-----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, OeGxwUG9czTZ7Ph3VDqyZCLPsZmpeD/CzQ+WK3trK3JW2G8LiMNfXkM1m1QxMxSO LyZAPzNKlXzW7xgUKXnnVg== 0000891618-96-000921.txt : 19960619 0000891618-96-000921.hdr.sgml : 19960619 ACCESSION NUMBER: 0000891618-96-000921 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960618 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORIAN CORP CENTRAL INDEX KEY: 0000822117 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03399 FILM NUMBER: 96582514 BUSINESS ADDRESS: STREET 1: 10260 BUBB ROAD CITY: CUPERTINO STATE: CA ZIP: 95014-4166 BUSINESS PHONE: 4082526800 S-1/A 1 AMENDMENT #1 TO THE S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996 REGISTRATION NO. 333-3399 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 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. / / ------------------------ 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 June 18, 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. THE COMPANY 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. However, there can be no assurance that the Company will receive such regulatory approvals or that any such approvals will not contain substantial restrictions limiting the Company's intended uses and applications. 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 3 6 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. RISK FACTORS An investment in the shares of Common Stock offered hereby involves a significant degree of risk, including the risk that the Company may not receive required regulatory approvals for its product from governmental entities, the risk that the Company is dependent upon its sole proprietary product, Norian SRS, the risk that the Company's product may not achieve market acceptance, the risk that third-party reimbursement for the Company's product may be unavailable or limited and the risks associated with the Company's limited sales, marketing and manufacturing experience. See "Risk Factors". The Company will not be able to market Norian SRS in the United States unless and until it obtains clearance or approval from the FDA, and there can be no assurance that the Company will obtain FDA clearance or approval for such product on a timely basis, if at all. 4 7 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." 5 8 RISK FACTORS 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 these risk factors. 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 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 6 9 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 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. 7 10 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 that has incurred net losses since its inception and anticipates that its operating losses will continue for at least the next two years. 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 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 existing patents will provide protection for the Company's products. 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. 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. See "Business -- Patents and Proprietary Information." Risk of Intellectual Property Litigation. 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 8 11 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. See "Business -- Patents and Proprietary Information." Risk of Patent Infringement Claims. 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. 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, 9 12 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 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. The Company 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 10 13 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, 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. 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 11 14 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." Lack of Operating Infrastructure in Event of Growth. Any substantial growth in the Company's business 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." 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. There can be no assurance that the Company will not require additional financing before the end of 1997. 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. 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 12 15 Company and the Underwriters, may not be indicative of prices that will prevail in the trading market. See "Underwriting." 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." Broad Discretion of Management to Allocate Offering Proceeds. The Company expects that approximately $18.7 million of the proceeds of this offering will be used to fund research and development activities, clinical trials of Norian SRS, and the expansion of marketing, sales and manufacturing activities. The balance of the proceeds, approximately $16.7 million or 47% of the overall proceeds, will be used for general corporate purposes. The Company's management will have broad discretion to allocate this portion of the proceeds of this offering and to determine the timing of expenditures. See "Use of Proceeds." Adverse Effect on Market Price 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. See "Shares Eligible for Future Sale." 13 16 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 of $8.22 per share. See "Dilution." Absence of Dividends. The Company has not paid any dividends on its Common Stock since its inception and does not contemplate or anticipate paying any dividends upon its Common Stock in the forseeable future. See "Dividend Policy." 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. 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. 19 22 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. 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. 20 23 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 which, if approved, would allow the Company 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 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. 22 25 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 of the fragments into their proper position, 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. Approximately 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 23 26 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 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. 24 27 - 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. 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 Fractures in the intertrochanteric region, which is an area located in the upper femur, are some 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. 25 28 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 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. 26 29 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 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 27 30 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 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. 28 31 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 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 29 32 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, 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 30 33 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, 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 31 34 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 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. 32 35 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. 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 FDA and foreign government authorities is unpredictable and 33 36 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 engaged in processes that are intended to permit it to affix the CE mark to its products under the rules of the European Union applicable to medical devices. This process will entail certification by a notified body recognized under EU law that the Company's practices and procedures are in compliance with European standards that implement the ISO 9000 series for medical devices, as well as assessments to determine that the Company's products conform to essential requirements under EU rules for medical devices, including requirements for safety, performance, labeling and other matters. 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 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 34 37 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 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. 35 38 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. 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. ("Oxime- 36 39 trix"), 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 ("DePuy"). From 1987 to 1994, Dr. Little held a variety of marketing and general managerial positions with DePuy. 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 1991 to 1993, Ms. Smith was Manager of Clinical Research at Triton Diagnostics, Inc., an in vitro cancer diagnostic company, and, from 1989 to 1991, 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 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 37 40 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. 38 41 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 $9.60 per share. The following table sets forth information for the Named Executive Officers regarding the value of unexercised options held as of December 31, 1995. No options were exercised by the Named Executive Officers during the fiscal year ended December 31, 1995. 39 42 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1995(#) DECEMBER 31, 1995(1)($) (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 served as Norian's President and Chief Executive Officer from November 1988 to May 1989. See "Management" and "Certain Transactions." 40 43 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 approved by the Company's shareholders on May 24, 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 approved by the shareholders on May 24, 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 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 41 44 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 approved by the shareholders on May 24, 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 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 42 45 401(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. 43 46 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, 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." 44 47 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 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. 45 48 (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. 46 49 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. Although the following summaries contain all of the material elements of the Common Stock and Preferred Stock, such summaries 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 registration 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. 47 50 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, 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. 48 51 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. 49 52 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 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. 50 53 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. 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, and 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. 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 contain all material elements of such contract or document but 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. 51 54 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 55 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. KPMG Peat Marwick LLP 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 56 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 57 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 58 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 59 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 60 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. 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 F-7 61 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.) 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. 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 F-8 62 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.) 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 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.) 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 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.) (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. 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 F-11 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.) 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. 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. F-12 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.) (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 ===========
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 F-13 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.) 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 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. F-14 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.) 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.......................................................... $ -- $ -- ====== ======
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. F-15 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.) (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. 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. F-16 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.) - 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 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 F-17 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 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 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-18 72 - ------------------------------------------------------ - ------------------------------------------------------ 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.......................... 6 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............................ 36 Certain Transactions.................. 44 Principal Shareholders................ 45 Description of Capital Stock.......... 47 Shares Eligible for Future Sale....... 48 Underwriting.......................... 50 Legal Matters......................... 51 Experts............................... 51 Additional Information................ 51 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 - ------------------------------------------------------ - ------------------------------------------------------ 73 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. 74 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 75 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. Pursuant to Rule 701 of the Securities Act, 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. Pursuant to Regulation D of the Securities Act, 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 accredited investors for an aggregate purchase price of $19,765,287.99. 3. Pursuant to Section 4(2) of the Securities Act, 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(1) Form of Underwriting Agreement. 3.1(1) Sixth Amended and Restated Articles of Incorporation of the Registrant, as currently in effect. 3.2 Form of Seventh Amended and Restated Articles of Incorporation of the Registrant. 3.3 Form of Eighth 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(1) 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(1) Specimen Common Stock Certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P. C. 10.1(1) Form of Indemnification Agreement between the Company and each of its directors and officers. 10.2(1) 1988 Stock Plan and form of Stock Option Agreement thereunder. 10.3(1) 1996 Stock Plan and form of Stock Option Agreement thereunder. 10.4(1) 1996 Director Option Plan and form of Stock Option Agreement thereunder. 10.5(1) 1996 Employee Stock Purchase Plan and forms of agreements thereunder.
II-2 76 10.6(1) Series C Preferred Stock Purchase Agreement dated August 9, 1990, between the Registrant and Pfizer Hospital Products Group, Ltd. 10.7(1) Exclusive Marketing Agreement dated April 16, 1996, between the Registrant and Mochida Pharmaceutical Co., Ltd. 10.8(1) Series D Preferred Stock Purchase Agreement dated April 16, 1996, between the Registrant and certain holders of the Registrant's securities. 10.9(1) 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(1) Calculation of pro forma net loss per share. 21.1(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(1) Power of Attorney.
- --------------- * Confidential treatment requested for certain portions. (1) Exhibit previously filed. (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 77 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CUPERTINO, STATE OF CALIFORNIA, ON THE 17TH DAY OF JUNE, 1996. NORIAN CORPORATION By: /s/ BRENT R. CONSTANTZ ------------------------------------ Brent R. Constantz (President, Chief Executive Officer and Chief Scientist) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE - --------------------------------------------- --------------------------------------- /s/ BRENT R. President, Chief Executive Officer and CONSTANTZ Chief Scientist - --------------------------------------------- (Brent R. Constantz) /s/ MARC E. FAERBER* Vice President, Finance and Chief - --------------------------------------------- Financial Officer (Principal (Marc E. Faerber) Financial and Accounting Officer) /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 WYSS* Director - --------------------------------------------- (Hansjorg Wyss)
*By: /s/ BRENT R. CONSTANTZ ------------------------------- Brent R. Constantz Attorney-in-Fact II-4 78 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 June 18, 1996 II-5 79 EXHIBIT INDEX 1.1(1) Form of Underwriting Agreement. 3.1(1) Sixth Amended and Restated Articles of Incorporation of the Registrant, as currently in effect. 3.2 Form of Seventh Amended and Restated Articles of Incorporation of the Registrant to be filed immediately prior to the effectiveness of this Registration Statement. 3.3 Form of Eighth 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(1) 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(1) Specimen Common Stock Certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P. C. 10.1(1) Form of Indemnification Agreement between the Company and each of its directors and officers. 10.2(1) 1988 Stock Plan and form of Stock Option Agreement thereunder. 10.3(1) 1996 Stock Plan and form of Stock Option Agreement thereunder. 10.4(1) 1996 Director Option Plan and form of Stock Option Agreement thereunder. 10.5(1) 1996 Employee Stock Purchase Plan and forms of agreements thereunder. 10.6(1) Series C Preferred Stock Purchase Agreement dated August 9, 1990, between the Registrant and Pfizer Hospital Products Group, Ltd. 10.7(1) Exclusive Marketing Agreement dated April 16, 1996, between the Registrant and Mochida Pharmaceutical Co., Ltd. 10.8(1) Series D Preferred Stock Purchase Agreement dated April 16, 1996, between the Registrant and certain holders of the Registrant's securities. 10.9(1) 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(1) Calculation of pro forma net loss per share. 21.1(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(1) Power of Attorney.
- --------------- * Confidential treatment requested for certain portions. (1) Exhibit previously filed. EX-3.2 2 7TH AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 SEVENTH 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 20,100,000. The number of shares of Common Stock which this corporation is authorized to issue is 10,750,000. The number of shares of Preferred Stock which this corporation is authorized to issue is 9,350,000. Upon the amendment of this Article III, every eight (8) outstanding shares of Common Stock shall be combined into one share of Common Stock and every eight (8) outstanding shares of Preferred Stock shall be combined into one share of Preferred Stock, respectively. 625,000 shares of Preferred Stock shall be designated Series A Preferred Stock, 1,254,688 shares of Preferred Stock shall be designated Series B Preferred Stock, 343,750 shares of Preferred Stock shall be designated Series C Preferred Stock, and 7,100,000 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: 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. 2 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 $.24 per annum for each share of Series A Preferred held by them, $.32 per annum for each share of Series B held by them, $.60 per annum for each share of Series C held by them, and $.56 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 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 2 3 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 $5.60 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 insufficient 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) $2.40 per share for each share of Series A Preferred then held by them, (ii) $3.20 per share for each share of Series B Preferred then held by them and (iii) $6.00 for each share of Series C 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 $12.00 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) 3 4 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. 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 $2.40 (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 $2.40 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 $3.20 (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 $3.20 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 $6.00 (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 $6.00 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 $5.60 (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 $5.60 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 under written 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 $10.00 (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 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. 4 5 (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. (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 595,332 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 595,332 shares; 5 6 (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 66,154 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 3,571,429 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 350,000 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 357,386 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 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 subse quent 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 6 7 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 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 applicable 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 7 8 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 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 proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. 8 9 (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 adjustment 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 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 9 10 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; 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 10 11 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 62,500 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; (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. 11 12 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 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 687,357 shares of Common Stock, 612,865 shares of Series A Preferred, 1,254,688 shares of Series B Preferred, 333,333 shares of Series C Preferred and 6,480,553 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, Series C Preferred and Series D Preferred Stock, voting as separate classes, and not less than 66 2/3% of the outstanding Preferred Stock voting as a single class. 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: June , 1996. -------------------------------------- Brent R. Constantz, President -------------------------------------- Steven E. Bochner, Assistant Secretary 12 EX-3.3 3 8TH AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.3 EIGHTH 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 shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 75,000,000, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 5,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Director originally fixing the number of shares constituting any series of Preferred Stock, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series, to determine the designation of any series, and to fix the number of shares of any series. 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. 2 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 687,357 shares of Common Stock, 612,865 shares of Series A Preferred, 1,254,688 shares of Series B Preferred, 333,333 shares of Series C Preferred and 6,480,553 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, Series C Preferred and Series D Preferred Stock, voting as separate classes, and not less than 66 2/3% of the outstanding Preferred Stock voting as a single class. 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: June , 1996. -------------------------------------- Brent R. Constantz, President -------------------------------------- Steven E. Bochner, Assistant Secretary 2 EX-3.5 4 AMENDED AND RESTATED BYLAWS OF NORIAN CORPORATION 1 EXHIBIT 3.5 AMENDED AND RESTATED BYLAWS OF NORIAN CORPORATION 2 AMENDED AND RESTATED 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 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER BUSINESS........... 3 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.............................. 4 2.7 QUORUM.................................................................... 4 2.8 ADJOURNED MEETING; NOTICE................................................. 4 2.9 VOTING.................................................................... 5 2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT......................... 6 2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING................... 6 2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS............... 7 2.13 PROXIES................................................................... 8 2.14 INSPECTORS OF ELECTION.................................................... 8 ARTICLE III DIRECTORS................................................................. 9 3.1 POWERS.................................................................... 9 3.2 NUMBER OF DIRECTORS....................................................... 9 3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTOR..................... 9 3.4 RESIGNATION AND VACANCIES................................................. 10 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................................. 11 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 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...................................................... 14 5.3 SUBORDINATE OFFICERS...................................................... 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS....................................... 15 5.5 VACANCIES IN OFFICES...................................................... 15
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PAGE ---- 5.6 CHAIRMAN OF THE BOARD..................................................... 15 5.7 PRESIDENT................................................................. 15 5.8 VICE PRESIDENTS........................................................... 16 5.9 SECRETARY................................................................. 16 5.10 CHIEF FINANCIAL OFFICER................................................... 16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........ 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................................. 17 6.2 INDEMNIFICATION OF OTHERS................................................. 17 6.3 PAYMENT OF EXPENSES IN ADVANCE............................................ 17 6.4 INDEMNITY NOT EXCLUSIVE................................................... 18 6.5 INSURANCE INDEMNIFICATION................................................. 18 6.6 CONFLICTS................................................................. 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................................. 21 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED......................... 22 8.4 CERTIFICATES FOR SHARES................................................... 22 8.5 LOST CERTIFICATES......................................................... 22 8.6 CONSTRUCTION; DEFINITIONS................................................. 22 ARTICLE IX AMENDMENTS................................................................. 23 9.1 AMENDMENT BY SHAREHOLDERS................................................. 23 9.2 AMENDMENT BY DIRECTORS.................................................... 23
ii 4 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. 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 5 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. 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 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER BUSINESS To be properly brought before an annual meeting or special meeting, nominations for the election of director or other business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a shareholder. For such nominations or other business to be considered properly brought before the meeting by a shareholder, such shareholder must have given timely notice and in proper form of his intent to bring such business before such meeting. To be timely, such shareholder's notice must be delivered to or mailed and received by the secretary of the corporation not less than ninety (90) days prior to the meeting; provided, however, that in the event that less than one hundred (100) days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a shareholder's notice to the secretary shall set forth: (a) the name and address of the shareholder who intends to make the nominations or propose the business and, as the case may be, the name and address of the person or persons to be nominated or the nature of the business to be proposed; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or to introduce the business specified in the notice; (c) if applicable, a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; 2 6 (d) such other information regarding each nominee or each matter of business to be proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (e) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting any refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 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 the notice, shall be prima facie evidence of the giving of such notice. 2.7 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. 2.8 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 3 7 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 2.6 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.9 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 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. Effective upon such time as (i) shares of the capital stock of the corporation are designated as qualified for trading as National Market System securities on the National Association of Securities Dealers, Inc. Automated Quotation System (or any successor national system) ("Qualified Public Offering") and (ii) the corporation has at least 800 holders of shares of its capital stock, shareholders shall no longer be entitled to cumulate votes. 2.10 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 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 4 8 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. 2.11 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 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. 2.12 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 5 9 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, 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. 2.13 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. 2.14 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 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 6 10 (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 six (6) nor more than eleven (11). 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 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 QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, at each annual meeting of shareholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a shareholders' meeting called and held in accordance with the Code. Effective upon such time as (i) shares of the capital stock of the corporation are designated as qualified for trading as National Market System securities on the National Association of Securities Dealers, Inc. Automated Quotation System (or any successor national system) ("Qualified Public Offering") and (ii) the corporation has at least 800 holders of shares of its capital stock, the directors of the corporation shall be divided into two classes as nearly equal in size as is practicable, hereby designated Class I and Class II. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of shareholders and the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of shareholders. For the purposes hereof, the initial Class I and Class II directors shall be those directors so designated and elected at the first annual meeting of shareholders scheduled to be held after the consummation of such a Qualified Public Offering. At each annual meeting after the annual meeting of shareholders scheduled to be held thereafter, directors to replace those of a Class office whose terms expire at such annual meeting shall be elected to hold office until the second succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make both classes as nearly equal in number as is practicable. 7 11 Directors need not be shareholders unless so required by the articles of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Election of directors need not be by written ballot. 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 resolution 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 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 8 12 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 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. 9 13 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, (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. 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 - --------------- * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. 10 14 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 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 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 11 15 meetings of the shareholders and, in the absence or nonexistence 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 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. 12 16 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, 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. 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. 13 17 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. 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 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. 14 18 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. 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 corporation 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. 15 19 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 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 16 20 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 shareholder. 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 authorized 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. 17 EX-5.1 5 OPINION OF WILSON SONINI GOODRICH & ROSATI 1 EXHIBIT 5.1 June 18, 1996 Norian Corporation 10260 Bubb Road Cupertino, CA 95014-4166 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by you with the Securities and Exchange Commission on May 9, 1996 (Registration No. 333-3399), as amended (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of up to 3,450,000 shares of your Common Stock, no par value (the "Shares"). The Shares include an over-allotment option granted to the underwriters of the offering to purchase 450,000 shares. We understand that the Shares are to be sold to the underwriters of the offering for resale to the public as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, including the proceedings being taken in order to permit such transaction to be carried out in accordance with applicable state securities laws, the Shares, when issued and sold in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of Norian Corporation, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.10 6 LEASE DATED JULY 22, 1994 AS AMENDED OCT. 3,1994 1 EXHIBIT 10.10 Renault & Handley INDUSTRIAL & COMMERCIAL REAL ESTATE PARTIES This Lease, executed in duplicate at Palo Alto, California, this eighteenth day of May, 1994, by and between Renault & Handley Employees Investment Co. (for Bubb Road Joint Venture) and Norian Corporation hereinafter called respectively Lessor and Lessee, without regard to number or gender, PREMISES 1. WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires from Lessor, those certain premises, hereinafter in this lease designated as "the Premises", with the appurtenances, situated in the City of Cupertino, County of Santa Clara, State of California, and more particularly described as follows, to-wit: Commonly known as 10260 Bubb Road. Said premises consist of an approximate 20,100 square foot concrete building plus all off street parking, walks and landscaping contained on the parcel bearing the above address. A copy of the floor plan shall be attached hereto as Exhibit "A" upon approval of the plan for Tenant Improvements (defined in the First Addendum to Lease). USE 2. The Premises shall be used and occupied by Lessee for General offices, Research and Development, Warehousing, Light Manufacturing, sales and marketing operations and related legal uses. and for no other purpose without the prior written consent of Lessor. TERM 3. The term shall be for five (5) years, commencing on the Commencement Date (defined in First Addendum to Lease) and ending upon the expiration of the fifth (5th) year following the Commencement Date. RENTAL 4. Rent shall be payable to the Lessor without deduction or offset at such place or places as may be designated from time to time in writing by the Lessor as follows: Eighteen Thousand and Ninety Dollars ($18,090.00) on execution of this Lease, constituting rental for the first month of the Lease term. $18,090 will be due on the first day of each succeeding month, to and including the last month of the Lease term. The monthly rental shall be increased over the lease term as follows: Commencing with the rental 2 due on January 1, 1996 (or on the first day of such other month as the Lease shall actually commence), the monthly rental shall increase in direct proportion to the increase in the Consumer Price Index for All Urban Consumers, All Items (CPI-U) (1982-1984=100) for San Francisco-Oakland-San Jose, now being published by the United States Department of Labor, Bureau of Labor Statistics (the "Index") for the month available which most immediately precedes the month on which the new rent is to commence when compared to the Index for the month available most immediately preceding the month of the actual commencement date of the Lease, providing that the monthly rental increase shall not exceed six percent (6%) per annum. This same formula is to be used for adjusting the rent for the years 1997, 1998, and 1999, respectively. SECURITY 5. Lessee has deposited with Lessor $18,090.00 as security DEPOSIT for the full and faithful performance of each and every term, provision, covenant, and condition of this Lease. In the event Lessee defaults in respect of any of the terms, provisions, covenants or conditions of this Lease, including, but not limited to the payment of rent, Lessor may use, apply or retain the whole or any part of such security for the payment of any rent in default or for any other sum which Lessor may spend or be required to spend by reason of Lessee's default. The security or any balance thereof shall be returned to Lessee or, at the option of Lessor, to the last assignee of Lessee's interest in this Lease at the expiration of the term hereof in accordance with California Civil Code Section 1950.7 or any successor statute thereto. Lessee shall not be entitled to any interest on said security deposit. POSSESSION 6. If Lessor, for reasons beyond Lessor's reasonable control, cannot deliver possession of the Premises to Lessee on October 1, 1994, as herein before specified, this Lease shall not be void or voidable, nor shall Lessor, or Lessor's agents, be liable to Lessee for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease and all other dates affected thereby shall be revised to conform to the date of Lessor's delivery of possession. The above is, however, subject to the provision that the period of delay of delivery of the Premises shall not be delayed beyond December 1, 1994, or Lessee, at his or its option, may declare this Lease null and void. ACCEPTANCE 7. By entry hereunder, the Lessee accepts the Premises as OF PREMISES being in good and satisfactory condition, unless within fifteen AND CONSENT (15) days after such entry Lessee shall give Lessor written TO notice specifying in reasonable detail the respects in which the SURRENDER Premises were not in satisfactory condition. The Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in the same good condition as at Lessee's entry into the Premises excepting for such wear and tear as would be normal for the period of the Lessee's occupancy. The Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all Lessee's personal property and trade fixtures from the premises and all property within thirty (30) days after expiration or sooner termination. Lessee shall pay rent for the period during which such property remains in the Premises after the expiration or sooner termination of this Lease. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, the Lessee shall indemnify the Lessor against loss or liability resulting from delay by the Lessee in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. USES 8. Lessee shall not commit, or suffer to be committed, any PROHIBITED waste upon the Premises, or any nuisance, or other act or thing which may materially disturb the quiet enjoyment of any other tenant in or around the buildings in which the Premises may be located, or allow any sale by auction upon the Premises, or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, or place any loads upon the floor, walls, or roof which endanger the structure, or place any harmful liquids in the drainage system of the building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside the building proper except for designated refuse areas or containers outside the building proper and except for chemical storage shed. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper. ALTERATIONS 9. The Lessee shall make no alterations, additions or AND improvement to the Premises or any part thereof without first ADDITIONS obtaining the prior written consent of the Lessor. The Lessor may impose as a condition to the aforesaid consent such requirements as Lessor may deem necessary in Lessor's reasonable discretion, including without limitation thereto, the manner in which the work is done, the times during which it is to be accomplished, and the requirement that upon written request of Lessor prior to the expiration or earlier termination of the Lease, Lessee will remove any or all improvements or additions to the Premises installed at Lessee's expense. All such alterations, additions, or 2 of 8 3 improvements not specified to be removed shall at the expiration or earlier termination of the lease become the property of the Lessor and remain upon and be surrendered with the Premises. All movable furniture, business and trade fixtures, and machinery and equipment shall remain the property of the Lessee and may be removed by the Lessee at any time during the Lease term. Items which are not to be deemed as movable furniture, business and trade fixtures, or machinery and equipment shall include heating, lighting, electrical systems, air conditioning, nonmodular or nonmovable partitioning, carpeting, or any other installation which has become an integral part of the Premises. The Lessee will at all times permit notices of non-responsibility to be posted and to remain posted until the completion of alterations or additions which have been approved by the Lessor. Personal property will include the items listed on Exhibit "B" hereto. MAINTENANCE 10. Lessee shall, at Lessee's sole cost, keep and maintain OF PREMISES the Premises and appurtenances and every part thereof, including but not limited to, glazing, sidewalks, parking areas, plumbing, electrical systems, heating and air conditioning installations, any store front, roof covering -- unless it is not feasible to repair the existing roof covering and a new roof covering is required, and the interior of the Premises in good order, condition, and repair. The foregoing notwithstanding, replacement of any of the mechanical, electrical or plumbing systems of the building shall be done by Lessor at Lessor's sole cost and expense, provided that Lessor will amortize any expenditure in excess of $1,000 for any of the foregoing over its useful life, and Lessee shall pay to Lessor an amount equal to that portion attributable to the length of time then remaining on the term of this Lease. Lessor at Lessor's sole costs and expense shall maintain the exterior of the walls, and structural portions of the roof, foundations, walls, and floors except for any repairs caused by the wrongful act of the Lessee and Lessee's agents. The Lessor at Lessor's sole cost and expense (subject to Lessee's obligation to pay a portion of Lessor's amortized expenditure in the amount described above) will replace the roof covering if repairs to said covering are no longer economically feasible in the judgment of roofing experts, and provided that said replacement is not made necessary by acts of the Lessee and Lessee's agents. The Lessee shall water, maintain and replace, when necessary, any shrubbery and landscaping provided by the Lessor on the Premises. The Lessee expressly waives the benefits of any statute nor or hereafter in effect which would otherwise afford the Lessee the right to make repairs at Lessors expense or to terminate this lease because of Lessor's failure to keep the Premises in good order, condition or repair. INSURANCE 11. Lessee shall not use, or permit the Premises, or any part thereof, to be used, for any purpose other than that for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall, at his sole cost and expense, comply with any and all requirements, pertaining to the Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said building and appurtenances, to the extent that such compliance is made necessary by some nontypical, particular use of Lessee, otherwise, Lessor shall be liable for such compliance. 11.1 Lessee shall, at its expense, obtain and keep in force during the term of this Lease a Commercial General Liability policy insurance insuring Lessee, with Lessor and Lessor's lender, if any, as additional insureds, against any liability with respect to the Premises which would be covered by a standard Commercial General Liability policy without special endorsement. Such insurance policy shall have a combined single limit for both bodily injury and property damage in an amount not less than Two Million & no/100ths Dollars ($2,000,000.00) of which One Million and no/100ths Dollars ($1,000,000) may be covered by an umbrella policy. The limits of said insurance shall not limit the liability of Lessee hereunder. 11.2 Less shall, at its expense, keep in force during the term of this Lease, a policy of fire and property damage insurance in an "all risk" form with a sprinkler leakage endorsement, insuring Lessee's inventory, fixtures, equipment and personal property within the Premises for the full replacement cost thereof. 11.3 Lessor shall maintain a policy or policies of fire and property damage insurance in an "all risk" form, with sprinkler and, at the option of the Lessor, earthquake endorsements, covering loss or damage to the building, including Lessee's leasehold improvements installed with the written consent of the Lessor for the full replacement cost thereof. 3 of 8 4 11.4 Lessee shall pay to Lessor as additional rent, during the term hereof, upon receipt of an invoice therefore, One Hundred percent of the premiums for any insurance obtained by Lessor pursuant to 11.3 above provided that Lessee shall not be required to pay more than Nine Thousand Dollars ($9,000) per year for any earthquake insurance carried by Lessor with respect to the building. Lessor may obtain such insurance for the Building separately, or together with other buildings and improvements which Lessor elects to insure together under blanket policies of insurance. In such case Lessee shall be liable for only such portion of the premiums for such blanket policies as are allocable to the Premises. It is understood and agreed that Lessee's obligation under this paragraph shall be prorated to reflect the Commencement Date and Expiration Date of the Lease. 11.5 Lessee and Lessor each hereby waives any and all rights of recovery against the other, or against the officers, directors, employees, partners, agents and representatives of the other, for loss of or damage to the property of the waiving party or the property of others under its control, to the extent such loss or damage is insured against under any insurance policy carried by Lessor or Lessee hereunder or required to be carried by this Lease. Each party shall notify their respective insurance carriers of this waiver. 12. Deleted. FREE FROM 13. Lessee shall keep the Premises and the property in LIENS which the Premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Lessee. COMPLIANCE 14. Lessee shall, at his sole cost and expense, comply with WITH all of the requirements of all Municipal, State and Federal GOVERN- authorities now in force, or which may hereafter be in force, MENTAL pertaining to the Premises, and shall faithfully observe in the REGULATIONS use of the Premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. The judgment of any court of competent jurisdiction, or the admission of Lessee in any action or proceeding against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Lessor and Lessee. INDEMNI- 15. The Lessee, as a material part of the consideration to FICATION OF be rendered to the Lessor, hereby waives all claims against the LESSOR AND Lessor for damages to goods, wares and merchandise, and all LESSEE'S other personal property in, upon, or about the Premises and for LIABILITY injuries to persons in or about the Premises, from any cause INSURANCE arising at any time, excepting to the extent claims arising from the Lessor's negligence or misconduct or breach of Lease, and the Lessee will hold the Lessor exempt and harmless from any damage or injury to any person, or the goods, wares, and merchandise and all other personal property of any person, arising from the use of the Premises by the Lessee, or from the failure of the Lessee to keep the Premises in good condition and repair, as herein provided. ADVERTISE- 16. Lessee will not place or permit to be placed, in, upon MENTS AND or about the Premises any unusual or extraordinary signs, or any SIGNS signs not approved by the city or other governing authority. The Lessee will not place, or permit to be placed, upon the Premises, any signs, advertisements or notices without the written consent of the Lessor first had an obtained. Any sign so placed on the Premises shall be so placed upon the understanding and agreement that Lessee will remove same at the termination of the tenancy herein created and repair any damage or injury to the Premises caused thereby, and if not so removed by Lessee than Lessor may have same so removed at Lessee's expense. UTILITIES 17. Lessee shall pay for all water, gas, heat, light, power, telephone service and all other service supplied to the Premises. ATTORNEY'S 18. In case suit should be brought for the possession of FEES the Premises, for the recovery of any sum due hereunder, or because of the Breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee, which shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. DEFAULT 19. In the event of any breach of this Lease by the Lessee, or an abandonment of the Premises by the Lessee, the Lessor has the option of 1) removing all persons and property from the Premises and repossessing the Premises in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of Lessee, or 2) allowing the Lessee to remain in full possession and control of the Premises. If the Lessor chooses to prepossess the Premises, the Lease will 4 of 8 5 automatically terminate in accordance with provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the Lessee: 1) the worth at the time of award of the unpaid rent which had been earned at the time of termination including interest at 7% per annum; 2) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the term of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided including interest at 7% per annum; 3) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonable avoided; and 4) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which in the ordinary course of things would be likely to result therefrom. If the Lessor chooses not to repossess the premises, but allows the Lessee to remain in full possession and control of the Premises, then in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the lease as specified in the lease. For the purposes of this paragraph, the following do not constitute a termination of Lessee's right to possession: a) Acts of maintenance or preservation or efforts to relet the property. b) The appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. LATE 20. Lessee hereby acknowledges that late payment by Lessee CHARGES to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. SURRENDER 21. The voluntary or other surrender of this Lease by OF LEASE Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subleases or subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such subleases or subtenancies. TAXES 22. The Lessee shall be liable for all taxes against Lessee's personal property and Lessee's trade or business fixtures. The Lessee also agrees to pay, as additional rental, during the term of this Lease and any extensions thereof, all real estate taxes plus the yearly installments of any special assessments which are payable(i) with respect to the Premises and (ii) with respect to the period of time commencing on the Commencement Date and terminating on the expiration or sooner termination of this Lease, of record or which may become of record during the term of this lease. If said taxes and assessments are assessed against the entire building and building site, and this Lease does not cover the entire building or building site, the taxes and assessment installments allocated to the Premises shall be pro-rated on a square footage or other equitable basis, as calculated by the Lessor. It is understood and agreed that the Lessee's obligation under this paragraph will be pro-rated to reflect the commencement and termination dates of this Lease. Real estate taxes shall exclude income taxes, estate taxes, any other taxes on the income of Lessee, and any taxes levied with respect to Hazardous Materials if the Hazardous Materials which are the subject of such taxes were not introduced in, on, under or about the Premises by Lessee. NOTICES 23. All notices to be given to Lessee may be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned or vacated the Premises. ENTRY BY 24. Lessee shall permit Lessor and his agents to enter into LESSOR and upon the Premises at all reasonable times for the purpose of inspecting the same or for the purpose of maintaining the building in which the Premises are situated, or for the purpose of making repairs, alterations or additional to any other portion of said building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required without any rebate of rent and without any liability to Lessee for any loss of occupation or quiet enjoyment of the Premises thereby occasioned, and shall permit Lessor and his agents, at any time within ninety days prior to the expiration of this Lease, 5 of 8 6 to place upon the Premises any usual or ordinary "For Sale" or "To Lease" signs and exhibit the Premises to prospective tenants at reasonable hours. DESTRUCTION 25. In the event of a partial destruction of the Premises OF PREMISES during the said term from any cause, Lessor shall forthwith repair the same, provided that the necessary funds for repair are available to the Lessor from insurance carried on the Premises per Revised Insurance Clause or would have been available had Lessor carried the insurance on the Premises required by the Revised Insurance Clause, including all leasehold improvements installed by Lessor or by Lessee with Lessor's approval, provided such repairs can be made within ninety (90) days under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Lessee in the Premises. If such repairs cannot be made in ninety (90) days, Lessor may, at his option, make same within a reasonable time, this Lease continuing in full force and effect and the rent to be proportionately reduced as aforesaid in this paragraph provided. In the event that Lessor does not so elect to make such repairs which cannot be made in ninety (90) days, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of either party. In respect to any partial destruction which Lessor is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Lessee. In the event that the building in which the Premises may be situated be destroyed to the extent of not less than 3 31/3% of the replacement cost thereof, Lessor may elect to terminate this Lease, whether the Premises be injured or not. A total destruction of the building in which the Premises may be situated shall terminate this Lease. In the event of any dispute between Lessor and Lessee relative to the provisions of this paragraph, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding upon both Lessor and Lessee, who shall bear the cost of such arbitration equally between them. ASSIGNMENT 26. The Lessee shall not assign, transfer, or hypothecate AND the leasehold estate under this Lease, or any interest therein, SUBLETTING and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of the Lessor. Lessor agrees not to unreasonably withhold or delay consent to sublet or assign. As a condition for granting its consent to any subletting the Lessor may require the Lessee to agree to pay to the Lessor, as additional rental 50% of rents received by the Lessee from its Sublessee which are in excess of the amount payable to the Lessee to the Lessor hereunder after first subtracting Lessee's reasonable leasing costs. If Lessee intends to sublet the entire Premises, Lessee shall so notify Lessor and Lessor shall have the right to terminate this Lease, and this Lease shall be terminated on the date specified in Lessee's notice as the date on which Lessee desires its sublease to commence. If the Lessor approves a subletting, the Lessee may sublet immediately after receipt of the Lessor's written approval. In the event Lessee is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Lessor, no assigned, transferee or sublessee shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of the Lessor. A consent of Lessor to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Lessee from any of Lessee's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Lessee and shall, at the option of Lessor exercised by written notice to Lessee, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Lessor. As a condition to its consent, Lessor may require Lessee to pay all expense in connection with the assignment, and Lessor may require Lessee's assignee or transferee (or other assignees or transferees) to assume in writing all of obligations under this Lease. CONDEM- 27. If any part of the premises shall be taken for any NATION public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Lessor shall have the option to terminate this 6 of 8 7 Lease as of the date when title to the part so taken vests in the condemnor or purchaser if Lessee reasonably determines that it cannot derive from the reduced premises the benefits to which it is entitled under this Lease. If all of the premises, or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go to the Lessor and the Lessee shall have no claim thereto. EFFECT OF 28. The term "Lessor" as used in this Lease, means only the CONVEYANCE owner for the time being of the land and building containing the Premises, so that, in the event of any sale of said land or building, or in the event of a lease of said building, the Lessor shall be and hereby is entirely freed and relieved of all covenants and obligations of the Lessor hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the Lessee of the building, that the purchaser or lessee of the building has assumed and agreed to carry out any and all covenants and obligations of the Lessor hereunder. If any security be given by the Lessee to secure the faithful performance of all or any of the covenants of this Lease on the part of the Lessee, the Lessor shall comply with the requirements of California Civil Code Section 1950.7 applicable in the event of transfer and thereafter Lessor shall have no further liability to Lessee with respect to such security. SUBORDI- 29. Lessee agrees that this Lease may, at the option of NATION Lessor, be subject and subordinate to any mortgage, deed of trust or other instrument of security which has been or shall be placed on the land and building or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee. The Lessee shall, at any time hereinafter, on demand, execute any instruments, releases , or other documents that may be required by any mortgagee, mortgagor, or trustor or beneficiary under any deed of trust for the purpose of subjecting and subordinating this Lease to the lien of any such mortgage, deed of trust or other instrument of security, and the failure of the Lessee to execute any such instruments, releases or documents, shall constitute a default hereunder. WAIVER 30. The waiver by Lessor of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition therein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. HOLDING OVER 31. Any holding over after the expiration of the said term, with the consent of Lessor, shall be construed to be a tenancy from month to month, at a rental to e negotiated by Lessor and Lessee prior to the expiration of said term, and shall otherwise be on the terms and conditions herein specified, so far as applicable. SUCCESSORS 32. The covenants and conditions herein contained shall, AND ASSIGNS subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. TIME 33. Time is of the essence of this Lease. MARGINAL 34. The marginal headings or titles to the paragraphs of CAPTIONS this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereof or their respective successors in interest. PARAGRAPHS 35 & 36 ATTACHED HERETO ARE MADE A PART OF THIS LEASE. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY WHO WILL REVIEW THE DOCUMENT AND ASSIST YOU TO DETERMINE WHETHER YOUR LEGAL RIGHTS ARE ADEQUATELY PROTECTED. RENAULT & HANDLEY IS NOT AUTHORIZED TO GIVE LEGAL AND TAX ADVICE. NO REPRESENTATION OR RECOMMENDATION IS MADE BY RENAULT & HANDLEY OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. THESE ARE QUESTIONS FOR YOUR ATTORNEY WITH WHOM YOU SHOULD CONSULT BEFORE SIGNING THIS DOCUMENT. 7 of 8 8 IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and year first above written. LESSOR LESSEE Renault & Handley Employees Investment Co. Norian Corporation (for Bubb Road Joint Venture) /s/ Lester A. Waller /s/ Brent R. Constantz, Ph.D. - ------------------------------------------ ----------------------------- President President and Chief Executive Officer 1 - ------------------------------------------ ----------------------------- - ------------------------------------------ ----------------------------- 35. Hazardous Substances. a) Lessee agrees that any and all handling, transportation, storage, treatment, disposal, or use of Hazardous Substances by Lessee in or about the Project shall strictly comply with all applicable Environmental Laws. b) Deleted. c) If the presence of Hazardous Substances on the Project caused by Lessee results in the contamination or deterioration of the Project or any water or soil beneath the Project, Lessee shall promptly take all action necessary to investigate and remedy that contamination. d) Lessee and Lessor each agree to promptly notify the other of any contamination received from any governmental entity concerning Hazardous Substances or the violation of Environmental Laws that relate to the Project. e) Lessee shall not use, handle, store, transport, generate, release, or dispose of any Hazardous Substances on, under, or about the Project, except that Lessee may use (i) small quantities of common chemicals such as adhesives, lubricants, and cleaning fluids in order to conduct business at the Leased Premises and (ii) other Hazardous Substances that are necessary for the operation of Lessee's business and of which Lessee gives Lessor written notice. At any time during the term of this Lease, Lessee shall, within ten (10) days after written request from Lessor, disclose in writing all Hazardous Substances that are being used by Lessee on the Project, the nature of the use, and the manner of storage and disposal. f) At any time and upon any prior written notice to Lessee, Lessor, at Lessor's sole cost and expense, may require testing wells to be drilled on the Project and may require the ground water to e tested to detect the presence of Hazardous Substances by the use of any tests that are then customarily used for those purposes. Lessor shall supply Lessee with copies of the test results. The cost of these tests and the installation, maintenance, repair, and replacement of the wells shall be paid by Lessee if the test discloses the existence of Hazardous Materials introduced to the Premises by Lessee, but only to the extent such expenses are attributable to such Hazardous Materials introduced to the Premises by Lessee. 36. Option to Renew. [See Addendum] 8 of 8 -----END PRIVACY-ENHANCED MESSAGE-----