1(c) above, in no event shall the price for Biomaterial Components of Products be less than a price that provides Norian with a gross margin of [CONFIDENTIAL INFORMATION REDACTED], and the price of Consumable Components and Durable Components shall not be less than Norian's Production Cost plus [CONFIDENTIAL INFORMATION REDACTED]. 2. Norian shall provide to Mochida mutually agreed upon quantities of Products intended for use in clinical trials free of charge. -2- 35 EXHIBIT B Training and Educational Programs Mochida shall provide Education Programs and Training Programs in accordance with the schedule set forth below for all Norian Applications:
Training Time to Complete -------- ---------------- 1. Education Programs and Training Programs for all Within [CONFIDENTIAL INFORMATION REDACTED] after the investigators and trialists who will participate in Effective Date Clinical Development 2. Education Programs and Training Programs for all Within [CONFIDENTIAL INFORMATION REDACTED] after faculty who will participate in providing the Training receipt of governmental approval of a Marketing Programs and Education Programs set forth in Sections Approval Application for a Product in Japan 3 and 4 below 3. Education Programs and Training Programs comprised Within [CONFIDENTIAL INFORMATION REDACTED] after of workshops for a minimum of [CONFIDENTIAL receipt of governmental approval of a Marketing INFORMATION REDACTED] key universities and large Approval Application for a Product in Japan hospitals 4. Education Programs for a minimum of [CONFIDENTIAL On [CONFIDENTIAL INFORMATION REDACTED], commencing on INFORMATION REDACTED] surgeons per year, with a the date of receipt of governmental approval of a [CONFIDENTIAL INFORMATION REDACTED] surgeons in Marketing Approval Application for a Product in Japan attendance at any one Education Program workshop.
Education Programs and Training Programs provided by Mochida shall address all Norian Applications. 36 EXHIBIT C Marks [TO BE COMPLETED BY NORIAN] 37 EXHIBIT D Preferred Stock Purchase Agreement 38 EXHIBIT E Norian Applications 1. Fractured distal radius repair 2. Tibial plateau repair 3. Intertrochanteric fracture of the hip repair 4. Spinal reconstructive surgery 39 EXHIBIT F Norian Data U.S. F.D.A. IDE #G92077 and all supplements thereto EX-10.8 13 SERIES D PREFERRED STOCK PURCHASE AGREEMENT 1 Exhibit 10.8 NORIAN CORPORATION 10260 BUBB ROAD CUPERTINO, CALIFORNIA 95014-4166 ------------------------------------------- SERIES D PREFERRED STOCK PURCHASE AGREEMENT APRIL 16, 1996 ------------------------------------------- 2 TABLE OF CONTENTS
Page No. SECTION 1 - Authorization and Sale of Preferred Stock......................................... 1 1.1 Authorization........................................................... 1 1.2 Sale of Series D Preferred.............................................. 1 SECTION 2 - Closing Dates; Delivery........................................................... 1 2.1 Closing Dates........................................................... 1 2.2 Delivery................................................................ 1 SECTION 3 - Representations and Warranties of the Company..................................... 2 3.1 Organization and Standing; Articles and By-Laws......................... 2 3.2 Corporate Power......................................................... 2 3.3 Subsidiaries............................................................ 2 3.4 Capitalization.......................................................... 2 3.5 Authorization........................................................... 3 3.6 Agreements; Action...................................................... 3 3.7 Title to Properties and Assets; Liens, etc.............................. 4 3.8 Compliance With Other Instruments, None Burdensome, etc................. 4 3.9 Litigation, etc......................................................... 4 3.10 Employees............................................................... 5 3.11 Registration Rights..................................................... 5 3.12 Governmental Consent, etc............................................... 5 3.13 Offering................................................................ 5 3.14 Brokers or Finders; Other Offers........................................ 5 3.15 Patents, Trademarks, Licenses........................................... 5 3.16 Agreements with Principals.............................................. 6 3.17 Disclosure.............................................................. 6 3.18 Corporate Documents..................................................... 6 3.19 Financial Statements.................................................... 7 3.20 Changes................................................................. 7 3.21 Employee Benefit Plans.................................................. 8 3.22 Tax Returns, Payments and Elections..................................... 8 3.23 Insurance............................................................... 8 3.24 Labor Agreements and Actions............................................ 8 3.25 Section 83(b) Elections................................................. 8
-i- 3 TABLE OF CONTENTS (CONTINUED)
Page No. SECTION 4 - Representations and Warranties of Mochida......................................... 9 4.1 Accredited Investor..................................................... 9 4.2 Investment.............................................................. 9 4.3 Rule 144................................................................ 9 4.4 No Public Market........................................................ 9 4.5 Access to Data.......................................................... 9 4.6 Authorization........................................................... 9 4.7 Brokers or Finders...................................................... 10 4.8 Further Limitations on Disposition...................................... 10 4.9 Legends................................................................. 10 SECTION 5 - Conditions to Closing of Mochida.................................................. 11 5.1 Representations and Warranties Correct.................................. 11 5.2 Covenants............................................................... 11 5.3 Compliance Certificate.................................................. 11 5.4 State Securities Laws................................................... 11 5.5 Compliance with Japanese Law............................................ 11 5.6 Restated Articles of Incorporation...................................... 11 5.7 Legal Matters........................................................... 11 5.8 Opinion of Counsel...................................................... 12 5.9 Modification Agreement.................................................. 12 5.10 No Bankruptcy Proceedings............................................... 12 5.11 Minimum Investment by Mochida........................................... 12 5.12 Qualifications.......................................................... 12 5.13 Proceedings and Documents............................................... 12 5.14 Proprietary Information and Inventions Employee Agreements.............. 12 5.15 Bylaws.................................................................. 12 5.16 Board of Directors...................................................... 12 5.17 Voting Agreement........................................................ 13 5.18 Co-Sale Agreement....................................................... 13 SECTION 6 - Conditions to Closing of Company.................................................. 13 6.1 Representations......................................................... 13 6.2 State Securities Laws................................................... 13 6.3 Restated Articles of Incorporation...................................... 13
-ii- 4 TABLE OF CONTENTS (CONTINUED)
Page No. 6.4 Legal Matters........................................................... 13 6.5 Modification Agreement.................................................. 13 SECTION 7 - Affirmative Covenants of the Company.............................................. 14 7.1 Financial Information................................................... 14 7.2 Rule 144A Information................................................... 15 7.3 Termination of Information and Inspection Covenants..................... 15 7.4 Additional Agreements................................................... 16 7.5 Nondisclosure........................................................... 16 7.6 Proprietary Information Agreements...................................... 17 7.7 Key Man Insurance....................................................... 17 7.8 Reservation of Shares................................................... 17 7.9 Public Disclosures...................................................... 17 SECTION 8 - Indemnification................................................................... 17 SECTION 9 - Restrictions on Transferability of Securities; Compliance With Securities Act; Registration Rights............................................................... 18 9.1 Restrictions on Transferability......................................... 18 9.2 Certain Definitions..................................................... 18 9.3 Restrictive Legend...................................................... 19 9.4 Notice of Proposed Transfers............................................ 20 9.5 Requested Registration.................................................. 21 9.6 Company Registration.................................................... 23 9.7 Registration on Form S-3................................................ 25 9.8 Expenses of Registration................................................ 25 9.9 Registration Procedures................................................. 25 9.10 Indemnification......................................................... 26 9.11 Information by Holder................................................... 28 9.12 Rule 144 Reporting...................................................... 28 9.13 Transfer of Registration Rights......................................... 28 9.14 Lockup Agreement........................................................ 28 SECTION 10 - Right of First Refusal........................................................... 29 10.1 Right of First Refusal.................................................. 29
-iii- 5 TABLE OF CONTENTS (CONTINUED)
Page No. SECTION 11 - Miscellaneous.................................................................... 31 11.1 Governing Law........................................................... 31 11.2 Survival................................................................ 31 11.3 Successors and Assigns.................................................. 31 11.4 Entire Agreement; Amendment............................................. 31 11.5 Notices, etc............................................................ 32 11.6 Delays or Omissions..................................................... 32 11.7 California Corporate Securities Law..................................... 32 11.8 Expenses and Counterparts............................................... 33 11.9 Severability............................................................ 33 11.10 Titles and Subtitles.................................................... 33
-iv- 6 EXHIBITS A. Sixth Amended and Restated Articles of Incorporation B. Exceptions to Representations and Warranties C. Form of Compliance Certificate D. Form of Opinion of Counsel E. Form of Modification Agreement F. Form of Proprietary Information and Inventions Employee Agreement G. Form of Fourth Amended and Restated Voting Agreement H. Form of Fourth Amended and Restated Co-Sale Agreement -v- 7 NORIAN CORPORATION SERIES D PREFERRED STOCK PURCHASE AGREEMENT This Series D Preferred Stock Purchase Agreement is made as of April 16, 1996 (the "Agreement") by and between Norian Corporation, a California corporation (the "Company"), and Mochida Pharmaceutical Co., Ltd., a corporation organized under the laws of Japan ("Mochida"). SECTION 1 AUTHORIZATION AND SALE OF PREFERRED STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to an additional 2,800,000 shares (the "Shares") of its Series D Preferred Stock ("Series D Preferred"), having the rights, privileges and preferences as set forth in the Company's Sixth Amended and Restated Articles of Incorporation (the "Restated Articles") in the form attached to this Agreement as Exhibit A. 1.2 SALE OF SERIES D PREFERRED. Subject to the terms and conditions hereof, the Company will issue and sell to Mochida and Mochida will buy from the Company, shares of Series D Preferred in the aggregate amount of U.S. Seven Million Dollars (US$7,000,000) within two (2) days after the Effective Date of the Exclusive Marketing Agreement by and between the Company and Mochida dated as of April 15, 1996 (the "Exclusive Marketing Agreement") (the meaning of "Effective Date" is as defined in the Exclusive Marketing Agreement). SECTION 2 CLOSING DATES; DELIVERY 2.1 CLOSING DATES. The closing of the purchase and sale of the Series D Preferred hereunder shall be held at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California on April 16, 1996 (the "Closing") or at such other times and places upon which the Company and Mochida shall agree (the "Closing Date"). The term "Closing" with respect to sales of Series D Preferred shall mean each closing under this Agreement and the term "Closing Date" shall refer to the date on which such Closing occurred. 2.2 DELIVERY. At the Closing, the Company will deliver to Mochida a certificate registered in Mochida's name, representing the number of Shares purchased by Mochida at the Closing against payment of the purchase price therefor, by check payable to the Company or wire transfer per the Company's instructions. 8 SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Company's Exceptions to Representations and Warranties attached hereto as Exhibit B (the "Schedule of Exceptions"), the Company represents and warrants to Mochida as follows: 3.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has the requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse effect on the Company's business as presently conducted. As the Company's business expands, additional qualifications in foreign jurisdictions may be required. 3.2 CORPORATE POWER. The Company has all requisite legal and corporate power and authority to execute and deliver this Agreement and all other agreements attached as Exhibits hereto (collectively and unless otherwise stated, the "Agreements"), to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Series D Preferred, and to carry out and perform its obligations under the terms of the Agreements. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of 86,000,000 shares of Common Stock, of which 5,373,739 shares are issued and outstanding immediately prior to the Closing and 74,800,000 shares of Preferred Stock, 5,000,000 of which are designated as Series A Preferred Stock (the "Series A Preferred"), 4,902,919 of which are issued and outstanding immediately prior to the Closing, 10,037,500 of which are designated Series B Preferred, 10,037,500 of which are outstanding immediately prior to the Closing, 2,750,000 of which are designated Series C Preferred, 2,666,666 of which are outstanding immediately prior to the Closing and 56,800,000 of which are designated Series D Preferred, 49,044,423 of which are outstanding immediately prior to the Closing. The Company has reserved and available for issuance 1,131,552 shares of its Common Stock to be granted to employees, consultants, directors and members of the Scientific Advisory Board of the Company pursuant to the Company's 1988 Stock Option Plan (the "Option Plan"). There are currently outstanding options to purchase 3,631,100 shares of Common Stock under the Option Plan. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Company has reserved 2,800,000 shares of Series D Preferred for issuance hereunder and an appropriate number of shares of Common Stock as may be deemed necessary for issuance upon conversion of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred. The Series D Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Articles. Except as set forth herein, in the Schedule of Exceptions or as described in the "Modification -2- 9 Agreement", as defined in Section 5.8 herein, there are no options, warrants or other rights to purchase any of the Company's authorized and unissued capital stock. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of the Agreements by the Company, the authorization, sale, issuance and delivery of the Series D Preferred (and the Common Stock issuable upon conversion of the Series D Preferred), and the performance of all of the Company's obligations under the Agreements has been taken prior to the Closing. The Agreements, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with their terms, except as the indemnification provisions of Section 9.10 of this Agreement may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Series D Preferred, when issued in compliance with the provisions of the Agreements and the Restated Articles, will be validly issued, fully paid and nonassessable, and will have the rights, preferences and privileges described in the Restated Articles. The Common Stock issuable upon conversion of the Series D Preferred has been duly and validly reserved and, when issued in compliance with the provisions of the Agreements and the Restated Articles, will be validly issued, fully paid and nonassessable; and the Series D Preferred and such Common Stock will be free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Series D Preferred and the Common Stock issuable upon conversion of the Series D Preferred may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein. The Series D Preferred and Common Stock issuable upon conversion of the Series D Preferred is not subject to any preemptive rights or rights of first refusal which have not been waived. As of the date hereof, there has been no issuance by the Company of its securities which has triggered an adjustment to the "Conversion Price" applicable to any outstanding series of the Company's Preferred Stock, as set forth in Article III, Section 4(c) of the Restated Articles ("Antidilution Adjustment"). Additionally, the issuance of the shares under this Agreement will not trigger any rights which currently exist or which have not been waived of any holders of Preferred Stock to such an Antidilution Adjustment at the Closing. 3.6 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no material agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound which involve (i) obligations of, or payments to the Company in excess of, $50,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $50,000, -3- 10 (iii) made any loans or advances to any person, other than ordinary advances for travel expenses or loans for stock purchases not exceeding $10,000, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) To its knowledge, the Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws, which adversely affects its business as now conducted, its properties or its financial condition. 3.7 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its property, assets and proprietary technology, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company and which have not arisen otherwise than in the ordinary course of business. 3.8 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of its Articles of Incorporation or By-Laws. The Company is not in violation in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or decree, and to the best of its knowledge is not in violation of any order, statute, rule or regulation applicable to the Company in which such violation would materially and adversely affect the Company. The execution, delivery and performance of and compliance with the Agreements, and the issuance of the Series D Preferred and the Common Stock issuable upon conversion of the Series D Preferred, have not resulted and will not result in any material violation of, or conflict with, or constitute a material default under any of the foregoing nor result in the creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. There is no such violation or default which materially and adversely affects the business of the Company or any of its properties or assets. 3.9 LITIGATION, ETC. There is no action, suit, proceeding or investigation pending or, to the knowledge of the Company, currently threatened against the Company which questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated thereby, or which might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or, to the Company's knowledge, threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. -4- 11 3.10 EMPLOYEES. Each employee of the Company has executed the Company's standard form of proprietary information agreement. To the best of the Company's knowledge, no employee of the Company is or is now expected to be in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or any other party because of the nature of the business conducted or proposed to be conducted by the Company. To the best of the Company's knowledge, its employees have not improperly used and are not making or expected to make improper use of any confidential information, trade secrets or intellectual property of others including, without limitation, those of any former employer, and, to the best of the Company's knowledge, there is no pending or threatened action, suit, proceeding or claim with respect to the foregoing. 3.11 REGISTRATION RIGHTS. Except as set forth in the Agreements, the Company is not under any contractual obligation to register (as defined in Section 9.2 below) any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.12 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of the Agreements, or the offer, sale or issuance of the Series D Preferred (and the Common Stock issuable upon conversion of the Series D Preferred), or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Articles in the office of the California Secretary of State (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Series D Preferred (and the Common Stock issuable upon conversion of the Series D Preferred) under the California Corporate Securities Law of 1968, as amended, and other applicable state securities laws, which filings and qualifications, if required, will be accomplished in a timely manner. 3.13 OFFERING. Subject to the accuracy of Mochida's representations in Section 4 of this Agreement, the offer, sale and issuance of the Series D Preferred to be issued in conformity with the terms of the Agreements, and the issuance of the Common Stock to be issued upon conversion of the Series D Preferred, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). 3.14 BROKERS OR FINDERS; OTHER OFFERS. Neither the Company nor Mochida has incurred, or will incur, directly or indirectly, as a result of any action taken by the Company (assuming that no unilateral action is taken by Mochida), any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Agreements. 3.15 PATENTS, TRADEMARKS, LICENSES. The Company has sufficient title and ownership of patents, copyrights, trademarks, trade secrets, and all other proprietary rights needed to conduct its business as proposed to be conducted. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, copyrights, trademarks, trade secrets or proprietary rights and processes of -5- 12 any other person or entity. A list of all patents, patent applications, trademarks and trademark applications is set forth on the Schedule of Exceptions. There are no pending infringement claims regarding any third party's patents, copyrights, trademarks, trade secrets or proprietary rights and processes against the Company nor, to the best of the Company's knowledge, is there any threat thereof or basis therefor. To the best of the Company's knowledge, the Company is not infringing upon or otherwise acting adversely to, and will not, by conducting its business as presently conducted, infringe upon or otherwise act adversely to, the right or claimed right of any other person with respect to any of the foregoing. The Company is not aware of any violation by a third party of any of its patents, copyrights, trademarks, trade secrets or other proprietary rights. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of its proprietary information. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of the employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of the Agreements, nor the carrying on of the Company's business by the employees of the Company will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 3.16 AGREEMENTS WITH PRINCIPALS. Except for agreements explicitly contemplated hereby, option agreements and restricted stock purchase agreements between the Company and several employees of the Company: (i) there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors or affiliates, and (ii) no officer, director or affiliate is indebted to the Company nor is the Company indebted to any of them. 3.17 DISCLOSURE. To the best of the Company's knowledge, the Agreements and the Company's disclosures to Mochida, when taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or made by the Company not misleading in light of the circumstances under which they were made. Any financial projections disclosed were prepared in good faith; however, the Company does not warrant that it will achieve any financial projections. Any assumptions used for projections are materially correct and unchanged as of the date hereof, provided, however, that no warranty or representation is given as to opinions, forecasts, or other non-factual matters. The Company has provided Mochida with all the information which Mochida has requested for deciding whether to purchase the Shares and all information which the Company believes is reasonably necessary to enable Mochida to make such decision. 3.18 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the form of which amendments has been approved by Mochida -6- 13 or its counsel), the Restated Articles and Bylaws of the Company are in the form previously provided to Mochida. 3.19 FINANCIAL STATEMENTS. The Company has delivered to Mochida or its counsel its audited financial statements (balance sheet and profit and loss statement, statement of shareholders' equity and statement of cash flows) as of December 31, 1995 (the "Financial Statements"). The Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except for the failure of the unaudited Financial Statements to include the footnotes required by generally accepted accounting principles. The Financial Statements accurately set out and describe the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject, in the case of the unaudited financial statements, to normal year-end audit adjustments which will not in the aggregate be material. Except as set forth in the Financial Statements, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 1995 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 3.20 CHANGES. Since December 31, 1995 there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business which have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business or which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted); (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) other than in the ordinary course of business, any material change in any compensation arrangement or agreement with any employee; or -7- 14 (g) to the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted). 3.21 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 3.22 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith which are listed in the Schedule of Exceptions. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or any of its properties or material assets. 3.23 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 3.24 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other material labor dispute involving the Company pending, or to the knowledge of the Company threatened, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. 3.25 SECTION 83(B) ELECTIONS. To the best of the Company's knowledge, all elections and notices required by Section 83(b) of the Internal Revenue Code and any analogous provisions of applic able state tax laws have been timely filed by all individuals who have purchased shares of the Company's Common Stock which are subject to repurchase pursuant to vesting provisions. -8- 15 SECTION 4 REPRESENTATIONS AND WARRANTIES OF MOCHIDA Mochida hereby represents and warrants to the Company with respect to the purchase of the Shares as follows: 4.1 ACCREDITED INVESTOR. It is an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act. 4.2 INVESTMENT. It is acquiring the Series D Preferred and the underlying securities for investment for its own account, not as a nominee or agent and not with the view to, or for resale in connection with, any distribution thereof. It understands that the securities to be purchased and the underlying securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Mochida's representations as expressed herein. 4.3 RULE 144. It acknowledges that the Series D Preferred and the underlying securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the Company's securities, the availability of certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 4.4 NO PUBLIC MARKET. It understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company's securities. 4.5 ACCESS TO DATA. It has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. It has also had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. It understands that such discussions, as well as any written information issued by the Company were intended to describe certain aspects of the Company's business and prospects but were not an exhaustive description. The foregoing, however, does not limit or modify the representations and warranties of Section 3 herein or the right of Mochida to rely thereon. 4.6 AUTHORIZATION. The Agreements when executed and delivered by Mochida will constitute a valid and legally binding obligation of Mochida, enforceable in accordance with its terms, except as the indemnification provisions of Section 9.10 hereof may be limited by principles of public policy, and -9- 16 subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.7 BROKERS OR FINDERS. Except as disclosed in the Schedule of Exceptions, neither the Company nor Mochida has incurred, directly or indirectly, as a result of any action taken by Mochida (assuming that no unilateral action is taken by the Company), any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Agreements. 4.8 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Mochida further agrees not to make any disposition of all or any portion of the Shares (or the Common Stock issuable upon the conversion thereof) unless and until: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) Mochida shall have (i) notified the Company of the proposed disposition and furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 or Rule 144A except in unusual circumstances. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by Mochida to any "affiliate" of Mochida, as defined in Rule 405 promulgated under the Securities Act, or any partnership or company, provided the transferee agrees in writing to be subject to the terms hereof to the same extent as if it were the original purchaser hereunder and such transfer may otherwise be effected in accordance with applicable securities laws. 4.9 LEGENDS. It is understood that the certificates evidencing the Shares will bear the following legends, in addition to any legend required by applicable state securities laws: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER COMPLIES WITH THE PROVISIONS OF RULE 144 OR RULE 144A UNDER THE ACT IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT." -10- 17 "COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES." SECTION 5 CONDITIONS TO CLOSING OF MOCHIDA Unless otherwise specifically stated, Mochida's obligations to purchase the Shares at the Closing are, at the option of Mochida, subject to the fulfillment of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the Closing Date. 5.2 COVENANTS. All covenants, agreements and conditions contained in the Agreements to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. 5.3 COMPLIANCE CERTIFICATE. The Company shall have delivered to Mochida a certificate of the Company in the form of Exhibit C hereto, executed by the Chief Financial Officer of the Company, dated the Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Section 5.1, 5.2, 5.4, 5.6, 5.7, 5.8, 5.9, 5.10, 5.12, 5.13, 5.14, 5.15, 5.16, 5.17 and 5.18 of this Agreement. 5.4 STATE SECURITIES LAWS. The Company shall have obtained all necessary state securities law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series D Preferred and the Common Stock issuable upon conversion of the Series D Preferred. 5.5 COMPLIANCE WITH JAPANESE LAW. Mochida shall have obtained all necessary Japanese government approvals. 5.6 RESTATED ARTICLES OF INCORPORATION. The Restated Articles shall have been filed as of the date of the Closing to occur pursuant to the terms of this Agreement and are in full force and effect with the California Secretary of State. 5.7 LEGAL MATTERS. All material matters of a legal nature which pertain to the Agreements, and the transactions contemplated hereby, shall have been reasonably approved by counsel to Mochida. -11- 18 5.8 OPINION OF COUNSEL. The Company shall have delivered to Mochida an opinion of counsel in the form attached hereto as Exhibit D. 5.9 MODIFICATION AGREEMENT. Concurrently with the Closing to occur pursuant to the terms of this Agreement, certain persons with both registration rights and rights of first refusal prior to the Closing will execute a Modification Agreement attached hereto as Exhibit E (the "Modification Agreement"). 5.10 NO BANKRUPTCY PROCEEDINGS. As of the Closing, the Company shall not have (i) ceased the conduct of its business, (ii) had appointed a receiver, custodian, trustee or liquidator for a substantial portion of its assets for the purpose of satisfying creditor claims, (iii) made a general assignment for the benefit of its creditors, (iv) be the subject of a voluntary case under the United Stated Bankruptcy Code; or (v) have pending a voluntary or involuntary petition under any law pertaining to the bankruptcy or insolvency of the Company for the purposes of satisfying creditor claims; provided that if an involuntary petition against the Company as described in clause (v) is dismissed within ninety (90) days after the Closing Date, such condition shall be deemed to be satisfied. 5.11 MINIMUM INVESTMENT BY MOCHIDA. At the Closing to occur pursuant to the terms of this Agreement, Mochida shall purchase shares of Series D Preferred with an aggregate offering price of at least $7,000,000. 5.12 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to the Agreement shall be duly obtained and effective as of the Closing. 5.13 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Mochida and Mochida's counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 5.14 PROPRIETARY INFORMATION AND INVENTIONS EMPLOYEE AGREEMENTS. Each employee of the Company shall have entered into a Proprietary Information and Inventions Employee Agreement in the form attached hereto as Exhibit F. 5.15 BYLAWS. The Bylaws of the Company shall provide that the Board of Directors of the Company shall consist of not less than six (6) nor more than nine (9) directors, the exact number of directors to be fixed from time to time within such limit by a duly adopted resolution of the Board of Directors or the Company's shareholders; the exact number of directors presently authorized shall be nine (9). 5.16 BOARD OF DIRECTORS. Effective as of the Closing, the directors of the Company shall be Brent R. Constantz, Peter Barton Hutt, Dr. Harry Skinner, Costa G. Sevastopoulos, Peter H. Gleason, Jon N. Gilbert and Hansjorg Wyss. -12- 19 5.17 VOTING AGREEMENT. Mochida shall have entered into a Fourth Amended and Restated Voting Agreement ("Voting Agreement") concerning the election of certain directors of the corporation, in the form attached hereto as Exhibit G. 5.18 CO-SALE AGREEMENT. The Company, Mochida and certain of the Company's shareholders shall have entered into that the Fourth Amended and Restated Co-Sale Agreement ("Co-Sale Agreement") in the form attached hereto as Exhibit H. SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing Date is, at the option of the Company, subject to the fulfillment as of the Closing Date of the following conditions: 6.1 REPRESENTATIONS. The representations made by Mochida in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 6.2 STATE SECURITIES LAWS. The Company shall have obtained all necessary state securities law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series D Preferred and the Common Stock issuable upon conversion of the Series D Preferred. 6.3 RESTATED ARTICLES OF INCORPORATION. The Restated Articles shall have been filed with the California Secretary of State as of the date of the Closing to occur pursuant to the terms of this Agreement. 6.4 LEGAL MATTERS. All material matters of a legal nature which pertain to the Agreements, and the transactions contemplated hereby, shall have been reasonably approved by counsel to the Company. 6.5 MODIFICATION AGREEMENT. Concurrently with the Closing to occur pursuant to the terms of this Agreement, certain persons with both registration rights and rights of first refusal prior to the Closing will execute the Modification Agreement attached hereto as Exhibit E. -13- 20 SECTION 7 AFFIRMATIVE COVENANTS OF THE COMPANY The Company hereby covenants and agrees as follows: 7.1 FINANCIAL INFORMATION. The Company shall deliver by international courier delivery service the following reports or information indicated below to Mochida or any transferee of Mochida who is a holder, together with affiliates, of at least 500,000 shares of Series D Preferred and any shares of Common Stock issued upon conversion of the Series D Preferred (the "Requisite Minimum Shares"): (a) Monthly Financial Statement. As soon as available, but in any event not later than 30 days after the end of each month (other than the last month of any fiscal year of the Company), the unaudited consolidated balance sheet of the Company and its subsidiaries as at the end of each such month and the related unaudited consolidated statements of income and cash flows of the Company and its subsidiaries for such month and for the elapsed period in such fiscal year, all in reasonable detail and stating in comparative form (i) the figures as of the end of and for the comparable periods of the preceding fiscal year and (ii) the figures reflected in the operating budget for such period as specified in the financial plan of the Company delivered pursuant to subparagraph (c) hereof. All such financial statements shall be complete and correct in all material respects, shall be prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods reflected therein except as stated therein and shall be accompanied by a certificate of the Company's president or chief financial officer to such effect. (b) Annual Financial Statements. As soon as available, but in any event within 90 days after the end of each fiscal year of the Company, a copy of the audited consolidated and consolidating balance sheet of the Company and its subsidiaries as at the end of such fiscal year and the related audited consolidated statements of operations, stockholders' equity and cash flows of the Company and its subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the figures as at the end of and for the previous fiscal year, accompanied by an opinion of an accounting firm of recognized national standing selected by the Company, which opinion shall state that such accounting firm's audit was conducted in accordance with generally accepted auditing standards. All such financial statements shall be complete and correct in all material respects and prepared in reasonable detail and in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods reflected therein except as stated therein. (c) Budgets and Other Information. As soon as available, but in any event not later than 30 days prior to the end of each fiscal year of the Company, the draft financial plan of the Company for the next succeeding fiscal year, and prior to the end of each fiscal year the final draft of such plan, in each such case, including but not limited to a cash flow projection and operating budget, calculated monthly, as contained in its operating plan approved by the Company's Board of Directors as well as any updates or revisions to such plan as soon as available. From time to time, such additional information regarding results or operations, financial condition, business or prospects of the Company and its subsidiaries, including without limitation, cash flow analyses, projections and minutes of any meetings -14- 21 of the Board of Directors, as Mochida, if still holding the Requisite Minimum Shares may reasonably request. The Company shall also afford to Mochida (and its representatives) access, at reasonable times and on reasonable prior notice, to the books, records and properties of the Company. (d) Accountants' Management Letters, etc. Promptly after receipt by the Company, copies of all accountants' management letters and all management and board responses to such letters, and all certificates as to compliance, defaults, material adverse changes, material litigation or similar matters relating to the Company and its subsidiaries. (e) Shareholders' Lists. As soon as available, but in any event within 60 days after the end of each of the first three fiscal quarters, a shareholders' list, showing, as of the end of each fiscal quarter, the authorized and outstanding shares by class (including the Common Stock equivalents of any convertible security), the holders of all outstanding shares (both before giving effect to dilution and on a fully-diluted basis) and all outstanding options, warrants and convertible securities and detailing all options granted, exercised or lapsed and all shares issued or sold. (f) Other Reports and Statements. Promptly (but in any event within ten days) after any distribution to the Company's shareholders generally, to its directors or to the financial community of an annual report, proxy statement or other report or communication, a copy of each such report, proxy statement or other report or communication and promptly (but in any event within ten days) after any filing by the Company with the Securities and Exchange Commission or with any national securities exchange, of any publicly available annual or periodic or special report or proxy statement or registration statement, a copy of such report or statement and copies of all press releases and other statements made available generally by the Company to the public concerning material developments in the Company's business. 7.2 RULE 144A INFORMATION. The Company will, as promptly as practicable after, but in any event within 30 days of a written request from Mochida, if it holds in the aggregate at least 1,428,572 shares of the Series D Preferred or Common Stock issued upon the conversion thereof, provide the information required in Rule 144A(d)(4) to Mochida and any person designated by Mochida to the Company as a prospective buyer in a transaction pursuant to Rule 144A, provided that each such person shall agree to maintain the confidentiality of the Company's confidential information and provided that no such person is a competitor of the Company. The Company further agrees that its obligations pursuant to this Section 7.2 shall extend to any person who acquires any Series D Preferred or Common Stock issued upon the conversion thereof, pursuant to a transaction pursuant to Rule 144A. 7.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The covenants set forth in Section 7.1 and 7.2 shall terminate and be of no further force or effect upon the consummation of the Company's sale of Common Stock in a firm commitment underwriting pursuant to a registration statement under the Act which results in aggregate gross proceeds to the Company of not less than $10,000,000 at a per share offering price of $1.50 per share (a "Qualified Public Offering"). -15- 22 7.4 ADDITIONAL AGREEMENTS. (a) Rule 144. If the Company shall have filed a registration statement pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a registration statement pursuant to the requirements of the Securities Act, the Company will timely file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission (the "SEC") thereunder, to the extent required from time to time to enable Mochida to sell Shares without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of Mochida, the Company will deliver a written statement as to whether it has complied with such requirements. (b) Transaction with Affiliates. Neither the Company nor any subsidiary of the Company shall, directly or indirectly, enter into any transaction or agreement with any shareholder of the Company or with any affiliate of the Company or of any such shareholder unless the transaction or agreement is reviewed and approved by a majority of the disinterested directors of the Board of Directors of the Company. (c) Meetings. The Company will hold an annual informational meeting of all shareholders at which information with respect to the business of the Company will be furnished and discussed, such meeting to be held within 180 days after the end of each fiscal year of the Company. The Company will notify each shareholder of the time and place of such annual meeting not less than 20 nor more than 60 days prior to the date of such meetings. 7.5 NONDISCLOSURE. Mochida agrees that, except as otherwise required by law he or it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information which Mochida may obtain from the Company, and which the Company has prominently marked "confidential," "proprietary" or "secret" or has otherwise identified in writing as being such, pursuant to financial statements, reports and other materials submitted by the Company as required hereunder, or pursuant to visitation or inspection rights granted hereunder, unless such information is or becomes known to Mochida from a source other than the Company or is or becomes publicly known, or unless the Company gives its written consent to Mochida's release of such information, except that no such written consent shall be required (and Mochida shall be free to release such information) if such information is to be provided to Mochida's lawyer, accountant, or to an employee, officer, director, trustee or partner of Mochida or Mochida's affiliate or an Institutional Holder, as defined below, who is a prospective transferee of the Shares or the Common Stock issuable upon the conversion thereof, other than a competitor of the Company, provided that Mochida shall inform the recipient of the confidential nature of such information, and shall obtain the agreement of the recipient, which agreement shall be written in the case of an Institutional Holder who is a prospective transferee of the Shares or the Common Stock issuable upon the conversion thereof, to treat the information as confidential. For the purposes of this Section 7.5 only, it is understood that any Institutional Holder who is a prospective transferee of the Shares or the Common Stock issuable upon the conversion thereof or its affiliates which holds debt or equity securities of any competitor of the Company solely as a portfolio investment shall not be deemed -16- 23 a competitor for the purposes of this provision. An "Institutional Holder" shall mean: (a) any bank, savings institution or trust company, acting for its own account or in a fiduciary capacity, (b) any charitable foundation, (c) any insurance company or fraternal benefit society, (d) any investment company (as defined in the Investment Company Act of 1940, as amended), (e) any small business investment company licensed under the Small Business Investment Act of 1958, as amended, (f) any broker or dealer registered under the Securities Exchange Act of 1934, as amended, or any investment adviser registered under the Investment Adviser Act of 1940, as amended, (g) any government, any public employees' pension or retirement system, or any other government agency supervising the investment of public funds, (h) any other entity all of the equity owners of which are Institutional Holders or (i) any other person or entity that qualifies under the definition of "qualified institutional buyer" as such term is used in Rule 144A, as amended. 7.6 PROPRIETARY INFORMATION AGREEMENTS. All employees of and consultants to the Company having access to the Company's proprietary and confidential information shall execute the Company's standard form of proprietary information agreement. 7.7 KEY MAN INSURANCE. The Company shall maintain a key-man insurance policy on the life of Brent R. Constantz, with the Company designated as beneficiary, in the amount of $1,000,000. In addition, the Company shall maintain a key-man life insurance policy on the lives of such other key officers and in such amounts as the Board of Directors of the Company determines is appropriate. 7.8 RESERVATION OF SHARES. So long as there are shares of Series D Preferred outstanding, the Company shall reserve and keep reserved a sufficient number of shares of its Common Stock for issuance upon the conversion of the Series D Preferred hereunder. 7.9 PUBLIC DISCLOSURES. Except as required by law, the Company shall not use the name of, or make reference to, Mochida or any of its affiliates in any press release or in any other public manner without Mochida's prior written consent. SECTION 8 INDEMNIFICATION The Company agrees to indemnify Mochida and each officer, director, trustee, employee and affiliate of Mochida (the "Indemnified Parties") for, and hold each Indemnified Party harmless from and against: (i) any and all damages, losses and other liabilities of any kind, including, without limitation, judgments and costs of settlement, and (ii) any and all out-of-pocket costs and expenses of any kind, including, without limitation, reasonable fees and disbursements of one counsel for such Indemnified Parties (selected by the holders of a majority of the Shares held by such Indemnified Parties) (all of which expenses shall be periodically reimbursed as incurred), in each case, suffered or incurred in connection with (A) any investigative, administrative or judicial proceeding or claim (collectively, a "claim") brought or threatened relating to or arising out of the Agreements, or the transactions contemplated hereby and thereby or the Company's use of the proceeds received in connection with the sale of the Shares or -17- 24 (B) any inaccuracy or alleged inaccuracy in any representation or warranty of the Company made or incorporated by reference in the Agreements or any breach or alleged breach by the Company of any covenant or agreement made or incorporated by reference in the Agreements; provided, however, that, without limiting any other remedy such Indemnified Party may have, such Indemnified Party shall have no right to be indemnified or held harmless under clause (A) of this Section 8 for any claims or inaccuracies derived solely from Indemnified Party's own negligence or arising from Indemnified Party's willful misconduct as finally determined by a court of competent jurisdiction and provided further that with respect to a claim referred to in either clause A or B above (X) the Company shall be entitled to control the defense of such claim (and to pay the fees and expenses only of such counsel as are thereby necessitated) unless counsel for either the Company or an indemnified party shall determine that a conflict of interest would occur as a result of such joint representation, provided that with respect to any claims in which the Indemnified Parties are named, the Indemnified Parties shall be required to consent to any such settlement (such consent not be unreasonably withheld), (Y) the Company shall not be required to pay any amounts incurred in settlement of any claim unless it has consented to such settlement (such consent not to be unreasonably withheld) and (Z) the indemnified party shall give the Company notice of such claim provided that the failure to give such notice shall not relieve the Company of its obligation to indemnify hereunder except to the extent the Company is actually prejudiced thereby. The indemnified party shall provide the Company with reasonable cooperation in the event of any claim referred to in clause (X) above. SECTION 9 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT; REGISTRATION RIGHTS 9.1 RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock and the Conversion Stock (as defined below) shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act. Mochida and each Holder (as defined below) will cause any proposed purchaser, assignee, transferee, or pledgee of the Preferred Stock or the Conversion Stock held by Mochida or the Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 9. 9.2 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Conversion Stock" means the Common Stock issued or issuable pursuant to conversion of the Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred or upon exercise of that certain warrant granted to Alex. Brown & Sons Incorporated and those certain warrants granted to Frazier Investment Securities, L.P. -18- 25 "Holder" shall mean any holder of Registrable Securities and any person holding Registrable Securities to whom the rights under this Section 9 have been transferred in accordance with Section 9.13 hereof. "Initiating Holders" shall mean any Holders who in the aggregate are Holders of at least 40% of the Registrable Securities. "Preferred Stock" shall mean the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred. "Registrable Securities" means (i) the Conversion Stock; and (ii) any Common Stock of the Company issued or issuable in respect of the Conversion Stock or other securities issued or issuable pursuant to the conversion of the Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to such securities; provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) transferred without concurrent transfer of registration rights pursuant to Section 9.13. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 9.5, 9.6 and 9.7 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of legal counsel for the Company, fees and disbursements for one special legal counsel for all Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company and exclusive of underwriting discounts and commissions). "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 9.3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders. 9.3 RESTRICTIVE LEGEND. Each certificate representing (i) the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred, (ii) the Conversion Stock and (iii) any other securities issued in respect of the Series A Preferred, Series B Preferred, Series C Preferred, Series D -19- 26 Preferred or the Conversion Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 9.4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER COMPLIES WITH THE PROVISIONS OF RULE 144 OR RULE 144A UNDER THE ACT IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. Mochida and each Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or the Conversion Stock in order to implement the restrictions on transfer established in this Section 9. Any legend endorsed on a certificate as described above shall be removed and the Company shall issue a certificate without such legend to the holder of such security if such security is registered under the Securities Act or if a notification under Regulation A of the Securities Act is in effect with respect thereto, or if such security may be sold under Rule 144(k) of the Commission under the Securities Act. 9.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 9.4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, except in the case of (i) a transfer not involving a change in beneficial ownership, (ii) a transfer which complies with the provisions of Rule 144 or Rule 144A under the Securities Act in the opinion of counsel to the Company, or (iii) in transactions involving the distribution without consideration of Restricted Securities by any of the holders to any of its "affiliates", as defined in Rule 405 under the Securities Act, partners, retired -20- 27 partners, or to the estate of any of its partners or retired partners, or to such holder's spouse, siblings, spouse of such siblings, ancestors and descendants and any trust established solely for such holder's benefit or for the benefit of such holder's spouse, siblings, ancestors and/or descendants, at such holder's expense by either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144 or Rule 144A, the appropriate restrictive legend set forth in Section 9.3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and the Company such legend is not required in order to establish compliance with any provision of the Securities Act. 9.5 REQUESTED REGISTRATION. (a) Request for Registration. In case the Company shall receive from either (i) holders of at least 25% of the Series D Preferred ("Series D Holders") outstanding as of the date of the last closing pursuant to the terms of the Agreement or the Common Stock issued upon conversion thereof, or (ii) Initiating Holders, a written request that the Company effect any registration, qualification or compliance where the reasonably anticipated aggregate offering price to the public, net of underwriting discounts and commissions, would exceed $7,500,000, provided, however, that if the registration qualification or compliance relates to the Company's initial public offering then, in such event, the written request must include holders of at least 40% of the outstanding Registrable Securities and shall be for a firmly underwritten public offering where the reasonably anticipated aggregate offering price to the public, net of underwriting discounts and commissions, would exceed $15,000,000, the Company shall: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; Provided, however, that the Company shall not be obligated to file a registration statement to effect any such registration, qualification or compliance pursuant to this Section 9.5: -21- 28 (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) Prior to six months after the effective date of the Company's first registered public offering of its stock; (C) Starting on a date two (2) days prior to and ending on a date six months immediately following the effective date of any registration statement pertaining to the securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) After (i) the Company has effected two such registrations pursuant to this Section 9.5 and (ii) such registrations have been declared or ordered effective; or (E) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 9.5 shall be deferred for a period not to exceed 120 days from the date of receipt of written request from the Initiating Holders and/or Series D Holders, as the case may be. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders and/or Series D Holders, as the case may be. (b) Underwriting. In the event that the Initiating Holders and/or Series D Holders, as the case may be, specify that a registration pursuant to Section 9.5 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 9.5(a)(i). In such event, the right of any Holder to registration pursuant to Section 9.5 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 9.5, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter of nationally recognized standing selected for such underwriting by a majority in interest of the Initiating Holders, and/or Series D Holders, as the case may be, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 9.5, if the managing underwriter advises the Initiating Holders and/or Series D Holders, as the case may be, in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all holders of Registrable Securities who have elected to participate in such offering and the -22- 29 number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders and/or Series D Holders, as the case may be. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 120 days after the effective date of such registration, or such other shorter period of time as the underwriters may permit. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation then imposed by the underwriters), then the Company shall offer to all Holders, if any, whose shares have been excluded from the registration by the terms of this paragraph, the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 9.5(b) up to the limitation then imposed by the Underwriters. In the event that the registration does not become effective due to the withdrawal of Registrable Securities then, unless the withdrawal was due to adverse market conditions or the discovery by the withdrawing Holder or Holders of material information relating to the registration which was not previously known by such Holder or Holders, then, at the Holder's or Holders' option, (i) the Holder or Holders shall not be entitled to another demand registration under Section 9.6 unless such Holder or Holders notwithstanding Section 9.8 hereof, shall pay all Registration Expenses and Selling Expenses incurred in connection therewith, or (ii) the Holder or Holders shall reimburse the Company for all of the Company's out-of-pocket expenses incurred in connection with the aborted registration. 9.6 COMPANY REGISTRATION. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Commission Rule 145 transaction or (iii) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 15 days after receipt of such written notice from the Company, by any Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part -23- 30 of the written notice given pursuant to Section 9.6(a)(i). In such event the right of any Holder to registration pursuant to Section 9.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company; provided however that no Holder participating in such underwriting shall be required to make any representations or warranties except as they relate to such Holder and its intended method of distribution and that the liability of such a Holder shall be limited to an amount equal to the net proceeds from the offering received by such Holder. If the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. Any such exclusion shall apply pro rata to all Holders, but the foregoing shall not be interpreted to require any cutback in the number of shares to be sold by the Company in such an offering. Notwithstanding the above, in the event of an offering other than the Company's initial public offering, the number of Registrable Securities included in such offering shall not be reduced to less than 40% of the shares to be offered in such offering. The Company shall advise all Holders and other holders distributing their securities through such underwriting of any such limitation, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders and such other holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders and such other holders at the time of filing the registration statement. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 120 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation then imposed by the underwriters), then the Company shall offer to all Holders, if any, whose shares have been excluded from the registration by the terms of this paragraph, the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section up to the limitation then imposed by the Underwriters. (c) Right to Terminate Registration. The Company shall have the right to reasonably terminate or withdraw any registration initiated by it under this Section 9.6 prior to the effectiveness of such registration whether or not any Holder elected to include securities in such registration. -24- 31 9.7 REGISTRATION ON FORM S-3. (a) If at anytime or from time to time a Holder or Holders request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request. The substantive provisions of Section 9.5(b) shall be applicable to each registration initiated under this Section 9.7. The Company shall give notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 9.7 and shall provide a reasonable opportunity for other Holders to participate in the registration. (b) Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement pursuant to this Section 9.7: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) starting with a date two (2) days prior to, and ending on a date six months immediately following, the effective date of any registration statement pertaining to the securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) if the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 120 days from the receipt of the request to file such registration by such Holder. 9.8 EXPENSES OF REGISTRATION. (a) All Registration Expenses incurred in connection with all registrations pursuant to Sections 9.5, 9.6 and 9.7 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 9.9 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 9, the Company will keep each Holder advised in -25- 32 writing as to the initiation of each registration, qualification and compliance and as to the completion thereof, including any stop order or other proceeding initiated with respect to such offering. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least 120 days or until the distribution described in the Registration Statement has been completed, whichever first occurs; and (b) Furnish to the Holders participating in such registration such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders may reasonably request. 9.10 INDEMNIFICATION. (a) The Company will indemnify each Holder, each of its officers, directors, trustees and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 9, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any state securities law or any rule or regulation promulgated thereunder applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, trustees and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by any Holder, controlling person or underwriter and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. -26- 33 (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers, trustees and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, trustees, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited in an amount equal to the initial public offering price of the shares sold by such Holder. (c) Each party entitled to indemnification under this Section 9.10 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnifying Party shall have the option to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 9 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No claim may be settled without the consent of the Indemnifying Party (which consent shall not be unreasonably withheld). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. -27- 34 9.11 INFORMATION BY HOLDER. Each Holder holding Registrable Securities included in any registration shall furnish to the Company such information regarding such Registrable Securities held by them and the distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 9. 9.12 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); and (c) So long as a Holder owns any Restricted Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 9.13 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted Mochida and each Holder under Sections 9.5, 9.6 and 9.7 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities by Mochida and each Holder provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, (ii) such assignee or transferee acquires at least 50,000 shares of Registrable Securities, (iii) written notice is promptly given to the Company and (iv) such transferee agrees to be bound by the provisions of this Section 9. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any constituent partner of Mochida or the Holder or to such Holder's spouse, siblings, spouse of such siblings ancestors and descendants and any trust established solely for Mochida's or the Holder's benefit or for the benefit of such Holder's spouse, siblings, ancestors and/or descendants without compliance with item (ii) above, provided written notice thereof is promptly given to the Company. 9.14 LOCKUP AGREEMENT. Each holder of Registrable Securities and each transferee pursuant to Section 9 hereof agrees, in connection with any registration of the Company's securities, upon request of the Company and the underwriters managing any underwritten offering of the Company's securities, -28- 35 not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company and such underwriter for such period of time (not to exceed 180 days) from the effective date of such registration as the Company and the underwriters may specify. The holders of Registrable Securities agree that the Company may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of this Section 9.14. SECTION 10 RIGHT OF FIRST REFUSAL 10.1 RIGHT OF FIRST REFUSAL. The Company hereby grants to each holder of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred (collectively, the "Rights Holders") the right of first refusal to purchase, pro rata, a portion of "New Securities" (as defined in this Section 10.1) that the Company may, from time to time, propose to sell and issue. Each Rights Holder's pro rata share, for purposes of this right of first refusal, is the ratio of (X) the number of shares of Common Stock owned or issuable upon the conversion of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred owned by such Rights Holder immediately after the Closing to (Y) the total number of shares of Common Stock outstanding or issuable upon the conversion of all outstanding Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred immediately after the Closing, provided, however, that in the event that any Rights Holder elects not to purchase its pro rata share in accordance with the above (a "Non-Participating Holder"), then each participating Rights Holder purchasing New Securities may purchase, on a pro rata basis among the participating Rights Holders, such Non-Participating Holder's pro rata share. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any Common Stock and Preferred Stock of the Company whether or not authorized on the date hereof, and rights, options, or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into said Common Stock or Preferred Stock; provided, however, that "New Securities" does not include the following: (i) up to 4,762,652 shares of Common Stock, or options to purchase shares of Common Stock, issued or granted to officers, directors, employees, consultants and Scientific Advisory Board members of the Company pursuant to stock and option plans or arrangements approved by the Board of Directors; (ii) shares of Common Stock issuable upon conversion of any of the Company's Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred; (iii) securities of the Company offered to the public pursuant to a bona fide public offering; -29- 36 (iv) securities of the Company issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such other corporation; (v) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or recapitalization by the Company; (vi) up to 529,234 shares of Common issued or issuable upon the exercise of the warrant dated August 4, 1992 held by Alex. Brown & Sons Incorporated. (vii) the shares of Series D Preferred issued pursuant to the Agreements; or (viii) up to 2,859,087 shares of Preferred Stock or Common Stock issued upon exercise of warrants dated April 13, 1995, June 12, 1995 and September 5, 1995 by Frazier Investment Securities, L.P. (b) In the event that the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Each Rights Holder shall have ten (10) business days from the date such notice is given to agree to purchase its pro rata share of such New Securities or any portion thereof at the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event that the Rights Holders' aggregate pro rata exercised portion is less than the amount of New Securities proposed to be issued in the notice referred to above, the Company shall have sixty (60) days thereafter to sell (or enter into an agreement pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within thirty (30) days from the date of such agreement) with the New Securities respecting which the Rights Holders' rights were not exercised at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within such sixty (60) day period (or sold and issued New Securities in accordance with the foregoing within thirty (30) days from the date of such agreement), the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Rights Holders in the manner provided above. (d) The right of first refusal granted under this Agreement shall expire upon the closing of the Company's initial public offering pursuant to a registration statement filed and declared effective under the Securities Act. (e) This right of first refusal is nonassignable except if (i) assigned to an assignee who acquires at least 500,000 shares of assignor's Preferred Stock having such rights under this Section 10 (or such lesser amount if assignee acquires all of such assignor's shares), (ii) such assignee agrees to be bound by the provisions of this Section 10 and (iii) written notice of such transfer is promptly furnished -30- 37 to the Company; provided, however, the rights pursuant to this Section 10 may be assigned without regard to item (i) above to any constituent or partner of the Rights Holders or to such Rights Holders' spouse, siblings, spouse of siblings, ancestors and descendants and any trust established solely for such Rights Holders' benefit or for the benefit of such Rights Holders' spouse, siblings, ancestors and/or descendants, provided written notice thereof is promptly given to the Company. (f) This right of first refusal shall terminate as to any Rights Holder who no longer owns any shares of Series A Preferred, Series B Preferred, Series C Preferred, or Series D Preferred or Common Stock issuable upon conversion thereof as of the date of the notice referred to above. SECTION 11 MISCELLANEOUS 11.1 GOVERNING LAW. The Agreements shall be governed in all respects by the internal laws of the State of California. 11.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Mochida and the closing of the transactions contemplated hereby. 11.3 SUCCESSORS AND ASSIGNS. Subject to such restrictions contained in this Agreement to the contrary, including certain share minimums set forth in Sections 7, 9 and 10 hereof, Mochida and each assignee of Mochida may otherwise, without the Company's consent, assign its rights under this Agreement, in whole or in part, in connection with a sale or transfer of the Shares issued hereunder and the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties, including the consent given in Section 11.4 hereof. Nothing in the Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of the Agreement, except as expressly provided in the Agreement. 11.4 ENTIRE AGREEMENT; AMENDMENT. The Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Neither the Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that (i) holders of at least 66-2/3% of the Common Stock issued or issuable upon conversion of the Series D Preferred may, with the Company's prior written consent, waive, modify or amend on behalf of all such holders, any provisions hereof other than the provisions of Sections 9, 10 and clause (ii) of this Section 11.4 hereof; and (ii) holders of at least 66-2/3% of the Common Stock issued or issuable upon conversion of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred may, with the Company's prior written consent, waive, modify or amend on behalf of all such holders, the provisions of Sections 9, 10 -31- 38 and clause (ii) of this Section 11.4 hereof. Additionally, notwithstanding the above, in the event Mochida or a holder of Preferred Stock desires to waive any beneficial right contained in this Agreement with respect to Mochida or a holder, then, in such event, Mochida or such holder may waive such beneficial right without regard to the Company's prior written consent referred to in items (i) and (ii) above. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Shares purchased under the Agreement at the time outstanding (including securities into which such Shares are convertible), each future holder of all such shares and the Company; provided, however, that no condition set forth in Section 5 hereof may be waived with respect to Mochida or any holder of Preferred Stock who does not consent thereto. 11.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by international courier delivery to Japan, or otherwise delivered by hand or by messenger, addressed (a) if to Mochida, at Mochida's address, as furnished to the Company by Mochida in writing, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to Mochida. Each such notice or other communications shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or by international courier delivery to Japan, addressed and mailed as aforesaid. Each such notice or other communications shall for all purposes of this Agreement be treated as effective or having been given when sent by international courier delivery service, postage prepaid, at the earlier of its receipt or 72 hours after the same has been deposited with an international courier delivery service, addressed and mailed as aforesaid. 11.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party to this Agreement (including said party's successors and assigns as defined in Section 11.3) upon any breach or default of any other party to this Agreement (including said party's successors and assigns as defined in Section 11.3) under the Agreement, shall impair any such right, power or remedy of such party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under the Agreement, or any waiver on the part of any party of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under the Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 11.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTIONS 25100, -32- 39 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 11.8 EXPENSES AND COUNTERPARTS. The Company and Mochida each shall bear its own expenses incurred on its behalf with respect to the Agreement and the transactions contemplated hereby. This Agreement may be executed in any number of counterparts each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 11.9 SEVERABILITY. In the event that any provision of the Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, the Agreement shall continue in full force and effect without said provision. 11.10 TITLES AND SUBTITLES. The titles and subtitles used in the Agreement are used for convenience only and are not considered in construing or interpreting the Agreement. -33- 40 The foregoing Series D Preferred Stock Purchase Agreement is hereby executed as of the date first above written. "COMPANY" NORIAN CORPORATION, a California corporation By: ------------------------------------------- Dr. Brent R. Constantz, President, Chief Executive Officer and Chief Scientist "MOCHIDA" MOCHIDA PHARMACEUTICAL CO., LTD., a corporation organized under the laws of Japan By: ------------------------------------------- *** PURCHASE AGREEMENT *** EX-10.9 14 MODIFICATION AGREEMENT 1 Exhibit 10.9 NORIAN CORPORATION MODIFICATION AGREEMENT This Modification Agreement (the "Agreement") is entered into as of the 16th day of April, 1996 by and among Norian Corporation, a California corporation (the "Company") and the persons and entities listed on Exhibit A hereto (the "Investors"). RECITALS: A. The Investors hold certain rights to registration of securities and certain rights of first refusal to acquire securities of the Company which are set forth in that certain Series D Preferred Stock Purchase Agreement dated April 13, 1995, as amended on June 5, 1995 and as further amended on September 5, 1995 (the "Series D Agreement") and which were rendered consistent among all Investors pursuant to the terms of that certain Modification Agreement dated September 5, 1995 (the "Prior Modification Agreement"). B. The Company and certain of the Investors desire to amend the Series D Agreement. C. The Company, certain of the Investors and other new investor(s) desire to enter into the Series D Agreement dated as of April 16, 1996, (the "Purchase Agreement"), which is attached hereto as Exhibit B, to which Purchase Agreement a copy of this Agreement is attached as an exhibit, providing for, among other things, the sale and issuance of up to 2,800,000 shares of Series D Preferred Stock, or such other securities described in the Purchase Agreement (the "Securities"), to the Company's Japanese distribution partner (the "New Investor(s)"). D. The Company and the Investors desire to render consistent with the Purchase Agreement all registration rights of securities and rights of first refusal to acquire securities of the Company as set forth in the Series D Agreement and as modified by the Prior Modification Agreement. E. The Company, Brent Constantz and Donald Caddes (the "Other Shareholders") and certain of the Investors desire to amend the Third Amended and Restated Co-Sale Agreement dated September 5, 1995 (the "Co-Sale Agreement"), which is attached hereto as Exhibit C, to provide a further inducement to the New Investor(s) to purchase the Company's Series D Preferred Stock pursuant to the Purchase Agreement. F. The Company, Morgan Investment Corporation or any affiliate thereof ("Morgan") and Frazier Healthcare Investments, L.P. or any affiliate thereof ("Frazier") and certain of the Investors desire to amend the Third Amended and Restated Voting Agreement dated September 5, 1995 (the "Voting Agreement"), which is attached hereto as Exhibit D. 2 NOW, THEREFORE, in consideration of the mutual promises contained herein, the Company, certain Investors and New Investors hereby agree as follows: 1. Termination of Prior Rights. Effective and contingent upon the closing of the sale of the Securities pursuant to the Purchase Agreement, Sections 7.3, 9, 10 and 11.4 of the Series D Agreement, and the rights granted pursuant to the Prior Modification Agreement (relating to registration rights, rights of first refusal and amendment of such rights) shall be null and void (except for prior waivers) and superseded by the rights and obligations agreed to herein and in the Purchase Agreement. 2. Agreement to be Bound by Certain Provisions of Purchase Agreement. As contemplated by the Purchase Agreement, the Company and each Investor hereby agrees to be bound by all of the provisions of Sections 7.3, 9, 10 and 11.4 of the Purchase Agreement (insofar as each such section by its terms applies to each such Investor). Each Investor acknowledges receipt of a copy of the Purchase Agreement. 3. Waiver of Rights of First Refusal. Each Investor hereby agrees that upon the closing of the sale of the Securities pursuant to the Purchase Agreement, the Investor waives (i) all right to any notice of the issuance and sale of the Securities as required by Section 10.1 of the Series D Agreement, and (ii) any right of first refusal it may have to acquire the Securities to be issued pursuant to the Purchase Agreement, including any shares issuable upon conversion or exercise of the Securities. 4. Agreement to Amend the Series D Agreement The Company and certain of the Investors hereby agree to amend the Series D Agreement to terminate certain information rights upon the occurrence of the Company's initial public offering, to extend the lock up period from 120 days to 180 days and to amend Sections 7.3 and 9.14 to read as follows: Section 7.3 is amended in its entirety to read as follows: "TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The covenants set forth in Section 7.1 and 7.2 shall terminate and be of no further force or effect upon the consummation of the Company's sale of Common Stock in a firm commitment underwriting pursuant to a registration statement under the Act which results in aggregate gross proceeds to the Company of not less than $10,000,000 at a per share offering price of $1.50 per share (a "Qualified Public Offering")." Section 9.14 is amended in its entirety to read as follows: "LOCKUP AGREEMENT. Each holder of Registrable Securities and each transferee pursuant to Section 9 hereof agrees, in connection with any registration of the Company's securities, upon request of the Company and the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose -2- 3 of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company and such underwriter for such period of time (not to exceed 180 days) from the effective date of such registration as the Company and the underwriters may specify. The holders of Registrable Securities agree that the Company may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of this Section 9.14." 5. Agreement to Amend the Co-Sale Agreement. The Company, the Other Shareholders and certain of the Investors hereby agree to amend the Co-Sale Agreement to include the New Investor(s) as an "Investor" within the meaning of the defined term "Investor" in the Co-Sale Agreement with all the rights and obligations thereto. 6. Agreement to Amend the Voting Agreement. The Company, Morgan, Frazier, the Wyss Trust and certain of the Investors hereby agree to amend the Voting Agreement to include the New Investor(s) as an "Investor" within the meaning of the defined term "Investor" in the Voting Agreement with all the rights and obligations thereto. 7. Amendment. Any amendment or waiver of Sections 1, 2, 3 and 4 hereof may only be effected by amendment or waiver of the appropriate provision(s) of the Purchase Agreement, in accordance with the provisions of Section 11.4 thereof. Any amendment or waiver of Section 5 hereof may only be effected by amendment or waiver of the appropriate provision(s) of the Co-Sale Agreement, in accordance with the provisions of Section 1.8 thereof. Any amendment or waiver of Section 6 hereof may only be effected by amendment or waiver of the appropriate provision(s) of the Voting Agreement, in accordance with the provisions of Section 5(e) thereof. 8. Miscellaneous. (a) Except as expressly modified herein or by the Prior Modification Agreement, the Series D Agreement, the Co-Sale Agreement, the Voting Agreement and the Prior Modification Agreement shall remain in full force and effect. (b) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (c) This Agreement shall be governed by the laws of the State of California. -3- 4 IN WITNESS WHEREOF, the undersigned or each of their respective duly authorized officers or representatives have set their hands hereunto effective upon the date first above written.
THE "COMPANY": THE "INVESTORS": NORIAN CORPORATION ------------------------------------------- (Print Name) By: ----------------------------------- ------------------------------------------- Brent Constantz (Signature) President ------------------------------------------- (Print name of signatory, if applicable) Signing for the Purposes of Amending the Signing for the Purposes of Amending the Third Amended and Restated Co-Sale Third Amended and Restated Voting Agreement Agreement dated September 5, 1995: dated September 5, 1995: THE "OTHER SHAREHOLDERS" "MORGAN" By: - ---------------------------------------- ---------------------------------------- Brent Constantz Title: ------------------------------------- - ---------------------------------------- Donald Caddes "FRAZIER" By: ---------------------------------------- Title: ------------------------------------- "WYSS TRUST" By: ---------------------------------------- Title: -------------------------------------
**MODIFICATION AGREEMENT** 5 EXHIBIT A TO MODIFICATION AGREEMENT
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- ABS Venture III Limited Partnership Series D Preferred David L. Anderson Series A Preferred Series B Preferred Series D Preferred Anvest, L.P. Series A Preferred Series B Preferred Series D Preferred G. Leonard Baker, Jr. Series A Preferred Series B Preferred Series D Preferred Banner Partners, Minaret Series D Preferred BEA Associates Batterybox & Co. fbo Temple Inland Master Trust Comply & Co. fbo Tab Products Company Pension Plan Series D Preferred Polly & Co. fbo Mary Van Schuyler Raiser Series D Preferred Series D Preferred Carl Behnke Series D Preferred Charles H. Blanchard Series D Preferred Steven E. Bochner Series B Preferred Brown Technology Associates Limited Series D Preferred Partnership Richard A. Carone Irrevocable Trust Series D Preferred Gerald L. Cohn Revocable Trust Series D Preferred Martin D. Cohn and George L. Cohn Trustees for George L. Cohn Trust
-i- 6
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Tench Coxe Series A Preferred Series B Preferred Series D Preferred Wells Fargo Bank, N.A., Trustee for the Series B Preferred SHV M/P/T Keogh FBO Tench Coxe Dean Wittier Reynolds Custodian for Series D Preferred Herbert L. Damner Jr. IRA Rollover DTD 10/16/89 William Davidowitz Series D Preferred Delphi BioInvestments, L.P. Series B Preferred Series D Preferred Delphi BioInvestments II, L.P. Series D Preferred Delphi BioVentures, L.P. Series B Preferred Series D Preferred Delphi BioVentures II, L.P. Series D Preferred Frederick DeMatteis Series D Preferred Robert Dietrich Series D Preferred William H. Draper, Revocable Trust Series D Preferred Peter W. Eising Series D Preferred Donald J. Elmer Series D Preferred John C. Fiddes & Karen D. Talmadge, Series D Preferred Trustees of the Fiddes-Talmadge Family Trust U/D/T dated 8/8/88 Frazier Healthcare Investments, L.P. Series D Preferred Donald C. Freeman, Jr. Series A Preferred James C. Gaither Series A Preferred Series B Preferred Series D Preferred
-ii- 7
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Genstar Investment Corporation Series A Preferred Series B Preferred Series D Preferred Fred M. Gibbons, A Separate Trust Series D Preferred Guarantee & Trust Co. TTEE FBO John F. Series D Preferred Banker R-IRA Guarantee & Trust TTEE FBO Donovan S. Series D Preferred Thayer IRA DTD 11/4/87 Anthony Hedley Series D Preferred Carl Hoag Series D Preferred Lamont W. Hornbeck, III, M.D. Series A Preferred Howmedica Inc. Series C Preferred George P. Hutchinson Series D Preferred P. Anthony Jacobs Series D Preferred JIBS Equities Series D Preferred Peter A. Johnson Series D Preferred J.P. Morgan Investment Corporation Series D Preferred Robert Eliot King, Trustee under the Series A Preferred Trust of the R.E.K. Profit Sharing Plan Series B Preferred Kirlan I, L.P. Series D Preferred Gitta M. Kurlat Series D Preferred Saul Kurlat Series D Preferred Richard F. Kyle Series D Preferred Michael G. Lyons & Patricia J. Wiesler as Series D Preferred Trustees or Their Successors of M.G. Lyons and P.J. Wiesler Trust David MacCallum Series D Preferred
-iii- 8
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Mallard Investments Limited Partnership Series D Preferred David Maryatt Series D Preferred James & Susan McClatchy, TTEES of the Series D Preferred McClatchy 1992 Revocable Trust James and Susan McClatchy, TTEES of the McClatchy 1992 Series D Preferred Revocable Trust Don Stevenson McGuire & Clay Felchlin Series D Preferred McGuire, Common Property John C. McGuire & Elinor McGuire TTEES Series D Preferred FBO The McGuire Living Trust Scott McNealy Series A Preferred Medical Innovation Fund, a Limited Series D Preferred Partnership Medical Innovation Partners Series B Preferred MicroCap Partners, Limited Partners Series D Preferred Ali J. Naini Series D Preferred Northwestern Mutual Life Insurance Company Series D Preferred Norwest Equity Partners, IV a Minnesota Series B Preferred Limited Partnership Series D Preferred Orien II, L.P. Series B Preferred Series D Preferred Palo Alto Investors, Inc. Series D Preferred Palo Alto Investors, Limited Partners Series D Preferred Penn Footwear Retirement Trust Series D Preferred Ronald L. Perkins Series A Preferred Series B Preferred Series D Preferred
-iv- 9
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Jeffrey Pfeffer Series A Preferred The Phoenix Partners II Limited Series D Preferred Partnership The Phoenix Partners III Limited Partnership Series D Preferred Pirate Ship & Co. Series D Preferred Patricia M. Pope TTEE FBO George A. Series D Preferred Pope, Jr. Marital Trust Joe A. Provines and Candace S. Provines, Series D Preferred as Community Property Adrienne M. Provo Series D Preferred G. Keith Provo Series D Preferred R.D. Merrill Associates II Series D Preferred Ralph H. Rinne, M.D. Series D Preferred Rousso Family Trust Series D Preferred Bertram Rowland Series A Preferred Saunders Holdings, L.P. Series A Preferred Series B Preferred Series D Preferred SBC Capital Markets Inc. Series D Preferred Scudder Development Fund Series D Preferred Seafield Capital Corporation Series D Preferred Costa G. Sevastopoulos Series A Preferred James R. Seward Series D Preferred Charles Shenk Series D Preferred Martin R. Smith Series D Preferred Larry W. Sonsini Series A Preferred Series B Preferred
-v- 10
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Rees A. Stevenson TTEE FBO Don McGuire Series D Preferred DM-2 Rees A. Stevenson TTEE FBO Jean C. Series D Preferred McGuire (JM 2) Robert J. Sullivan TTEE FBO J. Sullivan Series D Preferred Revocable Trust Sutter Hill Ventures, a California Series A Preferred Limited Partnership Series B Preferred Series D Preferred TIFF Investment Program (TIP), US Equity Fund Series D Preferred Technology Venture Investors - 3 Series A Preferred Series B Preferred Technology Venture Investors IV Series B Preferred Technology Venture Investors IV, as Series D Preferred nominee for Technology Venture Investors 4, L.P., TVI Partners 4, L.P. and TVI Affiliates 4, L.P. David Teece, Ph.D. Series A Preferred TOW Partners, a California Limited Series A Preferred Partnership Series B Preferred Series D Preferred TVI Management - 3 Series A Preferred Series B Preferred Ventures West III - U.S. Limited Series B Preferred Partnership Series D Preferred Vulcan Ventures, Inc. Series D Preferred W&K Partners Series D Preferred
-vi- 11
SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Jonathan Wilcox & Cynthia Wu Wilcox, Series D Preferred TTEES of the Jonathan J. Wilcox and Cynthia Wu Wilcox Revocable Trust DTD 5/5/89 WS Investment Company 88 Series A Preferred WS Investment Company 89B Series B Preferred WS Investments Series D Preferred Guarantee & Trust Co., Trustee FBO Series D Preferred Donald L. Wyler IRA The Amy Wyss 1995 Irrevocable Trust Series D Preferred Paul M. Wythes & Marsha R. Wythes, Series A Preferred Trustees of the Wythes Living Trust Series B Preferred Series D Preferred William H. Younger, Jr. Series A Preferred Series B Preferred Series D Preferred Zesiger Capital Group LLC, Albert Zesiger as Attorney-in-fact for: Hare & Co. fbo American Medical International Pension Series D Preferred Plan Kane & Co. fbo Arthur D. Little Employee Pension Plan Series D Preferred City of Milford CT Pension and Retirement Plan Series D Preferred Olen & Co. fbo Norwalk Employee Pension Fund Series D Preferred Albert L. Zesiger Series D Preferred Atwell & Co. fbo Wells Family LLC Series D Preferred Daly & Co. fbo Alza Corporation Retirement Plan Series D Preferred Hare & Co. fbo Brearley School General Investment Series D Preferred Fund Cudd & Co. fbo Chapin School Endowment Fund Series D Preferred Daly & Co. fbo Dean Witter Foundation Series D Preferred Kinko & Co. fbo Demvest Equities, L.P. Series D Preferred Batrus & Co. fbo The Jenifer Altman Foundation Series D Preferred Meehan Investment Partnership I Series D Preferred
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SHAREHOLDER CLASS/SERIES HELD - ----------------------------------------------------------- --------------------- Morgan Trust Company of the Bahamas Ltd. Series D Preferred First American Trust Co. as Trustee for NFIB Employee Series D Preferred Pension Trust Sigler & Co. fbo Raiser Marital Trust Series D Preferred Winsal & Co. fbo Roanoke College Series D Preferred Robert J. Suslow Series D Preferred Calmont & Co. fbo Van Loben Sels Foundation Series D Preferred Barrie Ramsay Zesiger Series D Preferred Cudd & Co. fbo Helen Hunt Series D Preferred Heil & Co. fbo The Ferris F. Hamilton Family Trust Series D Preferred Leonard E. Kingsley Series D Preferred Dr. William H. Lippy Series D Preferred Heil & Co. fbo Planned Parenthood of New York City Series D Preferred Strafe & Co. fbo Warren Otologic Group Profit Sharing Series D Preferred Trust Frederick L. Jacobson Series D Preferred Harold and Grace Willens, JTWROS Series D Preferred Psychology Associates Series D Preferred
-viii- 13 EXHIBIT B PURCHASER(S) Mochida Pharmaceutical Co., Ltd. EX-11.1 15 CALCULATION OF PRO FORMA NET LOSS PER SHARE 1 EXHIBIT 11.1 COMPUTATION OF PRO FORMA NET LOSS PER SHARE
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------ Net loss.............................................. $(5,858,000) $ (2,284,000) Pro forma weighted average shares used to compute pro forma net loss per share: Convertible preferred stock...................... 6,580,582 7,162,689 Common stock outstanding......................... 608,496 636,696 Convertible preferred stock from Mochida Transaction.................................... -- 3,846 Number of common shares, preferred shares and warrants issued and stock options granted in accordance with Staff Accounting Bulletin 83........................ 1,008,027 1,008,027 ----------- ----------- Total....................................... 8,197,105 8,811,258 =========== =========== Pro forma net loss per share................ $ (0.71) $ (0.26)
The calculation includes the shares of convertible preferred stock (Series A, Series B, Series C and Series D) as if they had converted to common stock on their respective original dates of issuance and the weighted average shares outstanding resulting from the issuance of 350,000 shares of Series D preferred stock in conjunction with the Mochida Transaction assumed to have occurred on March 31, 1996, because such shares automatically convert to common stock upon closing of the initial public offering of the Company's common stock. EX-23.1 16 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the Prospectus. /s/ KPMG Peat Marwick LLP ------------------------------------ KPMG Peat Marwick LLP San Francisco, California May 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----