<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORLAND MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5047 06-1387931
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
106 CORPORATE PARK DRIVE
SUITE 106
WHITE PLAINS, NEW YORK 10604
(914) 694-2285
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
REYNALD G. BONMATI, PRESIDENT
NORLAND MEDICAL SYSTEMS, INC.
106 CORPORATE PARK DRIVE
SUITE 106
WHITE PLAINS, NEW YORK 10604
(914) 694-2285
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
KEVIN J. CURLEY, Esq. MARK D. WHATLEY, Esq.
Morgan, Lewis & Bockius LLP Howard, Rice, Nemerovski
101 Park Avenue Canady, Falk & Rabkin, a
New York, New York 101783 Professional Corporation
(212) 309-6000 Embarcadero Center
San Francisco, California 94111
(415) 434-1600
</TABLE>
--------------------------
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 basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO AGGREGATE AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.0005 par value............. 2,587,500 $21.33 $55,191,375 $19,031.51
</TABLE>
(1) Includes a total of 337,500 shares of Common Stock which the Underwriters
may purchase to cover over-allotments.
(2) Estimated in accordance with Rule 457 solely for the purpose of calculating
the registration fee.
--------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Cross Reference Page; Outside Front Cover Page
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; The Company and Its Relationship
with Norland Corp. and Stratec; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Not applicable
7. Selling Security Holders............................. Outside Front Cover Page; Principal and Selling
Stockholders; Underwriting
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Prospectus Summary;
Dividend Policy; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Not applicable
11. Information with Respect to the Registrant........... Outside Front Cover; Prospectus Summary; Risk
Factors; The Company and Its Relationship with
Norland Corp. and Stratec; Use of Proceeds; Dividend
Policy; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not applicable
</TABLE>
<PAGE>
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 registration or qualification under the securities laws of
any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 6, 1996
PROSPECTUS
2,250,000 Shares
[LOGO]
Common Stock
-------------
Of the 2,250,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by Norland Medical Systems, Inc. (the "Company"), and 750,000 shares
are being sold by Norland Partners, L.P. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
Common Stock by Norland Partners, L.P. The Company's Common Stock is quoted on
the Nasdaq National Market under the symbol "NRLD." On June 3, 1996, the last
reported sale price for the Company's Common Stock on the Nasdaq National Market
was $32.00 ($21.33 assuming the June 13, 1996 three-for-two stock split). See
"Price Range of Common Stock."
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 6.
---------------
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>
Underwriting Proceeds to
Discounts and Proceeds to Selling
Price to Public Commissions (1) Company (2) Stockholders
<S> <C> <C> <C> <C>
Per Share ............ $ $ $ $
Total (3)............. $ $ $ $
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) Norland Partners, L.P., Novatech Ventures, L.P. (collectively, the "Selling
Stockholders"), and the Company have granted the Underwriters an option,
exercisable within 30 days from the date hereof, to purchase up to 337,500
additional shares of Common Stock on the same terms as set forth above,
solely to cover over-allotments, if any. See "Principal and Selling
Stockholders." If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will
be $ , the Proceeds to the Company will be $ and the Proceeds
to Selling Stockholders will be $ . See "Underwriting."
--------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made through the offices of UBS
Securities LLC, 299 Park Avenue, New York, New York on or about ,
1996.
--------------------
UBS Securities Pacific Growth Equities, Inc.
, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Commission. The
Registration Statement, the exhibits and schedules forming a part thereof, and
the reports and other information filed by the Company with the Commission in
accordance with the Exchange Act may be inspected without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W, Washington, D.C. 20549, at regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
3040 Federal Building, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of all or any part of such materials may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, Washington, D.C.
20549, upon payment of the fees prescribed by the Commission.
The Company and/or the Manufacturers have rights to the following registered
trademarks: pDEXA and pQCT. This Prospectus also includes trademarks of
companies other than the Company.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10-B6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE>
<TABLE>
<S> <C>
Photo
The pDEXA-Registered Trademark- X-Ray Bone
Densitometer
The easy-to-use pDEXA is compact and
affordable, and brings well-established DXA
technology to the physician office.
</TABLE>
<TABLE>
<S> <C>
Photo
The Eclipse-TM- X-Ray Bone Densitometer
Traditional DXA systems (XR36 and Eclipse) are marketed primarily
to hospitals and large clinics and can be used to perform axial,
peripheral and whole body scans. These systems are installed in
more than 40 countries.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Photo
The OsteoAnalyzer-TM- SXA2000 X-Ray Bone Densitometer
The OsteoAnalyzer line includes the new SXA3000 (not
pictured here), the most affordable series of bone
densitometer on the market today. The SXA3000 is a
portable system which measures bone density at the heel
with the push of a single button, eliminating the need for
a separate computer system.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
The XCT960 scans the forearm,
providing true volumetric density
and
allowing more precise assessment
of biomechanical soundness of
bone. Photo
The XCT960-TM- pQCT X-Ray Bone Densitometer
</TABLE>
<TABLE>
<S> <C>
The XCT3000 scans the tibia, the
femur and the entire femoral neck,
providing
assessment of hip fracture and
monitoring of implants following hip
Photo replacements.
The XCT3000-TM- pQCT X-Ray Bone Densitometer
</TABLE>
<TABLE>
<S> <C>
The Company also markets to phar-
maceutical laboratories a series
of pQCT-based research scanners
such
as the XCT Microscope capable of
bone measurement IN VITRO at a
maximum resolution of 20 microns. Photo
The XCT Microscope-TM- X-Ray Bone Densitometer
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK
FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II)
REFLECTS A THREE-FOR-TWO STOCK SPLIT (THE "STOCK SPLIT") EFFECTIVE JUNE 13,
1996. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
THE COMPANY
Norland Medical Systems, Inc. (the "Company") markets, sells and distributes
a broad range of bone densitometry systems for use in diagnosing and monitoring
bone disorders, particularly osteoporosis, a disease that affects an estimated
25 million people in the United States and 200 million worldwide. Driven by the
availability of new FDA-approved therapies for bone disorders, the Company is
focusing on bringing affordable, state-of-the-art diagnostic products directly
into physician offices. The Company offers two lines of proprietary, lower
priced, easy to operate and compact products designed to address the diagnostic
needs of gynecologists and family practice physicians. There are approximately
30,000 gynecologists and 450,000 family practice physicians in the United States
alone.
The Company has exclusive worldwide distribution rights to all present and
future diagnostic products developed and manufactured by Norland Corporation
("Norland Corp.") and Stratec Medizintechnik GmbH ("Stratec", and together with
Norland Corp., the "Manufacturers"), two leading manufacturers of bone
densitometry products. These rights extend through 2015 and may be renewed for
additional five-year periods.
The Company offers four product lines utilizing three different types of
technology. The Company markets a line of bone densitometry products based on
dual-energy X-ray ("DXA") technology, which, since 1987, has been a standard for
analyzing bone mass reduction, the primary indicator of osteoporosis. The
Company's DXA products are highly effective and offer essential features at
competitive prices. Because of the cost, space requirements and training
required, these systems are generally found in hospitals, large clinics and
research institutions, as opposed to physician offices, where patients would
benefit from timely and easy access to osteoporosis testing.
Recognizing a significant market opportunity for more affordable bone
measurement technologies, Norland Corp. and Stratec developed the pDEXA system,
a lower priced, high performance desktop system incorporating DXA technology.
The pDEXA is targeted primarily at gynecologists and other specialty
practitioners. It is the only FDA-approved desktop DXA-based system available
today and was the largest contributor to the Company's revenues in 1995 and the
three months ended March 31, 1996.
In April 1996, the Company acquired Dove Medical Systems ("Dove"), a
manufacturer of low-cost bone densitometry systems. The acquisition of Dove
added a new product line of bone densitometers based on single-energy X-ray
("SXA") technology to the Company's product portfolio. Dove's main product, the
OsteoAnalyzer SXA3000, utilizes SXA technology with single push-button operation
to provide the family physician with the most affordable (under $20,000)
densitometer currently on the market. This acquisition solidified the Company's
position as a leading provider of low-cost bone densitometry products.
The Company also markets a line of products based on peripheral quantitative
computed tomography ("pQCT") technology. Unlike the DXA-based densitometers,
pQCT systems permit separate, three-dimensional measurements of the cortical and
trabecular bone, allowing a more detailed assessment of the biomechanical
soundness of the bone. In addition, pQCT permits the detection of minute changes
within bone that occur over short periods of time. Research versions of this
product have been purchased by large pharmaceutical companies such as Eli Lilly
& Co., Sandoz Ltd. and Glaxo to monitor the effectiveness of potential new
therapies for the treatment of osteoporosis and related bone disorders.
3
<PAGE>
The National Osteoporosis Foundation ("NOF") estimates that osteoporosis
affects 25 million people in the United States, 80% of whom are women. In the
United States alone, more than 1.3 million fractures are attributed to the
disease. As a result, the estimated costs of osteoporosis and associated
fractures in the United States during 1987 was more than $10 billion.
Historically, treatment for osteoporosis has been inadequate. However, this
is changing with the onset of new therapies brought to the market by several
large pharmaceutical companies. In October 1995, Merck & Co., Inc. ("Merck")
announced the launch of Fosamax, a new therapy for the treatment of
osteoporosis. Merck and other pharmaceutical companies have launched extensive
educational and marketing campaigns targeting gynecologists and family practice
physicians to promote education and awareness that osteoporosis is now a
treatable disease. These efforts are increasing the demand for widespread
diagnosis and treatment of osteoporosis. The Company believes that over 50
pharmaceutical and biotechnology companies have programs to develop new
therapies for the treatment of osteoporosis, and that additional new approved
therapies will increase demand for low-cost densitometers.
For the United States and Canada, the Company currently employs regional
sales managers and third party distributors. The Company intends to increase its
network of third party distributors in the United States to target the expanded
market of gynecologists and family practice physicians and to increase the
number of regional sales managers to supervise and support these distributors.
For international markets, the Company uses third party distributors such as
Nissho Iwai Corporation ("Nissho") for Japan. The Company typically uses a
single distributor in each country in which it markets products, supported by
United States-based sales managers.
The Company's goal is to be the leading provider of affordable bone
densitometry systems. The key elements of the Company's business strategy
include: (i) expanding the bone densitometry market with lower priced systems,
(ii) establishing strategic relationships with pharmaceutical companies that
manufacture drugs to treat osteoporosis, (iii) expanding sales and marketing
capabilities, (iv) offering the broadest range of diagnostic systems and (v)
establishing pQCT as the leading technology for advanced systems.
Following this offering, approximately 28.2% (24.2% if the overallotment
option is exercised) of the Company's Common Stock will be owned by persons who
control Norland Medical Systems B.V. ("NMS BV"), a holding company that owns the
Manufacturers. Certain of the Company's officers and directors are officers and
directors of NMS BV and Norland Corp. See "Certain Transactions." There can be
no assurance that all arrangements between the Company and the Manufacturers
will be as advantageous to the Company as they would be in the absence of the
relationships among the officers, directors and controlling stockholders of the
Company, NMS BV and the Manufacturers. See "Risk Factors -- Dependence on
Norland Corp. and Stratec" and "-- Conflicts of Interest."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 1,500,000 shares
Common Stock Offered by Norland Partners,
L.P......................................... 750,000 shares
Common Stock Outstanding after this
Offering.................................... 8,395,788 shares (1)
Use of Proceeds.............................. To expand sales and marketing activities, for
new product development, to expand
manufacturing capabilities and for working
capital and general corporate purposes,
including potential acquisitions.
Nasdaq National Market Symbol................ NRLD
Risk Factors................................. The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
- ------------------------------
(1) Excludes an aggregate of 701,250 shares of Common Stock reserved for
issuance upon the exercise of options outstanding as of June 1, 1996. Also
excludes options for an aggregate of 364,500 shares of Common Stock
available for issuance pursuant to the Amended and Restated 1994 Stock
Option and Incentive Plan. See "Management -- Stock Option Plan."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NORLAND MEDICAL SYSTEMS, INC.
------------------------------------------------
OSTECH B.V. (1) THREE MONTHS ENDED
---------------
PRO FORMA
---------------------------
THREE MONTHS
YEAR ENDED ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996 1995 (2) 1996 (2)
--------------- ----------- ----------- ---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue................. $5,488,095 $10,041,548 $18,243,808 $3,895,921 $5,218,290 $20,104,737 $5,890,981
Cost of revenue......... 4,066,539 6,517,701 12,508,809 2,600,531 3,415,911 13,235,502 3,697,132
One-time distribution
agreement costs........ 0 1,922,247 0 0 0 0 0
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Gross profit.......... 1,421,556 1,601,600 5,734,999 1,295,390 1,802,379 6,869,235 2,193,849
Operating expenses:
Sales and marketing... 1,068,197 973,208 1,651,125 334,553 575,348 1,801,886 671,169
General and
administrative....... 399,449 526,364 960,368 225,453 305,716 1,733,019 600,321
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Total operating
expenses........... 1,467,646 1,499,572 2,611,493 560,006 881,064 3,534,905 1,271,490
Income (loss) from
operations........... (46,090) 102,028 3,123,506 735,384 921,315 3,334,330 922,359
Liquidation loss --
net.................... (326,007) 0 0 0 0 0 0
Other income (expense).. (13,760) (6,984) 412,983 2,515 242,941 416,347 243,731
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Income (loss) before
taxes................ (385,857) 95,044 3,536,489 737,899 1,164,256 3,750,677 1,166,090
Provision for taxes..... 60 27,000 1,436,000 299,587 473,000 1,570,632 486,088
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Net income (loss)..... $ (385,917) $ 68,044 $ 2,100,489 $ 438,312 $ 691,256 $ 2,180,045 $ 680,002
--------------- ----------- ----------- ---------- ---------- ------------ ------------
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Earnings per share...... -- $ 0.02 $ 0.40 $ 0.11 $ 0.10 $ 0.40 $ 0.09
--------------- ----------- ----------- ---------- ---------- ------------ ------------
--------------- ----------- ----------- ---------- ---------- ------------ ------------
Shares used in computing
earnings per share
(3).................... -- 4,002,000 5,245,235 4,002,000 7,057,010 5,406,773 7,218,548
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996 (UNAUDITED)
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (4)(5)
----------- ------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $17,639,970 $14,207,033 $43,907,333
Working capital.................................................... 21,049,451 17,667,500 47,367,800
Total assets....................................................... 24,687,761 28,330,834 58,031,134
Long-term debt..................................................... -- -- --
Total stockholders' equity......................................... 21,209,370 24,520,899 54,221,199
</TABLE>
- ------------------------------
(1) Figures presented for 1993 are those of Ostech B.V., a subsidiary of NMS BV
that ceased all business activities at the end of 1993. In 1993, Ostech B.V.
served as exclusive distributor of the Manufacturers' products in certain
markets. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(2) Presented to give pro forma effect to the Dove acquisition as if such
transaction had been consummated on January 1, 1995. See the Unaudited Pro
Forma Combined Condensed Financial Statements contained herein.
(3) Reflects the 2,000-for-1 split of the Common Stock in June 1995 and a
three-for-two stock split of the Common Stock effective June 13, 1996.
(4) Presented to give pro forma effect to the Dove acquisition as if such
transaction had been consummated on March 31, 1996. See the Unaudited Pro
Forma Combined Condensed Financial Statements contained herein.
(5) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 1,500,000 shares of Common Stock offered by the Company (at an assumed
public offering price of $21.33 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by the Company). See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION APPEARING IN
THIS PROSPECTUS.
DEPENDENCE ON NORLAND CORP. AND STRATEC. The Company is dependent on
contractual and other business relationships with Norland Corp. and Stratec for
various aspects of its business, including for the supply of the DXA-based and
pQCT-based products it markets, for the development of new products and product
enhancements and for certain regulatory compliance relating to the Company's
business.
In 1995, the Company entered into a distribution agreement (the
"Distribution Agreement") with the Manufacturers pursuant to which (i) the
Company has rights to the exclusive worldwide distribution of all medical
diagnostic products manufactured or developed by Norland Corp. or Stratec
(subject to Stratec's right to distribute pQCT products in certain countries in
Europe until such time as the Company elects to take over such distribution) and
(ii) the Company must use its best efforts to promote the sale of those products
and, with one exception, may not distribute products manufactured by any
non-affiliate of the Company that compete with Norland Corp. or Stratec
products. The Distribution Agreement has an initial term ending December 31,
2015 and may be extended by either party for successive five-year terms. The
only products marketed and sold by the Company currently are the bone
densitometry systems developed and manufactured by Norland Corp. and Stratec and
the OsteoAnalyzer line of bone densitometers developed by Dove. Under the
Distribution Agreement, the price at which the Company purchases each bone
densitometry system is generally based on the difference between the price at
which the Company sells that system and the "Manufacturer's Device Cost" for
that system, as defined in the Distribution Agreement. The Manufacturer's Device
Cost is set semi-annually based on the average cost of systems components and
parts purchased during the preceding six-month period plus an allowance for
other direct manufacturing costs. As a result, the Company's gross margins on
products other than OsteoAnalyzer systems are partially dependent on the
Manufacturers' abilities to procure components and manufacture their systems
efficiently. See "Business -- Distribution Agreement." In addition, reliance on
Stratec subjects the Company to certain risks inherent in foreign operations,
including currency fluctuations and changes in the regulatory and tax
environment in Germany.
The Company is dependent to a significant extent on the Manufacturers to
develop products and product enhancements that are marketable and competitive.
In 1995, the Company entered into an agreement (the "Product Development Loan
Agreement") with the Manufacturers under which the Company may make loans to the
Manufacturers in installments up to an aggregate amount of $3.5 million during
the period ending July 31, 1997 to fund specific development projects involving
enhancements of existing products and the application of technologies to new
products. The Company is not committed to make any particular loan. At May 1,
1996 there were outstanding loans of $75,906 from the Company to Norland Corp.
In the future, the Company may provide funding to the Manufacturers for
development projects other than through the Product Development Loan Agreement.
See "The Company and its Relationship with Norland Corp. and Stratec." There can
be no assurance that the Manufacturers' product development efforts will be
adequate to provide the Company with products that have the features and
capabilities, and can be sold at prices, that will allow the Company to compete
effectively. See "Use of Proceeds" and "Business -- Product Development."
The Company is also dependent on the Manufacturers to manufacture their
products in amounts and at levels of quality necessary to meet demand and be
competitive. If either of the Manufacturers fails to supply the Company with a
sufficient quantity of any product on a timely basis or if the systems provided
by the Manufacturers fail to meet the performance or other standards established
for those products, the Company has been granted licenses that give it the right
to make other arrangements for the manufacture of such products. While the
Company believes alternative manufacturers capable of providing those products
exist, there can be no assurance that the Company would be able to make
alternative arrangements on a timely basis, that any such alternative
arrangements would be adequate, or that they would be on terms as favorable
6
<PAGE>
to the Company as the terms of the Distribution Agreement. If the Company were
unable to make adequate alternative arrangements on a timely basis, its business
and results of operations would be materially adversely affected.
Should either of the Manufacturers file a petition in bankruptcy or be the
subject of an involuntary bankruptcy proceeding, there can be no assurance that,
under the United States Bankruptcy Code, the German Bankruptcy Code
(KONKURSRECHT) or other applicable laws, the Company's rights against such
Manufacturer would be enforceable. Among other things, such unenforceability
could mean that the Company would lose its exclusive right to distribute such
Manufacturer's products, would be unable to purchase products at the prices and
on the other terms provided in the Distribution Agreement, would not have the
license rights provided in the Distribution Agreement and/or would not be
entitled to make alternative arrangements for the manufacture of such
Manufacturer's products. The Company's rights to manufacture Norland Corp.
products are subject to a blanket lien on Norland Corp.'s assets securing loans
from a bank (balance of approximately $540,000 as of May 1, 1996) that are due
by December 31, 1996. Should the Company's rights under the Distribution
Agreement be avoided or limited in a bankruptcy-related proceeding, the
Company's business and results of operations would be materially adversely
affected. See "Business -- Manufacturing" and "-- Distribution Agreement."
CONFLICTS OF INTEREST. Reynald G. Bonmati, the President and a Director of
the Company is also the President and a Director of Norland Corp. and a Managing
Director of NMS BV and may be considered the beneficial owner, through a
partnership, of 41.2% of the outstanding capital stock of NMS BV, the parent
holding company of Norland Corp. and Stratec. Albert S. Waxman, a Director of
the Company, is also a Director of Norland Corp. and a Managing Director of NMS
BV. He may also be considered the beneficial owner through the same partnership
of the same 41.2% of the capital stock of NMS BV. Accordingly, Messrs. Bonmati
and Waxman may face conflicts of interest in negotiating with and making
decisions on behalf of the Company regarding transactions and arrangements with
the Manufacturers. Officers and directors of a corporation have a fiduciary
obligation to act in the interests of all the corporation's stockholders. The
Company expects to submit all decisions regarding transactions and arrangements
with the Manufacturers or NMS BV to the Company's board of directors. Two of the
three other directors of the Company, who are not officers or employees of the
Company, have small investments, indirectly, in NMS BV but are not officers or
directors of, and do not otherwise owe fiduciary duties to, NMS BV. Under the
terms of the distribution arrangement in effect with Norland Corp. for 1994, the
Company was required to purchase at least $5.2 million of products from Norland
Corp. for the year ended December 31, 1994. At the prices that would have
applied in the absence of such minimum requirement, purchases from Norland Corp.
during that period to fill customer orders totalled $3.3 million. The $1.9
million difference between the amount and the Company's minimum purchase
requirement is reflected as "One-time distribution agreement costs" in the
Company's statement of income for the year ended December 31, 1994. The Company
did not acquire products from Norland Corp. in 1994 in excess of the amounts
sold to customers, and the effect of the minimum requirement was to increase the
aggregate cost of the products purchased from $3.3 million to $5.2 million.
There is no minimum purchase requirement applicable to any period after 1994.
There can be no assurance that all arrangements between the Company and the
Manufacturers will be as advantageous to the Company as they would be in the
absence of the relationships between the Company's officers, directors and
controlling stockholders described above and elsewhere in this Prospectus. In
addition, there can be no assurance that, in light of the relationships between
the Company, NMS BV and the Manufacturers, taxing authorities will not challenge
the appropriateness of the pricing and other arrangements between the Company
and the Manufacturers. A successful challenge to those arrangements could result
in additional tax obligations for the Company and could have a material adverse
effect on the Company's results of operations and financial condition. See "The
Company and its Relationship with Norland Corp. and Stratec," "Business --
Distribution Agreement" and "Certain Transactions."
DEPENDENCE ON NEW THERAPIES FOR TREATMENT OF BONE DISORDERS. The Company
believes it is essential to its sales growth that the efficacy of new therapies
for the treatment of osteoporosis and other bone disorders be demonstrated and
that regulatory approval of such therapies be granted, particularly in the
United States. Although Fosamax and certain other drug therapies were approved
by the FDA in 1995, and the Company
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<PAGE>
believes that over 50 pharmaceutical and biotechnology companies have programs
to develop treatments for bone disorders, to date only a limited number of
therapies are available in the United States. There can be no assurance that
Fosamax will gain market acceptance or that any other new treatment will be
approved or gain acceptance. The failure of one or more of these newly approved
therapies to gain acceptance, or the failure of additional new therapies to be
approved or gain acceptance, could have or material adverse effect on the
Company's business. See "Business -- Therapies."
DEPENDENCE ON PDEXA. Although the Company markets a broad range of
products, it believes its near term growth potential will depend on the success
of the pDEXA, a relatively new, low-cost bone densitometer sold to, among
others, physician offices and small clinics. Sales of pDEXA systems have
comprised an increasing percentage of the Company's revenues since its
introduction in Japan in the third quarter of 1994 and, in the three months
ended March 31, 1996, such sales accounted for the majority of the Company's
revenues. Should a competitor introduce and successfully market a low-cost
osteoporosis diagnostic device or screening tool, or should the pDEXA not gain
acceptance in the market for any reason, the Company's revenues and results of
operations would be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business --
Strategy."
DEVELOPING NEW MARKETS. The Company's continued success will depend upon
broad acceptance and adoption by primary care providers, such as gynecologists
and family practice physicians, of newly introduced and emerging drug therapies
to treat osteoporosis, and the Company's ability to broaden sales of its
products, particularly the pDEXA and OsteoAnalyzer lines, to these physicians.
In order to penetrate this market more effectively, the Company has expanded its
sales and marketing activities, including increasing its sales force,
advertising and participation in trade shows. In addition, the Company has
implemented short-term leasing and pay-per-scan programs to make its systems
more available to physicians. There can be no assurance that these or other
activities or programs will be successful in obtaining broader market acceptance
for the Company's products. Failure to do so could have a material adverse
effect on the Company's business. See "Business -- Marketing."
DEPENDENCE ON THIRD PARTY REIMBURSEMENT. Future profitability of the
Company may be materially adversely affected by changes in reimbursement
policies of governmental and private third party payors. The products marketed
by the Company are purchased principally by healthcare providers that typically
bill third party payors such as governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care plans, for health care
services provided to their patients. Governmental reimbursement policies are
subject to rapid and significant changes in the United States at both the
federal and state levels and in other countries. In addition, private third
party payors are increasingly negotiating the prices charged for medical
products and services. If healthcare providers respond to such pressures by
substituting other products for the products marketed by the Company, the
Company could be adversely affected. A third party payor may deny reimbursement
if it determines that a device was not used in accordance with cost-effective
treatment methods, or was experimental, or for other reasons. There can be no
assurance that products marketed by the Company in the United States in the
future will qualify for reimbursement by Medicare in accordance with guidelines
established by the Health Care Financing Administration, by state government
payors, or by commercial insurance carriers or that reimbursement will be
available in other countries. See "Business -- Third Party Reimbursement."
HIGHLY COMPETITIVE MARKET; TECHNOLOGICAL CHANGE. The bone densitometry
market is highly competitive. Several companies have developed or are developing
low-cost bone densitometers that compete or will compete directly with products
marketed by the Company. Many of the Company's existing and potential
competitors have substantially greater financial, marketing and technological
resources, as well as established reputations for success in developing,
manufacturing, selling and servicing products, than the Company and the
Manufacturers. In addition, competitors that do not rely on third-party
manufacturers may have more flexibility to compete effectively on price. The
Company expects that existing and new competitors will continue to introduce
products or services that are directly or indirectly competitive with those sold
by the Company, including alternatives to absorptiometry and pQCT such as IN
VITRO diagnostic tests and ultrasound. Such competitors may succeed in
developing products that are more functional or less costly than those sold by
the Company and may be more successful in marketing such products. These and
other
8
<PAGE>
innovations in medical technology may negatively affect the marketing and sales
of the products marketed by the Company. There can be no assurance that the
Company will be able to compete successfully in this market. See "Business --
Competition" and "-- Therapies."
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS. For its sales and service
activities outside of the United States and Canada, the Company is primarily
dependent on third-party distributors. The Company is also expanding its use of
third-party distributors for sales in the United States and Canada. For sales to
Japan of Norland Corp. and Stratec products, the Company has an exclusive
subdistributor agreement with Nissho, and for sales to Korea, the Company has an
exclusive subdistributor agreement with Meditec Co., Ltd. ("Meditec"). For the
year ended December 31, 1995 and the three months ended March 31, 1996, sales to
Nissho totaled approximately 68% and 51%, respectively, of total sales and sales
to Meditec totaled approximately 9% and 8%, respectively. The Company typically
uses an exclusive distributor in each country in which it does not directly
market products through its own sales force. These distribution arrangements may
typically be terminated by either the Company or the exclusive distributor upon
sixty days' notice. There can be no assurance that such distributors will
continue to provide sales and service for the Company at acceptable levels or
that the Company would be able to replace any distributors on terms as
advantageous to the Company should any of its existing arrangements terminate.
Further, there can be no assurance that the Company will be able to make
acceptable arrangements with additional distributors. Should any third-party
distributors cease to promote the products the Company markets, or should the
Company be unable to make acceptable arrangements with distributors in other
markets, its sales and results of operations could be materially adversely
affected. See "Business -- Sales and Marketing."
LIMITED OPERATING HISTORY. The Company began operations in January 1994.
Although Ostech B.V. ("OBV"), a subsidiary of NMS BV, marketed and sold the
Manufacturers' systems prior to the Company's formation, OBV's management and
sales organization were not identical to the Company's. Reynald G. Bonmati, the
President (chief executive officer) and a Director of the Company, and Albert S.
Waxman, a Director of the Company, were two of the Supervisory Directors of OBV,
and James A. Sperlazza, Vice President, Latin American and Pacific Rim Sales, of
the Company, was in charge of Latin American and Pacific Rim sales for OBV.
However, the Managing Director of OBV, who was in charge of its overall business
operations, and all other OBV managers and staff members were Dutch, Swiss and
German nationals, none of whom has any relationship to the Company. The Company
and its management therefore have only limited operating experience and history.
There can be no assurance that recent operating results can be sustained on a
quarterly or annual basis. See "The Company and Its Relationship with Norland
Corp. and Stratec" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
POTENTIALLY SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS. Several factors may significantly affect the Company's revenues,
expenses and results of operations from quarter to quarter, including the timing
of new product introductions into specific markets by the Company or its
competitors, developments regarding new treatments for osteoporosis,
developments in government reimbursement policies, foreign currency
fluctuations, product mix, the ability to obtain products to meet customer
demand and fluctuations in manufacturing costs. Consequently, quarterly results
of operations can be expected to fluctuate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISK OF AND RELIANCE ON FOREIGN SALES. For the year ended December 31, 1995
and the three months ended March 31, 1996, foreign sales accounted for
approximately 94% and 72%, respectively, of the Company's sales. For 1995 and
the three months ended March 31, 1996, sales in Japan represented approximately
68% and 51%, respectively, of the Company's sales, and sales in Korea
represented approximately 9% and 8%, respectively, of the Company's sales.
Foreign sales are subject to certain inherent risks, including foreign currency
fluctuations, trade restrictions and inconsistent and changing regulatory
requirements. The loss of a key foreign subdistributor or the inability to
maintain a foreign distribution network could have a material adverse impact on
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
9
<PAGE>
DOVE ACQUISITION. On April 2, 1996, the Company acquired Dove, the
manufacturer of the OsteoAnalyzer line of SXA-based bone densitometers. The
integration of Dove will require special attention from management, which may
distract its attention from the day-to-day business of the Company, and will
require integration of Dove and the Company's product offerings and sales and
marketing activities. In addition, the Company may be required to expand and
enhance its financial and management controls, reporting systems and procedures
as it integrates these operations. There can be no assurance that the Company
will be successful in that integration. In addition, the operations acquired as
part of the Dove acquisition include manufacturing and research and development.
While some of the Company's management have been involved in such activities at
Norland Corp., the Company has not previously engaged directly in those
activities. The Company may pursue additional acquisitions of complementary
technologies, product lines, or businesses in the future. The integration of
acquired companies often results in unexpected costs and disruptions and
sometimes in significant fluctuations in, or reduced predictability of,
operating results from period to period. There can be no assurance that the
Company will realize any future benefits as a result of the acquisition of Dove
or any technologies, product lines or businesses it may acquire in the future or
that the integration of Dove or any such other technologies, product lines or
businesses will not result in unanticipated adverse consequences for the
Company's results of operations and financial condition.
GOVERNMENT REGULATION. The products the Company sells are subject to
extensive regulation. Before products can be marketed commercially in the United
States, they must receive FDA clearance or approval. The Company primarily
relies on Norland Corp. to obtain such clearances in the United States. Products
sold in the United States must also be manufactured in compliance with FDA Good
Manufacturing Practices ("GMPs"), regulations relating to the methods used in,
and the facilities and controls used for, the design, manufacture, packaging,
storage, and installation of all finished devices intended for human use.
Medical device products are also required to comply with FDA regulations
relating to investigational research, labeling, and postmarket reporting. States
may also regulate the manufacture, sale, and use of medical devices,
particularly those that employ X-ray technology. In addition, many foreign
countries, including some in which the Company markets products, have laws
governing the marketing and manufacturing of medical devices, some of which are
similar to laws in the United States. The Company generally relies on its local
distributors to obtain required clearances in the countries in which they sell
products marketed by the Company. Federal, state and foreign regulations
regarding the manufacture and sale of medical devices are subject to change. In
addition, product approvals could be withdrawn if a manufacturer or seller fails
to comply with regulatory standards or if unforeseen problems occur following
initial marketing. Extensive regulations or changes in regulations in countries
in which the Company sells may increase operating expenses or make doing
business in those countries impractical. In addition, the processes of obtaining
regulatory clearances and approvals can be time consuming and expensive and
there can be no assurance that all required clearances and approvals will be
obtained or that the Company will not experience delays in those processes that
would adversely affect the Company's marketing and sale of products. Delays in
obtaining, or the inability to obtain, necessary domestic or foreign regulatory
approvals or failures to comply with applicable regulatory requirements could
have a material adverse effect on the Company. See "Business -- Government
Regulation."
UNCERTAINTY OF HEALTH CARE REFORM. Health care reform in the United States
has been an area of national attention and a priority of many governmental
officials. Certain reforms may influence customer purchases and, if adopted,
could affect the markets for medical devices or impose limitations on the prices
the Company will be able to charge in the United States for the products that
the Company markets or on the amount of reimbursement available from
governmental agencies and private third party payors for bone densitometry scans
conducted with these products.
PROPRIETARY RIGHTS PROTECTION. The Company believes its sales are dependent
in part on certain proprietary features of the products it markets. The Company
relies upon the Manufacturers for the protection of intellectual property
pertaining to the proprietary features of their DXA-based and pQCT-based
products. The Manufacturers rely primarily on know-how, trade secrets and
trademarks to protect those intellectual property rights and have not sought
patent protection for their products. The Company relies primarily upon
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<PAGE>
know-how, trade secrets, trademarks and a patent to protect the SXA-based
technology used in the OsteoAnalyzer product line. There can be no assurance
that these measures will be adequate to protect the rights of the Manufacturers
and the Company. In addition, the laws of foreign countries may not protect
their proprietary rights to the same extent as the laws of the United States. To
the extent those rights are not adequately protected, the Company may be
vulnerable to competitors who attempt to copy products the Company markets, or
gain access to the trade secrets and know-how of the Company and the
Manufacturers. Further, there can be no assurance that the Company's competitors
will not independently develop substantially equivalent or superior technology.
Neither the Manufacturers nor the Company are currently the subject of any
litigation regarding proprietary rights, and the Company believes that the
technologies used by the Manufacturers and the Company were developed
independently. However, there can be no assurance that claims will not be
brought alleging infringement by the Manufacturers or the Company or that such
claims, if brought, would not have a material adverse effect on the Company's
ability to market their products. In addition, the Company's business depends on
proprietary information regarding customers and marketing, and there can be no
assurance that the Company will be able to protect such information. See
"Business -- Proprietary Rights."
PRODUCT LIABILITY. The Company's business involves the risk of product
liability claims inherent to the medical device business. If such claims arise
in the future they could have a material adverse impact on the Company. The
Company relies upon insurance maintained by the Manufacturers covering the
products they produce and maintains product liability insurance with respect to
the OsteoAnalyzer product line. Norland Corp. maintains product liability
insurance on a "claims made" basis in the aggregate amount of $4 million,
subject to certain deductibles and exclusions. Stratec maintains product
liability insurance in the aggregate amount of DM6 million (approximately $3.9
million based on current exchange rates as of May 1, 1996), subject to certain
deductibles and exclusions. The Company is an additional named insured on the
Norland Corp. and Stratec policies. The Company maintains product liability
insurance on a "claims made" basis in the aggregate amount of $1.0 million,
subject to certain deductibles and exclusions. There is no assurance that such
coverage will be sufficient to protect Norland Corp., Stratec and the Company
from product liability claims, that product liability insurance will be
available to Norland Corp., Stratec or the Company at a reasonable cost, if at
all, in the future or that insurance maintained by Norland Corp. or Stratec will
cover the Company. See "Business -- Product Liability Insurance."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part on
the continued services of certain key personnel at the Company, as well as
certain key employees of the Manufacturers. The loss or interruption of the
services of any of those individuals could have a material adverse effect on the
Company. Neither the Company nor the Manufacturers maintain key man life
insurance on any of their employees or have employment agreements with any key
personnel. The Company's success also depends upon the ability to attract and
retain additional qualified personnel. Competition exists for qualified
personnel and there can be no assurance the Company or the Manufacturers will be
successful in attracting or retaining such personnel. See "Business --
Employees" and "Management."
UNCERTAIN ABILITY TO MANAGE GROWTH. The Company's growth strategy will
require expanded sales, increased customer service and support, increased
personnel throughout the Company, expanded operational and financial systems and
the implementation of additional control procedures. There is no assurance that
the Company will be able to attract qualified personnel or successfully manage
expanded operations. If the Company expands, it may from time to time experience
constraints that will adversely affect its ability to satisfy customer demands
in a timely fashion. Failure to manage growth effectively could materially
adversely affect the Company's financial condition and results of operations.
Further, there can be no assurance that the Company will be able to sustain its
recent rate of growth or continue its profitable operations.
CONTROL BY EXISTING STOCKHOLDERS. Immediately after this offering, current
officers and directors, together with persons and entities that may be deemed
affiliates of or related to such persons, will own or control approximately
30.4% of the outstanding shares of Common Stock (26.4% if the Underwriter's
over-allotment option is exercised in full). In addition, the Company's officers
and directors hold options to purchase Common Stock, and their ownership will
increase if outstanding stock options are exercised. Thus,
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<PAGE>
officers and directors will have significant influence over all matters
requiring stockholder approval. See "Management -- Stock Option Plan," "Certain
Transactions," "Principal and Selling Stockholders" and "Description of Capital
Stock."
POSSIBLE VOLATILITY OF STOCK PRICE. The market for securities of early
stage, small market capitalization companies has been highly volatile in recent
years, often as a result of factors unrelated to a company's operations. The
Company believes factors such as quarterly fluctuations in financial results,
announcements of new developments relating to bone disorder therapies and
diagnostic technologies and developments in third party reimbursement policies
could contribute to the volatility of the price of its Common Stock, causing it
to fluctuate significantly. These factors, as well as general economic
conditions, such as recessions
or high interest rates or other events unrelated to the Company or the products
it sells, may adversely affect the market price of the Common Stock.
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS. The Company currently has no
specific plans for the use of a significant portion of the net proceeds of this
offering and Company management will have broad discretion as to the application
of such proceeds. The net proceeds will be available for working capital and
general corporate purposes, including potential acquisitions and, possibly,
providing financing for certain customers such as physician offices, group
practices, hospitals, clinics and research facilities through leasing and other
financing arrangements. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of shares of Common Stock of the
Company in the public market following this offering could adversely affect
market prices and the Company's ability to raise capital. The 2,250,000 shares
offered hereby will be freely tradeable, without restriction or further
registration under the Securities Act. Upon completion of this offering,
approximately 2,608,000 outstanding shares will be "restricted" securities
within the meaning of Rule 144 under the Securities Act. Approximately 678,000
shares will be available for immediate sale in the public market in reliance
upon Rule 144 or Rule 701 under the Securities Act, and the remaining
approximately 1,961,500 restricted shares will not be transferable pursuant to
Rule 144 until the expiration of their respective two-year holding periods. The
Company intends to file a registration statement under the Securities Act to
register Common Stock issuable upon exercise of options that have been or may be
granted under the Amended Plan. See "Shares Eligible For Future Sale."
ANTI-TAKEOVER CONSIDERATIONS. The Company's Restated Certificate of
Incorporation and by-laws and the Delaware General Corporation Law contain
certain provisions that may have the effect of inhibiting a non-negotiated
merger or other business combination. In addition, the level of ownership by
current directors and officers of the Company, together with persons and
entities that may be deemed affiliates of or related to such persons, will
enable them to have significant influence over or control the affairs of the
Company which may have the effect of delaying, deferring or preventing a change
in control of the Company. The Board of Directors will also have the authority,
without further action by the stockholders, to fix the rights and preferences
and issue "blank check" preferred stock. All of these factors could have the
effect of deterring hostile takeovers or delaying, deferring or preventing
changes in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over the
then-current market prices. In addition, these provisions and this level of
ownership also limit the ability of other stockholders to approve transactions
that they may deem to be in their best interests and could adversely affect the
voting and other rights of other stockholders. See "Control by Existing
Stockholders" and "Description of Capital Stock."
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THE COMPANY AND ITS RELATIONSHIP WITH NORLAND CORP. AND STRATEC
The Company was formed in December 1993 by certain stockholders of NMS BV to
market, sell and service a range of diagnostic products that address selected
needs in women's healthcare. It began operations in January 1994 as the
exclusive distributor throughout much of the world for all of the bone
densitometry products manufactured by Norland Corp. and Stratec, manufacturing
subsidiaries of NMS BV.
As a subsidiary of Cordis Corporation, Norland Corp. introduced the first
single photon absorptiometry ("SPA") bone densitometry device in the early
1970s, introduced a dual photon absorptiometry ("DPA") device in the early 1980s
and introduced a DXA device in 1987. Before 1992, Norland Corp. distributed its
products in North, South and Central America and the Pacific Rim through a
direct sales force and local distributors, and for sales in Europe and the
Middle East, Norland Corp. distributed its products through a subsidiary,
Norland Scientific Instruments, B.V., using a small direct sales force and local
distributors. Norland Corp. is located in Fort Atkinson, Wisconsin.
Stratec was formed in 1987 to develop medical devices based on quantitative
computed tomography ("QCT") technology. Stratec initially focused its
development efforts on measurement of the forearm, naming the approach pQCT. In
1990, Stratec introduced a compact, high-resolution pQCT bone measurement
system. Before 1992, Stratec sold its products exclusively in Germany using a
small direct sales force and independent distributors. Stratec is located in
Pforzheim, Germany.
Before 1992, the Manufacturers were unrelated to each other. In early 1992,
stockholders of the Manufacturers formed NMS BV to hold the two companies as
wholly-owned subsidiaries. Norland Corp. has continued to develop and
manufacture bone densitometry products using DXA technology and Stratec has
continued to focus on pQCT technology. In 1993, the two companies jointly
developed the pDEXA system marketed by the Company. Norland Corp. acts as
contract manufacturer for all Stratec products sold in the United States.
During 1992 and 1993, the Manufacturers began to combine their sales and
marketing efforts. OBV, another subsidiary of NMS BV, was formed in 1992 to act
as the exclusive distributor of Norland Corp.'s products outside the United
States, Canada and Switzerland and Stratec's products outside Germany and
Switzerland. Norland Corp. continued to distribute its products in the United
States and Canada, Stratec continued to distribute its products in Germany and a
separate subsidiary of NMS BV distributed both companies' products in
Switzerland. For sales of Stratec products in the United States and Canada,
Norland Corp. served as a subdistributor for OBV, until OBV ceased business
activities at the end of 1993 when the Company was formed.
In January 1994, the Company began performing the sales and marketing
functions of NMS BV and its subsidiaries. The Manufacturers and the Company are
parties to a Distribution Agreement under which the Company has the rights to
exclusive worldwide distribution of all medical diagnostic products manufactured
or developed by Norland Corp. or Stratec (subject to Stratec's right to
distribute pQCT products in certain countries in Europe until such time as the
Company elects to take over such distribution). The Company has entered into an
agreement (the "Product Development Loan Agreement") with the Manufacturers
under which the Company may make loans to the Manufacturers up to an aggregate
amount of $3.5 million during the period ending July 31, 1997. See "Business --
Distribution Agreement," "-- Product Development" and "Certain Transactions."
Prior to this offering, approximately 45.1% of the Company's outstanding
stock was owned by persons who control NMS BV. The Company's President, Chief
Executive Officer and Chairman of the Board, Reynald G. Bonmati, owns directly
562,500 shares of the Company's Common Stock and holds options to purchase an
additional 217,500 shares. Mr. Bonmati is also a Director and the President of
Norland Corp. and is one of three Managing Directors of NMS BV. Albert S.
Waxman, a director of the Company, is also a Director of Norland Corp. and one
of the Managing Directors of NMS BV. See "Management," "Certain Transactions"
and "Principal and Selling Stockholders."
The Company is a Delaware corporation whose principal office is located at
106 Corporate Park Drive, Suite 106, White Plains, New York 10604, and its
telephone number is (914) 694-2285.
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USE OF PROCEEDS
Based on an assumed public offering price of $21.33 per share, the Company
will receive approximately $29.7 million from the sale of the 1,500,000 shares
of Common Stock being offered by the Company after deduction of underwriting
discounts and commissions and estimated expenses payable by the Company in
connection with this offering. The Company expects to use the net proceeds to
expand sales and marketing activities, for new product development, to expand
manufacturing capability of its newly-acquired Dove manufacturing facilities and
for working capital and general corporate purposes, including potential
acquisitions. The Company has no present understandings, commitments or
agreements with respect to any such acquisitions. In addition, the Company may
consider providing financing for certain customers such as physician offices,
group practices, hospitals, clinics and research facilities through leasing or
other financing arrangements. Pending the uses described above, the Company
intends to invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities. The Company is undertaking the
offering in part because it believes that the availability of adequate financial
resources is important to the Company's competitive position. Management will
have broad discretion as to the application of such net proceeds.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "NRLD". The Company's Common Stock was first issued to the public under a
registration statement that became effective on August 1, 1995. August 2, 1995
was the first day of trading for the Company's Common Stock. The following table
sets forth, for the periods indicated, the implied high and low sales prices per
share of Common Stock, as reported by the Nasdaq National Market assuming (i)
that the Stock Split had been consummated prior to the periods presented and
(ii) that the sales prices would have been two-thirds of the actual sales prices
as a consequence of the Stock Split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ------------
<S> <C> <C>
PERIOD FROM AUGUST 2, 1995 THROUGH DECEMBER 31, 1995:
Third Quarter..................................................................... $ 13.42 $ 9.33
Fourth Quarter.................................................................... 15.67 10.83
PERIOD FROM JANUARY 1, 1996 THROUGH MARCH 31, 1996:
First Quarter..................................................................... 19.83 13.33
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on June 3, 1996 was $32.00 per share without adjustment for the Stock
Split (giving effect to such Stock Split would imply a last sale price of
$21.33). There were approximately 27 stockholders of record of the Company's
Common Stock. This number excludes persons whose shares were held of record by a
bank, broker or clearing agency.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
expect to pay any such dividends in the foreseeable future. The Company intends
to reinvest earnings in the continued development and operation of its business.
14
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1996 the (i) actual
capitalization of the Company, (ii) the pro forma effect of the Dove
acquisition, and (iii) the pro forma capitalization of the Company as adjusted
to reflect the receipt of the estimated proceeds from the sale of 1,500,000
shares of Common Stock being offered by the Company hereby at the assumed
initial public offering price of $21.33 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company and the application of the estimated net proceeds as
described in the "Use of Proceeds." This table should be read in conjunction
with the Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
-----------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA (1) ADJUSTED (1)(2)
------------- ------------- -----------------
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, $0.0005 par value; 1,000,000 shares
authorized; no shares issued and outstanding................. $ 0 $ 0 $ 0
Common stock, $0.0005 par value; 10,000,000 shares authorized;
6,698,250 shares issued and outstanding; and 8,359,788 shares
to be outstanding as adjusted (3)............................ 3,349 3,430 4,180
Additional paid-in capital.................................... 18,346,732 21,658,180 51,357,773
Retained earnings............................................. 2,859,289 2,859,289 2,859,289
------------- ------------- -----------------
Total stockholders' equity.................................. $ 21,209,370 $24,520,899 $ 54,221,199
------------- ------------- -----------------
------------- ------------- -----------------
</TABLE>
- ------------------------------
(1) Presented to give effect to the Dove acquisition.
(2) Adjusted to give effect to the receipt of net proceeds from the sale of
1,500,000 shares of Common Stock offered by the Company (at an assumed
public offering price of $21.33 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by the Company). See "Use of Proceeds."
(3) Excludes shares reserved for issuance under the Company's Amended and
Restated 1994 Stock Option and Incentive Plan. See "Management -- Stock
Option Plan."
15
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data as of and for the periods ended
December 31, 1992, 1993, 1994 and 1995 were derived from (i) the Company's
financial statements for the years 1994 and 1995, which were audited by Coopers
& Lybrand L.L.P., (ii) the financial statements of OBV for the year 1993, which
were audited by Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG, and
(iii) the audited financial statements of OBV for the period from April 1, 1992
(date of commencement of operations) through December 31, 1992. The financial
data should be read in conjunction with the audited financial statements of the
Company, and the notes thereto, and of OBV for the year ended December 31, 1993
and notes thereto, which are included elsewhere herein, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
OSTECH B.V. (1)
----------------------------
PERIOD FROM
APRIL 1, 1992
TO
NORLAND MEDICAL SYSTEMS, INC.
------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------ ----------------------
1992 1993 1994 1995 1995 1996
--------------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME (LOSS)
DATA:
Revenue.......... $4,094,964 $5,488,095 $10,041,548 $18,243,808 $3,895,921 $5,218,290
Cost of
revenue......... 3,118,925 4,066,539 6,517,701 12,508,809 2,600,531 3,415,911
One-time
distribution
agreement
costs........... 0 0 1,922,247 0 0 0
--------------- ---------- ----------- ----------- ---------- ----------
Gross profit..... 976,039 1,421,556 1,601,600 5,734,999 1,295,390 1,802,379
Operating
expenses:
Sales and
marketing..... 747,292 1,068,197 973,208 1,651,125 334,553 575,348
General and
administrative... 183,219 399,449 526,364 960,368 225,453 305,716
--------------- ---------- ----------- ----------- ---------- ----------
Income (loss)
from
operations...... 45,528 (46,090) 102,028 3,123,506 735,384 921,315
Liquidation loss
-- net.......... 0 (326,007) 0 0 0 0
Other income
(expense)....... 47,105 (13,760) (6,984) 412,983 2,515 242,941
--------------- ---------- ----------- ----------- ---------- ----------
Income (loss)
before taxes.... 92,633 (385,857) 95,044 3,536,489 737,899 1,164,256
Provision for
taxes........... 9,629 60 27,000 1,436,000 299,587 473,000
--------------- ---------- ----------- ----------- ---------- ----------
Net income
(loss).......... $ 83,004 $ (385,917) $ 68,044 $ 2,100,489 $ 438,312 $ 691,256
--------------- ---------- ----------- ----------- ---------- ----------
--------------- ---------- ----------- ----------- ---------- ----------
Earnings per
share (1)....... -- -- $ 0.02 $ 0.40 $ 0.11 $ 0.10
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Shares used in
computing
earnings per
share (2)....... -- 4,002,000 5,245,235 4,002,000 7,057,010
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1994 1995
---------- ----------- AS OF
MARCH 31,
-----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 554,732 $19,218,865 $17,639,970
Working capital............................................................. 68,044 20,472,327 21,049,451
Total assets................................................................ 2,751,929 24,886,630 24,687,761
Long-term debt.............................................................. -- -- --
Total stockholders' equity.................................................. 68,044 20,520,846 21,209,370
</TABLE>
- ------------------------------
(1) Figures presented for 1992 and 1993 are those of OBV, a subsidiary of NMS BV
that ceased all business activities at the end of 1993. In 1992 and 1993,
OBV served as exclusive distributor of the Manufacturers' products in
certain markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
(2) Reflects the 2,000-for-1 split of the Common Stock in June 1995 and the
three-for-two stock split of the Common Stock effective June 13, 1996.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company was formed in December 1993 and began operations in January 1994
as the exclusive distributor throughout much of the world for bone densitometry
products developed and manufactured by the Manufacturers. Under the Distribution
Agreement with the Manufacturers, the Company (i) has rights to exclusive
worldwide distribution of all medical diagnostic products manufactured or
developed by Norland Corp. or Stratec (subject to Stratec's right to distribute
its pQCT products in certain countries in Europe until such time as the Company
elects to take over such distribution) and (ii) with one exception, may not
distribute products manufactured by any non-affiliate of the Company that
directly compete with their products. The Distribution Agreement has an initial
term ending December 31, 2015, with rights to extend for successive five-year
periods.
During 1992 and 1993, OBV, a subsidiary of NMS BV, served as exclusive
distributor of Norland Corp.'s products for all locations outside the United
States, Canada and Switzerland and of Stratec's products for all locations
outside Germany and Switzerland. Some of the former officers and employees of
OBV are officers and employees of the Company. OBV's financial information is
presented for comparative purposes only; OBV ceased all business activities at
the end of 1993.
Revenues and costs of revenues for systems purchased by the Company from the
Manufacturers for immediate resale and for spare parts are recognized at the
time of shipment from the Manufacturers. Service revenue is recognized at the
time the service is performed. Both purchases from the Manufacturers and sales
to customers are generally made in U.S. dollars.
Under the Distribution Agreement, the Company's cost of revenues on systems
purchased for immediate resale is generally equal to (a) the Manufacturer's
Device Cost as defined in the Distribution Agreement plus (b) 50% of the
difference between the prices at which the Company sells systems and the
Manufacturer's Device Cost. Cost of revenues on systems purchased for the
Company's short-term rental and pay-per-scan programs or as demonstration
systems is generally equal to 150% of Manufacturer's Device Cost. The
Manufacturer's Device Cost is set semi-annually and is based on the average cost
of system components and parts purchased by the Manufacturers during the
preceding six-month period plus an allowance for other direct manufacturing
costs. The Company's customers outside the U.S. are predominantly third-party
distributors. Distributors often seek, and the Company may be willing to give,
discounts based on volume.
On April 2, 1996, the Company acquired Dove, which manufactured and sold the
OsteoAnalyzer line of bone densitometers based on single X-ray absorptiometry
technology, at a cost of approximately $6.9 million, consisting of $3.6 million
in cash and 161,538 shares of the Company's Common Stock. For the year ended
December 31, 1995, Dove had revenues and gross profit of $1.9 million and $1.0
million, respectively, and for the quarter ended March 31, 1996, it had revenues
and gross profit of $672,691 and $343,470, respectively. The Unaudited Pro Forma
Combined Condensed Financial Statements, included elsewhere in this Prospectus,
reflect the Company's acquisition of Dove under the purchase method of
accounting.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from
OBV's and the Company's Statements of Income (Loss) as a percentage of revenue:
<TABLE>
<CAPTION>
OSTECH B.V. NORLAND MEDICAL SYSTEMS, INC.
------------- --------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................................... 74.1 64.9 68.6 66.8 65.5
One-time distribution agreement costs..................... 0.0 19.1 0.0 0.0 0.0
----- ----- ----- ----- -----
Gross profit............................................ 25.9 16.0 31.4 33.2 34.5
Sales and marketing expense............................... 19.5 9.7 9.1 8.6 11.0
General and administrative expense........................ 7.3 5.2 5.3 5.8 5.9
----- ----- ----- ----- -----
Income (loss) from operations........................... (0.9) 1.1 17.0 18.8 17.6
Liquidation loss -- net................................... (5.9) 0.0 0.0 0.0 0.0
Other income (expense).................................... (0.2) (0.1) 2.3 0.1 4.7
----- ----- ----- ----- -----
(7.0) 1.0 19.3 18.9 22.3
Provision for taxes....................................... 0.0 0.3 7.8 7.7 9.1
----- ----- ----- ----- -----
Net income (loss)....................................... (7.0) 0.7 11.5 11.2 13.2
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
Revenue for the three months ended March 31, 1996 increased $1.3 million
(33.9%) to $5.2 million from $3.9 million for the comparable period of 1995. The
increase was largely a result of increased sales of pDEXA systems in the United
States following its introduction in the fourth quarter of 1995 and increased
sales of the Company's other products offset by a decrease in pDEXA sales in
Japan. Sales in Japan and the United States represented 50.9% and 28.5%,
respectively, of total revenue for the three months ended March 31, 1996
compared to 81.5% and 6.3%, respectively, of total revenue for the three months
ended March 31, 1995. Sales of complete bone densitometry systems represented
92.9% and 93.2% of total revenue for the three months ended March 31, 1996 and
1995, respectively. Sales of parts and services and, in the 1996 period, rental
income, comprised the balance of revenues.
Cost of revenue as a percentage of revenue was 65.5% and 66.8% for the three
months ended March 31, 1996 and 1995, respectively, resulting in a gross margin
of 34.5% for the three months ended March 31, 1996 compared to 33.2% for the
comparable period of 1995. The increase was due primarily to a change in product
mix.
Sales and marketing expense increased $240,795 (72.0%) to $575,348 for the
three months ended March 31, 1996 from $334,553 for the three months ended March
31, 1995, and increased as a percentage of revenue to 10.9% from 8.6%. The
increases were primarily due to increased salaries, commissions and incentive
payments related to increased sales staff and sales volume, increased expenses
related to customer service and marketing expenses related to market
introduction in the United States of the pDEXA.
General and administrative expense increased $80,263 (35.6%) to $305,716 for
the three months ended March 31, 1996 from $225,453 for the three months ended
March 31, 1995 and increased as a percentage of revenue to 5.9% from 5.8%. The
increases were primarily due to increased expenses of new and existing personnel
and legal, accounting and other expenses attributable to the Company being a
public company.
Other income in the three months ended March 31, 1996 consisted primarily of
interest earned on the initial public offering proceeds and other cash balances,
reduced by other expenses, consisting primarily of bank charges and other fees
related to bank transfers. In the three months ended March 31, 1995, other
income consisted primarily of interest earned on cash balances reduced by
charges and other fees related to bank transfers.
18
<PAGE>
The provision for taxes for the three months ended March 31, 1996 increased
by $173,413 (57.9%) to $473,000 from $299,587 for the three months ended March
31, 1995 and increased as a percentage of revenues to 9.1% from 7.7%. The
Company has provided for income taxes at its current effective tax rate of 40.6%
for the three months ended March 31, 1996 and 1995. The increase was entirely
due to the relative increase in income before taxes.
The Company had net income of $691,256 for the three months ended March 31,
1996 compared to net income of $438,312 for the three months ended March 31,
1995, an increase of $252,944 (57.7%). The increase was due primarily to
increased sales and interest earned on cash balances.
YEARS ENDED DECEMBER 31, 1995 AND 1994.
Revenue for 1995 increased $8.2 million (82%) to $18.2 million from $10.0
million for 1994. The increase was due primarily to the increased sales of the
pDEXA system. The pDEXA was introduced in Japan in the third quarter of 1994.
The increase in revenue for 1995 reflects the fact that the pDEXA was sold in
Japan during the entire year, as well as the fact that there were significant
increases in the level of pDEXA sales in each quarter of 1995 over the
corresponding period in 1994. Sales in the United States and Canada increased
53% to $1.2 million in 1995 from $750,739 in 1994, reflecting the effects of the
introduction of the pDEXA in the United States in the fourth quarter of 1995 and
increased customer interest in the Company's other products. Management expects
1996 sales in the United States and Canada to increase in terms of dollars and
percentage of total revenues. Sales of complete bone densitometry systems
represented 95% and 91% of total revenue for 1995 and 1994, respectively. Sales
of parts and services and, in 1995, rental income, comprised virtually all of
the other revenues for such periods.
Cost of revenue as a percentage of revenue was 69% and 65% for 1995 and 1994
(before one-time distribution agreement costs), respectively, resulting in a
gross margin of 31% for 1995 compared to 35% for the comparable period of 1994.
This decline in gross margin (before one-time distribution agreement costs) was
due principally to higher component costs and the relatively higher volume of
pDEXA product that is subject to volume discounts granted to the Company's
Japanese distributor. Under the terms of the distribution agreement in effect
with Norland Corp. for 1994, the Company was required to purchase $5.2 million
of products from Norland Corp. to satisfy a minimum requirement for the year
ended December 31, 1994. At the prices that would have applied in the absence of
such minimum requirement, purchases from Norland Corp. during that period to
fill customer orders totaled $3.3 million. The $1.9 million difference between
that amount and the Company's minimum purchase requirement is reflected as
"one-time distribution agreement costs" for 1994. After giving effect to this
payment, the Company's gross margin for 1994 was 16%.
Sales and marketing expense increased $677,917 (70%) to $1.7 million for
1995 from $973,208 for 1994, and decreased as a percentage of revenue to 9.1%
from 9.7%. The dollar increase was primarily due to increased sales commissions
and incentive payments related to increased sales, increased expenses related to
customer service and marketing expenses related to market introduction in the
United States of pDEXA. The decrease as a percentage of revenue was due to the
fact that revenues increased at a greater rate than selling expenses.
General and administrative expense increased $434,004 (82%) to $960,368 for
1995 from $526,364 for 1994 and increased as a percentage of revenue to 5.3%
from 5.2%. The increases were primarily due to the establishment of a $150,000
allowance for doubtful accounts, increased expenses of new and existing
personnel and increased legal, accounting and other expenses attributable to the
Company being a public company starting in August 1995.
Other income in 1995 consisted of interest earned on the initial public
offering proceeds and other cash balances, reduced by other expenses, consisting
primarily of bank charges and other fees related to bank transfers. Other
expense in 1994 consisted primarily of bank charges and other fees related to
bank transfers.
19
<PAGE>
The provision for taxes for 1995 increased to $1.4 million from $27,000 for
1994. The increase was due to the relative increase in income before taxes. The
Company provided for income taxes at its effective tax rates of 40.6% for 1995
and 28.4% for 1994. The increase in the effective rate is attributable to the
diminished impact of graduated federal income tax rates on 1995 income relative
to 1994 income.
The Company had net income of $2.1 million for 1995 compared to net income
of $68,000 for 1994 ($1.2 million, without giving effect to the one-time
distribution agreement costs). The increase was due primarily to increased
revenues from sales of the Company's pDEXA system and interest earned on cash
balances.
THE COMPANY'S YEAR ENDED DECEMBER 31, 1994 AND OBV'S YEAR ENDED DECEMBER 31,
1993
The Company's revenue for the year ended 1994 was $10.0 million, an increase
of $4.5 million (83%) over OBV's revenue of $5.5 million for the comparable
period in 1993. The difference was due primarily to increases of $1.7 million of
sales in Pacific Rim countries of the pDEXA introduced in January 1994, $2.5
million of sales of other products, and $0.3 million of sales of parts and
services. In 1993 and 1994, OBV and the Company, respectively, were the
exclusive distributors for the Manufacturers in the Pacific Rim. System sales
accounted for 91% of the Company's revenue in 1994 and 91% of OBV's 1993
revenue.
The Company's cost of revenue as a percentage of revenue was 65% of revenue
in 1994 for a gross margin (before the one-time distribution agreement costs) of
35%, as compared to OBV's cost of revenue as a percentage of revenue of 74% of
revenue in 1993, for a gross margin of 26%. The Company's higher gross margin
(before the one-time distribution agreement costs) was primarily a result of a
relatively higher margin product mix in 1994, particularly sales of pDEXA and
pQCT systems. In addition, OBV's cost of revenue included a provision for bad
debts of $160,615 (3% of revenue), while the Company had no provisions for bad
debts in 1994. OBV's provision for bad debts reflected estimates based on OBV's
collection experience.
Sales and marketing expense for the Company was $973,208 in 1994, which was
$94,989 (9%) less than sales and marketing expense of $1.1 million for OBV in
1993 and was 10% of the Company's revenue as compared to OBV's expense which was
20% of its revenue. The difference is primarily attributable to the fact that
the Company had a smaller direct sales force in 1994 than did OBV in 1993.
General and administrative expense for the Company was $526,364 in 1994,
which was $126,915 (32%) more than general and administrative expense of
$399,449 for OBV and was 5% of the Company's revenue as compared to OBV's
expense which was 7% of revenue. The Company's higher expense was due primarily
to the Company's addition of administrative personnel to support higher sales
volume while the decrease as a percentage of revenue was due to the fact that
sales revenues increased at a greater rate than general and administrative
expenses.
The Company provided $27,000 for income taxes in 1994, while, as a result of
the 1993 loss from operations, OBV made no provision for such taxes in 1993.
The Company had net income of $68,044 for 1994 compared to a net loss of OBV
of $385,917 in 1993. The difference was primarily the result of the Company's
substantial growth in sales in 1994 and the final liquidation of OBV which
resulted in a net liquidation loss of $326,007. If the Company had not been
subject to its minimum payment requirement to Norland Corp., it would have had
income before taxes of $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in December 1993, the Company's operations have been
financed primarily by loans from stockholders, cash flow from operations and
proceeds of its initial public offering. The Company has no bank credit line
and, other than $800,000 in stockholder loans and advances to fund the Company's
first year of operations, has incurred no indebtedness. All stockholder loans
and advances have been paid in full by the Company.
On August 2, 1995, the Company issued 3,000,000 shares in an initial public
offering that raised net proceeds of $18.4 million. The Company used a portion
of such net proceeds for general corporate purposes and the acquisition of Dove.
20
<PAGE>
Under the Distribution Agreement, except as to systems the Company purchases
for use in its short-term rental and pay-per-scan programs, the Company is
required to pay the Manufacturers for products only after receiving payment from
its customers for those products. Accordingly, even during periods of rapid
growth in sales of products purchased from the Manufacturers, the Company should
not require substantial amounts of cash to finance its sales or accounts
receivable relating to the Manufacturers' products. Similarly, an increase in
the average duration of accounts receivable as to sales of Norland/Stratec
products would not increase the Company's use of cash.
The Company's accounts receivable increased 23.1% to $5.9 million at March
31, 1996 from $4.8 million at December 31, 1995. The Company's accounts
receivable increased to $4.8 million at December 31, 1995 from $2.2 million at
December 31, 1994. The increase in accounts receivable reflects higher sales
volume.
Cash decreased $1.6 million to $17.6 million in the three months ended March
31, 1996. The decrease in cash was primarily the result of the Company making
nearly $1.3 million in payments of its corporate tax liabilities related to 1995
and the first quarter of 1996.
Cash increased $18.7 million in 1995 to $19.2 million at December 31, 1995.
The increase was primarily the result of the net proceeds from the initial
public offering. Apart from such proceeds, the Company generated cash of
approximately $300,000. At December 31, 1995, the Company had inventories
amounting to $798,484 which consisted of product kits to be assembled and sold
or rented, demonstration systems to support its marketing efforts, and spare
parts and sub-assemblies used for providing services to its customers.
At December 31, 1995, the Company employed no fixed assets other than leased
computers and office furniture. Property and equipment as of March 31, 1996
consisted of computer equipment and a management information system that were
obtained during the first quarter of 1996. Additional capital expenditures in
1996 are expected to include improvements to leased facilities. The Company also
expects to purchase additional systems in 1996 for its short-term rental and
pay-per-scan programs and as demonstration systems. The Company also expects to
provide additional financing to the Manufacturers under the Product Development
Loan Agreement. While new product efforts have historically been funded by the
Manufacturers, the Company has recently established internal research and
development and expects to expend additional funds on such effort.
The Company believes that its current cash position, together with cash flow
from operations and the proceeds of this offering, will be adequate to fund the
Company's growth and operations for the foreseeable future. However, the nature
of the Company's business is such that it is subject to changes in technology,
government approval and regulation, and changes in third-party reimbursement in
numerous foreign markets in addition to the United States. Significant changes
in one or more of these factors in a major market for the Company's products
could significantly affect the Company's ability to meet its cash needs through
internal sources.
21
<PAGE>
BUSINESS
The Company markets, sells and distributes a broad range of bone
densitometry systems for use in diagnosing and monitoring bone disorders,
particularly osteoporosis, a disease that affects an estimated 25 million people
in the United States and 200 million worldwide. Driven by the availability of
new FDA-approved therapies for bone disorders, the Company is focusing on
bringing affordable, state-of-the-art diagnostic products directly into
physician offices. The Company offers two lines of proprietary, lower priced,
easy to operate and compact products designed to address the diagnostic needs of
gynecologists and family practice physicians. There are approximately 30,000
gynecologists and 450,000 family practice physicians in the United States alone.
The Company has exclusive worldwide distribution rights to all present and
future diagnostic products developed and manufactured by Norland Corp. and
Stratec, two leading manufacturers of bone densitometry products. These rights
extend through 2015 and may be renewed for additional five-year periods.
The Company offers four product lines utilizing three different types of
technology. The Company markets a line of bone densitometry products based on
DXA technology, which, since 1987, has been a standard for analyzing bone mass
reduction, the primary indicator of osteoporosis. The Company's DXA products are
highly effective and offer essential features at competitive prices. Because of
the cost, space requirements and training required, these systems are generally
found in hospitals, large clinics and research institutions, as opposed to
physician offices, where patients would benefit from timely and easy access to
osteoporosis testing.
Recognizing a significant market opportunity for more affordable bone
measurement technologies, Norland Corp. and Stratec developed the pDEXA system,
a lower priced, high performance desktop system incorporating DXA technology.
The pDEXA is targeted primarily at gynecologists and other specialty
practitioners. It is the only FDA-approved desktop DXA-based system available
today and was the largest contributor to the Company's revenues in 1995 and the
three months ended March 31, 1996.
In April 1996, the Company acquired Dove, a manufacturer of low-cost bone
densitometry systems. The acquisition of Dove added a new product line of bone
densitometers based on SXA technology to the Company's product portfolio. Dove's
main product, the OsteoAnalyzer SXA3000, utilizes SXA technology with single
push-button operation to provide the family physician with the most affordable
(under $20,000) densitometer currently on the market. This acquisition
solidified the Company's position as a leading provider of low-cost bone
densitometry products.
The Company also markets a line of products based on peripheral quantitative
computed tomography (pQCT) technology. Unlike the DXA-based densitometers, pQCT
systems permit separate, three-dimensional measurements of the cortical and
trabecular bone, allowing a more detailed assessment of the biomechanical
soundness of the bone. In addition, pQCT permits the detection of minute changes
within bone that occur over short periods of time. Research versions of this
product have been purchased by large pharmaceutical companies such as Eli Lilly
& Co., Sandoz Ltd. and Glaxo to monitor the effectiveness of potential new
therapies for the treatment of osteoporosis and related bone disorders.
The NOF estimates that osteoporosis affects 25 million people in the United
States, 80% of whom are women. In the United States alone, more than 1.3 million
fractures are attributed to the disease. As a result, the estimated costs of
osteoporosis and associated fractures in the United States during 1987 was more
than $10 billion.
Historically, treatment for osteoporosis has been inadequate. However, this
is changing with the onset of new therapies brought to the market by several
large pharmaceutical companies. In October 1995, Merck announced the launch of
Fosamax, a new therapy for the treatment of osteoporosis. Merck and other
pharmaceutical companies have launched extensive educational and marketing
campaigns targeting gynecologists and family practice physicians to promote
education and awareness that osteoporosis is now a treatable disease. These
efforts are increasing the demand for widespread diagnosis and treatment of
22
<PAGE>
osteoporosis. The Company believes that over 50 pharmaceutical and biotechnology
companies have programs to develop new therapies for the treatment of
osteoporosis, and that additional new approved therapies will increase demand
for low-cost densitometers.
BACKGROUND
OSTEOPOROSIS
Osteoporosis is a disease generally associated with aging and characterized
by excessive loss of bone mineral, resulting in decreased bone density over
time. Bone is a dynamic organ which can be separated into two basic structural
components, outer cortical bone and inner trabecular bone. This combination of a
solid outer bone surrounding the inner bone is constantly broken down and
regenerated through a process known as bone remodeling, which consists of bone
resorption (removal) followed by bone formation. When remodeling does not
function properly, the result is a net loss of bone mass, often causing the
amount of bone to become deficient in meeting the body's needs. Factors
contributing to this condition include low calcium intake, excessive alcohol
consumption and certain drug therapies.
Osteoporosis is a "silent disease" and typically has no overt symptoms in
its early stages. The first sign of osteoporosis is often bone fracture.
Osteoporosis leads to increased risk of fracture, chronic pain and immobility,
usually at the hip, forearm or spine. According to the NOF, 25 million Americans
and approximately 200 million people worldwide, the majority of whom are women,
suffer from osteoporosis. The
post-menopausal female population has the highest incidence of osteoporosis and
the highest rate of morbidity (loss of quality life) and mortality due to
osteoporosis. Hip fractures produce the most serious consequences. According to
the NOF, there are 200,000 hip fractures per year in the United States and up to
20% of hip fracture patients die from complications within a year after
fracture, 25% require long-term care and a higher percentage never return to an
active and independent lifestyle. The NOF estimates that in the United States
osteoporosis contributes to more than 1.3 million fractures annually, a majority
of which were of the spine and hip, and that related direct health care and
indirect productivity costs in 1987 were approximately $10 billion.
Until recently, osteoporosis was thought to be an inevitable and untreatable
consequence of aging. The Company believes that recent availability of more
effective drug therapies, the aging of the population and an increased focus on
women's health issues and preventive medical practices have created a growing
awareness among patients and physicians that osteoporosis is in many cases a
disease which can be treated.
THERAPIES
The Company believes that the historic limitations of treatment options in
the United States contributed to a low level of demand for the diagnosis of
osteoporosis and other bone disorders. Until 1995, available therapies for
osteoporosis were limited. Most were classified as anti-resorptives and were
designed to maintain bone mass by decreasing the effective rate of bone
resorption. There was no proof that they promoted bone formation. Such therapies
included calcitonin, hormone replacement therapy using estrogen and
first-generation bisphosphonates. In the United States, available therapies were
limited to calcitonin, estrogen and over-the-counter calcium and vitamin D
supplements; only two therapies, calcitonin and estrogen, were approved
specifically as therapies for bone disorders. However, women's concerns
regarding the possible complications relating to the prolonged use of hormone
replacement therapy using estrogen and the availability of calcitonin only in
injectable form contributed to low patient acceptance.
In September 1995, the FDA approved Merck's drug Fosamax for the treatment
of established osteoporosis in post-menopausal women. Fosamax is a second
generation bisphosphonate that acts by coating the bone surface and inhibiting
bone resorption. Fosamax was shown in clinical trials to increase bone density
without significant adverse side effects. Other therapies approved by the FDA in
1995 to treat osteoporosis include Miacalcin, an intra-nasal formulation of
calcitonin developed by Sandoz Ltd.; and Premarin MPA, a one-tablet hormone
replacement therapy combining estrogen and progestin developed by Wyeth-Ayerst
Laboratories. In addition, an FDA advisory panel has recommended approval of
slow-release fluoride (a combination of sodium fluoride and calcium citrate) for
the treatment of osteoporosis.
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<PAGE>
The Company believes that worldwide there are more than 50 pharmaceutical
and biotechnology companies with programs to develop new therapies for
osteoporosis, some of which are in late-stage clinical trials. Therapeutic
products under development include new anti-resorptive agents and bone-formation
stimulators. New generations of bisphosphonates are being developed by Procter &
Gamble (rasidronate), Sanofi (tiludronate) and Boehringer-Mannheim
(ibandronate), while anti-estrogens (estrogen analogs) are being developed by
Eli Lilly & Company (raloxifene) and Pfizer (draloxifene).
The Company believes that advances in treatment options for osteoporosis
will increase the demand for the diagnosis and monitoring of osteoporosis and
other bone disorders. As pharmaceutical companies actively market their
treatments for osteoporosis, patients and physicians will become increasingly
aware of the importance of early diagnosis and treatment of osteoporosis. The
Company believes that as this awareness increases, more people will be tested
for osteoporosis and that primary care providers such as gynecologists and
family practice physicians will play a key role in providing such tests.
DIAGNOSIS AND MONITORING OF OSTEOPOROSIS
Typically, there are no overt symptoms of early stage osteoporosis.
Diagnostic efforts have focused on an individual's propensity for fracture by
determining bone mass and comparing it to normal healthy and age-related
reference populations, as well as monitoring bone mass over time for changes.
Absorptiometry is the primary technique for measuring bone mass and is based on
the principle that bone absorbs radiation at a different rate than does soft
tissue. The inner trabecular region, which is a lattice-like structure crucial
to the
maintenance of bone strength, absorbs radiation at a rate different from the
cortical region, enabling systems capable of separately measuring cortical and
trabecular bone to more effectively assess biomechanical soundness.
The primary targets for measurement of bone mass have historically been the
hip, upper femur and spine. Systems to measure these testing sites are large,
expensive and typically only available in hospitals and large clinics. In recent
years, researchers have been investigating the predictive value of peripheral
measurements, typically of the forearm or calcaneus (heel), in measuring bone
density. A number of studies by independent researchers comparing peripheral
testing with testing at the hip, femur or spine have concluded that peripheral
site measurement has equivalent accuracy and precision in measuring bone density
and is equally predictive of fracture risk. These findings were reaffirmed at
the annual meeting of the NOF held in May 1996 in Amsterdam.
There are a number of different types of absorptiometry devices. Single
photon absorptiometry (SPA) uses a single energy radioactive source and has
limited ability to measure bone in complex body regions. Dual photon
absorptiometry (DPA) reduces measurement error through complex body regions by
using a dual-energy radioactive source. X-ray-based systems provide improved
precision, faster scan times and lower operating costs as compared to single and
dual photon absorptiometry and have largely replaced SPA and DPA technology. SXA
technology replaces the radioactive source with a single energy X-ray source.
DXA, which has become the standard for bone mass analysis, uses a dual-energy
X-ray source. Radiographic absorptiometry ("RA") measures bone density from two
X-ray images of the hand. Although it does not require a dedicated bone
densitometry system since it uses traditional X-ray equipment, RA does not
provide point of care measurement of bone density, as the radiographs have to be
sent out to a laboratory for interpretation. All of these technologies produce
only two-dimensional (planar) measurements. Quantitative computed tomography
(QCT) is capable of separate, three-dimensional measurement of cortical and
trabecular bone, providing volumetric density and allowing more precise
assessment of the biomechanical soundness of the bone.
A limited number of alternatives to absorptiometry are currently available,
including ultrasound and IN VITRO diagnostic testing (biochemical markers).
Traditional ultrasound has not yet been proven as a reliable technique for
assessing fracture risk. Its use for the detection of osteoporosis has not yet
been approved by the FDA. IN VITRO testing measures the level of certain
byproducts in body fluids to determine the rate of bone resorption and bone
formation. However, these tests do not provide information about bone mass or
bone structure and cannot be used independently to diagnose osteoporosis or
assess fracture risk. The Company believes that biochemical marker testing may
complement bone densitometry in monitoring the effectiveness of drug therapies.
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<PAGE>
DXA-based systems remain the standard for bone mass analysis. However, until
recently, due to the
high cost of purchasing traditional DXA-based systems, penetration beyond
hospitals, large clinics and research institutions has been limited.
THE BONE DENSITOMETRY MARKET
The Company believes that the market for low-cost osteoporosis diagnostic
and monitoring systems is expanding rapidly, primarily due to the recent
development and introduction of new drug therapies to treat osteopororis, and
the significant marketing efforts being undertaken by major pharmaceutical
companies to promote education and awareness that osteoporosis is now a
treatable disease. With three FDA-approved therapies currently on the market,
Merck, Wyeth Ayerst Laboratories, and Sandoz Ltd. have all launched extensive
educational and marketing campaigns targeting the point-of-care physicians, such
as gynecologists and family practice physicians. Merck reports that it has hired
150 professionals in the United States alone dedicated to this effort. There are
over 30,000 gynecologists and over 450,000 family practice physicians in the
United States.
It is estimated that there are appproximately 2,000 bone densitometers
installed in the United States, consisting primarily of large DXA machines
installed at hospitals, clinics and research facilities at prices ranging from
$50,000 to $165,000. The Company believes there is less than 1% penetration of
the potential gynecologist and family practice physician market. The Company's
experience to date selling pDXA machines indicates that penetrating this market
will require low-cost (under $30,000), simple to operate densitometers that are
compact in size for use in physician offices. The Company also believes that the
extensive educational and marketing campaigns being conducted by major
pharmaceutical companies will promote the use of low-cost bone densitometers in
physician offices.
Developments in third party reimbursement may affect the markets for bone
densitometers in the United States and other countries. In Japan and Europe,
third party reimbursement for certain procedures recently has been reduced. The
Company believes that, in keeping with the trend of containing healthcare costs,
a similar reduction may occur in the United States. The Company believes that
its emphasis on low-cost systems should allow it to compete effectively in the
event of a general reduction in third party reimbursement in the United States.
Merck's Fosamax is only approved for use by patients with established
osteoporosis. Merck and other companies are currently conducting clinical trials
to establish the efficacy of drug therapies to prevent the onset of osteoporosis
in high-risk patients. The Company believes that if such therapies are approved
and gain market acceptance, the need for testing and monitoring of
pre-menopausal women may increase. The Company believes that this could result
in additional demand for low-cost bone densitometers.
THE NORLAND SOLUTION
The Company is the leading provider of affordable bone densitometers
designed specifically to take advantage of the market trends toward broader
diagnosis and treatment of osteoporosis. The Company currently offers two lines
of proprietary, lower priced, easy to operate and compact products designed to
address the diagnostic needs of gynecologists and family practice physicians.
The Company markets the pDEXA which is the only FDA-approved desktop
DXA-based bone densitometry system. The pDEXA utilizes peripheral bone
measurement techniques and is less expensive, easier to use, and much more
compact in size than traditional DXA systems. The pDEXA is targeted for
gynecologists and specialty practitioners.
The Company also manufactures and markets the OsteoAnalyzer, a SXA-based
system priced at under $20,000, which is the least expensive bone densitometer
currently available on the market. The OsteoAnalyzer is operable with a single
push-button, and was designed to provide affordable, easy-to-use osteoporosis
testing to family physician offices and other point-of-care facilities.
The Company believes it offers the most complete line of low-cost bone
densitometry product offerings available.
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<PAGE>
THE COMPANY'S STRATEGY
The Company's goal is to be the leading provider of affordable bone
densitometry systems. Driven by the availability of new FDA-approved therapies
for bone disorders, the Company is focusing on bringing affordable,
state-of-the-art diagnostic products directly into physician offices. The key
elements of the Company's business strategy include:
- EXPAND THE BONE DENSITOMETRY MARKET WITH LOWER PRICED SYSTEMS. The
Company believes that its pDEXA system, which brings affordable
well-established DXA technology to the desktop, and the recently
introduced, easy-to-use OsteoAnalyzer, operable by pushing a single
button, will expand the market for bone densitometers beyond hospitals and
large clinics, which constitute the primary market for traditional
DXA-based systems. The pDEXA, priced at under $30,000, and the
OsteoAnalyzer, priced at under $20,000, open the bone densitometer market
to primary care providers such as gynecologists and family practice
physicians.
- ESTABLISH STRATEGIC RELATIONSHIPS WITH PHARMACEUTICAL COMPANIES. The
Company is working to establish strategic relationships with
pharmaceutical companies which have developed and are developing therapies
for the treatment of osteoporosis and other bone disorders. For example,
the Company has entered into an agreement with Merck which will assist the
Company in its efforts to increase the accessibility of bone densitometry
systems. The Company is also participating with pharmaceutical companies,
including Merck and Wyeth-Ayerst Laboratories, in their marketing and
educational campaigns and programs aimed at increasing patients' and
physicians' awareness of the fact that osteoporosis is a treatable disease
and of the importance of bone density testing.
- EXPAND SALES AND MARKETING CAPABILITIES. The Company has developed key
distribution and marketing alliances with leading distributors, such as
Nissho in Japan and Meditec in Korea. The Company is also developing
alliances to expand its sales and marketing capabilities in the United
States and Europe. The Company currently employs regional sales managers
and uses third party distributors for sales to end-users in the United
States and Canada. The Company intends to increase its network of
third-party distributors in the United States and internationally.
- OFFER THE BROADEST RANGE OF DIAGNOSTIC SYSTEMS. The product lines
marketed by the Company range from the low-cost OsteoAnalyzer and desktop
pDEXA systems which scan peripheral sites, to the traditional DXA systems,
which provide full body scans in a clinical setting and the sophisticated
pQCT technology for advanced diagnostic and research functions. The
Company intends to continue to offer a range of product prices and
capabilities to fulfill a wide range of customer needs.
- ESTABLISH PQCT AS THE LEADING TECHNOLOGY FOR ADVANCED SYSTEMS. The
Company believes its pQCT systems are the only QCT systems available today
dedicated to bone densitometry and capable of low-radiation peripheral
measurement. QCT technology can differentiate between cortical and
trabecular bone and permits measurement and quantitative analysis in three
dimensions, capabilities that are important for research and advanced
diagnostic and monitoring uses. The Company has sold systems to many
leading pharmaceutical and biotechnology companies researching new
therapies for osteoporosis and other bone disorders. The Company intends
to build upon the popularity of the pQCT systems in the research
environment to establish pQCT as the leading technology for advanced bone
diagnostic and monitoring uses.
There can be no assurance that the Company will be able to implement
successfully any of its strategies on a timely basis, if at all, or if
successfully implemented, that any of these strategies will enable the Company
to maintain or enhance its growth. See "Risk Factors."
PRODUCTS
The Company believes it markets the broadest line of bone densitometers
available today with a wide range of price points and capabilities to satisfy
diverse customer needs. The Company currently offers four bone densitometry
product lines and eleven models. All products marketed by the Company consist of
an X-ray source, multiple photon detectors, specialized hardware and
electronics, proprietary software and (for all products other than the
OsteoAnalyzer SXA3000) a personal computer/printer.
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<PAGE>
The following table describes the product lines currently marketed by the
Company:
<TABLE>
<CAPTION>
PRODUCT LINES LIST PRICE (1) PRODUCT CHARACTERISTICS PRODUCT LINE BENEFITS
<S> <C> <C> <C>
PDEXA $25,000 - $30,000 Scan forearm, measures DXA precision
BMD (bone mineral Affordable for physician
density) and BMC (bone offices
mineral content), and Compact and portable
makes comparisons to Easy to use
reference populations Low operating costs
and to patient's prior Low patient radiation
examinations. exposure
Fast scanning time of 2
to 5 minutes
Provides measurements at
a site that is mostly
cortical bone and
another that is mostly
trabecular.
OSTEOANALYZER
- SXA3000 $19,900 All models scan heel Affordable for physician
- SXA2000 $20,000 - $30,000 (calcaneus), measure BMD offices
- SXA3000C $20,000 - $30,000 and make comparisons to Compact and portable
reference populations. Single push-button
SXA2000 and SXA3000C operation
models also measure BMC, Low operating costs
make comparisons to Low patient radiation
patient's prior exposure
examinations, and can Fast scanning time of 2
assess RLFP (remaining to 3.5 minutes
lifetime fracture
probability).
TRADITIONAL DXA
- Eclipse $35,000 - $45,000 Both models scan hip, Lower priced compared to
spine (appendicular and the competition
lateral), forearm, Well established
measure BMD and BMC, and technology
make comparisons to Capable of axial,
reference populations peripheral and full body
and to patient's prior scans
examinations. Low patient radiation
exposure
Fast scanning time of 2
to 6 minutes using
QuikScan option
- XR36 $40,000 - $55,000 XR36 also scans whole
body, measures body
composition and scans
laboratory animals for
research.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
PRODUCT LINES LIST PRICE (1) PRODUCT CHARACTERISTICS PRODUCT LINE BENEFITS
<S> <C> <C> <C>
PQCT
DIAGNOSTIC
- XCT960 $60,000 - $75,000 Scans forearm. All Capable of separate
models measure true cortical and trabecular
volumetric density of bone measurements in a
trabecular, cortical and single site
total bone, geometric Three-dimensional
measurements (2), and measurements
make comparisons to Precise detection of
reference populations minute changes in bone
(2) and patient's prior over short periods of
examinations. time
Low patient radiation
exposure
- XCT3000 (2) $95,000 - $125,000 Scans tibia, femur and Three-dimensional bone
femoral neck. geometry analysis not
available with any other
technology
RESEARCH
- XCT960A $75,000 - $85,000 Developed for use in
laboratory animal models
with all analytical
features of XCT960, plus
automatic multi-slice
capability.
- XCT960M $80,000 - $95,000 Developed for use in
laboratory mouse model
with all analytical
features of XCT960A,
plus 50 micron
resolution.
- XCT Microscope $100,000 In vitro analysis with
analytical benefits of
XCT960M, plus 20 micron
resolution.
</TABLE>
<TABLE>
<S> <C>
(1) List prices are for basic models without options. Prices vary based on market
conditions, territory, model and whether direct or distributor sale.
(2) The pQCT XCT3000 is not yet approved for sale in the United States. It is expected that
Norland Corp. will apply for Section 510(k) marketing clearance from the FDA in 1996.
With respect to the XCT960, the specified use is not FDA-approved for the United States.
</TABLE>
PDEXA
The pDEXA brings DXA-based technology to the desktop in an affordable,
easy-to-use model that is designed for physician offices, small clinics and
other settings beyond large hospitals and clinics. The primary target market for
the pDEXA is gynecologists and other specialty practitioners. Like traditional
DXA systems, the pDEXA measures bone mass and compares it to a normal reference
population to determine propensity for bone fracture. However, the pDEXA
measures only the forearm, enabling it to be more compact, and therefore, more
affordable than traditional DXA systems. The pDEXA measures the forearm at a
site that is mostly cortical bone and at another site that is mostly trabecular
bone. The pDEXA utilizes a miniaturized X-ray source using a dental X-ray tube
which does not require a cooling system. The software used in the pDEXA systems
provides quantitative analysis of bone mass, including BMD and BMC, as well
28
<PAGE>
as comparisons to normal reference populations and to the patient's prior
examinations. It also provides skeletal images of the region of interest as well
as graphical presentation of the results. The pDEXA was the largest contributor
to the Company's revenues in 1995.
OSTEOANALYZER
The OsteoAnalyzer product line brings to the primary care physician office
SXA technology used by NASA to monitor loss of bone in space. The target market
for the OsteoAnalyzer product line is family practice physician offices. The
OsteoAnalyzer SXA3000, which sells for under $20,000, is fast and the easiest,
least expensive bone densitometer available on the market today. This new device
is a portable system which measures bone mineral density at the calcaneus (heel)
with the push of a single button, eliminating the need for a separate computer
system. The OsteoAnalyzer products utilize a miniature X-ray tube that does not
require a cooling system.
TRADITIONAL DXA
The traditional DXA-based bone densitometers marketed by the Company are the
compact Eclipse and the full size XR36. The target market for traditional DXA
systems is hospitals and large clinics. DXA technology is well-established. The
Company's DXA systems are capable of performing axial, peripheral and whole-body
scans. Price and service are the primary competitive factors among DXA products
offering similar basic capabilities. These systems have been sold in over forty
countries.
PQCT
The XCT line of systems brings a new type of bone densitometer based on pQCT
technology to the market for bone densitometers. Unlike DXA-based densitometers,
pQCT systems permit separate, three-dimensional measurement of cortical and
trabecular bone by taking multiple images in a 360-degree rotation around the
scanned limb, providing true volumetric density and allowing more precise
assessment of biomechanical soundness of the bone. The ability to measure
trabecular bone precisely also permits detection over short periods of time of
minute changes in bone, indicating changes in metabolic status. The pQCT systems
use the same miniaturized low-radiation X-ray source as the pDEXA. The XCT960
scans the forearm and is marketed to hospitals, clinics and private practices.
The XCT3000 can also scan the tibia, the femur and is capable of
three-dimensional measurement of the entire femoral neck, providing more precise
assessment of hip fractures and monitoring of implants following hip
replacements. The Company expects to submit the XCT3000 for 510(k) marketing
clearance from the FDA in 1996. The Company also markets a series of pQCT-based
research scanners: the XCT960A and XCT960M, for research involving laboratory
animals, and the XCT Microscope, for research IN VITRO at a maximum resolution
of 20 microns.
PRODUCT DEVELOPMENT
Historically, the Company has been dependent on Norland Corp. and Stratec
for refinements of existing products and creation of new bone densitometry
applications. Recently the Company has begun to develop an internal research and
development effort. The Company has hired a Vice President, Product Development,
who is responsible for coordinating the product development programs at the
Company and the Manufacturers. The Company further strengthened its research and
development effort with the acquisition of Dove which had three employees
engaged in research and development. The Company's employees are pursuing
technological advances and additions to the OsteoAnalyzer product line, as well
as other approaches to the bone assessment market. At May 1, 1996, the Company
had five, and the Manufacturers had an aggregate of 16, persons engaged in
research and development, respectively. Of the Manufacturers' personnel, an
aggregate of nine persons were devoted to software development.
Norland Corp. has historically focused its product development on DXA-based
bone densitometry systems. In 1995, Norland Corp. introduced QuikScan, an
upgrade to the existing Eclipse and XR36 systems that decreased scanning times
from 5 to 8 minutes to 2 to 6 minutes.
In early 1993, the Manufacturers began joint development of the pDEXA. The
development effort was based on the software and hardware expertise of Norland
Corp. and Stratec, respectively. The pDEXA was introduced in January 1994 and
now accounts for the largest portion of the Company's revenues. A Japanese
language version of the pDEXA software has been released in Japan.
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<PAGE>
Stratec focuses its product development efforts on pQCT-based systems.
Stratec is developing enhancements of its pQCT products, including the XCT960,
which performs a forearm scan, and the XCT3000, which scans weight-bearing bones
such as the tibia and the femur and measures the bone directly at the femoral
neck, enabling a more direct assessment of hip fracture risk and monitoring hip
implants. It is expected that Norland Corp. will apply for 510(k) clearance for
the pQCT XCT3000 in 1996. Stratec is also developing enhancements of its very
high resolution pQCT scanner (XCT-Microscope), which is sold to research
laboratories.
In 1995, the Company entered into a Product Development Loan Agreement with
the Manufacturers under which the Company may make loans to the Manufacturers in
installments up to an aggregate amount of $3.5 million during the period ending
July 31, 1997. At May 1, 1996, there were outstanding loans of $75,906 from the
Company to Norland Corp. The proceeds of such loans are to be used by the
Manufacturers for specific new product development involving enhancements of
existing products and the application of pQCT technology to new products.
Interest is payable at the rate of 10% per annum, and the principal is to be
repaid over five years commencing September 30, 1997. If a new product covered
by the Product Development Loan Agreement is introduced into the marketplace,
the Company will be entitled to receive a royalty equal to 5% of the sales
proceeds received by the Manufacturers with respect to such product. The
Manufacturers have granted the Company rights of first refusal with respect to
any additional financing for research and development work by the Manufacturers.
On May 31, 1996, the Company entered into a Distribution Agreement with
Vitel, Inc. of Dallas, Texas ("Vitel"), pursuant to which the Company has the
worldwide rights to all products that may be developed by Vitel. The Company
also made a $250,000 investment in Vitel. Vitel has not yet developed any
products which are marketed. Vitel is currently developing bone diagnostic
devices that use technology called Ultrasound Critical Angle Reflection (the
"UCR Technology") under an exclusive license from the University of Texas
Southwestern Medical Center at Dallas (the "University"). Traditional
transmission and reflection ultrasound technologies have failed to provide a
true quantitative assessment of bone quality. The Company believe the UCR
Technology represents the first ultrasound technology able to provide true
quantitative assessment of bone quality, permitting the independent assessment
of both cortical and trabecular bone. With several large prototypes in use at
the University, the UCR Technology has already been used in studies involving
more than 500 patients, including normal subjects as well as treated and
untreated patients diagnosed with osteoporosis. Vitel and the Company are
currently working to refine prototype systems into a low-cost commercial unit.
The Company anticipates that initial product marketing will take place outside
the United States. Prior to sales in the United States, the Company and Vitel
may need to conduct clinical trials and must receive FDA approval or clearance.
There can be no assurance that Vitel and the Company will succeed in producing a
low-cost commercial unit.
SALES AND MARKETING
UNITED STATES
The Company currently employs nine regional managers and uses third party
distributors for sales to end-users in the United States and Canada. The Company
typically uses an exclusive distributor to cover one or more states, and each
Company regional sales manager is responsible for the support and supervision of
several distributors. Support includes participation in trade shows, symposiums,
customer visits, product demonstrations, ongoing literature and publications,
sales training and regular user group meetings. The Company sells directly to
end-users in those regions where the Company does not currently have third party
distributiors. The Company intends to increase its network of third-party
distributors in the United States to exploit the expanded market of
gynecologists and primary care physicians and to increase the number of regional
sales managers to supervise and support these distributors.
INTERNATIONAL
The Company's customers outside the United States are primarily third party
distributors. The Company typically uses an exclusive distributor in each
country in which it markets products, supported by United States-based sales
managers. Similar to the United States, support includes participation in trade
shows, symposiums, customer visits, product demonstrations, ongoing literature
and publications, sales training and
30
<PAGE>
regular user group meetings. Except with respect to the Company's relationship
with Nissho, which is described below, the Company's distribution arrangements
with its foreign distributors may typically be terminated by either the Company
or the exclusive distributor upon sixty days' notice. On June 1, 1996, the
Company exercised its right to assume the distribution in Europe of the DXA line
of products, including the pDEXA. Prior to this, European distribution of those
products was controlled by Stratec. The Company intends to increase its network
of third party distributors worldwide.
In 1995, the Company sold products in over 20 countries. In 1995, 68% of the
Company's revenue was derived from sales to Nissho, its Japanese subdistributor.
The Company and Nissho are negotiating a new five-year distribution agreement.
The loss of Nissho as a customer, a reduction in Nissho's sales efforts or any
other adverse change in the Company's relationship with Nissho could have a
material adverse effect on the Company. For a more detailed breakdown of the
Company's 1995 sales by geographic territory, see Note 12 to the Company's
Financial Statements contained elsewhere herein.
MANUFACTURING
Except for the OsteoAnalyzer, the Company does not manufacture its products.
Manufacturing consists primarily of testing of components, final assembly and
systems testing. The Company's manufacturing facilities for the OsteoAnalyzer
product line are located in Newbury Park, California. Norland Corp. manufactures
traditional DXA-based systems for sale worldwide and pDEXA and certain pQCT
systems for sale in the United States and Canada. All establishments, whether
foreign or domestic, manufacturing medical devices for sale in the United States
are subject to periodic inspections by or under the authority of the FDA to
determine whether the manufacturing establishment is operating in compliance
with GMPs (good manufacturing practices). Norland Corp.'s manufacturing
facilities are located in Fort Atkinson, Wisconsin. Stratec manufactures pDEXA
and pQCT systems for sale outside the United States and Canada. Stratec's
manufacturing facilities, which are ISO-9001 certified, are located in
Pforzheim, Germany. The Company is dependent on Norland Corp. and Stratec to
manufacture the DXA-based and pQCT-based products that the Company markets in
amounts and at standards of quality necessary to meet demand and be competitive.
Both Manufacturers are subsidiaries of NMS BV. See "Certain Transactions."
Some components are manufactured in accordance with custom specifications
and require substantial lead times. While efforts are made to purchase
components from more than one source and to use generally available parts,
certain components, including X-ray tubes and detectors, are available from only
one or a limited number of sources. In the past there have been delays in the
receipt of certain components, although to date no such delays have had a
material adverse effect on the Company. The Company believes that the
Manufacturers and the Company have sufficient capacity to supply the Company's
product needs for at least the next twelve months.
Manufacturing processes for the products marketed by the Company are subject
to stringent federal, state and local laws and regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. In the United States, such laws and regulations include the occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, and the Resource Conservation and Recovery Act. The Company
believes that it and Norland Corp. have complied in all material respects with
such laws and regulations. There can be no assurance that the Company and the
Manufacturers will not be required to incur significant costs in the future with
respect to compliance with such laws and regulations.
DISTRIBUTION AGREEMENT
The Company's Distribution Agreement with the Manufacturers grants the
Company exclusive distribution rights for all medical diagnostic devices which
have been, or may during the term of the Distribution Agreement be, developed by
Norland Corp. and Stratec. The distribution rights are worldwide, except that in
the case of Stratec's pQCT products, certain countries in Europe are currently
excluded. The Company has the option to become the exclusive distributor for
Stratec in these countries at any time during the term of the Distribution
Agreement on 90 days notice to Stratec.
31
<PAGE>
The Company must use its best efforts to promote the sale of the
Manufacturers' systems and may not distribute any products manufactured by any
non-affiliate of the Company which compete with the Manufacturers' products,
except for products which may be marketed by the Company pursuant to its
distribution agreement with Vitel. See "-- Product Development." The
Manufacturers are obligated to supply the Company with sufficient quantities of
their systems on a timely basis to fill customer orders. Each system must meet
all performance and other standards established by the Manufacturer for the
system.
The term of the Distribution Agreement extends until December 31, 2015. At
the end of such term or any renewal term, the Manufacturers or the Company may
renew the Distribution Agreement for an additional term of five years, provided
that if the party electing to renew is in material breach of the Distribution
Agreement at the time of renewal, the other party may reject such election to
renew. The Distribution Agreement is also subject to termination in the event of
the bankruptcy of a party or a continuing general failure by a party to fulfill
its obligations.
Under the Distribution Agreement, the price at which the Company purchases a
system for immediate resale is the Manufacturer's Device Cost as defined in the
Distribution Agreement plus 50% of the difference between the amount for which
the Company sells such system and such Manufacturer's Device Cost. Thus, the
gross margin between the Company's selling price and the Manufacturer's Device
Cost is allocated 50% to the Company and 50% to Norland Corp. or Stratec. In the
case of Norland Corp. products sold by Stratec in Europe as distributor for the
Company, the gross margin between Stratec's selling price and the Manufacturer's
Device Cost is allocated 50% to Stratec, 25% to Norland Corp. and 25% to the
Company. The Company has recently introduced programs in which certain customers
are offered short-term rentals of systems or the ability to use systems on a
pay-per-scan basis, in each case with an option to purchase the system. Systems
subject to these programs, as well as demonstration systems, are purchased by
the Company from the Manufacturers for 150% of Manufacturer's Device Cost.
The Manufacturer's Device Cost of a system is the aggregate of the standard
costs of the components and parts used in such system plus an allowance for
other direct manufacturing costs. Each Manufacturer maintains a list of standard
costs which is revised at least twice annually. The standard cost of a component
or part is the average cost to the Manufacturer of all units of such component
or part purchased by the Manufacturer during the six months preceding the
revision of such list. If at the time the list is to be revised, the aggregate
standard costs of all components and parts used in a system would not increase
or decrease by more than 5% from the aggregate standard costs of such components
and parts then in effect, the standard costs of such components and parts (and,
therefore, the Manufacturer's Device Cost) are not changed. The Distribution
Agreement grants the Company licenses to manufacture and sell the Manufacturers'
systems and to use all related technology, subject to a blanket lien on Norland
Corp.'s assets securing loans from a bank (current balance as of May 1, 1996 of
approximately $540,000) which are due to be paid in full by December 31, 1996.
The Company may only exercise its rights under its license from a Manufacturer
when such Manufacturer is not in compliance with its obligations under the
Distribution Agreement. The only amount which a Manufacturer is entitled to
receive with respect to systems manufactured pursuant to such licenses is a
royalty of 5% of any sales proceeds received by the Company.
COMPETITION
The bone densitometry systems market is highly competitive. Several
companies have developed or are developing bone densitometers or other
technologies that compete or will compete with products marketed by the Company.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing and technological resources, as well as established
reputations for success in developing, selling and servicing products. The
Company expects existing and new competitors will continue to introduce products
that are directly or indirectly competitive with those marketed by the Company,
including alternatives to absorptiometry such as ultrasound and IN VITRO
diagnostics. Such competitors may succeed in developing products that are more
functional or less costly than those sold by the Company and may be more
successful in marketing such products. There can be no assurance that the
Company will be able to continue to compete successfully in this market. In
addition, competitors that do not rely on third party manufacturers may have
more flexibility to compete effectively on price.
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<PAGE>
The Company's primary competitors for the sale of bone densitometry systems
are Hologic, Inc., Lunar Corporation, Aloka, Hitachi, Panasonic and OsteoMeter
A/S. These companies have products that compete directly with the products
marketed by the Company and have their own manufacturing and research
capabilities. There can be no assurance that the Company's competitors will not
succeed in continuing to develop and market lower priced devices comparable to
the Company's pDEXA and OsteoAnalyzer product lines.
The Company believes the products it markets compete primarily on the basis
of price/performance characteristics, accuracy and precision of results, ease
and convenience of use, features and functions, quality of service and price. In
the small clinic and physician's office market, price, ease of use and
convenience are of particular importance. In the hospital and large clinic
market, DXA machines are predominant and price is the primary competitive factor
among products that provide similar basic capabilities. The Company believes
that the DXA-based systems it markets are competitive. In the research market,
the range, accuracy and precision of measurements are the principal competitive
factors. The Company believes the pQCT-based products it markets provide
measurement capabilities, such as three-dimensional measurements and separate
measurement of cortical and trabecular bone, not available with traditional
DXA-based technology, at prices competitive with systems using that technology.
See "-- Products."
THIRD PARTY REIMBURSEMENT
Health care reform in the United States has been an area of national
attention and a priority of many governmental officials. Certain reforms may
influence customer purchases and, if adopted, could impose limitations on the
prices the Company will be able to charge in the United States for the products
that it markets or on the amount of reimbursement available from governmental
agencies and private third party payors for bone densitometry scans conducted
with these products.
In the United States, the Health Care Financing Administration ("HCFA")
establishes guidelines for the coverage and reimbursement of health care
providers treating Medicare and Medicaid patients. Although there currently
exist physician service reimbursement codes for DXA (including pDEXA) and pQCT
bone densitometry scans, HCFA has not issued a national coverage policy with
respect to these tests. As a result, it is currently within the discretion of
the thirty-eight local Medicare carriers as to whether DXA (including pDEXA) and
pQCT bone densitometry scans will be covered by Medicare and, if covered, the
rate of reimbursement. Coverage and reimbursement decisions for SXA scans are
also within the discretion of the local Medicare carriers, who generally approve
reimbursements under the HCFA codes. As of December 1995, several local carriers
provided no reimbursement or only partial reimbursement for bone densitometry
scans. There can be no guarantee that scans using any of the products the
Company markets will be covered by Medicare or other third party payors, and, if
covered, there can be no guarantee as to the level of reimbursement that will be
provided.
In a number of European countries, Japan and several other countries, third
party payors provide reimbursement for bone densitometry scans. In Japan and
Europe, third party reimbursement for certain procedures recently has been
reduced. The Company believes that, in keeping with the trend of containing the
costs of healthcare, a similar reduction may occur in the United States.
Currently scans generated by the Company's pDEXA, traditional DXA-based and pQCT
systems are reimbursable. Scans generated by the OsteoAnalyzer are not
reimbursable. The Company believes that its emphasis on low-cost systems should
allow it to compete effectively in the event of a general reduction in third
party reimbursement in the United States.
GOVERNMENT REGULATION
The development, testing, manufacturing and marketing of the products
marketed by the Company are regulated by the FDA in the United States and by
various foreign regulatory agencies. The testing for, preparation of, and
subsequent FDA review of required applications is expensive, lengthy and
uncertain. Moreover, regulatory approval, if granted, can include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulations can result in civil penalties,
33
<PAGE>
suspensions of approvals, product seizures, injunctions, recalls, operating
restrictions and criminal prosecutions. Delays in receipt of or failure to
receive clearances or approvals for new products would adversely affect the
marketing of such products and the results of future operations.
All products currently marketed commercially by the Company in the United
States are considered Class II medical devices subject to FDA clearance pursuant
to the Section 510(k) premarket notification process. Section 510(k) submissions
may be filed only for those devices that are "substantially equivalent" to a
device that was legally marketed in the United States prior to 1978. FDA review
times may vary depending upon FDA resources and workload demands and the
complexity of product submissions. It is expected that Norland Corp. will apply
for 510(k) clearance for the pQCT XCT3000 in 1996.
All establishments, whether foreign or domestic, manufacturing medical
devices for sale in the United States are subject to periodic inspections by or
under authority of the FDA to determine whether the manufacturing establishment
is operating in compliance with GMPs (good manufacturing practices). The FDA
also requires that medical device manufacturers and distributors undertake
postmarket reporting for serious injuries, deaths, or malfunctions associated
with their products. Norland Corp. has had only one such reportable incident
related to its bone densitometer products. Although not currently required for
medical devices, the payment of user fees to the FDA for medical device product
application review is currently being considered by the United States Congress.
If medical device user fee legislation is enacted, this could significantly
increase the costs associated with product development and marketing.
Although legislation has been recently passed which permits the exportation
of unapproved devices to Europe, Japan and certain other principal international
markets, prior FDA export authorization continues to be required for devices
intended for export to certain other non-industrialized countries. The Company
currently exports unapproved devices only to those countries for which export is
permitted by law, or for which Norland Corp. has obtained the necessary export
authorization.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in most foreign countries must be obtained prior to the
commencement of marketing of the product in each such country. Requirements
governing the conduct of clinical trials and product approvals vary
significantly from country to country. The time required for approval may be
longer or shorter than that required for FDA approval. The Company generally
relies on its local distributors to obtain any required clearances in the
countries in which they sell products marketed by the Company. There can be no
assurance that the Manufacturers and the Company will not be required to incur
significant costs in the future with respect to compliance with laws and
regulations of such countries.
In addition to the regulatory framework for product approvals, the
Manufacturers and the Company are, and may be subject to, regulation under
local, state, federal and foreign law, including requirements regarding
occupational safety, laboratory practices, the use, handling and disposition of
radiological materials, environmental protection and hazardous substance
control, and may be subject to other present and possible future local, state,
federal and foreign regulation. There can be no assurance that the Manufacturers
and the Company will not be required to incur significant costs in the future
with respect to compliance with such laws and regulations.
PROPRIETARY RIGHTS
The Company believes that its sales are dependent in part on certain
proprietary features of the products it markets. The Company relies upon the
Manufacturers for the protection of intellectual property pertaining to
proprietary features of their DXA-based and pQCT-based products. The
Manufacturers rely primarily on know-how, trade secrets and trademarks to
protect those intellectual property rights and have not sought patent protection
for the products marketed by the Company. The Company relies primarily upon
know-how, trade secrets, trademarks and a patent to protect the SXA-based
technology used in the OsteoAnalyzer product line. The Company owns one patent
relating to its SXA-based technology. There can be no assurance that these
measures will be adequate to protect the rights of Norland Corp., Stratec and
the Company. To the extent that intellectual property rights are not adequately
protected, the Company may be vulnerable to competitors who attempt to copy the
products the Company markets or gain access to the
34
<PAGE>
trade secrets and know-how of the Manufacturers and the Company. Further, there
can be no assurance that the Company's competitors will not independently
develop substantially equivalent or superior technology. The Manufacturers and
the Company are currently not the subject of any litigation regarding
proprietary rights, and the Company believes that the technologies used by the
Manufacturers and the Company were developed independently. In addition, the
Company's business depends on proprietary information regarding customers and
marketing, and there can be no assurance that the Company will be able to
protect such information.
BACKLOG
Backlog consists of signed purchase orders received by the Company from its
customers. Backlog as of May 1, 1996 and May 1, 1995 totaled approximately
$4,277,413 and $3,916,500, respectively. The Company's ability to ship products
depends on its production capacity and that of the Manufacturers. Purchase
orders are generally cancelable. The Company expects to be able to ship products
representing all of its backlog before the end of the current fiscal year. The
Company believes that its backlog as of any date is not a meaningful indicator
of future operations or net revenues for any future period.
PRODUCT LIABILITY INSURANCE
The Company's business involves the inherent risk of product liability
claims. If such claims arise in the future they could have a material adverse
impact on the Company. The Company relies upon insurance maintained by the
Manufacturers covering the products they produce and maintains product liability
insurance with respect to the OsteoAnalyzer product line. Norland Corp.
maintains product liability insurance on a "claims made" basis in the aggregate
amount of $4 million, subject to certain deductibles and exclusions. Stratec
maintains product liability insurance in the aggregate amount of DM6 million
(approximately $3.9 million based on current exchange rates as of May 1, 1996),
subject to certain deductibles and exclusions. The Company is an additional
named insured on the Norland Corp. and Stratec policies. The Company maintains
product liability insurance on a "claims made" basis in the aggregate amount of
$1.0 million, subject to certain deductibles and exclusions. There is no
assurance that such coverage will be sufficient to protect Norland Corp.,
Stratec and the Company from risks to which they may be subject, including
product liability claims, or that product liability insurance will be available
to Norland Corp., Stratec or the Company at a reasonable cost, if at all, in the
future or that insurance maintained by Norland Corp. or Stratec will cover the
Company.
CUSTOMER SUPPORT SERVICES
The Manufacturers offer one-year warranties on both the hardware and
software included in their systems. The Company provides warranty services to
its customers on behalf of the Manufacturers. Any costs incurred by the Company
in connection with a Manufacturer's warranty are borne by that Manufacturer. The
Company offers one-year warranties on the OsteoAnalyzer product line.
The Company has no obligation to provide any other services to its
third-party distributors or its customers. However, the Company does offer
non-warranty services and a range of other product support services in
cooperation with its third-party distributors, including a telephone hotline for
customer inquiries, product installation, product enhancements and maintenance
releases. The Company also offers training at customer locations, the Company's
facilities and the Manufacturers' facilities to both end-user customers and
third-party distributors.
EMPLOYEES
At May 1, 1996, the Company had 40 employees, 18 of whom were engaged in
direct sales and marketing activities. The remaining employees are in finance,
administration, product development and customer service. No employees of the
Company are covered by any collective bargaining agreements, and management
considers its employee relations to be excellent.
PROPERTIES
The Company leases its principal executive offices, which are located at 106
Corporate Park Drive, Suite 106, White Plains, New York 10604. The Company
sublets a portion of this office space to an affiliate of The EICON Group, Inc.
("EICON"). Both the lease and sublease expire on August 31, 2000. The Company
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<PAGE>
also subleases office space in New Haven, Connecticut, from other affiliates of
EICON. The New Haven lease and sublease expire on August 31, 1996. The Company
believes it would be able to find suitable replacements for these facilities, if
necessary, on reasonable terms. See "Certain Transactions."
The Company subleases office space from Norland Corp. in Fort Atkinson,
Wisconsin. The lease and sublease expire on June 30, 1996. Effective July 1,
1996, the Company will lease approximately 18,000 square feet of space in the
building where Norland Corp. presently leases space. The lease will have a term
of ten years. The Company will sublet approximately 14,000 square feet of this
space to Norland Corp. for the full term of the lease. The Company will use its
portion of the space for sales and marketing, customer services, administration
and warehousing. See "Certain Transactions."
The Company leases approximately 3,500 square feet of office and
manufacturing space in Newbury Park, California, under a lease which expires on
February 1, 1998.
Although the Company believes its existing facilities are adequate for the
short-term, the Company anticipates opening additional sales offices to
accommodate needs for increased sales personnel.
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<PAGE>
MANAGEMENT
The Company's current directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -----------------------------------------------------------------
<S> <C> <C>
Reynald G. Bonmati 48 Chairman of the Board; President; Treasurer; and Director
Kurt W. Streams 34 Vice President, Finance; and Secretary
Ralph G. Theodore 69 Vice President, Operations; and Assistant Secretary
Thomas P. Regan 49 Vice President, U.S. Sales
James A. Sperlazza 47 Vice President, Latin America and Pacific Rim Sales
Lewis N. Harrold 48 Vice President, Product Development
James J. Baker 63 Director
Michael W. Huber 68 Director
Robert L. Piccioni, Ph.D. 50 Director
Albert S. Waxman, Ph.D. 54 Director
</TABLE>
MR. BONMATI has served as a Director of the Company since its formation in
December 1993 and has served as Chairman of the Board, President and Treasurer
of the Company since January 1994. Mr. Bonmati has served since January 1992 as
a Managing Director of NMS BV, a holding company that owns Norland Corp. and
Stratec, manufacturers of bone densitometers marketed by the Company. He has
served as a Director and President of Norland Corp. since June 1990 and July
1993, respectively. He has also served as President and Chairman of the Board of
Directors of EICON, an environmental and infrastructure service company, since
March 1991, as President of Novatech Resource Corporation, a private investment
firm, since 1981 and as President of Novatech Management Corporation, a private
investment firm, since 1990. Mr. Bonmati received BS and MS degrees from the
Institute National Superieur de Chimie Industrielle, an MS degree from the Ecole
Nationale Superieure du Petrole et des Moteurs and an MBA from the University of
Paris.
MR. STREAMS joined the Company in September 1995 and has served as Vice
President, Finance and Secretary of the Company since February 1996. From 1988
to 1995, Mr. Streams was an Audit Manager and a Senior Audit Manager with
Deloitte & Touche LLP in the United States and Deloitte & Touche
Registeraccountants in the Netherlands. Mr. Streams holds a BA degree in
economics from the University of Massachusetts.
MR. THEODORE has served as Vice President, Operations of the Company since
January 1994 and Assistant Secretary since May 1995. From 1980 to 1994, Mr.
Theodore was a business consultant in Connecticut. He was Vice President of
Kensington Management Consultants from 1981 to 1984. He then undertook a
two-year assignment as Chairman of the Board of AID3 Group, a start-up,
multinational computer development company. Between 1972 and 1980, he held a
succession of senior management positions with ITT Corporation in Europe and the
United States, including the position of Worldwide Product Line Manager for
industrial products. Mr. Theodore holds BE and ME degrees in electrical
engineering from Yale University.
MR. REGAN has served as Vice President, U.S. Sales since January 1994. Mr.
Regan has served as Vice President, U.S. Sales of Norland Corp. since January
1991. From December 1988 to January 1991, he was a Director of U.S. Sales and
Service for Interspec, Inc., now Advanced Technology Laboratories. From August
1986 to November 1988, he was Vice President, Marketing and Sales of Ultrasonix
Company. From February 1981 to December 1986, Mr. Regan was Vice President,
Sales of Diasonics, Inc., a medical imaging company providing ultrasound and
magnetic resonance imaging products.
MR. SPERLAZZA has served as Vice President, Latin America and Pacific Rim
Sales of the Company since January 1994. From December 1991 to the present, Mr.
Sperlazza has been a partner of Sansper Trading Company, which sells medical
devices. From April 1992 to December 1993, Mr. Sperlazza was Vice
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<PAGE>
President, Latin American and Pacific Rim Sales of OBV, and from February 1992
to March 1992, he was a Vice President of Norland Corp. From January 1986 to
February 1992, Mr. Sperlazza was Vice President, Marketing and Vice President,
International of Diasonics, Inc.
MR. HARROLD joined the Company in November 1995 and serves as Vice
President, Product Development. From 1976 to 1995, Mr. Harrold held various
positions with Waters Medical Systems, serving most recently as Vice President
of Engineering and General Manager from 1992 through 1995. He holds a BSEE from
Carnegie Mellon University.
MR. BAKER has served as a Director of the Company since May 1995. He has
been a private investor for over twelve years, specializing in start-up venture
capital. He is Vice President of Flight Landata, Inc., a company involved in
multi-spectral remote sensing. Previously, Mr. Baker spent twelve years at
Cullinet Software Corporation serving initially as Vice President in charge of
technical development and later as Senior Vice President in charge of Customer
Support. He holds a BS in Mathematics from the Massachusetts Institute of
Technology.
MR. HUBER has served as a Director of the Company since May 1995. He is
retired Chairman and Chief Executive Officer and is currently a Director of J.M.
Huber Corporation, a diversified family-owned company engaged in natural
resource development, and specialty chemical and specialty equipment and wood
product manufacturing. He is also a Director of Crompton and Knowles
Corporation, a specialty chemical and equipment manufacturing company.
DR. PICCIONI has served as a consultant to the Company since April 2, 1996.
He was elected a director of the Company on May 30, 1996. He has been a
consultant to OnTrak Systems, Inc. since March 1996. From June 1995 to March
1996, he was Chief Operating Officer of OnTrak Systems, Inc. From October 1993
to January 1995, Dr. Piccioni was President of the Thermco Systems Division of
Silicon Valley Group. From December 1992 to October 1993 he was President of
Dove, the company which was acquired by the Company in April 1996. Prior to
founding Dove, Dr. Piccioni served as Chief Operating Officer and then as
President and CEO of Osteon, Inc. Osteon, Inc. filed a petition in bankruptcy in
November 1992. Mr. Piccioni and others purchased certain assets of Osteon, Inc.
in such bankruptcy proceeding and licensed them to Dove until such assets were
purchased by the Company in April 1996. Dr. Piccioni received a BS degree in
Physics from California Institute of Technology and a Ph.D. degree in Physics
from Stanford University.
DR. WAXMAN has served as a Director of the Company since January 1994. Dr.
Waxman has served as a Director of Norland Corp. since June 1990 and as a
Managing Director of NMS BV since January 1992. He has also served as a Director
of EICON since December 1994. Since 1993, Dr. Waxman has been Chairman and Chief
Executive Officer of Merit Behavioral Care Corporation, the parent company of
American Biodyne, Inc., which he co-founded in 1985 and for which he served as
Chairman and Chief Executive Officer from 1988 to 1993. From 1983 to 1988, Dr.
Waxman served as Chairman and Chief Executive Officer of Diasonics, Inc., which
he founded. Dr. Waxman received a BSEE degree from City College of New York and
MA and Ph.D. degrees from Princeton University. He serves on the Advisor Council
of Princeton University's School of Engineering and Applied Sciences.
BOARD COMMITTEES
There are two standing committees of the Board of Directors:
AUDIT COMMITTEE. The Audit Committee was established in June, 1995. The
Audit Committee consists of James J. Baker, Michael W. Huber and Reynald G.
Bonmati. The Audit Committee: (i) makes recommendations to the Board of
Directors with respect to the independent auditors who conduct the annual
examination of the Company's accounts; (ii) reviews the scope of the annual
audit and meets periodically with the Company's independent auditors to review
their findings and recommendations; (iii) approves major accounting policies or
changes thereto; and (v) periodically reviews principal internal controls to
assure that the Company is maintaining a sound and modern system of financial
controls.
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<PAGE>
COMPENSATION COMMITTEE. The Compensation Committee was established in June,
1995. The Compensation Committee consists of Albert S. Waxman, James J. Baker
and Michael W. Huber. The Compensation Committee periodically determines the
amount and form of compensation and benefits payable to all principal officers
and certain other management personnel. This committee also performs the duties
of administration with respect to the Company's Amended Plan.
DIRECTORS' REMUNERATION
Each director of the Company who is not an employee of or consultant to the
Company or any subsidiary (a "Non-Employee Director") receives $1,000 for each
regular Board meeting attended and is reimbursed for all expenses relating to
attendance at meetings. Under the Company's Amended and Restated 1994 Stock
Option and Incentive Plan (the "Amended Plan"), each Non-Employee Director
receives an automatic grant of options to acquire 30,000 shares of Common Stock,
vesting in four equal annual installments, commencing on the first anniversary
of the date of grant, at an exercise price per share equal to the market value
on the date of grant. For Messrs. Baker, Huber and Waxman, such options were
granted on January 3, 1996, the date the Amended Plan was approved by the Board.
The exercise price for such options is $15.00 per share. For any future
Non-Employee Director, such options will be deemed granted on the date such
person becomes a Board member. Directors who are employees of or consultants to
the Company do not receive compensation for serving as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
James J. Baker, Michael W. Huber and Albert S. Waxman. None of these individuals
has ever served as an officer or an employee of the Company. Except as described
below, no executive officer of the Company has ever served as (i) a member of
the compensation committee or equivalent of another entity, one of whose
executive officers served on the Company's Compensation Committee, (ii) a
director of another entity, one of whose executive officers served on the
Company's Compensation Committee, or (iii) a member of the compensation
committee or equivalent of another entity, one of whose executive officers
served as a director of the Company. Dr. Waxman is a director of Norland Corp.
and EICON, and Reynald G. Bonmati is a director of Norland Corp. and a member of
the Compensation Committee of the Board of Directors of EICON. Mr. Bonmati,
President and a director of the Company, is also an executive officer of Norland
Corp. and EICON. Mr. Bonmati is a Managing Director of NMS BV and President and
a director of Novatech Management Corporation, the general partner of Norland
Partners, L.P. and the voting trustee for 41.2% of the outstanding stock of NMS
BV. Dr. Waxman is also a Managing Director of NMS BV, and the Chairman, a
director and 50% stockholder of Novatech Management Corporation. Mr. Baker's
wife and Mr. Huber are limited partners of Novatech Ventures, L.P., which is a
limited partner in Norland Partners, L.P. See "Certain Transactions."
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<PAGE>
EXECUTIVE COMPENSATION
The following table provides, for the periods indicated, certain summary
information concerning the cash and non-cash compensation earned by or awarded
to the Company's President (the Chief Executive Officer) and each of the four
other most highly compensated executive officers who were serving as executive
officers as of December 31, 1995 (collectively, the "named executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) COMPENSATION ($)
- ----------------------------------------------- --------- ---------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Reynald G. Bonmati............................. 1995 $ 100,000 $ 100,000 0 $ 0
Chairman of the Board, 1994 100,000 0 750,000 0
President and Treasurer
John W. Buckman................................ 1995 21,667 0 0 27,000(2)
Vice President, Finance, and 1994 50,000 0 6,000 0
Secretary
Ralph G. Theodore.............................. 1995 29,700 0 0 0
Vice President, Operations and 1994 26,000 0 6,000 0
Assistant Secretary
Thomas P. Regan................................ 1995 155,529 0 0 0
Vice President, 1994 113,409 0 75,000 0
U.S. Sales
James A. Sperlazza............................. 1995 326,602 0 0 0
Vice President, Latin American and Pacific Rim 1994 271,241 0 75,000 0
Sales
</TABLE>
- ------------------------------
(1) Represents shares of Common Stock issuable upon exercise of options granted
to the named executive officers.
(2) Consists of a $15,000 interest-free loan forgiven by the Company in May 1995
and a $12,000 payment for a four-month rental by the Company of a house
owned by Mr. Buckman.
EMPLOYMENT AGREEMENTS
The Company does not have employment agreements with any of the named
executive officers.
OPTION GRANTS/EXERCISES IN 1995
No stock options were granted to any named executive officer in 1995. The
following tables set forth certain information concerning the exercise of
options to purchase Common Stock of the Company during 1995 and the value at
December 31, 1995 of outstanding options held by each of the named executive
officers. The unexercisable portions of such options vest in two equal
installments, the first of which vested on January 1, 1996 and the second of
which vests on January 1, 1997, except for Mr. Buckman, all of whose options
have become exercisable.
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<PAGE>
OPTION EXERCISES IN 1995 AND VALUE OF OPTIONS AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE- MONEY (1) OPTIONS
YEAR END (#) AT FISCAL YEAR END ($)(2)
SHARES ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE (#)(3) REALIZED ($)(4) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------------- ------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Reynald G. Bonmati 0 $ 0 375,000 375,000 $ 5,812,275 $ 5,812,350
John W. Buckman 0 0 3,000 3,000 46,498 46,498
Ralph G. Theodore 0 0 3,000 3,000 46,498 46,498
Thomas P. Regan 0 0 37,500 37,500 581,231 581,231
James A. Sperlazza 0 0 37,500 37,500 581,231 581,231
</TABLE>
- ------------------------------
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options.
(2) The value of unexercised options represents the difference between the
exercise price of such options and $15.50, the closing market price of the
Company's Common Stock on December 31, 1995.
(3) Represents the number of shares received upon exercise or, if no shares were
received, the number of shares with respect to which the options were
exercised.
(4) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of the Company's
Common Stock on the date of exercise.
STOCK OPTION PLAN
The Company was incorporated in December 1993 and commenced operations in
January 1994. In January 1994, the Company's Board of Directors adopted the 1994
Stock Option Plan, which was approved by the Company's stockholders in May 1994.
Certain amendments were approved in June 1994. On January 3, 1996, the Board
adopted the Amended Plan, subject to stockholder approval. The Company's
stockholders approved the Amended Plan at the Annual Meeting of Stockholders
held on May 30, 1996. Under the Amended Plan, awards may be granted with respect
to an aggregate of 1,800,000 shares of Common Stock. As of June 1, 1996, options
had been granted with respect to 1,435,500 shares (of which options for 734,250
shares had been exercised and options for 701,250 shares were outstanding) and
364,500 shares were available for additional awards.
The purpose of the Amended Plan is to provide directors, officers, key
employees and consultants with additional incentives by increasing their
ownership interests in the Company. Directors, officers and other key employees
of and consultants to the Company and its subsidiaries are eligible to
participate in the Amended Plan. Awards may be granted by the Compensation
Committee of the Board of Directors and may include: (i) options to purchase
shares of Common Stock, including incentive stock options ("ISOs"), non-
qualified stock options or both; and (ii) stock appreciation rights ("SARs"),
whether in conjunction with the grant of stock options or independent of such
grant, or SARs that are only exercisable in the event of a change in control of
the Company or upon other events. Awards are not assignable or transferable
except by the laws of descent and distribution. Under the Amended Plan, each
Non-Employee Director receives an automatic grant of options to purchase 30,000
shares of Common Stock. The Non-Employee Directors are not eligible for any
other awards under the Amended Plan. See "Management -- Directors'
Remuneration."
The Compensation Committee of the Board of Directors, which administers the
Amended Plan, is required to consist of two or more directors who qualify as
disinterested persons within the meaning of Rule 16b-3 under the Exchange Act.
The Compensation Committee has the authority, among other things, to: (i) select
the officers and other key employees and consultants entitled to receive awards
under the Amended Plan; (ii) determine the type or types of awards; (iii)
determine the number of shares of Common Stock or rights covered by an award;
and (iv) determine the terms and conditions of any awards granted under the
Amended Plan, including any restrictions or limitations on transfer, any vesting
schedules or the acceleration thereof and any forfeiture provisions or waivers
thereof. The exercise price at which shares of Common Stock may be purchased
pursuant to the grant of stock options under the Amended Plan and the
41
<PAGE>
grant price of an SAR are determined by the Compensation Committee at the time
of grant. In no event may any one individual receive in any one year options
for, or SARs which relate to, more than 180,000 shares of Common Stock.
The Amended Plan will remain in effect until terminated by the Board of
Directors. The Amended Plan may be amended by the Board of Directors without the
consent of the stockholders of the Company, except that any amendment, although
effective when made, will be subject to stockholder approval at or before the
annual meeting of stockholders following approval by the Board of Directors if
required by any Federal or state law or regulation or by the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted.
The grant of an option or SAR will create no tax consequences for the
grantee or the Company. A grantee will not have taxable income upon exercising
an ISO (except that the alternative minimum tax may apply) and the Company will
receive no deduction at that time. Upon exercising a non-qualified option, the
participant must generally recognize ordinary income equal to the difference
between the exercise price and fair market value of the stock received. Upon
exercise of a SAR, the participants must generally recognize ordinary income
equal to any cash received and the fair market value of any stock received. In
each case, the Company will be entitled to a deduction equal to the amount
recognized as ordinary income by the participant.
A participant's disposition of shares acquired upon the exercise of an
option or SAR generally will result in capital gain or loss measured by the
difference between the sale price and the participant's tax basis in such shares
(or the exercise price of the option in the case of shares acquired by exercise
of an ISO and held for the applicable ISO holding periods). Generally, there
will be no tax consequences to the Company in connection with a disposition of
shares acquired under an option or other award, except that the Company will be
entitled to a deduction (and the participant will recognize ordinary taxable
income) if shares acquired upon exercise of an ISO are disposed of before the
applicable ISO holding periods have been satisfied.
Different tax rules may apply with respect to participants who are subject
to Section 16 of the Exchange Act when they acquire stock in a transaction
deemed to be a nonexempt purchase under Section 16, upon disposition of a
derivative security or the underlying stock within six months after the exempt
grant of such derivative security under the Amended Plan or in other kinds of
transactions under the Amended Plan (such as payment of the exercise price of an
option by surrender of previously acquired Common Stock).
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Internal Revenue Code, which generally disallows a public company's tax
deduction for compensation to the chief executive officer and the four other
most highly compensated executive officers in excess of $1 million in any tax
year beginning on or after January 1, 1994. Compensation that qualifies as
"performance-based compensation" is excluded from the $1 million deductibility
cap, and therefore remains fully deductible by the company that pays it. The
Company intends that options and SARs granted with an exercise price at least
equal to 100% of fair market value of the underlying stock at the date of grant
will qualify as such "performance-based compensation."
RETIREMENT PLANS
Pursuant to the Norland Medical Systems, Inc. 401(k) Profit Sharing Plan,
eligible employees may elect to contribute a portion of their salary on a
pre-tax basis. With respect to employee contributions of up to 7% of salary, the
Company makes a contribution at the rate of 25 cents on the dollar. The Company
may also make additional discretionary contributions for any year. Contributions
are subject to applicable limitations contained in the Internal Revenue Code.
Employees are at all times vested in their own contributions; Company matching
contributions vest gradually over six years of service.
42
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING THE MANUFACTURERS
The Company is a distributor of bone densitometers manufactured by the
Manufacturers (Norland Corp. and Stratec). All of the outstanding stock of the
Manufacturers is owned by NMS BV. Certain officers and directors of the Company,
and certain other persons who have significant relationships with the Company,
have direct and indirect material interests in or relationships with the
Manufacturers and/or NMS BV. The Company has no ownership interest in NMS BV.
The following is a list of those officers, directors and other persons who have
specified relationships to the Company, a description of their relationships to
the Company immediately prior to this offering and a description of the
interests of those persons in NMS BV or the Manufacturers.
<TABLE>
<CAPTION>
PERSON RELATIONSHIP TO COMPANY RELATIONSHIP TO MANUFACTURER/NMS BV
- ------------------------ ------------------------------------------- -------------------------------------------
<S> <C> <C>
Norland Partners, L.P. -Owner of 11.4% of the Company's Common -Owner of 41.2% of outstanding capital
Stock. stock of NMS BV.
-Novatech Management Corporation ("Novatech -Novatech Management is a voting trustee
Management") is the sole general partner. for the 41.2% of NMS BV held by Norland
Partners and the 8.8% of NMS BV held by
Nissho Iwai Corporation and Nissho Iwai
American Corporation.
Novatech Ventures, L.P. -Owner of 3.8% of the Company's Common -Limited partner of Norland Partners.
Stock.
-Novatech Resource Corporation ("Novatech
Resource") is the sole general partner.
-Limited partner of Norland Partners, L.P.
("Norland Partners").
Reynald G. Bonmati -President (chief executive officer), -One of three Managing Directors of NMS BV.
Director and Treasurer.
-Direct owner of 8.2% of the Company's -President and a Director of Norland Corp.
Common Stock
-President, Director and 50% stockholder of -President, Director and 50% stockholder of
Novatech Management. Novatech Management.
-President, Director and principal -President, Director and principal
stockholder of Novatech Resource. stockholder of Novatech Resource.
-Limited partner of Novatech Ventures. -Limited partner of Novatech Ventures.
Albert S. Waxman -Director. -One of three Managing Directors
-Chairman, Director and 50% stockholder of of NMS BV.
Novatech Management. -Director of Norland Corp.
-Chairman, Director and 50% stockholder of
Novatech Management.
Hans Schiessl -Owner of 21.8% of outstanding Common -One of three Managing Directors of NMS BV.
Stock.
-Owner of 50% of outstanding capital stock
of NMS BV.
-President of Stratec.
James J. Baker -Wife is limited partner of Novatech -Wife is limited partner of Novatech
Ventures. Ventures.
Michael W. Huber -Limited partner of Novatech Ventures. -Limited partner of Novatech Ventures.
</TABLE>
43
<PAGE>
Under the Company's Distribution Agreement with the Manufacturers, the
Company has rights to exclusive worldwide distribution of all current and future
medical diagnostic products developed or manufactured by Norland Corp. or
Stratec. The Company's purchases from Norland Corp. and Stratec in 1995 were
$4,012,468 and $9,294,825, respectively. Sales of Norland Corp. products and
services by the Company to Stratec in 1995 were $889,982.
The Company is party to the Product Development Loan Agreement with
Manufacturers, under which the Company may make loans to the Manufacturers in
installments up to an aggregate amount of $3.5 million during the period ending
July 31, 1997. The proceeds of any such loans are to be used by the
Manufacturers for specific new product development involving enhancements of
existing products and the application of pQCT technology to new products. The
loans will bear interest at the rate of 10% per annum, and the principal will be
payable in twenty equal quarterly installments commencing September 30, 1997. At
May 1, 1996, there were outstanding loans of $75,906 from the Company to Norland
Corp. If a new product covered by the Product Development Loan Agreement is
introduced into the marketplace, the Company will be entitled to receive a
royalty equal to 5% of the sales proceeds received by the Manufacturers with
respect to such product. The Manufacturers have also granted the Company rights
of first refusal with respect to any additional financing of research and
development work by the Manufacturers.
The Company subleases office space from Norland Corp. in Fort Atkinson,
Wisconsin. Rent is allocated between Norland Corp. and the Company on a pro rata
basis (based on square footage). The lease and sublease expire on June 30, 1996.
Effective July 1, 1996, the Company will lease approximately 18,000 square feet
of space in the building where Norland Corp. presently leases space. The lease
will have a term of ten years. The Company will sublet approximately 14,000
square feet of this space to Norland Corp. for the full term of the lease, with
the rent to be prorated on a square footage basis.
In February 1996, Mr. Bonmati made a $1,000,000 loan to Stratec. This loan
bears interest at the rate of 7% per annum payable quarterly and is payable in
full on December 31, 1996. Mr. Bonmati and Mr. Schiessl are the owners of a
building in Pforzheim, Germany, part of which will be leased to Stratec.
LOANS AND ADVANCES
In 1994, Novatech Ventures made loans to the Company in the aggregate
principal amount of $500,000, payable on demand and bearing interest at 10% per
annum. In addition to the relationships with regard to Novatech Ventures
described above, Catherine Bonmati, the wife of Reynald G. Bonmati, is trustee
of trusts for the benefit of Sandrine Bonmati and Chrystele Bonmati, which,
together, own 20% of the outstanding capital stock of Novatech Resource, general
partner of Novatech Ventures, and are limited partners in Novatech Ventures. The
loan was repaid in January 1995.
Also in 1994, Dr. Waxman lent $250,000 to the Company on the same terms as
the loan by Novatech Ventures and Mr. Bonmati made $50,000 of interest-free
advances to the Company. These loans and advances were repaid in full in June
and December of 1995, respectively.
On February 22, 1995, the Company made an interest-free loan to Mr. Buckman
in the principal amount $15,000. Such loan was payable on demand and was
forgiven by the Company in May 1995.
OTHER TRANSACTIONS
The Company leases its principal executive offices at 106 Corporate Park
Drive, Suite 106, White Plains, New York 10604. The Company sublets a portion of
this office space to an affiliate of EICON. Both the lease and sublease expire
on August 31, 2000. The Company subleases office space in New Haven,
Connecticut, from other affiliates of EICON. The New Haven lease and sublease
expire on August 31, 1996. The White Plains and New Haven rents are and will be
allocated between the EICON affiliates and the Company on a pro rata basis
(based on square footage). Mr. Bonmati, President and a Director of the Company,
is President and a Director of EICON. Dr. Waxman, a Director of the Company, is
a Director of EICON. Novatech Ventures, L.P., which immediately prior to this
offering owns 3.8% of the outstanding Common Stock of the Company and is a
limited partner in Norland Partners, L.P. (the owner of 11.4% of the Company's
outstanding Common Stock), is the owner of 24% of the outstanding stock of
EICON. Novatech Ventures, L.P. and Mr. Bonmati hold warrants to purchase EICON
stock.
44
<PAGE>
In the year ended December 31, 1995, purchases by Nissho accounted for
approximately 68% of the Company's revenues. Nissho received volume discounts
for its purchases of systems in 1995.
On April 2, 1996, Dove Medical Systems, which manufactured, marketed and
sold the OsteoAnalyzer line of bone densitometers, was merged into a newly
formed wholly-owned subsidiary of the Company (the "Merger"). Pursuant to the
Merger, all of the issued and outstanding stock of Dove Medical Systems was
exchanged for an aggregate of 161,538 shares of Common Stock. Following the
Merger, the Company's subsidiary changed its name to Dove Medical Systems, Inc.
At the time of the Merger, approximately 76% of the stock of Dove Medical
Systems was owned by Robert L. Piccioni and Joan Piccioni, his wife.
On April 2, 1996 the Company also entered into a Purchase Agreement with Dr.
and Mrs. Piccioni, CHC, Inc. and Mirella Monti Belshe (the "Purchase Agreement")
pursuant to which the Company purchased a patent and rights to technology and
other property rights which were licensed to Dove in its business. The cash
purchase price paid by the Company for such assets was $3,600,000. The Company
transferred the purchased assets to Dove Medical Systems, Inc. Following the
Merger, Joan Piccioni became President of, and Robert L. Piccioni became a
consultant to, Dove Medical Systems, Inc. Dr. Piccioni became a director of the
Company on May 30, 1996. Dr. and Mrs. Piccioni received 123,345 of the 161,538
shares of the Company's Common Stock issued in connection with the Merger. They
also received an aggregate of $3,001,846 of the $3,600,000 paid by the Company
pursuant to the Purchase Agreement. The holders of the Company's Common Stock
issued in connection with the Merger, including Dr. and Mrs. Piccioni, received
certain registration rights with respect to such stock. See "Description of
Capital Stock -- Registration Rights."
BYLAW PROVISION.
The Company is in the process of amending its bylaws to provide that, before
the Company may consummate certain "business combinations" with certain "related
parties," the terms of the transaction must be approved by the affirmative vote
of a majority of the Company's stockholders, including a majority of those
stockholders who have no economic interest in such related party. See
"Description of Capital Stock."
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of June 1, 1996 (except as otherwise
indicated) by (i) each person known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) the Selling Stockholders, (iii)
each of the Company's directors; (iv) each named executive officer and (v) all
directors and named executive officers as a group. Except as otherwise indicated
below, each of the persons named in the table has sole voting and investment
power with respect to the shares set forth opposite such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING (1) AFTER OFFERING (1)(2)
----------------------- NUMBER OF SHARES -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- -------------------------------------------------- ---------- ----------- ----------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reynald G. Bonmati (3) ........................... 1,612,500 23.3% 750,000 862,500 10.3
Premium Point
New Rochelle, NY 10801
Albert S. Waxman (4), (5) ........................ 786,000 11.4 750,000 36,000 *
59 Wooster Street
New York, NY 10012
Kurt W. Streams (5)............................... 0 -- 0 0 --
Ralph G. Theodore (6)............................. 4,500 * 0 4,500 *
Thomas P. Regan (7)............................... 56,250 * 0 56,250 *
James A. Sperlazza (8)............................ 0 -- 0 0 --
James J. Baker (5)................................ 0 -- 0 0 --
Michael W. Huber (5).............................. 0 -- 0 0 --
Robert L. Piccioni (9)............................ 123,345 1.8 0 123,345 1.5
All directors and officers of the Company as a
group (9 persons) (3), (4), (7), (9)............. 1,796,595 26.1 750,000 1,046,595 12.5
Novatech Ventures, L.P. .......................... 264,000 3.8 0 264,000 3.1
Premium Point
New Rochelle, NY 10801
Norland Partners, L.P. ........................... 786,000 11.4 750,000 36,000 *
Premium Point
New Rochelle, NY 10801
Hans Schiessl .................................... 1,500,000 21.8 0 1,500,000 17.9
Markgrafenstrasse 8
75117 Pforzheim
Germany
Oppenheimer Funds, Inc. (10) ..................... 459,000 6.7 0 459,000 5.5
Two World Trade Center
Suite 3400
New York, NY 10048-0203
Strong Capital Management, Inc. (11) ............. 359,700 5.2 0 359,700 4.3
100 Heritage Reserve
Menomonee Falls, Wisconsin
53051
</TABLE>
- ------------------------
* Less than 1%.
46
<PAGE>
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not
outstanding that are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person, but
not deemed outstanding for the purpose of calculating the percentage owned
by any other person.
(2) If the over-allotment option is exercised in full by the Underwriters,
Norland Partners, L.P. would sell an additional 36,000 shares of Common
Stock and Novatech Ventures, L.P. would sell 264,000 shares of Common
Stock.
(3) Excludes 217,500 shares which may be acquired upon the exercise of options
not exercisable within 60 days. Amount prior to this offering includes
786,000 shares held of record by Norland Partners, L.P. and 264,000 shares
held of record by Novatech Ventures, L.P. that Mr. Bonmati may be deemed to
beneficially own due to his relationship with such entities. Number of
shares being offered consists of 750,000 shares being offered by Norland
Partners, L.P. Mr. Bonmati is President and a principal stockholder of (i)
Novatech Management Corporation, the general partner of Norland Partners,
L.P., and (ii) Novatech Resource Corporation, the general partner of
Novatech Ventures, L.P. Mr. Bonmati is also a limited partner of Novatech
Ventures, L.P. Such beneficial ownership is disclaimed by Mr. Bonmati,
except to the extent of his proportionate interest in such limited
partnerships.
(4) Amount prior to this offering consists of 786,000 shares held of record by
Norland Partners, L.P. that Dr. Waxman may be deemed to beneficially own
due to his relationship with such entity. Number of shares being offered
consists of 750,000 shares being offered by Norland Partners, L.P. Dr.
Waxman is Chairman of the Board and a principal stockholder of Novatech
Management Corporation, the general partner of Norland Partners, L.P. Such
beneficial ownership is disclaimed by Dr. Waxman, except to the extent of
his proportionate interest in such limited partnership.
(5) Excludes 30,000 shares which may be acquired upon the exercise of options
not exercisable within 60 days.
(6) Excludes 1,500 shares which may be acquired upon the exercise of options
not exercisable within 60 days.
(7) Includes 3,750 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days. Excludes 18,750 shares which may be acquired
upon the exercise of options not exercisable within 60 days.
(8) Excludes 18,750 shares which may be acquired upon the exercise of options
not exercisable within 60 days.
(9) Shares owned by Robert L. Piccioni and Joan Piccioni, his wife. Excludes
30,000 shares which may be acquired upon the exercise of options granted to
Mr. Piccioni and 37,500 shares which may be acquired upon the exercise of
options granted to Mrs. Piccioni, none of which are exercisable within 60
days.
(10) Information is as of December 31, 1995, based on Schedule 13D filed with
the Securities and Exchange Commission. Oppenheimer Funds, Inc. reported
shared dispositive power with respect to 459,000 shares, and Oppenheimer
Discovery Fund reported sole voting power and shared dispositive power with
respect to 450,000 shares.
(11) Information as of December 31, 1995, based on Schedule 13D filed with the
Securities and Exchange Commission. Strong Capital Management, Inc. and
Richard S. Strong reported sole voting power with respect to 352,200 shares
and sole dispositive power with respect to 359,700 shares.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description does not purport to be complete and is qualified
in its entirety by this reference to the Company's Restated Certificate of
Incorporation (the "Charter") and bylaws, copies of which are filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
AUTHORIZED AND OUTSTANDING COMMON STOCK
As of the date of this Prospectus, the Company is authorized to issue
10,000,000 shares of Common Stock, $0.0005 par value per share. As of May 1,
1996, there were an aggregate of 6,895,788 shares of Common Stock outstanding.
After completion of the offering pursuant to this Prospectus, 8,395,788 shares
of Common Stock will be issued and outstanding (8,433,288 shares if the
Underwriters over-allotment option is exercised in full). The issued and
outstanding shares of Common Stock are and, upon payment therefor, the shares
being offered hereby will be, validly issued, fully paid and nonassessable. The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the Board of Directors may from time to time determine. The Company has not paid
dividends on the Common Stock and does not currently anticipate paying
dividends. See "Dividend Policy." The shares of Common Stock are neither
redeemable nor convertible, and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive pro rata the assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of Preferred Stock, if any, then
outstanding. Each outstanding share of Common Stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative voting.
PREFERRED STOCK
As of the date of this Prospectus, the Company is authorized to issue
1,000,000 shares of Preferred Stock, $0.0005 par value per share, none of which
are outstanding. The Charter of the Company expressly authorizes the Board of
Directors, without further action by the Company's stockholders, from time to
time, to issue authorized shares of Preferred Stock in one or more series and to
determine the designations, preferences, qualifications, limitations or
restrictions of any series, including without limitation, dividends rights, the
price and terms and conditions on which shares may be redeemed, the amount
payable in the event of voluntary or involuntary liquidation, the terms and
conditions for conversion or voting rights and other terms. Any Preferred Stock
so issued could dilute the voting power and equity of the holders of the Common
Stock by, for example, reducing the amount of funds otherwise available for
payment to holders of the Common Stock, either upon liquidation of the Company
or as dividends, restricting the payment of dividends to holders of the Common
Stock, and diluting the voting power of the holders of the Common Stock.
UNISSUED AND UNRESERVED CAPITAL STOCK
One of the effects of the existence of unissued and unreserved shares of
capital stock may be to enable the Board of Directors to render more difficult
or to discourage an attempt to obtain control of the Company by means of a
merger, tender offer, proxy contest or otherwise, and thereby to protect the
continuity of the Company's management. If, in the due exercise of its fiduciary
obligations, for example, the Board of Directors were to determine that a
takeover proposal were not in the Company's best interest, such shares could be
issued by the Board of Directors without stockholder approval in one or more
private placements or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by diluting the
voting or other rights of the proposed acquiror or insurgent stockholder group,
by creating a substantial voting block in institutional or other hands that
might undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company has included in the Charter and in its by-laws provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the General
Corporation Law of Delaware (the "DGCL") and (ii) indemnify its directors and
48
<PAGE>
officers to the fullest extent permitted by the DGCL, including circumstances in
which indemnification is otherwise discretionary. The Company believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers.
The Company elected on June 2, 1995 to exclude itself from the provisions of
Section 203 of the DGCL ("Section 203"). Section 203 restricts certain
transactions between a corporation organized under Delaware law (or its
majority-owned subsidiaries) and any "interested stockholder" (as defined in
Section 203) which includes, among others, any person holding 15% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of that stockholder (an "Interested Stockholder").
Section 203 prevents, for a period of three years following the date that a
person becomes an Interested Stockholder, the following types of transactions
between the Company and the Interested Stockholder (subject to certain
exceptions specified in Section 203): (i) mergers or consolidations, (ii) sales,
leases, exchanges or other transfers of 10% or more of the aggregate assets of
the Company, (iii) issuance or transfers by the Company of any stock of the
Company which would have the effect of increasing the Interested Stockholder's
proportionate share of stock of any class or series of the Company, (iv) any
other transaction which has the effect, directly or indirectly, of increasing
the proportionate share of the stock of any class or series of the Company which
is owned by the Interested Stockholder, and (v) receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of loans,
advances, guarantees, pledges or other financial benefits provided by the
Company. Among the exceptions specified in Section 203 are transactions approved
by (i) the Board of Directors prior to the time the Interested Stockholder
obtained such status or (ii) the holders of two-thirds of the outstanding shares
of each class or series of stock entitled to vote generally in the election of
directors, excluding shares owned by the Interested Stockholder.
The Company is in the process of amending its bylaws to provide that, before
the Company may consummate a "business combination" with certain "related
parties," the terms of the transaction must be approved by the affirmative vote
of a majority of the Company's stockholders, including a majority of those
stockholders who have no economic interest in such related party. A "related
party" is any entity more than 20% of the voting securities of which (including
rights to acquire such voting securities) are owned beneficially directly or
indirectly, in aggregate, by (i) any director of the Company and (ii) any person
who benefically owns, within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, 20% or more of the outstanding capital stock
of the Company. The types of "business combinations" that will be subject to
these requirements are any of the following transactions in which the total
value of the consideration received by the related party or its equity owners
exceeds the lesser of 20% of the value of the Company's assets (on a
consolidated basis) as of the end of its most recently ended fiscal quarter or
20% of the Company's revenues (on a consolidated basis) for the four most
recently ended fiscal quarters: (i) any merger or consolidation with the Company
or any subsidiary; (ii) any acquisition by the Company or any subsidiary of
securities issued by the related party; (iii) any acquisition of assets by the
Company or any subsidiary from the related party; and (iv) any transaction that
results in the issuance or transfer by the Company or any subsidiary of any
securities of the Company or such subsidiary (including securities convertible
or exchangeable into stock and options or other rights to purchase stock, but
excluding stock issued upon the exercise of any such conversion or exchange
rights or of the exercise of any such options or other rights). The term
"business combination" shall not include transactions pursuant to the
Distribution Agreement or the Product Development Loan Agreement.
REGISTRATION RIGHTS
The Company, Robert L. Piccioni and Joan Piccioni entered into a
Registration Rights Agreement dated as of April 2, 1996 (the "Registration
Rights Agreement") in connection with the Company's acquisition by merger of
Dove. See "Certain Transactions." Under the Registration Rights Agreement,
Robert L. Piccioni and Joan Piccioni and the other former stockholders of Dove
(the "Holders") are entitled to demand and incidental registration rights with
respect to the registration under the Securities Act of the 161,538 shares of
Common Stock of the Company that they received in connection with the Dove
acquisition. The Holders may exercise their demand and registration rights for a
period beginning two years after the effective date of the Dove acquisition, or
such earlier date, if any, as the termination without cause of the employment of
Robert L. Piccioni or Joan Piccioni with the Company or a material adverse
change by the
49
<PAGE>
Company of the terms or location of their employment with the Company. The
registration rights terminate at such time as the Common Stock acquired in the
Dove acquisition may be sold by the Holders pursuant to Rule 144 under the
Securities Act.
TRANSFER AGENT AND REGISTER
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have approximately
8,395,788 shares of the Common Stock outstanding (8,433,288 shares if the
over-allotment option is exercised in full). Of these shares, the 2,250,000
shares of Common Stock sold in this offering (2,587,500 shares if the
over-allotment option is exercised in full), will be freely tradeable, without
restriction under the Securities Act, except for any such shares which may be
acquired by an affiliate of the Company (an "Affiliate"), as that term is
defined in Rule 144, which shares will be subject to the resale limitations of
Rule 144. After the completion of the offering approximately 2,639,538
outstanding shares (2,339,538 shares if the over-allotment option is exercised
in full) are "restricted" securities within the meaning of Rule 144.
Approximately 678,000 restricted shares will be available for immediate sale in
the public market in reliance upon Rule 144 or Rule 701 promulgated under the
Securities Act and the remaining approximately 1,961,538 restricted shares will
not be transferable pursuant to Rule 144 until the expiration of their
respective two-year holding periods.
The Selling Stockholders and officers and directors of the Company (owning
an aggregate of approximately 3,250,000 shares of Common Stock immediately prior
to the offering) have agreed pursuant to lock-up agreements with the
Underwriters not to offer, sell or otherwise dispose of any shares of Common
Stock before 120 days after effectiveness of the Registration Statement for the
shares of Common Stock offered hereby without the consent of UBS Securities LLC.
See "Underwriting."
In general, under Rule 144 as currently in effect, if a period of at least
two years has elapsed between the later of the date restricted shares (as that
phrase is defined in Rule 144) were acquired from the Company and the date on
which they were acquired from an Affiliate, then the holder of such restricted
shares (including an Affiliate) is entitled to sell a number of shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of the Common Stock (approximately 83,400 shares
immediately after this offering), and (ii) the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding the date on
which the notice of such sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are also subject to certain requirements
pertaining to the manner of such sales, notices of such sales and the
availability of current public information concerning the Company. Under Rule
144(k), if a period of at least three years has elapsed between the later of the
date on which restricted shares were acquired from the Company and the date on
which they were acquired from an Affiliate, a holder of such restricted shares
who is not an Affiliate at the time of the sale and has not been an Affiliate
for at least three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions
described above. Under proposed amendments to Rule 144, the two and three year
holding periods referred to above would be reduced to one year and two years,
respectively.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers up to the date the Company became
subject to the reporting requirements of the Exchange Act pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons. In addition, the Securities and Exchange Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options. Securities issued in reliance
on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, such securities may be sold (i) by persons other
than Affiliates, subject only to the manner of sale provisions of Rule 144 and
(ii) by Affiliates under Rule 144 without compliance with its
50
<PAGE>
two-year minimum holding period requirements. An aggregate of 678,000 shares of
Common Stock issuable upon exercise of outstanding options may, following
exercise of such options, be sold immediately pursuant to Rule 701.
An aggregate of 701,250 shares of Common Stock are subject to issuance upon
exercise of outstanding stock options. The Company intends to file a
registration statement on Form S-8 to register shares issuable under the
Company's Amended Plan. See "Management -- Stock Option Plan." Options for
approximately 26,250 shares of the outstanding options are vested. When such
registration statement becomes effective, shares issued upon exercise of options
pursuant to such plan will be freely tradeable in the public market, subject, in
the case of Affiliates, to the volume, manner of sale, notice and public
information requirements of Rule 144.
Sales of significant amounts of the Common Stock could have an adverse
impact on the market price of the Common Stock.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC and
Pacific Growth Equities, Inc. are acting as representatives (the
"Representatives"), have agreed to purchase from the Company and Norland
Partners, L.P. the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
UBS Securities LLC.........................................................................
Pacific Growth Equities, Inc...............................................................
Total..................................................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased. The
Underwriting Agreement contains certain provisions whereby if any Underwriter
defaults in its obligation to purchase shares, and the aggregate obligations of
the Underwriters so defaulting do not exceed 10% of the shares offered hereby,
the remaining Underwriters, or some of them, must assume such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover 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 public offering of the shares of Common Stock,
the offering price and other selling terms may be changed by the Underwriters.
The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 337,500 additional shares of Common Stock to cover
over-allotments, if any, at the public offering price set forth on the cover
page of this Prospectus, less underwriting discounts and commissions. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters to the extent the option is
exercised. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders pursuant to the Underwriters exercise (if any)
of the over-allotment option.
The Representatives have informed the Company that the Underwriters do not
expect to confirm sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
52
<PAGE>
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof.
Pacific Growth Equities acted as Underwriter for the Company's initial
public offering in August 1995.
The Selling Stockholders and officers and directors of the Company (owning
an aggregate of approximately 3,250,000 shares of Common Stock immediately prior
to the offering) have entered into lock-up agreements with the Underwriters
which provide that they will not offer, sell or otherwise dispose of any of the
Company's Common Stock for a period of 120 days after effectiveness of the
Registration Statement for the shares of Common Stock offered hereby without the
prior written consent of UBS Securities LLC. The Company has agreed that it will
not, without the prior written consent of UBS Securities LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock for a period of 180 days after the date of this
Prospectus, except that the Company may grant additional options under its stock
option plans, or issue shares upon the exercise of outstanding stock options.
See "Shares Eligible for Future Sale."
Certain of the Underwriters that currently act as market makers for the
Company's Common Stock may engage in "passive market making" in such securities
on Nasdaq in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters and selling
group members participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6A under the Exchange Act would
otherwise prohibit that activity (the "cooling off period"). It prohibits
underwriters and selling group members engaged in passive market making
generally from entering a bid or effecting a purchase at a price that exceeds
the highest bid for those securities displayed on Nasdaq by a market maker that
is not participating in the distribution. Under Rule 10b-6A, each underwriter or
selling group member engaged in passive market making is subject to a daily net
purchase limitation equal to 30% of that underwriter's or selling group member's
average daily trading volume during the two full consecutive calendar months
immediately preceding the date of the filing of the registration statement under
the Securities Act pertaining to the security to be distributed. Certain
Underwriters intend to engage in passive market making in the Company's Common
Stock during the cooling off period pursuant to Rule 10b-6A.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be passed
upon for the Company by Morgan, Lewis & Bockius LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, San Francisco,
California.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited (i) by Coopers & Lybrand L.L.P. for the
Company as of and for the years ended December 31, 1994 and 1995, (ii) by
Schweizerische Treuhandgesellschaft - Coopers & Lybrand AG for OBV as of and for
the year ended December 31, 1993, and (iii) by Hurley & Company for Dove Medical
Systems as of and for the years ended December 31, 1994 and 1995, each
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon such reports given upon the authority
of such firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, 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 of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the shares of Common Stock offered hereby, reference
is made to such Registration Statement, exhibits and schedules. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS:
NORLAND MEDICAL SYSTEMS, INC.
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1995 and 1994.......................................................... F-3
Statements of Income for the years ended December 31, 1995 and 1994...................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1994............. F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1994.................................. F-6
Notes to Financial Statements............................................................................ F-7
OSTECH B.V.
Report of Independent Accountants.......................................................................... F-13
Financial Statements:
Statement of Income (Loss) for the year ended December 31, 1993.......................................... F-14
Statement of Cash Flows for the year ended December 31, 1993............................................. F-15
Notes to Financial Statements............................................................................ F-16
DOVE MEDICAL SYSTEMS
Report of Independent Accountants.......................................................................... F-20
Financial Statements:
Balance Sheets as of December 31, 1995 and 1994.......................................................... F-21
Statements of Income for the years ended December 31, 1995 and 1994...................................... F-22
Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1994............. F-23
Statements of Cash Flows for the years ended December 31, 1995 and 1994.................................. F-24
Notes to Financial Statements............................................................................ F-25
UNAUDITED FINANCIAL STATEMENTS:
NORLAND MEDICAL SYSTEMS, INC.
Condensed Balance Sheets as of March 31, 1996 and 1995..................................................... F-29
Condensed Statements of Income for the three months ended March 31, 1996 and 1995.......................... F-30
Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and
1995...................................................................................................... F-31
Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1995...................... F-32
Notes to Condensed Financial Statements.................................................................... F-33
DOVE MEDICAL SYSTEMS
Condensed Balance Sheets as of March 31, 1996 and 1995..................................................... F-34
Condensed Statements of Income for the three months ended March 31, 1996 and 1995.......................... F-35
Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and
1995...................................................................................................... F-36
Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1995...................... F-37
Notes to Condensed Financial Statements.................................................................... F-38
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS:
NORLAND MEDICAL SYSTEMS, INC.
Pro Forma Combined Condensed Balance Sheet as of March 31, 1996............................................ F-40
Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1995 and for the three
months ended March 31, 1996............................................................................... F-41
Notes to the Pro Forma Combined Condensed Financial Statements............................................. F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Norland Medical Systems, Inc.:
We have audited the accompanying balance sheets of Norland Medical Systems,
Inc. (formerly Ostech, Inc.) as of December 31, 1995 and 1994, and the related
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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.
The Company, as disclosed in the financial statements, has extensive
transactions and relationships with related parties. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Norland Medical Systems,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 4, 1996, except for
Note 14, for which the
date is June 4, 1996.
F-2
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 19,218,865 $ 554,732
Accounts receivable, net (Note 3).................................................. 4,571,520 1,872,494
Accounts receivable -- affiliate (Note 3).......................................... 180,253 303,353
Inventories (Note 4)............................................................... 798,484 --
Prepaid expenses and other current assets.......................................... 68,989 21,350
------------- ------------
Total current assets............................................................. 24,838,111 2,751,929
------------- ------------
Product development loan receivable -- affiliate (Note 5)............................ 48,519 --
------------- ------------
Total assets..................................................................... $ 24,886,630 $ 2,751,929
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- stockholders (Note 6)............................................. $ -- $ 750,000
Stockholder advances (Note 6)...................................................... -- 50,000
Accounts payable -- Stratec (Note 7)............................................... 2,139,656 605,995
Accounts payable -- Norland (Note 7)............................................... 493,424 1,086,163
Accounts payable -- trade.......................................................... 32,000 --
Accrued expenses................................................................... 361,003 46,727
Income taxes payable............................................................... 1,305,037 27,000
Customer deposits.................................................................. 34,664 118,000
------------- ------------
Total current liabilities........................................................ 4,365,784 2,683,885
------------- ------------
Stockholders' equity (Notes 8 and 14):
Common stock, par value of $0.0005 per share -- 10,000,000 shares authorized,
6,000,000 shares issued and outstanding........................................... 3,000 1,500
Additional paid-in capital......................................................... 18,349,813 --
Stock subscriptions receivable..................................................... -- (1,000)
Retained earnings.................................................................. 2,168,033 67,544
------------- ------------
Total stockholders' equity....................................................... 20,520,846 68,044
------------- ------------
Total liabilities and stockholders' equity....................................... $ 24,886,630 $ 2,751,929
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Revenue (including sales to an affiliate of $889,982 and $631,523 in 1995 and 1994,
respectively)..................................................................... $ 18,243,808 $ 10,041,548
Cost of revenue.................................................................... 12,508,809 6,517,701
One-time distribution agreement costs (Note 2)..................................... -- 1,922,247
------------- -------------
Gross profit................................................................... 5,734,999 1,601,600
Sales and marketing expense........................................................ 1,651,125 973,208
General and administrative expense (including an overhead charge from an affiliate
of $22,360 and $150,000 in 1995 and 1994, respectively)........................... 960,368 526,364
------------- -------------
Operating income................................................................... 3,123,506 102,028
Other income (expense):
Interest income.................................................................. 443,653 --
Other expense.................................................................... (30,670) (6,984)
------------- -------------
412,983 (6,984)
------------- -------------
Income before income taxes....................................................... 3,536,489 95,044
Provision for income taxes (Note 10)............................................... 1,436,000 27,000
------------- -------------
Net income..................................................................... $ 2,100,489 $ 68,044
------------- -------------
------------- -------------
Net income per common and common equivalent share.................................. $ 0.40 $ 0.02
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON PAID-IN STOCK RETAINED
TOTAL SHARES STOCK CAPITAL SUBSCRIPTIONS EARNINGS
------------- ---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 1,000 shares of common
stock.............................. $ -- 1,000 $ 10 $ 990 $ (1,000) $ --
2,000-for-1 stock split on June 2,
1995 (Note 8)...................... -- 1,999,000 990 (990) -- --
3-for-2 stock split on June 13, 1996
(Note 14).......................... -- 1,000,000 500 -- -- (500)
Net income.......................... 68,044 -- -- -- -- 68,044
------------- ---------- ----------- ------------- ------------- ------------
Balance as of December 31, 1994..... 68,044 3,000,000 1,500 -- (1,000) 67,544
Proceeds from common stock
subscription....................... 1,000 -- -- -- 1,000 --
Issuance of 2,000,000 shares of
common stock on August 2, 1995, net
of costs and expenses directly
related to the offering (Note 8)... 18,351,313 2,000,000 1,000 18,350,313 -- --
3-for-2 stock split on June 13, 1996
(Note 14).......................... -- 1,000,000 500 (500) -- --
Net income.......................... 2,100,489 -- -- -- -- 2,100,489
------------- ---------- ----------- ------------- ------------- ------------
Balance as of December 31, 1995..... $ 20,520,846 6,000,000 $ 3,000 $ 18,349,813 $ -- $ 2,168,033
------------- ---------- ----------- ------------- ------------- ------------
------------- ---------- ----------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 2,100,489 $ 68,044
------------- -------------
Adjustments to reconcile net income to net cash used in operating activities:
Provision for doubtful accounts................................................. 150,000 --
Amortization expense............................................................ 17,415 --
Changes in:
Accounts receivable........................................................... (2,725,926) (2,175,847)
Inventories................................................................... (815,899) --
Prepaid expenses and other current assets..................................... (47,639) (21,350)
Accounts payable.............................................................. 972,922 1,692,158
Accrued expenses.............................................................. 314,276 46,727
Income taxes payable.......................................................... 1,278,037 27,000
Customer deposits............................................................. (83,336) 118,000
------------- -------------
Total adjustments........................................................... (940,150) (313,312)
------------- -------------
Net cash provided by (used in) operating activities......................... 1,160,339 (245,268)
------------- -------------
Cash flows from financing activities:
Product development loan to affiliate............................................. (48,519) --
------------- -------------
Net cash used in investing activities......................................... (48,519) --
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net....................................... 18,351,313 --
Proceeds from common stock subscriptions.......................................... 1,000 --
Notes payable to stockholders..................................................... (750,000) 750,000
Stockholder advances.............................................................. (50,000) 50,000
------------- -------------
Net cash provided by financing activities..................................... 17,552,313 800,000
------------- -------------
Net increase in cash................................................................ 18,664,133 554,732
Cash and cash equivalents at beginning of year...................................... 554,732 --
------------- -------------
Cash and cash equivalents at end of year............................................ $ 19,218,865 $ 554,732
------------- -------------
------------- -------------
Noncash financing activities:
The $18,351,313 net proceeds of the initial public offering represents the $21,000,000 of gross proceeds less the
costs and expenses directly related to the offering of $2,648,687.
During 1994, the Company issued common stock having an aggregate par value of $1,000 in return for stock
subscriptions receivable of $1,000.
Cash paid for:
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Income taxes...................................................................... $ 157,963 $ 0
------------- -------------
------------- -------------
Interest.......................................................................... $ 10,342 $ 0
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
COMPANY'S ACTIVITIES
Norland Medical Systems, Inc. ("NMS" or the "Company") distributes devices
which aid in the detection and monitoring of bone diseases, and in the
assessment of the effect of existing and potential therapies for the treatment
of such diseases throughout the world to hospitals, clinics, research
institutions, pharmaceutical companies and individual practitioners. The Company
primarily sells through medical product distributors in foreign (non-U.S.)
countries, and directly to end users in the United States.
CORPORATE STRUCTURE
NMS was incorporated on December 21, 1993 as Ostech, Inc. to be the
exclusive marketer and distributor of certain medical products and technologies
of Norland Corporation (U.S.) and Stratec Medizintechnik GmbH (Germany)
("Stratec") (jointly "manufacturers"). The Company commenced operations January
1, 1994 as the exclusive distributor of Norland Corporation products for all
markets of the world and for Stratec products for all markets of the world
except Europe and the Middle East. The Company changed its name to Norland
Medical Systems, Inc. effective October 10, 1995.
Both Norland Corporation and Stratec have been wholly-owned subsidiaries of
Norland Medical Systems B.V. (Netherlands) since 1992. Certain shareholders of
NMS are shareholders of Norland Medical Systems B.V. and own 91.2% of that
company. Nissho Iwai American Corporation ("Nissho Iwai"), a major customer of
NMS, and its affiliate own the remaining 8.8% of Norland Medical Systems B.V.
MANAGEMENT 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 and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION
NMS purchases merchandise and services from the manufacturers on the basis
of sales orders in hand. NMS invoices customers and is invoiced by the
manufacturers when the product is shipped. Revenue is recognized at the time of
shipment. Management believes the gross profit recognized by NMS materially
approximates that which would have been realized had the Company used
unaffiliated suppliers.
The manufacturers offer one-year warranties on both the hardware and
software included in their systems. The Company provides warranty services on
behalf of the manufacturers. Costs for returns and exchanges are borne by the
respective manufacturer, not the Company. The Company invoices the manufacturer
for the costs of performing such warranty services.
The Company has no obligations to provide any other services to any of its
sub-distributors or their customers.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
at the date of purchase to be cash equivalents. The Company had no such
instruments and the cash reflected on the balance sheets reflects only cash in
the Company's bank accounts, a short-term time deposit and an investment in a
money market mutual fund.
INVENTORY
Based on the shipping terms and when product title is transferred with its
suppliers and customers, NMS does not generally maintain finished goods
inventory.
F-7
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
From time to time, the Company may judge it desirable for marketing purposes
to provide a device to a prominent scientist or research institution
specializing in the study of bone disease until the device is eventually
returned to be sold. In such cases, the Company will carry the device in
inventory at cost less amortization expense calculated on a straight-line basis
over thirty-six months. In addition, the Company will occasionally rent a device
in anticipation of an eventual sale following satisfactory use by the customer.
In such cases, the Company will carry the device in inventory at its net
realizable value until the time of the sale.
Inventory includes product kits purchased from Stratec which are recorded in
inventory at purchase cost until the time of sale or rental of the assembled
product.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred income taxes
are recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect of a change in tax rates on deferred taxes is
recognized in income in the period that includes the enactment date.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Primary income per share is calculated by dividing net income by the average
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are stock options, which have been included
using the treasury stock method only when their effect is dilutive.
The average common and common equivalent shares issued and under option was
5,245,235 shares and 4,002,000 shares for the years ended December 31, 1995 and
1994, respectively after giving effect to the 3-for-2 stock split described in
Note 14.
CONCENTRATION OF CREDIT RISK
The Company generally sells on either sixty day terms or against irrevocable
letters of credit. Any financing of the end user is the decision of, and
dependent on, the distributor in each country. At December 31, 1995 and 1994,
the largest balance, 58% and 42%, respectively, of the total outstanding trade
receivables, was owed by a single distributor.
FOREIGN EXCHANGE EXPOSURE
All of the Company's purchases and sales of products and services are made
in U.S. dollars. As a result, the Company has minimal exposure to foreign
exchange risk in the short-term. However, a significant portion of the Company's
products are supplied by Stratec and sold along with Norland Corporation
products into foreign markets. Any significant and lasting change in the
exchange rates between the U.S. dollar and the currencies of those countries
could have a material effect on both the costs and sales of those products and
services.
2. DISTRIBUTION AGREEMENT:
In 1994, the Company entered into exclusive distribution agreements with the
manufacturers. The invoice prices from the manufacturers to NMS are determined
by using a pricing formula whereby the margin retained by NMS is equal to
one-half of the difference between the price at which the product is sold to the
distributor or end user and the direct cost of material, parts and labor of
Stratec or Norland Corporation.
The agreement with Norland Corporation provided that in 1994 the Company
would purchase a minimum of $5,200,000 of products and services during the first
year of the agreement, irrespective of the pricing formula described above. If
the minimum purchase requirement had not been in effect for the first
F-8
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. DISTRIBUTION AGREEMENT: (CONTINUED)
year of this distribution agreement, the total purchases by the Company of
products and services from Norland Corporation would have been $3,277,753. The
excess of $1,922,247 paid by the Company over the pricing formula was, based on
its materiality, charged to operations as a separate line item for fiscal 1994.
Effective April 1, 1995, the Company entered into an amended distribution
agreement which expires December 31, 2015. This agreement may be renewed for an
indefinite number of successive five-year terms and contains no purchase
obligation on the part of NMS. Under this agreement, the Company may not
distribute devices manufactured by any non-affiliate of the Company which
compete directly with the devices obtained from the manufacturers.
Under the distribution agreement, the Company is not limited to products
manufactured by the manufacturers. However, for the years ending December 31,
1995 and 1994, the manufacturers were the sole suppliers of products and
services to NMS.
3. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Account receivable................................................ $ 4,901,733 $ 2,175,847
Less Allowance for doubtful accounts.............................. 150,000 --
------------ ------------
$ 4,751,773 $ 2,175,847
------------ ------------
------------ ------------
</TABLE>
Accounts receivable were entirely represented by sales of products and
services purchased from Stratec and Norland Corporation.
NMS does not currently distribute products manufactured by Stratec and
Norland Corporation in Europe. Those products are distributed directly by
Stratec through its own sales organization and through distributors. As a
result, NMS is both a supplier of Norland Corporation products to Stratec and a
purchaser of Stratec products. From time to time, the two companies issue
compensating credit memos in payment of merchandise debt in order to minimize
the costs of foreign exchange and bank transfers. The amount owed by Stratec to
NMS at December 31, 1995 and 1994 was $180,253 and $303,353, respectively.
During 1995 and 1994, the Company sold $889,982 and $631,523, respectively,
of products and services to Stratec.
4. INVENTORIES:
Inventories consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Products kits......................................................... $ 413,255 $ --
Spare parts........................................................... 170,007 --
Demonstration systems, net of $17,415 and $0 accumulated amortization
at December 31, 1995 and 1994, respectively.......................... 146,274 --
Rental systems........................................................ 68,948 --
---------- ----------
$ 798,484 $ --
---------- ----------
---------- ----------
</TABLE>
5. PRODUCT DEVELOPMENT LOAN RECEIVABLE -- AFFILIATE:
In accordance with the terms of a Product Development Loan Agreement dated
June 1, 1995 between NMS and the manufacturers, the Company advanced $48,519 to
Norland Corporation as of December 31, 1995. The loan accrues interest at 10%
per annum payable quarterly beginning March 31, 1996. Principal payments are due
in twenty equal quarterly installments beginning September 30, 1997.
F-9
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE -- STOCKHOLDERS:
During 1994, the Company entered into uncollateralized demand promissory
notes payable in the amount of $750,000, with interest payable at 10%, with
three beneficial stockholders of the Company to provide financing for the first
year of operations. The notes were repaid in full during 1995.
A certain beneficial stockholder advanced $50,000, without interest, in
December 1994. The advance was repaid in full in December 1995.
7. TRADE ACCOUNTS PAYABLE:
During 1995 and 1994, the Company purchased $4,012,468 and $5,200,000,
respectively, of products and services from Norland Corporation and $9,294,825
and $3,239,948, respectively, from Stratec. The amounts owed at December 31,
1995 and 1994 by NMS to these two companies for such purchases were $493,424 and
$2,139,656, and $1,086,163 and $605,995, respectively.
8. STOCKHOLDERS' EQUITY:
On August 2, 1995, NMS sold 2,000,000 shares of common stock, having an
aggregate par value of $1,000, at the initial public offering price of $10.50
per share. Deducted from the resulting gross proceeds of $21,000,000 are
$2,648,687 in costs and expenses directly related to the offering, resulting in
net proceeds of $18,351,313.
On June 2, 1995, the Board authorized a 2,000-for-1 stock split which
decreased par value to $0.0005 per share and increased authorized and issued
shares to 10,000,000 and 2,000,000, respectively.
9. COMPENSATION PROGRAMS:
STOCK OPTION PLAN
The Company has a Stock Option Plan covering officers, key employees and
consultants of the Company. The Company has authorized 1,200,000 shares for
options under the plan after giving effect to the 3-for-2 stock split described
in Note 14.
Options outstanding as of December 31 were as follows:
<TABLE>
<CAPTION>
SHARES
----------------------
OPTION PRICE 1995 1994
- ------------ ---------- ----------
<S> <C> <C>
$ 0.0005 252,000 252,000
0.0006 750,000 750,000
10.67 21,000 --
10.83 30,000 --
12.83 31,500 --
13.33 3,000 --
13.83 30,000 --
---------- ----------
1,117,500 1,002,000
---------- ----------
---------- ----------
</TABLE>
The outstanding options at December 31, 1994 have an exercise price not less
than the market value on January 3, 1994, the date on which such options were
granted. Fifty percent of the options became exercisable in 1995. On January 1,
1996, an additional twenty-five percent became exercisable and the remaining
twenty-five percent becomes exercisable on January 1, 1997. Of the 1,002,000
options granted in 1994, the term for 252,000 options is ten years and the term
for 750,000 options is five years. Options granted in 1995 vest over a four year
period and expire ten years from the granting date, or upon termination of
employment. The option price was based on 100% of market value of the Company's
stock on the dates the options were granted.
F-10
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMPENSATION PROGRAMS: (CONTINUED)
The following is a summary of options related to the plan as of December 31:
<TABLE>
<CAPTION>
OPTION PRICE OPTION PRICE
1995 PER SHARE 1994 PER SHARE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year........... 1,002,000 $ 0.0005-0.0006 -- --
Granted............................................ 115,500 $ 10.67-13.83 1,002,000 $ 0.0005-0.0006
---------- ----------
Options outstanding at end of year................. 1,117,500 $ 0.0005-13.83 1,002,000 $ 0.0005-0.0006
---------- ----------
---------- ----------
Options exercisable at end of year................. 501,000 --
---------- ----------
---------- ----------
</TABLE>
The Company is currently evaluating its alternatives under the provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation" and plans on implementing
the statement in 1996 in accordance with its effective date.
401(K) PLAN
Pursuant to the Norland Medical Systems, Inc. Retirement Savings Plan,
eligible employees may elect to contribute a portion of their salary on a
pre-tax basis. With respect to employee contributions of up to 7% of salary, the
Company makes a contribution at the rate of 25 cents on the dollar. The Company
may also make additional discretionary contributions for any year. Contributions
are subject to applicable limitations contained in the Internal Revenue Code.
Employees are at all times vested in their own contributions; Company matching
contributions vest gradually over six years of service. The Company's policy is
to fund plan contributions as they accrue. Contribution expense was $1,776 and
$0 for the years ended December 31, 1995 and 1994, respectively.
10. INCOME TAX:
The components of the provision for income taxes as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ---------
<S> <C> <C>
Current:
Federal............................................................ $ 1,202,406 $ 17,500
State.............................................................. 233,594 9,500
Deferred-net....................................................... -- --
------------ ---------
$ 1,436,000 $ 27,000
------------ ---------
------------ ---------
</TABLE>
As of December 31, 1995 and 1994, the Company did not have any significant
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities.
A reconciliation of the difference between the statutory federal income tax
rate and the effective income tax rate for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Statutory income tax rate................................................. 34.0% 34.0%
State income taxes, net of federal tax effect............................. 6.6 6.6
Impact of graduated federal income tax rates.............................. -- (12.2)
--- -----
Effective income tax rate................................................. 40.6% 28.4%
--- -----
--- -----
</TABLE>
F-11
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. OTHER RELATED PARTY TRANSACTIONS:
The Company rents space and purchases administrative support services from
another company in which certain beneficial stockholders of NMS are also
stockholders. The cost of the space and services to NMS for the years ended
December 31, 1995 and 1994 was $22,360 and $150,000, respectively. As of
December 31, 1995 and 1994, no amount was due by the Company for these costs.
12. SUPPLEMENTAL SALES AND CUSTOMER INFORMATION:
The Company's largest customers are medical distributors in countries with
high incidence of bone disease, available therapies and significant third party
reimbursement. Two such distributors accounted for 68% and 9%, and 34% and 30%
of revenues, respectively, for the years ended December 31, 1995 and 1994,
respectively.
Sales by geographic territory for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Pacific Rim............................... $ 15,998,238 87.7% $ 7,737,897 77.0%
North America............................. 1,152,046 6.3 750,739 7.5
Europe/Middle East........................ 889,982 4.9 631,523 6.3
Latin America............................. 203,542 1.1 921,389 9.2
------------- ----- ------------- -----
$ 18,243,808 100.0% $ 10,041,548 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
13. QUARTERLY FINANCIAL DATA: (UNAUDITED)
<TABLE>
<CAPTION>
1994 QUARTERS
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 1,733,995 $ 2,366,798 $ 2,427,780 $ 3,512,975 $ 10,041,548
Gross profit (loss)...................... 679,247 815,950 873,955 (767,552) 1,601,600
Operating income (loss).................. 406,442 549,146 451,071 (1,304,631) 102,028
Net income (loss)........................ 240,526 325,136 267,173 (764,791) 68,044
Net income (loss) per Common and Common
equivalent share........................ $ 0.06 $ 0.08 $ 0.07 $ (0.19) $ 0.02
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTERS
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 3,895,921 $ 4,003,310 $ 5,230,527 $ 5,114,050 $ 18,243,808
Gross profit............................. 1,295,390 1,254,162 1,519,420 1,666,027 5,734,999
Operating income......................... 735,384 796,134 719,811 872,177 3,123,506
Net income............................... 438,312 475,666 505,364 681,148 2,100,490
Net income per Common and Common
equivalent share........................ $ 0.11 $ 0.12 $ 0.08 $ 0.10 $ 0.40
</TABLE>
14. SUBSEQUENT EVENTS:
On April 2, 1996, the Company acquired Dove Medical Systems ("Dove") and
certain assets that were licensed to Dove, and the Company gave as consideration
161,538 shares of its Common Stock, after giving effect to the 3-for-2 stock
split effective June 13, 1996, and $3,600,000 in cash.
On May 30, 1996, the Board authorized a 3-for-2 stock split to be effective
June 13, 1996 which increased issued and outstanding shares to 6,000,000. The
impact of the split has been reflected in the accompanying financial statements.
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Ostech B.V.:
We have audited the accompanying statement of net assets in liquidation of
Ostech B.V. as of December 31, 1993, not presented separately herein, and the
related statement of income (loss) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides reasonable basis for
our opinion.
The Company, as disclosed in the financial statements, has extensive
transactions and relationships with related parties. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets in liquidation as of December 31, 1993,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
As described in Note 1 to the financial statements, the stockholders of
Ostech B.V. decided to cease operations and to liquidate the assets and
liabilities. As a result, the Company changed its basis of accounting from the
going concern to a liquidation basis.
SCHWEIZERISCHE TREUHANDGESELLSCHAFT --
COOPERS & LYBRAND AG
Zurich, Switzerland
June 5, 1995
F-13
<PAGE>
OSTECH B.V.
STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Revenue (including sales to affiliates of $672,396)............................. $5,488,095
Cost of revenue................................................................. 4,066,539
----------
Gross Profit.................................................................. 1,421,556
Sales and marketing expense..................................................... 1,068,197
General and administration
(including expense reimbursements from an affiliate of $2,000)................. 399,449
----------
Operating Loss................................................................ (46,090)
Other expense................................................................... (13,760)
Liquidation loss -- net......................................................... (326,007)
----------
(339,767)
----------
Loss before taxes............................................................. (385,857)
Provision for taxes............................................................. 60
----------
Net Loss...................................................................... $ (385,917)
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
OSTECH B.V.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss......................................................................... $(385,917)
---------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation................................................................... 27,326
Amortization................................................................... 29,502
Bad debts...................................................................... 160,615
Changes in assets and liabilities:
Accounts receivable.......................................................... 543,270
Accounts receivable -- affiliates............................................ 38,327
Other current assets......................................................... (9,274)
Inventory.................................................................... 745
Net assets in liquidation.................................................... (45,372)
Accounts payable............................................................. (159,682)
Accrued commissions and expenses............................................. 21,449
Accounts payable -- affiliates............................................... (463,979)
---------
Total adjustments.......................................................... 142,927
---------
Net cash used in operating activities...................................... (242,990)
---------
FINANCING ACTIVITIES:
Repayment of advances from affiliates.......................................... (74,213)
---------
Net cash used in financing activities...................................... (74,213)
---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......................................... 1,656
---------
NET DECREASE IN CASH............................................................. (315,547)
CASH AT BEGINNING OF YEAR........................................................ 604,810
---------
CASH AT END OF YEAR.............................................................. $ 289,263
---------
---------
</TABLE>
Supplemental disclosure of non-cash financing activities:
During 1993, Ostech B.V. settled outstanding assets and liabilities with
affiliates of $333,732, which has been reflected as a contribution of capital by
the common parent, Norland Medical Systems B.V.
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
OSTECH B.V.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE STRUCTURE
Ostech B.V. (Rotterdam, The Netherlands) ("OBV") was incorporated on May 7,
1992 to market and distribute the products and technologies of Norland
Corporation (U.S.) ("Norland Corp.") outside of the U.S., Canada and Switzerland
and of Stratec Medizintechnik GmbH (Germany) ("Stratec") outside of Germany and
Switzerland through its branch operations located in Pfaffikon, Switzerland. Its
branch operations represented all of the operating activity of OBV. OBV
commenced operations on April 1, 1992. OBV, Norland Corp. and Stratec are
wholly-owned subsidiaries of Norland Medical Systems B.V. (The Netherlands)
("NMS BV") since 1992. The sole founding shareholder of OBV was NMS BV, with an
initial capital contribution of NLG 40,000 ($22,096) for 400 shares at par,
constituting all of the issued and outstanding stock at the time.
COMPANY'S ACTIVITIES
OBV distributes devices to aid in the detection and monitoring of bone
diseases, and in the assessment of the effect of existing and potential
therapies for the treatment of those diseases. These devices are distributed
throughout the world to hospitals, clinics, research institutions,
pharmaceutical companies and individual practitioners. Sales are made generally
to distributors of medical products in the foreign (non-U.S.) countries. Norland
Corp. continued to distribute its products in the U.S. and Canada, Stratec
continued to distribute its products in Germany and a separate subsidiary of NMS
BV distributed both companies' products in Switzerland. For sales of Stratec
products in the U.S. and Canada, Norland Corp. served as a subdistributor of
OBV.
BASIS OF PRESENTATION
In December, 1993 the management of NMS BV decided to cease operations and
adopted a plan to liquidate OBV's assets and liabilities. Accordingly, OBV
changed its basis of accounting from a going concern basis as of December 31,
1993. That liquidation was substantially carried out through 1994, and the
results of that liquidation have been reflected in OBV's accounts as of December
31, 1993 as "Liquidation loss -- net." The trade accounts receivable were
transferred at their net book value to Stratec, which has the responsibility for
collecting all open accounts. Fixed assets were sold or scrapped. All of the
intercompany accounts receivable and payable were settled with the respective
affiliate at their net realizable value. All outstanding third party obligations
were paid utilizing the cash remaining in OBV's bank account. OBV incurred net
operating losses on liquidation of $110,007, due primarily to severance payments
and outstanding lease commitments offsetting sale of remaining inventory and
committed sales and other wind-up activity of $104,880. OBV realized a gain on
the liquidation of outstanding assets and liabilities with affiliates of
$333,732, which has been reflected as a contribution of capital by the common
parent, NMS BV. In addition, the company wrote-off organizational expenses
totalling $320,880. The summation of these items resulting in a net loss as a
result of winding up the company of $326,007. The statement of net assets in
liquidation has not been presented as it bears no relationship to Norland
Medical Systems, Inc.
The "Liquidation loss -- net" for 1993 includes the following components:
<TABLE>
<S> <C> <C>
A. Write-off of the unamortized organizational expenses........ $(320,880)
---------
B. Net operating losses on liquidation......................... (110,007)
---------
C. Other wind-up activity after December 31, 1993 (i.e., sales 104,880
of inventory, fixed assets, etc.)...........................
---------
Total....................................................... $(326,007)
---------
---------
</TABLE>
F-16
<PAGE>
OSTECH B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE AND COST RECOGNITION
OBV purchases merchandise and services from Norland Corp. and Stratec on the
basis of firm orders in hand. OBV invoices customers and is invoiced by Norland
Corp. and Stratec when the product is shipped. Revenue is recognized at the time
of shipment.
As both OBV and the customer are invoiced at the same time, costs of
products and services are recognized at the time of shipment. The invoice prices
from Norland Corp. and Stratec to OBV are determined by using a pricing formula
whereby the direct cost of material, parts and labor of Stratec or Norland Corp.
is multiplied by a standard markup coefficient which has been determined to
provide gross margins to OBV and the supplying factories which are
representative of other manufacturers and distributors in similar industries.
Management believes the gross profit recognized by OBV materially approximates
that which would have been realized had OBV used unaffiliated suppliers.
The manufacturers offer one-year warranties on both the hardware and
software included in their systems. OBV provides warranty services on behalf of
the manufacturers. Costs for returns and exchanges are borne by the respective
manufacturer, not OBV. OBV invoices the manufacturer for the costs of performing
such warranty services. OBV has no obligations to provide any other services to
any of its sub-distributors or their customers.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, OBV considers all highly
liquid debt instruments purchased with a maturity of three months or less at the
date of purchase to be cash equivalents.
INVENTORY
As a result of the simultaneous invoice from the supplier and to the
customer, OBV does not generally maintain any finished goods inventory on its
books. OBV maintains a stock of replacement parts at its location in Pfaffikon,
which also houses its service organization. Service is provided to customers in
OBV's sales territories on the basis of the warranty provided by each
manufacturer on both the hardware and software included in their systems.
From time to time, OBV judged it desirable for marketing purposes to place a
device at the disposal of a prominent scientist or research institution
specializing in the study of bone disease. In such cases, OBV carried the device
inventory at its net realizable value until it was eventually returned to be
sold. In addition, OBV occasionally rented a device in anticipation of an
eventual sale following satisfactory use by the customer. In such cases, OBV
carried the device in inventory until the time of the sale.
INCOME TAXES
Effective January 1, 1993, OBV adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." At
January 1, 1993, the cumulative effect of the change in accounting for income
taxes is immaterial.
Under SFAS No. 109, deferred tax assets and liabilities are determined based
on the differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Under SFAS No. 109, the provision for income taxes includes taxes payable for
the current period plus the change in deferred tax assets and liabilities during
the period.
F-17
<PAGE>
OSTECH B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
MAJOR CUSTOMERS
OBV's largest customers are medical distributors in countries with high
incidence of bone disease, available therapies and significant third party
reimbursement. These include Picker in Germany, Emsor in Spain, Cam Diagnostics
in Italy, Dutoit Medical in Belgium, Nissho Iwai Corporation in Japan, Inderlec
Australia in Australia and Meditec Co., Ltd. in Korea. Sales to Meditec totalled
12% of 1993 revenues.
CONCENTRATION OF CREDIT RISK
OBV generally sells on either thirty day terms or against irrevocable
letters of credit. Any financing of the end user is the decision of, and
dependent on, the distributor in each country.
FOREIGN EXCHANGE
The accounts of OBV are maintained in Dutch Guilders and Swiss Francs and
are translated into U.S. dollars at the month-end exchange rate for the balance
sheet and statement of net assets in liquidation and average exchange rate for
the month for the income statement. Foreign currency gains and losses resulting
from transactions are included in net income. OBV did not have the rights to
distribute products manufactured by Stratec in Germany and Norland Corp. in the
U.S. Those products were distributed directly by Norland Corp. and Stratec
through their own sales organizations. As a result, OBV was both a supplier of
Norland Corp. products to Stratec and a purchaser of Stratec products. From time
to time, the two companies issue compensating credit memos in payment of
merchandise debt in order to minimize the costs of foreign exchange and bank
transfers.
2. CAPITAL TRANSACTIONS:
Ostech B.V.-Paffikon is organized as a branch of Ostech B.V.-Rotterdam and
is consolidated with that entity. OBV was capitalized upon incorporation on May
7, 1992 with $22,096 (NLG40,000 at $0.5524). There have been no capital
contributions or dividends since that date.
Upon adoption of the liquidation basis of accounting, the affiliate accounts
were adjusted to ultimate settlement amounts resulting in a capital contribution
of $333,732 at December 31, 1993.
3. INCOME TAX:
OBV satisfied all of its Swiss tax obligations in 1994 and, as a result, has
no further provision necessary for the Swiss branch. Ostech B.V.-Rotterdam
performs all of its sales activities through its Swiss branch and incurs a tax
obligation in the Netherlands based on the criteria of the available tax ruling
in such circumstances.
4. OPERATING LEASES:
OBV leased facilities and motor vehicles under noncancelable leases with
terms in excess of one year. These leases were terminated during 1994, the cost
of which has been included in liquidation gain-net in the accompanying statement
of income (loss) and retained earnings. Rental expenses totaled $71,472 for the
year ended December 31, 1993.
5. OTHER RELATED PARTY TRANSACTIONS:
The Company purchased its products and services exclusively from Norland
Corp. and Stratec.
OBV's facilities were shared with an affiliate. During 1993, OBV received
approximately $2,000 as a rent and administrative cost reimbursement. The basis
for determining the allocation was the square feet occupied by the affiliate
plus a portion of administrative support personnel based on usage, which is
deemed reasonable by management.
OBV's revenues include sales of merchandise to affiliates totaling $672,396
in 1993.
F-18
<PAGE>
OSTECH B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. OTHER RELATED PARTY TRANSACTIONS: (CONTINUED)
Management believes the revenues would not be materially different if the
sales were to unaffiliated companies.
6. SALES BY GEOGRAPHIC TERRITORY:
Sales by geographic territory for the year ended December 31, 1993 were as
follows:
<TABLE>
<S> <C> <C>
Europe.................................................. $2,973,516 54.2%
Latin America........................................... 1,177,453 21.5
Korea................................................... 644,579 11.7
North America........................................... 356,396 6.5
Pacific Rim, remaining.................................. 336,151 6.1
---------- ------
$5,488,095 100.0%
---------- ------
---------- ------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Dove Medical Systems:
We have audited the accompanying balance sheets of Dove Medical Systems as
of December 31, 1995 and 1994, and the related statements of income, changes in
stockholders' equity and cash flows, for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Dove Medical Systems as of
December 31, 1995 and 1994, and the results of its operations and cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Hurley & Company
Granada Hills, California
May 10, 1996
F-20
<PAGE>
DOVE MEDICAL SYSTEMS
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 195,122 $ 158,696
Accounts receivable, net of allowance for doubtful accounts of $1,000 and $0 at December
31, 1995 and 1994, respectively........................................................ 160,366 19,396
Inventories............................................................................. 219,886 211,082
Prepaid expenses........................................................................ 3,487 3,338
---------- ----------
Total current assets.................................................................. 578,861 392,512
---------- ----------
Property and equipment:
Equipment, furniture and fixtures....................................................... 39,364 23,914
Less accumulated depreciation........................................................... 13,498 7,536
---------- ----------
25,866 16,378
Other assets:
Organization costs, net of accumulated amortization of $1,637 and $1,086 at December 31,
1995 and 1994, respectively............................................................ 1,118 1,669
Deposits................................................................................ 7,546 5,011
---------- ----------
Total assets.......................................................................... $ 613,391 $ 415,570
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................................... $ 69,313 $ 71,859
Profit sharing contribution payable..................................................... 52,000 --
Accrued employee personal time.......................................................... 10,113 8,127
Product warranty reserve................................................................ 10,000 5,000
Service deposits........................................................................ 13,000 --
Income tax payable...................................................................... 1,374 2,534
---------- ----------
Total current liabilities............................................................. 155,800 87,520
---------- ----------
Commitments and contingencies............................................................. -- --
Stockholders' equity:
Common Stock, no par value, authorized 100,000 shares, issued and outstanding 35,000
shares................................................................................. 35,000 35,000
Retained earnings....................................................................... 422,591 293,050
---------- ----------
Total Stockholders' equity............................................................ 457,591 328,050
---------- ----------
Total liabilities and stockholders' equity............................................ $ 613,391 $ 415,570
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-21
<PAGE>
DOVE MEDICAL SYSTEMS
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Revenue, net of discounts and allowances.............................................. $ 1,860,929 $ 1,903,034
Cost of revenue....................................................................... 854,693 1,145,807
------------ ------------
Gross profit...................................................................... 1,006,236 757,227
Sales and marketing expense........................................................... 150,761 33,569
General and administrative expense.................................................... 419,814 396,645
------------ ------------
Operating income.................................................................. 435,661 327,013
Other income:
Interest income..................................................................... 3,120 3,022
Other Income, net................................................................... 244 997
------------ ------------
Income before income tax.......................................................... 439,025 331,032
Income tax............................................................................ 6,094 4,694
------------ ------------
Net income........................................................................ $ 432,931 $ 326,338
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
DOVE MEDICAL SYSTEMS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL
AND COMMON RETAINED STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS EQUITY
------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1994............................... 35,000 $ 35,000 $ 96,722 $ 131,722
Net Income.................................................. -- -- 326,328 326,328
Stockholder Distributions................................... -- -- (130,000) (130,000)
------ --------- ----------- ------------
Balance as of December 31, 1994............................. 35,000 35,000 293,050 328,050
Net Income.................................................. -- -- 432,931 432,931
Stockholder Distributions................................... -- -- (303,390) (303,390)
------ --------- ----------- ------------
Balance as of December 31, 1995............................. 35,000 $ 35,000 $ 422,591 $ 457,591
------ --------- ----------- ------------
------ --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
DOVE MEDICAL SYSTEMS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income............................................................................ $ 432,931 $ 326,328
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 6,513 4,764
Product warranty reserve............................................................ 5,000 5,000
Changes in:
Accounts receivable............................................................... (140,970) (7,796)
Inventories....................................................................... (8,804) (148,214)
Prepaid expenses.................................................................. (149) (1,386)
Deposits.......................................................................... (2,535) (1,785)
Accounts payable and other accrued expenses....................................... 51,440 (55,415)
Service deposits.................................................................. 13,000 --
Income tax payable................................................................ (1,160) 1,188
----------- -----------
Total adjustments............................................................... (77,665) (203,644)
----------- -----------
Net cash provided by operating activities....................................... 355,266 122,684
----------- -----------
Cash flows from investing activities:
Furniture and equipment expenditures................................................ (15,450) (2,245)
----------- -----------
Net cash used by investing activities:.......................................... (15,450) (2,245)
----------- -----------
Cash flows from financing activities:
Distributions to stockholders......................................................... (303,390) (30,000)
----------- -----------
Net cash used by financing activities........................................... (303,390) (30,000)
----------- -----------
Net increase in cash and cash equivalents............................................... 36,426 90,439
Cash and cash equivalents at beginning of year.......................................... 158,696 68,257
----------- -----------
Cash and cash equivalents at end of year................................................ $ 195,122 $ 158,696
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1994, the Company distributed to its stockholder a
$100,000 note receivable from a debtor.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Income taxes paid....................................................................... $ 7,254 $ 3,506
----------- -----------
----------- -----------
Interest paid........................................................................... $ 0 $ 3
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
DOVE MEDICAL SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ACTIVITY:
Dove Medical Systems (the "Company") manufactures medical scanning devices
(bone densitometers, known as the "OsteoAnalyzer") that are utilized by
hospitals, medical clinics, research institutions, and individual practitioners
throughout the world to help in the diagnosis of osteoporosis and other bone
disorders.
2. ORGANIZATION AND BASIS OF PRESENTATION:
The Company was incorporated in California on December 9, 1992. Through
December 31, 1995, all the issued and outstanding common shares of the Company
(totaling 35,000 shares) were owned by a single stockholder (a husband and wife)
as community property. In April 1996, Norland Medical Systems, Inc. ("Norland"),
a publicly held company, acquired all the outstanding common shares of the
Company (including exercised stock options issued to other individuals) through
an exchange of common stock. The financial statements of the Company as of
December 31, 1995 and 1994 and for the years then ended do not reflect any
amounts or valuations arising from this transaction.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and on deposit and highly
liquid debt instruments with original maturities of three months or less.
Substantially all funds are on deposit with one financial institution.
INVENTORIES
Inventories represent raw material (parts and components), work-in-process
(assemblies) and finished goods. Inventories are valued at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets. The estimated useful lives range from five to seven years.
ORGANIZATION COSTS
Organization costs are amortized over sixty months using the straight-line
method.
REVENUE RECOGNITION
Revenues are considered earned when all work on an inventoried system or
replacement part intended for customer use has been completed and the unit has
been shipped.
INCOME TAXES
Differences between financial statement and taxable income exist, due
primarily to timing differences pertaining to depreciation. These differences
are not material. The Company's stockholder has elected to be taxed as an S
Corporation and pay taxes primarily at the shareholder level. As such, income
taxes reflect only the 1.5% rate due California for S Corporations. In April
1996, the Company's S Corporation status was terminated prior to its merger with
Norland.
F-25
<PAGE>
DOVE MEDICAL SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Raw materials and component parts................................ $ 125,082 $ 106,163
Assemblies in process............................................ 33,534 76,616
Finished goods................................................... 65,270 32,303
------------ ------------
223,886 215,082
Less obsolescence reserve........................................ 4,000 4,000
------------ ------------
$ 219,886 $ 211,082
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Furniture and fixtures........................................... $ 4,243 $ 4,243
Equipment........................................................ 35,121 19,671
------------ ------------
39,364 23,914
Less accumulated depreciation.................................... 13,498 7,536
------------ ------------
$ 25,866 $ 16,378
------------ ------------
------------ ------------
</TABLE>
6. PROFIT SHARING PLAN:
During the years ended December 31, 1995 and 1994, the Company had a defined
contribution pension plan covering substantially all of its employees. The plan
utilized an age weighted allocation, whereby the current year's contribution was
allocated proportional to the participants' present value of a benefit payable
at normal retirement date equal to 1% of pay, using annual pre-retirement
interest of 8.00%. The Company contributed at approximately 15% of covered
payroll (the maximum rate) during both of these years, resulting in pension plan
costs of $52,000 and $34,391, respectively. The plan was subsequently terminated
and vesting requirements waived (with employee accumulated benefit amounts
transferred to individual IRA accounts) prior to the acquisition of 100% of the
Company's common stock by Norland in April 1996.
7. RELATED PARTY TRANSACTIONS:
(a) The Company was granted an exclusive worldwide license by the owners of
intellectual property purchased from the bankruptcy estate of Osteon, Inc.
pertaining to a U.S. patent employed in the manufacture and calibration of the
Company's scanning devices, along with other software and technology.
Approximately 83% of this intellectual property was owned by the Company's
chairman and principal stockholder, 10% by his mother, and another 7% by an
unrelated S corporation.
As consideration for this license during the period January 1, 1994 through
June 30, 1994, the Company paid its chairman $27,500 and issued a total of
17,700 options to the three intellectual property owners (15,000, 2,000, and 700
options, respectively) to purchase the Company's common stock at $6.00 per share
over a term of five years. Another $100,000 was paid to the intellectual
property owners as a use fee for the period July 1, 1994 through December 31,
1994. Extended agreements covering the 1995 calendar year and subsequent period
dictated a use fee of $2,000 for every OsteoAnalyzer sold. Total use fees
incurred, based upon shipment of 65 OsteoAnalyzers, amounted to $130,000 for the
year ended December 31, 1995.
F-26
<PAGE>
DOVE MEDICAL SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
(b) The Company's president (and wife of the chairman) was paid a salary of
$150,000 during each of the years ended December 31, 1995 and 1994,
respectively. Under California's community property laws, she beneficially held
100% of the Company's outstanding stock throughout these periods.
8. COMMITMENTS AND CONTINGENCIES:
(a) The Company has a two-year lease to rent warehouse and office space in
Newbury Park, California. The lease expires in January 1998. Monthly payments
are currently $2,052, with a 3% to 6% rent adjustment to be made in February
1997. From inception, the Company previously leased smaller facilities in its
Newbury Business Park location, and for part of 1994, rented additional office
space in Los Angeles.
Future minimum lease payments required under its operating lease(s) are as
follows:
<TABLE>
<S> <C>
Year ended December 31:
1996..................................................... $ 23,634
1997..................................................... 25,312
1998..................................................... 2,115
---------
$ 51,061
---------
---------
</TABLE>
Rental expense for the years ended December 31, 1995 and 1994 was $12,744
and $23,423, respectively.
(b) The Company warrants its products for a full year from date of sale,
including all parts and on-site labor. The Company limits its risk by having
similar arrangements in place with its primary component manufacturers and
suppliers. A warranty liability reserve in the amount of $10,000 and $5,000 was
recognized at December 31, 1995 and 1994, respectively, to cover estimated
repair and replacement costs to be incurred after the balance sheet date
related, respectively, to revenues generated during the respective annual
periods.
9. STOCK OPTIONS:
The following stock option computations are reflective of a 100:1 common
stock split, which occurred in December, 1993:
At December 31, 1995, there were 2,100 options outstanding to purchase the
Company's common stock at a price of $1.00 per share. These stock options had
been issued under the Company's 1992 Incentive Stock Option Plan. Additionally,
there were another 2,500 stock options exercisable at $6.00 per share which had
been issued to a consultant, as well as 17,700 more stock options issued to
intellectual property owners, also exercisable at $6.00 per share, as described
in Note 7(a) above. The total number of options outstanding at December 31, 1995
was therefore 22,300.
In April 1996, prior to the consummation of the acquisition of 100% of the
Company's common stock by Norland, 5,600 of the above stock options were
exercised, bringing the total number of common shares outstanding to 40,600,
including 35,000 shares of stock owned as community property by the Company's
chairman and president, and representing 100% of previously issued common stock.
The balance of 16,700 stock options, namely, 15,000 held by the Company's
chairman, 1,000 hold by his mother, and 700 held by an unrelated intellectual
property owner, were not exercised and were voided. The chairman did sell 4,000
of his personal shares to the unrelated intellectual property owner at a price
of $6.00 each.
10. EXPORT SALES AND MAJOR CUSTOMERS/SUPPLIERS:
During the years ended December 31, 1995 and 1994, export sales,
predominantly to Japan, China (both Taiwan and the mainland), and Korea,
accounted for greater than 90% of the Company's total revenues. These sales were
transacted in U.S. dollars, so revenues were not affected by currency
translations. One customer accounted for approximately 67% of sales during
calendar 1995 and approximately 83% of sales
F-27
<PAGE>
DOVE MEDICAL SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EXPORT SALES AND MAJOR CUSTOMERS/SUPPLIERS: (CONTINUED)
during the 1994 year. Another customer accounted for approximately 17% of sales
during 1995. No other customer accounted for 10% or more of sales during the
years ended December 31, 1995 and 1994, respectively.
While the Company believes it can develop alternate sources for all parts,
there are currently three vendors that are the sole source for the items
provided. During each of the years ended December 31, 1995 and 1994,
respectively, these suppliers collectively accounted for approximately 60% of
the Company's net purchases of parts and materials.
11. SUBSEQUENT EVENT:
In April 1996, Norland acquired all the outstanding common stock of Dove
Medical Systems (totalling 40,600 shares as detailed in Note 9 above), in a
stock swap valued at approximately $3,311,000.
F-28
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Current assets:
Cash............................................................................... $ 17,639,970 $ 480,046
Accounts receivable -- trade, less allowance for doubtful accounts of $150,000 at
March 31, 1996.................................................................... 5,708,930 2,347,385
Accounts receivable -- affiliate................................................... 142,395 321,937
Inventories........................................................................ 879,132 0
Prepaid expenses and other current assets.......................................... 157,415 34,540
------------- ------------
Total current assets............................................................. 24,527,842 3,183,908
Property and equipment............................................................. 84,013 0
Product development loan receivable -- affiliate................................... 75,906 0
------------- ------------
Total assets..................................................................... $ 24,687,761 $ 3,183,908
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- stockholders...................................................... $ 0 $ 250,000
Stockholder advances............................................................... 0 50,000
Accounts payable -- Stratec........................................................ 1,685,351 1,045,838
Accounts payable -- Norland........................................................ 892,975 694,690
Accrued expenses................................................................... 374,156 202,000
Income taxes payable............................................................... 485,837 295,587
Customer deposits.................................................................. 40,072 138,937
------------- ------------
Total current liabilities........................................................ $ 3,478,391 $ 2,677,052
------------- ------------
------------- ------------
Stockholders' equity:
Common stock, par value of $.0005 per share -- 10,000,000 shares authorized,
6,698,250 shares issued at March 31, 1996 and 3,000,000 shares issued at March 31,
1995.............................................................................. 3,349 1,500
Subscriptions receivable........................................................... 0 (500)
Additional paid-in capital......................................................... 18,346,732 0
Retained earnings.................................................................. 2,859,289 505,856
------------- ------------
Total stockholders' equity....................................................... 21,209,370 506,856
------------- ------------
Total liabilities and stockholders' equity....................................... $ 24,687,761 $ 3,183,908
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-29
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenue............................................................................... $ 5,218,290 $ 3,895,921
Cost of revenue....................................................................... 3,415,911 2,600,531
------------ ------------
Gross profit...................................................................... 1,802,379 1,295,390
Sales and marketing expense........................................................... 575,348 334,553
General and administrative expense.................................................... 305,716 225,453
------------ ------------
Operating income.................................................................. 921,315 735,384
Other income.......................................................................... 242,941 2,515
------------ ------------
Income before taxes................................................................... 1,164,256 737,899
Provision for taxes................................................................... 473,000 299,587
------------ ------------
Net income........................................................................ $ 691,256 $ 438,312
------------ ------------
Earnings per share.................................................................... $ .10 $ .11
------------ ------------
------------ ------------
Weighted average number of common and common equivalent shares........................ 7,057,010 4,002,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-30
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON PAID-IN STOCK RETAINED
TOTAL SHARES STOCK CAPITAL SUBSCRIPTIONS EARNINGS
------------- ---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1995.......................... $ 20,520,846 6,000,000 $ 3,000 $ 18,349,813 -- $ 2,168,033
Issuance of shares for stock
options exercised............. 270 698,250 349 (79) -- --
Cost and expenses directly
related to the stock
offering...................... (3,002) -- -- (3,002) -- --
Net income..................... 691,256 -- -- -- -- 691,256
------------- ---------- ----------- ------------- ------------- ------------
Balance as of March 31, 1996... $ 21,209,370 6,698,250 $ 3,349 $ 18,346,732 -- $ 2,859,289
------------- ---------- ----------- ------------- ------------- ------------
------------- ---------- ----------- ------------- ------------- ------------
Balance as of December 31,
1994.......................... $ 68,044 3,000,000 $ 1,500 -- $ (1,000) $ 67,544
Proceeds from common stock
subscriptions................. 500 -- -- -- 500 --
Net income..................... 438,312 -- -- -- -- 438,312
------------- ---------- ----------- ------------- ------------- ------------
Balance as of March 31, 1995... $ 506,856 3,000,000 $ 1,500 -- $ (500) $ 505,856
------------- ---------- ----------- ------------- ------------- ------------
------------- ---------- ----------- ------------- ------------- ------------
</TABLE>
See accompanying notes to condensed financial statements.
F-31
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................................................... $ 691,256 $ 438,312
Adjustments to reconcile net income to net cash used in operating activities:...... 12,933 0
Amortization expense.............................................................
Inventory obsolescence expense................................................... 15,000 0
Changes in:
Accounts receivable............................................................ (1,099,552) (493,475)
Inventories.................................................................... (108,581) 0
Prepaid expenses and other current assets...................................... (88,426) (13,190)
Accounts payable............................................................... (86,754) 48,370
Customer deposits.............................................................. 5,408 20,937
Accrued expenses............................................................... 13,153 155,273
Income taxes payable........................................................... (819,200) 268,587
------------- -----------
Total adjustments............................................................ (2,156,019) (13,498)
------------- -----------
Net cash (used in) provided by operating activities.......................... (1,464,763) 424,814
------------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment................................................. (84,013) 0
Product development Loan to affiliate.............................................. (27,387) 0
------------- -----------
Net cash used in investing activities........................................ (111,400) 0
------------- -----------
FINANCING ACTIVITIES:
Repayment of stockholder notes..................................................... 0 (500,000)
Cost and expense of issuance of Common Stock....................................... (3,002) 0
Proceeds from stock options exercised.............................................. 270 0
Proceeds from common stock subscriptions........................................... 0 500
------------- -----------
Net cash used in financing activities........................................ (2,732) (499,500)
------------- -----------
NET DECREASE IN CASH................................................................. (1,578,895) (74,686)
CASH, BEGINNING OF PERIOD............................................................ 19,218,865 554,732
------------- -----------
CASH, END OF PERIOD.................................................................. $ 17,639,970 $ 480,046
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-32
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express an
opinion thereon. The information furnished herein includes all adjustments which
are, in the opinion of management, necessary for a fair statement of financial
position and the results of operations as of and for the three months ended
March 31, 1996 and 1995, and all such adjustments are of a normal recurring
nature. Management recommends the accompanying financial information be read in
conjunction with the Company's audited financial statements and related notes
set forth elsewhere herein.
The results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 1996.
2. INVENTORIES
As of March 31, 1996, inventories consist of the following:
<TABLE>
<S> <C>
Rental systems.................................................... $ 433,680
Demonstration systems, less accumulated amortization of $30,348... 276,368
Spare parts and sub-assemblies, less an obsolescence reserve of
$15,000.......................................................... 85,597
Product kits...................................................... 83,487
---------
$ 879,132
---------
---------
</TABLE>
Systems used in the Company's short-term rental and pay-per-scan programs
are carried in inventory at the lower cost or net realizable value until the
time of sale.
The Company maintains an inventory of demonstration systems to support its
marketing efforts. Such systems are carried in inventory at the lower of cost or
net realizable value until the time of sale. From time to time, the Company may
judge it desirable for marketing purposes to provide a device to a prominent
scientist or research institution specializing in the study of bone disease. In
such cases, the Company will carry the device in demonstration system inventory
at cost less amortization expense calculated on a straight-line basis over
thirty-six months.
Spare parts and sub-assemblies are stated at the lower of cost or market;
cost is determined principally by the first-in, first-out method. Inventory
includes product kits purchased from Stratec which are recorded in inventory at
purchase cost until the time of sale or rental of the assembled product.
3. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Primary income per share is calculated by dividing net income by the average
shares of common stock and common stock equivalents outstanding during the
period after giving effect to the Stock Split. Common stock equivalents are
stock options which have been included using the treasury stock method only when
their effect is dilutive.
F-33
<PAGE>
DOVE MEDICAL SYSTEMS
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 167,063 $ 296,027
Accounts receivable, net of allowance for doubtful accounts of $1,000 and $0 at March
31, 1996 and 1995, respectively........................................................ 139,174 149,825
Inventories............................................................................. 233,688 211,915
Prepaid expenses........................................................................ 9,668 3,214
---------- ----------
Total current assets.................................................................. 549,593 660,981
---------- ----------
Property and equipment:
Equipment, furniture and fixtures....................................................... 51,188 24,772
Less accumulated depreciation........................................................... 15,770 9,027
---------- ----------
35,418 15,745
Other assets:
Organization costs, net of accumulated amortization of $1,774 and $1,224 at March 31,
1996 and 1995, respectively............................................................ 981 1,531
Deposits................................................................................ 7,546 4,576
---------- ----------
Total assets.......................................................................... $ 593,538 $ 682,833
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................................... $ 158,934 $ 122,062
Accrued employee personal time.......................................................... 12,400 8,127
Product warranty reserve................................................................ 10,000 5,000
Service deposits........................................................................ 24,500 50
Income tax payable...................................................................... 710 676
---------- ----------
Total current liabilities............................................................. 206,544 135,915
---------- ----------
Commitments and contingencies............................................................. -- --
Stockholders' equity:
Common stock, no par value, authorized 100,000 shares, issued and outstanding 40,600
shares and 35,000 shares at March 31, 1996 and 1995, respectively...................... 58,100 35,000
Retained earnings....................................................................... 328,894 511,918
---------- ----------
Stockholders' equity.................................................................. 386,994 546,918
---------- ----------
Total liabilities and stockholders' equity............................................ $ 593,538 $ 682,833
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-34
<PAGE>
DOVE MEDICAL SYSTEMS
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenue, net of discounts and allowances.................................................. $ 672,691 $ 594,705
Cost of revenue........................................................................... 329,221 269,427
---------- ----------
Gross profit.......................................................................... 343,470 325,278
Sales and marketing expense............................................................... 95,821 15,647
General and administrative expense........................................................ 138,396 88,365
Staff service bonus....................................................................... 68,000 --
---------- ----------
Operating Income...................................................................... 41,253 221,266
Other income:
Interest income......................................................................... 790 902
---------- ----------
Income before income tax.............................................................. 42,043 222,168
Income tax................................................................................ 2,240 3,300
---------- ----------
Net income............................................................................ $ 39,803 $ 218,868
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-35
<PAGE>
DOVE MEDICAL SYSTEMS
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL
AND COMMON RETAINED STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS EQUITY
------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995............................. 35,000 $ 35,000 $ 422,591 $ 457,591
Net Income.................................................. -- -- 39,803 39,803
Common Stock Issued Upon Exercise of Stock Options.......... 5,600 23,100 -- 23,100
Stockholder Distributions................................... -- -- (133,500) (133,500)
------ --------- ----------- ------------
Balance as of March 31, 1996................................ 40,600 $ 58,100 $ 328,894 $ 386,994
------ --------- ----------- ------------
------ --------- ----------- ------------
Balance as of December 31, 1994............................. 35,000 $ 35,000 $ 293,050 $ 328,050
Net Income.................................................. -- -- 218,868 218,868
------ --------- ----------- ------------
Balance as of March 31, 1995................................ 35,000 $ 35,000 $ 511,918 $ 546,918
------ --------- ----------- ------------
------ --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-36
<PAGE>
DOVE MEDICAL SYSTEMS
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows for operating activities:
Net income............................................................................ $ 39,803 $ 218,868
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 2,409 1,629
Changes in:
Accounts receivable............................................................... (7,308) (130,429)
Inventories....................................................................... (13,802) (833)
Prepaid expenses.................................................................. (6,181) 124
Deposits.......................................................................... -- 435
Accounts payable and other accrued expenses....................................... 39,908 50,203
Service deposits.................................................................. 11,500 50
Income tax payable................................................................ (664) (1,858)
----------- -----------
Total adjustments............................................................... 25,862 (80,679)
----------- -----------
Net cash provided by operating activities:...................................... 65,665 138,189
----------- -----------
Cash flows from investing activities:
Furniture and equipment expenditures.................................................. (11,824) (858)
----------- -----------
Net cash used by investing activities:.......................................... (11,824) (858)
----------- -----------
Cash flows from financing activities:
Issuance of common stock.............................................................. 23,100 --
Stockholder distributions............................................................. (105,000) --
----------- -----------
Net cash used by financing activities........................................... (81,900) --
----------- -----------
Net decrease in cash and cash equivalents............................................... (28,059) 137,331
Cash and cash equivalents at beginning of period........................................ 195,122 158,696
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 167,063 $ 296,027
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended March 31, 1996, the Company distributed to its principal
stockholder a $28,500 account receivable from a major customer.
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-37
<PAGE>
DOVE MEDICAL SYSTEMS
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express an
opinion thereon. The information furnished herein includes all adjustments which
are, in the opinion of management, necessary for a fair statement of financial
position and the results of operations as of and for the three months ended
March 31, 1996 and 1995, and all such adjustments are of a normal recurring
nature. Management recommends the accompanying financial information be read in
conjunction with the Company's audited financial statements and related notes
set forth elsewhere herein.
The results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 1996.
2. COMMITMENTS AND CONTINGENCIES
(a) The Company has a two-year lease to rent warehouse and office space in
Newbury Park, California. The lease expires in January 1998. Monthly payments
are currently $2,052, with a 3% to 6% rent adjustment to be made in February
1997.
Future minimum lease payments required under its operating lease are as
follows:
<TABLE>
<S> <C>
Twelve months ended March 31:
1997................................................................... $24,749
1998................................................................... 21,146
---------
$45,895
---------
---------
</TABLE>
Rental expense for the three month periods ended March 31, 1996 and 1995 was
$5,166 and $3,186, respectively.
(b) The Company warrants its products for a full year from date of sale,
including all parts and on-site labor. The Company limits its risk by having
similar arrangements in place with its primary component manufacturers and
suppliers. A warranty liability reserve in the amount of $10,000 and $5,000, was
recognized at March 31, 1996 and 1995, respectively, to cover estimated repair
and replacement costs to be incurred after the balance sheet dates.
F-38
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the merger of Norland Medical Systems, Inc. (the "Company") and
Dove Medical Systems ("Dove") under the purchase method of accounting. These pro
forma financial statements are presented for illustrative purposes only, and
therefore, are not necessarily indicative of the operating results and financial
position that might have been achieved had the merger occurred as of an earlier
date, nor are they necessarily indicative of operating results and financial
position which may occur in the future.
A pro forma combined condensed balance sheet is provided as of March 31,
1996, giving effect to the merger as though it had been consummated on that
date. Pro forma combined condensed income statements are provided for the three
month period ended March 31, 1996, and the year ended December 31, 1995, giving
effect to the merger as though it had occurred on January 1, 1995.
The pro forma combined condensed financial statements are derived from the
historical audited financial statements of the Company and Dove, and should be
read in conjunction with the Company's separate 1995 Annual Report on Form 10-K
and separate Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
as filed, incorporated herein by reference, and with Dove's audited financial
statements for 1995 and 1994, included herein.
F-39
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
NORLAND MEDICAL DOVE MEDICAL PRO FORMA PRO FORMA
SYSTEMS, INC. SYSTEMS ADJUSTMENTS NOTE REF. COMBINED
--------------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash.................................... $ 17,639,970 $ 167,063 $ (3,600,000) (a) $ 14,207,033
Accounts receivable..................... 5,851,325 139,174 0 5,990,499
Inventories............................. 879,132 233,688 0 1,112,820
Other................................... 157,415 9,668 0 167,083
--------------- ------------ ------------- -------------
Total current assets.................. 24,527,842 549,593 (3,600,000) 21,477,435
Other Assets:
Fixed assets, net......................... 84,013 35,418 0 119,431
Other non current assets................ 75,906 8,527 0 84,433
Patent, net............................. 0 0 407,200 (a)(i) 407,200
Other intangible assets, net............ 0 0 3,257,800 (a)(i) 3,257,800
Goodwill, net........................... 0 0 2,984,535 (d)(i) 2,984,535
--------------- ------------ ------------- -------------
Total other assets.................... 159,919 43,945 6,649,535 6,853,399
--------------- ------------ ------------- -------------
Total Assets.............................. $ 24,687,761 $ 593,538 $ 3,049,535 $ 28,330,834
--------------- ------------ ------------- -------------
--------------- ------------ ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable........................ $ 2,578,326 158,934 0 $ 2,737,260
Accrued expenses........................ 374,156 22,400 125,000 (i) 521,556
Income taxes payable.................... 485,837 710 0 486,547
Other current liabilities............... 40,072 24,500 64,572
--------------- ------------ ------------- -------------
Total current liabilities............. 3,478,391 206,544 125,000 3,809,935
--------------- ------------ ------------- -------------
Common stock............................ 3,349 58,100 (58,019) (b)(c) 3,430
Additional paid-in capital.............. 18,346,732 0 3,311,448 (b) 21,658,180
Retained earnings....................... 2,859,289 328,894 (328,894) (b)(c) 2,859,289
--------------- ------------ ------------- -------------
Total stockholder's equity............ 21,209,370 386,994 2,924,535 24,520,899
--------------- ------------ ------------- -------------
Total Liabilities & Stockholders'
Equity............................... $ 24,687,761 $ 593,538 $ 3,049,535 $ 28,330,834
--------------- ------------ ------------- -------------
--------------- ------------ ------------- -------------
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-40
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------------------------------------- ---------------
HISTORICAL HISTORICAL
----------------------------- ---------------
NORLAND MEDICAL DOVE MEDICAL PRO FORMA PRO FORMA NORLAND MEDICAL
SYSTEMS, INC. SYSTEMS ADJUSTMENTS NOTE REF. COMBINED SYSTEMS, INC.
--------------- ------------ ----------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues....................... $18,243,808 $1,860,929 $ 0 $20,104,737 $ 5,218,290
--------------- ------------ ----------- ---------- ---------------
Expense (Income):
Cost of revenue.................... 12,508,809 854,693 $(128,000) (e) 13,235,502 3,415,911
Sales and marketing expense........ 1,651,125 150,761 0 1,801,886 575,348
General and administrative
expense........................... 960,368 419,814 352,837 (f) 1,733,019 305,716
Other (income) expense............. (412,983) (3,364) 0 (416,347) (242,941)
--------------- ------------ ----------- ---------- ---------------
Total Expenses................... 14,707,319 1,421,904 224,837 16,354,060 4,054,034
--------------- ------------ ----------- ---------- ---------------
Earnings from continuing operations
before income taxes................. 3,536,489 439,025 (224,837) 3,750,677 1,164,256
Provision for income taxes........... (1,436,000) (6,094) (128,538) (g) (1,570,632) (473,000)
--------------- ------------ ----------- ---------- ---------------
Earnings from continuing
operations.......................... $ 2,100,489 $ 432,931 $(353,375) $2,180,045 $ 691,256
--------------- ------------ ----------- ---------- ---------------
--------------- ------------ ----------- ---------- ---------------
Earnings from continuing operations
per common and common equivalent.... 0.40 0.40 0.10
Weighted average common and common
equivalent shares outstanding....... 5,245,235 161,538 (h) 5,406,773 7,057,010
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, 1996
--------------------------------------------------
DOVE MEDICAL PRO FORMA PRO FORMA
SYSTEMS ADJUSTMENTS NOTE REF. COMBINED
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Total revenues....................... $ 672,691 $ 0 $5,890,981
------------- ----------- -----------
Expense (Income):
Cost of revenue.................... 329,221 $ (48,000) (e) 3,697,132
Sales and marketing expense........ 95,821 0 671,169
General and administrative
expense........................... 206,396 88,209 (f) 600,321
Other (income) expense............. (790) 0 (243,731)
------------- ----------- -----------
Total Expenses................... 630,648 40,209 4,724,891
------------- ----------- -----------
Earnings from continuing operations
before income taxes................. 42,043 (40,209) 1,166,090
Provision for income taxes........... (2,240) (10,848) (g) (486,088)
------------- ----------- -----------
Earnings from continuing
operations.......................... $ 39,803 $ (51,057) $ 680,002
------------- ----------- -----------
------------- ----------- -----------
Earnings from continuing operations
per common and common equivalent.... 0.09
Weighted average common and common
equivalent shares outstanding....... 161,538 (h) 7,218,548
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-41
<PAGE>
NORLAND MEDICAL SYSTEMS, INC. AND DOVE MEDICAL SYSTEMS
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION:
The unaudited pro forma combined condensed balance sheet reflects the
issuance of 161,538 shares of the Company Common Stock, after giving effect to
the Stock Split, in exchange for 40,600 shares of Dove Common Stock, based on
the number of shares of Dove Common Stock outstanding as of April 2, 1996. In
addition, the statement reflects a payment by the Company of $3,600,000 in
exchange for certain patent and other intangible assets owned by the Dove
majority shareholder and certain other investors. The purchase price also
includes approximately $125,000 of direct costs related to the transaction. The
acquisitions are accounted for under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, and are presented in
the pro forma condensed combined balance sheet as though they had occurred on
March 31, 1996.
Earnings per share for each period is based on the weighted average number
of shares of the Company's Common Stock outstanding, including common stock
equivalents, and is presented on a combined basis giving effect to the issuance
of the Company's shares in accordance with the terms of the merger as if the
merger had occurred on January 1, 1995.
NOTES TO PRO FORMA ADJUSTMENTS:
Pro forma adjustments have been made to reflect the following:
(a) Adjustment to reflect payment of $3,600,000 in cash in exchange for a patent
and other intangible assets.
(b) Adjustment to reflect the issuance of 161,538 shares of the Company's Common
Stock after giving effect to the Stock Split, having an aggregate par value
of $81 and a market value of $3,311,529 on April 2, 1996.
(c) Adjustment to reflect the elimination of Dove's equity accounts.
(d) Adjustment to record goodwill resulting from the transactions.
(e) Adjustment to eliminate fees incurred by Dove according to various licensing
arrangements acquired by NMS as part of the transaction.
(f) Adjustment to reflect amortization expense related to goodwill, patent and
other intangible assets, based on useful lives of 20, 10 and 20 years,
respectively.
(g) The tax provision calculated based on Dove's pretax earnings from continuing
operations, giving effect on the pro forma adjustments, at the combined
effective federal and state tax rate of 41%.
(h) The number of new shares of common stock issued by the Company to owners of
Dove, giving effect to the transaction on January 1, 1995 and after giving
effect to the Stock Split.
(i) Adjustment to reflect capitalization of acquisition costs.
F-42
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM 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 HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company and Its Relationship with Norland
Corp. and Stratec............................. 13
Use of Proceeds................................ 14
Price Range of Common Stock.................... 14
Dividend Policy................................ 14
Capitalization................................. 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 22
Management..................................... 37
Certain Transactions........................... 43
Principal and Selling Stockholders............. 46
Description of Capital Stock................... 48
Shares Eligible for Future Sale................ 50
Underwriting................................... 52
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 53
Index to Financial Statements.................. F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,250,000 Shares
[LOGO]
Common Stock
---------------
PROSPECTUS
, 1996
--------------------------
UBS Securities
Pacific Growth Equities, Inc.
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the Commission registration fee,
the Nasdaq listing fee and the National Association of Securities Dealers, Inc.
("NASD") filing fee) of the fees and expenses payable by the Company in
connection with the distribution of Common Stock:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................... $19,031.51
Nasdaq Listing Fee..................................................... 17,500.00
NASD Filing Fee........................................................ 6,019.13
Printing and Engraving Costs........................................... 100,000.00
Legal Fees............................................................. 150,000.00
Accountants' Fees...................................................... 50,000.00
Blue Sky Qualification Fees and Expenses............................... 10,000.00
Miscellaneous.......................................................... 22,449.36
----------
Total................................................................ $375,000.00
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has included in its Certificate of Incorporation and by laws
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the General Corporation Law of the State of Delaware (the "DGCL") and (ii)
indemnify its directors and officers to the fullest extent permitted by the
DGCL, including circumstances in which indemnification is otherwise
discretionary.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by each in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses (including attorneys' fees) actually and reasonably incurred by
directors, officers, employees or agents in connection with the defense or
settlement of an action or suit, and only with respect to a matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
directors, officers, employees or agents are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
The Company's directors and officers are covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
Reference is made to Section 10 of the Underwriting Agreement filed as
Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify
officers and directors of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to the securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
(i) On January 3, 1994, the Company issued 412 shares of Common Stock to
Norland Partners, L.P for $1.00 per share;
(ii) On January 11, 1994, the Company issued 88 shares of Common Stock
to Novatech Ventures, L.R for $1.00 per share;
(iii) On May 27, 1994, the Company issued 250 shares of Common Stock to
Hans Schiessl for $1.00 per share; and
II-1
<PAGE>
(iv) On May 27, 1994, the Company issued 250 shares of Common Stock to
Hermann Leistner for $1.00 per share.
(v) On June 2, 1995, the Company effected a 2,000-for-1 split of the
Common Stock.
(vi) On April 2, 1996, the Company issued 107,692 shares of Common Stock
to the former stockholders of Dove in connection with the merger of Dove
into a subsidiary of the Company.
(vii) In 1996 to date, the Company issued an aggregate of 489,500 shares
of Common Stock upon exercises of stock options by employees of the Company.
(viii) On June 13, 1996, the Company effected a 3-for-2 split of the
Common Stock.
Each of these transactions was completed without registration of the
relevant security under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act for transactions not involving a
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Preliminary form of Underwriting Agreement.
2.1 Agreement and Plan of Merger by and among Dove Medical Systems, DMS Acquisition Corp. and Norland
Medical Systems, Inc. (D)
2.2 Purchase Agreement by and among Robert L. Piccioni and Joan Piccioni, CHC, Inc., Mirella Monti Belshe
and Norland Medical Systems, Inc. (D)
3.1 Restated Certificate of Incorporation of the Registrant. (B)
3.2 By-laws of the Registrant, as amended. (A)
*5.1 Opinion of Morgan, Lewis & Bockius LLP as to the validity of the issuance of the securities registered
hereby.
+10.1 Distribution Agreement dated as of April 1, 1995 by and among Norland Corporation, Stratec
Medizintechnik GmbH and Norland Medical Systems, Inc. (A)
+10.2 Product Development Loan Agreement dated as of June 1, 1995 by and among Stratec Medizintechnik GmbH,
Norland Corporation and Norland Medical Systems, Inc. (A)
10.3 Amended and Restated 1994 Stock Option and Incentive Plan. (E)
10.4 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and
Nissho Iwai American Corporation. (A)
10.5 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and
Meditec Co., Ltd. (A)
10.6 Amendment No. 1 to Distribution Agreement by and among Norland Corporation, Stratec Medizintechnik GmbH
and Norland Medical Systems, Inc. (C)
11.1 Statement regarding computation of earnings per share
23.1 Consent of Coopers & Lybrand L.L.P
23.2 Consent of Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG.
23.3 Consent of Hurley & Company.
*23.4 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Power of attorney (included on signature page).
(b) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidentiality requested as to certain provisions.
(A) This Exhibit was previously filed as an Exhibit to the Company's
Registration Statement on Form S-1 (Registration No. 33-93220), effective
August 1, 1995, and is incorporated herein by reference.
II-2
<PAGE>
(B) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 8-K dated October 20, 1995 and is incorporated herein by reference.
(C) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 10-K dated March 27, 1996 and is incorporated herein by reference.
(D) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 8-K dated April 15, 1996 and is incorporated herein by reference.
(E) This Exhibit was previously filed as an Exhibit to the Company's Proxy
Statement dated April 25, 1996 and is incorporated herein by reference.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that:
1. For the purposes of determining any liability under the Securities
Act of 1933, as amended (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 the 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 purposes 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions described under Item 14 above 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, 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 of 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of White
Plains, New York, on the 6th day of June, 1996.
NORLAND MEDICAL SYSTEMS, INC.
By: /s/ REYNALD G. BONMATI
-----------------------------------
Name: Reynald G. Bonmati
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Reynald G. Bonmati, Kurt W. Streams and Ralph G. Theodore, or any one of them,
his true and lawful attorney-in-fact, for him and in his name, place and stead
to sign any and all amendments (including post-effective amendments) to this
Registration Statement and to cause the same to be filed with the Securities and
Exchange Commission, hereby granting to said attorneys-in-fact full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact may do or cause to be done by virtue
of these presents.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
- ----------------------------------------------- ----------------------------------------------- ---------------
<C> <S> <C>
/s/ REYNALD G. BONMATI Chairman of the Board and President (Principal
------------------------------------- Executive Officer); Treasurer and Director June 6, 1996
Reynald G. Bonmati
/s/ KURT W. STREAMS Vice President, Finance (Principal Financial
------------------------------------- Officer and Principal Accounting Officer); June 6, 1996
Kurt W. Streams Secretary
/s/ JAMES J. BAKER Director
------------------------------------- June 6, 1996
James J. Baker
/s/ MICHAEL W. HUBER Director
------------------------------------- June 6, 1996
Michael W. Huber
/s/ ROBERT L. PICCIONI Director
------------------------------------- June 6, 1996
Robert L. Piccioni
/s/ ALBERT S. WAXMAN Director
------------------------------------- June 6, 1996
Albert S. Waxman
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Norland Medical Systems, Inc.:
In connection with our audits of the financial statements of Norland Medical
Systems, Inc. as of December 31, 1995 and 1994, and for each of the two years in
the period ended December 31, 1995, which financial statements are included in
the Registration Statement, we have also audited the financial statement
schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 4, 1996
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO COSTS BALANCE AT
JANUARY 1, 1995 AND EXPENSES DEDUCTIONS DECEMBER 31, 1995
--------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts................ $ 0 $ 150,000 $ 0 $ 150,000
------ -------- ----------- --------
------ -------- ----------- --------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO COSTS BALANCE AT
JANUARY 1, 1994 AND EXPENSES DEDUCTIONS DECEMBER 31, 1994
--------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts................ $ 0 $ 0 $ 0 $ 0
------ -------- ----------- --------
------ -------- ----------- --------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 Preliminary form of Underwriting Agreement.
2.1 Agreement and Plan of Merger by and among Dove Medical Systems, DMS Acquisition Corp. and
Norland Medical Systems, Inc. (D)
2.2 Purchase Agreement by and among Robert L. Piccioni and Joan Piccioni, CHC, Inc., Mirella Monti
Belshe and Norland Medical Systems, Inc. (D)
3.1 Restated Certificate of Incorporation of Norland Medical Systems, Inc. (B)
3.2 By-laws of Norland Medical Systems, Inc., as amended (A)
*5.1 Opinion of Morgan, Lewis & Bockius LLP as to the validity of the issuance of the securities
registered hereby.
+10.1 Distribution Agreement dated as of April 1, 1995 by and among Norland Corporation, Stratec
Medizintechnik GmbH and Norland Medical Systems, Inc. (A)
+10.2 Product Development Loan Agreement dated as of June 1, 1995 by and among Stratec Medizintechnik
GmbH, Norland Corporation and Norland Medical Systems, Inc. (A)
10.3 Amended and Restated 1994 Stock Option and Incentive Plan (E)
10.4 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc.
and Nissho Iwai American Corporation (A)
10.5 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc.
and Meditec Co., Ltd. (A)
10.6 Amendment No. 1 to Distribution Agreement by and among Norland Corporation, Stratec
Medizintechnik GmbH and Norland Medical Systems, Inc. (C)
11.1 Statement regarding computation of earnings per share
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG
23.3 Consent of Hurley & Company
*23.4 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidentiality requested as to certain provisions.
(A) This Exhibit was previously filed as an Exhibit to the Company's
Registration Statement on Form S-1 (Registration No. 33-93220), effective
August 1, 1995, and is incorporated herein by reference.
(B) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 8-K dated October 20, 1995 and is incorporated herein by reference.
(C) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 10-K dated March 27, 1996 and is incorporated herein by reference.
(D) This Exhibit was previously filed as an Exhibit to the Company's Report on
Form 8-K dated April 15, 1996 and is incorporated herein by reference.
(E) This Exhibit was previously filed as an Exhibit to the Company's Proxy
Statement dated April 25, 1996 and is incorporated herein by reference.
<PAGE>
2,250,000 Shares
NORLAND MEDICAL SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
June __, 1996
UBS Securities LLC
Pacific Growth Equities, Inc.
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
Norland Medical Systems, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 1,500,000 shares (the "Company Shares") of its
authorized but unissued Common Stock, $.0005 par value per share (the "Common
Stock"), to the several Underwriters listed on SCHEDULE A to this Agreement
(collectively, the "Underwriters"); and Norland Partners ("Norland Partners"),
L.P., a stockholder, proposes to sell 750,000 shares of issued and outstanding
Common Stock (the "Stockholder Shares") to the Underwriters. The Company,
Norland Partners, and Novatech Ventures, L.P. also propose to grant to the
Underwriters an option to purchase an aggregate of up to 337,500 additional
shares (the "Option Shares") of Common Stock on the terms and for the purposes
set forth in Section 4.c. Norland Partners and Novatech Ventures, L.P. are
hereinafter individually referred to as a "Selling Stockholder" and collectively
referred to as the "Selling Stockholders." The Company Shares and the
Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares," and the Firm Shares and the Option Shares are hereinafter collectively
referred to as the "Shares."
The Company wishes to confirm as follows its agreements with you (the
"Representatives") and the other Underwriters on whose behalf you are acting in
connection with the several purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-1
(File No. ________) including a prospectus relating to the Shares and each
amendment thereto has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder,
-1-
<PAGE>
and has been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared and
filed with the Commission; and the Company will file such additional amendments
to such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
There have been delivered to you two signed copies of such registration
statement and amendments, of each related prospectus subject to completion and
of any abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to you
in such reasonable quantities as you have requested for each of the
Underwriters. If such registration statement has not become effective, a
further amendment or amendments to such registration statement, including a form
of final prospectus, necessary to permit such registration statement to become
effective will be filed promptly by the Company with the Commission. If such
registration statement has become effective, a final prospectus containing all
Rule 430A Information (as hereinafter defined) will be filed by the Company with
the Commission in accordance with Rule 424(b) of the Rules and Regulations on or
before the second business day after the date hereof (or such earlier time as
may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes or
became effective and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined), shall also mean
such registration statement as so amended; provided, however, that such term
shall also include all Rule 430A Information or information included in a term
sheet pursuant to Rule 434 of the Rules and Regulations and in each case deemed
to be included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A or Rule 434(d) of the Rules
and Regulations. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary prospectus
included in the Registration Statement at the time it becomes effective that
omits Rule 430A Information. The term "Prospectus" as used in this Agreement
shall mean the prospectus relating to the Shares in the form in which it is
first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final prospectus included in the
Registration Statement at the time such registration statement becomes
effective; provided, however, that if in reliance on Rule 434 of the Rules and
Regulations and with the consent of UBS Securities LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares
-2-
<PAGE>
(including the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
For purposes of this Agreement, all references to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement to any
of the foregoing shall, if applicable, be deemed to include the copy filed with
the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR"). If in reliance on Rule 434 of the Rules and Regulations and
with the consent of UBS Securities LLC, on behalf of the several Underwriters,
the Company shall have provided to the Underwriters a term sheet pursuant to
Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent
or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the
term sheet, together, will not be materially different from the prospectus in
the Registration Statement. The term "Rule 430A Information" means information
with respect to the Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A of
the Rules and Regulations. The term "Offering Memorandum" as used in this
Agreement shall mean the offering memorandum consisting of the Prospectus and
any Canadian wrap-around used in connection with the offering of the Shares in
Canada.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Underwriters as follows:
a. The Company has not received, and has no notice of, any
order of the Commission preventing or suspending the use of any Preliminary
Prospectus, or any institution of proceedings for that purpose, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the Rules and Regulations. When the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date") and at all times subsequent thereto up to and at the Closing
Date (as hereinafter defined), any later date on which Option Shares are to be
purchased (the "Option Closing Date") and when any post-effective amendment to
the Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, (ii) each Preliminary
Prospectus and Prospectus, and any supplement thereto, delivered to the
Underwriters for use in connection with the offering of Shares contemplated
hereunder will be identical, if applicable, to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T and (iii) none of the Registration Statement, the
Prospectus, the Offering Memorandum, or any amendment or supplement thereto,
will include any
-3-
<PAGE>
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement and
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company on behalf of any
Underwriter through the Representatives, specifically for use in the preparation
thereof. The Company has not distributed any offering material in connection
with the offering or sale of the Shares other than the Registration Statement,
the Preliminary Prospectus, the Prospectus, the Offering Memorandum or any other
materials, if any, permitted by the Act and applicable Canadian securities
legislation.
b. Each of the Company, Dove Medical Systems, Inc. (the
"Subsidiary"), Norland Corporation ("Norland") and Stratec Medizintech GmbH
("Stratec"; Norland and Stratec are together sometimes referred to herein as the
"Manufacturers") has been duly incorporated and otherwise formed and is validly
existing as a corporation or limited liability company (Gesellschaft mit
beschrankter Haftung) in good standing (where such concept is legally relevant)
under the laws of the jurisdiction of its formation, with full power and
authority (corporate and other) to own, lease and operate its properties and
conduct its business as described in the Registration Statement. Each of the
Company and the Subsidiary is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction where the ownership or leasing
of its properties or the conduct of its business requires such qualification,
except where the failure to so qualify would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and the Subsidiary (as hereinafter defined)
taken as a whole (a "Material Adverse Effect"). The Company has no subsidiaries
(as defined in the Rules and Regulations) other than the Subsidiary. The
Company owns all of the outstanding common stock of the Subsidiary. Other than
the Subsidiary and as otherwise described in the Registration Statement, the
Company does not own, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the certificates of incorporation and of the
bylaws of the Company and the Subsidiary and all amendments thereto have been
delivered to the Representatives, and except as set forth in the exhibits to the
Registration Statement no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date. All
of the outstanding shares of capital stock of the Subsidiary have been duly
authorized and validly issued, are fully paid and non-assessable and are owned
beneficially by the Company subject to no security interest, other encumbrance
or adverse claims.
c. The Company has full power and authority (corporate and
otherwise) to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by applicable
laws, including without limitation,
-4-
<PAGE>
federal and state securities laws, or equitable principles and except as
enforcement hereof may be limited by applicable bankruptcy, insolvency,
moratorium, fraudulent conveyance, reorganization or other similar laws relating
to or affecting creditors' rights generally or by general equitable principles.
The performance of this Agreement by the Company and the consummation by the
Company of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any material indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, or any lease,
contract or other agreement or instrument to which the Company, the Subsidiary
or, to the best of the Company's knowledge, either Manufacturer, is a party or
by which any of their respective properties are bound, or (ii) the certificate
of incorporation or bylaws of the Company, the Subsidiary or, to the best of the
Company's knowledge, either Manufacturer, or (iii) any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body to which the Company, the Subsidiary or, to the best of the Company's
knowledge, either Manufacturer, is subject. The Company is not required to
obtain or make (as the case may be) any consent, approval, authorization, order,
designation or filing by or with any court or regulatory, administrative or
other governmental agency or body as a requirement for the consummation by the
Company of the transactions herein contemplated, except such as may be required
under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or under state securities or blue sky ("Blue Sky") laws or under the rules
and regulations of the National Association of Securities Dealers, Inc. ("NASD")
or under applicable Canadian securities legislation.
d. There is not pending or, to the Company's knowledge,
threatened, any legal or governmental action, suit, claim, proceeding or
investigation against the Company, the Subsidiary or either Manufacturer or to
the Company's knowledge, any pending or threatened action, suit, claim or
proceeding against any of their respective officers or any of their respective
properties, assets or rights before any court or governmental agency or body or
otherwise which, if adversely determined, is likely to result in any Material
Adverse Effect or cause a material adverse change in its condition (financial or
otherwise), properties, assets, business, results of operations or rights, or
prevent consummation of the transactions contemplated hereby or materially
adversely affect the rights of the Company under the Distribution Agreement or
Loan Agreement. There are no statutes, rules, regulations, agreements,
contracts, leases or documents that are required to be described in the
Prospectus, or to be filed as exhibits to the Registration Statement by the Act
or by the Rules and Regulations that have not been accurately described in all
material respects in the Prospectus or filed as exhibits to the Registration
Statement.
e. All outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws and
were not issued in violation of any preemptive right, resale right, right of
first refusal or similar right. The authorized and outstanding capital stock of
the Company conforms in all material respects to the description thereof
contained in the Registration Statement, the Prospectus and the
-5-
<PAGE>
Offering Memorandum (and such description correctly states the substance of the
provisions of the instruments defining the capital stock of the Company). The
Company Shares and Option Shares to be issued and sold by the Company have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest. Except as
set forth in the Registration Statement, no preemptive right, co-sale right,
registration right, right of first refusal or other similar rights of security
holders exists with respect to any of the Shares to be issued and sold by the
Company or the issue and sale thereof other than those that have lapsed or been
expressly waived prior to the date hereof. No further approval or authorization
of any security holder, the Board of Directors or any duly appointed committee
thereof or others is required for the issuance and sale or transfer of the
Shares, except as may be required under the Act, the Exchange Act or state
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus and the Offering Memorandum and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, the Company
does not have outstanding any options or warrants to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The descriptions of the Company's stock option and other plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus and the Offering Memorandum accurately
and fairly present, in all material respects, the information required to be
shown with respect to such plans, arrangements, options and rights. All of the
outstanding equity securities of Norland and Stratec are owned of record and
beneficially by Norland Medical Systems, B.V. ("NMS"), a corporation organized
under the laws of the Netherlands, and there are no outstanding options to
purchase or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of equity securities of Norland or Stratec or any such options, rights,
convertible securities or obligations. All of the outstanding equity securities
of NMS are owned of record and beneficially by Hans Schiessl, Norland Partners,
L.P., Nissho Iwai Corporation, and Nissho Iwai American Corporation, and there
are no outstanding options to purchase or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of equity securities of NMS or any such
options, rights, convertible securities or obligations, except pursuant to the
NMS Stock Option Plan.
f. Each of the Company, Norland, and Stratec, has full legal
right, power and authority to enter into the distribution agreement among the
Company, Norland and Stratec described in the Prospectus (as amended, the
"Distribution Agreement"), the product development loan agreement among the
Company, Norland and Stratec (the "Loan Agreement") and the applicable
Promissory Notes attached as exhibits to the Loan Agreement (the "Notes") and to
comply with and perform its respective obligations contemplated thereby, and NMS
has full legal right, power, and authority to make the
-6-
<PAGE>
covenants set forth directly below the signatures of the parties to the
Distribution Agreement and the Loan Agreement in the manner set forth therein
and to comply with and perform its obligations contained in such covenants. The
Distribution Agreement and the Loan Agreement were duly authorized, executed and
delivered by each of the Company, Norland, and Stratec, and the covenants of NMS
set forth below the signatures of the parties to the Distribution Agreement and
the Loan Agreement were duly authorized, executed and delivered by NMS. Each of
the Distribution Agreement and the Loan Agreement constitutes and each of the
Notes when executed and delivered will constitute a valid and binding obligation
of each party thereto, enforceable in accordance with its terms, and NMS's
covenants set forth below the signatures of the parties to the Distribution
Agreement and the Loan Agreement constitute valid and binding obligations of
NMS, enforceable in accordance with their terms. The Company's, Norland's, and
Stratec's entering into and performing under the Distribution Agreement, the
Loan Agreement, and Norland's and Stratec's execution, delivery, and performance
of the Notes, will not violate any provisions of their respective certificates
or articles of incorporation or bylaws, as amended or restated, or other
organizational documents, nor will any such entering into, execution, delivery,
or performance conflict with, result in the breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
default under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company, Norland or, to the
best of the Company's knowledge, Stratec, respectively, is a party or by which
the Company, Norland, or, to the best of the Company's knowledge, Stratec, or
any properties of any of them, respectively, may be bound or affected, any
statute or any authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other governmental body
applicable to any party to the Distribution Agreement, the Loan Agreement and
the Notes when issued, or any of their properties.
g. Coopers & Lybrand, LLP, who have examined the financial
statements, together with the related schedules and notes, of the Company filed
with the Commission as a part of the Registration Statement, which are included
in the Prospectus; Schweizerische Treuhandgesellscshoft-Coopers & Lybrand AG,
who have examined the financial statements, together with related schedules and
notes, of Ostech BV ("OBV") filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, and Hurley &
Company, who have examined the financial statements, together with related
schedules and notes of the Subsidiary filed with the Commission, as a part of
the Registration Statement, which are included in the Prospectus, are
independent public accountants with respect to the Company, OBV and the
Subsidiary, as the case may be, within the meaning of the Act and the Rules and
Regulations. The financial statements of the Company, OBV and the Subsidiary,
together with the related schedules and notes, forming part of the Registration
Statement, the Prospectus and the Offering Memorandum, fairly present in all
material respects the financial position and the results of operations of the
Company, OBV and the Subsidiary, as the case may be, at the respective dates and
for the respective periods to which they apply. All financial statements,
together with the related schedules and notes, filed with the Commission as part
of the Registration Statement have been prepared in accordance with generally
accepted accounting principles
-7-
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as in effect in the United States consistently applied throughout the periods
involved except as may be otherwise stated in the Registration Statement. The
selected and summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the financial statements presented therein. No other
financial statements or schedules are required by the Act or the Rules and
Regulations to be included in the Registration Statement.
h. Subsequent to the respective dates as of which information
is given in the Registration Statement, the Prospectus and the Offering
Memorandum, there has not been (i) any material adverse change, or any
development which, in the Company's reasonable judgment, is likely to result in
a Material Adverse Effect or to cause a material adverse change in the condition
(financial or otherwise) business, properties, results of operations or assets
described or referred to in the Registration Statement of the Company and the
Subsidiary taken as a whole, or, to the best of the Company's knowledge, either
Manufacturer (except as to a Manufacturer changes that would not materially or
adversely affect the condition (financial or otherwise), business, properties,
assets or results of operations of the Company), (ii) any transaction which is
material to the Company or the Subsidiary, except transactions in the ordinary
course of business, (iii) any obligation, direct or contingent, which is
material to the Company and the Subsidiary taken as a whole, incurred by the
Company or the Subsidiary, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company or the Subsidiary, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, the Subsidiary or,
to the best of the Company's knowledge, either Manufacturer, or (vi) any loss or
damage (whether or not insured) to the property of the Company, the Subsidiary
or, to the best of the Company's knowledge, either Manufacturer, which has been
sustained or will have been sustained which is material to the Company and the
Subsidiary taken as a whole. Neither the Company nor the Subsidiary has any
contingent obligation which is material to the Company and the Subsidiary taken
as a whole which is not disclosed in the Registration Statement.
i. Except as set forth in the Prospectus and the Offering
Memorandum, (i) each of the Company and the Subsidiary has good and marketable
title to all material properties and assets described in the Prospectus and
Offering Memorandum as owned by them, and, to the best of the Company's
knowledge, each Manufacturer has good and marketable title to the properties and
assets necessary for the conduct of its business and the satisfaction of its
obligations under the Distribution Agreement, in each case free and clear of any
pledge, lien, security interest, charge, encumbrance, claim, equitable interest,
or restriction, except those that are not material in amount and do not
adversely affect the use made and proposed to be made of such property by the
Company or affect the satisfaction of obligations under the Distribution
Agreement by each Manufacturer, respectively, (ii) the agreements to which the
Company, the Subsidiary and, to the best of the Company's knowledge, Norland or
Stratec, is a party described in the Prospectus and the Offering Memorandum are
valid agreements, enforceable against the Company, the Subsidiary, Norland or
Stratec, as the case may be, in accordance with their terms, except
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as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws relating
to or affecting creditors' rights generally or by general equitable principles,
and, to the best of the Company's knowledge, the other contracting party or
parties thereto are not in material breach or default under any of such
agreements and (iii) the Company, the Subsidiary, Norland and, to the best of
the Company's knowledge, Stratec have valid and enforceable leases for the
properties described in the Prospectus and the Offering Memorandum as leased by
it, and such leases conform in all material respects to the description thereof,
if any, set forth in the Registration Statement. Except as set forth in the
Prospectus and the Offering Memorandum, the Company, the Subsidiary and, to the
best of the Company's knowledge, each of the Manufacturers owns or leases all
such properties as are necessary to its operations as now conducted or proposed
to be conducted.
j. Each of the Company, the Subsidiary, Norland and, to the
best of the Company's knowledge, Stratec, now hold and at the Closing Date and
any later Option Closing Date, as the case may be, will hold, all licenses,
certificates, approvals and permits from all state, United States, foreign and
other regulatory authorities, including but not limited to the United States
Food and Drug Administration (the "FDA"), and any foreign regulatory authorities
performing functions similar to those performed by the FDA, that are material to
the conduct of the business of the Company (as such business is currently
conducted), except for such licenses, certificates, approvals and permits the
failure of which to hold would not have a Material Adverse Effect, all of which
are valid and in full force and effect (and there is no proceeding pending or,
to the knowledge of the Company, threatened which may cause any such license,
certificate, approval or permit to be withdrawn, canceled, suspended or not
renewed). Neither the Company nor the Subsidiary nor, to the best of the
Company's knowledge, Norland or Stratec, is in violation of its certificate of
incorporation or bylaws, or, except for defaults or violations which would not
have a Material Adverse Effect, in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, joint venture or other agreement or instrument to
which it is a party or by which it or any of its properties are bound, or in
violation of any law, order, rule, regulation, writ, injunction or decree of any
court or governmental agency or body, including, but not limited to, the FDA
(including, without limitation, all applicable statutes or regulations relating
to: the development, testing, manufacture, labelling, advertising or sale of X-
ray devices; the development, testing, manufacture, labelling, advertising or
sale of medical devices generally; and the control of exports from the United
States); and there does exist any state of facts that constitutes an event of
default or violation on the part of the Company or, to the best of the Company's
knowledge, either Manufacturer as defined in such documents or that, with notice
or lapse of time or both, would constitute such an event of default or
violation. All of the descriptions in the Registration Statement and Prospectus
of the legal and governmental proceedings by or before the FDA or any foreign,
state or local government body exercising comparable authority are true,
complete and accurate in all material respects.
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<PAGE>
k. Each of the Company, the Subsidiary and Norland has filed on
a timely basis all necessary federal, state and foreign income, franchise and
other tax returns and has paid all taxes shown thereon as due, and the Company
has no knowledge of any tax deficiency which has been or might be asserted
against the Company, the Subsidiary or either Manufacturer which might have a
Material Adverse Effect. All material tax liabilities are adequately provided
for within the financial statements of the Company.
l. Each of the Company and the Subsidiary maintain insurance
(other than product liability and clinical trial liability insurance) of the
types and in the amounts adequate for its business and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
Each of the Manufacturers has product liability insurance (including clinical
trial liability insurance) in full force and effect to the extent described in
the Prospectus and Registration Statement, which insurance names the Company as
an additional insured.
m. Neither the Company, the Subsidiary nor, to the best of the
knowledge of the Company, either Manufacturer, is involved in any labor dispute
or disturbance nor, to the best of the knowledge of the Company, is any such
dispute or disturbance threatened. No collective bargaining agreement exists
with any of the Company's or the Subsidiary's employees and, to the best of the
Company's knowledge, no such agreement is imminent.
n. Each of the Company, the Subsidiary, Norland and, to the
best of the Company's knowledge, Stratec, own or possess adequate licenses or
other rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, tradenames, copyrights,
manufacturing processes, formulae, trade secrets, know-how, franchises, and
other material intangible property and assets (collectively, "Intellectual
Property") necessary to the conduct of their businesses as conducted and as
proposed to be conducted as described in the Prospectus and the Offering
Memorandum except as otherwise set forth in the Prospectus under the heading
"Risk Factors--Proprietary Rights Protection." The Company has no knowledge
that it, the Subsidiary or either Manufacturer lacks or will be unable to obtain
any rights or licenses to use any of the Intellectual Property necessary to
conduct the business now conducted or proposed to be conducted by it as
described in the Prospectus, except as described in the Prospectus and the
Offering Memorandum. The Prospectus fairly and accurately describes the
Company's, the Subsidiary's, Norland's and, to the best of the Company's
knowledge, Stratec's rights with respect to the Intellectual Property. The
Company has not received any notice of, and has no knowledge of, infringement or
of conflict with rights or claims of others with respect to any Intellectual
Property. The Company is not aware of any asserted rights or patents of others
which are infringed upon by potential products or processes referred to in the
Prospectus and the Offering Memorandum in such a manner as to materially and
adversely affect the Company and the Subsidiary taken as a whole, except as
described in the Prospectus and the Offering Memorandum.
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<PAGE>
o. The Company is not an "investment company," or a "promoter"
or "principal underwriter" for a registered investment company, as such terms
are defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
p. Neither the Company nor the Subsidiary has incurred any
liability for a fee, commission, or other compensation on account of the
employment of a broker or finder in connection with the transactions
contemplated by this Agreement other than the underwriting discounts and
commissions contemplated hereby.
q. The Company is not aware of any state of facts that might
reasonably be expected to result in Norland or Stratec, or any supplier to
either, failing to deliver or delaying delivery of goods, services, or other
products to the Company, except for failures or delays that would not materially
adversely affect the condition (financial or otherwise), business or results of
operations of the Company.
r. Neither the Company nor the Subsidiary has received any
notice, whether written or oral, from any of their respective distributor of
termination of a distribution agreement between the Company or the Subsidiary
and such distributor, and neither the Company nor the Subsidiary is aware of the
revocation or impending revocation of any governmental permit necessary for the
sale of the Company's or the Subsidiary's products in any country in which any
such distributor has authority to sell such products, except such terminations
or revocations as would not individually or in the aggregate have a material
adverse effect on the Company.
s. Neither the Company nor the Subsidiary has received any
notice, whether written or oral, from any distributor, customer, or person or
entity using any product marketed by the Company or the Subsidiary to return any
such product, which notice or returns the Company or the Subsidiary knows arise
from a defect or shortcoming in the products marketed by the Company or the
Subsidiary, except such defects as would not individually or in the aggregate
have a material adverse effect on the condition (financial or otherwise),
business, or results of operations of the Company.
t. Each of the Company, the Subsidiary, Norland and, to the
best of the Company's knowledge, Stratec (i) is in compliance with any and all
applicable United States, state and local and foreign environmental laws, rules,
regulations, treaties, statutes and codes promulgated by any and all
governmental authorities relating to the protection of human health and safety,
the environment or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business as currently conducted, and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's, the Subsidiary's, Norland's or to the best of the Company's
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<PAGE>
knowledge, Stratec's. activities involving Hazardous Materials. "Hazardous
Materials" means any material or substance (i) that is prohibited or regulated
by any environmental law, rule, regulation, order, treaty, statute or code
promulgated by any governmental authority, or any amendment or modification
thereto, or (ii) that has been designated or regulated by any governmental
authority as radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment.
u. Neither the Company nor the Subsidiary nor Norland nor, to
the best of the Company's knowledge, Stratec, has engaged in the generation,
use, manufacture, transportation or storage of any Hazardous Materials on any of
the Company's, the Subsidiary's, Norland's or Stratec's properties or former
properties, except where such use, manufacture, transportation or storage is in
material compliance with Environmental Laws. No Hazardous Materials have been
treated or disposed of on any of the Company's, the Subsidiary's, Norland's, or
to the best of the Company's knowledge, Stratec's, properties or on properties
formerly owned or leased by the Company, the Subsidiary, Norland, or to the best
of the Company's knowledge, Stratec, during the time of such ownership or lease,
except in compliance with Environmental Laws. No spills, discharges, releases,
deposits, emplacements, leaks or disposal of any Hazardous Materials have
occurred on or under or have emanated from any of the Company's, the
Subsidiary's, Norland's or to the best of the Company's knowledge, Stratec's,
properties or former properties.
v. The Company and the Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable and appropriate action is taken with respect to
any differences.
w. Neither the Company nor the Subsidiary nor, to the best of
the Company's knowledge, either Manufacturer, has at any time during the last
five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any foreign, United States or state governmental
officer or official, or other person charged with similar public of quasi-public
duties, other than payments required or permitted by the laws of the United
States.
x. The Common Stock is registered pursuant to Section 12(g) of
the Exchange Act. The Shares that are currently outstanding are quoted, and the
Shares to be issued and sold under this Agreement have been duly authorized for
quotation, on the National Association of Securities Dealers, Inc. Automated
Quotation System National Market System ("Nasdaq National Market"). The Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under
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<PAGE>
the Exchange Act or delisting the Common Stock from the Nasdaq National Market,
nor has the Company received any notification that the Commission or the Nasdaq
National Market is contemplating terminating such registration or listing.
y. Neither the Company nor, to its knowledge, any of its
officers, director or affiliates have taken, and at the Closing Date and at any
later Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.
z. The Company has not distributed and will not distribute
prior to the later of the (i) the Closing Date or any Option Closing Date, as
the case may be, and (ii) completion of the distribution of the Shares, any
offering material in connection with the offering and sale of the Shares other
than any Preliminary Prospectus, Prospectus, Offering Memorandum, Registration
Statement and other materials, if any, permitted by the Act.
aa. The Company has timely and properly filed with the
Commission all reports and other documents required to have been filed by it
with the Commission pursuant to the Act and the Rules and Regulations and the
Exchange Act and the rules and regulations thereunder. True and complete copies
of all such reports and other documents have been delivered to you.
bb. The Company has complied with all provisions of Section
517.075, Florida statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
cc. The Company and the Subsidiary each had all corporate power
and authority to execute, deliver and perform the Agreement and Plan of
Reorganization dated as of April 2, 1996 (the "Acquisition Agreement"), and each
of such corporations took all action required by law, their articles or
certificates of incorporation and bylaws or otherwise, to authorize such
execution and delivery and to approve the merger of Dove Medical Systems
("Dove") into the Subsidiary (the "Merger").
dd. The Company had all corporate power and authority to
execute, deliver and perform the Purchase Agreement dated April 2, 1996 (the
"Purchase Agreement") relating to the Merger, and the Company took all action
required by law, its articles of incorporation and bylaws or otherwise, to
authorize such execution and delivery and the performance of the transactions
contemplated thereby.
ee. The execution and delivery of the Acquisition Agreement and
the consummation of the Merger and, in the case of the Company, the execution
and delivery of the Purchase Agreement, did not contravene any provision of
applicable law or the articles or certificates of incorporation or bylaws of the
Company or the Subsidiary, or any
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<PAGE>
provision of any material agreement or instrument binding upon the Company or
the Subsidiary or any order, writ, injunction or decree of any jurisdiction,
court or governmental body.
ff. Each of the Acquisition Agreement and the Purchase Agreement
is a valid and binding agreement of each of the parties thereto, and the Merger
has been duly consummated with the Subsidiary as the sole surviving corporation.
gg. To the knowledge of the Company, no shareholders of Dove
have exercised their rights of appraisal or other dissenter's rights with
respect to the Merger or any of the actions that were conditions precedent to,
or otherwise necessary to effect, the Merger.
hh. The Merger qualified as a tax-free reorganization under the
Internal Revenue Code of 1986, as amended.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDERS.
a. Each Selling Stockholder hereby represents and warrants to,
and covenants with, the Underwriters as follows:
(1) It has, and on the Closing Date (as hereinafter
defined) will have, good and marketable title to the Stockholder Shares and
Option Shares to be sold by it and full right, power and authority to enter into
this Agreement and to sell, assign, transfer and deliver such Stockholder Shares
and Option Shares hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, equities, security interests, restrictions and claims
whatsoever; and upon delivery of and payment for such Stockholder Shares and
Option Shares hereunder, the several Underwriters will acquire good and
marketable title thereto, free and clear of all liens, encumbrances, equities,
claims, restrictions, security interests, voting trusts or other defects of
title whatsoever.
(2) It has executed and delivered a Power of Attorney and
caused to be executed and delivered on its behalf a Custody Agreement
(hereinafter collectively referred to as the "Stockholder's Agreement") and in
connection herewith the Selling Stockholder further represents, warrants and
agrees that it has deposited in custody, under the Stockholder's Agreement, with
the agent named therein (the "Agent") as custodian, certificates in negotiable
form for the Stockholder Shares and Option Shares to be sold by it, for the
purpose of further delivery pursuant to this Agreement. The Selling Stockholder
agrees that the Stockholder Shares and Option Shares on deposit with the Agent
are subject to the interests of the Company and the several Underwriters, that
the arrangements made for such custody are to that extent irrevocable, and that
the Selling Stockholder's obligations hereunder shall not be terminated, except
as provided in this Agreement or in the Stockholder's Agreement, by any act of
the Selling Stockholder, by operation of law, by the insolvency or dissolution
of the Selling Stockholder or by the occurrence of any other event. If the
Selling Stockholder should be dissolved or
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<PAGE>
liquidated, or if any other such event should occur, before the delivery of the
Stockholder Shares and Option Shares hereunder, the documents evidencing the
Stockholder Shares and Option Shares then on deposit with the Agent shall be
delivered by the Agent in accordance with the terms and conditions of this
Agreement and the Stockholder's Agreement as if such event had not occurred,
regardless of whether or not the Agent shall have received notice thereof. This
Agreement and the Stockholder's Agreement have been duly executed and delivered
by or on behalf of the Selling Stockholder and a copy of such Stockholder's
Agreement has been delivered to you.
(3) The performance of this Agreement and the Stockholder's
Agreement and the consummation of the transactions contemplated hereby and by
the Stockholder's Agreement will not result in a breach or violation by the
Selling Stockholder of any of the terms or provisions of, or constitute a
default by the Selling Stockholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which the Selling Stockholder is a party or
by which the Selling Stockholder or any of its properties is bound, any statute,
or any judgment, decree, order, rule or regulation of any court or governmental
agency or body applicable to the Selling Stockholder or any of its properties.
(4) The Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or that has constituted or
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(5) With respect to any statements in the Registration
Statement, the Prospectus, or any amendment or supplement thereto that are made
in reliance upon and in conformity with written information furnished to the
Company by the Selling Stockholder specifically for use in the preparation of
the Registration Statement, the Prospectus, or such amendment or supplement, at
the time the Registration Statement becomes or became effective and at all times
subsequent thereto up to and including the Closing Date (hereinafter defined) or
any later Option Closing Date, neither the Registration Statement nor the
Prospectus nor such amendment or supplement included or will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(6) The executive officers of the general partner of the
Selling Stockholder have reviewed and are familiar with the Registration
Statement as originally filed with the Commission and all amendments and
supplements thereto, if any, filed with the Commission prior to the date hereof,
with the Preliminary Prospectus contained therein and with the Offering
Memorandum, as supplemented, if applicable, to the date hereof. To the best
knowledge of the Selling Stockholder, the representations, warranties and
agreements of the Company contained in Section 2 of this Agreement are true and
correct.
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<PAGE>
b. The Selling Stockholder agrees with the Company and the
several Underwriters that, without the prior written consent of UBS Securities
LLC which may be withheld in your sole discretion, the Selling Stockholder will
not, directly or indirectly, offer, sell, assign, transfer, encumber, contract
to sell, grant any option to purchase, or otherwise dispose of, any Common Stock
(including Common Stock that may be deemed to be beneficially owned by the
Selling Stockholder in accordance with the Rules and Regulations) or any
securities convertible into or exchangeable for any shares of Common Stock,
until the one hundred twentieth (120th) day after the effective date of the
Registration Statement. Notwithstanding the foregoing, this paragraph shall not
prohibit any of the following types of transfers: (i) a private transfer by the
Selling Stockholder to a partner of the Selling Stockholder or a retired partner
of the Selling Stockholder, in accordance with the Selling Stockholder's
partnership agreement; and (ii) following any transfer permitted in clause (i)
of this sentence to an individual, any private transfer by gift, will or
intestate succession from such individual to such individual's spouse or members
of the immediate family of such individual or such individual's spouse, in each
case described in clause (i) or (ii) if the transferee agrees in writing to be
subject to the terms of this paragraph to the same extent as the Selling
Stockholder.
4. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
a. On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell the Company Shares, and Norland Partners, L.P. agrees to sell the
Stockholder Shares, to the several Underwriters. Each of the Underwriters
agrees to purchase from the Company and Norland Partners, L.P. the respective
aggregate number of Firm Shares set forth opposite its name on SCHEDULE A, plus
such additional number of Firm Shares which such Underwriter may become
obligated to purchase pursuant to Section 4.b. hereof. The price at which such
Firm Shares shall be sold by the Company and purchased by the several
Underwriters shall be $_____ per share. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs b. and c. of this Section 4, the agreement of each Underwriter is to
purchase only the respective number of Firm Shares specified on SCHEDULE A.
b. If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 11 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the non-defaulting Underwriters shall have the right within
twenty-four (24) hours after such default to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such Shares
and portion, the number of Shares which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis (as adjusted by you in
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<PAGE>
such manner as you deem advisable to avoid fractional shares) to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the Shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
Shares exceeds 10% of the total number of Shares which all Underwriters agreed
to purchase hereunder. If the total number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within twenty-four (24) hours next succeeding the 24-hour period
referred to above, to make arrangements with other underwriters or purchasers
reasonably satisfactory to you for purchase of such Shares and portion on the
terms herein set forth. In any such case, either you or the Company shall have
the right to postpone the Closing Date determined as provided in Section 6
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to said Section 6 in order that any necessary changes
in the Registration Statement, the Prospectus, the Offering Memorandum or any
other documents or arrangements may be made. If the aggregate number of Shares
which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10%
of the total number of Shares which all Underwriters agreed to purchase
hereunder, and if neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph b., and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
c. On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company and the Selling Stockholders grant an option to the several
Underwriters to purchase all or any portion of the Option Shares from the
Company at the same price per share as the Underwriters shall pay for the Firm
Shares. Said option may be exercised only to cover over-allotments in the sale
of the Firm Shares by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
this Agreement upon written or telegraphic notice by you to the Company setting
forth the aggregate number of Option Shares as to which the several Underwriters
are exercising the option. If the Underwriters exercise their option as to
fewer than all the Option Shares, the first 36,000 Option Shares will be sold by
Norland Partners, L.P., the next 264,000 Option Shares will be sold by Novatech
Ventures, L.P., and the remaining 37,500 Option Shares will be sold by the
Company. Delivery of certificates for the shares of Option Shares, and payment
therefor, shall be made as provided in Section 6 hereof. Each Underwriter will
purchase such percentage of the Option Shares as is equal to the percentage of
Firm Shares that such Underwriter is purchasing, the exact number of shares to
be adjusted by you in such manner as you deem advisable to avoid fractional
shares.
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5. OFFERING BY UNDERWRITERS.
a. The terms of the initial public offering in the United
States and the private placement in Canada by the Underwriters of the Shares to
be purchased by them shall be as set forth in the Prospectus and the Offering
Memorandum, respectively. The Underwriters may from time to time change the
public offering and private placement prices after the closing of the initial
public offering and private placement and increase or decrease the concessions
and discounts to dealers as they may determine.
b. You, on behalf of the Underwriters, represent and warrant
that (i) the information set forth in the last paragraph on the front cover page
and under the caption "Underwriting" in the Registration Statement, any
Preliminary Prospectus, the Prospectus and the Offering Memorandum relating to
the Shares (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, any Preliminary Prospectus, the Prospectus and
the Offering Memorandum, and that the statements made therein are correct and do
not omit to state any material fact required to be stated therein or necessary
to make the statements made therein in light of the circumstances under which
they were made not misleading, and (ii) the Underwriters have not distributed
and will not distribute prior to the Closing Date or on any Option Closing Date,
as the case may be, any offering material in connection with the offering and
sale of the shares other than the Preliminary Prospectus, the Prospectus, the
Registration Statement, the Offering Memorandum and other materials permitted by
the Act.
6. DELIVERY OF AND PAYMENT FOR THE SHARES.
a. Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted pursuant to Section 4.c. hereof shall have been
exercised not later than 1:00 p.m., New York time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York
10782 at 9:00 a.m., New York time, on the third business day after first day
that Shares are traded or at such time on such other day, not later than seven
full business days after the first day that Shares are traded, as shall be
agreed upon in writing by the Company and you (the "Closing Date").
b. If the option granted pursuant to Section 4.c. hereof shall
be exercised after 1:00 p.m., New York time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the office of Morgan, Lewis & Bockius, 101 Park Avenue, New
York, New York 101783 at 9:00 a.m., New York time, on the third business day
after the exercise of such option (the "Option Closing Date").
c. Payment for the Shares purchased from the Company and the
Selling Stockholders shall be made to the Company or its order, at the Company's
option
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and the Agent, as their interests may appear, either by (i) certified or
official bank check in same day funds (and the Company and the Agent agree not
to deposit any such check in the bank on which drawn until the day following the
date of its delivery to the Company and the Agent, respectively) or (ii) by same
day wire transfer on terms to be agreed upon by the Underwriters and the Company
and the Underwriters and the Agent. Such payment shall be made upon delivery of
certificates for the Shares to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the
Shares to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least three business days
before the Closing Date, in the case of Firm Shares, and at least two business
days prior to the Option Closing Date, in the case of the Option Shares. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at a location in New York, New York, designated by the
Underwriters not less than one full business day prior to the Closing Date or,
in the case of the Option Shares, by 3:00 p.m., New York time, on the business
day preceding the Option Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later Option Closing Date. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
d. If the Representatives so elect, delivery of the Firm Shares
and any Option Shares may be made by credit though full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
7. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the Underwriters as follows:
a. The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective as promptly as possible; the Company will use its best
efforts to cause any abbreviated registration statement pursuant to Rule 462(b)
of the Rules and Regulations as may be required subsequent to the date the
Registration Statement is declared effective to become effective as promptly as
possible; it will notify you, promptly after it shall receive notice thereof, of
the time when the Registration Statement or any subsequent amendment to the
Registration Statement or abbreviated registration statement has become
effective or any supplement to the Prospectus or abbreviated registration
statement has been filed. If the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and
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Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations, have been filed, within the time
period prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations. If for any reason the filing of the final
form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly in writing of (i) the
receipt of any comments of the Commission, (ii) any request by the Commission
for the amending or supplementing of the Registration Statement (either before
or after it becomes effective) or the Prospectus or for additional information
and (iii) when the Registration Statement shall have become effective. Promptly
upon your request, it will prepare and file with the Commission any amendments
or supplements to the Registration Statement or Prospectus which, in the
reasonable opinion of counsel to the several Underwriters ("Underwriters
Counsel"), may be necessary or advisable in connection with the distribution of
the Shares by the Underwriters and shall use its reasonable best efforts to
cause the same to become effective as promptly as possible. The Company will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
an untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. In the event of any such amendments or
supplements made or required to be made to the Registration Statement, the
Prospectus or any amendments or supplements thereto, the Company shall promptly
prepare an Offering Memorandum containing such amendment or supplement and
provide the same forthwith to the Underwriters. In case any Underwriter is
required to deliver a prospectus within the nine-month period referred to in
Section 10(a)(3) of the Act in connection with the sale of the Shares, the
Company will prepare promptly upon request, but at its own expense, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act. Notwithstanding the foregoing, if such untrue
statement or omission was made in reliance on and in conformity with written
information provided by you specifically for inclusion in the Registration
Statement or the Prospectus, such preparation and filing shall be at your
expense. In case you are required to deliver a prospectus after such nine-month
period, the Company, upon request, but at your expense, shall promptly prepare
such amendment or amendments to the Registration Statement and such Prospectus
or Prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Act. The Company will file no amendment or
supplement to the Registration Statement or Prospectus that shall not previously
have been submitted to you a reasonable time prior to the proposed filing
thereof or to which you shall reasonably object in writing or which is not in
compliance with the Act and Rules and Regulations or the provisions of this
Agreement.
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b. The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the issuance of
any such stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.
c. The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation, or to execute a general consent to service of
process in any jurisdiction, or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified, the Company will make and file such statements, reports and
other documents in each year as are or may be reasonably required by the laws of
such jurisdictions so as to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares, or as
otherwise may be required by law. The Company shall advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the event of
the issuance of any order suspending such qualification, registration or
exemption, the Company, with your cooperation, shall use its reasonable best
efforts to obtain the withdrawal thereof.
d. The Company will furnish to you, as soon as available,
copies of the Registration Statement (two of which will be signed and which will
include all exhibits), each Preliminary Prospectus, the Prospectus, the Offering
Memorandum and any amendments or supplement to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all
in such quantities as you may from time to time reasonably request. If
applicable, the copies of the Registration Statement, any Preliminary Prospectus
or Prospectus and each amendment or supplement thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
e. The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the 45th
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and covering a twelve-month period beginning after the effective
date of the Registration Statement, and will advise you in writing when such
statement has been made available.
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f. During a period of five years after the date hereof, the
Company, as soon as practicable after the end of each respective period, will
furnish to its stockholders annual reports (including financial statements
audited by independent certified public accountants) and will make available to
its stockholders unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year, and will, upon request, furnish to you and
the other several Underwriters hereunder (i) concurrently with making such
reports available to its stockholders, statements of operations of the Company
for each of the first three quarters in the form made available to the Company's
stockholders; (ii) concurrently with the furnishing thereof to its stockholders,
a balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity and of cash flow of the
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National Market
by the Company (except for documents for which confidential treatment is
requested); and (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared for general release by the Company. During such
five-year period, if the Company shall have any active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company are consolidated with any subsidiaries, and
shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
g. Prior to or simultaneously with the execution and delivery
of this Agreement, the Company will obtain agreement from each beneficial owner
of the Company's Common Stock listed on Schedule B to this Agreement providing
that such person will not, for a period of 120 days after the date of the
Prospectus, without the prior written consent of UBS Securities LLC, directly or
indirectly, offer to sell, sell, hypothecate, contract to sell, grant any option
to purchase, or otherwise dispose of, any shares of Common Stock beneficially
owned as of the date such lockup is executed (including, without limitation,
shares of Common Stock which may be deemed to be beneficially owned in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock which may be issued upon exercise of a
stock option or warrant) or any securities convertible into or exercisable or
exchangeable for such Common Stock except, (a) by operation of law or (b)
pursuant to a bona fide gift to any person or other entity which agrees in
writing to be bound by this restriction. Each such person or entity shall also
agree and consent to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of shares of Common Stock held by such
person or entity, except in compliance with the foregoing restriction.
h. The Company shall not, during the 180 days following the
effective date of the Registration Statement, except with the prior written
consent of UBS
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Securities LLC, file a registration statement covering any of its shares of
capital stock, except that one or more registration statements on Form S-8 may
be filed at any time following the effective date of the Registration Statement.
i. The Company shall not, during the 180 days following the
effective date of the Registration Statement, except with the prior written
consent of UBS Securities LLC, issue, sell, offer or agree to sell, grant,
distribute or otherwise dispose of, directly or indirectly, any shares of Common
Stock, or any options, rights or warrants with respect to shares of Common
Stock, or any securities convertible into or exchangeable for Common Stock,
other than (i) the sale of Shares hereunder, (ii) the grant of options or the
issuance of Shares of Common Stock under the Company's stock option plans or
stock purchase plan, as the case may be, existing on the date hereof, (iii) the
issuance of shares of Common Stock upon exercise of the currently outstanding
options or warrants described in the Registration Statement.
j. The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus and the Offering Memorandum.
k. The Company will maintain a Transfer Agent and, if necessary
under the laws of the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Common Stock.
l. For a period of five years after the date hereof, the
Company shall use its reasonable best efforts to (i) maintain the listing of the
Common Stock on the Nasdaq National Market, (ii) qualify or register its Common
Stock for sale in non-issuer transactions under the Blue Sky laws of the State
of California or (iii) obtain and maintain exemptions from the application of
such Blue Sky laws to non-issuer transactions in the Common Stock.
m. Prior to the earlier of (i) the Option Closing Date or
(ii) 30 days after the first date any Shares are released for sale to the
public, the Company shall not repurchase or otherwise acquire any of the
Company's Common Stock or declare or pay any dividend or make any other
distribution upon its Common Stock.
n. The Company is familiar with the Investment Company Act, and
the rules and regulations thereunder, and has in the past conducted its affairs,
and will in the future conduct its affairs, in such a manner so as to ensure
that the Company was not and will not be an "investment company" within the
meaning of the Investment Company Act, and the rules and regulations thereunder.
o. If at any time during the 180-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been or is likely to
be materially affected (regardless of whether
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such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and, if you and the Company agree, disseminate a
press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
8. EXPENSES.
The Company agrees with each Underwriter that:
a. The Company will pay and bear all costs, fees and expenses
in connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses, the Prospectus and the Offering Memorandum and any amendments or
supplements thereto; the reproduction of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Memoranda
and any Supplemental Blue Sky Memoranda and any instruments related to any of
the foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and regulatory counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectuses, the Prospectus and the Offering Memorandum and any amendments or
supplements to any of the foregoing; NASD filing fees and expenses incident to
securing any required review and the cost of qualifying the Shares under the
laws of such jurisdictions within the United States as you may designate
(including filing fees and fees and disbursements of Underwriters' counsel in
connection with such NASD filings and Blue Sky qualifications); and all other
expenses directly incurred by the Company in connection with the performance of
its obligations hereunder.
b. If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, the Company will, in
addition to paying the expenses described in paragraph a. above, reimburse the
several Underwriters for all out-of-pocket expenses (including reasonable fees
and disbursements of Underwriters' counsel) incurred by the Underwriters in
reviewing the Registration Statement and the Prospectus and in preparing the
Offering Memorandum and in otherwise investigating, preparing to market or
marketing the Shares. The Company will in no event be liable to any of the
several Underwriters for any loss of anticipated profits from the sale by them
of the Shares.
c. Except to the extent paid by the Company pursuant to the
preceding paragraph, each Selling Stockholder shall pay (directly or by
reimbursement) all fees and expenses incident to the performance of its
obligations under this Agreement,
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including but not limited to (i) any fees and expenses of counsel for such
Selling Stockholder; (ii) any fees and expenses of the Agent; and (iii) all
expenses and taxes incident to the sale and delivery of the Option Shares,
including any transfer and other stamp taxes applicable to the sale of the
Option Shares to you or the public offering of such shares.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for
the Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
a. The Registration Statement shall have become effective not
later than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of Underwriters' counsel.
b. All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement, the
Prospectus, the Offering Memorandum and the registration, authorization, issue,
sale and delivery of the Shares shall have been reasonably satisfactory to
Underwriters' counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this subsection.
c. You shall have received, at no cost to you, on the Closing
Date and on any later Option Closing Date, as the case may be, in the forms
attached hereto on Appendix A, the opinions of (i) Morgan, Lewis & Bockius,
corporate counsel to the Company, (ii) Morgan, Lewis & Bockius, Frankfurt,
Republic of Germany, special counsel to the Company, (iii) Quarles & Brady,
special counsel for the Company, and (iv) Barents & Krans, The Hague,
Netherlands, special counsel for the Company, in each case dated the Closing
Date or such later Option Closing Date and addressed to the Underwriters and
with signed counterparts thereof for the Representatives.
d. You shall have received from Howard, Rice, Nemerovski,
Canady, Falk & Rabkin, A Professional Corporation, Underwriters' counsel, an
opinion or opinions,
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<PAGE>
dated the Closing Date or on any later Option Closing Date, as the case may be,
in form and substance reasonably satisfactory to you, with respect to the
sufficiency of all corporate proceedings undertaken by the Company and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company and the Selling
Stockholders shall have furnished to such counsel such documents as it may have
reasonably requested for the purpose of enabling it to pass upon such matters.
In connection with such opinion, such counsel may rely on representations or
certificates of officers of the Company and governmental officials.
e. You shall have received on the date Preliminary Prospectuses
are first circulated, the date immediately preceding the date this Agreement is
executed, the Closing Date and on any later Option Closing Date, a letter from
each of Coopers & Lybrand, LLP, independent accountants, and Schweizerische
Treuhandgesellscshaft-Coopers & Lybrand AG addressed to the Company and the
Underwriters, dated the date of its delivery, confirming that it is an
independent certified public accountant with respect to the Company within the
meaning of the Act and the Rules and Regulations thereunder and based upon the
procedures described in its letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than five days prior to the Closing Date or any such
later Option Closing Date, as the case may be, (i) confirming that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later Option Closing Date, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter that are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company which, in your reasonable judgment, makes it impracticable or
inadvisable to proceed with the public offer of the Shares as contemplated by
the Prospectus. All such letters shall be in a form and substance reasonably
satisfactory to the Representatives and their counsel.
f. You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate of the President or
Chairman of the Board and the chief financial or accounting officer of the
Company, dated the Closing Date or such later date, to the effect that as of
such date (and you shall be satisfied that as of such date):
(1) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date or
any later Option Closing Date, as the case may be; and the Company has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later Option
Closing Date, as the case may be;
(2) The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the Registration
Statement or
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preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the best
of their knowledge, threatened under the Act;
(3) They have carefully reviewed the Registration
Statement, the Prospectus and the Offering Memorandum; and, when the
Registration Statement became effective and at all times subsequent thereto up
to the delivery of such certificate, the Registration Statement and the
Prospectus and any amendments or supplements thereto contained all statements
and information required to be included therein or necessary to make the
statements therein not misleading; and when the Registration Statement became
effective, and at all times subsequent thereto up to the delivery of such
certificate none of the Registration Statement, the Prospectus and the Offering
Memorandum nor any amendment or supplement thereto included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and, since
the effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus or Offering
Memorandum that has not been so set forth; and
(4) Subsequent to the respective dates as of which
information is given in the Registration Statement, the Prospectus and the
Offering Memorandum, there has not been (i) any material adverse change in the
properties or assets described or referred to in the Registration Statement, the
Prospectus and the Offering Memorandum or in the condition (financial or
otherwise), operations, business, properties, results of operation, or prospects
of the Company and the Subsidiary, (ii) any transaction which is material to the
Company and the Subsidiary taken as a whole, except transactions entered into in
the ordinary course of business, (iii) any liability or obligation, direct or
contingent, incurred by the Company or the Subsidiary, which is material to the
Company and the Subsidiary taken as a whole, (iv) any change in the capital
stock or outstanding indebtedness of the Company or the Subsidiary which is
material to the Company and the Subsidiary taken as a whole, (v) repurchase or
other acquisition of its capital stock or any dividend or distribution of any
kind declared, paid or made on the outstanding capital stock of the Company
payable to stockholders of record, (vi) any loss or damage (whether or not
insured) to the property of the Company or the Subsidiary or, to the best of the
signer's knowledge, either Manufacturer, which has been sustained or will have
been sustained which is material to the Company and the Subsidiary taken as a
whole, or, to the best of the Company's knowledge, either Manufacturer, or
(vii) any legal or governmental action pending or threatened against the
Company, the Subsidiary or, to the best of the signers' knowledge, either
Manufacturer, that may result in a material adverse change in the condition
(financial or otherwise), operations, business, properties, results of
operations or prospects of the Company, whether or not arising from transactions
in the ordinary course of business, or that may adversely affect the
transactions contemplated by this Agreement.
g. The Company shall have furnished to you such further
certificates and documents as you shall reasonably request as to the accuracy of
the representations and warranties of the Company herein, as to the performance
by the Company of its obligations
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hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
h. The Shares that are currently outstanding are quoted, and
the Shares to be issued and sold under this Agreement are duly authorized for
quotation upon notice of issuance, on the Nasdaq National Market.
i. On the Closing Date and on any later Option Closing Date a
certificate, dated such Closing Date and addressed to you, signed by or on
behalf of each Selling Stockholder selling Common Stock as of such Closing Date
or Option Closing Date, to the effect that the representations and warranties of
such Selling Stockholder in this Agreement are true and correct, as if made at
and as of such Closing Date, and such Selling Stockholder has complied with all
the agreements and satisfied all the conditions on his part to be performed or
satisfied prior to such Closing Date;
j. On or before the Closing Date, letters from each person
identified on Schedule B hereto who owns shares of Common Stock as of the date
hereof, in form and substance satisfactory to you, confirming that, without the
prior written consent of UBS Securities LLC, which may be withheld in the sole
discretion of UBS Securities LLC, such person will not, directly or indirectly,
offer, sell, assign, transfer, encumber, contract to sell, grant any option to
purchase, or otherwise dispose of, any Common Stock (including Common Stock that
may be deemed to be beneficially owned by such person in accordance with the
Rules and Regulations) or any securities convertible into or exchangeable for
any shares of Common Stock, until the one hundred twentieth (120th) day after
the effective date of the Registration Statement. Notwithstanding the
foregoing, this paragraph shall not prohibit any of the following types of
transfers: (i) if such person is a partnership, a private transfer by such
person to a partner of such or a retired partner of such person, in accordance
with its partnership agreement; and (ii) following any transfer permitted in
clause (i) of this sentence to an individual, any private transfer by gift, will
or intestate succession from such individual to such individual's spouse or
members of the immediate family of such individual or such individual's spouse,
in each case described in clause (i) or (ii) if the transferee agrees in writing
to be subject to the terms of this paragraph to the same extent as the
transferor.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and Underwriters' counsel. The Company will furnish you with such number
of conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request. Any certificate signed by the Selling Stockholder or
any officer of the Company and delivered to you or to your counsel shall be
deemed to be a representation and warranty by the Selling Stockholder or the
Company, as applicable, to you as to the statements made therein.
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10. INDEMNIFICATION AND CONTRIBUTION.
a. Subject to the provisions of paragraph e. below, the Company
agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof), if any, who controls any
Underwriter within the meaning of Section 15 of the Act from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Act, the
Exchange Act, or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
out-of-pocket expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any breach of
any representation, warranty, agreement or covenant of the Company herein
contained, (ii) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof) or in the Offering Memorandum or any post-effective amendment thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or in the Offering Memorandum or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that (1) the indemnity agreements of
the Company contained in this paragraph a. shall not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission is
contained in or made in reliance on or in conformity with the section of the
Prospectus entitled "Underwriting" (except for the sixth and [directed shares]
paragraphs thereof) or the last paragraph of text on the cover page of the
Prospectus or in the section of the Offering Memorandum entitled
"Representations by Purchasers," and (2) the indemnity agreement contained in
this paragraph a. with respect to any Preliminary Prospectus or Offering
Memorandum shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages, liabilities or expenses
purchased the Shares which is the subject thereof (or to the benefit of any
person controlling such Underwriter) if at or prior to the written confirmation
of the sale of such Shares a copy of the Prospectus (or the Prospectus as
amended or supplemented), in the case of purchasers resident in Ontario, the
revised Offering Memorandum was not sent or delivered to such person and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus or Offering Memorandum was corrected in the Prospectus (or the
Prospectus as amended or supplemented), in the case of purchasers resident in
Ontario, the revised offering Memorandum unless the failure is the result of
noncompliance by the Company with paragraph a. of Section 6 hereof. The
indemnity agreements of the Company contained in this paragraph a. and the
representations and warranties of the Company contained in
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Section 2 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of any payment for the Shares.
b. Subject to the provisions of paragraph e. below, each Selling
Stockholder agrees to indemnify and hold harmless each Underwriter and each
person (including each partner or officer thereof), if any, who controls any
Underwriter within the meaning of Section 15 of the Act from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Act, the
Exchange Act, or the common law or otherwise, and the Selling Stockholder agrees
to reimburse each such Underwriter and controlling person for any legal or other
out-of-pocket expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) (A) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof) or in the
Offering Memorandum or any post-effective amendment thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (B) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or in the Offering Memorandum or the omission or alleged omission to
state therein a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading, in
each case specified in clause (A) and (B) to the extent any such statements or
omissions were made in reliance upon and in conformity with written information
furnished to the Company by the Selling Stockholder specifically for use in the
preparation of the Registration Statement, the Preliminary Prospectus, the
Offering Memorandum or the Prospectus, and (ii) any breach of any
representation, warranty, agreement or covenant of the Selling Stockholder
herein contained; provided, however, that the indemnity agreement contained in
this paragraph b. with respect to any Preliminary Prospectus or Offering
Memorandum shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages, liabilities or expenses
purchased the Shares which is the subject thereof (or to the benefit of any
person controlling such Underwriter) if at or prior to the written confirmation
of the sale of such Shares a copy of the Prospectus (or the Prospectus as
amended or supplemented), in the case of purchasers resident in Ontario, the
revised Offering Memorandum was not sent or delivered to such person and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus or Offering Memorandum was corrected in the Prospectus (or the
Prospectus as amended or supplemented), in the case of purchasers resident in
Ontario, the revised offering Memorandum unless the failure is the result of
noncompliance by the Company with paragraph a. of Section 6 hereof. The
indemnity agreements of each Selling Stockholder contained in this paragraph b.
and the representations and warranties of each
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Selling Stockholder contained in Section 3 hereof shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of any payment for the
Shares.
c. Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its executive officers, each of its directors,
each Selling Stockholder, each other Underwriter and each person (including each
partner or officer thereof) who controls the Company, each Selling Stockholder
or any such other Underwriter within the meaning of Section 15 of the Act, from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Act, the Exchange Act, or the common law or otherwise, and to
reimburse each of them for any legal or other out-of-pocket expenses (including,
except as otherwise hereinafter provided, reasonable fees and disbursements of
counsel), incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which may
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any breach of any representation, warranty, agreement or
covenant of such Underwriter herein contained (ii) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof) or in the Offering
Memorandum or any post-effective amendment thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or in the Offering Memorandum or the omission or alleged omission to
state therein a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that in the cases of clauses (ii) and (iii) above, such
statement or omission is contained in or made in reliance on or in conformity
with the Section of the Prospectus entitled "Underwriting" (except for the sixth
paragraph thereof) or the last paragraph on the cover page of the Prospectus or
in the section of the Offering Memorandum entitled "Representations by
Purchasers." The indemnity agreement of each Underwriter contained in this
paragraph c. shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares.
d. Each party indemnified under the provision of paragraphs a.,
b. and c. of this Section 10 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to whom
such Notice was not given
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was unaware of the action, suit, investigation, inquiry or proceeding to which
the Notice would have related and was prejudiced by the failure to give the
Notice, but the omission so to notify such indemnifying party or parties of any
such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (the "Notice of Defense") to the indemnified party, to assume (alone or
in conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled, at its or their own expense to
have counsel chosen by such indemnified party or parties participate in, but not
conduct, the defense. It is understood that the indemnifying parties shall not,
in respect of the legal defenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
(a) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all of the Underwriters and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act, and (b) the fees
and expenses of more than one separate firm (in addition to any local counsel)
for the Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act and the Selling Stockholders. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs a. through d. of this
Section 10 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear the legal and other expenses, incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the third
sentence of this Section 10.d. and (B) the indemnifying party or parties shall
bear such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of the
Notice, no Notice of Defense has been given, the indemnifying party or parties
shall be responsible for any legal or other expenses incurred by the indemnified
party or parties in connection with the defense of the action, suit,
investigation, inquiry or
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<PAGE>
proceeding. The indemnifying party or parties shall not be liable for any
settlement of any proceeding effected without its or their written consent,
provided such consent has not been unreasonably withheld.
e. If the indemnification provided for in this Section 10 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph a., b. or c. of this Section 10, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph a., b. or c. of this Section 10 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, the Underwriters, and each Selling Stockholder shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the Shares received by the Company and each Selling Stockholder, respectively,
and the total underwriting discount received by the Underwriters, as set forth
in the table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Shares. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph e. were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph e. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities, or actions in respect thereof, referred to in
the first sentence of this paragraph e. shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph e. Notwithstanding the provisions of
this paragraph e., no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this paragraph e. to contribute are several in
proportion to their respective underwriting obligations and not joint.
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<PAGE>
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph d. of this Section 10).
f. The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who controls such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
g. The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 10 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 10 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act, or in the Offering Memorandum.
11. TERMINATION.
This Agreement may be terminated by you at any time on or prior to the
Closing Date or on or prior to any later Option Closing Date, as the case may
be, (i) if the Company shall have failed, refused or been unable, at or prior to
the Closing Date, or on or prior to any later Option Closing Date, as the case
may be, to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company is not fulfilled, or (ii) if trading on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market, by such trading exchanges or by order of the Commission or any other
governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, accident or other calamity
of such character as to have a Material Adverse Effect regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the judgment of the Representatives
makes it inadvisable
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<PAGE>
or impracticable to proceed with the offering, sale and delivery of the Shares,
or (v) if there shall have occurred an outbreak or escalation of hostilities
between the United States and any foreign power or of any other insurrection or
armed conflict involving the United States or other national or international
calamity, hostilities or crisis or the declaration by the United States of a
national emergency which, in the judgment of the Representatives, adversely
affects the marketability of the Shares, or (vi) if since the respective dates
as of which information is given in the Registration Statement and the
Prospectus and the Offering Memorandum, there shall have occurred any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company or
the business affairs, management, or business prospects of the Company, whether
or not arising in the ordinary course of business, or (vii) if any foreign,
federal or state statute, regulation, rule or order of any court or other
governmental authority shall have been enacted, published, decreed or otherwise
promulgated which in the judgment of the Representatives materially and
adversely affects or will materially and adversely affect the business or
operations of the Company, or trading in the Common Stock shall have been
suspended, or (viii) there shall have occurred a material adverse decline in the
value of securities generally on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or (ix) action shall be taken by any
foreign, federal, state or local government or agency in respect of its monetary
or fiscal affairs which, in the judgment of the Representatives, has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated in accordance with this Section 11, there shall be
no liability of the Company to the Underwriters and no liability of the
Underwriters to the Company except, in each case, as provided in Sections 8, 10
and 12 hereof.
If you elect to terminate this Agreement as provided in this
Section 11, the Company shall be notified promptly by you by telephone, telecopy
or telegram, confirmed by letter.
12. REIMBURSEMENT OF CERTAIN EXPENSES.
a. In addition to their other obligations under Section 10 of
this Agreement, the Company hereby agrees to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph a. of Section 10 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 12 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
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<PAGE>
b. In addition to their other obligations under Section 10 of
this Agreement, the Underwriters hereby agree to reimburse on a quarterly basis
the Company for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph c. of Section 10 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 12 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the Company shall promptly refund it and (ii) the Company shall
provide to the Underwriters, upon request, reasonable assurances of its ability
to effect any refund, when and if due.
c. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 10 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 10, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Shares from any of the several Underwriters.
13. NOTICES.
Except as otherwise provided herein, all communications hereunder
shall be in writing or by telegraph and, if to the Underwriters, shall be faxed,
mailed, telegraphed or delivered to UBS Securities LLC, 299 Park Avenue, New
York, NY 10171, Attention: David H. MacCallum, with a copy to Mark D. Whatley,
Esq., Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional
Corporation, Three Embarcadero Center, San Francisco, CA 94111; and if to the
Company, shall be faxed, mailed, telegraphed or delivered to it at its office
Attention: President, with a copy to Kevin Curley, Esq., Morgan, Lewis &
Bockius, 101 Park Avenue, New York, New York 101783. All notices given by
telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (i) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or its respective directors of
officers, and (ii) delivery of and payment for the Shares under this Agreement.
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<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
You will act as Representatives of the several Underwriters in all
dealings with the Company under this Agreement, and any action under or in
respect of this Agreement taken by you, as Representatives, will be binding upon
all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
[INTENTIONALLY LEFT BLANK]
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<PAGE>
Please sign and return to the Company the enclosed duplicate of this
letter, whereupon this letter will become a binding agreement among the Company
and the several underwriters in accordance with its terms.
Very truly yours,
NORLAND MEDICAL SYSTEMS, INC.
By: __________________________
Reynald G. Bonmati
President
SELLING STOCKHOLDERS
By: __________________________
[name]
Attorney-in-Fact
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
UBS SECURITIES LLC
PACIFIC GROWTH EQUITIES, INC.
By: UBS SECURITIES LLC
By:_____________________________
Title:
Acting on behalf of the several
Underwriters, including themselves,
named on SCHEDULE A hereto.
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SCHEDULE A
UNDERWRITERS
Number of Shares to be
Underwriters Purchased
------------ ---------
UBS Securities LLC
Pacific Growth Equities, Inc.
TOTAL 2,250,000
<PAGE>
SCHEDULE B
LOCK-UP AGREEMENTS
NAME SHARES
---- ------
Reynald G. Bonmati
Kurt W. Streams
Ralph G. Theodore
Thomas P. Regan
James A. Sperlazza
Lewis N. Harrold
James J. Baker
Michael W. Huber
Robert L. Piccioni, Ph.D
Albert S. Waxman, Ph.D.
Novatech Ventures, L.P.
Norland Partners, L.P.
Hans Schiessl
TOTAL
<PAGE>
APPENDIX A
OPINION OF MORGAN, LEWIS & BOCKIUS.
Morgan, Lewis & Bockius shall opine to the effect that:
1. a. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, is duly qualified to do business as a foreign corporation and is in
good standing in the States of Connecticut, New York, and Wisconsin, and has
full corporate power and authority to own its properties and conduct its
business as described in the Registration Statement; and the Subsidiary has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, is duly qualified to do business as a
foreign corporation and is in good standing in the State of California [OTHER
STATES?] and has full corporate power to own its properties and conduct its
business as described in the Registration Statement.
b. The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Registration
Statement and the Prospectus; all necessary and proper corporate proceedings
have been taken in order to authorize validly such Common Stock; all shares of
Common Stock outstanding immediately prior to the sale of the Firm Shares on the
Closing Date have been duly and validly issued, are fully paid and
nonassessable, were not issued in violation of or subject to any preemptive
rights under applicable law or the Company's certificate of incorporation or
bylaws or to such counsel's knowledge any other rights to subscribe for or
purchase any securities and conform to the description thereof contained in the
Registration Statement and the Prospectus; and to such counsel's knowledge,
except as described in the Prospectus, the Company does not own or control,
directly or indirectly, any corporation, association or other entity. All of
the outstanding shares of capital stock of the Subsidiary have been duly and
validly issued, are fully paid and nonassessable and to such counsel's
knowledge, have not been issued in violation of or subject to any preemptive
rights under applicable law or the Subsidiary's certificate of incorporation or
bylaws or, to our knowledge, any other rights to subscribe for or purchase any
securities, and are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance claim or equitable interest;
c. The Shares to be issued by the Company pursuant to this
Agreement have been duly authorized. The certificates evidencing such Shares to
be delivered hereunder are in due and proper form under Delaware law and when
duly countersigned by the Company's transfer agent and registrar and delivered
to you or upon your order against payment of the agreed consideration therefor
in accordance with the provisions of this Agreement, the Common Shares
represented thereby will be validly issued, fully paid and nonassessable, will
not have been issued in violation of or subject to any preemptive rights under
applicable law or the Company's certificate of incorporation or bylaws or to
such counsel's knowledge any other rights to subscribe for or purchase
A-1
<PAGE>
securities, co-sale right, right of first refusal or other similar right (which
rights have not previously been waived in connection with the purchase of sale
of such Shares) and will conform in all respects to the description thereof
contained in the Prospectus;
d. Except as disclosed in or specifically contemplated by the
Prospectus, to such counsel's knowledge there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
e. The Company has full corporate power and authority to enter
into this Agreement and to sell and deliver the Firm Shares or the Option
Shares, as the case may be, to be sold by it to you; this Agreement has been
duly and validly authorized by all necessary corporate action by the Company,
has been duly and validly executed and delivered by and on behalf of the
Company, and is a valid and binding agreement of the Company in accordance with
its terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those provisions relating
to indemnity or contribution, as to which no opinion need be expressed; and no
approval, authorization, order, consent, registration, filing, qualification,
license or permit of or with any court, regulatory, administrative or other
governmental body is required for the execution and delivery of this Agreement
by the Company or the consummation of the transactions contemplated by this
Agreement, except such as have been obtained and are in full force and effect
under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and such as may be required under applicable Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters and the
clearance of such offering with the NASD;
f. The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not (i) conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument known to
such counsel to which the Company or the Subsidiary is a party or by which the
Company or the Subsidiary or any of its property may be bound or affected which
is material to the Company or the Subsidiary, (ii) to the knowledge of such
counsel, result in the creation or imposition of any lien or encumbrance upon
any assets of the Company or the Subsidiary, (iii) violate any of the provisions
of the certificate of incorporation or bylaws as amended or restated, of the
Company or the Subsidiary or (iv) to the knowledge of such counsel, violate any
statute, judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or the Subsidiary or any
of its property;
g. To such counsel's knowledge, neither the Company nor the
Subsidiary is in violation of its certificate of incorporation or bylaws or to
such counsel's knowledge in breach of or default with respect to any provision
of any agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument filed
A-2
<PAGE>
with the Registration Statement as an exhibit to which it is a party or by which
it or any of its properties may be bound or affected, except where such default
would not materially adversely affect the Company or the Subsidiary, as the case
may be;
h. To such counsel's knowledge, no holders of securities of the
Company have rights which have not been waived to the registration of shares of
Common Stock or other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby;
i. (1) The Registration Statement has become effective under
the Act, and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission; any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations has been made in the manner and within the time period
required by such Rule 424(b);
(2) The Registration Statement, all Preliminary
Prospectuses, the Prospectus and each amendment or supplement thereto (except
for the financial statements and schedules, if any, and financial data included
therein as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the Rules and
Regulations;
(3) To such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required to be
disclosed in the Registration Statement or Prospectus or to be filed as exhibits
to the Registration Statement that are not disclosed or filed, as required;
(4) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened against the
Company or the Subsidiary that, if adversely determined, would have a Material
Adverse Effect or would limit, revoke, cancel, suspend or cause not to be
renewed any existing license, certificate, registration, approval or permit,
known to such counsel, from any state, federal or regulatory authority that is
material to the conduct of the business of the Company as currently conducted,
or that are of a character otherwise required to be described in the Prospectus
or Registration Statement that are not described as required; and
(5) The statements in the Prospectus or the Registration
Statement under the captions "Risk Factors--Government Regulation," "Risk
Factors--Dependence on Third-Party Reimbursement," "Risk Factors--Proprietary
Rights Protection," "Risk Factors--Product Liability," "The Company and its
Relationship with Norland and Stratec," "Management's Discussion and Analysis--
General," "Business" (first paragraph), "Business--Distribution Agreement,"
"Business--Product Development," "Business-Third Party Reimbursement,"
"Business--Government Regulation," "Business-Property Rights," "Management--
Stock Option Plan," "Certain Transactions," "Description of Capital Stock," and
"Shares Eligible for Future Sale," insofar as those statements
A-3
<PAGE>
constitute summaries of documents referred to therein, statutes, rules or
regulations, including the Delaware General Corporation Law, or matters of law
or legal conclusions, and the description of the Company's certificate of
incorporation and bylaws, are accurate in all material respects and fairly
present the information required to be shown in Form S-1 with respect to such
documents and matters; and such counsel does not know of any statutes, rules or
regulations required to be described in the Registration Statement that are not
described therein.
j. The Distribution Agreement is enforceable against Norland
and Stratec, the covenant and agreement of NMS set forth on the signature page
of the Distribution Agreement are enforceable against NMS, and the Loan
Agreement is enforceable against Norland, Stratec, and the covenant and
agreement of NMS set forth on the signature page of the Loan Agreement is
enforceable against NMS, in each case except (i) as such enforceability may be
limited by equitable principles, bankruptcy, insolvency, reorganization,
moratorium, or other, similar laws affecting creditors' rights generally and
(ii) as to the enforceability of provisions of the Distribution Agreement or the
Loan Agreement granting to the Company security interests in certain property
and provisions requiring arbitration of disputes, as to which such counsel need
not express any opinion.
k. To such counsel's knowledge, this Agreement and the
Stockholder's Agreements have been duly authorized, executed and delivered by or
on behalf of the Selling Stockholders; the Agent has been duly and validly
authorized to act as the custodian of the Stockholder Shares and Option Shares
to be sold by each Selling Stockholders; and the performance of this Agreement
and the Stockholder's Agreements and the consummation of the transactions herein
contemplated by each Selling Stockholder will not result in a breach of, or
constitute a default under, any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit, or other instrument to which each Selling
Stockholder is a party or by which each Selling Stockholder or any of its
properties may be bound, or violate any statute, judgment, decree, order, rule
or regulation of any court or governmental body having jurisdiction over each
Selling Stockholder or any of its properties; and no approval, authorization,
order or consent of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the Stockholder's Agreements or the consummation by each Selling Stockholder
of the transactions contemplated by this Agreement, except such as have been
obtained and are in full force and effect under the Act and the Exchange Act and
such as may be required under applicable Blue Sky laws and the clearance of such
offering with the NASD;
l. To such counsel's knowledge, each Selling Stockholder has
full right, power and authority to enter into this Agreement and the respective
Stockholder's Agreement and to sell, transfer and deliver the Stockholder Shares
and Option Shares to be sold by it on Closing Date or the Option Closing Date,
and good and marketable title to such Stockholder Shares and Option Shares so
sold, free and clear of all liens, encumbrances, equities, claims, restrictions,
security interests, voting trusts, or other defects of title whatsoever, has
been transferred to you (whom counsel may assume to be a bona fide purchaser
within the meaning of the Uniform Commercial Code);
A-4
<PAGE>
m. To such counsel's knowledge, this Agreement and the
Stockholder's Agreements are valid and binding agreements of the Selling
Stockholder that is party thereto in accordance with their terms except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
generally and except with respect to those provisions relating to indemnities or
contribution, as to which no opinion need be expressed;
n. No transfer taxes are required to be paid in connection with
the sale and delivery of the Firm Shares or the Option Shares to you hereunder;
o. The Company is not and, upon receipt of the net proceeds
from the sale of the Firm Shares and the Option Shares to be sold by it in the
manner described in the Prospectus, will not be for a period of one year from
the Closing Date, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended; and
p. Each of the Company and the Subsidiary had all corporate
power and authority to execute, deliver and perform the Acquisition Agreement
and, in the case of the Company, the Purchase Agreement, and each of them took
all action required by law, their respective charters and bylaws or otherwise to
authorize such execution, delivery and performance. The Acquisition Agreement
was duly approved and adopted by the affirmative vote of a number of the
outstanding shares of capital stock of the Subsidiary required to approve the
Acquisition Agreement, the Merger, and all actions necessary to effect the
Merger. The Certificate and Plan of Merger dated [April 2, 1996] has been filed
with the Secretary of State of the State of Delaware and the Merger has become
effective under applicable law. To such counsel's knowledge, no shareholders of
Dove has exercised their rights of appraisal or other dissenter's rights with
respect to the Merger or any of the actions that were conditions precedent to,
or otherwise necessary to effect, the Merger.
In rendering such opinions, such counsel may limit its opinion as to
the foregoing matters to the federal laws of the United States, the laws of the
State of New York and the Delaware General Corporate Law, and may rely as to
matters of local law on opinions of local counsel addressed to you and, as to
matters of fact, on certificates of officers of the Company, the Selling
Stockholder, or governmental officials, provided that such counsel's opinion
states that such counsel is so doing and that you are justified in relying on
such opinions of local counsel or certificates and that copies of such
certificates are attached to such counsel's opinion. Such counsel shall also
include a statement to the effect that in connection with the preparation of the
Registration Statement and the Prospectus, such counsel has participated in
conferences with officers and representatives of the Company and the independent
accountants of the Company, at which conferences such counsel has made inquiries
of such persons and others and discussed the contents of the Registration
Statement and the Prospectus. While the limitations inherent in the independent
verification of factual matters and the character of determinations involved in
the registration process are such that such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus (except as
specifically stated elsewhere in
A-5
<PAGE>
such opinion), nothing has come to such counsel's attention that would lead such
counsel to believe that (except for the financial statements, related notes and
schedules, if any, and schedules and financial data included therein, as to
which such counsel need express no view), the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as amended or
supplemented, if applicable, contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
2. OPINION OF MORGAN, LEWIS & BOCKIUS, FRANKFURT, REPUBLIC OF
GERMANY. Morgan, Lewis & Bockius, Frankfurt, shall opine to the effect that:
a. Stratec has been duly incorporated (or otherwise formed) and
is validly existing as a Gesellschaft mit beschrankter Haftung (limited
liability company) in good standing (or whatever equivalent statement may be
made under the laws of the jurisdiction of Stratec's formation) under the laws
of the Republic of Germany;
b. Stratec has full corporate power and authority to enter into
the Distribution Agreement and the Loan Agreement and the officer of Stratec who
executed and delivered the Distribution Agreement and the Loan Agreement on
behalf of Stratec was duly authorized and empowered to do so; and
c. The provisions of the Distribution Agreement and the Loan
Agreement specifying that those agreements will be governed by New York law are
enforceable against Stratec in accordance with their terms.
In rendering such opinions, such counsel may limit its opinion as to
the foregoing matters to the laws of the Federal Republic of Germany [and
applicable provincial laws] and may rely as to matters of fact on certificates
of officers of Stratec and/or governmental officials and records, provided that
such counsel's opinion states that such counsel is so doing and that you are
justified in relying on such certificates and/or public records and that copies
of such certificates are attached to such counsel's opinion;
3. OPINION OF QUARLES & BRADY. Quarles & Brady shall opine to the
effect that:
a. Norland has been duly incorporated (or otherwise formed) and
is validly existing as a corporation under the laws of the State of Wisconsin;
b. Norland has full corporate power and authority to enter into
the Distribution Agreement and the Loan Agreement and the Distribution Agreement
and the Loan Agreement were duly and validly authorized by all necessary
corporate action by Norland; and
A-6
<PAGE>
c. The provisions of the Distribution Agreement and the
Development Agreement specifying that those agreements will be governed by New
York law are enforceable against Norland in accordance with their terms;
In rendering such opinions, such counsel may limit its opinion as to
the foregoing matters to the laws of the State of Wisconsin and may rely as to
matters of fact on certificates of officers of Norland and governmental
officials, provided that such counsel's opinion states that such counsel is so
doing and that you are justified in relying on such certificates and that copies
of such certificates are attached to such counsel's opinion;
4. OPINION OF BARENTS & KRANS, THE HAGUE, NETHERLANDS. Barents &
Krans shall opine to the effect that:
a. NMS has been duly incorporated (or otherwise formed) and is
validly existing as a private company with limited liability under the laws of
the Netherlands;
b. NMS has full corporate power and authority to make the
covenants and agreements set forth on the signature page of the Distribution
Agreement and the covenants and agreements set forth on the signature page of
the Loan Agreement and the Distribution Agreement and the Loan Agreement were
duly and validly authorized by all necessary corporate action by NMS; and
c. The provisions of the Distribution Agreement and the Loan
Agreement specifying that those agreements will be governed by New York law are,
insofar as those provisions relate to the covenants and agreements of NMS set
forth on the signature page of the Distribution Agreement and those set forth on
the signature page of the Loan Agreement are enforceable against NMS in
accordance with their terms;
In rendering such opinions, such counsel may limit its opinion as to
the foregoing matters to the laws of the Netherlands and may rely as to matters
of fact on certificates of officers of NMS and/or governmental officials and
records, provided that such counsel's opinion states that such counsel is so
doing and that you are justified in relying on such certificates and/or public
records and that copies of such certificates are attached to such counsel's
opinion.
A-7
<PAGE>
EXHIBIT 11
NORLAND MEDICAL SYSTEMS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Primary Basis:
Net income....................................................................... $ 691,256 $ 438,312
Weighted average shares outstanding.............................................. 6,345,288 3,000,000
Stock options.................................................................... 711,722 1,002,000
Weighted average number of common and common equivalent shares outstanding....... 7,057,010 4,002,000
Earnings per share............................................................... $ 0.10 $ 0.11
Fully Diluted Basis:
Net income....................................................................... $ 691,256 $ 438,312
Weighted average shares outstanding.............................................. 6,345,288 3,000,000
Stock options.................................................................... 726,072 1,002,000
Weighted average number of common and common equivalent shares outstanding....... 7,071,360 4,002,000
Earnings per share............................................................... $ 0.10 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Primary Basis:
Net income....................................................................... $ 2,100,489 $ 68,044
Weighted average shares outstanding.............................................. 4,241,096 3,000,000
Stock options.................................................................... 1,004,139 1,002,000
Weighted average number of common and common equivalent shares
outstanding..................................................................... 5,245,235 4,002,000
Earnings per share............................................................... $ 0.40 $ .02
Fully Diluted Basis:
Net income....................................................................... $ 2,100,489 $ 68,044
Weighted average shares outstanding.............................................. 4,241,096 3,000,000
Stock options.................................................................... 1,007,088 1,002,000
Weighted average number of common and common equivalent shares
outstanding..................................................................... 5,248,184 4,002,000
Earnings per share............................................................... $ 0.40 $ .02
</TABLE>
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated March 4, 1996, except for Note 14, for which the date is June
4, 1996, on our audits of the financial statements and Financial Statement
Schedule of Norland Medical Systems, Inc. (formerly Ostech, Inc.) as of and for
the years ended December 31, 1995 and 1994. We also consent to the reference to
our Firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
June 4, 1996
<PAGE>
[STG - COOPERS & LYBRAND LETTERHEAD]
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated June 5, 1995, on our audit of the financial statements of
Ostech B.V. as of and for the year ended December 31, 1993. We also consent to
the reference to our Firm under the caption "Experts".
Schweizerische Treuhandgesellschaft -
Coopers & Lybrand AG
Zurich, Switzerland
June 4, 1996
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement on Form S-1 of Norland Medical Systems, Inc., of our
report on the financial statements of Dove Medical Systems, as of and for the
years ended December 31, 1995 and 1994, dated May 10, 1996, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to our Firm under the caption "Experts".
/s/ Hurley & Company
Hurley & Company
Granada Hills, California
June 5, 1996
