<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 333-3399
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORIAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3842 77-0147561
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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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.
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<PAGE> 2
NORIAN CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1
REGISTRATION STATEMENT LOCATION OF CAPTION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Forepart of Registration Statement; Outside
Front Cover Page; Additional Information
2. Inside Front and Outside Back Cover
Pages of Prospectus........................ Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges......... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Outside and Inside Front Cover Pages;
Underwriting; Outside Back Cover Page
9. Description of Securities to be
Registered................................. Prospectus Summary; Dividend Policy;
Capitalization; Description of Capital
Stock; Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant................................. Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Shareholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements; Outside and
Inside Back Cover Pages
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
Subject to Completion
June 18, 1996
3,000,000 SHARES
LOGO
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by Norian
Corporation ("Norian" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
NORI.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE PROCEEDS
TO TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS AND
COMMISSIONS(1)
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<S> <C> <C> <C>
Per Share................................ $ $ $
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Total(3)................................. $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses of the offering estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock offered by the several Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about June ,
1996.
ALEX. BROWN & SONS ROBERTSON, STEPHENS & COMPANY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS JUNE , 1996.
<PAGE> 4
INSIDE FRONT COVER
Photo One
Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver bone.
A compression fracture of the upper tibia forces a fragment of the knee joint
surface downward, crushing the porous cancellous bone beneath it.
Photo Two
Computer-enhanced cutaway depiction of reduced tibial plateau fracture in
cadaver bone.
Surgical intervention restores the bone fragments to their proper positions, but
leaves a void in the cancellous bone beneath the joint surface.
Photo Three
Computer-enhanced cutaway depiction of the insertion of Norian SRS into a
cancellous bone void secured with three orthopaedic screws in cadaver bone.
Norian SRS may be used to fill this void in the crushed cancellous bone.
Orthopaedic screws are used, as in this example, if the fracture has broken the
hard cortical bone on the side of the tibia.
Photo Four
Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver bone
treated with Norian SRS and orthopaedic screws.
The Company believes that the use of Norian SRS may provide direct structural
support to the fracture site, improve the fixation of screws and other
orthopaedic hardware and reduce the amount of orthopaedic hardware required for
an optimal outcome.
Photo Five
Computed-enhanced cutaway depiction of healed tibial plateau fracture in
cadaver bone with majority of Norian SRS replaced by natural bone.
The Company believes that Norian SRS will help to maintain proper alignment of
the joint surface throughout the healing process, resulting in improved
long-term functionality of the knee. Over time, Norian SRS appears to be
replaced with natural bone.
Photo Six
Cancellous man
Computer-generated depiction of human skeleton with regions of cancellous bone
highlighted.
Norian SRS is an injectable, moldable and biocompatible cancellous bone fixation
and replacement material. Cancellous bone comprises approximately 20% of the
human skeleton and is found principally in the spine and at the ends of long
bones near joints.
Norian SRS is an investigational device and has not been approved by the FDA
for marketing in the United States. Norian SRS cannot be sold commercially in
the United States unless and until such FDA approval is obtained, and FDA
approvals may not be received for several years, if at all.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
Norian(R), the Norian logo, CrystalCoat(R), SRS(R) and Norian SRS(R) are
trademarks of the Company. Trademarks of others are also referred to in this
Prospectus.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Norian develops, manufactures and markets Norian Skeletal Repair System
("Norian SRS"), a proprietary bone fixation and replacement material designed
for use in regions of structurally compromised cancellous bone such as the
wrist, hip, knee and spine. Norian SRS is inserted into bone defects as a paste,
either through minimally invasive injection or in an open surgical procedure.
The material sets within 10 minutes of application and continues to cure over 12
hours to achieve its ultimate strength. The Company believes that Norian SRS
provides direct structural support to compromised cancellous bone and can
withstand compressive mechanical force soon after a procedure and over time.
Additionally, Norian SRS may reduce the need for orthopaedic hardware in
weakened cancellous bone. Norian SRS cures into a crystalline structure similar
to the mineral phase of natural bone and appears to be replaced by natural bone
over time.
Fractures in cancellous bone tend to be complex, highly variable and
difficult to repair with currently available treatment methods. These problems
are compounded when cancellous bone is weakened by osteoporosis. The Company
believes that Norian SRS overcomes the shortcomings of currently available
treatment methods for cancellous bone fractures. The Company believes that one
of the principal benefits of Norian SRS is to provide direct structural support
to fractures, thereby reducing the risk of loss of anatomical positioning during
the healing process and improving post-operative function and long-term outcome
for the patient. In addition, Norian SRS may decrease the overall treatment cost
by reducing the extent of rehabilitation required following fracture fixation
and immobilization.
The orthopaedic trauma market is the second largest segment of the
orthopaedic industry, representing approximately 19% of the industry's $2.2
billion estimated 1995 sales in the United States. This market includes over six
million fractures in the United States every year. The Company's strategy is to
establish Norian SRS as the leading cancellous bone fixation and replacement
product to be used independently or in conjunction with conventional fixation
devices. Key elements of the Company's strategy include seeking regulatory
approvals in the United States and in other selected countries and demonstrating
clinical utility and cost-effectiveness by conducting clinical trials of the use
of Norian SRS in selected applications. Following receipt of regulatory
approvals, the Company intends to focus on providing extensive physician
education and training, seeking reimbursement from third-party payors and
establishing a direct sales force in the United States and a direct sales force
or a network of distributors in foreign markets. However, there can be no
assurance that the Company will receive such regulatory approvals or that any
such approvals will not contain substantial restrictions limiting the Company's
intended uses and applications.
The Company intends to seek regulatory approval of Norian SRS as a
cancellous bone cement. Under an Investigational Device Exemption ("IDE")
approved by the United States Food and Drug Administration ("FDA"), the Company
is conducting a randomized, multi-center clinical trial of the use of Norian SRS
in the treatment of wrist fractures in up to 324 patients. This study is
designed to demonstrate the safety and efficacy of Norian SRS in its ability to
maintain the anatomical alignment of cancellous bone fragments and to improve
functional outcomes such as grip strength and range of motion. The Company
expects to use the data from this trial to support a pre-market approval ("PMA")
application to market Norian SRS in the United States and to demonstrate its
cost-effectiveness to third-party payors for purposes of reimbursement. As of
April 30, 1996, 196 patients had been enrolled in the study. The Company is also
seeking to obtain the right to affix to Norian SRS the "CE" mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. The CE mark will allow the
Company to market the product in all of the member countries of the European
Union ("EU"). In addition, the Company has test-marketed Norian SRS in the
Netherlands since 1994, where the product is approved for commercial sale.
In April 1996, the Company and Mochida Pharmaceutical Co., Ltd. ("Mochida")
entered into a collaborative agreement for the exclusive marketing and
distribution of Norian SRS in Japan for use in certain applications (the
"Mochida Transaction"). The agreement provides for payments by Mochida to Norian
of up to a total of $15.0 million, consisting of a $7.0 million equity
investment completed in April 1996 and $8.0
3
<PAGE> 6
million in non-refundable payments based on achievement of time-related,
clinical and regulatory milestones, of which $2.0 million was received upon
execution of the contract. Mochida will be responsible for performing clinical
development in accordance with the Company's protocols and obtaining government
approval for Norian SRS in Japan. The Company will be responsible for
manufacturing and supplying the product to Mochida. The agreement has an initial
term ending on the earlier of 10 years from the date of regulatory approval to
commence commercial sales of Norian SRS in Japan or 15 years from the date of
the agreement.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
significant degree of risk, including the risk that the Company may not receive
required regulatory approvals for its product from governmental entities, the
risk that the Company is dependent upon its sole proprietary product, Norian
SRS, the risk that the Company's product may not achieve market acceptance, the
risk that third-party reimbursement for the Company's product may be unavailable
or limited and the risks associated with the Company's limited sales, marketing
and manufacturing experience. See "Risk Factors".
The Company will not be able to market Norian SRS in the United States
unless and until it obtains clearance or approval from the FDA, and there can be
no assurance that the Company will obtain FDA clearance or approval for such
product on a timely basis, if at all.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
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
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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<S> <C> <C> <C>
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
</TABLE>
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(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
<PAGE> 8
RISK FACTORS
The following factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. The Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of these risk factors.
Lack of Regulatory Approvals. The Company's product, Norian SRS, has not
been approved for sale in the United States. To market Norian SRS in the United
States, the Company must obtain approval from the FDA. In the United States, the
Company intends to file a PMA application seeking labeling for usage of Norian
SRS as a cancellous bone cement in regions of cancellous bone throughout the
body. There can be no assurance that the FDA will act favorably or quickly on
the Company's planned PMA application, and significant difficulties and costs
may be encountered by the Company in its efforts to obtain such approval that
would delay or preclude the Company from selling its products in the United
States. Furthermore, there can be no assurance that the FDA will not request
additional data, require the Company to conduct further clinical and
non-clinical studies, or require supplements to the Company's PMA application,
causing the Company to incur substantial cost and delay. In addition, if PMA
approval is obtained, there can be no assurance that such approval will not
significantly restrict the anatomic sites or types of procedures for which
Norian SRS can be used. Failure to obtain PMA approval or restrictions on the
anatomic sites and types of procedures for which Norian SRS may be used would
substantially limit the Company's ability to market Norian SRS in the United
States, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
To market Norian SRS in Europe and certain other foreign countries, the
Company and its distributors and agents must obtain regulatory approvals and
otherwise comply with extensive regulations regarding safety and quality. These
regulations, including the time required for regulatory review, vary from
country to country. Prior to mid-1998, medical device companies selling products
in the EU must comply with the applicable regulations of the various countries
in effect on December 31, 1994. The EU has promulgated rules which require that
medical products receive the right to affix the CE mark by mid-1998. Failure to
receive the right to affix the CE mark will prohibit the Company from selling
Norian SRS in the member countries of the EU after mid-1998. The Company, with
its Japanese partner, Mochida, intends to file applications for Japanese
regulatory approval from the Ministry of Health and Welfare ("MHW") and plans to
commence clinical trials to support regulatory and reimbursement approval in
Japan. There can be no assurance that the Company will obtain regulatory
approvals in such countries, that any regulatory approval would not include
restrictions on the anatomic sites and types of procedures for which Norian SRS
can be used, or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals. Delays in the receipt
of approvals to market the Company's products, failure to receive these
approvals, or future loss of previously received approvals would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Extensive Government Regulation" and
"Business -- Government Regulation."
Dependence Upon Norian SRS. The Company is dependent upon the success of
Norian SRS, its sole product, which will require further development and
regulatory and reimbursement approvals before it can be marketed in the United
States or in other nations. The Company has never sold Norian SRS in the United
States, and there can be no assurance that the Company's development efforts
will be successful or that Norian SRS or any other product developed by the
Company will be safe or effective, approved by regulatory authorities, capable
of being manufactured in commercial quantities at acceptable costs, or
successfully marketed. The Company expects that Norian SRS, if commercialized,
will account for substantially all of the Company's revenues for the foreseeable
future. Furthermore, because Norian SRS currently represents the Company's sole
product focus, if Norian SRS is not successfully commercialized, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
New Technology; Uncertainty of Market Acceptance. Norian SRS is based on
new technology which has not been previously used to treat bone fractures and
must compete with more established orthopaedic treatments currently accepted as
the standards of care. Market acceptance of Norian SRS will largely depend on
the Company's ability to demonstrate the relative safety, clinical efficacy,
cost-effectiveness and ease of use of
6
<PAGE> 9
its products. The use of Norian SRS will depend on physician awareness,
concerted sales efforts by the Company and its distributors and the availability
and extent of third-party reimbursement. The Company believes that
recommendations and endorsements by physicians will be essential for market
acceptance of Norian SRS, and there can be no assurance that any such
recommendations or endorsements will be obtained. Physicians will not use Norian
SRS unless they determine, based on clinical data and other factors, that the
use of Norian SRS is an attractive alternative or complement to other means of
repairing damaged cancellous bone. Such determinations will depend, in part, on
the ability of Norian SRS to aid in the proper alignment of bone during healing,
and to reduce the time to ambulation and the length of hospital stays associated
with certain cancellous bone fractures. Acceptance among physicians will also
depend upon the Company's ability to train, and the rate of training of,
orthopaedic surgeons in the use of Norian SRS and the willingness of such
physicians to learn these new techniques. There can be no assurance that Norian
SRS will be accepted in the market in preference to other competing therapies or
to therapies that may subsequently be developed. Lack of market acceptance by
physicians would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Physician
Education and Training" and "-- Product Marketing."
Limited Clinical Trials. To date, the Company has conducted significant
clinical trials only for use of Norian SRS in treatment of certain wrist (distal
radius) fractures, from which the Company has only limited follow-up data. The
Company intends to initiate clinical studies for the use of Norian SRS in the
treatment of certain hip (intertrochanteric) and knee (tibial plateau) fractures
and for spinal reconstruction. Accordingly, there can be no assurance that
Norian SRS will prove safe and efficacious for use in any application, or that
the Company will obtain regulatory approval to market Norian SRS, that Norian
SRS will achieve market acceptance, or that adequate third-party reimbursement
will be available, for any application. Failure to demonstrate safety and
efficacy, obtain regulatory approval for commercial sales, achieve market
acceptance or gain third-party reimbursement for use of Norian SRS could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Clinical Applications," " -- Physician
Education and Training," " -- Government Regulation" and " -- Third-Party
Reimbursement."
Uncertainty Related to Third-Party Reimbursement. The Company's products
will generally be purchased by hospitals or practicing physicians, which then
bill various third-party payors, such as governmental programs, managed care
organizations, such as health maintenance organizations, and other private
health insurers. Successful sales of Norian SRS in the United States and other
markets will depend on the availability of adequate reimbursement from
third-party payors. There is significant uncertainty concerning third-party
reimbursement for the use of any medical device incorporating new technology.
Even if the Company receives approval of a PMA application for Norian SRS for
orthopaedic uses, third-party payors may nevertheless deny reimbursement or
reimburse at a low price if they conclude, on the basis of clinical, economic
and other data, that its use is not cost-effective, or if the product is used
for an unapproved indication. Furthermore, third-party payors are increasingly
challenging the need to perform medical procedures, as well as limiting
reimbursement coverage for medical devices, and in many instances are pressuring
medical suppliers to lower their prices. There can be no assurance that use of
Norian SRS will be considered cost-effective by third-party payors, that
reimbursement will be available or, if available, that payors' reimbursement
policies will not adversely affect the Company's ability to sell its products on
a profitable basis. The market for the Company's products could also be
adversely affected by recent federal legislation that reduces reimbursements
under the cost pass-through system for the Medicare program. In addition, an
increasing emphasis on managed care in the United States has increased, and will
continue to increase, the pressure on medical device pricing. While the Company
cannot predict whether any such legislative or regulatory proposals will be
adopted or the effect such proposals or managed care efforts may have on its
business, the announcement of such proposals could have a material adverse
effect on the Company's ability to raise capital, and the adoption of such
proposals would have a material adverse effect on the Company's business,
financial condition and results of operations. Failure by hospitals and other
users of the Company's products to obtain reimbursement from third-party payors
and/or changes in governmental and private third-party payors' policies toward
reimbursement for procedures employing the Company's products would also have a
material adverse effect on the Company's business, financial condition and
results of operations.
7
<PAGE> 10
Member countries of the EU operate various combinations of
centrally-financed health care systems and private health insurance systems. The
relative importance of such government and private systems varies from country
to country. Medical devices are most commonly sold to hospitals or health care
facilities at a price set by negotiation between the buyer and the seller. The
choice of devices is subject to constraints imposed by the availability of funds
within the purchasing institution. A contract to purchase products may result
from an individual initiative or as a result of a public invitation and a
competitive bidding process. In either case, the purchaser pays the supplier and
payment terms can vary widely throughout the EU.
In Japan, at the end of the regulatory approval process, the MHW makes a
determination of the unit reimbursement price of the product. The MHW can set
the reimbursement level for Norian SRS at its discretion, and there can be no
assurance that the Company and its partner, Mochida, will be able to obtain
regulatory approval in Japan or if such approval is granted that the Company
will obtain a favorable per unit reimbursement price. See
"Business -- Third-Party Reimbursement."
History of Losses; Lack of Product Revenues; Uncertainty of Future
Results. The Company is a development stage enterprise that has incurred net
losses since its inception and anticipates that its operating losses will
continue for at least the next two years. At March 31, 1996, the Company's
accumulated deficit was approximately $24.2 million. Net losses for the years
ended December 31, 1994 and 1995 and for the three months ended March 31, 1996
were approximately $4.2 million, $5.9 million and $2.3 million, respectively.
The Company expects to incur substantial operating losses at least until it
begins significant marketing activities, which remain subject to FDA approval in
the United States and the approval of international regulatory agencies.
Further, the Company's expenses are expected to increase relative to prior years
as the Company prepares for expanded multi-center clinical trials, manufacturing
and international marketing of Norian SRS, while expanding its research and
development activities. Even if the Company receives approval for use of Norian
SRS in the United States and abroad, there can be no assurance that the Company
will ever generate substantial revenues or achieve profitability. The Company's
results of operations will depend upon numerous factors, including the need for
and timing of regulatory approval, market acceptance by physicians of Norian
SRS, third-party reimbursement policies and the Company's ability to manufacture
Norian SRS efficiently and competitively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Physician Education and Training" and "-- Product Marketing."
Dependence on Patents and Proprietary Rights. The Company has seven United
States and several foreign applications pending. There can be no assurance that
pending patent applications will be allowed or that any of the Company's
existing patents will provide protection for the Company's products. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the measures taken by the Company to protect its proprietary technology
will prevent misappropriation of such technology, and such protections may not
preclude competitors from developing products similar to the Company's products.
In addition, effective patent, copyright, trademark and trade secret protection
may be unavailable or limited in certain foreign countries. The failure of the
Company to protect its proprietary information would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. The agreements generally
provide that all inventions conceived of by the individual in the course of
rendering services to the Company, shall be the exclusive property of the
Company. However, certain of the Company's agreements with consultants, who
typically are employed on a full-time basis by academic institutions or
hospitals, do not contain assignment of invention provisions. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to, or independently developed by, competitors. See
"Business -- Patents and Proprietary Information."
Risk of Intellectual Property Litigation. The medical device industry has
been characterized by extensive litigation regarding patents and other
intellectual property rights, and companies in the medical device industry have
employed intellectual property litigation to gain a competitive advantage. There
can be no
8
<PAGE> 11
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings declared by the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope and validity of the
proprietary rights of others.
Any litigation or interference proceedings will result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms, if
at all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Patents and Proprietary Information."
Risk of Patent Infringement Claims. There can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of such
third parties. The Company is aware of one Japanese patent and several Japanese
patent applications filed by a Japanese corporation which claim ratio
compositions comprising two of the components of Norian SRS. The formulation of
Norian SRS currently in clinical and commercial use by the Company in countries
other than Japan may have a ratio of these two components that falls within the
range claimed by such patent and patent applications. In addition, the Company
is aware that another Japanese corporation has filed a patent application in
Japan, and several counterpart applications in countries outside the United
States, that include a composition of matter claim covering one of the
components of Norian SRS. If a patent including this claim were to issue, Norian
SRS, in its current formulation, may be deemed to infringe such patent. There
can be no assurance that the Japanese entities or other entities will not bring
a claim of patent infringement against the Company or that the Company's product
will not be determined to be infringing. Any such claims, including meritless
claims, could result in costly, time-consuming litigation and diversion of
technical and management personnel. In the event any third party were to make a
valid claim and a license were not made available on commercially reasonable
terms, or if the Company were unable to develop non-infringing alternative
technology, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "Business -- Patents
and Proprietary Information."
Extensive Government Regulation. The Company's products and its
manufacturing activities for Norian SRS are subject to extensive regulation by
the FDA and, in some instances, by foreign and state governments. Pursuant to
the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder (the "FDC Act"), the FDA regulates the clinical testing,
manufacture, labeling, sale, distribution and promotion of medical devices.
Before a new device can be introduced into the market, the manufacturer must
obtain market clearance through either the 510(k) premarket notification process
under Section 510(k) of the FDC Act or the lengthier PMA application process
under Section 515 of the FDC Act. Noncompliance with applicable requirements,
including good manufacturing practices ("GMP"), can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
The Company believes that an FDA-approved PMA application will be required
to market Norian SRS in the United States. The Company is currently conducting
clinical studies of Norian SRS pursuant to an FDA-approved IDE to collect data
necessary to support a PMA application. Although the Company plans to pursue
approval for use of Norian SRS as a cancellous bone cement at any anatomic site
where cancellous bone exists,
9
<PAGE> 12
only wrist fractures are currently being studied in the United States under the
Company's FDA-approved IDE. The Company plans to provide clinical data of the
safety and effectiveness of Norian SRS as a cancellous bone cement for anatomic
sites other than the wrist with data from clinical trials being conducted in the
United States and abroad. The FDA often analyzes data from foreign clinical
studies more critically, and there can be no assurance that the Company's
foreign clinical data will be accepted as part of the Company's PMA application.
On two occasions, the Company has expanded the number of sites at which it
is conducting its clinical studies in the United States due to slow enrollment
of patients at existing sites. There can be no assurance that the Company will
be successful in enrolling sufficient numbers of patients to complete its
clinical studies. Moreover, there can be no assurance that data from any
completed domestic or foreign clinical studies will demonstrate the safety and
effectiveness of Norian SRS or that such data will otherwise be adequate to
support approval of a PMA application. In addition, if PMA approval is obtained,
there can be no assurance that such approval will not significantly restrict the
anatomic sites and types of procedures for which Norian SRS can be used. Failure
to obtain approval of a PMA application or restrictions on the anatomic sites
and types of procedures for which Norian SRS can be used would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Any products manufactured or distributed by the Company pursuant to FDA
approvals will be subject to extensive regulation by the FDA, and the FDA's
enforcement policy strictly prohibits the promotion of products for any uses
other than those for which approval was obtained. New governmental regulations
may be established that could prevent or delay regulatory approval of the
Company's products. Furthermore, if approval of a PMA application is obtained,
modifications to the approved product may require a PMA supplement or may
require the submission of a new PMA application. There can be no assurance that
approval of any necessary PMA supplements or new PMA applications could be
obtained in a timely manner, if at all. In addition, the Company's manufacturing
facilities are subject to periodic inspections by state and federal agencies,
including the FDA and the California State Department of Health Services
("CDHS"). Delays in obtaining any necessary approvals, failure to obtain
approvals, or the loss of previously obtained approvals would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances which may impose additional
substantial costs and burdens. International sales of medical devices are
subject to the regulatory requirements of each country. The regulatory review
process varies from country to country. Many countries also impose product
standards, packaging and labeling requirements and import restrictions on
devices. In addition, each country has its own tariff regulations, duties and
tax requirements. The approval by the foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
approvals or clearances will be granted on a timely basis or at all. Delays in
receipt of, or failure to receive, such approvals or clearances, or the loss of
any previously received approvals or clearances, could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
The EU has promulgated rules which require that medical products receive
the right to affix the CE mark by mid-1998. Prior to mid-1998, medical device
companies selling products in the EU must comply with the applicable regulations
of the various countries in effect on December 31, 1994. Failure to receive the
right to affix the CE mark will prohibit the Company from selling its products
in member countries of the EU. Unexpected delays or problems could occur, and
there can be no assurance that the Company will be successful in meeting
certification requirements. See "Business -- Government Regulation."
Limited Manufacturing Experience. The Company has limited experience in
manufacturing Norian SRS and currently manufactures the product in limited
quantities for United States clinical trials, international clinical trials and
limited international test-marketing. The Company will need additional resources
to commence full-scale production of Norian SRS for commercial sales. The
Company does not have experience in manufacturing its products in commercial
quantities. Manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel.
Furthermore, the Company is dependent upon its Cupertino, California facility as
the only site for the manufacture of Norian SRS. Difficulties encountered by
10
<PAGE> 13
Norian in its manufacturing scale-up would have a material adverse effect on its
business, financial condition and results of operations, and there can be no
assurance that such difficulties will not occur. See "Business --
Manufacturing."
Intense Competition; Uncertainty of Technological Change. The market for
musculoskeletal disease and injury treatments is characterized by extensive
research efforts and rapid technological change. The Company faces intense
competition in that market from other medical device and pharmaceutical
companies. Many of these competitors have substantially greater financial,
manufacturing, marketing and technical resources than the Company. Furthermore,
the medical device industry has experienced consolidation and competitors could
acquire companies or technologies that could limit the Company's ability to
compete. There can be no assurance that the Company's current and future
competitors will not develop or market technologies and products that are more
effective or commercially attractive than the Company's current or future
products, thereby rendering the Company's technologies and products obsolete, or
that such competitors will not succeed in obtaining regulatory approval and
introducing or commercializing any such products prior to the Company. See
"Business -- Competition."
Dependence Upon International Operations and Sales. All of the Company's
product sales to date are from controlled test-marketing in the Netherlands, and
the Company anticipates that substantially all of its revenues will be derived
from international sales until such time, if ever, that its products are
approved for sale in the United States. Part of the Company's strategy will be
to rely on third-party distributors and corporate partners for sales and
marketing of Norian SRS in international markets. Sales through distributors and
corporate partners are subject to several risks, including the risk of financial
instability of distributors and corporate partners and the risk that such
parties will not effectively promote the Company's products. In Japan, the
Company will be relying on Mochida for its sales and marketing, regulatory
compliance and reimbursement functions and may rely on similar corporate
partners in other nations for these functions. Because Norian SRS is based on a
new technology for the treatment of orthopaedic trauma, suitable distributors
and corporate partners with relevant expertise may be difficult to engage. The
inability to engage suitable distributors or corporate partners on acceptable
terms or the loss or termination of any distribution or corporate partner
relationships could have a material adverse effect on the Company's
international sales efforts. In addition, distributor agreements could require
the Company to repurchase unsold inventory from former distributors to comply
with local laws applicable to distribution relationships, provisions of
distribution agreements or negotiated settlements entered into with such
distributors.
A number of risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and managing international operations, fluctuations in international currency
exchange rates, difficulties in obtaining export licenses, constraints on its
ability to maintain or increase prices and competition. Any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that Norian SRS
or any future product will be successfully commercialized in any international
market. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Physician Education and Training" and
"-- Product Marketing."
Limited Sales and Marketing Experience. The Company has limited experience
in marketing and selling its products and does not have experience in marketing
and selling its products in commercial quantities. There can be no assurance
that the Company will be able to recruit and retain qualified marketing
personnel or contract sales representatives or that future sales efforts of the
Company will be successful. The Company's sales and marketing strategy will
depend on the success of physician education and training programs. There can be
no assurance that the Company will be successful in establishing such programs
or that these programs will be an effective sales channel for the Company's
products. If the physician training and education programs do not result in the
adoption of Norian SRS by a significant percentage of orthopaedic trauma
surgeons, the Company's business, financial condition and results of operations
would be materially and adversely impacted. Furthermore, there is no established
sales organization for marketing the Company's products in the United States,
and there can be no assurance that the Company will be successful in
establishing such a sales organization. The failure to establish and maintain an
effective distribution channel for the Company's products, or to retain
qualified sales personnel to support commercial sales of the Company's products,
would
11
<PAGE> 14
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Physician Education and Training"
and "-- Product Marketing."
Lack of Operating Infrastructure in Event of Growth. Any substantial
growth in the Company's business would result in new and increased
responsibilities for management and place a significant strain upon the
Company's management, operating and financial systems and resources. The Company
also believes that it must develop greater marketing, sales and client support
capabilities in order to secure new customer contracts at a rate necessary to
sustain desired growth and effectively serve the evolving needs of the Company's
present and future customers. The failure of the Company to address these needs
in a satisfactory fashion would inhibit the Company's ability to exploit market
opportunities and would have a material adverse effect on its business,
financial condition and results of operations. See "Business -- Employees" and
"Management."
Risk of Inadequate Funding. The Company plans to continue to spend
substantial funds for clinical trials in support of regulatory and
reimbursements approvals, expansion of sales and marketing activities, research
and development and establishment of commercial scale manufacturing
capabilities. The Company may be required to spend greater-than-anticipated
funds if unforeseen difficulties arise in the course of clinical trials of
Norian SRS, in connection with obtaining necessary regulatory and reimbursement
approvals in the United States or internationally or in other aspects of the
Company's business. There can be no assurance that the Company will not require
additional financing before the end of 1997. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the progress
of the Company's clinical trials, actions relating to regulatory and
reimbursement matters, the costs and timing of expansion of marketing, sales,
manufacturing and product development activities, the extent to which the
Company's products gain market acceptance, the acquisition and defense of
intellectual property rights and competitive developments. Any additional
required financing may not be available on satisfactory terms, if at all. Future
equity financings may result in dilution to the holders of the Common Stock, and
future debt financing may result in certain financial and operational
restrictions. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Dependence on Key Personnel and Advisors. The Company relies on its key
personnel and scientific advisors to assist the Company in formulating and
implementing its product research, development and commercialization strategies.
In addition, all of such advisors are employed by other companies and
institutions and may have commitments to, or consulting or advisory contracts
with, other entities that limit their availability to the Company. The Company's
future success will depend, in part, upon its ability to attract and retain
highly qualified personnel. The Company is headquartered in the San Francisco
Bay Area, which is characterized by intense competition for personnel with the
specialized skills necessary to enable the Company to compete in the medical
device industry. The Company competes for such personnel with other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining
qualified personnel. Loss of, or the inability to hire, key personnel or
advisors could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management."
Product Liability; Availability of Insurance. Use of the Company's
products entails the risk of product liability claims. Although the Company
maintains product liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate or that
insurance will continue to be available on commercially reasonable terms or at
all. In addition, whether or not successful, any litigation brought against the
Company could divert management's attention and time and result in significant
expenditures, which could have a material adverse effect on the Company's
business, financial condition and results of operations. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company currently has no earthquake
insurance coverage. There can be no assurance that such insurance, or other
liability insurance, will be available in the future on favorable terms or at
all. See "Business -- Product Liability and Insurance."
No Prior Public Trading Market. Prior to this offering, there has been no
public market for the Common Stock, and there can be no assurance that an active
trading market will develop or, if one does develop, that it will be maintained.
The initial public offering price, which will be established by negotiations
between the
12
<PAGE> 15
Company and the Underwriters, may not be indicative of prices that will prevail
in the trading market. See "Underwriting."
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Common Stock. In addition, the
market price of the shares of Common Stock is likely to be highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new products by the Company or its competitors,
FDA and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the United States and internationally, changes in stock
market analyst recommendations regarding the Company, other medical device
companies or the medical device industry generally and general market conditions
may have a significant effect on the market price of the Common Stock.
Possible Anti-Takeover Effects. Certain provisions of the Company's
Articles of Incorporation and Bylaws, each as amended, may have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. Certain of these provisions
allow the Company to issue Preferred Stock without any vote or further action by
the shareholders, provide for a classified board of directors and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for shareholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company.
In addition, the Company has granted to Howmedica, Inc., a division of
Pfizer Pharmaceuticals, Inc. and a shareholder of the Company ("Howmedica"), a
non-exclusive right of first negotiation with respect to transactions involving
the sale of the Company, whether through merger, stock exchange or sale of all,
or substantially all, of its assets. If the Company's Board of Directors decides
to begin discussions with any third party regarding a sale of the Company, the
Company is required to notify Howmedica in writing and to negotiate with
Howmedica for a period of 60 days. The Company is not prohibited from
negotiating concurrently with other parties regarding similar transactions
during this 60-day period. If the Company and Howmedica fail to reach a written
agreement in principle during the 60-day period, or if Howmedica consents to the
early termination of such 60-day period, the Company will be free to complete
the sale of the Company to any third party without further obligation to
Howmedica. This right of first negotiation expires on the earliest to occur of:
(i) the termination of the license agreement between the Company and Howmedica,
pursuant to which Howmedica was granted an exclusive license to manufacture,
market and sell CrystalCoat (the "CrystalCoat License"); (ii) the occurrence of
an event that would cause the CrystalCoat License to become non-exclusive; or
(iii) the completion of a sale of the Company, whether by merger, share exchange
or sale of all, or substantially all, of the Company's assets. This right of
first negotiation may make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, the Company in a negotiated
transaction, and may also impair the Company's ability to respond to a hostile
takeover attempt. See "Management" and "Description of Capital Stock."
Broad Discretion of Management to Allocate Offering Proceeds. The Company
expects that approximately $18.7 million of the proceeds of this offering will
be used to fund research and development activities, clinical trials of Norian
SRS, and the expansion of marketing, sales and manufacturing activities. The
balance of the proceeds, approximately $16.7 million or 47% of the overall
proceeds, will be used for general corporate purposes. The Company's management
will have broad discretion to allocate this portion of the proceeds of this
offering and to determine the timing of expenditures. See "Use of Proceeds."
Adverse Effect on Market Price of Shares Eligible for Future Sale. Sales
of Common Stock (including shares issued upon the exercise of outstanding
options) in the public market after this offering could materially and adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate. See
"Shares Eligible for Future Sale."
13
<PAGE> 16
Dilution. The initial public offering price is substantially higher than
the net tangible book value per share of Common Stock. Investors purchasing
shares of Common Stock in this offering will therefore incur immediate and
substantial net tangible book value dilution of $8.22 per share. See "Dilution."
Absence of Dividends. The Company has not paid any dividends on its Common
Stock since its inception and does not contemplate or anticipate paying any
dividends upon its Common Stock in the forseeable future. See "Dividend Policy."
14
<PAGE> 17
THE COMPANY
Norian Corporation was incorporated in California on March 17, 1987. Unless
the context otherwise requires, references in this Prospectus to "Norian" and
the "Company" refer to Norian Corporation, a California corporation. The
Company's principal executive offices are located at 10260 Bubb Road, Cupertino,
California 95014-4166. Its telephone number is (408) 252-6800.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share are estimated to be $35,370,000 ($40,810,500 if the
over-allotment option is exercised in full), after deducting the underwriting
discount and the estimated expenses of the offering.
The Company expects to use approximately $13.0 million of the net proceeds
of this offering to fund the expansion of manufacturing, marketing and sales
activities, approximately $4.2 million to fund clinical trials of Norian SRS in
the United States and abroad, and approximately $1.5 million to fund future
research and development activities. The balance of the net proceeds,
approximately $16.7 million, will be used for general corporate purposes.
Although the Company may use a portion of the net proceeds for the licensing or
acquisition of new products or technologies from others, the Company currently
has no such specific plans or commitments. Expenditures may vary significantly
depending upon numerous factors, including the progress of the Company's
clinical trials, actions relating to regulatory and reimbursement matters, the
costs and timing of expansion of marketing, sales, manufacturing and product
development activities, the extent to which the Company's products gain market
acceptance and competition. Pending such uses, the Company intends to invest the
net proceeds of this offering in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
Norian has never declared nor paid dividends on its capital stock. The
Company currently intends to retain any future earnings for funding growth and,
therefore, does not intend to pay any cash dividends in the foreseeable future.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 (i) on an actual basis; (ii) on a pro forma basis after giving
effect to a $7.0 million equity investment in connection with the Mochida
Transaction and the conversion of all of the outstanding shares of Preferred
Stock into Common Stock upon completion of this offering; and (iii) as adjusted
to give effect to the receipt by the Company of the net proceeds from the sale
of 3,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
- ---------------
(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.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1996, was $23,671,000 or approximately $2.53 per share. Pro forma net
tangible book value per share represents the amount of the Company's
shareholders' equity, less intangible assets, divided by 9,353,003 shares of
Common Stock outstanding after giving effect to the Mochida Transaction and the
conversion of all of the outstanding shares of Preferred Stock into Common
Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering made hereby and the pro forma net tangible book value per
share of Common Stock immediately after completion of this offering. After
giving effect to the sale of the 3,000,000 shares of Common Stock in this
offering at an assumed initial public offering price of $13.00 per share, and
after deducting underwriting discounts and commission and estimated offering
expenses payable by the Company, the Company's pro forma net tangible book value
at March 31, 1996, would have been $59,041,000, or $4.78 per share. This
represents an immediate increase in pro forma net tangible book value of $2.25
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value of $8.22 per share to new investors purchasing Common Stock
in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
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%
========= === =========== ===
</TABLE>
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
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 are derived from the audited
financial statements of the Company. The financial data set forth below for the
three months ended March 31, 1995 and 1996 are derived from unaudited financial
statements of the Company. The financial statements of the Company as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995, together with the notes thereto and the related report
of KPMG Peat Marwick LLP, independent auditors, are included elsewhere in this
Prospectus. The selected consolidated financial data set forth below as of and
for the three months ended March 31, 1995 and 1996, and for the period from
March 17, 1987 (inception) to March 31, 1996 were derived from unaudited
consolidated financial statements, which are included elsewhere in this
Prospectus, and include, in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position at that date and results of
operations for those periods. The results for the three months ended March 31,
1996 are not necessarily indicative of the results for any future period. The
selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(2)
------- -------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its incorporation on March 17, 1987, the Company has been engaged in
the design, development, preclinical and clinical testing and, more recently,
the manufacturing and test-marketing of Norian SRS. Norian SRS is an injectable,
moldable and biocompatible cancellous bone fixation and replacement material
designed to overcome the shortcomings of currently available fracture treatment
methods by providing direct structural support to regions of compromised
cancellous bone. The Company has received regulatory approval for commercial
sale of Norian SRS in the Netherlands, where it has test-marketed the product.
The Company is currently seeking to obtain the right to affix the CE mark to
Norian SRS to permit the Company to market the product in the member countries
of the EU. Commercial sales and use of the product in the member countries of
the EU will be partially dependent on country-specific reimbursement approvals
and compliance with certain other country-specific regulations. In February
1995, the Company commenced a randomized, multi-center clinical trial of the use
of Norian SRS in the treatment of wrist fractures in up to 324 patients. Norian
expects to submit an IDE supplement for a randomized, multi-center hip fracture
trial which will involve the use of Norian SRS in conjunction with orthopaedic
hardware. Following commencement of this study, the Company anticipates
performing clinical trials on fractures of the tibia, just below the knee, and
spinal reconstructions, in addition to considering other potential clinical
trials. Currently, the Company plans to conduct a substantial portion of these
trials in Europe.
The Company anticipates that its operating losses will continue for at
least the next two years as it spends substantial resources in funding clinical
trials in support of regulatory approvals, and continues to expand research and
development, marketing and sales, manufacturing and administrative functions. To
date, the Company has received a majority of its revenues from research and
development payments, royalties and contract revenue. Since the Company's
inception, product sales have been minimal and revenues generated from the
Company's test-marketing are treated as cost recovery instead of revenue in the
Company's financial statements.
The Company anticipates that its results of operations will fluctuate on a
quarterly basis for the foreseeable future due to several factors, including
actions relating to regulatory and reimbursement matters, progress of clinical
trials, the extent to which the Company's products gain market acceptance,
introduction of alternative means for treatment of bone fractures, defects and
certain other skeletal deficiencies, and competitive developments.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 and 1995
Research and development costs were $1.9 million for the three months ended
March 31, 1996, compared to $974,000 for the comparable period in 1995,
representing an increase of $876,000. This increase is primarily attributable to
costs associated with the rate of clinical trial enrollment, product development
and preclinical and clinical activities. The Company believes that research and
development costs will increase in future periods as clinical trials of Norian
SRS expand and as the Company develops additional products.
General and administrative expenses were $681,000 for the three months
ended March 31, 1996, compared to $571,000 for the three months ended March 31,
1995, representing an increase of $110,000. The increase in expenses is
associated with additions to personnel in both the United States and Europe,
compensation relating to stock option grants and increased business development
costs. The Company anticipates that general and administrative expenses will
increase as the Company expands clinical trials and begins commercialization in
Europe.
Net interest and other income was $211,000 for the three months ended March
31, 1996, compared to $46,000 for the three months ended March 31, 1995,
representing an increase of $165,000. This increase is attributable to the
Company's investment of the proceeds received in an equity financing completed
in 1995.
19
<PAGE> 22
Years Ended December 31, 1995, 1994 and 1993
Contract revenue was $150,000 for the year ended December 31, 1995,
compared to $210,000 for the year ended December 31, 1994, and $444,000 for the
year ended December 31, 1993, representing decreases of $60,000 from 1994 to
1995 and $234,000 from 1993 to 1994. The successive decreases are primarily
attributable to the expiration in 1994 of a research and development contract.
Research and development costs were $4.6 million for the year ended
December 31, 1995, compared to $3.1 million for the year ended December 31,
1994, and $2.6 million for the year ended December 31, 1993, representing
increases of $1.5 million from 1994 to 1995 and $540,000 from 1993 to 1994. The
increased spending in 1995 is primarily attributable to costs associated with
the initiation of clinical trials. The increases for both years are also
attributable to product development, preclinical activities, relocation and
expansion of facilities and the addition of personnel to support increased
clinical activities.
General and administrative expenses were $2.2 million for the year ended
December 31, 1995, compared to $1.5 million for the year ended December 31,
1994, and $1.3 million for the year ended December 31, 1993, representing
increases of $674,000 from 1994 to 1995 and $236,000 from 1993 to 1994. The
increased costs are associated with personnel increases and additional facility
costs.
Net interest and other income was $722,000 for the year ended December 31,
1995, compared to $271,000 for the year ended December 31, 1994, and $325,000
for the year ended December 31, 1993, representing an increase of $451,000 for
the period from 1994 to 1995 and a decrease of $54,000 for the period from 1993
to 1994. The increase from 1994 to 1995 is attributable to the investment of the
proceeds from the equity financing completed in 1995, and the decrease from 1993
to 1994 is attributable to a reduction of cash available for investment during
that period.
INCOME TAXES
The Company has not generated any net income to date and therefore has not
paid any federal income taxes since its inception. The income tax expense
recognized by the Company is primarily attributable to the operations of Norian
B.V., a wholly-owned Dutch subsidiary. Under a service contract with the
Company, Norian B.V. has generated income before taxes of $15,000, $18,000 and
$6,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred assets as of December 31, 1995, 1994 and 1993, have
been established in each period to reflect these uncertainties.
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $13.2 million and $6.9 million, respectively, and
federal and state research credit carryforwards of approximately $450,000 and
$230,000, respectively. The federal net operating loss and research credit
carryforwards expire from 2004 through 2010, if not utilized. The state net
operating loss and research credit carryforwards expire from 1996 through 2000,
if not utilized. The Company has experienced "changes in ownership" as defined
in Section 382 of the Internal Revenue Code as amended. As a result, Federal net
operating loss and credit carryforwards are subject to an annual limitation.
Future changes in ownership of the Company may further reduce the Company's
ability to utilize net operating loss and credit carryforwards. The annual
limitation may result in the expiration of net operating loss and research
credit carryforwards before full utilization.
SUBSEQUENT EVENTS
In April 1996, the Company entered into an exclusive clinical development
and marketing agreement for Japan with Mochida. The agreement provides for
payments by Mochida to Norian for up to a total of $15.0 million, consisting of
a $7.0 million equity investment completed in April 1996, and $8.0 million in
non-refundable payments based on achievement of time-related, clinical and
regulatory milestones, of which $2.0 million was received upon execution of the
contract. Mochida will work in collaboration with the Company to conduct
clinical trials and obtain regulatory reimbursement approvals from the MHW in
Japan.
20
<PAGE> 23
Mochida will also be responsible for training and educating surgeons in Japan in
the use of Norian SRS under guidelines and standards prescribed by the Company.
The Company will be responsible for manufacturing and supplying the product to
Mochida. See "Business -- Physician Education and Training" and "-- Product
Marketing."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the private sale
of equity securities and, to a lesser extent, through the licensing of
technology, leasing of capital equipment and research and development contracts.
From inception through March 31, 1996, the Company raised $40.8 million from
private equity financings and stock option exercises. In April 1996, the Company
raised an additional $7.0 million from a private equity financing associated
with the Mochida Transaction. The agreement has an initial term ending on the
earlier of 10 years from the date of regulatory approval to commence commercial
sales of Norian SRS in Japan or 15 years from the date of the agreement.
In the period from inception to March 31, 1996, the Company used a total of
$21.9 million to fund its operations. During the three months ended March 31,
1996 and 1995, and the years ended December 31, 1995 and 1994, the Company used
cash to fund operations of $1.8 million, $2.5 million, $6.3 million and $3.1
million, respectively. The changes in cash used in operations were the result of
costs associated with increased research and development activities,
international marketing activities and increased general and administrative
expenses necessary to support increased operations. The Company's expenditures
for equipment and leasehold improvements for the period from inception to March
31, 1996 were approximately $3.0 million.
The Company anticipates that its operating losses will continue for at
least the next two years as a result of funding clinical trials in support of
regulatory approvals, and the expansion of research and development, marketing
and sales, and general and administrative activities. To support these expanded
activities, the Company anticipates expanding its facilities both in the United
States and Europe through 1997. In addition, the Company may use a portion of
the net proceeds to acquire or license technology, products or businesses
related to the Company's current business, although no such acquisitions or
licenses are currently being negotiated or planned and no portion of the net
proceeds has been allocated to specific acquisitions. Although the Company
believes that the proceeds from this offering together with current cash
balances and revenue from the future sales of product will be sufficient to meet
the Company's currently projected operating and capital requirements at least
through 1997, there can be no assurance that the Company will not require
earlier additional financing. Moreover, there can be no assurance that
additional financing, if required, will be available on satisfactory terms, or
at all. In any event, in the future, the Company may attempt to raise additional
funds through bank facilities, debt or equity offerings or other sources of
capital. The Company's future liquidity and capital requirements will depend on
numerous factors including progress of the Company's clinical trials, actions
relating to regulatory and reimbursement matters, costs and timing of expansion
of marketing, sales, manufacturing and product development activities, the
extent to which the Company's products gain market acceptance and competitive
developments.
21
<PAGE> 24
BUSINESS
THE COMPANY
Norian develops, manufactures and markets Norian SRS, a proprietary bone
fixation and replacement material designed for use in regions of structurally
compromised cancellous bone such as the wrist, hip, knee and spine. Norian SRS
is inserted into bone defects as a paste, either through minimally invasive
injection or in an open surgical procedure. The material sets within 10 minutes
of application and continues to cure over 12 hours to achieve its ultimate
strength. The Company believes that Norian SRS provides direct structural
support to compromised cancellous bone and can withstand compressive mechanical
force soon after a procedure and over time. Additionally, Norian SRS may reduce
the need for orthopaedic hardware in weakened cancellous bone. Norian SRS cures
into a crystalline structure similar to the mineral phase of natural bone and
appears to be replaced by natural bone over time.
Fractures in cancellous bone tend to be complex, highly variable and
difficult to repair with currently available treatment methods. These problems
are compounded when cancellous bone is weakened by osteoporosis. The Company
believes that Norian SRS overcomes the shortcomings of currently available
treatment methods for cancellous bone fractures. The Company believes one of the
principal benefits of Norian SRS is to provide direct structural support to
fractures, thereby reducing the risk of loss of anatomical positioning during
the healing processes and improving post-operative function and long-term
outcome for the patient. In addition, Norian SRS may decrease the overall
treatment cost by reducing the extent of rehabilitation required following
fracture fixation and immobilization.
The Company intends to seek regulatory approval of Norian SRS as a
cancellous bone cement. Under an IDE approved by the FDA, the Company is
conducting a randomized, multi-center clinical trial of the use of Norian SRS in
the treatment of wrist fractures in up to 324 patients. This study is designed
to demonstrate the safety and efficacy of Norian SRS in its ability to maintain
the anatomical alignment of cancellous bone fragments and to improve functional
outcomes such as grip strength and range of motion. The Company expects to use
the data from this trial to support a PMA application which, if approved, would
allow the Company to market Norian SRS in the United States and to demonstrate
its cost-effectiveness to third-party payors for purposes of reimbursement. As
of April 30, 1996, 196 patients had been enrolled in the study. The Company is
also seeking to obtain the right to affix to Norian SRS the CE mark, which will
allow the Company to market the product in most European nations. In addition,
the Company has test-marketed Norian SRS in the Netherlands since 1994, where
the product is approved for commercial sale.
OVERVIEW
Background
The human skeleton is composed of two types of bone tissue: cortical and
cancellous bone. Cortical bone, which makes up approximately 80% of the human
skeleton, is dense, generally tubular in shape and is primarily subject to
significant bending and twisting forces. Cortical bone is found primarily in the
mid-sections of the long bones such as the tibia in the lower leg and the radius
in the forearm. Cancellous bone, which constitutes approximately 20% of the
human skeleton, is less dense than cortical bone, is primarily subject to
compressive forces and is situated principally in the spine and at the ends of
long bones near joints, including areas such as the wrist, knee and hip.
In order to repair microscopic stress fractures resulting from the
repetitive forces acting on the skeleton and to adapt to changes in routine
mechanical loading on the skeleton, all bone tissue is subject to perpetual
remodeling, which is a complex process involving a coupled process of bone
removal and replacement. At the beginning of a remodeling cycle, osteoclasts
erode away bone in targeted areas. In the next phase of the cycle, osteoblasts
fill in the osteoclast-created cavities with collagen which then mineralizes
over several months to become mature bone. Osteoporosis is a bone disorder found
primarily in people over the age of 65 which results from an imbalance in the
remodeling process. Osteoporosis is characterized by a decrease in bone mass and
deterioration of bone structure, which may lead to fractures as a result of bone
fragility, particularly in cancellous bone.
22
<PAGE> 25
Cancellous Bone Repair
The orthopaedic trauma market is the second largest segment of the United
States orthopaedic industry, representing approximately 19% of the $2.2 billion
estimated 1995 sales in the United States. This market includes over six million
fractures in the United States every year. The majority of these occur in the
cortical portion of long bones, for which current treatment methods are
generally effective, even in patients with osteoporosis. However, fractures in
regions of cancellous bone tend to be highly variable and difficult to repair
with currently available treatment methods. The objectives of treatment are to
restore the fractured bone to its anatomic position and to regain mobility in
the shortest possible time, with the least expense. The first step in achieving
these objectives is to realign the fractured bone by manipulation of the
fragments into their proper position, or "reduction." Depending on the
complexity of the fracture, reduction may be achieved by manual manipulation,
traction or through a surgical procedure. Once reduction has been achieved, the
fractured bone must be immobilized through fixation to maintain proper alignment
and to allow proper healing. Current fixation techniques include casting,
external fixators and internal fixation with orthopaedic hardware. Maintaining
reduction with hardware is often difficult because hardware tends to dislodge
from porous cancellous bone. In addition, reduction of crushed cancellous bone
often leaves significant voids. Current void filling materials, such as bone
grafts and synthetic bone graft material, provide a scaffolding for new bone
growth, but do not provide sufficient structural support for immobilization of
the fracture site. When immobilization of the fracture fragments is not
maintained, reduction is lost and the bone heals out of alignment resulting in
"malunion." With current treatment methods, cancellous bone fractures often heal
in some degree of malunion creating varying levels of compromised patient
function. Fractures in osteoporotic bone are even more susceptible to loss of
reduction and healing in malunion. Additionally, if a fracture involving a joint
heals in malunion, there is increased potential for additional complications,
such as arthritis.
There are also significant costs related to the extent of rehabilitation
necessary for orthopaedic trauma patients. The time required for rehabilitation
can vary greatly and is generally related to the duration of immobilization.
Long periods of immobilization may be required for proper fracture healing and
are generally followed by extensive rehabilitation which is often a significant
portion of the cost associated with fracture treatment. While an accelerated
rehabilitation schedule may decrease the length of immobilization and overall
treatment costs, it may also lead to an increased risk of loss of reduction
resulting in malunion. Therefore, a need exists for a treatment that provides
direct structural support to compromised cancellous bone, permitting an earlier
return to functionality and improving long-term patient outcomes.
THE NORIAN SRS SOLUTION
Norian SRS is an injectable, moldable and biocompatible cancellous bone
fixation and replacement material designed to overcome the shortcomings of
currently available fracture treatment methods. By providing structural support
directly to the fracture site, the Company believes that the use of Norian SRS
will decrease the risk of a loss of reduction and contribute to improved
long-term patient outcomes.
Norian SRS is supplied as a kit containing a sterile calcium and phosphate
source powder and a liquid solution that are mixed together to form a paste.
Norian SRS has a five minute working time during which it can be inserted into
compromised cancellous bone during an open surgical procedure or by percutaneous
injection. Norian SRS is radiopaque, permitting the surgeon to confirm its
proper placement by monitoring the procedure using an x-ray fluoroscope.
Approximately 10 minutes after insertion, Norian SRS sets into a hard,
ceramic-like material without damaging surrounding tissue. Within 12 hours,
Norian SRS cures, assumes a crystallographic structure that mimics the mineral
phase of bone, and attains its ultimate physical strength, which can support
greater compressive loads than natural cancellous bone. During the setting and
curing process, the volume of Norian SRS remains unchanged, thus maintaining
integral contact with the surrounding host bone. As a result of its chemical and
crystallographic similarity to host bone, Norian SRS appears to be gradually
replaced by natural bone through the remodeling process.
The key benefits of Norian SRS are:
- Provides Structural Support. The Company believes that Norian SRS
provides direct structural support to compromised cancellous bone and can
withstand compressive mechanical force soon after a
23
<PAGE> 26
procedure. As a result, treatment with Norian SRS may facilitate load
bearing earlier in the healing process and provide structural support
over time. In certain cases, orthopaedic hardware may be combined with
Norian SRS to optimally stabilize the damaged area.
- Improves Patient Outcomes. The Company believes that Norian SRS improves
the maintenance of reduction during the healing process and facilitates
the rapid return to mobility, thereby improving the long-term
functionality of the patient. Rapid return to mobility is particularly
important for the elderly, because extensive periods of immobility may
lead to additional complications, such as pneumonia and circulatory
problems.
- Remodels into Natural Bone. Norian SRS mimics the mineral phase of bone,
and animal studies indicate that Norian SRS is gradually replaced by
natural bone over time. Radiographic evidence from humans treated with
Norian SRS is consistent with the remodeling process observed in the
animal studies. Moreover, Norian SRS is non-toxic, does not appear to
cause inflammation in surrounding tissue, does not generate heat and has
passed the applicable medical device safety and toxicity tests.
- Simplifies Fracture Fixation. Norian SRS is a moldable paste that may be
injected or manually inserted into a fracture void, assuming the shape of
the void while hardening without shrinkage. In certain unstable
fractures, Norian SRS can be injected percutaneously, reducing the need
for invasive open surgical procedures to implant, and subsequently
remove, orthopaedic hardware.
NORIAN'S STRATEGY
Norian's strategy is to establish Norian SRS as the leading cancellous bone
fixation and replacement product to be used independently or in conjunction with
conventional fixation devices. The principal elements of the Company's strategy
are:
- Seek Regulatory Approvals in Targeted Markets. The Company seeks to
obtain required regulatory approvals initially in countries with large
potential markets that have favorable regulatory environments. Currently,
the Company is seeking to obtain the right to affix the CE mark on Norian
SRS to market the product in Europe. In the United States, the Company
intends to file a PMA application seeking labeling for usage of Norian
SRS in areas of cancellous bone throughout the body. There can be no
assurance that the FDA will approve the Company's product or that it will
grant labeling for all uses requested by the Company. The Company plans
to conduct clinical trials of the use of Norian SRS for various
applications and to support an application to the FDA for label
expansion, if necessary. The Company, with its Japanese partner, Mochida,
intends to file applications for Japanese regulatory approval from the
MHW and plans to conduct clinical trials to support reimbursement
approval in Japan.
- Demonstrate Clinical Utility. The Company intends to use data collected
from clinical trials to demonstrate to physicians and health care payors
the anticipated clinical advantages of Norian SRS compared to current
treatment methods. The Company believes that Norian SRS may decrease time
to patient mobility and increase short- and long-term functionality
resulting in improved patient outcomes.
- Establish Physician Education and Training. Physician education is an
accepted method of introducing new surgical methods and products for
orthopaedic procedures. Accordingly, Norian believes that ongoing
physician education and training will be a critical element in the
adoption of Norian SRS as the preferred treatment for damaged cancellous
bone. The Company intends to conduct training sessions led by highly
respected orthopaedic trauma surgeons in targeted markets. Additionally,
the Company plans to provide supplemental physician education through
peer-reviewed publications regarding the Company's clinical trials.
- Implement Focused Product Distribution. Norian SRS will be marketed
primarily to orthopaedic surgeons. If and when FDA approval is received,
the Company plans to market Norian SRS in the United States through a
direct network of product specialists. Upon required regulatory approval
in Europe, the Company plans to market Norian SRS through a combination
of a direct European sales force and, in certain countries, through
distributors. In Japan, upon required regulatory approval, the Company
plans to market Norian SRS through its collaboration with Mochida.
24
<PAGE> 27
- Seek Reimbursement by Third-Party Payors. The Company intends to use
data collected in its clinical studies to demonstrate the
cost-effectiveness of Norian SRS and to establish third-party
reimbursement. In Europe and the United States, the Company will focus
its efforts on obtaining reimbursement from a broad range of third-party
payors, including private entities such as insurance carriers and
governmental entities. In Japan, the Company will seek reimbursement
approval from the MHW in collaboration with Mochida.
- Access New Market Opportunities. The Company believes that several
additional applications for both human and animal bone may be candidates
for Norian SRS. The Company intends to explore other applications for its
technology in which improved patient outcomes and reduced medical costs
can be demonstrated. The Company may pursue these other applications
independently or in collaboration with third parties.
CLINICAL APPLICATIONS
Initially, the Company is focusing on the development of four clinical
applications for the use of Norian SRS: the wrist, the hip, the knee and the
spine. In the United States, the Company intends to file a PMA application
seeking labeling for usage of Norian SRS in regions of cancellous bone
throughout the body. However, there can be no assurance that the FDA will
approve the product or that any approval will not restrict the anatomic sites
and types of procedures for which Norian SRS may be used. The Company intends to
use data from clinical trials to support regulatory filings, reimbursement
approvals and marketing efforts in the United States.
Wrist Fractures
In 1994, there were approximately 700,000 fractures of the wrist, or distal
radius, in the United States. Stable wrist fractures are those that maintain
anatomic alignment after reduction. These fractures are generally treated by
closed reduction, placed in a cast for six weeks and are usually followed by
rehabilitative physical therapy. However, a significant number of these
fractures become unstable following reduction and casting, frequently resulting
in a loss of reduction which necessitates further clinical intervention.
Unstable wrist fractures are those that cannot maintain reduction and require
pinning with casting, external fixator frames, or an open surgical procedure to
implant hardware. Furthermore, unstable fractures generally require extended
periods of immobilization, resulting in the need for long-term rehabilitation to
regain function.
The Company believes that the use of Norian SRS will provide direct
structural support at the fracture site for unstable wrist fractures. Norian SRS
may be inserted into bone voids to counter the compressive forces across the
wrist and to maintain anatomic alignment of the bone fragments. This may result
in a lower incidence of malunion and improved functional outcome for the
patient. Moreover, the Company believes that because the application of Norian
SRS maintains reduction, patients may begin rehabilitative therapy earlier in
the healing process.
The Company began a randomized, multi-center distal radius fracture trial
involving up to 324 patients under an FDA-approved IDE in February 1995. The
primary clinical endpoints of this study will be measured by radiographic
analysis of the fracture site and functional outcomes such as grip strength and
range of motion. As of April 30, 1996, the Company had enrolled 196 patients in
this trial.
Hip Fractures
Fractures in the intertrochanteric region, which is an area located in the
upper femur, are some of the most devastating injuries that can affect the
elderly. There are approximately 150,000 intertrochanteric fractures each year
in the United States, occurring primarily in osteoporotic patients over the age
of 70. Intertrochanteric fractures are commonly treated with specialized
orthopaedic hardware known as sliding hip screws. Although surgery may be
initially successful, many patients develop impaired functional outcomes when
osteoporotic bone collapses along the fracture site or when the hardware loses
fixation. Between 14% and 36% of all intertrochanteric fracture patients die of
complications within the first year following the fracture.
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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.
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<PAGE> 29
Other Potential Applications
Several additional potential applications of Norian SRS are currently being
evaluated by the Company, some of which have been or continue to be the subject
of limited clinical studies, pre-clinical studies and limited test-marketing
experiences. Norian SRS has been used in the treatment of femoral neck hip
fractures in 29 patients. The Company believes that Norian SRS can eliminate the
need for complicated procedures in the repair of femoral neck fractures as well
as improve the success rate of femoral neck fractures repaired by orthopaedic
hardware when Norian SRS is used to augment such hardware. Norian SRS has been
used in the treatment of five patients with fractures of the calcaneus, the heel
of the foot. Repair of the calcaneus requires decompression of the fractured
bone which often results in a void that the Company believes could be filled
with Norian SRS to reestablish compressive load capacity. Avascular necrosis is
a disorder that occurs when cancellous bone is deprived of its blood supply and
usually results in localized bone death. The Company believes that Norian SRS
could be used to fill a region of avascular necrosis-afflicted bone to reinforce
surrounding viable bone. The Company also believes that there are applications
for Norian SRS in total joint replacements, including filling all gaps between
the replacement and host bone with Norian SRS to reduce the possibility of
slippage and pain. The Company also believes that Norian SRS may be used in the
repair of the anterior cruciate ligament in the knee by replacing the
conventional method of tendon grafting to reconstruct the ligament.
Additionally, the Company is evaluating other potential uses of Norian SRS in
areas of cancellous bone such as in fractures of the shoulder, ankle, hand and
foot.
Norian SRS may also have important uses in a variety of non-orthopaedic
bone filling and stabilization procedures for oral and maxillofacial surgery,
neurosurgery, craniofacial surgery, certain dental applications and certain
veterinary applications. The Company has discussed potential business
relationships with collaborators in these fields. However, no definitive
agreements have been reached and there can be no assurance that the Company will
enter into any of these markets or that it will be successful in penetrating any
such markets.
PHYSICIAN EDUCATION AND TRAINING
Physician education and training is an accepted method of introducing new
surgical methods and products for orthopaedic procedures. The Company believes
that physician acceptance is a critical element in the successful introduction
of Norian SRS into the marketplace and therefore plans to establish an extensive
education and training program for physicians. These programs will address
product attributes and the appropriate clinical applications developed by the
Company and will be conducted initially by both domestic and international
clinical investigators. The Company will focus these initial training efforts on
highly respected opinion leaders in the orthopaedic community and on orthopaedic
surgeons with high volume practices or residency programs. Other objectives of
these programs may include the penetration of new geographical markets or the
introduction of new clinical applications. Mochida will manage similar training
and education programs for surgeons in Japan.
PRODUCT MARKETING
Following the initial surgeon training, the Company also intends to provide
technical support to orthopaedic surgeons in operative procedures. To provide
this logistical support and reinforcement at the time of surgery, the Company
intends to hire product specialists who will be located in major markets and
will manage the distribution of Norian SRS in their regions. In certain European
regions where the Company determines a direct product specialist is appropriate
and most effective, it will implement the same strategy. These experienced
orthopaedic trauma representatives will complete the Norian training program to
qualify to assist at the clinician education programs and conduct in-service
training for relevant hospital personnel. Outside the United States, in regions
in which the Company relies on a third-party distributor or corporate partner,
the Company expects to ensure maintenance of an equivalent standard of
education, training and support services.
In April 1996, the Company and Mochida entered into a collaborative
agreement for the exclusive marketing and distribution of Norian SRS in Japan
for use in certain applications. The agreement provides for payments by Mochida
to Norian of up to a total of $15.0 million, consisting of a $7.0 million equity
investment
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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.
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------- ------------------------------------------------------------------
<S> <C>
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
</TABLE>
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.
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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
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<PAGE> 32
limited in certain foreign countries. The failure of the Company to protect its
proprietary information would have a material adverse effect on the Company's
business, financial condition and results of operations.
While the Company believes that its products and trademarks do not infringe
upon the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of such
third parties. In Japan, the Company is aware of a patent and several patent
applications filed by a Japanese corporation which claim ratio compositions
comprising two of the components of Norian SRS. Although the claimed composition
does not contain the other components of Norian SRS, the specific formulation of
Norian SRS currently in clinical and commercial use by the Company in countries
other than Japan may have a ratio of those two components that fall within the
range claimed by such patent and patent applications. In addition, the Company
is aware that a Japanese corporation has filed a patent application in Japan,
and several counterpart applications in countries outside the United States,
that include a composition of matter claim covering one of the components of
Norian SRS. If a patent including this claim were to issue, Norian SRS, in its
current formulation, may be deemed to infringe such patent. The Company believes
that this composition of matter claim may be found to be overly broad or
anticipated by prior art and that, as a result, a patent including this claim
may not issue, or if a patent issues, such claim may not be enforceable. There
can be no assurance that the Japanese entity or another entity will not bring a
claim of patent infringement against the Company or that the Company's product
will not be determined to be infringing. Any such claims, including meritless
claims, could result in costly, time-consuming litigation and diversion of
technical and management personnel. In the event any third party were to make a
valid claim and a license were not made available on commercially reasonable
terms, or if the Company were unable to develop non-infringing alternative
technology, the Company's business, financial condition and results of
operations could be materially adversely affected.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the Company
or to determine the enforceability, scope and validity of the proprietary rights
of others.
Any litigation or interference proceedings will result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms, if
at all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. The agreements generally
provide that all inventions conceived of by the individual in the course of
rendering services to the Company, shall be the exclusive property of the
Company; however, certain of the Company's agreements with consultants, who
typically are employed on a full-time basis by academic institutions or
hospitals, do not contain assignment of invention provisions. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company
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<PAGE> 33
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to, or independently developed by, competitors.
GOVERNMENT REGULATION
United States
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA. Pursuant to the FDA Act and the
regulations promulgated thereunder, the FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMPs) and Class II devices are
subject to general and special controls (for example, performance standards,
post-market surveillance, patient registries and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through either a 510(k) notification
or a PMA application. A 510(k) clearance will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed Class I or II medical device, or to a Class III medical
device for which the FDA has not called for a PMA. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, or
that additional information or data are needed before a substantial equivalence
determination can be made. A request for additional data may require that
clinical studies of the device's safety and efficacy be performed.
Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. The FDA has recently been
requiring a more rigorous demonstration of substantial equivalence than it has
in the past. It generally takes from four to twelve months from the date of
submission to obtain a 510(k) clearance, but may take longer.
A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category and could have a material adverse effect on the Company's
business, financial condition and results of operations. For any of the
Company's products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the
device that constitute a major change to the intended use of the device will
require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which FDA has called for PMA applications. A PMA application must
be supported by valid scientific evidence which typically includes extensive
data, including human clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA application must also contain the results
of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the submission must include the proposed labeling, advertising literature and
training methods.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for
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<PAGE> 34
filing. Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA application. An FDA review of a PMA application generally
takes one to two years from the date the PMA application is accepted for filing,
but may take significantly longer. The review time is often significantly
extended by the FDA asking for more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, typically a panel of clinicians, will likely be convened to review
and evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter," which usually contains a number of conditions which must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
application approval letter, authorizing commercial marketing of the device for
certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities are not favorable, the FDA will deny approval of the
PMA application or issue a "not approvable letter." The FDA may also determine
that additional clinical trials are necessary, in which case PMA approval may be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the PMA application. The PMA process can be
expensive, uncertain and lengthy and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA
application, its labeling, or manufacturing process may require approval by the
FDA of PMA supplements or new PMAs. Supplements to a PMA application often
require the submission of the same type of information required for an initial
PMA, except that the supplement is generally limited to that information needed
to support the proposed change from the product covered by the original PMA
application. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis, or at all, and delays in
receipt of or failure to receive such approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operation.
If human clinical trials of a device are required in connection with either
a 510(k) notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an IDE application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is reviewed and approved by the FDA and one or more appropriate
Institutional Review Boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate IRBs, but not the FDA. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. An IDE supplement must be
submitted to and approved by the FDA before a sponsor or an investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.
The Company believes that an FDA-approved PMA application will be required
to market Norian SRS in the United States. The Company is currently conducting
clinical studies of Norian SRS pursuant to an FDA-approved IDE to collect data
necessary to support a PMA application. Although the Company plans to pursue
approval for use of Norian SRS as cancellous bone cement at any anatomic site
where cancellous bone exists, only wrist fractures are currently being studied
in the United States under the Company's FDA-approved IDE. The Company plans to
provide clinical data of the safety and effectiveness of Norian SRS as a
cancellous bone cement for anatomic sites other than the wrist with data from
clinical trials being conducted in the United States and abroad. The FDA
analyzes data from foreign clinical studies more critically, and there can be no
assurance that the Company's foreign clinical data will be accepted as part of
the Company's PMA application.
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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
<PAGE> 36
uncertain, and no assurance can be given that the necessary approvals or
clearances will be granted on a timely basis or at all. Delays in receipt of, or
failure to receive, such approvals or clearances, or the loss of any previously
received approvals or clearances could have a material adverse effect on the
business, financial condition and results of operations of the Company.
The Company is engaged in processes that are intended to permit it to affix
the CE mark to its products under the rules of the European Union applicable to
medical devices. This process will entail certification by a notified body
recognized under EU law that the Company's practices and procedures are in
compliance with European standards that implement the ISO 9000 series for
medical devices, as well as assessments to determine that the Company's products
conform to essential requirements under EU rules for medical devices, including
requirements for safety, performance, labeling and other matters.
THIRD-PARTY REIMBURSEMENT
The majority of Medicare expenditures in 1993 were attributable to
inpatient hospital care. Medicare inpatient reimbursement was changed from a
cost-based retrospective system to a prospective reimbursement system in 1983.
Rates are set in advance, fixed for a specific fiscal period, constitute full
institutional payment for the designated service and generally do not vary with
hospital treatment costs. When the cost of providing service differs from the
payment rate, the hospital makes a profit or experiences a shortfall. In the
United States, health care providers, such as hospitals and physicians that
purchase medical devices for treatment of their patients, generally rely on
third-party payors to reimburse all or part of the costs and fees associated
with the procedures performed with these devices. Private insurance plans are
central to new product acceptance.
Successful sales of Norian SRS in the United States and other markets will
depend on the availability of adequate reimbursement from third-party payors.
There is significant uncertainty concerning third-party reimbursement for the
use of any medical device incorporating new technology. Even if the Company
receives approval of a PMA application for Norian SRS for orthopaedic uses,
third-party payors may nevertheless deny reimbursement or reimburse at a low
price if they conclude that using it is not cost-effective, not medically
necessary, or is used for an unapproved indication. Furthermore, third-party
payors are increasingly challenging the need to perform medical procedures, or
limiting reimbursement for those that are performed. There can be no assurance
that use of Norian SRS will be considered cost-effective or medically necessary
by third-party payors, that reimbursement will be available or, if available,
that payors' reimbursement policies will not adversely affect the Company's
ability to sell its products on a profitable basis. The market for the Company's
products could also be adversely affected by recent federal legislation that
reduces reimbursement under the cost pass-through system for the Medicare
program. In addition, an increasing emphasis on managed care in the United
States has and will continue to increase the pressure on medical device pricing.
The Company cannot predict whether legislative or regulatory proposals will be
adopted or the effect such proposals or managed care efforts may have on its
business. The announcement of such proposals or efforts could have a material
adverse effect on the Company's ability to raise capital, and the adoption of
such proposals or efforts could have a material adverse effect on the Company's
business, financial condition and results of operations. Failure by hospitals
and other users of the Company's products to obtain reimbursement from
third-party payors and/or changes in governmental and private third-party
payors' policies toward reimbursement for procedures employing the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
Member countries of the EU operate various combinations of
centrally-financed health care systems and private health insurance systems. The
relative importance of government and private systems varies from country to
country. The choice of devices is subject to constraints imposed by the
availability of funds within the purchasing institution. Medical devices are
most commonly sold to hospitals or health care facilities at a price set by
negotiation between the buyer and the seller. A contract to purchase products
may result from an individual initiative or as a result of a public invitation
and a competitive bidding process. In either case, the purchaser pays the
supplier. Payment terms can vary widely throughout the EU.
In Japan, at the end of the regulatory process, the MHW makes a
determination of the per unit sales price of the product. The MHW can set the
reimbursement level for Norian SRS at its discretion and there can be no
34
<PAGE> 37
assurance that the Company will be able to obtain regulatory approval in Japan
or if such approval is granted that the Company will obtain a favorable per unit
sales price.
Through the patient informed consent process, the Company receives full
access to the United States clinical trial patient's hospital discharge
financial record and other medical financial information. By comparing the cost
outcomes of treated patients, and control patients, the Company expects to
substantiate the claim that Norian SRS provides overall reduction in costs which
outweighs the incremental added cost of the product.
COMPETITION
The Company competes with a number of manufacturers of bone fixation and
replacement devices. Products that are competitive with Norian SRS include
casts, splints, external fixators, internal fixators, bone grafts, bone graft
substitutes and bone cement. Most of the Company's competitors have
significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than any which are being developed by the Company or which would render the
Company's products obsolete or noncompetitive. Such developments could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any product developed by the Company that receives
regulatory approval will have to compete for market acceptance and market share.
The Company believes that the primary competitive factors in the market for bone
fixation and replacement devices include clinical need and efficacy, relative
cost for the episode of care and ease of use. Another important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete clinical testing and regulatory approval processes and supply
commercial quantities of the product to the market is expected to be an
important competitive factor.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. Although the
Company maintains product liability insurance with coverage limits of $1.0
million per occurrence and an annual aggregate maximum of $1.0 million, and
general commercial liability insurance with an additional $3.0 million umbrella
coverage per occurrence and an annual aggregate maximum of $3.0 million, there
can be no assurance that product liability claims will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will continue to be available on commercially reasonable
terms, if at all.
EMPLOYEES
As of April 30, 1996, the Company had 52 full-time employees, of which 24
persons were engaged in research and development activities, nine persons in
manufacturing and facilities, four persons in quality assurance and regulatory
affairs, seven persons in sales and marketing and eight persons in general and
administrative functions. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees.
FACILITIES AND OPERATIONS
The Company leases a 20,100-square foot facility in Cupertino, California.
The facility is leased through December 1999, with an option to renew for an
additional five-year term. The Cupertino facility contains research,
development, manufacturing, marketing and administrative space. In addition, the
Company leases approximately 950 square feet of office space in Naarden,
Netherlands under a lease expiring February 2000, and 900 square feet of office
space in Bedale, United Kingdom under a lease that terminates at the Company's
option, on three months' notice. The Company is currently negotiating the lease
of additional office space in Cupertino, California to accommodate expanded
marketing and administrative functions, although no definitive agreement has
been reached.
35
<PAGE> 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- --- ----------------------------------------------
<S> <C> <C>
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
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Dr. Constantz founded the Company in 1987 and has been a member of the
Board of Directors since that time. Dr. Constantz served as the Chairman of the
Company from its inception until September 1993. He was elected President and
Chief Executive Officer of the Company in March 1994. Following the completion
of certain performance milestones, the Board of Directors intends to re-elect
Dr. Constantz to the position of Chairman of the Company. Dr. Constantz
conducted post-doctoral research on isotope geochemistry at the United States
Geological Survey and studied protein-crystal interactions in biomineralization
as a Fulbright Scholar at the Weizmann Institute of Science in Israel. Dr.
Constantz holds a B.A. in Aquatic Biology/Geological Sciences from the
University of California, Santa Barbara, and an M.S. and a Ph.D. in Earth
Sciences from the University of California, Santa Cruz.
Mr. Pering joined the Company in February 1996 as Executive Vice President,
Operations. From 1990 to 1996, he was Vice President and Chief Operating Officer
of Ace Medical Company, a manufacturer and marketer of orthopaedic trauma
devices. He holds a B.S. in Chemistry, Biology and Psychology from Drury
College.
Mr. Faerber joined the Company in April 1994 as Vice President, Finance and
Chief Financial Officer. From 1990 to 1994, he was International and Corporate
Controller at Collagen Corporation, a medical device company. He holds a B.S. in
Business Administration from Providence College, Rhode Island and is a Certified
Public Accountant.
Mr. Fagot joined the Company in January 1995 as Vice President, Marketing
and Business Development. From 1986 to 1995, Mr. Fagot held several marketing
and general management positions with domestic and international divisions of
Johnson & Johnson. Mr. Fagot received a B.B.A. in Business Management from North
Texas State University.
Mr. Jackson joined the Company in December 1992 as Vice President, Quality
Assurance and Regulatory Affairs. Mr. Jackson was Vice President, Quality
Assurance and Regulatory Affairs for Oximetrix, Inc. ("Oxime-
36
<PAGE> 39
trix"), a medical device company, from 1975 to 1985, when Oximetrix was acquired
by Abbott Laboratories, Inc. ("Abbott"), a medical device and pharmaceutical
company. He remained with Abbott until 1992. Mr. Jackson has over 26 years of
professional experience in the medical device field.
Dr. Little joined the Company in February 1996 as Vice President, Europe.
From 1994 to 1995 Dr. Little was Vice President, Sales and Marketing of the CMW
division of DePuy International, Ltd., a subsidiary of Boehringer Mannheim, a
pharmaceutical and health care products company ("DePuy"). From 1987 to 1994,
Dr. Little held a variety of marketing and general managerial positions with
DePuy. Dr. Little received a B.Sc. in Zoology from the University of London, an
M.Tech. in Applied Immunology from Brunel University, London, and a Ph.D. in
Biochemistry from the University of the Witwatersrand in Johannesburg, South
Africa.
Dr. Poser joined the Company in January 1993 as the Director of Orthopaedic
Research, and was promoted to Vice President of Research and Development in
January 1996. Dr. Poser was Head of Experimental Surgery at the Harrington
Arthritis Research Center in Phoenix, Arizona from 1989 to 1993. Dr. Poser
received a B.S. in Biology from East Carolina University and a D.V.M. from the
University of Georgia.
Ms. Smith joined the Company in March 1993 as Director of Clinical
Research, and was promoted to Vice President, Clinical Affairs in January 1996.
From 1991 to 1993, Ms. Smith was Manager of Clinical Research at Triton
Diagnostics, Inc., an in vitro cancer diagnostic company, and, from 1989 to
1991, she was Director of Clinical Research at Target Therapeutics, Inc., a
neurovascular microcatheter and guidewire company. She holds a B.S. in Nursing
from Marymount College of Virginia and an M.S. in Administration from George
Mason University.
Dr. Sevastopoulos has been a director of the Company since April 1988 and
was elected Chairman of the Board in March 1994. He was a general partner of
Delphi BioVentures L.P. from 1988 to 1994. Dr. Sevastopoulos is currently
self-employed as a private investor and consultant and is also the Chairman of
the Board of Metra Biosystems, Inc. He received a B.S. in Physics from the
University of Athens, Greece, an M.S. in Electrical Engineering from the
California Institute of Technology, an M.B.A. from INSEAD, France, and a Ph.D.
in Molecular Biology from the University of California at Berkeley.
Mr. Gilbert has served as a director of the Company since April 1995. He is
a general partner of Frazier & Company L.P., a private equity firm specializing
in health care, which he joined at its inception in 1991. Mr. Gilbert, a
Certified Public Accountant, holds a B.A. in Accounting from the University of
Washington and an M.B.A. from Dartmouth College.
Mr. Hutt has served as a director of the Company since May 1994. Mr. Hutt
was Chief Counsel for the FDA from 1971 to 1975 and was responsible for FDA
policy relating to the Medical Device Amendments of 1976. Since leaving the FDA
in 1975, Mr. Hutt has been a partner with the Washington, D.C. law firm of
Covington & Burling, where he specializes in FDA law. Mr. Hutt is a member of
the Institute of Medicine of the National Academy of Sciences, and an advisory
board member of the Center for the Study of Drug Development at Tufts
University. Mr. Hutt teaches a course on food and drug law at Harvard Law School
during the winter term. He also serves as a director of Cell Genesys, Inc.,
Emisphere Technologies, Inc., IDEC Pharmaceuticals Corporation, Interneuron
Pharmaceuticals, Inc. and Vivus, Inc. He holds a B.A. in Political Science and
Economics from Yale University, an LL.B. from Harvard University, and an LL.M.
from New York University under a fellowship from the Food and Drug Law
Institute.
Dr. Skinner has served as a director of the Company since April 1988. He
has been the Chairman of the Department of Orthopaedic Surgery at the College of
Medicine at the University of California, Irvine since 1994. He was a professor
at the University of California, San Francisco from 1983 to 1994. He is a fellow
of the American College of Surgeons and of the American Academy of Orthopaedic
Surgeons. He has served as the User Vice-Chairman of the F4 Committee of the
American Society of Testing Materials dealing with medical devices. In addition,
he was the Chairperson of the Medical Device Committee of the American College
of Surgeons. He holds a B.S. in Ceramic Engineering from Alfred University, an
M.D. from Medical University of South Carolina, and a Ph.D. in Material Science
and Engineering from the University of California at Berkeley.
Mr. Wyss has been a director of the Company since September 1995. Mr. Wyss
is a trustee and board member of the Association for the Study of Internal
Fixation ("AO"), and has been Chairman and Chief
37
<PAGE> 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 $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------- SECURITIES
SALARY UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION ($) BONUS ($) OPTIONS(#) COMPENSATION ($)
- -------------------------------------------- -------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(1) Reflects an automobile allowance paid to Dr. Constantz.
(2) Reflects relocation expenses paid to Mr. Fagot.
38
<PAGE> 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
<TABLE>
<CAPTION>
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% ($)
- ---------------------------------------- ---------- ---------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(1) These options were granted under the Company's 1988 Stock Option Plan and
vest at the rate of 1/48th per month beginning on the grant date.
(2) The exercise price equals the fair market value of the Common Stock on the
date of grant and is to be paid in cash. The Company may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the five-year
option term will be at the assumed 5% or 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
(4) On January 30, 1996, the Company granted Dr. Constantz an option to purchase
37,500 shares of Common Stock at an exercise price of $2.00 per share.
(5) On January 30, 1996, the Company granted Mr. Faerber an option to purchase
6,250 shares of Common Stock at an exercise price of $2.00 per share, and on
May 2, 1996, the Company granted Mr. Faerber an option to purchase 10,000
shares of Common Stock at an exercise price of $9.60 per share.
(6) On January 30, 1996, the Company granted Mr. Jackson an option to purchase
6,250 shares of Common Stock at an exercise price of $2.00 per share, and on
May 2, 1996, the Company granted Mr. Jackson an option to purchase 10,000
shares of Common Stock at an exercise price of $9.60 per share.
(7) On January 30, 1996, the Company granted Dr. Poser an option to purchase
2,500 shares of Common Stock at an exercise price of $2.00 per share, and on
May 2, 1996, the Company granted Dr. Poser an option to purchase 10,000
shares of Common Stock at an exercise price of $9.60 per share.
The following table sets forth information for the Named Executive Officers
regarding the value of unexercised options held as of December 31, 1995. No
options were exercised by the Named Executive Officers during the fiscal year
ended December 31, 1995.
39
<PAGE> 42
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995(1)($)
(EXERCISABLE/ (EXERCISABLE/
NAME UNEXERCISABLE) UNEXERCISABLE)
- ------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
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 --/ --
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1995 ($2.00 per share
as determined by the Board of Directors) and the exercise price of the
option.
(2) Includes options to purchase 8,463 shares, which Mr. Fagot exercised on
March 11, 1996.
(3) Includes options to purchase 9,973 shares, which Mr. Jackson exercised on
March 5, 1996.
DIRECTOR COMPENSATION
From October 1993 to December 1995, Dr. Skinner received $700 per month for
his service as a director, and, effective January 1996, this monthly stipend was
increased to $1,500 per month. In January 1996, the Company also began paying
Dr. Sevastopoulos $1,500 per month for his service as the Chairman of the Board
of Directors. From time to time, certain directors who are not employees of the
Company have received grants of nonstatutory stock options to purchase shares of
Common Stock under the 1988 Incentive Stock Option Plan. On January 30, 1996,
Drs. Sevastopoulos and Skinner each received 6,250 shares of Common Stock for
their service as Chairman of the Board of Directors and as a director,
respectively. During 1995 and through March 31, 1996, Mr. Hutt received options
to purchase 12,500 shares of Common Stock for his services as a director. Each
of the options granted to Drs. Sevastopoulos and Skinner and Mr. Hutt has an
exercise price of $2.00 per share. On April 28, 1996, Drs. Sevastopoulos and
Skinner and Messrs. Gilbert, Hutt and Wyss each received options to purchase
10,000 shares of Common Stock, all at an exercise price of $9.60 per share, for
their service as directors. Under the 1996 Director Option Plan, non-employee
directors who first join the Board after this offering will receive options to
purchase 10,000 shares of Common Stock, and all non-employee directors will
receive annual grants of options to purchase 2,000 shares of Common Stock. See
"Stock Plans -- 1988 Stock Option Plan" and "-- 1996 Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the year ended December 31, 1995, Drs. Constantz and Sevastopoulos
and Peter Gleason served as the Compensation Committee of the Company's Board of
Directors. Dr. Constantz, who served as President, Chief Executive Officer and
Chief Scientist during 1995, resigned as a member of the Compensation Committee
in April 1996. Mr. Gleason resigned from the Board of Directors and the
Compensation Committee in April 1996. The current members of the Compensation
Committee are Drs. Sevastopoulos and Skinner and Mr. Wyss. Dr. Sevastopoulos
served as Norian's President and Chief Executive Officer from November 1988 to
May 1989. See "Management" and "Certain Transactions."
40
<PAGE> 43
STOCK PLANS
1988 Stock Option Plan. As of March 31, 1996, 279,654 shares of Common
Stock had been acquired on the exercise of options granted under the Company's
1988 Stock Option Plan (the "1988 Plan"), 453,137 shares of Common Stock were
subject to outstanding options, and 142,194 shares were available under the 1988
Plan for issuance on the exercise of options granted in the future. Since March
31, 1996, options to purchase an additional 139,125 shares of Common Stock have
been granted under the 1988 Plan, and 15,638 shares of Common Stock have been
issued on the exercise of options outstanding at March 31, 1996. Options granted
under the 1988 Plan before the effective date of the 1996 Plan will remain
outstanding in accordance with their terms, but no further grants will be made
under the 1988 Plan after the effective date of this offering.
1996 Stock Plan. The Company's 1996 Stock Plan (the "1996 Plan") was
adopted by the Board of Directors in April 1996 and approved by the Company's
shareholders on May 24, 1996. The 1996 Plan will serve as the successor equity
incentive program to the Company's 1988 Plan upon completion of this offering.
The Company has reserved 1,000,000 shares of Common Stock for issuance under the
1996 Plan, plus an automatic increase on each anniversary of the effective date
of the 1996 Plan equal to the lesser of 500,000 shares, two percent of the
outstanding shares on such date, or an amount determined by the Board.
The 1996 Plan provides for the grant of stock options and stock purchase
rights to employees (including directors who are employees) and consultants of
the Company or any parent or subsidiary of the Company. Incentive stock options
(as defined under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")) may be granted only to employees. No person will be eligible to
receive an option under the 1996 Plan covering more than 100,000 shares in any
fiscal year of the Company, other than new employees of the Company, who will be
eligible to receive options covering up to a maximum of 400,000 shares in the
calendar year in which they begin employment with the Company. The 1996 Plan
will be administered by the Compensation Committee which will have the
discretion to determine the terms of options and stock purchase rights
(including the exercise price and the vesting schedule), subject to certain
statutory limitations and other limitations in the 1996 Plan.
In the event of a merger or sale of all or substantially all of the assets
of the Company, outstanding options and stock purchase rights under the 1996
Plan may be assumed or substituted for by the successor corporation (if any). In
the event such successor corporation refuses to assume or substitute such
options or stock purchase rights, the vesting of such awards will accelerate in
full immediately prior to such transaction.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate by its terms in June 2006, unless sooner terminated by the Board.
1996 Director Option Plan. The Company's 1996 Director Option Plan (the
"Director Plan") was adopted by the Board in April 1996 and approved by the
shareholders on May 24, 1996. The Director Plan will become effective upon
completion of this offering. A total of 200,000 shares have been reserved for
issuance under the Director Plan, plus an annual increase to be added on each
anniversary of the effective date of the Director Plan equal to 0.5% of the
outstanding shares as of such date, or a lesser amount determined by the Board.
Only non-employee directors are eligible to participate in the Director
Plan. Each non-employee director who first becomes a director after this
offering will automatically be granted a nonstatutory option to purchase 10,000
shares of Common Stock. In addition, each non-employee director (including such
directors who first were elected before this offering) will be granted an
automatic option to purchase 2,000 shares on June 30 of each year, commencing in
1997; provided that he is then a non-employee director; and provided, further,
that such director has served on the Board during the preceding six months. The
per share exercise price of options granted under the Director Plan will be
equal to the fair market value of the Common Stock on the date of grant. The
initial option grant to non-employee directors will vest at a rate of 1/48th per
month over four years following the date of grant, so long as the non-employee
director continues to serve as a director on such dates. Each subsequent option
grant will vest at a rate of 1/12th per month over the next year following the
date of grant, so long as the non-employee director continues to serve as a
director on such date.
In the event of a merger or sale of all or substantially all of the assets
of the Company, options granted under the Director Plan may be assumed or
substituted for by the successor corporation (if any). If assumed or
41
<PAGE> 44
substituted, an option will continue to vest as provided under the Director Plan
for so long as the non-employee director continues to serve as a director of the
successor corporation. If the director is terminated as a director of the
successor corporation, other than upon a voluntary termination or termination
for cause (as defined in the Director Plan), such option will become fully
exercisable as of the date of such termination. If the successor corporation
does not assume or substitute the option, the option will become exercisable in
full immediately prior to such transaction.
The Board may amend or terminate the Director Plan at any time, provided,
however, that the provisions regarding the grant of options under the Director
Plan may be amended only once in any six-month period, other than to comport
with changes in the Code or the Employee Retirement Income Security Act of 1974,
as amended. If not terminated earlier, the Director Plan will terminate by its
terms in June 2006.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board in April 1996 and
approved by the shareholders on May 24, 1996. A total of 300,000 shares of
Common Stock has been authorized for issuance under the Purchase Plan, plus an
annual increase to be added on each anniversary date of the effective date of
the Purchase Plan equal to the lesser of 150,000 shares, one percent of the
outstanding shares on such date, or an amount determined by the Board. As of the
date of this Prospectus, no shares have been issued under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Code, will
be administered by the Board or by a committee appointed by the Board.
Any employee who is employed by the Company or any designated subsidiary of
the Company for at least 20 hours per week and for at least five months in any
calendar year will be eligible to participate in the Purchase Plan. Under the
Purchase Plan, the Company will withhold a specified percentage (not to exceed
15%) of the compensation paid to each participant, and the amount withheld will
be used to purchase Common Stock from the Company on the last day of each
purchase period. The price at which Common Stock will be purchased under the
Purchase Plan will be equal to 85% of the fair market value of the Common Stock
on the first day of the applicable offering period, or the last day of the
applicable purchase period, whichever is lower. The length of each offering
period and each purchase period will be determined by the Board or the
Compensation Committee, but no offering period will exceed 27 months in
duration. Unless the Board or the Compensation Committee determines otherwise,
offering periods will be divided into consecutive purchase periods of
approximately six months. The first offering period and the first purchase
period will begin on the effective date of this Prospectus. New offering periods
will begin approximately every six months thereafter.
Employees may end their participation in an offering period at any time,
and participation ends automatically on termination of employment with the
Company. The maximum number of shares that a participant may purchase during any
purchase period will be equal to $12,500 divided by the fair market value of the
shares on the first day of the applicable offering period. In addition, no
participant may purchase shares under the Purchase Plan to the extent that such
participant would own five percent or more of the total combined voting power or
value of all classes of the capital stock of the Company or any subsidiary, or
to the extent that such participant's right to purchase the stock under all
employee stock purchase plans of the Company accrues at a rate that exceeds
$25,000 worth of stock during any calendar year. In the event of a merger or
sale of all or substantially all of the Company's assets, purchase periods then
in progress will be shortened and will end on a new exercise date, at which time
all options will automatically be exercised. The Board may amend or terminate
the Purchase Plan at any time. The Purchase Plan will terminate by its terms in
June 2006.
SECTION 401(K) PLAN
In April 1994, the Company adopted the Norian Corporation Retirement
Savings Plan (the "401(k) Plan"), covering the Company's full-time employees
located in the United States. Pursuant to the 401(k) Plan, employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit ($9,500 in 1996) and to have the amount of such reduction contributed to
the 401(k) Plan. The 401(k) Plan permits, but does not require, additional
matching contributions to the 401(k) Plan by the Company on behalf of all
participants in the 401(k) Plan. The Company has not made any contributions to
the 401(k) Plan. The
42
<PAGE> 45
401(k) Plan is intended to qualify under Section 401(k) of the Code, such that
contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and such that contributions by the Company, if any, will be
deductible by the Company.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation eliminate the personal liability of
its directors for monetary damages arising from a breach of their fiduciary
duties in certain circumstances to the fullest extent permitted by law and
authorize the Company to indemnify its directors and officers to the fullest
extent permitted by law. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Bylaws of the Company provide for the indemnification of the Company's
officers and directors against certain liabilities and expenses relating to
lawsuits and other proceedings in which they may become involved. Sections
204(a)(10) and (11) and Section 317 of the California Corporations Code also
provide for indemnification of a corporation's directors and officers under
certain circumstances.
The Company currently carries indemnity insurance pursuant to which its
directors and officers are insured under certain circumstances against certain
liabilities or losses, including liabilities under the Securities Act. The
Company has entered into indemnity agreements with certain directors and
executive officers. These agreements, among other things, indemnify the
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement payments incurred by such person in any
action, including any action by or in the right of the Company, in connection
with the good faith performance of his or her duties as a director or officer.
The indemnification agreements also provide for the advance payment by the
Company of defense expenses incurred by the director or officer; however, the
affected director or officer must undertake to repay such amounts advanced if it
is ultimately determined that such director or officer is not entitled to be
indemnified.
At present, there is no pending litigation involving a director or officer
of the Company in which indemnification is required or permitted, and the
Company is not aware of any threatened litigation or proceeding that may result
in a claim for such indemnification.
43
<PAGE> 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.
<TABLE>
<CAPTION>
WARRANTS TO
AGGREGATE PURCHASE
SHARES OF SERIES D PURCHASE SERIES D
NAME PREFERRED STOCK PRICE PREFERRED STOCK
- ------------------------------------------------------ ------------------ ---------- ---------------
<S> <C> <C> <C>
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
</TABLE>
- ---------------
(1) Jon N. Gilbert, a director of the Company, is a member of Frazier
Management, L.L.C., which is affiliated with Frazier Securities, L.P. and
Frazier Healthcare Investments, L.P. Mr. Gilbert may be deemed to have an
indirect material interest in the shares held by Frazier Healthcare
Investments L.P. and Frazier Securities L.P. However, Mr. Gilbert does not
believe he has a material interest in the transactions.
(2) Consists of 714,285 shares sold to The Amy Wyss 1995 Irrevocable Trust. Amy
Wyss is the adult daughter of Hansjorg Wyss, a director of the Company. Mr.
Wyss disclaims any material interest in the transaction.
Contingent upon the completion of this offering, on March 12, 1996, the
Board of Directors approved a loan of up to $500,000 to Brent R. Constantz,
President, Chief Executive Officer and Chief Scientist of the Company, to be
secured by shares of Common Stock held by Dr. Constantz. The loan is intended to
be used to finance the purchase of a primary residence. The terms and conditions
of the loan will be determined upon funding of the loan.
Peter Barton Hutt, a director of the Company, is a partner in the law firm
of Covington & Burling, which provides international regulatory counsel to the
Company. The Company paid fees to Covington & Burling of approximately $7,000 in
the aggregate over the three years ended December 31, 1995.
Dr. Sevastopoulos and Dr. Skinner each have a consulting agreement with the
Company. See "Management -- Director Compensation."
44
<PAGE> 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.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
---------------------
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
- ---------------
* Less than one percent
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants exercisable within 60 days of March 31, 1996 are
deemed outstanding for computing the percentage of the person or entity
holding such options but are not deemed outstanding for computing the
percentage of any other person.
45
<PAGE> 48
(2) Consists of 535,714 shares held by Frazier Healthcare Investments, L.P. and
warrants to purchase 357,386 shares held by Frazier Securities, L.P.
(3) Consists of 535,714 shares held by Frazier Healthcare Investments, L.P.,
warrants to purchase 357,386 shares held by Frazier Securities, L.P. and
208 shares issuable under stock options held by Mr. Gilbert exercisable
within 60 days of March 31, 1996. Mr. Gilbert is a member of Frazier
Management, L.L.C., which is affiliated with Frazier Securities, L.P. and
Frazier Healthcare Investments L.P. Therefore, Mr. Gilbert may be deemed to
be a beneficial owner of the shares held by Frazier Healthcare Investments,
L.P. and the warrants held by Frazier Securities, L.P. Nonetheless, Mr.
Gilbert disclaims beneficial ownership of the shares held by Frazier
Healthcare Investments, L.P., and the warrants held by Frazier Securities,
L.P., except to the extent of his pecuniary interest. Voting and investment
power is shared among all of the above-mentioned entities.
(4) Includes 78,125 shares held by Technology Venture Investors IV, L.P., 7,686
shares held by TVI Management-3, L.P., 400,439 shares held by Technology
Venture Investors-3, L.P., and 266,564 shares held by Technology Venture
Investors IV, L.P., as nominee for Technology Venture Investors-4, L.P.,
TVI Partners-4, L.P., and TVI Affiliates-4, L.P.
(5) Amy Wyss is the adult daughter of Hansjorg Wyss, a director of the Company,
and Mr. Wyss disclaims beneficial ownership of shares held by the trust.
(6) Includes 729 shares issuable under stock options held by Dr. Sevastopoulos
exercisable within 60 days of March 31, 1996. Also includes 348,923 shares
held by Delphi Ventures, L.P., 1,237 shares held by Delphi BioInvestments,
L.P., 485 shares held by Delphi BioInvestments II, L.P., and 87,390 shares
held by Delphi Ventures II, L.P. Because Dr. Sevastopoulos is a limited
partner of Delphi Management Partners and Delphi Management Partners II,
which are general partners of these limited partnerships, he may be deemed
to be a beneficial owner of such shares. Dr. Sevastopoulos disclaims
beneficial ownership of such shares, except to the extent of his interest
in such shares arising from his interest in Delphi Management Partners and
Delphi Management Partners II.
(7) Includes 32,291 shares issuable under stock options held by Dr. Constantz
exercisable within 60 days of March 31, 1996.
(8) Includes 729 shares issuable under stock options held by Dr. Skinner
exercisable within 60 days of March 31, 1996.
(9) Consists of 14,505 shares issuable under stock options held by Dr. Poser
exercisable within 60 days of March 31, 1996.
(10) Consists of 12,369 shares issuable under stock options held by Mr. Faerber
exercisable within 60 days of March 31, 1996.
(11) Consists of 12,317 shares issuable under stock options held by Mr. Hutt
exercisable within 60 days of March 31, 1996.
(12) Includes 1,771 shares issuable under stock options held by Mr. Jackson
exercisable within 60 days of March 31, 1996.
(13) Includes 1,953 shares issuable under stock options held by Mr. Fagot
exercisable within 60 days of March 31, 1996.
(14) Consists of 208 shares issuable under stock options held by Mr. Wyss
exercisable within 60 days of March 31, 1996.
(15) Includes 78,278 shares issuable under stock options held by such directors
and executive officers exercisable within 60 days of March 31, 1996, and
warrants to purchase 357,386 shares held by Frazier Securities, L.P., which
may be deemed beneficially owned by Mr. Gilbert.
46
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 75,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock, after giving
effect to the restatement of the Company's Articles of Incorporation and the
completion of this offering. Although the following summaries contain all of the
material elements of the Common Stock and Preferred Stock, such summaries do not
purport to be complete, are subject to, and qualified in their entirety by, the
provisions of the Company's Seventh Amended and Restated Articles of
Incorporation, which is included as an exhibit to the Registration Statement of
which this Prospectus forms a part, and by applicable law.
COMMON STOCK
As of March 31, 1996, there were 9,003,003 shares of Common Stock
outstanding assuming the conversion of all of the outstanding shares of
Preferred Stock into Common Stock, which were held of record by 199
shareholders. The holders of Common Stock are entitled to one vote per share on
all matters to be voted upon by the shareholders. Subject to preferences that
may be applicable to any outstanding Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
shareholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not possible
to state the actual effect of the issuance of any shares of Preferred Stock upon
the rights of holders of the Common Stock until the Board of Directors
determines the specific rights of the holders of such Preferred Stock. However,
the effects might include, among other things, restricting dividends on the
Common Stock, diluting the voting power of the Common Stock, impairing the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the shareholders. The Company
has no present plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
The holders of 9,434,527 shares of Common Stock or their transferees
(including 423,540 shares subject to outstanding and exercisable warrants) are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Subject to certain limitations, the holders of at least 25%
of the Common Stock issued on the conversion of the Company's Series D Preferred
Stock or at least 40% of the Common Stock issued on the conversion of all
Preferred Stock and on the exercise of all warrants, may require, on two
occasions beginning six months after the date of this Prospectus, that the
Company use its best efforts to register the resale of shares of Common Stock.
If the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of securities with
registration rights are entitled to include their shares of Common Stock in the
registration, subject to the underwriters' right to limit the number of shares
included in the offering. In addition, certain shareholders may also require the
Company to register the resale of all or a portion of their shares on Form S-3
when the Company becomes eligible to use such form; provided that, among other
limitations, the proposed aggregate selling price (net of any underwriters'
discounts or commissions) is at least $1.0 million; and provided further, that
approximately 357,386 shares underlying outstanding warrants with registration
rights are not subject to such limitations. All registration expenses must be
borne by the Company and all selling expenses relating to the sale of the
securities with registration rights must be borne by the holders of the
securities being registered.
47
<PAGE> 50
CERTAIN CHANGE OF CONTROL PROVISIONS
The Company's Seventh Amended and Restated Articles of Incorporation will
provide that, upon the completion of this offering, the Board of Directors will
be divided into two classes, with each class serving a staggered two-year term.
The classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors. The Seventh Amended and Restated Articles
of Incorporation and Bylaws do not provide for cumulative voting in the election
of directors. The authorization of undesignated Preferred Stock makes it
possible for the Board of Directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. These and other provisions may have the effect of
deferring hostile takeovers or delaying changes in control or management of the
Company.
In addition, the Company has granted to Howmedica a non-exclusive right of
first negotiation with respect to transactions involving the sale of the
Company, whether through merger, stock exchange or sale of all, or substantially
all, of its assets. If the Company's Board of Directors decides to begin
discussions with any third party regarding a sale of the Company, the Company is
required to notify Howmedica in writing and to negotiate with Howmedica for a
period of 60 days. The Company is not prohibited from negotiating concurrently
with other parties regarding similar transactions during this 60-day period. If
the Company and Howmedica fail to reach a written agreement in principle during
the 60-day period, or if Howmedica consents to the early termination of such
60-day period, the Company will be free to complete the sale of the Company to
any third party without further obligation to Howmedica. This right of first
negotiation expires on the earliest to occur of: (i) the termination of the
CrystalCoat License; (ii) the occurrence of an event that would cause the
CrystalCoat License to become non-exclusive; or (iii) the completion of a sale
of the Company, whether by merger, share exchange or sale of all, or
substantially all, of the Company's assets. This right of first negotiation may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, the Company in a negotiated transaction, and may
also impair the Company's ability to respond to a hostile takeover attempt.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the American Stock
Transfer and Trust Company. Its telephone number is (212) 936-5100.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time and the
ability of the Company to raise equity capital in the future.
Upon the completion of this offering, the Company will have 12,368,641
shares of Common Stock outstanding. Of these shares, the 3,000,000 shares sold
in this offering will be freely tradable without restriction under the
Securities Act. The remaining 9,368,641 shares of the Common Stock will be
restricted securities within the meaning of the Securities Act. Shareholders of
the Company, holding in the aggregate 9,210,311 shares of Common Stock, have
entered into lock-up agreements under which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or agree
to dispose of, directly or indirectly, any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into Common Stock owned by them for a period of either 120 days or
180 days after the date of this Prospectus, without the prior written consent of
the Representatives of the Underwriters or, in certain cases, the Company. The
Company has entered into a similar agreement, except that the Company may grant
options and issue stock under its current stock purchase plans and pursuant to
other currently outstanding options.
48
<PAGE> 51
As of March 31, 1996, 453,137 shares were subject to outstanding options,
342,623 of which would be subject to lock-up agreements if issued. After the
completion of this offering, the Company intends to file a Registration
Statement on Form S-8 covering shares issuable under the Company's 1988 Stock
Plan (including shares subject to then outstanding options), the 1996 Stock
Plan, the Director Plan and the Purchase Plan, thus permitting the resale of
such shares in the public market without restriction under the Securities Act
after expiration of the applicable agreements.
On the date of this Prospectus, the 3,000,000 shares offered hereby, as
well as an additional 28,989 shares, will be available for sale in the public
market. Beginning 90 days after the date of this Prospectus, an additional
69,603 shares of Common Stock (excluding approximately 46,810 shares subject to
outstanding vested options which, if exercised, would be included) will be
available for sale in the public market subject to the requirements of Rules 144
or 701. Upon expiration of the lock-up agreements, beginning 120 days and 180
days after the date of this Prospectus, an additional 50,694 and 5,286,002
shares of Common Stock, respectively (excluding approximately 146,146 shares
subject to outstanding vested options which, if exercised, would be included),
will become eligible for immediate public resale subject to compliance with Rule
144. The remaining approximately 3,933,353 shares held by existing shareholders
will become eligible for public resale at various times over a period of less
than two years following the completion of this offering, subject to compliance
with Rule 144. The holders of 9,434,527 shares of Common Stock outstanding
immediately following the completion of this offering (including 423,540 shares
subject to outstanding, exercisable warrants) will be entitled to registration
rights with respect to such shares upon the release of lock-up agreements. The
number of shares sold in the public market could increase if such rights are
exercised. See "Description of Capital Stock -- Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 123,700 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701, persons who
purchase shares upon exercise of options granted prior to the effective date of
this offering are entitled to sell such shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of nonaffiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modification will have a material effect on
the time when shares of the Common Stock become eligible for resale.
49
<PAGE> 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:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------ ---------
<S> <C>
Alex. Brown & Sons Incorporated...........................................................
Robertson, Stephens & Company LLC.........................................................
---------
Total..................................................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock offered hereby, if any of
such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Shareholders of the Company, holding in the aggregate 8,767,842 shares of
Common Stock, have agreed not to offer, sell or otherwise dispose of any of such
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representatives of the
Underwriters. The Company has entered into a similar agreement, except that it
may issue, and grant options to purchase, shares of Common Stock under its
current stock option and purchase plans and pursuant to other currently
outstanding options and warrants. See "Shares Eligible for Future Sale."
In 1992, the Company engaged Alex. Brown & Sons Incorporated, one of the
Representatives of the Underwriters, as agent for the private placement of
2,601,037 shares of Series D Preferred Stock. Alex. Brown & Sons Incorporated
was granted a warrant to purchase 66,154 shares of Common Stock at an exercise
price of $9.20 per share as consideration for this service. This warrant expires
in August 1997.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
50
<PAGE> 53
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. The factors considered in such negotiations
were prevailing market conditions, estimates of the business potential of the
Company, the present state of the Company's development, the results of
operations of the Company in recent periods, and the market capitalizations and
stages of development of other companies which the Company and the
Representatives of the Underwriters believed to be comparable to the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California ("WSGR"). Certain legal matters will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California. As of the date of this Prospectus, certain members of WSGR, and
investment partnerships of which such persons are partners beneficially own an
aggregate of 15,402 shares of the Company's Common Stock. Steven E. Bochner,
Assistant Secretary of the Company, is a member of WSGR.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1995, and for each of the years in the three-year period ended December
31, 1995, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or other document referred to contain all
material elements of such contract or document but are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the principal office of
the Securities and Exchange Commission in Washington, D.C., and copies of all or
any part of the Registration Statement may be obtained from the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees.
The Company intends to furnish to its shareholders annual reports
containing audited financial statements examined by independent auditors and
quarterly reports containing interim unaudited financial information for the
first three quarters of each fiscal year.
51
<PAGE> 54
NORIAN CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE> 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
<PAGE> 56
NORIAN CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- -------- MARCH 31, PRO FORMA
1996 MARCH 31,
----------- 1996 (NOTE 1)
(UNAUDITED) -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
NORIAN CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
NORIAN CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
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
---------- ------- ---------- ------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== ====== ========== ======= ====== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 59
NORIAN CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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
======= === ==== =======
</TABLE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
(4) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- ---------
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
F-10
<PAGE> 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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------- OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
1996................................................................................ $253
1997................................................................................ 241
1998................................................................................ 243
1999................................................................................ 247
------
Total minimum lease payments........................................................... $984
=============
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
TOTAL STOCK
OPTIONS PRICE PER SHARE
----------- ---------------
<S> <C> <C>
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
===========
</TABLE>
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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets is presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
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.......................................................... $ -- $ --
====== ======
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,000,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
ROBERTSON, STEPHENS & COMPANY
June , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 73
INSIDE BACK COVER
Photo Top Left
Computer-enhanced cutaway depiction of distal radius fracture in cadaver bone
treated with Norian SRS.
DISTAL RADIUS FRACTURE
Photo Top Right
Computer-enhanced cutaway depiction of vertebral body crush fracture in cadaver
bone treated with Norian SRS.
VERTEBRAL BODY CRUSH FRACTURE
Photo Lower Left
Computer-enhanced cutaway depiction of intertrochanteric hip fracture in
cadaver bone treated with Norian SRS and a sliding hip screw.
INTERTROCHANTERIC HIP FRACTURE
Photo Lower Right
Computer-enhanced cutaway depiction of tibial plateau fracture in cadaver
bone treated with Norian SRS.
TIBIAL PLATEAU FRACTURE
Norian SRS is an investigational device and has not been approved by the FDA
for marketing in the United States. Norian SRS cannot be sold commercially in
the United States unless and until such FDA approval is obtained, and FDA
approvals may not be received for several years, if at all.
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
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
========
</TABLE>
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
<PAGE> 75
The Company understands that the staff of the Commission is of the opinion
that statutory, charter and contractual provisions as are described above have
no effect on claims arising under the federal securities laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 1993 the registrant has issued and sold the following
unregistered securities:
1. Pursuant to Rule 701 of the Securities Act, from March 31, 1993 to
May 8, 1996, the Registrant issued and sold 221,460 shares of Common Stock
to employees and consultants at prices ranging from $0.40 to $2.80 per
share pursuant to the Registrant's 1988 Stock Plan.
2. Pursuant to Regulation D of the Securities Act, from April 13, 1995
to September 14, 1995, the Registrant issued and sold 3,529,516 shares of
Series D Preferred Stock to a total of 97 accredited investors for an
aggregate purchase price of $19,765,287.99.
3. Pursuant to Section 4(2) of the Securities Act, on April 16, 1996,
the Registrant issued and sold 350,000 shares of Series D Preferred Stock
to Mochida for an aggregate purchase price of $7,000,000.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
where affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<C> <S>
1.1(1) Form of Underwriting Agreement.
3.1(1) Sixth Amended and Restated Articles of Incorporation of the Registrant, as
currently in effect.
3.2 Form of Seventh Amended and Restated Articles of Incorporation of the
Registrant.
3.3 Form of Eighth Amended and Restated Articles of Incorporation of the
Registrant to be filed after the closing of the offering made under this
Registration Statement.
3.4(1) Bylaws of the Registrant, as currently in effect.
3.5 Bylaws of the Registrant, as in effect immediately following the closing of
the offering made under this Registration Statement.
4.1(1) Specimen Common Stock Certificate.
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P. C.
10.1(1) Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2(1) 1988 Stock Plan and form of Stock Option Agreement thereunder.
10.3(1) 1996 Stock Plan and form of Stock Option Agreement thereunder.
10.4(1) 1996 Director Option Plan and form of Stock Option Agreement thereunder.
10.5(1) 1996 Employee Stock Purchase Plan and forms of agreements thereunder.
</TABLE>
II-2
<PAGE> 76
<TABLE>
<C> <S>
10.6(1) Series C Preferred Stock Purchase Agreement dated August 9, 1990, between
the Registrant and Pfizer Hospital Products Group, Ltd.
10.7(1) Exclusive Marketing Agreement dated April 16, 1996, between the Registrant
and Mochida Pharmaceutical Co., Ltd.
10.8(1) Series D Preferred Stock Purchase Agreement dated April 16, 1996, between
the Registrant and certain holders of the Registrant's securities.
10.9(1) Modification Agreement dated April 16, 1996, between the Registrant and
certain holders of the Registrant's securities.
10.10 Lease dated July 22, 1994, as amended October 3, 1994, between Registrant
and Renault & Handley Employee Investment Company for the facility located
at 10260 Bubb Road, Cupertino, California.
11.1(1) Calculation of pro forma net loss per share.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1(1) Power of Attorney.
</TABLE>
- ---------------
* 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
<PAGE> 77
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CUPERTINO, STATE
OF CALIFORNIA, ON THE 17TH DAY OF JUNE, 1996.
NORIAN CORPORATION
By: /s/ BRENT R. CONSTANTZ
------------------------------------
Brent R. Constantz
(President, Chief Executive Officer
and Chief Scientist)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------
<C> <S> <C>
/s/ BRENT R. President, Chief Executive Officer and
CONSTANTZ Chief Scientist
- ---------------------------------------------
(Brent R. Constantz)
/s/ MARC E. FAERBER* Vice President, Finance and Chief
- --------------------------------------------- Financial Officer (Principal
(Marc E. Faerber) Financial and Accounting Officer)
/s/ PETER BARTON HUTT* Director
- ---------------------------------------------
(Peter Barton Hutt)
/s/ JON N. Director
GILBERT*
- ---------------------------------------------
(Jon N. Gilbert)
/s/ COSTA G. SEVASTOPOULOS* Director
- ---------------------------------------------
(Costa G. Sevastopoulos)
/s/ HARRY B. Director
SKINNER*
- ---------------------------------------------
(Harry B. Skinner)
/s/ HANSJORG WYSS* Director
- ---------------------------------------------
(Hansjorg Wyss)
</TABLE>
*By: /s/ BRENT R.
CONSTANTZ
-------------------------------
Brent R. Constantz
Attorney-in-Fact
II-4
<PAGE> 78
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the Prospectus.
/s/ KPMG Peat Marwick LLP
------------------------------------
KPMG Peat Marwick LLP
San Francisco, California
June 18, 1996
II-5
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1(1) Form of Underwriting Agreement.
3.1(1) Sixth Amended and Restated Articles of Incorporation of the Registrant, as
currently in effect.
3.2 Form of Seventh Amended and Restated Articles of Incorporation of the
Registrant to be filed immediately prior to the effectiveness of this
Registration Statement.
3.3 Form of Eighth Amended and Restated Articles of Incorporation of the
Registrant to be filed after the closing of the offering made under this
Registration Statement.
3.4(1) Bylaws of the Registrant, as currently in effect.
3.5 Bylaws of the Registrant, as in effect immediately following the closing of
the offering made under this Registration Statement.
4.1(1) Specimen Common Stock Certificate.
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P. C.
10.1(1) Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2(1) 1988 Stock Plan and form of Stock Option Agreement thereunder.
10.3(1) 1996 Stock Plan and form of Stock Option Agreement thereunder.
10.4(1) 1996 Director Option Plan and form of Stock Option Agreement thereunder.
10.5(1) 1996 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6(1) Series C Preferred Stock Purchase Agreement dated August 9, 1990, between
the Registrant and Pfizer Hospital Products Group, Ltd.
10.7(1) Exclusive Marketing Agreement dated April 16, 1996, between the Registrant
and Mochida Pharmaceutical Co., Ltd.
10.8(1) Series D Preferred Stock Purchase Agreement dated April 16, 1996, between
the Registrant and certain holders of the Registrant's securities.
10.9(1) Modification Agreement dated April 16, 1996, between the Registrant and
certain holders of the Registrant's securities.
10.10 Lease dated July 22, 1994, as amended October 3, 1994, between Registrant
and Renault & Handley Employee Investment Company for the facility located
at 10260 Bubb Road, Cupertino, California.
11.1(1) Calculation of pro forma net loss per share.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1(1) Power of Attorney.
</TABLE>
- ---------------
* Confidential treatment requested for certain portions.
(1) Exhibit previously filed.
<PAGE> 1
EXHIBIT 3.2
SEVENTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
NORIAN CORPORATION
Brent R. Constantz and Steven E. Bochner certify that:
1. They are the President and Assistant Secretary, respectively, of
Norian Corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read as follows:
I
The name of this corporation is Norian Corporation.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
This corporation is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock". The total number of shares which this
corporation is authorized to issue is 20,100,000. The number of shares of Common
Stock which this corporation is authorized to issue is 10,750,000. The number of
shares of Preferred Stock which this corporation is authorized to issue is
9,350,000. Upon the amendment of this Article III, every eight (8) outstanding
shares of Common Stock shall be combined into one share of Common Stock and
every eight (8) outstanding shares of Preferred Stock shall be combined into one
share of Preferred Stock, respectively. 625,000 shares of Preferred Stock shall
be designated Series A Preferred Stock, 1,254,688 shares of Preferred Stock
shall be designated Series B Preferred Stock, 343,750 shares of Preferred Stock
shall be designated Series C Preferred Stock, and 7,100,000 shares of Preferred
Stock shall be designated Series D Preferred Stock, which shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series
D Preferred Stock shall have the rights, preferences, and restrictions as
follows:
Section 1.
(a) General Definitions. For purposes of these Restated Articles of
Incorporation, the following definitions shall apply:
A. "Series A Preferred" shall refer to the Series A Preferred Stock.
B. "Series B Preferred" shall refer to the Series B Preferred Stock.
C. "Series C Preferred" shall refer to the Series C Preferred Stock.
D. "Series D Preferred" shall refer to the Series D Preferred Stock.
E. "Preferred" shall refer to the Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred.
F. "Common" shall mean all Common Stock.
<PAGE> 2
G. "Subsidiary" shall mean any corporation at least 50% of whose
outstanding voting shares shall at the time be owned by this corporation or
by one or more of such subsidiaries.
H. "Original Issue Date" shall mean the date on which a share of
Series D Preferred is first issued by the corporation in 1995.
I. "Board" shall mean the Board of Directors of this corporation.
Section 2. Dividend Rights of Preferred. The holders of the Series A
Preferred, Series B Preferred, Series C Preferred, and Series D Preferred shall
be entitled to receive, out of any funds legally available therefor, dividends
in an amount equal to $.24 per annum for each share of Series A Preferred held
by them, $.32 per annum for each share of Series B held by them, $.60 per annum
for each share of Series C held by them, and $.56 per annum for each share of
Series D held by them respectively, payable in preference and priority to any
payment of any dividend on Common when and as declared by the Board. After
payment of such dividends, any additional dividends declared shall be
distributed among all holders of Series A Preferred, Series B Preferred, Series
C Preferred and Series D Preferred and all holders of Common in proportion to
the number of shares of Common which would be held by each such holder if all
shares of Series A Preferred, Series B Preferred, Series C Preferred and Series
D Preferred were converted into Common at the then effective Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, and Series D
Conversion Price respectively (as defined in Section 4(a) below). The right to
such dividends on the Series A Preferred, Series B Preferred, Series C Preferred
and Series D Preferred shall not be cumulative, and no right shall accrue to
holders of Series A Preferred, Series B Preferred, Series C Preferred or Series
D Preferred by reason of the fact that dividends on such shares are not declared
or paid in any prior year; provided, however, that in the event dividends are
declared or paid on the Common in any year, each holder of the Series D
Preferred purchased pursuant to the Series D Preferred Stock Purchase Agreement
dated August 5, 1992 (the "1992 Series D Preferred) shall be entitled to
receive, prior and in preference to any such dividends on the Common, a dividend
payment equal to the aggregate amount which would have been accumulated by the
holder of the 1992 Series D Preferred had the dividend rights of the 1992 Series
D Preferred been cumulative since the date of issuance of the first share of
1992 Series D Preferred; each holder of the Series D Preferred purchased
pursuant to the Series D Preferred Stock Purchase Agreement dated April 13, 1995
as amended on June 5, 1995 (the "1995 Series D Preferred") shall be entitled to
receive, prior and in preference to any such dividends on the Common, a dividend
payment equal to the aggregate amount which would have been accumulated by the
holder of the 1995 Series D Preferred had the dividend rights of the 1995 Series
D Preferred been cumulative since the date of issuance and each holder of the
Series D Preferred purchased pursuant to the Series D Preferred Stock Purchase
Agreement dated April 16, 1996 (the "1996 Series D Preferred") shall be entitled
to receive, prior and in preference to any such dividends on the Common, a
dividend payment equal to the aggregate amount which would have been accumulated
by the holder of the 1996 Series D Preferred had the dividend rights of the 1996
Series D Preferred been cumulative since the date of issuance. If no dividends
are declared or paid on the Common, no rights to any dividends shall accrue to
the holder of the Series D Preferred for the purposes of this Section 2, Section
3 or otherwise.
In the event that the corporation shall have declared but unpaid dividends
outstanding immediately prior to, and in the event of, a conversion of the
Preferred (as provided in Section 4 hereof), the corporation shall, at the
option of the holder, pay in cash to the holder(s) of the Preferred subject to
conversion the full amount of any such dividends or allow such dividends to be
converted into Common in accordance with, and pursuant to the terms specified
in, Section 4 hereof.
Section 3. Liquidation Preference; Mergers.
(a) In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary, the holders of the Series D
Preferred shall be entitled to receive, prior and
2
<PAGE> 3
in preference to any distribution of any of the assets or surplus funds of the
corporation to the holders of any other series of Preferred or the holders of
the Common by reason of their ownership thereof, the amount of $5.60 per share
for each share of Series D Preferred then held by them and, in addition, an
amount equal to all declared but unpaid dividends on the Series D Preferred. If
upon occurrence of such event the assets and funds thus distributed among the
holders of the Series D Preferred shall be insufficient to permit the payment to
such holders of the full preferential amount, then the entire assets and funds
of the corporation legally available for distribution shall be distributed among
the holders of the Series D Preferred pro rata based on the number of shares
held.
(b) After payment has been made to the holders of the Series D Preferred of
the full amounts to which they shall be entitled as aforesaid, the holders of
the Series A Preferred, Series B Preferred and Series C Preferred shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the corporation to the holders of the Common by
reason of their ownership thereof the amount of (i) $2.40 per share for each
share of Series A Preferred then held by them, (ii) $3.20 per share for each
share of Series B Preferred then held by them and (iii) $6.00 for each share of
Series C Preferred then held by them and, in addition, an amount equal to all
declared but unpaid dividends on the Preferred. If upon the occurrence of such
event the assets and funds thus distributed to the holders of the Preferred as
aforesaid shall be insufficient to permit the payment to such holders of their
full preferential amount as set forth in this paragraph (b), then the entire
assets and funds of the corporation legally available for distribution shall be
distributed among the holders of the Preferred with each such holder being
entitled to receive a fraction of the amount so available for distribution,
based on the ratio that the aggregate liquidation preferences of the Series A,
Series B and Series C Preferred held by such holder as set forth in this
paragraph (b) bears to the aggregate liquidation preferences of shares of Series
A, Series B and Series C Preferred held by all such holders of Preferred as set
forth in this paragraph (b).
(c) After payment has been made to the holders of the Preferred of the full
amounts to which they shall be entitled as aforesaid, the holders of the
Preferred shall participate on a pro rata basis based on the number of Common
equivalent shares held by a holder in the distribution of all remaining assets
of the corporation legally available for distribution, with the outstanding
shares of the Preferred treated as though they had been converted into the
appropriate number of shares of Common pursuant to Section 4 hereof as of the
date of such distribution.
(d) For purposes of this Section 3, a merger, consolidation or sale of all
or substantially all of the assets of the corporation with and into any other
corporation or corporations or the merger or consolidation of any other
corporation or corporations into the corporation, in which consolidation or
merger the shareholders of the corporation will receive distributions in cash or
securities of another corporation or corporations as a result of such
consolidation or merger, or sale of all or substantially all of the assets of
the corporation, shall be treated as a liquidation, dissolution or winding-up of
the corporation in accordance with Sections 3(a), 3(b) and 3(c) above; provided,
however, that, notwithstanding the foregoing, such merger, consolidation or sale
of assets shall not be treated as a liquidation, dissolution or winding up if
(i) the per share consideration to be received by a holder of Preferred pursuant
to any of the above-mentioned transactions (without reference to the provisions
of Sections 3(a), 3(b) and 3(c) above) is in the form of cash and/or securities,
which securities are publicly traded on the New York or American Stock Exchange
or quoted on the NASDAQ National Market System, and have a fair market value on
a fully distributed basis of at least $12.00 per share, in which event such
merger, consolidation or sale of all or substantially all of the assets, the
corporation shall be treated as set forth in Section 3(e) below, or (ii) the
shareholders of this corporation immediately prior to the merger, consolidation
or sale of assets continue to hold, or receive by virtue of their equity
interest in the corporation, hold greater than 50% of the voting equity
securities of the successor or surviving corporation immediately after such
merger, consolidation or sale of assets.
(e) In the event of a merger, consolidation or sale of all or substantially
all of the assets of the corporation which is not treated as a liquidation,
dissolution or winding-up pursuant to Section 3(d)
3
<PAGE> 4
above with respect to the outstanding series of Preferred, the consideration to
be paid by the acquiring corporation or entity in such transaction shall be
distributed among the holders of the Preferred and Common on a pro rata basis
based on the number of Common equivalent shares held by a holder, with the
outstanding shares of Preferred treated as though they had been converted into
the appropriate number of shares of Common pursuant to Section 4 hereof as of
the date of such distribution.
Section 4. Conversion. The holders of the Preferred shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred shall be
convertible, at the option of the holder thereof, at any time, into such number
of fully paid and nonassessable shares of Common as is determined by dividing
$2.40 (the "Series A Original Purchase Price") by the then applicable Series A
Conversion Price, determined as hereinafter provided, in effect at the time of
conversion. The price at which shares of Common shall be deliverable upon
conversion (the "Series A Conversion Price") shall initially be $2.40 per share
of Common. Such initial Series A Conversion Price shall be subject to adjustment
as hereinafter provided.
Each share of Series B Preferred shall be convertible, at the option of the
holder thereof, at any time, into such number of fully paid and nonassessable
shares of Common as is determined by dividing $3.20 (the "Original Series B
Purchase Price") by the then applicable Series B Conversion Price, determined as
hereinafter provided, in effect at the time of the conversion. The price at
which shares of Common shall be deliverable upon conversion (the "Series B
Conversion Price") shall initially be $3.20 per share of Common. Such initial
Series B Conversion Price shall be subject to adjustment as hereinafter
provided.
Each share of Series C Preferred shall be convertible, at the option of the
holder thereof, at any time, into such number of fully paid and nonassessable
shares of Common as is determined by dividing $6.00 (the "Original Series C
Purchase Price") by the then applicable Series C Conversion Price, determined as
hereinafter provided, in effect at the time of the conversion. The price at
which shares of Common shall be deliverable upon conversion (the "Series C
Conversion Price") shall initially be $6.00 per share of Common. Such initial
Series C Conversion Price shall be subject to adjustment as hereinafter
provided.
Each share of Series D Preferred shall be convertible, at the option of the
holder thereof, at any time, into such number of fully paid and nonassessable
shares of Common as is determined by dividing $5.60 (the "Series D Original
Purchase Price") by the then applicable Series D Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. The price at which
shares of Common shall be deliverable upon conversion (the "Series D Conversion
Price") shall initially be $5.60 per share of Common. Such initial Series D
Conversion Price shall be subject to adjustment as hereinafter provided.
Each share of the Preferred shall automatically be converted into shares of
Common at the then effective Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price, as applicable,
immediately prior to the closing of a firm commitment under written public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common for the account
of the corporation to the public yielding gross proceeds of not less than
$10,000,000 at a price per share (determined without regard to underwriter
commissions and expenses) of not less than $10.00 (as adjusted for stock splits,
reverse stock splits and the like effected after the Original Issue Date). In
the event of such an offering as described above, the person(s) entitled to
receive the Common issuable upon such conversion of the Preferred shall not be
deemed to have converted such Preferred until immediately prior to the closing
of such underwritten public offering. Notwithstanding the above, in the event of
a public offering as described above, no share of Series D Preferred shall be
automatically converted in accordance with the above unless prior thereto or
concurrently therewith all other shares of Preferred are so converted.
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<PAGE> 5
(b) Mechanics of Conversion. No fractional shares of Common shall be
issued upon conversion of the Preferred. In lieu of any fractional share to
which a holder would otherwise be entitled, the corporation shall pay cash equal
to such fraction multiplied by the then effective Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price, as applicable. Before any holder of the Preferred shall be entitled to
convert the same into full shares of Common, he or she shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
corporation or of any transfer agent for the Preferred, and shall give written
notice to the corporation at such office that (i) he elects to convert the same
and (ii) whether the holder elects, pursuant to Section 2 hereof, to receive
declared but unpaid dividends on the Preferred proposed to be converted in cash,
or to convert such dividends into shares of Common at the then effective Series
A Conversion Price, Series B Conversion Price, Series C Conversion Price or
Series D Conversion Price, as applicable, provided, however, that in the event
of an automatic conversion pursuant to Section 4(a), the outstanding shares of
Preferred shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the corporation or its transfer agent, and provided
further that the corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Preferred are either delivered
to the corporation or its transfer agent as provided above, or the holder
notifies the corporation or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
corporation to indemnify the corporation from any loss incurred by it in
connection with such certificates. The corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of the Preferred, a
certificate or certificates for the number of shares of Common to which he shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into a fractional share of
Common, and any declared but unpaid dividends on the converted Preferred which
the holder elected to receive in cash. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred to be converted, and the person or persons
entitled to receive the shares of Common issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common on such date.
(c) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definitions. For purposes of this Section 4(c), the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common or Convertible Securities.
(2) "Convertible Securities" shall mean any evidences of indebtedness,
shares (other than Common, Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred) or other securities directly or
indirectly convertible into or exchangeable for Common.
(3) "Additional Shares of Common" shall mean all shares of Common
issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by the
corporation after the Original Issue Date, other than:
(A) shares of Common Stock issued or issuable upon conversion of
shares of Series A Preferred, Series B Preferred, Series C Preferred or
Series D Preferred;
(B) up to 595,332 shares of Common issued or issuable to directors,
officers or employees of, or consultants to, the corporation or to
members of the corporation's Scientific Advisory Board pursuant to a
stock grant, option plan or purchase plan or other employee stock
incentive program (collectively, the "Plans") approved by the Board, in
an amount not to exceed 595,332 shares;
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<PAGE> 6
(C) shares of Common issued or issuable as a dividend or
distribution on Series A Preferred, Series B Preferred, Series C
Preferred or Series D Preferred;
(D) up to 66,154 shares of Common issued or issuable upon the
exercise of the warrant dated August 4, 1992 held by Alex. Brown & Sons
Incorporated.
(E) up to 3,571,429 shares of Series D Preferred including shares
of Common issued or issuable upon the conversion thereof, pursuant to
the terms of that certain Series D Preferred Stock Purchase Agreement
dated April 13, 1995, as amended;
(F) up to 350,000 shares of Series D Preferred including shares of
Common issued or issuable upon the conversion thereof, pursuant to the
terms of that certain Series D Preferred Stock Purchase Agreement dated
April 16, 1996;
(G) up to 357,386 shares of Series D Preferred issued or issuable
upon the exercise of certain Warrants held by Frazier Investment
Securities, L.P. issued in connection with the offer and sale of the
Company's 1995 Series D Preferred; or
(H) shares of Common Stock issued or issuable by way of dividend or
other distribution on shares of Common excluded from the definition of
Additional Shares of Common by the foregoing clauses (A), (B), (E) or
this clause (G) or on shares of Common so excluded.
(ii) No Adjustment of Conversion Price. No adjustment in the
applicable Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price of a particular share of
Preferred shall be made in respect of the issuance of Additional Shares of
Common unless the consideration per share for an Additional Share of Common
issued or deemed to be issued by the corporation is less than the
applicable Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price in effect on the date of, and
immediately prior to, such issue for such share of Preferred.
(iii) Deemed Issue of Additional Shares of Common.
(1) Options and Convertible Securities. In the event the corporation
at any time or from time to time after the Original Issue Date shall issue
any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional Shares of
Common issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date,
provided that Additional Shares of Common shall not be deemed to have been
issued unless the consideration per share (determined pursuant to Section
4(c)(vi) hereof) of such Additional Shares of Common would be less than the
applicable Series A Conversion Price or Series B Conversion Price or Series
C Conversion Price or Series D Conversion Price for such share of Preferred
in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common are deemed to be issued:
(A) no further adjustment in the Series A Conversion Price, Series
B Conversion Price, Series C Conversion Price or Series D Conversion
Price shall be made upon the subse quent issue of Convertible Securities
or shares of Common upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the corporation, or decrease in the number of
shares of Common issuable, upon the exercise, conversion or
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<PAGE> 7
exchange thereof, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; and
(C) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not
have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if;
(I) in the case of Convertible Securities or Options for Common
Stock, the only Additional Shares of Common Stock issued were shares
of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities
and the consideration received therefor was the consideration
actually received by the corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually
received by the corporation upon such exercise, or for the issue of
all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually
received by the corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible Securities, only the
Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares
of Common Stock deemed to have been then issued was the consideration
actually received by the corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to
have been received by the corporation upon the issue of the
Convertible Securities with respect to which such Options were
actually exercised;
(D) no readjustment pursuant to clause (B) or (C) above shall have
the effect of increasing the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D
Conversion Price to an amount which exceeds the lower of (i) the
applicable Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price or Series D Conversion Price on the original
adjustment date, or (ii) the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D
Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date
and such readjustment date; and
(E) in the case of any Options which expire by their terms not more
than 30 days after the date of issue thereof, no adjustment of the
applicable Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price or Series D Conversion Price shall be made until the
expiration or exercise of all such Options, however such adjustment
shall be made if shares of Preferred are converted during such period.
(2) Stock Dividends. In the event the corporation at any time or from
time to time after the Original Issue Date shall declare or pay any
dividend on the Common payable in Common, then Additional Shares of Common
shall be deemed to have been issued immediately after the close of business
on the record date for the determination of holders of any class of
securities entitled to receive such dividend.
(iv) Adjustment of Conversion Price. In the event this corporation
shall issue at any time after the Original Issue Date Additional Shares of
Common (including Additional Shares of Common deemed to be issued pursuant
to Section 4(c)(iii)) without consideration or for a
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<PAGE> 8
consideration per share less than the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price in effect on the date of and immediately prior to such issue, then
and in such event, such Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price by a fraction, the numerator of which shall be the number of shares
of Common outstanding immediately prior to such issue plus the number of
shares of Common which the aggregate consideration received by the
corporation for the total number of Additional Shares of Common so issued
would purchase at such Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price; and the
denominator of which shall be the number of shares of Common outstanding
immediately prior to such issue plus the number of such Additional Shares
of Common so issued; and provided further that, for the purposes of this
Section (iv), all shares of Common (a) issuable upon conversion of all
outstanding Series A Preferred, Series B Preferred, Series C Preferred, and
Series D Preferred, (b) issuable upon conversion of all outstanding
Convertible Securities, and (c) issuable upon exercise of all outstanding
Options bearing an exercise price which is lower than the price at which
the Additional Shares of Common were issued (or deemed to be issued), shall
be deemed to be outstanding, and immediately after any Additional Shares of
Common are deemed issued pursuant to Section (iii), such Additional Shares
of Common shall be deemed to be outstanding. In the event of the issuance
of Additional Shares of Common which results in an adjustment to the Series
C Conversion Price, the Series D Conversion Price shall be subject to
adjustment (in addition to any adjustment provided above) such that the
number of shares of Common issuable upon conversion of the Series D
Preferred after giving effect to such issuance of Additional Shares of
Common shall represent the same percentage equity interest in the Company
as if the Series C Conversion Price in effect immediately prior to such
issuance of Additional Shares of Common had been equal to the Series D
Conversion Price in effect immediately prior to such issuance of Additional
Shares of Common. The purpose and intent of the foregoing sentence is to
ensure that the percentage equity interest of the holders of Series D
Preferred is not reduced by virtue of the fact that the Series C Conversion
Price is greater than the Series D Conversion Price.
(v) Determination of Consideration. For purposes of this Section
4(c), the consideration received by the corporation for the issue of any
Additional Shares of Common shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(A) insofar as it consists of cash, be computed at the aggregate
amount of cash received by the corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as
determined by the Board in the good faith exercise of its reasonable
business judgment; provided, however, that if within 10 days of such
determination holders of a majority of the outstanding shares of
Preferred advise the Board of Directors in writing that such holders
object to such determination, then the fair value of such property
shall be determined pursuant to the appraisal of an independent
appraiser mutually acceptable to the Board and such holders; and
(C) in the event Additional Shares of Common are issued together
with other shares or securities or other assets of the corporation
for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and
(B) above, as determined in good faith by the Board.
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(2) Options and Convertible Securities. The consideration per
share received by the corporation for Additional Shares of Common deemed
to have been issued pursuant to Section 4(c)(iii)(1), relating to
Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities by
(y) the maximum number of shares of Common (as set forth in
the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(vi) Adjustments for Subdivisions, Combinations, or Consolidations of
Common. In the event the outstanding shares of Common Stock shall be
subdivided (by stock split, stock dividend, or otherwise) at any time after
the Original Issue Date, into a greater number of shares of Common Stock,
the applicable Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price and Series D Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price and Series D
Conversion Price then in effect shall, concurrently with the effectiveness
of such combination or consolidation, be proportionately increased.
(vii) Adjustments for Reclassification, Exchange and Substitution. If
the Common Stock issuable upon conversion of the Preferred shall be changed
at any time after the Original Issue Date into the same or a different
number of shares of any other class or classes of stock or other securities
or property, whether by capital reorganization, reclassification and
otherwise (other than a subdivision or combination of shares provided for
above), the applicable Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price and Series D Conversion Price then in
effect shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Preferred shall
be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock or other securities or
property equivalent to the number of shares of Common Stock that would have
been subject to receipt by the holders upon conversion of the Preferred
immediately before that change and, in any such case, appropriate
adjustment (as determined by the Board) shall be made in the application of
the provisions herein set forth with respect to the rights and interest
thereafter of the holders of the Preferred, to the end that the provisions
set forth herein (including provisions with respect to change in and other
adjustments of the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price or Series D Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of
stock or other property thereafter deliverable upon the conversion of the
Preferred.
(d) No Impairment. The corporation will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
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<PAGE> 10
of the terms to be observed or performed hereunder by the corporation but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the applicable conversion rights of the holders
of the Preferred, as set forth in this Section 4, against impairment.
(e) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the applicable Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price pursuant to this
Section 4, the corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of such series of Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The corporation shall, upon the written request at any
time of any holder of Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, (ii)
the applicable Conversion Price for such series of Preferred at the time in
effect, and (iii) the number of shares of Common and the amount, if any, of
other property which at the time would be received upon the conversion of such
series of Preferred.
(f) Notices of Record Date. In the event that this corporation shall
propose at any time:
(i) to declare any dividend or distribution upon the Common, whether
in cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series
or other rights;
(iii) to effect any reclassification or recapitalization of the Common
outstanding; or
(iv) to merge or consolidate with or into any other corporation, the
result of which is that this corporation is not the surviving corporation,
or sell, lease or convey all or substantially all its property or business,
or to liquidate, dissolve or wind up;
then, in connection with each such event, this corporation shall
send to the holders of the Preferred:
(1) at least 20 days' prior written notice of the date on which
a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of
Common shall be entitled thereto) or for determining rights to vote
in respect of the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to in (iii) and (iv)
above, at least 20 days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders
of Common shall be entitled to exchange their Common for securities
or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of the Preferred shares at the address for
each such holder as shown on the books of this corporation.
(g) The corporation shall at all times keep a sufficient number of shares
of Common Stock authorized to allow the conversion of Preferred as set forth in
this Section 4.
Section 5. Voting Rights. Except as otherwise required by law, the holder
of each share of Common Stock issued and outstanding shall have one vote and the
holder of each share of the Preferred shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Preferred
could be converted at the record date for determination of the shareholders
entitled to vote on such matters, or, if no such record date is established, at
the date such vote is taken or any written consent of shareholders is solicited,
such votes to be counted together with all other shares of stock of the Company
having general voting power and not
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separately as a class. Holders of Common Stock and Preferred shall be entitled
to notice of any shareholders' meeting in accordance with the Bylaws of the
corporation. Fractional votes by the holders of Preferred shall not, however, be
permitted and any fractional voting rights shall (after aggregating all shares
into which shares of Preferred held by each holder could be converted) be
rounded to the nearest whole number.
Section 6. Series D Preferred Protective Provisions. In addition to the
other rights provided by law, so long as at least 62,500 shares of Series D
Preferred shall be outstanding, this corporation shall not, without first
obtaining the affirmative consent or written vote of the holders of not less
than a majority of such outstanding shares of Series D Preferred voting, as a
single class, approve:
(i) any increase in the authorized number of shares of Series D
Preferred;
(ii) the authorization or issuance of any new series or class of stock
senior to or on a parity with the Series D Preferred with respect to the
payment of dividends or the distribution of assets on liquidation, and
increases in the authorized shares of any such class or series;
(iii) any amendment to the Articles of Incorporation that adversely
affects the rights of the Series D Preferred (including, without
limitation, the liquidation preference of the Series D Preferred); and
(iv) issue any dividends or distributions on, or repurchases of,
junior securities, other than pursuant to this corporation's employee stock
purchase agreements or other employee benefit plans.
Section 7. Covenants. In addition to any other rights provided by law, so
long as at least 10% of the Preferred shall be outstanding, this corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than 66 2/3% of such outstanding shares of Preferred:
(a) amend or repeal any provision of, or add any provision to, this
corporation's articles of incorporation or bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, any Preferred;
(b) authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity
with any such preference or priority of the Preferred, or authorize or
issue shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights
to purchase, any shares of stock of this corporation having any preference
or priority as to dividends or assets superior to or on a parity with any
such preference or priority of the Preferred;
(c) reclassify any Common into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the Preferred;
(d) increase the authorized number of shares of Preferred; or
(e) effect any sale or other conveyance of all or substantially all of
the assets of the corporation, or any consolidation or merger involving the
corporation that results in the exchange of outstanding shares of this
corporation for securities or consideration issued, or caused to be issued,
by the acquiring corporation or its subsidiary (except for a merger or
consolidation in which the shareholders of this corporation do not receive
cash or securities and after the consummation of which the shareholders of
this corporation own more than five-sixths of the voting power of the
surviving or acquiring corporation or parent party).
Section 8. Status of Converted Stock. In the event any shares of Preferred
shall be converted pursuant to Section 4 hereof, the shares so converted shall
be canceled and shall not be issuable by the corporation and the articles of
incorporation of this corporation shall be appropriately amended to effect the
corresponding reduction in the corporation's authorized capital stock.
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Section 9. Consent for Certain Repurchases of Common Stock Deemed to be
Distributions. Each holder of Preferred shall be deemed to have consented, for
purposes of Section 502, 503 and 506 of the California Corporations Code, to
distributions made by the corporation in connection with the repurchase of
shares of Common issued to or held by employees or consultants upon termination
of their employment or services or pursuant to agreements providing for the
right of said repurchase between the corporation and such persons.
IV
Section 1. Limitation of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
Section 3. Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article IV shall not adversely affect any right of
indemnification or limitation of liability of an agent of this corporation
relating to acts or omissions occurring prior to such repeal or modification.
3. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the required vote of Shareholders in accordance with
Sections 902 and 903 of the Corporations Code. The total number of outstanding
shares of the corporation is 687,357 shares of Common Stock, 612,865 shares of
Series A Preferred, 1,254,688 shares of Series B Preferred, 333,333 shares of
Series C Preferred and 6,480,553 shares of Series D Preferred. The number of
shares voting in favor of the Amendment equaled or exceeded the vote required.
The percentage vote required was more than 50% of the outstanding Common Stock
voting as a class, more than 50% of the outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred Stock,
voting as separate classes, and not less than 66 2/3% of the outstanding
Preferred Stock voting as a single class.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June , 1996.
--------------------------------------
Brent R. Constantz,
President
--------------------------------------
Steven E. Bochner,
Assistant Secretary
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EXHIBIT 3.3
EIGHTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
NORIAN CORPORATION
Brent R. Constantz and Steven E. Bochner certify that:
1. They are the President and Assistant Secretary, respectively, of
Norian Corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read as follows:
I
The name of this corporation is Norian Corporation.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
This corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this corporation shall have authority to issue is
75,000,000, and the total number of shares of Preferred Stock this corporation
shall have authority to issue is 5,000,000. The Preferred Stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
fix the number of shares of any series of Preferred Stock and to determine or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and, within the
limits and restrictions stated in any resolution or resolutions of the Board of
Director originally fixing the number of shares constituting any series of
Preferred Stock, to increase or decrease (but not below the number of shares of
any such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series, to determine the designation
of any series, and to fix the number of shares of any series.
IV
Section 1. Limitation of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
<PAGE> 2
Section 3. Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article IV shall not adversely affect any right of
indemnification or limitation of liability of an agent of this corporation
relating to acts or omissions occurring prior to such repeal or modification.
3. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the required vote of Shareholders in accordance with
Sections 902 and 903 of the Corporations Code. The total number of outstanding
shares of the corporation is 687,357 shares of Common Stock, 612,865 shares of
Series A Preferred, 1,254,688 shares of Series B Preferred, 333,333 shares of
Series C Preferred and 6,480,553 shares of Series D Preferred. The number of
shares voting in favor of the Amendment equaled or exceeded the vote required.
The percentage vote required was more than 50% of the outstanding Common Stock
voting as a class, more than 50% of the outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred Stock,
voting as separate classes, and not less than 66 2/3% of the outstanding
Preferred Stock voting as a single class.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June , 1996.
--------------------------------------
Brent R. Constantz,
President
--------------------------------------
Steven E. Bochner,
Assistant Secretary
2
<PAGE> 1
EXHIBIT 3.5
AMENDED AND RESTATED
BYLAWS
OF
NORIAN CORPORATION
<PAGE> 2
AMENDED AND RESTATED
BYLAWS OF
NORIAN CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I CORPORATE OFFICES........................................................... 1
1.1 PRINCIPAL OFFICE.......................................................... 1
1.2 OTHER OFFICES............................................................. 1
ARTICLE II MEETINGS OF SHAREHOLDERS................................................... 1
2.1 PLACE OF MEETINGS......................................................... 1
2.2 ANNUAL MEETING............................................................ 1
2.3 SPECIAL MEETING........................................................... 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS.......................................... 2
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER BUSINESS........... 3
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.............................. 4
2.7 QUORUM.................................................................... 4
2.8 ADJOURNED MEETING; NOTICE................................................. 4
2.9 VOTING.................................................................... 5
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT......................... 6
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING................... 6
2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS............... 7
2.13 PROXIES................................................................... 8
2.14 INSPECTORS OF ELECTION.................................................... 8
ARTICLE III DIRECTORS................................................................. 9
3.1 POWERS.................................................................... 9
3.2 NUMBER OF DIRECTORS....................................................... 9
3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTOR..................... 9
3.4 RESIGNATION AND VACANCIES................................................. 10
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................................. 11
3.6 REGULAR MEETINGS.......................................................... 11
3.7 SPECIAL MEETINGS; NOTICE.................................................. 11
3.8 QUORUM.................................................................... 11
3.9 WAIVER OF NOTICE.......................................................... 12
3.10 ADJOURNMENT............................................................... 12
3.11 NOTICE OF ADJOURNMENT..................................................... 12
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING......................... 12
3.13 FEES AND COMPENSATION OF DIRECTORS........................................ 12
3.14 APPROVAL OF LOANS TO OFFICERS............................................. 13
ARTICLE IV COMMITTEES................................................................. 13
4.1 COMMITTEES OF DIRECTORS................................................... 13
4.2 MEETINGS AND ACTION OF COMMITTEES......................................... 14
ARTICLE V OFFICERS.................................................................... 14
5.1 OFFICERS.................................................................. 14
5.2 ELECTION OF OFFICERS...................................................... 14
5.3 SUBORDINATE OFFICERS...................................................... 15
5.4 REMOVAL AND RESIGNATION OF OFFICERS....................................... 15
5.5 VACANCIES IN OFFICES...................................................... 15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.6 CHAIRMAN OF THE BOARD..................................................... 15
5.7 PRESIDENT................................................................. 15
5.8 VICE PRESIDENTS........................................................... 16
5.9 SECRETARY................................................................. 16
5.10 CHIEF FINANCIAL OFFICER................................................... 16
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........ 17
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................................. 17
6.2 INDEMNIFICATION OF OTHERS................................................. 17
6.3 PAYMENT OF EXPENSES IN ADVANCE............................................ 17
6.4 INDEMNITY NOT EXCLUSIVE................................................... 18
6.5 INSURANCE INDEMNIFICATION................................................. 18
6.6 CONFLICTS................................................................. 18
ARTICLE VII RECORDS AND REPORTS....................................................... 18
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER.............................. 18
7.2 MAINTENANCE AND INSPECTION OF BYLAWS...................................... 19
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS..................... 19
7.4 INSPECTION BY DIRECTORS................................................... 20
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER..................................... 20
7.6 FINANCIAL STATEMENTS...................................................... 20
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............................ 21
ARTICLE VIII GENERAL MATTERS.......................................................... 21
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..................... 21
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................................. 21
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED......................... 22
8.4 CERTIFICATES FOR SHARES................................................... 22
8.5 LOST CERTIFICATES......................................................... 22
8.6 CONSTRUCTION; DEFINITIONS................................................. 22
ARTICLE IX AMENDMENTS................................................................. 23
9.1 AMENDMENT BY SHAREHOLDERS................................................. 23
9.2 AMENDMENT BY DIRECTORS.................................................... 23
</TABLE>
ii
<PAGE> 4
BYLAWS
OF
NORIAN CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year within 180 days
from the end of the corporation's fiscal year as determined by the Board of
Directors or such other time as the Board of Directors may designate. However,
if such day falls on a legal holiday, then the meeting shall be held at the same
time and place on the next succeeding full business day. At the meeting,
directors shall be elected, and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons
<PAGE> 5
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing or affecting the time
when a meeting of shareholders called by action of the board of directors may be
held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES AND SHAREHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a shareholder. For such nominations or
other business to be considered properly brought before the meeting by a
shareholder, such shareholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
shareholder's notice must be delivered to or mailed and received by the
secretary of the corporation not less than ninety (90) days prior to the
meeting; provided, however, that in the event that less than one hundred (100)
days notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper form, a shareholder's notice to the secretary shall set
forth:
(a) the name and address of the shareholder who intends to make the
nominations or propose the business and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the
business to be proposed;
(b) a representation that the shareholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or to introduce the
business specified in the notice;
(c) if applicable, a description of all arrangements or understandings
between the shareholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder;
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<PAGE> 6
(d) such other information regarding each nominee or each matter of
business to be proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(e) if applicable, the consent of each nominee to serve as director of
the corporation if so elected.
The chairman of the meeting any refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.8 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting
3
<PAGE> 7
is fixed or if the adjournment is for more than forty-five (45) days from the
date set for the original meeting, then notice of the adjourned meeting shall be
given. Notice of any such adjourned meeting shall be given to each shareholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.6 of these bylaws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
2.9 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes, up to the number
of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect. Effective upon such time as (i)
shares of the capital stock of the corporation are designated as qualified for
trading as National Market System securities on the National Association of
Securities Dealers, Inc. Automated Quotation System (or any successor national
system) ("Qualified Public Offering") and (ii) the corporation has at least 800
holders of shares of its capital stock, shareholders shall no longer be entitled
to cumulate votes.
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is
4
<PAGE> 8
taken or proposed to be taken for approval of any of those matters specified in
the second paragraph of Section 2.4 of these bylaws, the waiver of notice or
consent or approval shall state the general nature of the proposal. All such
waivers, consents, and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the
5
<PAGE> 9
day on which notice is given or, if notice is waived, at the close of
business on the business day next preceding the day on which the meeting is
held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action by the board has been
taken, shall be at the close of business on the day on which the board
adopts the resolution relating to that action, or the sixtieth (60th) day
before the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.13 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date of the proxy, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.14 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment. If
no inspector of election is so appointed, then the chairman of the meeting may,
and on the request of any shareholder or a shareholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more shareholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any shareholder or
a shareholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
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<PAGE> 10
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the articles
of incorporation and these bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than six (6)
nor more than eleven (11). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16 2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, at each annual meeting
of shareholders, directors of the corporation shall be elected to hold office
until the expiration of the term for which they are elected, and until their
successors have been duly elected and qualified; except that if any such
election shall not be so held, such election shall take place at a shareholders'
meeting called and held in accordance with the Code. Effective upon such time as
(i) shares of the capital stock of the corporation are designated as qualified
for trading as National Market System securities on the National Association of
Securities Dealers, Inc. Automated Quotation System (or any successor national
system) ("Qualified Public Offering") and (ii) the corporation has at least 800
holders of shares of its capital stock, the directors of the corporation shall
be divided into two classes as nearly equal in size as is practicable, hereby
designated Class I and Class II. The term of office of the initial Class I
directors shall expire at the next succeeding annual meeting of shareholders and
the term of office of the initial Class II directors shall expire at the second
succeeding annual meeting of shareholders. For the purposes hereof, the initial
Class I and Class II directors shall be those directors so designated and
elected at the first annual meeting of shareholders scheduled to be held after
the consummation of such a Qualified Public Offering. At each annual meeting
after the annual meeting of shareholders scheduled to be held thereafter,
directors to replace those of a Class office whose terms expire at such annual
meeting shall be elected to hold office until the second succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make both classes as nearly equal in number as is practicable.
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Directors need not be shareholders unless so required by the articles of
incorporation or these bylaws, wherein other qualifications for directors may be
prescribed. Election of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written consent, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the
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meeting. If the notice is delivered personally or by telephone or telegram, it
shall be delivered personally or by telephone or to the telegraph company at
least forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
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3.14 APPROVAL OF LOANS TO OFFICERS*
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the
board of directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to
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* This section is effective only if it has been approved by the shareholders in
accordance with Sections 315(b) and 152 of the Code.
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attend all meetings of the committee. The board of directors may adopt rules for
the government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all
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meetings of the shareholders and, in the absence or nonexistence of a chairman
of the board, at all meetings of the board of directors. He shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Section 6, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 6, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Section 6.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Section 6 shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Section 6.
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6.6 CONFLICTS
No indemnification or advance shall be made under this Section 6, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise limits
indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
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7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
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The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the
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president or a vice president and by the chief financial officer or an assistant
treasurer or the secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
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<PAGE> 1
EXHIBIT 5.1
June 18, 1996
Norian Corporation
10260 Bubb Road
Cupertino, CA 95014-4166
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission on May 9, 1996 (Registration No.
333-3399), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 3,450,000
shares of your Common Stock, no par value (the "Shares"). The Shares include an
over-allotment option granted to the underwriters of the offering to purchase
450,000 shares. We understand that the Shares are to be sold to the
underwriters of the offering for resale to the public as described in the
Registration Statement. As your legal counsel, we have examined the proceedings
taken, and are familiar with the proceedings proposed to be taken, by you in
connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of Norian Corporation, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 10.10
Renault & Handley
INDUSTRIAL & COMMERCIAL REAL ESTATE
PARTIES This Lease, executed in duplicate at Palo Alto, California, this
eighteenth day of May, 1994, by and between
Renault & Handley Employees Investment Co. (for Bubb Road Joint
Venture)
and
Norian Corporation
hereinafter called respectively Lessor and Lessee, without regard to
number or gender,
PREMISES 1. WITNESSETH: That Lessor hereby leases to Lessee, and Lessee
hires from Lessor, those certain premises, hereinafter in this lease
designated as "the Premises", with the appurtenances, situated in the
City of Cupertino, County of Santa Clara, State of California, and
more particularly described as follows, to-wit:
Commonly known as 10260 Bubb Road. Said premises consist of an
approximate 20,100 square foot concrete building plus all off street
parking, walks and landscaping contained on the parcel bearing the
above address.
A copy of the floor plan shall be attached hereto as Exhibit "A" upon
approval of the plan for Tenant Improvements (defined in the First
Addendum to Lease).
USE 2. The Premises shall be used and occupied by Lessee for General
offices, Research and Development, Warehousing, Light Manufacturing,
sales and marketing operations and related legal uses.
and for no other purpose without the prior written consent of Lessor.
TERM 3. The term shall be for five (5) years, commencing on the
Commencement Date (defined in First Addendum to Lease) and ending
upon the expiration of the fifth (5th) year following the
Commencement Date.
RENTAL 4. Rent shall be payable to the Lessor without deduction or
offset at such place or places as may be designated from time to time
in writing by the Lessor as follows:
Eighteen Thousand and Ninety Dollars ($18,090.00) on execution of
this Lease, constituting rental for the first month of the Lease
term. $18,090 will be due on the first day of each succeeding month,
to and including the last month of the Lease term. The monthly rental
shall be increased over the lease term as follows: Commencing with
the rental
<PAGE> 2
due on January 1, 1996 (or on the first day of such other month
as the Lease shall actually commence), the monthly rental shall
increase in direct proportion to the increase in the Consumer
Price Index for All Urban Consumers, All Items (CPI-U)
(1982-1984=100) for San Francisco-Oakland-San Jose, now being
published by the United States Department of Labor, Bureau of
Labor Statistics (the "Index") for the month available which
most immediately precedes the month on which the new rent is to
commence when compared to the Index for the month available most
immediately preceding the month of the actual commencement date
of the Lease, providing that the monthly rental increase shall
not exceed six percent (6%) per annum. This same formula is to
be used for adjusting the rent for the years 1997, 1998, and
1999, respectively.
SECURITY 5. Lessee has deposited with Lessor $18,090.00 as security
DEPOSIT for the full and faithful performance of each and every term,
provision, covenant, and condition of this Lease. In the event
Lessee defaults in respect of any of the terms, provisions,
covenants or conditions of this Lease, including, but not
limited to the payment of rent, Lessor may use, apply or retain
the whole or any part of such security for the payment of any
rent in default or for any other sum which Lessor may spend or
be required to spend by reason of Lessee's default. The security
or any balance thereof shall be returned to Lessee or, at the
option of Lessor, to the last assignee of Lessee's interest in
this Lease at the expiration of the term hereof in accordance
with California Civil Code Section 1950.7 or any successor
statute thereto. Lessee shall not be entitled to any interest on
said security deposit.
POSSESSION 6. If Lessor, for reasons beyond Lessor's reasonable
control, cannot deliver possession of the Premises to Lessee on
October 1, 1994, as herein before specified, this Lease shall
not be void or voidable, nor shall Lessor, or Lessor's agents,
be liable to Lessee for any loss or damage resulting therefrom;
but in that event the commencement and termination dates of the
Lease and all other dates affected thereby shall be revised to
conform to the date of Lessor's delivery of possession. The
above is, however, subject to the provision that the period of
delay of delivery of the Premises shall not be delayed beyond
December 1, 1994, or Lessee, at his or its option, may declare
this Lease null and void.
ACCEPTANCE 7. By entry hereunder, the Lessee accepts the Premises as
OF PREMISES being in good and satisfactory condition, unless within fifteen
AND CONSENT (15) days after such entry Lessee shall give Lessor written
TO notice specifying in reasonable detail the respects in which the
SURRENDER Premises were not in satisfactory condition. The Lessee agrees
on the last day of the term hereof, or on sooner termination of
this Lease, to surrender the premises, together with all
alterations, additions, and improvements which may have been
made in, to, or on the Premises by Lessor or Lessee, unto Lessor
in the same good condition as at Lessee's entry into the
Premises excepting for such wear and tear as would be normal for
the period of the Lessee's occupancy. The Lessee, on or before
the end of the term or sooner termination of this Lease, shall
remove all Lessee's personal property and trade fixtures from
the premises and all property within thirty (30) days after
expiration or sooner termination. Lessee shall pay rent for the
period during which such property remains in the Premises after
the expiration or sooner termination of this Lease. If the
Premises be not surrendered at the end of the term or sooner
termination of this Lease, the Lessee shall indemnify the Lessor
against loss or liability resulting from delay by the Lessee in
so surrendering the Premises including, without limitation, any
claims made by any succeeding tenant founded on such delay.
USES 8. Lessee shall not commit, or suffer to be committed, any
PROHIBITED waste upon the Premises, or any nuisance, or other act or thing
which may materially disturb the quiet enjoyment of any other
tenant in or around the buildings in which the Premises may be
located, or allow any sale by auction upon the Premises, or
allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, or place any loads upon the
floor, walls, or roof which endanger the structure, or place any
harmful liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to remain
upon any part of the Premises outside the building proper except
for designated refuse areas or containers outside the building
proper and except for chemical storage shed. No materials,
supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be
stored upon or permitted to remain on any portion of the
Premises outside of the building proper.
ALTERATIONS 9. The Lessee shall make no alterations, additions or
AND improvement to the Premises or any part thereof without first
ADDITIONS obtaining the prior written consent of the Lessor. The Lessor
may impose as a condition to the aforesaid consent such
requirements as Lessor may deem necessary in Lessor's reasonable
discretion, including without limitation thereto, the manner in
which the work is done, the times during which it is to be
accomplished, and the requirement that upon written request of
Lessor prior to the expiration or earlier termination of the
Lease, Lessee will remove any or all improvements or additions
to the Premises installed at Lessee's expense. All such
alterations, additions, or
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improvements not specified to be removed shall at the expiration
or earlier termination of the lease become the property of the
Lessor and remain upon and be surrendered with the Premises. All
movable furniture, business and trade fixtures, and machinery
and equipment shall remain the property of the Lessee and may be
removed by the Lessee at any time during the Lease term. Items
which are not to be deemed as movable furniture, business and
trade fixtures, or machinery and equipment shall include
heating, lighting, electrical systems, air conditioning,
nonmodular or nonmovable partitioning, carpeting, or any other
installation which has become an integral part of the Premises.
The Lessee will at all times permit notices of
non-responsibility to be posted and to remain posted until the
completion of alterations or additions which have been approved
by the Lessor. Personal property will include the items listed
on Exhibit "B" hereto.
MAINTENANCE 10. Lessee shall, at Lessee's sole cost, keep and maintain
OF PREMISES the Premises and appurtenances and every part thereof, including
but not limited to, glazing, sidewalks, parking areas, plumbing,
electrical systems, heating and air conditioning installations,
any store front, roof covering -- unless it is not feasible to
repair the existing roof covering and a new roof covering is
required, and the interior of the Premises in good order,
condition, and repair. The foregoing notwithstanding,
replacement of any of the mechanical, electrical or plumbing
systems of the building shall be done by Lessor at Lessor's sole
cost and expense, provided that Lessor will amortize any
expenditure in excess of $1,000 for any of the foregoing over
its useful life, and Lessee shall pay to Lessor an amount equal
to that portion attributable to the length of time then
remaining on the term of this Lease. Lessor at Lessor's sole
costs and expense shall maintain the exterior of the walls, and
structural portions of the roof, foundations, walls, and floors
except for any repairs caused by the wrongful act of the Lessee
and Lessee's agents. The Lessor at Lessor's sole cost and
expense (subject to Lessee's obligation to pay a portion of
Lessor's amortized expenditure in the amount described above)
will replace the roof covering if repairs to said covering are
no longer economically feasible in the judgment of roofing
experts, and provided that said replacement is not made
necessary by acts of the Lessee and Lessee's agents. The Lessee
shall water, maintain and replace, when necessary, any shrubbery
and landscaping provided by the Lessor on the Premises. The
Lessee expressly waives the benefits of any statute nor or
hereafter in effect which would otherwise afford the Lessee the
right to make repairs at Lessors expense or to terminate this
lease because of Lessor's failure to keep the Premises in good
order, condition or repair.
INSURANCE 11. Lessee shall not use, or permit the Premises, or any
part thereof, to be used, for any purpose other than that for
which the Premises are hereby leased; and no use shall be made
or permitted to be made of the Premises, nor acts done, which
will cause a cancellation of any insurance policy covering said
building, or any part thereof, nor shall Lessee sell or permit
to be kept, used or sold, in or about the Premises, any article
which may be prohibited by the standard form of fire insurance
policies. Lessee shall, at his sole cost and expense, comply
with any and all requirements, pertaining to the Premises, of
any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance,
covering said building and appurtenances, to the extent that
such compliance is made necessary by some nontypical, particular
use of Lessee, otherwise, Lessor shall be liable for such
compliance.
11.1 Lessee shall, at its expense, obtain and keep in
force during the term of this Lease a Commercial General
Liability policy insurance insuring Lessee, with Lessor and
Lessor's lender, if any, as additional insureds, against any
liability with respect to the Premises which would be covered by
a standard Commercial General Liability policy without special
endorsement. Such insurance policy shall have a combined single
limit for both bodily injury and property damage in an amount
not less than Two Million & no/100ths Dollars ($2,000,000.00) of
which One Million and no/100ths Dollars ($1,000,000) may be
covered by an umbrella policy. The limits of said insurance
shall not limit the liability of Lessee hereunder.
11.2 Less shall, at its expense, keep in force during the
term of this Lease, a policy of fire and property damage
insurance in an "all risk" form with a sprinkler leakage
endorsement, insuring Lessee's inventory, fixtures, equipment
and personal property within the Premises for the full
replacement cost thereof.
11.3 Lessor shall maintain a policy or policies of fire and
property damage insurance in an "all risk" form, with sprinkler
and, at the option of the Lessor, earthquake endorsements,
covering loss or damage to the building, including Lessee's
leasehold improvements installed with the written consent of the
Lessor for the full replacement cost thereof.
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<PAGE> 4
11.4 Lessee shall pay to Lessor as additional rent, during
the term hereof, upon receipt of an invoice therefore, One
Hundred percent of the premiums for any insurance obtained by
Lessor pursuant to 11.3 above provided that Lessee shall not be
required to pay more than Nine Thousand Dollars ($9,000) per
year for any earthquake insurance carried by Lessor with respect
to the building. Lessor may obtain such insurance for the
Building separately, or together with other buildings and
improvements which Lessor elects to insure together under
blanket policies of insurance. In such case Lessee shall be
liable for only such portion of the premiums for such blanket
policies as are allocable to the Premises. It is understood and
agreed that Lessee's obligation under this paragraph shall be
prorated to reflect the Commencement Date and Expiration Date of
the Lease.
11.5 Lessee and Lessor each hereby waives any and all
rights of recovery against the other, or against the officers,
directors, employees, partners, agents and representatives of
the other, for loss of or damage to the property of the waiving
party or the property of others under its control, to the extent
such loss or damage is insured against under any insurance
policy carried by Lessor or Lessee hereunder or required to be
carried by this Lease. Each party shall notify their respective
insurance carriers of this waiver.
12. Deleted.
FREE FROM 13. Lessee shall keep the Premises and the property in
LIENS which the Premises are situated, free from any liens arising out
of any work performed, materials furnished, or obligations
incurred by Lessee.
COMPLIANCE 14. Lessee shall, at his sole cost and expense, comply with
WITH all of the requirements of all Municipal, State and Federal
GOVERN- authorities now in force, or which may hereafter be in force,
MENTAL pertaining to the Premises, and shall faithfully observe in the
REGULATIONS use of the Premises all Municipal ordinances and State and
Federal statutes now in force or which may hereafter be in
force. The judgment of any court of competent jurisdiction, or
the admission of Lessee in any action or proceeding against
Lessee, whether Lessor be a party thereto or not, that Lessee
has violated any such ordinance or statute in the use of the
Premises, shall be conclusive of that fact as between Lessor and
Lessee.
INDEMNI- 15. The Lessee, as a material part of the consideration to
FICATION OF be rendered to the Lessor, hereby waives all claims against the
LESSOR AND Lessor for damages to goods, wares and merchandise, and all
LESSEE'S other personal property in, upon, or about the Premises and for
LIABILITY injuries to persons in or about the Premises, from any cause
INSURANCE arising at any time, excepting to the extent claims arising from
the Lessor's negligence or misconduct or breach of Lease, and
the Lessee will hold the Lessor exempt and harmless from any
damage or injury to any person, or the goods, wares, and
merchandise and all other personal property of any person,
arising from the use of the Premises by the Lessee, or from the
failure of the Lessee to keep the Premises in good condition and
repair, as herein provided.
ADVERTISE- 16. Lessee will not place or permit to be placed, in, upon
MENTS AND or about the Premises any unusual or extraordinary signs, or any
SIGNS signs not approved by the city or other governing authority. The
Lessee will not place, or permit to be placed, upon the
Premises, any signs, advertisements or notices without the
written consent of the Lessor first had an obtained. Any sign so
placed on the Premises shall be so placed upon the understanding
and agreement that Lessee will remove same at the termination of
the tenancy herein created and repair any damage or injury to
the Premises caused thereby, and if not so removed by Lessee
than Lessor may have same so removed at Lessee's expense.
UTILITIES 17. Lessee shall pay for all water, gas, heat, light,
power, telephone service and all other service supplied to the
Premises.
ATTORNEY'S 18. In case suit should be brought for the possession of
FEES the Premises, for the recovery of any sum due hereunder, or
because of the Breach of any other covenant herein, the losing
party shall pay to the prevailing party a reasonable attorney's
fee, which shall be deemed to have accrued on the commencement
of such action and shall be enforceable whether or not such
action is prosecuted to judgment.
DEFAULT 19. In the event of any breach of this Lease by the Lessee,
or an abandonment of the Premises by the Lessee, the Lessor has
the option of 1) removing all persons and property from the
Premises and repossessing the Premises in which case any of the
Lessee's property which the Lessor removes from the Premises may
be stored in a public warehouse or elsewhere at the cost of, and
for the account of Lessee, or 2) allowing the Lessee to remain
in full possession and control of the Premises. If the Lessor
chooses to prepossess the Premises, the Lease will
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<PAGE> 5
automatically terminate in accordance with provisions of the
California Civil Code, Section 1951.2. In the event of such
termination of the Lease, the Lessor may recover from the
Lessee: 1) the worth at the time of award of the unpaid rent
which had been earned at the time of termination including
interest at 7% per annum; 2) the worth at the time of award of
the amount by which the unpaid rent which would have been earned
after termination until the term of award exceeds the amount of
such rental loss that the Lessee proves could have been
reasonably avoided including interest at 7% per annum; 3) the
worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds
the amount of such rental loss that the Lessee proves could be
reasonable avoided; and 4) any other amount necessary to
compensate the Lessor for all the detriment proximately caused
by the Lessee's failure to perform his obligations under the
Lease or which in the ordinary course of things would be likely
to result therefrom. If the Lessor chooses not to repossess the
premises, but allows the Lessee to remain in full possession and
control of the Premises, then in accordance with provisions of
the California Civil Code, Section 1951.4, the Lessor may treat
the Lease as being in full force and effect, and may collect
from the Lessee all rents as they become due through the
termination date of the lease as specified in the lease. For the
purposes of this paragraph, the following do not constitute a
termination of Lessee's right to possession:
a) Acts of maintenance or preservation or efforts to relet
the property.
b) The appointment of a receiver on the initiative of the
Lessor to protect his interest under this Lease.
LATE 20. Lessee hereby acknowledges that late payment by Lessee
CHARGES to Lessor of rent and other sums due hereunder will cause Lessor
to incur costs not contemplated by this lease, the exact amount
of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due
from Lessee shall not be received by Lessor or Lessor's designee
within ten (10) days after such amount shall be due, Lessee
shall pay to Lessor a late charge equal to ten percent (10%) of
such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs
Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such
overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder.
SURRENDER 21. The voluntary or other surrender of this Lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work a
merger, and shall, at the option of Lessor, terminate all or any
existing subleases or subtenancies, or may, at the option of
Lessor, operate as an assignment to him of any or all such
subleases or subtenancies.
TAXES 22. The Lessee shall be liable for all taxes against
Lessee's personal property and Lessee's trade or business
fixtures. The Lessee also agrees to pay, as additional rental,
during the term of this Lease and any extensions thereof, all
real estate taxes plus the yearly installments of any special
assessments which are payable(i) with respect to the Premises
and (ii) with respect to the period of time commencing on the
Commencement Date and terminating on the expiration or sooner
termination of this Lease, of record or which may become of
record during the term of this lease. If said taxes and
assessments are assessed against the entire building and
building site, and this Lease does not cover the entire building
or building site, the taxes and assessment installments
allocated to the Premises shall be pro-rated on a square footage
or other equitable basis, as calculated by the Lessor. It is
understood and agreed that the Lessee's obligation under this
paragraph will be pro-rated to reflect the commencement and
termination dates of this Lease. Real estate taxes shall exclude
income taxes, estate taxes, any other taxes on the income of
Lessee, and any taxes levied with respect to Hazardous Materials
if the Hazardous Materials which are the subject of such taxes
were not introduced in, on, under or about the Premises by
Lessee.
NOTICES 23. All notices to be given to Lessee may be given in
writing personally or by depositing the same in the United
States mail, postage prepaid, and addressed to Lessee at the
said Premises, whether or not Lessee has departed from,
abandoned or vacated the Premises.
ENTRY BY 24. Lessee shall permit Lessor and his agents to enter into
LESSOR and upon the Premises at all reasonable times for the purpose of
inspecting the same or for the purpose of maintaining the
building in which the Premises are situated, or for the purpose
of making repairs, alterations or additional to any other
portion of said building, including the erection and maintenance
of such scaffolding, canopies, fences and props as may be
required without any rebate of rent and without any liability to
Lessee for any loss of occupation or quiet enjoyment of the
Premises thereby occasioned, and shall permit Lessor and his
agents, at any time within ninety days prior to the expiration
of this Lease,
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to place upon the Premises any usual or ordinary "For Sale" or
"To Lease" signs and exhibit the Premises to prospective tenants
at reasonable hours.
DESTRUCTION 25. In the event of a partial destruction of the Premises
OF PREMISES during the said term from any cause, Lessor shall forthwith
repair the same, provided that the necessary funds for repair
are available to the Lessor from insurance carried on the
Premises per Revised Insurance Clause or would have been
available had Lessor carried the insurance on the Premises
required by the Revised Insurance Clause, including all
leasehold improvements installed by Lessor or by Lessee with
Lessor's approval, provided such repairs can be made within
ninety (90) days under the laws and regulations of State,
Federal, County or Municipal authorities, but such partial
destruction shall in no way annul or void this Lease, except
that Lessee shall be entitled to a proportionate reduction of
rent while such repairs are being made, such proportionate
reduction to be based upon the extent to which the making of
such repairs shall interfere with the business carried on by
Lessee in the Premises. If such repairs cannot be made in ninety
(90) days, Lessor may, at his option, make same within a
reasonable time, this Lease continuing in full force and effect
and the rent to be proportionately reduced as aforesaid in this
paragraph provided. In the event that Lessor does not so elect
to make such repairs which cannot be made in ninety (90) days,
or such repairs cannot be made under such laws and regulations,
this Lease may be terminated at the option of either party. In
respect to any partial destruction which Lessor is obligated to
repair or may elect to repair under the terms of this paragraph,
the provision of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of
California are waived by Lessee. In the event that the building
in which the Premises may be situated be destroyed to the extent
of not less than 3 31/3% of the replacement cost thereof, Lessor
may elect to terminate this Lease, whether the Premises be
injured or not. A total destruction of the building in which the
Premises may be situated shall terminate this Lease. In the
event of any dispute between Lessor and Lessee relative to the
provisions of this paragraph, they shall each select an
arbitrator, the two arbitrators so selected shall select a third
arbitrator and the three arbitrators so selected shall hear and
determine the controversy and their decision thereon shall be
final and binding upon both Lessor and Lessee, who shall bear
the cost of such arbitration equally between them.
ASSIGNMENT 26. The Lessee shall not assign, transfer, or hypothecate
AND the leasehold estate under this Lease, or any interest therein,
SUBLETTING and shall not sublet the Premises, or any part thereof, or any
right or privilege appurtenant thereto, or suffer any other
person or entity to occupy or use the Premises, or any portion
thereof, without, in each case, the prior written consent of the
Lessor. Lessor agrees not to unreasonably withhold or delay
consent to sublet or assign. As a condition for granting its
consent to any subletting the Lessor may require the Lessee to
agree to pay to the Lessor, as additional rental 50% of rents
received by the Lessee from its Sublessee which are in excess of
the amount payable to the Lessee to the Lessor hereunder after
first subtracting Lessee's reasonable leasing costs. If Lessee
intends to sublet the entire Premises, Lessee shall so notify
Lessor and Lessor shall have the right to terminate this Lease,
and this Lease shall be terminated on the date specified in
Lessee's notice as the date on which Lessee desires its sublease
to commence. If the Lessor approves a subletting, the Lessee may
sublet immediately after receipt of the Lessor's written
approval. In the event Lessee is allowed to assign, transfer or
sublet the whole or any part of the Premises, with the prior
written consent of Lessor, no assigned, transferee or sublessee
shall assign or transfer this Lease, either in whole or in part,
or sublet the whole or any part of the Premises, without also
having obtained the prior written consent of the Lessor. A
consent of Lessor to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not
release Lessee from any of Lessee's obligations hereunder or be
deemed to be a consent to any subsequent similar or dissimilar
assignment, transfer, hypothecation, subletting, occupation or
use by any other person. Any such assignment, transfer,
hypothecation, subletting, occupation or use without such
consent shall be void and shall constitute a breach of this
Lease by Lessee and shall, at the option of Lessor exercised by
written notice to Lessee, terminate this Lease. The leasehold
estate under this Lease shall not, nor shall any interest
therein, be assignable for any purpose by operation of law
without the written consent of Lessor. As a condition to its
consent, Lessor may require Lessee to pay all expense in
connection with the assignment, and Lessor may require Lessee's
assignee or transferee (or other assignees or transferees) to
assume in writing all of obligations under this Lease.
CONDEM- 27. If any part of the premises shall be taken for any
NATION public or quasi-public use, under any statute or by right of
eminent domain or private purchase in lieu thereof, and a part
thereof remains which is susceptible of occupation hereunder,
this Lease shall, as to the part so taken, terminate as of the
date title shall vest in the condemnor or purchaser, and the
rent payable hereunder shall be adjusted so that the Lessee
shall be required to pay for the remainder of the term only such
portion of such rent as the value of the part remaining after
such taking bears to the value of the entire Premises prior to
such taking; but in such event Lessor shall have the option to
terminate this
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Lease as of the date when title to the part so taken vests in
the condemnor or purchaser if Lessee reasonably determines that
it cannot derive from the reduced premises the benefits to which
it is entitled under this Lease. If all of the premises, or such
part thereof be taken so that there does not remain a portion
susceptible for occupation hereunder, this Lease shall thereupon
terminate. If a part of all of the Premises be taken, all
compensation awarded upon such taking shall go to the Lessor and
the Lessee shall have no claim thereto.
EFFECT OF 28. The term "Lessor" as used in this Lease, means only the
CONVEYANCE owner for the time being of the land and building containing the
Premises, so that, in the event of any sale of said land or
building, or in the event of a lease of said building, the
Lessor shall be and hereby is entirely freed and relieved of all
covenants and obligations of the Lessor hereunder, and it shall
be deemed and construed, without further agreement between the
parties and the purchaser at any such sale, or the Lessee of the
building, that the purchaser or lessee of the building has
assumed and agreed to carry out any and all covenants and
obligations of the Lessor hereunder. If any security be given by
the Lessee to secure the faithful performance of all or any of
the covenants of this Lease on the part of the Lessee, the
Lessor shall comply with the requirements of California Civil
Code Section 1950.7 applicable in the event of transfer and
thereafter Lessor shall have no further liability to Lessee with
respect to such security.
SUBORDI- 29. Lessee agrees that this Lease may, at the option of
NATION Lessor, be subject and subordinate to any mortgage, deed of
trust or other instrument of security which has been or shall be
placed on the land and building or land or building of which the
Premises form a part, and this subordination is hereby made
effective without any further act of Lessee. The Lessee shall,
at any time hereinafter, on demand, execute any instruments,
releases , or other documents that may be required by any
mortgagee, mortgagor, or trustor or beneficiary under any deed
of trust for the purpose of subjecting and subordinating this
Lease to the lien of any such mortgage, deed of trust or other
instrument of security, and the failure of the Lessee to execute
any such instruments, releases or documents, shall constitute a
default hereunder.
WAIVER 30. The waiver by Lessor of any breach of any term,
covenant or condition, herein contained shall not be deemed to
be a waiver of such term, covenant or condition or any
subsequent breach of the same or any other term, covenant or
condition therein contained. The subsequent acceptance of rent
hereunder by Lessor shall not be deemed to be a waiver of any
preceding breach by Lessee of any term, covenant or condition of
this Lease, other than the failure of Lessee to pay the
particular rental so accepted, regardless of Lessor's knowledge
of such preceding breach at the time of acceptance of such rent.
HOLDING OVER 31. Any holding over after the expiration of the said term,
with the consent of Lessor, shall be construed to be a tenancy
from month to month, at a rental to e negotiated by Lessor and
Lessee prior to the expiration of said term, and shall otherwise
be on the terms and conditions herein specified, so far as
applicable.
SUCCESSORS 32. The covenants and conditions herein contained shall,
AND ASSIGNS subject to the provisions as to assignment, apply to and bind
the heirs, successors, executors, administrators and assigns of
all the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
TIME 33. Time is of the essence of this Lease.
MARGINAL 34. The marginal headings or titles to the paragraphs of
CAPTIONS this Lease are not a part of this Lease and shall have no effect
upon the construction or interpretation of any part thereof.
This instrument contains all of the agreements and conditions
made between the parties hereto and may not be modified orally
or in any other manner than by an agreement in writing signed by
all of the parties hereof or their respective successors in
interest.
PARAGRAPHS 35 & 36 ATTACHED HERETO ARE MADE A PART OF THIS
LEASE.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY WHO
WILL REVIEW THE DOCUMENT AND ASSIST YOU TO DETERMINE WHETHER
YOUR LEGAL RIGHTS ARE ADEQUATELY PROTECTED. RENAULT & HANDLEY IS
NOT AUTHORIZED TO GIVE LEGAL AND TAX ADVICE. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY RENAULT & HANDLEY OR ITS AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING
THERETO. THESE ARE QUESTIONS FOR YOUR ATTORNEY WITH WHOM YOU
SHOULD CONSULT BEFORE SIGNING THIS DOCUMENT.
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IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and
year first above written.
LESSOR LESSEE
Renault & Handley Employees Investment Co. Norian Corporation
(for Bubb Road Joint Venture)
/s/ Lester A. Waller /s/ Brent R. Constantz, Ph.D.
- ------------------------------------------ -----------------------------
President President and Chief Executive
Officer 1
- ------------------------------------------ -----------------------------
- ------------------------------------------ -----------------------------
35. Hazardous Substances.
a) Lessee agrees that any and all handling, transportation, storage,
treatment, disposal, or use of Hazardous Substances by Lessee in or about the
Project shall strictly comply with all applicable Environmental Laws.
b) Deleted.
c) If the presence of Hazardous Substances on the Project caused by
Lessee results in the contamination or deterioration of the Project or any water
or soil beneath the Project, Lessee shall promptly take all action necessary to
investigate and remedy that contamination.
d) Lessee and Lessor each agree to promptly notify the other of any
contamination received from any governmental entity concerning Hazardous
Substances or the violation of Environmental Laws that relate to the Project.
e) Lessee shall not use, handle, store, transport, generate, release,
or dispose of any Hazardous Substances on, under, or about the Project, except
that Lessee may use (i) small quantities of common chemicals such as adhesives,
lubricants, and cleaning fluids in order to conduct business at the Leased
Premises and (ii) other Hazardous Substances that are necessary for the
operation of Lessee's business and of which Lessee gives Lessor written notice.
At any time during the term of this Lease, Lessee shall, within ten (10) days
after written request from Lessor, disclose in writing all Hazardous Substances
that are being used by Lessee on the Project, the nature of the use, and the
manner of storage and disposal.
f) At any time and upon any prior written notice to Lessee, Lessor, at
Lessor's sole cost and expense, may require testing wells to be drilled on the
Project and may require the ground water to e tested to detect the presence of
Hazardous Substances by the use of any tests that are then customarily used for
those purposes. Lessor shall supply Lessee with copies of the test results. The
cost of these tests and the installation, maintenance, repair, and replacement
of the wells shall be paid by Lessee if the test discloses the existence of
Hazardous Materials introduced to the Premises by Lessee, but only to the extent
such expenses are attributable to such Hazardous Materials introduced to the
Premises by Lessee.
36. Option to Renew. [See Addendum]
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