-----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, UWVWqq4DBVVZABzHiFa6N+SoErclaiq16wxjuUGbtoh28d/zcwfvwX3C/QuDCxWU mFlyb5hiXeqJq0zrAeI7uA== 0000891618-96-001136.txt : 19960708 0000891618-96-001136.hdr.sgml : 19960708 ACCESSION NUMBER: 0000891618-96-001136 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960705 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORIAN CORP CENTRAL INDEX KEY: 0000822117 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 770147561 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: 96591510 BUSINESS ADDRESS: STREET 1: 10260 BUBB ROAD CITY: CUPERTINO STATE: CA ZIP: 95014-4166 BUSINESS PHONE: 4082526800 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 DATED JULY 5, 1996 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996 REGISTRATION NO. 333-3399 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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 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 July 5, 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 JULY , 1996. 3 INSERT COLOR GRAPHIC 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. 2 4 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 5 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 6 THE OFFERING Common Stock offered hereby...................... 3,000,000 shares Common Stock to be outstanding after the 12,368,641 shares(1) offering....................................... Use of proceeds.................................. To fund expansion of manufacturing, marketing and sales activities, clinical trials of Norian SRS, research and development activities and general corporate purposes. Proposed Nasdaq National Market symbol........... NORI
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (In thousands, except per share amounts)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Contract revenue............................. $ 444 $ 210 $ 150 $ 38 $ 38 Operating expenses: Research and development................... 2,564 3,104 4,556 974 1,850 Contract revenue costs..................... 224 36 -- -- -- General and administrative................. 1,255 1,491 2,165 571 681 Net loss..................................... $(3,277) $(4,158) $(5,858) $(1,465) $(2,284) Pro forma net loss per share(2).............. $ (0.71) $ (0.26) Pro forma weighted average shares used to compute pro forma net loss per share(2).... 8,197 8,811
MARCH 31, 1996 ------------------------------------------- ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- BALANCE SHEET DATA: Cash, cash equivalents and securities available-for-sale...................................... $15,342 $ 22,342 $ 57,712 Total assets.............................................. 18,146 25,146 60,516 Deficit accumulated during development stage.............. (24,234) (24,234) (24,234) Total shareholders' equity................................ 16,671 23,671 59,041
- --------------- (1) Excludes (i) 576,624 shares of Common Stock issuable upon exercise of options outstanding under the Company's stock option plans and (ii) 423,540 shares of Common Stock issuable upon exercise of outstanding warrants. See "Management -- Executive Compensation," "Certain Transactions," "Description of Capital Stock" and Notes 8 and 13 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements for information concerning calculation of pro forma net loss per share. (3) Pro forma to give effect to the receipt by the Company of a $7.0 million equity investment in connection with the Mochida Transaction. (4) Adjusted to give effect to the estimated net proceeds of this offering based upon an assumed initial public offering price of $13.00 per share. See "Use of Proceeds." ------------------ Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Except as set forth in the financial statements and as otherwise noted, all information in this Prospectus has been adjusted to give effect to (i) the conversion of all of the outstanding shares of Preferred Stock into Common Stock and (ii) a one-for-eight reverse split of the outstanding shares of Common Stock and Preferred Stock, each of which will occur prior to or upon the completion of this offering. See "Capitalization" and "Description of Capital Stock." 5 7 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 approval 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 may comply either with the national regulations in effect on December 31, 1994 or with a new harmonized EU regulatory system. After mid-1998, all medical devices marketed in the EU must comply with the new system, which requires, among other things, that products meet requirements necessary to affix the CE mark. 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 8 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 for services provided on an inpatient basis or as hospital outpatient or ambulatory surgery center ("ASC") services. 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, not medically necessary 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 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 or medically necessary by third-party payors, that reimbursement will be available or, if available, adequate to cover the actual costs of the Company's products to the purchaser, or that payors' reimbursement policies will not otherwise adversely affect the Company's ability to sell its products on a profitable basis. Therefore, purchasers of the Company's products generally will receive no separate, additional payment for such products, the costs of which could represent a significant percentage of the prospective rate. Moreover, with respect to inpatient services, the Medicare program has begun to bundle hospital and physician payments into a global fee for certain orthopedic procedures, including hip and knee replacements, as a demonstration project in 10 states, placing even more pressure on hospitals to reduce costs. There can be no assurance that prospective rates will be adequate to reimburse purchasers for their costs of acquiring and using the Company's products. The market for the Company's products also could be adversely affected by recent federal legislation that reduces reimbursements under the cost pass-through system for Medicare by 5.8%. 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 legislative or 7 9 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 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 also could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that reimbursement for the Company's products will be available or adequate in international markets under either governmental or private reimbursement systems. 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 8 10 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 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) 9 11 of the FDC Act or the lengthier PMA application process under Section 515 of the FDC Act. Noncompliance with applicable requirements, including good manufacturing practices ("GMP"), can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The Company believes that an FDA-approved PMA application will be required to market Norian SRS in the United States. The Company is currently conducting clinical studies of Norian SRS pursuant to an FDA-approved IDE to collect data necessary to support a PMA application. Although the Company plans to pursue approval for use of Norian SRS as a cancellous bone cement at any anatomic site where cancellous bone exists, only wrist fractures are currently being studied in the United States under the Company's FDA-approved IDE. The Company plans to provide clinical data of the safety and effectiveness of Norian SRS as a cancellous bone cement for anatomic sites other than the wrist with data from clinical trials being conducted in the United States and abroad. The FDA often analyzes data from foreign clinical studies more critically, and there can be no assurance that the Company's foreign clinical data will be accepted as part of the Company's PMA application. On two occasions, the Company has expanded the number of sites at which it is conducting its clinical studies in the United States due to slow enrollment of patients at existing sites. There can be no assurance that the Company will be successful in enrolling sufficient numbers of patients to complete its clinical studies. Moreover, there can be no assurance that data from any completed domestic or foreign clinical studies will demonstrate the safety and effectiveness of Norian SRS or that such data will otherwise be adequate to support approval of a PMA application. In addition, if PMA approval is obtained, there can be no assurance that such approval will not significantly restrict the anatomic sites and types of procedures for which Norian SRS can be used. Failure to obtain approval of a PMA application or restrictions on the anatomic sites and types of procedures for which Norian SRS can be used would have a material adverse effect on the Company's business, financial condition and results of operations. Any products manufactured or distributed by the Company pursuant to FDA approvals will be subject to extensive regulation by the FDA, and the FDA's enforcement policy strictly prohibits the promotion of products for any uses other than those for which approval was obtained. New governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Furthermore, if approval of a PMA application is obtained, modifications to the approved product may require a PMA supplement or may require the submission of a new PMA application. There can be no assurance that approval of any necessary PMA supplements or new PMA applications could be obtained in a timely manner, if at all. In addition, the Company's manufacturing facilities are subject to periodic inspections by state and federal agencies, including the FDA and the California State Department of Health Services ("CDHS"). Delays in obtaining any necessary 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 may comply either with the national regulations in effect on December 31, 1994 or with a new harmonized EU regulatory system. After mid-1998, all medical devices marketed in the EU must comply with the new system, which requires, among 10 12 other things, that products meet requirements necessary to affix the CE mark. 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 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." 11 13 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 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." 12 14 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 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 13 15 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." 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 16 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 17 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 18 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 19 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 20 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 21 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 22 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 23 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 24 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 25 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 26 - 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 27 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 28 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 29 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 30 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 31 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 32 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 33 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 34 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 35 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. Until June 14, 1998, the European Union will maintain parallel systems of regulation for medical devices such as Norian SRS. Products that bear the CE mark may be marketed in accordance with harmonized EU rules, but products that do not bear the CE mark may be marketed, on a country-by-country basis, in compliance with national regulations in effect on December 31, 1994. In some EU countries, those regulations include requirements for premarket approval. After June 14, 1998, commercial distribution of medical devices that do not bear the CE mark will be prohibited. Even for products that bear the CE mark, EU rules permit national authorities to make inquiries concerning conformity assessments, to take action against products to which the CE mark has been improperly affixed, and, pursuant to a "safeguard clause," to take regulatory action against products that present a hazard to health. 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. There can be no assurance that the Company will be successful in meeting the requirements for affixing the CE mark to Norian SRS or any future products, nor is there any assurance that the Notified Body will approve labeling that covers all of the anatomic sites and types of procedures for which Norian SRS may be used. THIRD-PARTY REIMBURSEMENT Medicare and many private insurance plans reimburse inpatient hospital and ambulatory surgery center ("ASC") services on a prospective payment basis. Under a prospective payment system, rates are set in advance, fixed for a specific fiscal period, constitute full payment for the designated service and generally do not vary with treatment costs. Therefore, purchasers of the Company's products generally will receive no separate, additional payment for such products, the costs of which could represent a significant percentage of the prospective rate. Moreover, with respect to inpatient services, the Medicare program has begun to bundle hospital and physician payments into a global fee for certain orthopedic procedures, including hip and knee replacements, as a demonstration project in 10 states, placing even more pressure on hospitals to reduce costs. There can be no assurance that prospective rates will be adequate to reimburse purchasers for their costs of acquiring and using the Company's products. 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. Reimbursement by private insurance plans also is central to new product acceptance. 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. There can be no assurance, however, that the clinical trial outcomes will establish the cost effectiveness of Norian SRS. Successful sales of Norian SRS in the United States and other markets will depend on the availability of adequate reimbursement from third-party payors. The Company's products generally will be purchased by hospitals or practicing physicians, which will then bill various third-party payors, such as Medicare, Medicaid, private health insurers, and managed care organizations, for services provided on an inpatient basis or as hospital outpatient or ASC services. 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 34 36 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 also could be adversely affected by recent federal legislation that reduces reimbursement by 5.8% under the cost pass-through system for Medicare. In addition, an increasing emphasis on managed care in the United States has and will continue to increase the pressure on medical device pricing. Medicare also has announced its intention to issue in the near future a regulation which is expected to alter some criteria for Medicare coverage of items and services. 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 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. 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 35 37 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. 36 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- 37 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 October 1995 until Dr. Little joined the Company, Dr. Little was a consultant in the medical device field. From 1994 to October 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 38 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. 39 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 $9.60 per share. The following table sets forth information for the Named Executive Officers regarding the value of unexercised options held as of December 31, 1995. No options were exercised by the Named Executive Officers during the fiscal year ended December 31, 1995. 40 42 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1995(#) DECEMBER 31, 1995(1)($) (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." 41 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 42 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 43 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. 44 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." 45 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. 46 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. 47 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. 48 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. 49 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. 50 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. 51 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. 52 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 July , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 73 INSIDE FRONT COVER 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. 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. 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. 74 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. 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 75 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 76 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(1) Form of Seventh Amended and Restated Articles of Incorporation of the Registrant. 3.3(1) 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(1) 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(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 77 10.6(1) Series C Preferred Stock Purchase Agreement dated August 9, 1990, between the Registrant and Pfizer Hospital Products Group, Ltd. 10.7* 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(1) 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(1) 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 78 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 5TH DAY OF JULY, 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. CONSTANTZ President, Chief Executive Officer and - --------------------------------------------- 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. GILBERT* Director - --------------------------------------------- (Jon N. Gilbert) /s/ COSTA G. SEVASTOPOULOS* Director - --------------------------------------------- (Costa G. Sevastopoulos) /s/ HARRY B. SKINNER* Director - --------------------------------------------- (Harry B. Skinner) s/ HANSJORG WYSS* Director - --------------------------------------------- (Hansjorg Wyss)
*By: /s/ BRENT R. CONSTANTZ ------------------------------- Brent R. Constantz Attorney-in-Fact II-4 79 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 July 3, 1996 II-5 80 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(1) Form of Seventh Amended and Restated Articles of Incorporation of the Registrant. 3.3(1) 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(1) 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(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* 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(1) 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(1) 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-10.7 2 EXCLUSIVE MARKETING AGREEMENT/MOCHIDA PHARM. 1 *Confidential Treatment Requested EXHIBIT 10.7 EXCLUSIVE MARKETING AGREEMENT* 2 EXCLUSIVE MARKETING AGREEMENT This EXCLUSIVE MARKETING AGREEMENT (the "Agreement"), effective as of April 15, 1996 (the "Effective Date"), is made by and between Norian Corporation, a California corporation having offices at 10260 Bubb Road, Cupertino, California 95014-4166 ("Norian"), and Mochida Pharmaceutical Co., Ltd., a corporation organized under the laws of Japan having offices at 7, Yotsuya 1-chome, Shinjuku-ku, Tokyo 160, Japan ("Mochida"). BACKGROUND A. Norian is developing certain cementing biomaterials and related delivery systems. B. Norian and Mochida desire that Mochida perform clinical development activities in Japan with respect to such biomaterials and related delivery systems. C. Norian desires to grant Mochida the exclusive right to market, sell and distribute such biomaterials and related delivery systems in Japan and Mochida desires to accept such grant, on the terms and conditions set forth below. NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: ARTICLE 1 DEFINITIONS 1.1 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with Mochida or Norian. An entity shall be regarded as in control of another entity for purposes of this definition if it owns or controls more than fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). 1.2 "Cementing" shall mean the hardening of a biomaterial in situ. 1.3 "Clinical Development" shall mean all clinical trials, preclinical studies and all other activities reasonably required to obtain and maintain all governmental approvals required to market a Product for use within the Field in Japan. 1.4 "Delivery/Nonbiomaterial Components" shall mean, collectively and individually, components selected by Norian for incorporation into the Products, which in each case were developed for use in the mixing or local delivery of the biomaterial component of Products, including without limitation mixers, injection guns, delivery nozzles, and delivery needles. 3 1.5 "Education Programs" shall mean programs conducted by surgeons directed toward other surgeons to educate such other surgeons in orthopaedic science and surgical principles specific to the clinical attributes of the Products. 1.6 "Europe" shall mean those countries which are members of the European Union. 1.7 "Field" shall mean all applications other than veterinary, dental, and periodontal applications. As used herein, it is understood that "dental" and "periodontal" applications shall include without limitation all procedures in the oral cavity or performed by dentists, dental implantologists, periodontists, or similar specialists. 1.8 "Joint Development Committee" shall have the meaning set forth in the provisions of Article 2 below. 1.9 "Marketing Approval Application" shall mean any application with a governmental regulatory agency for authority to market a Product within Japan, including without limitation an import approval application ("yunyu shonin shinsei"), import license application ("yunyu kyoka shinsei"), or other similar application or filing. 1.10 "Net Sales" shall mean the total amounts invoiced by Mochida or its Affiliates to third parties upon sales of the Products, less the following reasonable and customary deductions to the extent applicable to such invoiced amounts: (i) trade and cash discounts; (ii) amounts for claims, allowances or credits for Product returns; (iii) prepaid freight and sales taxes, in each case if charged separately on the invoice and paid by the customer. A "sale" shall include a transfer or other disposition for consideration other than cash, in which case such consideration shall be valued at the fair market value thereof. 1.11 "New Products" shall mean new Norian calcium phosphate Cementing biomaterials other than the Products; provided that Norian has the right to grant the rights set forth herein to Mochida with respect to such biomaterials, and further provided that such biomaterials are specifically intended by Norian for use within the Field. 1.12 "Norian Applications" shall mean any and all applications of a Product for which Norian elects to conduct clinical development or otherwise promote or distribute such Product in any country of North America or Europe, or for which Norian has developed Education Programs and/or Training Programs, from time to time during the term of this Agreement. The Norian Applications existing as of the Effective Date include those applications set forth in Exhibit E. 1.13 "North America" shall mean the United States, Canada, and Mexico. 1.14 "Production Costs" with respect to units of a Product shall mean Norian's fully burdened direct and indirect costs associated with the manufacture and/or preparation of such Product, including without limitation the costs of facilities, equipment, management time, general and administrative expenses, inventory costs, other overhead, materials and validation studies, and packaging and labeling -2- 4 costs, calculated in accordance with cost accounting procedures generally accepted in the United States, and with respect to units or portions acquired from a non-Affiliate vendor, the amounts paid to the vendor plus costs associated with acquisition from such vendor, in each case including without limitation freight, insurance, shipping, packaging and other similar costs associated with acquiring such portions or units for delivery to Mochida's destination point. Production Costs shall also include royalties or other consideration payable to non-Affiliate third parties with respect to the manufacture, sale or use of Products. 1.15 "Products" shall mean, collectively and individually, Norian's calcium phosphate Cementing biomaterials and Delivery/Nonbiomaterial Components known collectively within Norian as the Norian Skeletal Repair System (SRS), in each case as defined in Norian's Investigational Device Exemption filed with the U.S. Food and Drug Administration prior to the Effective Date and supplements thereto, or a Pre-Market Approval (PMA) received from the FDA with respect to the foregoing Investigational Device Exemption and supplements to such PMA, to the extent such biomaterials and Delivery/Nonbiomaterial Components are specifically intended for use within the Field and with respect to technology acquired by Norian after the Effective Date, to the extent Norian has the right to include the same hereunder. It is understood that Products, and/or any component thereof, may be changed, substituted or added to by Norian to the extent such changes do not require modifications or changes to a Market Approval Application for a Product approved by the Ministry of Health and Welfare in Japan to market and distribute such Product in Japan, upon ninety (90) days prior written notice to Mochida. If a change to a Product requires modifications or changes to a Market Approval Application for such Product approved by the Ministry of Health and Welfare in Japan, the Joint Development Committee shall consult in good faith and determine a reasonable transition period with respect to implementation of such Product change in Japan. 1.16 "Reimbursement Price" shall mean the reimbursement price assigned by the Ministry of Health and Welfare for the Products or, prior to establishment of a reimbursement price by the Ministry of Health and Welfare, the provisional price established by competent authorities on a prefecture-by-prefecture basis in Japan for the Products. It is understood and agreed that if no such reimbursement price or provisional price is established for the Products, or if the actual Net Sales price of a Product is higher than such reimbursement price or provisional price, then the "Reimbursement Price" shall be the Net Sales price charged for the Products. 1.17 "Subdistributor" shall mean, with respect to a particular Product, a third party, including a wholesaler, who has obtained through Mochida directly or indirectly the right to distribute, but not to actively promote or market such Product. 1.18 "Training Programs" shall mean programs conducted by Mochida in specific technical aspects relating to surgical techniques and procedures specific to the use of the Products, which training is provided to all product managers, clinical trial teams, medical representatives and medical professionals, and other participants in Clinical Development or commercialization of the Products, both within and outside of Mochida. -3- 5 CONFIDENTIAL TREATMENT REQUESTED ARTICLE 2 JOINT DEVELOPMENT COMMITTEE 2.1 Joint Development Committee. Mochida and Norian shall establish a joint development committee to oversee, review and coordinate the conduct of Clinical Development of Products and to review and approve research programs, if any, with respect to the Products ("Joint Development Committee"). 2.2 Membership. The Joint Development Committee shall be comprised of an equal number of representatives from each of Mochida and Norian, selected by such party. The exact number of such representatives shall be three (3) for Mochida and three (3) for Norian. Each of Norian and Mochida shall at all times have at least one representative on the Joint Development Committee at the Vice President level or above for Norian and at the Managing Director level or above for Mochida. Subject to the foregoing provisions of this Section 2.2, Norian and Mochida each may replace its Joint Development Committee representatives at any time, with prior written notice to the other parties. 2.3 Joint Development Committee Meetings. During the term of this Agreement, the Joint Development Committee shall meet quarterly during the first year of this Agreement and every six months thereafter, or as otherwise agreed by the parties, at such locations as the parties agree. At its meetings, the Joint Development Committee will monitor the Clinical Development of the Products. With the consent of Norian and Mochida, other representatives of Norian or Mochida may attend Joint Development Committee meetings as non-voting observers. Norian's lead representative shall chair meetings of the Joint Development Committee and shall be responsible for preparing the meeting agendas and minutes. Such minutes shall be deemed accepted and effective if and when authorized representatives of each party have signed the same. Each party shall bear its own personnel and travel costs and expenses relating to Joint Development Committee meetings. 2.4 Decision Making. Decisions of the Joint Development Committee shall be made by majority approval. ARTICLE 3 CLINICAL DEVELOPMENT 3.1 Clinical Development. Mochida shall be responsible for conducting all Clinical Development with respect to Products, [CONFIDENTIAL INFORMATION REDACTED], in accordance with protocols supplied by Norian, or if the Joint Development Committee mutually approves an alternative or supplemental protocol, in accordance with such alternative or supplemental protocols. Accordingly, it is understood that all protocols used in Clinical Development of Products or Norian Applications shall be Japanese translations of those supplied by Norian (translated at Mochida's expense) modified to the extent required to comply with Japanese laws and regulations, it being understood that Norian shall not unreasonably withhold its consent to modifications to the Norian protocols which incorporate additional end points or accommodate adopted standards of the Japanese Orthopaedic -4- 6 CONFIDENTIAL TREATMENT REQUESTED Association. If Mochida desires to pursue Clinical Development of one or more applications of Products other than the Norian Applications, Mochida shall submit the proposed application to the Joint Development Committee for review and approval, and if the Joint Development Committee mutually approves the incorporation of such application under the Clinical Development, the protocols used in Clinical Development of such application shall be prepared by Mochida and submitted to the Joint Development Committee for review and approval prior to initiation of any such Clinical Development and submission of product registration plans and applications for marketing approval for Products with any health regulatory agency. Norian shall be consulted and informed with respect to Clinical Development through its representatives on the Joint Development Committee. It is understood and agreed that except as otherwise expressly agreed in writing, [CONFIDENTIAL INFORMATION REDACTED] pre-clinical or clinical studies or other portions of the Clinical Development. Norian shall supply Mochida with Products for use in clinical trials in accordance with the Japanese Pharmaceutical Affairs Law and Good Clinical Practice (GCP) standards prevailing in Japan, to the extent Mochida communicates such legal and standards requirements to Norian in writing in advance. 3.2 Regulatory Filings. (a) Mochida shall prepare and file all regulatory documents in Mochida's name with respect to Products. Norian shall have the right to obtain copies directly from Mochida of, and to reference or authorize third parties to reference, for any purpose, any and all regulatory filings made by Mochida with respect to Products. (b) All product registration plans and applications for marketing approvals (including Marketing Approval Applications filed with the Ministry of Health and Welfare, and similar applications, including applications for pricing approval and governmental reimbursement authorization, to be filed in Japan) for Products shall be submitted to the Joint Development Committee for review and approval by the Joint Development Committee prior to filing of such registrations with any health regulatory agency. (c) Upon Norian's written request, Norian may visit the clinical trial sites at which Mochida is conducting Clinical Development to review the Clinical Development activities being performed at such clinical trial site, including without limitation the clinical data and other documents relating to the performance of the Clinical Development. Mochida agrees not to conduct any clinical testing involving the Products except in accordance with protocols described in Section 3.1 above. ARTICLE 4 MILESTONE PAYMENTS 4.1 Initial Fee. Mochida shall make a nonrefundable and noncreditable payment to Norian in the amount of Two Million Dollars ($2,000,000) within ten (10) days after the Effective Date. -5- 7 CONFIDENTIAL TREATMENT REQUESTED 4.2 Product Milestones. Mochida shall make the following payments to Norian upon the first occurrence of each milestone specified below:
PRODUCT MILESTONES PAYMENT 1. [CONFIDENTIAL INFORMATION REDACTED] FOR A PRODUCT IN U.S.$2,000,000 JAPAN, [CONFIDENTIAL INFORMATION REDACTED]. 2. [CONFIDENTIAL INFORMATION REDACTED] FOR A PRODUCT U.S.$2,000,000 IN JAPAN, [CONFIDENTIAL INFORMATION REDACTED]. 3. [CONFIDENTIAL INFORMATION REDACTED] IN JAPAN, U.S.$2,000,000 [CONFIDENTIAL INFORMATION REDACTED].
4.3 Other. Norian and Mochida agree to promptly notify the other in writing of its achievement of any milestone. If at the time a particular milestone is achieved under Section 4.2, above, any prior milestones under Section 4.2 have not been achieved with respect to a Product, the payments for such prior milestones shall then be due. The payments set forth in Section 4.2 above shall each be due and payable within fifteen (15) days after the occurrence of the milestone event. If the parties do not agree upon the definition or achievement of a particular milestone set forth above, the matter shall be settled by arbitration pursuant to Section 20.2 below. It is understood that milestones shall be payable on achievement of milestones for Products incorporating biomaterial and not for milestones achieved solely for nonbiomaterial components of Products. ARTICLE 5 RECORDKEEPING; PUBLICATION 5.1 Records. Mochida shall maintain records of the Clinical Development (or cause such records to be maintained) in sufficient detail and in good scientific manner as will properly reflect all work done and results achieved in the performance of the Clinical Development (including all data in the form required under any applicable governmental regulations). Subject to confidentiality provisions reasonably acceptable to Mochida and Norian, upon Norian's request, Mochida shall allow Norian to have prompt access to all records, materials and data generated with respect to each Product during Mochida's normal business hours at times mutually agreed upon by Norian and Mochida and in a reasonable manner. The parties will endeavor to minimize disruption of Mochida's normal business activities to the extent reasonably practicable. 5.2 Reports. Mochida shall periodically provide the Joint Development Committee with a written report summarizing the progress of the Clinical Development performed by Mochida with respect to each Product and application of the Product for which Mochida is conducting Clinical Development -6- 8 during the preceding calendar half-year. Unless otherwise agreed, such reports shall be due semi-annually, by March 1 and September 1 of each calendar year. ARTICLE 6 USE OF PRECLINICAL AND CLINICAL DATA 6.1 Exchange. Norian shall have access to any preclinical and/or clinical data acquired and/or produced by or for Mochida with respect to Products. Norian shall provide to Mochida such preclinical and clinical data set forth in Exhibit F that Norian possesses and has the right to disclose to Mochida which relates to the usefulness or disadvantage or side-effects of the Products, to the extent such data is reasonably necessary or useful in obtaining governmental approval to market Products in Japan. Norian shall maintain the preclinical and/or clinical data in Exhibit F in good scientific manner as will properly reflect all work done and results achieved in Norian's prelinical studies and clinical trials with respect to the Products, and Mochida shall maintain all preclinical and/or clinical data relating to the Products in the same manner. Subject to the provisions of Section 15 below, Norian shall allow Mochida to have prompt access to the materials set forth in Exhibit F during Norian's normal business hours at times mutually agreed upon by Norian and Mochida and in a reasonable manner. The parties will endeavor to minimize disruption of Norian's normal business activities to the extent reasonably practicable. Upon Mochida's written request, Norian further shall provide to Mochida reprints of articles published by Norian's clinical investigators pertaining to the Products. To the extent required for Mochida to obtain governmental approval to market Products in Japan, Norian shall make its manufacturing facilities for the Products available for inspection by the Ministry of Health and Welfare upon reasonable written notice and during Norian's normal business hours subject to confidentiality provisions reasonably acceptable to the parties. Mochida will provide to Norian access to and copies of all Market Approval Applications and other regulatory and governmental filings made with respect to clinical trials and marketing approval in Japan (including without limitation pricing approvals) with respect to each Product, together with the underlying preclinical and clinical data, promptly after submission to the Ministry of Health and Welfare and shall provide to Norian copies of all correspondence with the Ministry of Health and Welfare with respect to the Products promptly after receipt or submission thereof. 6.2 Disclosure. Norian may use, reference and provide copies of regulatory and governmental filings, clinical data and/or preclinical data ("Data") made, developed or acquired by Mochida in accordance with this Agreement relating to the Products, to third parties as is reasonably necessary or useful for commercialization of any and all products outside Japan or as required by law. Mochida will only use, reference and disclose Data relating to the Products to third parties as required to obtain governmental approval to market and distribute Products in Japan, or as required by law, and in each case subject to Section 6.3 and Article 15 below. In all agreements with third parties or Affiliates involving the development of Data for a Product, Mochida shall require that such third parties and Affiliates provide Norian access to all such Data. Norian will use good faith efforts during the term of the Clinical Development to make available to Mochida for use with Products comparable Data generated by Norian alone or jointly with others in developing Products within the Field outside Japan. If Norian does not -7- 9 obtain from a third party that is commercializing a Product outside Japan the right to permit Mochida to use such comparable Data generated by the third party for such Products for the purpose of obtaining governmental approval in Japan to market and distribute the Products, Norian shall not disclose to such third party the Data developed by Mochida under the Clinical Development hereunder for such Product. 6.3 Review of Publication. As soon as is practicable prior to the oral public disclosure, and prior to the submission to any outside person for public dissemination of a manuscript describing the scientific data with respect to Products generated in any stage of the Clinical Development, in each case to the extent the contents of the oral disclosure or manuscript have not been previously disclosed pursuant to this Section 6.3 before such proposed disclosure, Mochida shall disclose to Norian the disclosure or manuscript to be made or submitted, and shall allow Norian at least thirty (30) days to determine whether such disclosure or manuscript contains subject matter for which patent protection should be sought prior to publication or which Norian reasonably believes should be modified to avoid (i) disclosure of information of a confidential or proprietary nature, or (ii) regulatory or other similar problems. 6.3.1 Publication Rights. After the expiration of thirty (30) days from the date of mailing such disclosure or manuscript, unless Mochida has received the written notice specified below, Mochida shall be free to submit such manuscript for publication or to orally disclose or publish the disclosed research results in any manner consistent with academic standards. 6.3.2 Delay of Publication. Prior to the expiration of the thirty (30) day period specified in Section 6.3 above, Norian may notify Mochida in writing of its determination that such oral presentation or manuscript contains confidential or objectionable material or material that consists of patentable subject matter for which patent protection should be sought. If so notified, Mochida shall withhold its proposed public disclosure and the parties shall mutually consult in good faith to determine the best course of action to take in order to modify the disclosure or to obtain patent protection. After resolution of the confidentiality, regulatory or other issues, including without limitation the filing of a patent application, to both parties' reasonable satisfaction Mochida shall be free to submit the manuscript and/or make its public oral disclosure. ARTICLE 7 MARKETING AND DISTRIBUTION RIGHTS 7.1 Appointment. Subject to the terms and conditions of this Agreement, including without limitation the payment by Mochida to Norian of all of the milestone payments set forth in Article 4, Norian hereby grants to Mochida, the exclusive right under Norian's patents and know-how to market, sell and distribute directly or indirectly the Products in Japan solely for use within the Field. Mochida agrees not to market, promote or distribute any Product for use outside the Field or outside Japan, or for an application other than a Norian Application for which Norian and Mochida then have a Training Program and an Education Program in place in Japan. Mochida further agrees not to provide Products to any third party if Mochida knows or has reason to believe that Products provided to such third party -8- 10 CONFIDENTIAL TREATMENT REQUESTED have been sold for use or used outside the Field or outside Japan or by personnel other than surgeons who have attended Education Programs in the Norian Applications. Mochida may authorize Subdistributors to market, sell or distribute any Product in accordance with this Section 7.1, provided that Mochida provides Norian with prior written notice of the identity of the Subdistributors, uses best efforts to ensure that such Subdistributors comply with the provisions of this Agreement and ensures that a Mochida medical representative supervises the activities of each Subdistributor. 7.2 Exclusivity of Efforts. Neither Mochida nor their Affiliates shall directly or indirectly develop, market, sell or otherwise distribute any Cementing calcium phosphate materials, technologies or products, or any other Cementing materials, technologies or products, other than the Products. In addition, except for the Products, Mochida shall not appoint or license any third party to develop, market, sell or otherwise distribute any Cementing calcium phospate materials, technologies or products or any other Cementing materials, technologies or products. 7.3 No Rights Beyond Products. Nothing in this Agreement shall be deemed to grant to Mochida rights in products or technology other than the Products; nor shall any provision of this Agreement be deemed to restrict Norian's right to exploit Products, or patents or any other intellectual property rights, outside the Field, outside Japan or in products other than Products. 7.4 Sale Conveys No Right to Manufacture or Modify. The Products are offered for sale and are sold by Norian subject in every case to the condition that such sale does not convey any license, expressly or by implication, to manufacture, modify, duplicate or otherwise copy or reproduce any of the Products. 7.5 Conflicts of Interest. Mochida acknowledges that the price for Products to be paid hereunder by Mochida to Norian will depend upon Reimbursement Prices. Accordingly, Mochida agrees that neither Mochida nor any of its Affiliates shall [CONFIDENTIAL INFORMATION REDACTED] a Product to a greater degree than Mochida or such Affiliate generally [CONFIDENTIAL INFORMATION REDACTED] of other products or services of Mochida or such Affiliate to a third party. It is understood that the foregoing sentence shall apply to negotiation of Reimbursement Prices as well as Net Sales prices of Products. ARTICLE 8 TERMS OF SALE 8.1 Terms and Conditions. All Product purchases hereunder shall be subject to the terms and conditions of this Agreement. Nothing contained in any purchase order submitted pursuant to this Agreement shall in any way modify or add any terms or conditions to said purchases, unless otherwise agreed in writing by the parties. 8.2 Product Supply. Subject to the terms and conditions of this Article 8, Norian shall supply Mochida with all Mochida's commercial requirements for Products in Japan during the term of this Agreement in accordance with Good Manufacturing Practices as defined in the regulations promulgated -9- 11 under the U.S. Food and Drug Administration Food and Cosmetics Act for medical devices, and Mochida shall exclusively purchase all such commercial requirements from Norian. 8.3 Forecasts. At least one hundred eighty (180) days prior to the first commercial sale of a Product in Japan, and at least sixty (60) days prior to the first day of each calendar quarter for two (2) years after first commercial sale of a Product, Mochida shall provide to Norian a good faith rolling twelve (12) month forecast showing Mochida's prospective requirements for the Products and anticipated purchase order submittal dates for the next four (4) calendar quarters, in a format reasonably specified by Norian. Such forecasts shall commence on the first day of the calendar quarter following submission of the forecast to Norian. Thereafter, on a calendar monthly basis, by the fifth (5th) day of each calendar month, Mochida shall provide to Norian a good faith rolling twelve (12) month forecast showing Mochida's prospective requirements for the Products and anticipated purchase order submittal dates for the next twelve (12) months, which forecasts shall commence on the first day of the calendar month following submission of the forecast to Norian (the foregoing forecasts referred to collectively herein as "Forecasts"). Such Forecasts are for Norian's planning purposes only and shall not constitute a binding obligation upon Norian or Mochida. In the event that Mochida believes, in good faith, that the information provided in any Forecast is no longer accurate, Mochida will promptly notify Norian and provide Norian with a revised Forecast. 8.4 Order and Acceptance. Mochida shall place its firm order with Norian for Product requirements at least ninety (90) days in advance of the start of each calendar quarter for Products to be shipped in such calendar quarter, and Norian shall supply such requirements in accordance with its normal practices and lead times then in effect. All orders for Products submitted by Mochida shall be initiated by the office at Mochida's address for notice hereunder. All orders shall be by means of signed written purchase orders by Mochida to Norian, sent to Norian at Norian's address for notice hereunder and requesting a delivery date during the term of this Agreement. Orders may initially be placed by telephone, provided that a signed confirming purchase order is received in writing (which may include telecopy transmission) by Norian within five (5) days after a telephone order is placed. Norian shall notify Mochida within twenty-one (21) days from receipt of a purchase order of its acceptance or rejection of such purchase order. Mochida may cancel or reschedule purchase orders for Products only with Norian's prior written approval. 8.5 Invoicing. Norian shall submit an invoice to Mochida upon shipment of Product ordered by Mochida. All invoices shall be sent to Mochida's address for notices hereunder, and each such invoice shall state Mochida's aggregate and unit transfer price for Products in a given shipment, plus any insurance, taxes or other costs incident to the purchase or shipment initially paid by Norian but to be borne by Mochida hereunder. 8.6 Shipping. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for shipment in Norian's standard shipping cartons, marked for shipment to the destination point indicated in Mochida's purchase order, and delivered to Mochida to such destination point. The carrier shall be selected by agreement between Norian and Mochida, provided that in the event no such agreement is reached Norian shall select the carrier. All insurance, as well as any special packaging -10- 12 CONFIDENTIAL TREATMENT REQUESTED expenses, shall be paid by [CONFIDENTIAL INFORMATION REDACTED]. Freight and other shipping expenses for Products shipped in accordance with Norian's standard shipping practices by surface to Mochida's warehouse in Tokyo or such other location as the parties agree shall be paid by Norian. In the event Mochida selects a carrier other than in accordance with Norian's standard shipping practices, Mochida shall bear any incremental increase in cost. Risk of loss and title shall pass to Mochida upon delivery to Mochida or its designee in Japan. Mochida shall also bear all applicable taxes, duties, and similar charges that may be assessed against the Products or the transfer price thereof after delivery to the carrier at Norian's shipping location. All shipments and all shipping and other charges shall be deemed correct unless Norian receives from Mochida, no later than fifteen (15) days after Mochida's receipt of a given shipment, a written notice specifying the shipment, the purchase order number, and the exact nature of the discrepancy between the order and the shipment or the exact nature of the discrepancy in the shipping or other charges, as applicable. 8.7 Product Returns. Except as set forth in Article 11 below, Mochida may return Products only with Norian's prior written approval. Products returned to Norian other than under Article 11 shall be returned F.O.B. the destination point designated by Norian and shall be subject to a restocking fee in an amount equal to [CONFIDENTIAL INFORMATION REDACTED] of the sum of (i) the transfer price paid by Mochida to Norian for such Products computed in accordance with Exhibit A, and (ii) all freight, customs duties, taxes and other charges incurred by Norian in shipping the Products to Mochida. ARTICLE 9 TRANSFER PRICES; EQUITY; PAYMENTS; BOOKS AND RECORDS 9.1 Prices. The difference between Mochida's transfer price and Mochida's price to its customers shall be Mochida's sole remuneration for the sale of the Products. The transfer price to Mochida for each of the Products shall be as set forth in Exhibit A. 9.2 Payment Terms. Mochida shall make payments to Norian under this Agreement by wire transfer in [CONFIDENTIAL INFORMATION REDACTED] in immediately available funds to a bank designated by Norian. Payment for Product supplied hereunder shall be made [CONFIDENTIAL INFORMATION REDACTED] after the date of invoice or date of shipment, whichever is later. Any payments due hereunder which are not paid on the date such payments are due shall bear interest at the lesser of [CONFIDENTIAL INFORMATION REDACTED] per month or the maximum rate permitted by California law, calculated on the number of days such payment is delinquent. This Section 9.2 shall in no way limit any other remedies available to Norian. 9.3 Equity. On the Effective Date or within two (2) days thereafter, Mochida shall purchase U.S. Seven Million Dollars ($7,000,000) of Norian's Series D Preferred Stock, at a price equal to Two Dollars and Fifty Cents ($2.50) per share, all per the terms and conditions set forth in the Preferred Stock Purchase Agreement attached hereto as Exhibit D. -11- 13 CONFIDENTIAL TREATMENT REQUESTED 9.4 Taxes. 9.4.1 Any and all amounts payable hereunder do not include any government taxes (including without limitation sales, use, excise, and value added taxes) or duties imposed by any Japanese governmental agency that are applicable to the export, import, or purchase of the Products (other than taxes on the net income of Norian), and Mochida shall bear all such taxes and duties. When Norian has the legal obligation to collect and/or pay such taxes, the appropriate amount shall be added to Mochida's invoice and paid by Mochida, unless Mochida provides Norian with a valid tax exemption certificate authorized by the appropriate taxing authority. 9.4.2 All payments by Mochida specified hereunder (including those under Article 4 above) are expressed as [CONFIDENTIAL INFORMATION REDACTED] and shall be made free and clear of, and without reduction for, any [CONFIDENTIAL INFORMATION REDACTED]. Any such [CONFIDENTIAL INFORMATION REDACTED] on payments to Norian shall be the sole responsibility of Mochida. Mochida shall provide Norian with official receipts issued by the appropriate [CONFIDENTIAL INFORMATION REDACTED] or such other evidence as is reasonably requested by Norian to establish that such [CONFIDENTIAL INFORMATION REDACTED] have been paid. If Norian uses a [CONFIDENTIAL INFORMATION REDACTED] received by Norian as a result of the payment of [CONFIDENTIAL INFORMATION REDACTED] by Mochida and thereby reduces the amount of [CONFIDENTIAL INFORMATION REDACTED] that Norian otherwise would have paid, Norian shall refund to Mochida the amount of such [CONFIDENTIAL INFORMATION REDACTED] with respect to such [CONFIDENTIAL INFORMATION REDACTED]. 9.5 Third Party Royalties. If during the term of this Agreement Norian enters into a royalty-bearing license or agreement or a license or agreement requiring payment of license fees or other payments for the license or other acquisition of rights to new technologies applicable to the manufacture, sale or use of Products, and after consultation with Mochida, Mochida does not agree to pay any such amounts applicable to the manufacture, sale or use of Products, within thirty (30) days after a written request by Norian, Norian at its option may exclude from this Agreement the subject matter covered by such license or agreement, and in such event the same shall not be within the Products for any purposes of this Agreement. The provisions of this Section 9.5 shall not limit the obligations of the parties under Section 13.3. 9.6 Currency Conversion. If any currency conversion shall be required in connection with the calculation of amounts payable under this Agreement, other than transfer prices of Products or components thereof pursuant to Exhibit A, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan for the [CONFIDENTIAL INFORMATION REDACTED] to which such payment pertains. With respect to any currency conversion required in connection with calculation of transfer prices of Products or components thereof pursuant to Exhibit A attached hereto, such conversion for the first year from the date of issuance of the Reimbursement Price for such Product or component thereof, shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan -12- 14 CONFIDENTIAL TREATMENT REQUESTED [CONFIDENTIAL INFORMATION REDACTED]. Thereafter, such transfer price in United States Dollars shall be [CONFIDENTIAL INFORMATION REDACTED] by using the selling exchange rate for conversion of the foreign currency into U.S. Dollars quoted for current transactions reported by the Bank of Tokyo-Mitsubishi in Japan, on the day of [CONFIDENTIAL INFORMATION REDACTED] of the date of issuance of the Reimbursement Price for such Product or component thereof. 9.7 Records; Inspection. Mochida shall keep complete, true and accurate books of account and records for the purpose of determining the amounts payable under Articles 4, 8 and 9. Such books and records shall be kept at the principal place of business of Mochida for at least five (5) years following the end of the calendar quarter to which they pertain. Such records will be open for inspection during such five (5) year period by a certified public accountant, or if not a certified public accountant, then a representative or agent of Norian reasonably acceptable to Mochida, for the purpose of verifying the amounts payable by Mochida under Articles 4, 8 and 9. Such inspections may be made no more than once each calendar year, at reasonable times mutually agreed upon by Norian and Mochida. Norian's representative or agent will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Inspections conducted under this Section 9.7 shall be at the expense of Norian, unless a variation or error producing an underpayment in amounts payable exceeding five percent (5%) of the amount paid for any period covered by the inspection is established in the course of any such inspection, whereupon all costs relating to the inspection for such period and any unpaid amounts that are discovered will be paid by Mochida, together with interest on such unpaid amounts at the rate specified in Section 9.2 above. The parties will endeavor to minimize disruption of Mochida's normal business activities to the extent reasonably practicable. ARTICLE 10 DUE DILIGENCE 10.1 General. Mochida shall use its best efforts to conduct as expeditiously as possible all Clinical Development for Products for each Norian Application and to launch Products in Japan as soon as possible after regulatory approval to market such Products in Japan have been obtained, and to maximize sales of Products in Japan for all Norian Applications. 10.2 Milestones; Particular Applications. Without limiting Section 10.1 above: (a) Mochida shall use its best efforts to achieve the following milestones within the times to complete set forth below: -13- 15 CONFIDENTIAL TREATMENT REQUESTED Table 1
Time to Complete Milestone from the Effective Date ------------------------------------------------- ----------------------------------- 1. [CONFIDENTIAL INFORMATION REDACTED] for a Product [CONFIDENTIAL INFORMATION REDACTED] in Japan 2. [CONFIDENTIAL INFORMATION REDACTED] for a Product [CONFIDENTIAL INFORMATION REDACTED] in Japan 3. [CONFIDENTIAL INFORMATION REDACTED] a Product in [CONFIDENTIAL INFORMATION REDACTED] Japan
(b) On a Product-by-Product basis, if at any time Mochida is not using [CONFIDENTIAL INFORMATION REDACTED] to conduct Clinical Development or marketing, promotion and distribution of a Product in all of the Norian Applications for such Product, Norian may notify Mochida in writing ("Application Notice") ofits intent to terminate Mochida's rights with respect to those Norian Applications for which Mochida is not conducting Clinical Development or marketing, promotion and distribution activities ("Notified Applications"). Norian will consider in good faith whether Mochida's decision not to pursue Clinical Development or other marketing and distribution activities within the Notified Applications is justified taking into account specific regulatory and/or market conditions substantially different from those in the United States or Japanese pricing conditions, which in each case make commercialization of the Notified Applications infeasible in Japan. If Norian determines that such decision is not justified, notwithstanding the provisions of Section 7.1 above, if Mochida does not commence Clinical Development or marketing, promotion and distribution of each of such Products in the Notified Applications immediately after receipt of the Application Notice, and thereafter use its continuing best efforts with respect to such Clinical Development, marketing, promotion and distribution, Norian may terminate Mochida's rights to such Products with respect to the Notified Applications effective upon written notice, and thereafter Norian may proceed to conduct clinical development, and to manufacture, market, distribute and/or sell the Products in such Notified Applications itself or through third parties in Japan. 10.3 Training and Education Programs. Mochida shall provide, at Mochida's cost and expense, Education Programs and Training Programs in accordance with the schedule set forth in Exhibit B. Each Training Program and Education Program shall incorporate the training modules and education modules developed by Norian for use outside Japan, and the scope and content of each such Training Program and Education Program shall be presented in full detail at the Joint Development Committee and in the Business Plan (as defined in Section 12.8). Mochida shall be responsible for fully implementing and utilizing Education Programs and Training Programs to generate maximum demand for the Products in Japan, which Education Programs and Training Programs shall include training of medical representatives in all Norian Applications. 10.4 New Products Option. Norian agrees to notify Mochida of each planned New Product that Norian proposes to be commercialized in Japan ("New Product Notice"). Mochida shall have an option, on a New Product-by-New Product basis, to include such New Product under this Agreement -14- 16 ("Option"), exercisable by written notice to Norian delivered to Norian during the ninety (90) day period immediately following Norian's delivery of the New Product Notice to Mochida ("Option Period"). If Mochida exercises the Option within the Option Period, the New Product described in the New Product Notice shall be deemed a Product for all purposes of this Agreement and Mochida shall commence human clinical trials on the New Product within twelve (12) months after the date of Mochida's exercise notice and use its best efforts to complete Clinical Development of such New Product for all Norian Applications therefor, as expeditiously as possible. If Mochida exercises the Option for a New Product, Mochida shall pay to Norian reasonable milestone payments to be mutually agreed upon, taking into account the investment by Norian in developing such New Product, the level of innovation embodied therein and other similar factors. If Mochida does not exercise the Option during the Option Period, Norian may proceed to commercialize all or any part of the New Product itself or through third parties in Japan, with no further obligation to Mochida under this Section 10.4. ARTICLE 11 PRODUCT WARRANTY 11.1 Product Warranty. Norian warrants to Mochida that at the time of delivery to Mochida the Products purchased by Mochida shall conform to packaging and labeling specifications agreed upon by the parties and the specifications for the Products set forth in the Marketing Approval Application for such Product approved by the Ministry of Health and Welfare. This warranty is contingent upon proper use of Products in the application for which they were intended as indicated in the Product label claims, and Norian makes no warranty (express, implied, or statutory) for Products that are modified (except as expressly contemplated herein) or subjected to accident, misuse, neglect, unauthorized repair, or improper testing or storage. 11.2 Exclusive Remedy. In the event that any Product purchased by Mochida from Norian fails to conform to the warranty set forth in Section 11.1 above or is recalled pursuant to Section 12.6.2, Norian's sole and exclusive liability and Mochida's exclusive remedy shall be, at Norian's sole election, to repair or replace the Product, or component thereof, or credit Mochida's account for the net amount actually paid for any such Product, or component thereof, provided that (i) Mochida promptly notifies Norian in writing that such Product failed to conform and furnishes a detailed explanation of any alleged nonconformity and requests a return material authorization number; (ii) such Product is returned to Norian by Mochida F.O.B. the address designated by Norian during the warranty period with the return material authorization number affixed prominently to the outside packaging; and (iii) the claimed nonconformities actually exist and were not caused by accident, misuse, neglect, alteration, repair or improper testing or storage. If such Product fails to so conform, Norian will reimburse Mochida for shipment charges for return of the nonconforming Product. 11.3 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES PROVIDED IN SECTION 11.1 ABOVE AND SECTION 14.1 BELOW, NORIAN GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY COMMUNICATION WITH MOCHIDA OR THE CUSTOMER, OR OTHERWISE, REGARDING -15- 17 THE PRODUCTS OR VALIDITY OF NORIAN TECHNOLOGY, AND NORIAN SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF FITNESS FOR ANY PURPOSE, MERCHANTABILITY, AND NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. NORIAN NEITHER ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME ANY OTHER LIABILITIES ARISING OUT OF OR IN CONNECTION WITH THE SALE OR USE OF ANY NORIAN PRODUCT. ARTICLE 12 COMMERCIALIZATION 12.1 Advertising and Promotions. Mochida shall list the Products in its catalogs and make such Products available to its customers. Mochida shall vigorously advertise and promote the Products and shall transmit Product information and promotional materials to its customers, in order to maximize Product sales in Japan. Such advertising and promotion shall include, but shall not be limited to, trade show displays, training workshops, educational seminars and other activities related to promoting Products. 12.2 Materials. Norian shall provide to Mochida samples of Norian's promotional, educational and training materials for the Products in English. Mochida shall translate Norian's promotional and educational materials into Japanese, at Mochida's expense, and copy, use and distribute such materials in Japanese in Japan. Mochida shall provide to Norian samples of all promotional, advertising, exhibition, training and educational materials prepared by or on behalf of Mochida and relating to the Products, for purposes of review and approval by Norian (in Japanese and English), at least four (4) weeks prior to the date of intended commercial release of such materials or commencement of such programs. Norian shall make its best efforts to provide to Mochida, within ten (10) business days after receipt of such materials, any and all comments and suggestions relating to such materials. 12.3 Product Packaging and Labeling. Mochida shall not repackage or relabel Products supplied to Mochida by Norian hereunder without the prior written consent of Norian. 12.4 Inventory. Mochida shall maintain a quantity of each Product at all times during the term of this Agreement as necessary in order to meet the demand and service level requirements of Mochida's customers and potential customers. Mochida shall provide to Norian, at Mochida's expense, Product inventory levels and sales data as reasonably requested by Norian. 12.5 Market Research. Mochida shall assist Norian in assessing customer requirements for the Products, including modifications and improvements thereto, in terms of quality, design, functional capability, and other features. Mochida shall advise Norian on market conditions as reasonably requested by Norian. -16- 18 CONFIDENTIAL TREATMENT REQUESTED 12.6 Other Reporting. 12.6.1 Mochida shall provide, at Mochida's expense, within thirty (30) days after publication, copies of any and all articles, manuscripts, abstracts or other literature relating to the Products generated by investigators or others in Japan in each case to the extent reasonably available to Mochida. 12.6.2 Pursuant to the FDA's Medical Device Reporting (MDR) Regulations, Norian may be required to report to the FDA information that reasonably suggests that a Product may have caused or contributed to the death or serious injury or has malfunctioned and that the device would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Each of Norian and Mochida agree to supply to the other any such information promptly after becoming aware of it so that each of Norian and Mochida can comply with governmental reporting requirements. It is understood and agreed that reporting to Norian shall be within twenty-four (24) hours to enable Norian to comply with FDA reporting requirements. In the event that Norian is required by any regulatory agency to recall the Products or if Norian voluntarily initiates a recall of the Products, Mochida shall cooperate with and assist Norian in locating and retrieving if necessary, the recalled Products from Mochida's customers. Mochida shall maintain records of sales of Products to wholesalers and Subdistributors by lot number, and shall procure wholesalers and Subdistributors to maintain such records of sales of Products to end users, that is hospitals and physicians. Upon Norian's request, Mochida shall provide Norian with access to such records in the event of a Product recall or other quality related issue. Mochida shall be responsible for obtaining all records of Mochida and its Subdistributors' sales to end users in the event of a Product recall or other quality related issue. During the time that the Products are commercially marketed, distributed, or sold by Mochida, Mochida also shall promptly forward all Product complaints which it received to Norian. Mochida shall make available to Norian for inspection Mochida's process and records for adverse event and other regulatory reporting purposes at mutually agreed upon times and further shall ensure that Mochida's processes comply with all applicable laws and regulations in (i) the United States to the extent known to Mochida through Norian or which reasonably should be known to Mochida, and (ii) Japan. 12.7 Business Obligations. Any and all obligations associated with Mochida's business shall remain the sole responsibility of Mochida. Any and all sales and other agreements between Mochida and its customers are and shall remain Mochida's exclusive responsibility and shall have no affect on Mochida's obligations pursuant to this Agreement. 12.8 Annual Operating and Marketing Plans. Mochida shall develop annual operating and marketing plans for the Products (collectively, the "Business Plan") which shall include without limitation [CONFIDENTIAL INFORMATION REDACTED] and (iii) Education Programs, Training Programs and plans for support of personnel and customers which conform with the requirements of Section 10.3 above and 12.9 below. For each year during the term of this Agreement, the Business Plan shall be provided to Norian for review and approval by Norian not later than September 30 of such year. Mochida shall comply with the Business Plan, and shall appoint a product manager who shall be exclusively responsible for management of the Business Plan and for ensuring that Mochida complies with such Business Plan. -17- 19 [CONFIDENTIAL TREATMENT REQUESTED] 12.9 Customer Support. Mochida shall maintain knowledgeable support personnel to provide instructions to customers in the use of the Products. Without limiting the provisions of Section 10.3, Mochida agrees that such support personnel, that is medical representatives, product managers and product specialists, will, at Mochida's expense attend a hands-on sales training session relating to the Products in a location to be designated by Mochida, and observe the use of the Products in applicable surgical applications to improve the clinical knowledge of such personnel relating to the Products. Mochida shall be fully responsible for any and all technical support of Mochida's customers, that is surgeons, nurses, and hospital technical support staff. It is understood and agreed that as part of worldwide development of Products, Norian may contact Japanese users of the Products and will keep Mochida reasonably informed of such activity. 12.10 Norian Training. Norian shall provide basic training relating to use and application of the Products once per year free of charge for product managers, product specialists, clinical trial teams, and medical representatives, and other medical professionals and participants in Clinical Development for all Norian Applications free of charge at times to be mutually agreed upon by the parties, provided that such training shall be provided to surgeon clinical trialists up to [CONFIDENTIAL INFORMATION REDACTED] per year during the [CONFIDENTIAL INFORMATION REDACTED] of this Agreement and thereafter [CONFIDENTIAL INFORMATION REDACTED] (collectively "Basic Training"), and Mochida will ensure that such personnel both within and outside Mochida attend such training. Mochida will also ensure that all product managers, product specialists, clinical trial teams, and medical representatives, and other medical professionals and participants in Clinical Development attend Norian training specific to use of the Products in Norian Applications introduced from time to time during the term of this Agreement. Additional training may be provided by Norian to Mochida upon Mochida's request, which request shall not be unreasonably denied. Training in excess of the Basic Training first described above or that is provided at a location other than Norian's facilities in Cupertino, California shall be provided [CONFIDENTIAL INFORMATION REDACTED] the Basic Training or at Norian's facility in Cupertino, California, respectively. In addition, all expenses incurred by Mochida's personnel in connection with all training including without limitation travel and lodging expenses shall be borne by Mochida. All training set forth in this Section 12.10 shall be conducted at facilities mutually agreed upon by the parties. 12.11 Sales and Inventory Reports. Mochida shall provide to Norian semi-annual sales and inventory reports setting forth Mochida's sales and inventory of Products, on a Product-by-Product basis, during the prior six (6) month period. Such sales and inventory reports shall be submitted to Norian by June 30 and December 31 of each calendar year. 12.12 Marketing Committee. Upon submission of a Marketing Approval Application for the first Product, the parties shall establish a steering committee to oversee, review and coordinate Product launch in Japan, marketing activities in Japan with respect to the Products, and Training Programs ("Marketing Committee"). The Marketing Committee shall be comprised of an equal number of representatives from Mochida and Norian [CONFIDENTIAL INFORMATION REDACTED], selected by such party with at least one representative from Mochida at the Director level or above and at least one representative from Norian at the Vice President level or above. Each party may replace its -18- 20 CONFIDENTIAL TREATMENT REQUESTED Marketing Committee representatives at any time, with prior written notice to the other party. The Marketing Committee shall meet at times and locations to be mutually agreed, provided that the Marketing Committee shall meet no less frequently than once every six (6) months. ARTICLE 13 INTELLECTUAL PROPERTY 13.1 License. In consideration of the rights granted to Mochida under Section 7.1, Mochida grants to Norian the rights set forth in this Section 13.1. As used herein, "Mochida Intellectual Property Rights" shall mean all inventions, discoveries, know-how, information, and data and all patent rights and other intellectual property rights therein, made, conceived or reduced to practice by Mochida, alone or jointly with Norian or a third party in connection with the Clinical Development, or otherwise relating to or including Cementing biomaterial, a Product or any part thereof, or the manufacture or use of any of the foregoing. Mochida hereby grants to Norian [CONFIDENTIAL INFORMATION REDACTED] license, with the right to [CONFIDENTIAL INFORMATION REDACTED], under Mochida Intellectual Property Rights to manufacture, use and sell all products or components; practice any method or process; and otherwise exploit the Mochida Intellectual Property Rights; provided that such license shall be [CONFIDENTIAL INFORMATION REDACTED] with respect to the manufacture, use or sale of products, the practice of methods or processes and other exploitation of the Mochida Intellectual Property Rights outside Japan. Mochida promptly shall disclose to Norian all inventions and patent rights within the Mochida Intellectual Property Rights, and upon Norian's request shall disclose all know-how and information within the Mochida Intellectual Property Rights, including without limitation know-how and information reasonably required or useful for Norian to manufacture the Products. Subject to Mochida's use of best efforts to obtain from third parties the rights under Mochida Intellectual Property Rights made, conceived, or reduced to practice by Mochida jointly with third parties sufficient for Mochida to grant to Norian the rights and licenses set forth above, it is understood that the foregoing license under Mochida Intellectual Property Rights made, conceived or reduced to practice by Mochida jointly with third parties shall be limited to the extent that Mochida has the right to grant to Norian the rights and licenses set forth above. Upon Norian's request and at Norian's expense, Mochida further agrees to, and to cause its employees, agents and consultants to, sign, execute and acknowledge such documents and perform such acts as may be reasonably necessary for Norian to perfect Norian's rights in Mochida Intellectual Property Rights and obtain, enforce and defend all intellectual property rights worldwide in Mochida Intellectual Property Rights. At Mochida's option and election, Mochida may assign to Norian, [CONFIDENTIAL INFORMATION REDACTED], all or any part of the Mochida Intellectual Property Rights, in which event Norian's obligation to keep Mochida reasonably informed and consult with Mochida with respect to prosecution and maintenance of the Mochida Intellectual Property assigned to Norian shall terminate. 13.2 Prosecution; Cooperation. Norian shall have the exclusive right to pursue patent or other intellectual property protection for Mochida Intellectual Property Rights, and to enforce and defend such Mochida Intellectual Property Rights, in countries outside Japan at [CONFIDENTIAL INFORMATION REDACTED] and without accounting to Mochida, and Mochida agrees to take all reasonable action to -19- 21 CONFIDENTIAL TREATMENT REQUESTED cooperate fully with Norian in this regard. Norian and Mochida each shall keep the other reasonably informed as to the status of patent matters pertaining to the Mochida Intellectual Property Rights, and shall each cooperate with and assist the other in connection with such activities, at the other party's request and expense, and shall use good faith efforts to consult with each other regarding the prosecution and maintenance of the Mochida Intellectual Property Rights as is reasonably appropriate. 13.3 Defense of Third Party Infringement Claims. 13.3.1 If the manufacture, preparation, sale or use of any Product pursuant to this Agreement results in a claim, suit or proceeding brought by a third party against Mochida or Norian alleging infringement of such third party's Japanese patents (including utility models), or if the use of Norian's Marks (as defined in Section 18.6 below) in accordance with this Agreement results in such claim alleging infringement of such third party's trademark rights in Japan (collectively, "Actions"), such party shall promptly notify the other parties hereto in writing. The party subject to such Action shall have the exclusive right to defend and control the defense of any such Action using counsel of its own choice, and the Action, subject to Section 16.1, [CONFIDENTIAL INFORMATION REDACTED]. The party subject to the Action agrees to keep the other parties hereto reasonably informed of all material developments in connection with any such Action. 13.3.2 If such an Action is brought against Mochida, and Norian agrees in writing or a court of competent jurisdiction has determined, that the Product or Mark infringes the third party intellectual property rights that are the subject of such Action, then Mochida shall have the right to deduct up to [CONFIDENTIAL INFORMATION REDACTED] of the amounts actually paid by Mochida to the third party bringing such Action from the transfer prices set forth in Exhibit A paid by Mochida for such Product, provided that in no event shall the transfer price for the Product be reduced by more than [CONFIDENTIAL INFORMATION REDACTED]. The foregoing right of offset shall be Mochida's exclusive remedy and Norian's sole liability to Mochida or its Subdistributors with respect to infringement of third party intellectual property rights by the Products, or the manufacture, sale or use thereof. 13.4 Enforcement. Subject to the provisions of this Section 13.4, in the event that Norian or Mochida reasonably believes that any Norian patents necessary for the manufacture, use or sale of a Product is infringed or misappropriated by a third party or is subject to a declaratory judgment action arising from such infringement in Japan, in each case with respect to the manufacture, sale or use of a product in Japan, Norian or Mochida (respectively) shall promptly notify the other party hereto, and Mochida shall cooperate with Norian and provide to Norian full information with respect to third party infringement or misappropriation. [CONFIDENTIAL INFORMATION REDACTED] (for purposes of this Section 13.4, an "Enforcement Action"). The parties shall consult with one another concerning the possibility of initiating an Enforcement Action, it being understood that the decision whether to initiate an Enforcement Action shall be made [CONFIDENTIAL INFORMATION REDACTED] [CONFIDENTIAL INFORMATION REDACTED] of the costs and expenses (including attorneys' and professional fees) of such Enforcement Action under this -20- 22 Section 13.4. Any recovery received as a result of any Enforcement Action to enforce Norian patents pursuant to this Section 13.4 shall be used first to reimburse Norian for the costs and expenses (including attorneys' and professional fees) incurred in connection with such Enforcement Action, and the remainder of the recovery shall be shared equally between Norian and Mochida; provided, however, if the Enforcement Action applies outside the Field or Norian initiates the Enforcement Action and does not request that Mochida pay the costs and expenses thereof, Norian shall retain one hundred percent (100%) of the amounts recovered in such Enforcement Action. ARTICLE 14 REPRESENTATIONS AND WARRANTIES 14.1 Norian Warranties. Norian warrants and represents to Mochida that (i) it has the full right and authority to enter into this Agreement and grant the rights granted herein; (ii) it has not previously granted and will not grant any rights in conflict with the rights granted herein; and (iii) to Norian's knowledge and belief, there are no existing or threatened actions, suits or claims pending against it with respect to its right to enter into and perform its obligations under this Agreement. Notwithstanding the foregoing, Mochida acknowledges that Norian may obtain Delivery/Nonbiomaterial Components included within the Products from third party suppliers, and the rights granted under this Agreement with respect to such Delivery/Nonbiomaterial Components shall be limited to the extent that Norian has the right to grant the same to Mochida. 14.2 Mochida Warranties. Mochida warrants and represents to Norian that (i) Mochida has the full right and authority to enter into this Agreement and grant the rights granted herein; (ii) Mochida has not previously granted and will not grant any rights in conflict with the rights granted herein; and (iii) to Mochida's knowledge and belief, there are no existing or threatened actions, suits or claims pending against it with respect to its right to enter into and perform its obligations under this Agreement. 14.3 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 11.1 AND THIS ARTICLE 14, NORIAN AND MOCHIDA EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CLINICAL DEVELOPMENT, THE PRODUCTS AND NORIAN INTELLECTUAL PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF NORIAN TECHNOLOGY, PATENTED OR UNPATENTED, AND NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ARTICLE 15 CONFIDENTIALITY 15.1 Confidential Information. Except as expressly provided herein, the parties agree that, for the term of this Agreement and for seven (7) years thereafter, the receiving party shall not publish or -21- 23 otherwise disclose and shall not use for any purpose any information furnished to it by the other party hereto pursuant to this Agreement which if disclosed in tangible form is marked "Confidential" or with other similar designation to indicate its confidential or proprietary nature, or if disclosed orally is confirmed as confidential or proprietary by the party disclosing such information at the time of such disclosure ("Confidential Information"). Notwithstanding the foregoing, it is understood and agreed that Confidential Information shall not include information that, in each case as demonstrated by written documentation: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; or (d) was subsequently lawfully disclosed to the receiving party by a person other than a party hereto or developed by the receiving party without reference to any information or materials disclosed by the disclosing party. 15.2 Permitted Disclosures. Notwithstanding the provisions of Section 15.1 above, each party hereto may disclose the other's Confidential Information to the extent such disclosure is reasonably necessary, in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations, submitting information to tax or other governmental authorities, or conducting clinical trials, provided that if a party is required to make any such disclosure of another party hereto's Confidential Information, to the extent it may legally do so, it will give reasonable advance written notice to the latter party of such disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information prior to its disclosure (whether through protective orders or otherwise). If the party whose Confidential Information is to be disclosed has not filed a patent application with respect to such Confidential Information, it may require the other party to delay the proposed disclosure (to the extent the disclosing party may legally do so), for up to ninety (90) days after receipt of written notice from the disclosing party of its intent to disclose, to allow for the filing of such an application. ARTICLE 16 INDEMNIFICATION 16.1 Indemnification of Norian. Mochida shall indemnify each of Norian and the directors, officers, and employees of Norian and the licensors, successors and assigns of any of the foregoing (the "Norian Indemnitees"), and hold each Norian Indemnitee harmless from and against any and all liabilities, -22- 24 damages, settlements, claims, actions, suits, penalties, fines, costs or expenses (including, without limitation, reasonable attorneys' fees and other expenses of litigation) (any of the foregoing, a "Claim") incurred by any Norian Indemnitee, arising from or occurring as a result of (a) claims relating to any Products used, sold or otherwise distributed by Mochida, or Subdistributors of Mochida except to the extent such claim is covered under Section 16.2 below or is caused by the gross negligence or willful misconduct of a Norian Indemnitee; (b) subject to Section 13.3.1 above, infringement claims brought in Japan by third parties with respect to Norian's manufacture or supply of Products hereunder, except to the extent caused by Norian's willful infringement of a third party intellectual property right, which third party intellectual property right Mochida was not aware of and should not reasonably have been aware of at the time the cause of action arose; or (c) the gross negligence or willful misconduct of Mochida. 16.2 Indemnification of Mochida. Norian shall indemnify each of Mochida and the directors, officers, and employees of Mochida and the successors and assigns of any of the foregoing (the "Mochida Indemnitees"), and hold each Mochida Indemnitee harmless from and against any and all liabilities, damages, settlements, claims, actions, suits, penalties, fines, costs or expenses (including, without limitation, reasonable attorneys' fees and other expenses of litigation) (any of the foregoing, a "Claim") incurred by any Mochida Indemnitee, arising from or occurring as a result of a claim brought by a third party caused by a failure by Norian to manufacture the Product in accordance with the specifications for such Product set forth in the packaging and labeling specifications agreed upon by the parties pursuant to Section 11.1 and the Marketing Approval Application for such Product, or the gross negligence or willful misconduct of Norian, except to the extent such claim is covered under Section 16.1 above or is caused by the gross negligence of willful misconduct of Mochida. 16.3 Procedure. A party (the "Indemnitee") that intends to claim indemnification under this Article 16 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its directors, officers, employees, agents, licensors, successors or assigns intends to claim such indemnification, and, except for matters described in Section 16.1(b) above, the Indemnitor shall have sole control of the defense and/or settlement thereof. The indemnity agreement in this Article 16 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 16 but the omission so to deliver written notice to the Indemnitor shall not relieve the Indemnitor of any liability that it may have to any Indemnitee otherwise than under this Article 16. The Indemnitee under this Article 16, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives and provide full information in the investigation of any Claim covered by this indemnification. The foregoing sentence shall also apply with respect to each party's cooperation and assistance in the event a third party claim is brought against the other party arising out of the manufacture, use, or sale of the Products which claim is not included within the indemnification obligations of such other party, provided that such cooperation or assistance would not, in such other party's judgment, be prejudicial to its ability to defend itself against a claim brought against such other party by the same third party. -23- 25 ARTICLE 17 TERM AND TERMINATION 17.1 Term. This Agreement shall become effective as of the Effective Date and, unless earlier terminated pursuant to the other provisions of this Article 17, shall continue in full force and effect for a period of ten (10) years after approval of the first Marketing Approval Application by the Japanese Ministry of Health and Welfare for the first biomaterial component of a Product, but in no event more than fifteen (15) years after the Effective Date ("Initial Term"), unless earlier terminated in accordance with this Article 17. This Agreement may be renewed for up to an additional five (5) year period by mutual written agreement of the parties prior to the expiration of the Initial Term. Unless the parties so agree to extend this Agreement, this Agreement shall expire at the end of the Initial Term. 17.2 Termination for Cause. Either Norian or Mochida may terminate this Agreement by written notice stating each party's intent to terminate in the event the other shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for sixty (60) days after written notice thereof was provided to the breaching party by the non-breaching party. 17.3 Termination for Serious Adverse Events. In the event a Product causes death or serious injury resulting in a requirement by the Ministry of Health and Welfare to cease Clinical Development of the Products ("Serious Event"), Mochida shall notify Norian promptly and thereafter Mochida and Norian shall consult with one another to determine the cause of the Serious Event and the appropriate course of action. If the parties do not agree upon an acceptable course of action during the sixty (60) days following a Serious Event, either party may terminate this Agreement during the sixty (60) days thereafter upon thirty (30) days prior written notice. 17.4 Effect of Breach or Termination. 17.4.1 Accrued Obligations. In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Norian or Mochida. Termination of this Agreement for any reason, however, shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. Subject to any liability for damages by reason of a breach of this Agreement by Norian, Norian may retain any amounts paid to it prior to the effective date of any termination of this Agreement. 17.4.2 Other Rights on Termination. Upon expiration or any termination of this Agreement, other than termination of this Agreement by Mochida for Norian's breach pursuant to Section 17.2 Mochida shall transfer ownership of any and all preclinical and/or clinical data made by or -24- 26 for Mochida and of all product registrations of any kind with respect to Products and applications therefor, including without limitation Marketing Approval Applications, Reimbursement Price approvals, and any other governmental approvals, registrations and the like to Norian, at Mochida's cost and expense and shall execute such documents and perform such acts as may be necessary, useful, or convenient to perfect such transfer. It is understood that Norian may use and disclose the foregoing for any purpose. 17.4.3 Repurchase of Inventory. As soon as reasonably practicable but no later than thirty (30) days after the effective date of termination of this Agreement, Mochida shall provide Norian a complete inventory of Products in Mochida's possession, or in transit to Mochida from Norian or otherwise in Mochida's control. At such time, Norian may inspect Mochida's Product inventory and audit Mochida's records in the manner provided hereinabove. If Norian terminates this Agreement pursuant to Section 17.2 for Mochida's breach, then Norian, in Norian's sole discretion, may purchase or instruct Mochida to destroy, and Mochida shall sell to Norian or destroy and provide to Norian written certification of destruction, respectively, all or any part of Mochida's inventory of Products in Mochida's possession on the effective date of such termination. If Mochida terminates this Agreement pursuant to Section 17.2 for Norian's breach or Mochida terminates this Agreement pursuant to Section 17.3, Norian shall purchase and Mochida shall sell to Norian those Products in Mochida's inventory of Products existing on the effective date of such termination that Mochida purchased from Norian within the three (3) month period prior to the effective date of termination and that are in good and resaleable condition in their original packaging. All other units of Products existing in inventory shall be destroyed by Mochida, and Mochida shall provide written certification of destruction to Norian. The price of repurchased inventory, whether this Agreement is terminated by Norian or Mochida, shall be the net price actually paid by Mochida (i.e., net of any prior Mochida price adjustment, credits or other allowances) plus any shipping insurance, customs duties, or taxes (other than taxes paid with respect to Mochida's net income) actually paid by Mochida with respect to such repurchased Products. Products purchased from Mochida by Norian pursuant to this Section 17.4.3 shall be shipped promptly by Mochida, at Norian's expense, to a location specified by Norian. 17.5 Return of Materials. All trademarks, marks, trade names, patents, copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales and promotional aids of every kind relating to the Products and received from or owned by Norian shall remain the property of Norian. Within thirty (30) days after the effective date of termination of this Agreement, Mochida shall destroy all tangible items bearing, containing, or contained in, any of the foregoing, in its possession or control and provide written certification of such destruction, or prepare such tangible items for shipment to Norian, as Norian may direct, at Norian's expense. Mochida shall not make or retain any copies of any Confidential Information of Norian which may have been entrusted to it. Effective upon the termination of this Agreement, Mochida shall cease to use all trademarks and trade names of Norian. During the term of this Agreement and after any termination or expiration of this Agreement, Norian shall have the right to continue to use and disclose for any purpose customer lists, customer data and other customer information and any and all clinical trial results and other data relating to the Products, which is or was provided or required to be provided by Mochida to Norian pursuant to this Agreement. -25- 27 17.6 No Renewal, Extension or Waiver. Acceptance of any order from, or sale or license of, any Product to Mochida after the effective date of termination of this Agreement shall not be construed as a renewal or extension hereof, or as a waiver of termination of this Agreement. 17.7 Survival. Articles 1, 15, 16, 19, 20, and 21; Sections 5.1, 6.2, 7.4, 9.7, 12.6.2, 13.1, 13.2, 17.4, 17.5, 17.6 and 17.7; and the second sentence of Section 3.2(a) shall survive expiration or termination of this Agreement for any reason. In addition, in the event this Agreement is terminated by Norian, pursuant to Section 17.2, the provisions of Section 7.2 shall survive for a period of five (5) years. ARTICLE 18 TRADEMARKS 18.1 Marks. During the term of this Agreement, Mochida shall have the right and agrees to, advertise and promote the Products in Japan under Norian's trademarks and trade names identified on Exhibit C as modified by Norian pursuant to this Section 18.1 ("Marks"). Norian reserves the right to modify Marks or substitute alternative marks for any or all of the Marks at any time upon thirty (30) days prior written notice, provided that Norian shall not modify the Marks unreasonably after the filing of the Marketing Approval Application. The rights granted under this Section 18.1 shall automatically terminate on termination or expiration of this Agreement. Norian shall endeavor to register the Marks with the Japanese Patent Office as trademarks in the appropriate classes and maintain the registrations of such Marks, and Mochida shall cooperate and upon Norian's request, provide full information and reasonable assistance to Norian in registering and maintaining the Marks, including without limitation providing evidence of use of the Marks as reasonably required to renew registrations or defend actions for cancellations. 18.2 Use. Mochida shall not remove, modify, or obscure Marks affixed to Products without the prior written consent of Norian. Except as set forth in this Section 18.2, nothing contained in this Agreement shall grant to Mochida any right, title or interest in or to Marks whether or not specifically recognized or perfected under applicable laws of Japan, and Mochida irrevocably assigns to Norian all such right, title and interest, if any, in any Marks. At no time during or after the term of this Agreement shall Mochida challenge or assist others to challenge Marks or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to Marks. All representations of Marks that Mochida intends to use shall first be submitted to Norian for approval (which shall not be unreasonably withheld) of design, color, and other details or shall be exact copies of those used by Norian. In addition, Mochida shall fully comply with all reasonable guidelines, if any, communicated by Norian concerning the use of Marks. -26- 28 ARTICLE 19 LIMITATION OF LIABILITY EXCEPT FOR LIABILITY ARISING UNDER SECTION 16.2, NORIAN'S LIABILITY ARISING OUT OF THIS AGREEMENT, THE TERMINATION THEREOF, AND/OR SALE OF THE PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY MOCHIDA FOR THE PRODUCT. IN NO EVENT SHALL NORIAN BE LIABLE TO MOCHIDA OR ANY OTHER ENTITY FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS, LOST PROFITS, OR ANY OTHER SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THESE LIMITATIONS SHALL APPLY WHETHER OR NOT NORIAN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN. ARTICLE 20 DISPUTE RESOLUTION 20.1 Disputes. If the Joint Development Committee, or Norian and Mochida, are unable to resolve any dispute between them, either Norian or Mochida may, by written notice to the other, have such dispute referred to the chief executive officers (or equivalent) of Norian and Mochida, for attempted resolution by good faith negotiations within twenty-one (21) days after such notice is received. Unless otherwise mutually agreed, the negotiations between the designated officers shall be conducted by telephone, with three (3) days and times within the period stated above offered by the designated officers of Mochida to the designated officer of Norian for consideration. 20.2 Arbitration. Any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to alleged breach or to termination of this Agreement, shall be settled by final, binding arbitration in the manner described in this Section 20.2. The arbitration shall be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association then in effect ("Rules"). Notwithstanding those rules, the following provisions shall apply to the arbitration hereunder: 20.2.1 Arbitrators. The arbitration shall be conducted by a panel of three (3) arbitrators ("the Panel"). Each party shall have the right to appoint one (1) member of the Panel, with the third member to be mutually agreed by the two (2) Panel members appointed by the parties or appointed in accordance with the rules of the American Arbitration Association. The arbitrators shall be persons in the medical device industry with experience in the matters in dispute. 20.2.2 Proceedings. The parties and the arbitrators shall use their best efforts to complete the arbitration within one (1) year after the appointment of the Panel under Section 20.2.1 above, unless a party can demonstrate to the Panel that the complexity of the issues or other reasons warrant the -27- 29 extension of the time table. In such case, the Panel may extend such time table as reasonably required. Notwithstanding the foregoing, any arbitration of whether a milestone payment is due under Section 4.2 above shall be completed and a decision reached within sixty (60) days after the appointment of the Panel. The Panel shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions, except that the interpretation of and enforcement of this Article 20 shall be governed by the U.S. Federal Arbitration Act. The proceeding shall take place in the city and county of San Francisco, California. The fees of the Panel shall be paid by the losing party which party shall be designated by the Panel. If the Panel is unable to designate a losing party, it shall so state and the fees shall be shared equally between the parties. ARTICLE 21 MISCELLANEOUS 21.1 Governing Law. This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with, the laws of the State of California, without reference to conflicts of laws principles and without regard to the 1980 Convention on the International Sale of Goods. 21.2 Review by Fair Trade Commission. Mochida agrees to file this Agreement, if required, with the Japan Fair Trade Commission (the "JFTC"), and shall provide to Norian English translations of all notifications filed in connection with this Agreement promptly after such filing. If the JFTC advises or recommends the amendment or deletion of any terms and conditions of, or any addition to, this Agreement, Mochida shall immediately inform Norian of such advice or recommendation and the parties shall negotiate in good faith to modify this Agreement in accordance with such advice or recommendation. Notwithstanding the provisions of Section 21.9, if within thirty (30) days after receipt of a written recommendation from the JFTC, the parties do not reach agreement, either party may terminate this Agreement without incurring any further liability or obligation. 21.3 Force Majeure. Nonperformance of any party (except for payment obligations) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, delay or failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the gross negligence or willful misconduct of the nonperforming party. 21.4 No Implied Waivers; Rights Cumulative. No failure on the part of Norian or Mochida to exercise and no delay in exercising any right under this Agreement, or provided by statute or at law or in equity or otherwise, shall impair, prejudice or constitute a waiver of any such right, nor shall any partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. 21.5 Independent Contractors. Nothing contained in this Agreement is intended implicitly, or is to be construed, to constitute Norian or Mochida as partners in the legal sense. No party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the -28- 30 name of any other party or to bind any other party to any contract, agreement or undertaking with any third party. 21.6 Notices. All notices, requests and other communications hereunder shall be in writing and shall be personally delivered or sent by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other parties hereto: Mochida: __________________________________ __________________________________ Attn: _________________________ with a copy to: __________________________________ __________________________________ __________________________________ __________________________________ Attn: General Counsel Norian: Norian Corporation 10260 Bubb Road Cupertino, California 95014-4166 Attn: _________________________ with a copy to: Wilson, Sonsini, Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Kenneth A. Clark, Esq. 21.7 Assignment. This Agreement shall not be assignable by either party to any third party hereto without the written consent of the other party hereto; except that either party may assign this Agreement without the other party's consent to an entity that acquires all or substantially all of the business or assets of the assigning party, in each case whether by merger, acquisition, or otherwise. 21.8 Modification. No amendment or modification of any provision of this Agreement shall be effective unless in writing signed by all parties hereto. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by all parties. -29- 31 21.9 Severability. If any provision hereof should be held invalid, illegal or unenforceable in any jurisdiction, all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible. Such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. The provisions of this Section 21.9 shall be subject to the provisions of Section 21.2. 21.10 Publicity. Each of the parties hereto agrees not to disclose to any third party the financial terms of this Agreement without the prior written consent of the other party hereto, except to advisors, investors and others on a need-to-know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law. Notwithstanding the foregoing, the parties shall agree upon a press release to announce the execution of this Agreement, together with a corresponding Question & Answer outline for use in responding to inquiries about the Agreement; thereafter, Mochida and Norian may each disclose to third parties the information contained in such press release and Question & Answer outline without the need for further approval by the other. From time to time during the term of this Agreement, upon Norian's request, the parties shall agree upon additional press releases. 21.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together, shall constitute one and the same instrument. 21.12 Headings. Headings used herein are for convenience only and shall not in any way affect the construction of or be taken into consideration in interpreting this Agreement. 21.13 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of Norian and Mochida are subject to prior compliance with United States export regulations and such other United States laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States. Norian and Mochida shall cooperate with each other and shall provide assistance to the other as reasonably necessary to obtain any required approvals. 21.14 No Implied Licenses. Except as expressly provided herein, no party hereto grants to any other party hereto any rights or licenses under such party's patent rights, trade secrets or other intellectual property rights. 21.15 Entire Agreement. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement with respect to the subject matter hereof, and supersedes all prior or contemporaneous understandings or agreements, whether written or oral, between Norian and Mochida with respect to such subject matter. -30- 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered effective as of the Effective Date. NORIAN CORPORATION MOCHIDA PHARMACEUTICAL CO. LTD. By: ________________________________ By: _______________________________ Name: ______________________________ Name: _____________________________ Title: _____________________________ Title: ____________________________ -31- 33 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT A Transfer Prices 1. The price to Mochida for Products intended for commercial sale shall be equal to the prices set forth in this paragraph 1 below: a. Durable components of the Products such as mixers and injection guns ("Durable Components"): [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price, but in the event that a Reimbursement Price is not obtained, then the transfer price set forth in Section 1(d) below shall apply. b. Consumable components of the Products such as delivery nozzles, needles, and other single-use components of the Products, but excluding Biomaterial Components ("Consumable Components"): [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price, but in the event that a Reimbursement Price is not obtained, then the transfer price set forth in Section 1(d) below shall apply. c. Biomaterial components of the Products ("Biomaterial Components"): i. Until the earlier of (i) [CONFIDENTIAL INFORMATION REDACTED] after approval of a Marketing Approval Application in Japan, or (ii) such time as [CONFIDENTIAL INFORMATION REDACTED] exceed either [CONFIDENTIAL INFORMATION REDACTED] in any given one year period after the date of first commercial sale of the first Product, [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price. ii. Thereafter, the transfer price shall be [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price up to or equaling the threshold for the amount of annual Net Sales calculated as set forth below, and if the amount of annual Net Sales exceeds any of the threshold levels calculated as set forth below, then the transfer price for Products exceeding the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED] of the Reimbursement Price: 1. If the Reimbursement Price for 10cc of Biomaterial Components is less than [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED]. 2. If the Reimbursement Price for 10cc of Biomaterial Components is more than [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be [CONFIDENTIAL INFORMATION REDACTED]. 34 CONFIDENTIAL TREATMENT REQUESTED 3. If the Reimbursement Price for 10cc of Biomaterial Components is between [CONFIDENTIAL INFORMATION REDACTED], then the threshold for annual Net Sales shall be calculated in accordance with the following formula: [CONFIDENTIAL INFORMATION REDACTED], where [CONFIDENTIALITY INFORMATION REDACTED] iii. In the event that a Reimbursement Price is not obtained for Biomaterial Components, the transfer price set forth in Section 1(d) below shall apply to sales of Biomaterial Components to Mochida, and notwithstanding the foregoing provisions of this Section 1(c) set forth above, in no event shall the transfer price for Biomaterial Components be less than [CONFIDENTIAL INFORMATION REDACTED] for 5cc of Biomaterial Components, [CONFIDENTIAL INFORMATION REDACTED] for 10cc of Biomaterial Components, and [CONFIDENTIAL INFORMATION REDACTED] for 20cc of Biomaterial Components; provided that upon either party's request, the parties shall negotiate in good faith as mutually agreed a reduction in the foregoing fixed prices in the event Norian's Production Costs for the Biomaterial Components materially decrease. d. Notwithstanding the prices set forth in Paragraphs 1(a), 1(b) and 1(c) above, in no event shall the price for Biomaterial Components of Products be less than a price that provides Norian with a gross margin of [CONFIDENTIAL INFORMATION REDACTED], and the price of Consumable Components and Durable Components shall not be less than Norian's Production Cost plus [CONFIDENTIAL INFORMATION REDACTED]. 2. Norian shall provide to Mochida mutually agreed upon quantities of Products intended for use in clinical trials free of charge. -2- 35 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT B Training and Educational Programs Mochida shall provide Education Programs and Training Programs in accordance with the schedule set forth below for all Norian Applications:
Training Time to Complete -------- ---------------- 1. Education Programs and Training Programs for all Within [CONFIDENTIAL INFORMATION REDACTED] after the investigators and trialists who will participate in Effective Date Clinical Development 2. Education Programs and Training Programs for all Within [CONFIDENTIAL INFORMATION REDACTED] after faculty who will participate in providing the Training receipt of governmental approval of a Marketing Programs and Education Programs set forth in Sections Approval Application for a Product in Japan 3 and 4 below 3. Education Programs and Training Programs comprised Within [CONFIDENTIAL INFORMATION REDACTED] after of workshops for a minimum of [CONFIDENTIAL receipt of governmental approval of a Marketing INFORMATION REDACTED] key universities and large Approval Application for a Product in Japan hospitals 4. Education Programs for a minimum of [CONFIDENTIAL On [CONFIDENTIAL INFORMATION REDACTED], commencing on INFORMATION REDACTED] surgeons per year, with a the date of receipt of governmental approval of a [CONFIDENTIAL INFORMATION REDACTED] surgeons in Marketing Approval Application for a Product in Japan attendance at any one Education Program workshop.
Education Programs and Training Programs provided by Mochida shall address all Norian Applications. 36 EXHIBIT C Marks [TO BE COMPLETED BY NORIAN] 37 EXHIBIT D Preferred Stock Purchase Agreement 38 EXHIBIT E Norian Applications 1. Fractured distal radius repair 2. Tibial plateau repair 3. Intertrochanteric fracture of the hip repair 4. Spinal reconstructive surgery 39 EXHIBIT F Norian Data U.S. F.D.A. IDE #G92077 and all supplements thereto -----END PRIVACY-ENHANCED MESSAGE-----