<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
NORLAND MEDICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$20,000,000 which includes $17,500,000 to be paid in the form of cash
and a promissory note and up to $2.5 million to be paid in the form of
an additional promissory note.
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$20,000,000
------------------------------------------------------------------------
(5) Total fee paid:
$4,000
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[LOGO]
106 CORPORATE DRIVE PARK, SUITE 106
WHITE PLAINS, N. Y. 10604
(914) 694-2285
August 28, 1997
To the Stockholders of Norland Medical Systems, Inc.:
As I indicated in my letter of August 14, 1997, as a result of litigation
initiated after the July 25, 1997 Proxy Statement was mailed to stockholders,
the Annual Meeting of Stockholders of Norland Medical Systems, Inc. (the
"Company") had to be adjourned. The litigation sought to block the proposed
acquisition of Norland Corporation by the Company. I am pleased to report that
an agreement in principle has been reached to settle this litigation and that
the Adjourned Annual Meeting of Stockholders of the Company will be held on
Monday, September 8, 1997, at 10:00 a.m. at the Rye Courtyard by Marriott, 631
Midland Avenue, Rye, New York 10580.
Enclosed is a Supplement to the July 25, 1997 Proxy Statement. The
Supplement summarizes the terms of the agreement in principle and includes
unaudited June 30, 1997 financial statements of both the Company and Norland
Corporation.
AS INDICATED IN THE PROXY STATEMENT, THE BOARD OF DIRECTORS HAS APPROVED
THE ACQUISITION OF NORLAND CORPORATION AND BELIEVES THAT THE TRANSACTION IS FAIR
AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD
RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE SUCH ACQUISITION.
On behalf of the Board of Directors and employees of the Company, I
cordially invite all stockholders to attend the Adjourned Annual Meeting. It is
important that your shares be voted on matters that come before the meeting.
Whether or not you plan to attend the meeting, if you have not already done so,
I urge you to promptly complete, sign, date and return the proxy card in the
prepaid envelope that has been provided to you.
Sincerely,
REYNALD G. BONMATI
President and Chairman of the Board of Directors
<PAGE>
NOTICE OF ADJOURNED ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 8, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Norland
Medical Systems, Inc., a Delaware corporation (the "Company"), has been
adjourned to Monday, September 8, 1997 at 10:00 a.m. The continuation of the
Annual Meeting will be held at the Rye Courtyard By Marriott, 631 Midland
Avenue, Rye, New York 10580 for the following purposes:
i. To consider and act upon a proposal to approve the acquisition by the
Company of all of the outstanding stock of Norland Corp. pursuant to a Stock
Purchase Agreement dated as of February 26, 1997 between the Company and Norland
Medical Systems B.V.;
ii. To elect five directors to serve for the ensuing year;
iii. To consider and act upon a proposal to approve and adopt an amendment
to the Company's Certificate of Incorporation which would increase the number of
authorized shares of the Company's Common Stock from 10,000,000 to 20,000,000;
iv. To consider and act upon a proposal to approve and adopt amendments to
the Company's Amended and Restated 1994 Stock Option and Incentive Plan;
v. To consider and act upon a proposal to ratify the selection of Coopers
& Lybrand L.L.P. as the Company's independent auditors for 1997; and
vi. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on July 16, 1997 continues to be the record date for
determining the stockholders entitled to notice and to vote at the adjourned
Annual Meeting. Only holders of record of Common Stock of the Company at that
date are entitled to vote at the adjourned Annual Meeting or any further
adjournments thereof.
By Order of the Board of Directors,
KURT W. STREAMS
Secretary
White Plains, N.Y.
August 28, 1997
YOUR VOTE IS IMPORTANT. IF YOU HAVE NOT ALREADY DONE SO, PLEASE COMPLETE, SIGN,
DATE AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE EVEN IF YOU INTEND
TO BE PRESENT AT THE MEETING. RETURNING THE PROXY WILL NOT LIMIT YOUR RIGHT TO
VOTE IN PERSON OR TO ATTEND THE ANNUAL MEETING, BUT WILL ENSURE YOUR
REPRESENTATION IF YOU CANNOT ATTEND. IF YOU HOLD SHARES IN MORE THAN ONE NAME,
OR IF YOUR STOCK IS REGISTERED IN MORE THAN ONE WAY, YOU MAY RECEIVE MORE THAN
ONE COPY OF THE PROXY MATERIAL. IF SO, PLEASE SIGN AND RETURN EACH OF THE PROXY
CARDS THAT YOU RECEIVE SO THAT ALL OF YOUR SHARES MAY BE VOTED. THE PROXY IS
REVOCABLE AT ANY TIME PRIOR TO ITS USE.
<PAGE>
[LOGO]
106 CORPORATE PARK DRIVE, SUITE 106
WHITE PLAINS, N.Y. 10604
(914) 694-2285
August 28, 1997
SUPPLEMENT TO PROXY STATEMENT
This supplement ("Supplement") to the Proxy Statement dated July 25, 1997
(the "Proxy Statement") is being mailed on or about August 28, 1997, to holders
of record as of July 16, 1997 of Common Stock, par value $0.0005 per share
("Common Stock"), of Norland Medical Systems, Inc. (the "Company"), in
connection with the solicitation by the Board of Directors of the Company of a
proxy for the Annual Meeting of Stockholders of the Company to be held on
September 8, 1997.
For your convenience, a new proxy card and return envelope is enclosed.
Unless revoked, any previously submitted proxy will remain in effect.
Accordingly, if you have previously returned the proxy card you received with
the Proxy Statement, it will remain in effect unless you revoke it. If you have
not previously returned the proxy card or you have returned the proxy card but
you wish to change your vote, please return the proxy card in the enclosed
envelope as soon as possible. Proxy cards will also be available at the
meeting. As stated in the Proxy Statement, a stockholder who wishes to revoke a
proxy can do so by delivering a subsequently signed and dated proxy or other
written notice to the Secretary of the Company at any time prior to the vote at
the meeting or by appearing at the meeting and voting in person the shares to
which the proxy relates.
LITIGATION
One of the proposals that the stockholders of the Company will be asked to
consider and act upon at the Annual Meeting is a proposal to approve the
acquisition by the Company (the "Acquisition") of all of the issued and
outstanding stock of Norland Corporation, a Wisconsin corporation ("Norland
Corp."), pursuant to a Stock Purchase Agreement dated as of February 26, 1997,
as amended (the "Stock Purchase Agreement"), between the Company and Norland
Medical Systems B.V. ("NMS BV"). The Proxy Statement describes the terms and
background of the Acquisition and the interests that certain officers and
directors of the Company have in NMS BV.
On August 1, 1997, after copies of the Proxy Statement were mailed to the
Company's stockholders, a shareholder's class action and derivative complaint
entitled IRWIN I. MILLER V. REYNALD G. BONMATI ET. AL. AS DEFENDANTS, AND
NORLAND MEDICAL SYSTEMS, INC., NOMINAL DEFENDANT (Civil Action No. 15849), was
filed in the Court of Chancery of the State of Delaware, New Castle County,
against four members of the Company's Board of Directors, Reynald G. Bonmati,
James J. Baker, Michael W. Huber and Albert S. Waxman (the "Individual
Defendants"), NMS BV and the Company. The complaint alleges that the Individual
Defendants breached their fiduciary duties of loyalty, candor and care in
connection with the Acquisition, that the terms of the Acquisition were unfair,
and that the Proxy Statement does not contain full and fair disclosure with
respect to the Acquisition. The plaintiff seeks, among other things: to enjoin
the consummation of the Acquisition; to require that the Company make additional
disclosures to its
<PAGE>
stockholders in connection with the Acquisition; damages in unspecified amounts;
and costs, disbursements and counsel and expert fees. Plaintiff also made a
motion for a preliminary injunction against the consummation of the Acquisition.
The Company and Individual Defendants believe that the action is without
merit. However, they also believe that litigation will delay, and create
uncertainty as to the ability to consummate the Acquisition, and that such delay
and uncertainty are not in the best interests of the Company and its
stockholders. Accordingly, representatives of the Company and the Individual
Defendants entered into discussions with counsel for the plaintiff with respect
to a possible settlement of the action. An agreement in principle has been
reached to settle this litigation (the "Agreement in Principle"). The following
is a summary of the terms of the Agreement in Principle:
1. The plaintiff withdrew the motion for a preliminary injunction and
agreed that, except for certain confirmatory discovery, he will refrain from any
further proceedings pending approval of the Settlement Agreement by the Court of
Chancery.
2. The Company agreed to prepare a Supplement to the Proxy Statement and,
after review and comment by plaintiff's counsel, to circulate the Supplement to
the stockholders. The Company specifically agreed to provide the stockholders
with unaudited financial statements of both Norland Corp. and the Company for
the six month periods ended June 30, 1997 and 1996 and to update the unaudited
pro forma combined condensed financial statements included in the Proxy
Statement to June 30, 1997. These financial statements are included herein
beginning on page F-1. Plaintiff was of the view that the Proxy Statement
should contain additional disclosure with respect to the background of the
amendments that were effected in the fourth quarter of 1996 to the pricing
provisions of the Distribution Agreement between the Company and Norland Corp.
and Stratec Medizintechnik GmbH ("Stratec"). The Company agreed to provide such
disclosure in this Supplement, and such information is set forth below in
"Distribution Agreement Amendments."
3. The Company agreed to adjourn the Annual Meeting to the extent
necessary to effect distribution of this Supplement. If the Acquisition is
approved by the stockholders at the adjourned meeting, the Acquisition can be
consummated following the stockholder vote. Plaintiff and his counsel have
agreed to use their best efforts to expedite the process to permit the meeting
to go forward and the Acquisition to be consummated at the earliest possible
time.
4. The Stock Purchase Agreement provides for a $17,500,000 purchase
price, plus an additional purchase price of up to $2,500,000, the exact amount
to be based upon the Company's 1997 sales. The $17,500,000 will be payable at
closing, $1,250,000 in cash and $16,250,000 by the Company's 7% promissory note
(the "Purchase Note"). A $1,250,000 principal payment on the Purchase Note will
be due six months after closing. The balance will be payable on the fifth
anniversary of the closing, with a right on the part of the Company to extend
the maturity for an additional two years. If the maturity is so extended, the
applicable interest rate was to increase by one percentage point at the original
maturity date and at the end of each six month period thereafter. The Company
may repay the Purchase Note at any time and, except for the $1,250,000 payment
due six months after closing, the Company may make payments of principal by
delivering shares of its Common Stock, valued at the average closing price for
the five trading days preceding the delivery. The amount of any additional
purchase price will be determined upon completion of the audit of the Company's
financial statements for the year ending December 31, 1997. For each full
$1,000,000 of Company 1997 sales above $32,000,000, the Company will be
obligated to pay an additional $312,500 in purchase price, up to a maximum
additional purchase price of $2,500,000. The entire additional purchase price
will be paid by a second promissory note (the "Additional Note"). The terms of
the Additional Note will be the same as those of the Purchase Note, except that
there will be no mandatory
-2-
<PAGE>
prepayment of principal prior to maturity. The Purchase Note and the Additional
Note will be secured by a pledge by the Company to NMS BV of all of the stock of
Norland Corp.
The Agreement in Principle provides that the Stock Purchase Agreement will
be amended to provide that if the Company elects to extend the maturity date of
the Purchase Note and/or the Additional Note, the interest rate will be
increased by one percentage point at the end of the fifth year and the sixth
year rather than every six months. Thus, the interest rate will be 8% per annum
for all of year six and 9% per annum for all of year seven. Under the Stock
Purchase Agreement, as originally executed, the interest rate would have
increased to 8% for the first six months of year six, 9% for the last six months
of year six, 10% for the first six months of year seven, and 11% for the last
six months of year seven. Except for this amendment, the terms of the
Acquisition and the provisions of the Stock Purchase Agreement remain unchanged
from the description contained in the Proxy Statement.
5. The Company agreed that it will use its best efforts to nominate for
election to the Board at the Annual Meeting one nominee who has no direct or
indirect affiliation with NMS BV. Dr. Andre-Jacques Neusy, who is a nominee for
election to the Board at the Annual Meeting, has no such affiliation with NMS
BV. The Company also agreed that with respect to each succeeding Annual Meeting
of the Company's stockholders, it will use its best efforts to nominate for
election to the Board at least two nominees who have no direct or indirect
affiliation with NMS BV.
6. The Company agreed that it will not oppose an application by
plaintiff's counsel, Rabin & Peckel LLP and Rosenthal, Monhait, Gross and
Goddess, P.A., for an award of counsel fees and expenses of up to $250,000.
Such amount will be payable by the Company.
The parties and their counsel are in the process of incorporating the
terms of the Agreement in Principle into a formal settlement agreement (the
"Settlement Agreement"). The Settlement Agreement will be submitted to the
Delaware Court of Chancery for approval. The Court will set a date for a
hearing on the proposed settlement. A notice describing the terms of the
settlement in detail will be sent to the Company's stockholders at least 45 days
prior to the hearing date. The Company will pay for the costs of printing and
mailing such notice. In connection with such hearing, stockholders and other
interested parties will have an opportunity to present to the Court any
objections they may have to the terms of the Settlement Agreement. If for any
reason a Settlement Agreement is not entered into or is not approved by the
Court of Chancery, the plaintiff will be able to continue the action and seek
relief on the basis of the allegations contained in the complaint, including
damages and, if the Acquisition has not been effected, an injunction against its
consummation.
DISTRIBUTION AGREEMENT AMENDMENTS
As indicated above, one of the reasons for the litigation was that the
plaintiff was of the view that the Proxy Statement should have contained
additional information explaining the reasons for the amendments to the pricing
provision of the Distribution Agreement between the Company and Norland Corp.
and Stratec.
In 1995 the Company entered into the Distribution Agreement with Norland
Corp. and Stratec. With respect to Norland Corp., the Distribution Agreement
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. The distribution rights for Norland Corp.
devices are worldwide. The terms of the Distribution Agreement extends until
December 31, 2015, subject to rights of either party to extend the term for
additional five year periods.
-3-
<PAGE>
The Distribution Agreement originally provided that the price at which
Norland Corp. sold a system to the Company was 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 was allocated 50% to the Company and 50% to Norland
Corp. 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. The intent and effect of this splitting
of the margin was to provide the Company with a gross margin of approximately
35% on its sales under circumstances where the Company was free to determine the
prices at which systems were sold to its customers. The parties believed that
35% represented an industry standard gross margin for a distribution agreement
of this type. The allocations were made based on the difference between Norland
Corp.'s cost and the Company's resale price because both amounts could be
readily and independently determined and verified. Because of the interested
party relationships between the Company and Norland Corp., the ability to easily
verify the payment terms was considered to be very important.
The largest contributor to the revenues of the Company and Norland Corp. in
1996 was the pDEXA, a peripheral densitometry system that scans the forearm.
During 1996, the Medicare reimbursement rate established by the Health Care
Financing Administration ("HCFA") for bone densitometry tests was the same for
peripheral systems such as the pDEXA and the larger, more expensive system that
scan the hip and spine. In November of 1996, HCFA adopted new reimbursement
rates for bone densitometer scans that became effective in January of 1997. The
Medicare reimbursement rate for tests using the larger systems was reduced from
$124 to approximately $120. However, the rate for tests using peripheral
systems was reduced from $124 to approximately $37. The reduction of the
reimbursement rate for peripheral systems had a dramatic adverse impact on
pDEXA sales. Sales were significantly down in November of 1996 in anticipation
of the change in reimbursement rates and, in an effort to restore demand for the
pDEXA, the Company reduced its selling price by nearly 20% in December of 1996.
Under the pricing provisions of the Distribution Agreement, such price
reduction would have reduced the Company's gross margin significantly below 35%.
However, both manufacturers agreed to effect a temporary change in the pricing
provisions of the Distribution Agreement (the "Amended Pricing Provisions").
Under the Amended Pricing Provisions, the Company pays Norland Corp. an amount
equal to the Distributor's Device Cost as defined in the Distribution Agreement.
The Distributor's Device Cost of a system is the aggregate of the standard costs
of the components and parts used in the system, plus the actual labor costs
incurred by the Manufacturer in producing the system (subject to a cap), plus an
agreed upon markup on the standard costs of all non-computer components used in
the system. Norland Corp. is also entitled to receive royalties equal to 5% of
the price for which the Company sells all new systems manufactured by Norland
Corp. (i.e., any system other than the pDEXA, the Eclipse and the XR-36). If
the aggregate amount payable by the Company to Norland Corp. and Stratec for a
year under the Amended Pricing Provisions would exceed the aggregate amount
payable to them pursuant to the previously applicable provisions described
above, then the Amended Pricing Provisions will not be applicable, and the
provisions described in the preceding paragraph will apply.
While Norland Corp. and Stratec were willing to implement the Amended
Pricing Provisions, they were not willing to do so on a permanent basis. The
manufacturers wanted to see if the price reduction in fact increases sales and
if Amended Pricing Provisions result in the Company achieving gross margins of
approximately 35%. Accordingly, Norland Corp. has the right to terminate the
Amended Pricing Provisions effective on December 31 of any year, commencing
December 31, 1997, by notice given to the Company not less than 90 nor more than
180 days prior to the end of such year. As indicated below in the "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
sections that follow the unaudited June 30, 1997 financial statements of both
Norland Corp. and the Company, the
-4-
<PAGE>
Amended Pricing Provisions have in fact resulted in a significant shift of
revenue and net income from Norland Corp. to the Company and in the Company
having a gross margin of 43.4% for the first six months of 1997 (compared to
35.9% for the first six months of 1996). Since the Amended Pricing Provisions
have been significantly more beneficial to the Company than originally
anticipated, there can be no assurance that, should the Acquisition not be
effected, they will continue in effect beyond December 31, 1997, and it is not
unreasonable to expect that they will not continue in effect and will be the
subject of serious renegotiation.
OTHER INFORMATION
Advest, Inc. ("Advest") has reviewed the information contained in this
Supplement (including the financial statements) and has indicated that if such
information had been available at the time Advest issued the Advest Opinion
referred to in the Proxy Statement, it would not have caused Advest to make any
change in the Advest Opinion.
-5-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-------
UNAUDITED FINANCIAL STATEMENTS PAGE
NORLAND CORPORATION
Condensed Consolidated Balance Sheets as of June 30, 1997 and 1996 F-2
Condensed Consolidated Statements of Income for the six months
ended June 30, 1997 and 1996 F-3
Condensed Consolidated Statements of Changes in Common Stockholder's
Equity for the six months ended June 30, 1997 and 1996 F-4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 F-5
Notes to Condensed Consolidated Financial Statements F-6
Management's Discussion and Analysis of Financial Conditions
and Results of Operations of Norland Corp. for the six months
ended June 30, 1997 and 1996 F-7
NORLAND MEDICAL SYSTEMS, INC.
Condensed Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 F-9
Condensed Consolidated Statements of Income for the six months
ended June 30, 1997 and 1996 F-10
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1997 and 1996 F-11
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 F-12
Notes to Condensed Consolidated Financial Statements F-13
Management's Discussion and Analysis of Financial Condition and Results
of Operations for the six months ended June 30, 1997 and 1996 F-15
Unaudited Pro Forma Combined Condensed Financial Statements F-18
Pro Forma Combined Condensed Balance Sheet as of June 30, 1997 F-19
Pro Forma Combined Condensed Statements of Income for the year ended
December 31, 1996 and for the three months ended March 31, 1997 F-20
Notes to the Pro Forma Combined Condensed Financial Statements F-21
F-1
<PAGE>
NORLAND CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
(Unaudited)
-----------
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
Current assets:
<S> <C> <C>
Cash $ 82,590 $ 113,641
Accounts receivable - affiliates 291,532 1,710,362
Inventories 3,632,594 1,809,171
Prepaid expenses and other current assets 32,367 29,391
Income taxes recoverable 233,948 -
Deferred income taxes 95,000 -
---------- ----------
Total current assets 4,368,031 3,662,565
Property and equipment - net 373,920 184,351
---------- ----------
Total assets $4,741,951 $3,846,916
========== ==========
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY
Current liabilities:
Note payable - bank $ - $ 480,000
Accounts payable:
Affiliate 21,881 1,332,320
Trade 1,382,290 550,327
Accrued liabilities 207,556 83,588
Current portion of product development loan - affiliate 100,000 -
Current portion of capital lease obligations 5,815 9,394
---------- ----------
Total current liabilities 1,717,542 2,455,629
---------- ----------
Product development loan payable - affiliate 400,000 75,906
Capital lease obligations 3,274 19,389
---------- ----------
403,274 95,295
---------- ----------
Common stockholder's equity:
Common stock, voting, par value of $1.00 per share - 58,500
shares authorized, 8,457 shares issued and outstanding 8,457 8,457
Common stock, non-voting, par value of $1.00 per share,
3,000 shares authorized, no shares issued and outstanding - -
Additional paid-in capital 454,379 454,379
Retained earnings 2,011,613 687,013
Foreign currency translation adjustments 146,686 146,143
---------- ----------
Total common stockholder's equity 2,621,135 1,295,992
---------- ----------
Total liabilities and common stockholder's equity $4,741,951 $3,846,916
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-2
<PAGE>
NORLAND CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
for the six months ended June 30, 1997 and 1996
(Unaudited)
-----------
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Revenue from affiliate $7,084,885 $4,973,256
Cost of revenue 5,657,060 3,059,263
---------- ----------
Gross profit 1,427,825 1,913,993
---------- ----------
Operating expenses:
General and administrative 354,812 263,330
Research and development 838,820 439,985
---------- ----------
Total operating expenses 1,193,632 703,315
---------- ----------
Operating income 234,193 1,210,678
---------- ----------
Other expense:
Interest expense 22,182 37,110
---------- ----------
Total other expense 22,182 37,110
---------- ----------
Income before income taxes 212,011 1,173,568
Income tax expense 57,340 -
---------- ----------
Net income attributable to common stockholder $ 154,671 $1,173,568
=========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-3
<PAGE>
NORLAND CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY
for the six months ended June 30, 1997 and 1996
(Unaudited)
------------
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL RETAINED EARNINGS CURRENCY TOTAL COMMON
PAID-IN (ACCUMULATED TRANSLATION STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS EQUITY
-------- -------- ---------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 8,457 $8,457 $454,379 $ (486,555) $146,137 $ 122,418
Foreign currency translation adjustment - - - - 6 6
Net income - - - 1,173,568 - 1,173,568
----- ------ -------- --------- -------- ----------
Balance, June 30, 1996 8,457 $8,457 $454,379 $ 687,013 $146,143 $1,295,992
===== ====== ======== ========== ======== ==========
Balance, January 1, 1997 8,457 $8,457 $454,379 $1,856,942 $146,585 $2,466,363
Foreign currency translation adjustment - - - - 101 101
Net income - - - 154,671 - 154,671
----- ------ -------- ------- -------- ----------
Balance, June 30, 1997 8,457 $8,457 $454,379 $2,011,613 $146,686 $2,621,135
===== ====== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-4
<PAGE>
NORLAND CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)
---------------------
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 154,671 $1,173,568
--------- ----------
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization expense 53,370 42,078
Changes in:
Accounts receivable 1,964,313 (1,214,708)
Inventories (1,579,119) (1,209,811)
Prepaid expenses and other current assets (17,096) (12,347)
Income taxes recoverable 38,815 -
Deferred income taxes 38,000 -
Accounts payable (631,537) 1,640,172
Accrued liabilities 58,337 94,871)
--------- ----------
Total (74,917) (849,487)
--------- ----------
adjustments
Net cash provided by operating activities 79,754 324,081
--------- ----------
Cash flows from investing activities:
Purchases of property and equipment (242,579) (75,771)
--------- ----------
Net cash used in investing activities (242,579) (75,771)
--------- ----------
Cash flows from financing activities:
Proceeds from product development loan - affiliate 242,261 27,387
Payments on capital lease obligations (2,578) (7,481)
Repayment of product development loan - affiliate (32,046) -
Payments on note payable - bank - (200,000)
--------- ----------
Net cash provided by (used in) financing activities
207,637 (180,084)
--------- ----------
Effect of exchange rate changes on cash (1,447) 42
--------- ----------
Net increase in cash 43,365 68,258
Cash at beginning of period 39,225 45,383
--------- ----------
Cash at end of period $ 82,590 $ 113,641
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-5
<PAGE>
NORLAND CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
(Unaudited)
1. BASIS OF PRESENTATION
The financial information included herein has been prepared by management
without audit by independent certified public accountant 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 six months ended June
30, 1997 and 1996, and all such adjustments are of a normal recurring nature.
Management recommends the accompanying financial information be read in
conjunction with Norland Corporation's audited financial statements and related
notes set forth elsewhere herein.
The results for the six-month period ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 1997.
2. INVENTORIES
As of June 30, 1997, inventories consists of the following:
Finished goods $ 473,958
Work-in-process 495,181
Raw materials 2,663,455
----------
$3,632,594
Inventories are stated at the lower of cost or net realizable value, with
cost determined on a first-in, first-out basis.
F-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NORLAND CORP.
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NORLAND CORP. SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS SUPPLEMENT
AND IN THE PROXY STATEMENT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. A NUMBER OF THE RISKS AND
UNCERTAINTIES DESCRIBED IN THE INTRODUCTION TO THE COMPANY'S REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996 ARE ALSO APPLICABLE TO NORLAND CORP.
NORLAND CORP.'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS.
RESULTS OF OPERATIONS
Revenue for the six months ended June 30, 1997 increased $2,111,629
(42.5%) to $7,084,885 from $4,973,256 for the six months ended June 30, 1996.
The increase was largely the result of increased sales of Eclipse and XR-36
systems, and sales of pDEXA systems manufactured by Norland Corp. which the
Company began selling in the United States in May 1996. The amount of the
increase was reduced by the impact of Amended Pricing Provisions under the
Distribution Agreement with the Company which became effective October 1, 1996.
If the Amended Pricing Provisions had not been in effect during the six months
ended June 30, 1997, revenues for the six month period would have been
$8,827,885. The large majority of revenues for the six months ended June 30,
1997 and 1996 are comprised of sales of complete bone densitometry systems, with
sales of spare parts comprising the balance. Revenues have been affected by the
reduction in the Medicare reimbursement rate for peripheral bone densitometry
tests announced in November 1996. The mix of products sold has changed in that
the majority of Norland Corp.'s revenues are now derived from sales of the
larger Eclipse and XR36 systems that scan the hip and spine and for which the
Medicare reimbursement rate was not significantly decreased, as compared to the
pDEXA system that performs peripheral bone densitometry tests. Norland Corp.'s
revenues and the mix of products sold are expected to continue to be influenced
by the degree of difference in Medicare reimbursement rate levels for peripheral
and larger systems. They will also be influenced by Norland Corp.'s ability to
develop lower cost peripheral systems that can be operated more profitably by
end users at the lower reimbursement levels. The Health Care Financing
Administration (HCFA) recently published proposed changes to the Medicare
reimbursement rates that would increase the reimbursement rate for peripheral
systems and reduce the reimbursement rate for the larger systems. No new rates
will be adopted until after the comment period on the proposed changes.
Cost of revenue as a percentage of revenue was 79.8% and 61.5% for the six
months ended June 30, 1997 and 1996, respectively, resulting in a gross margin
of 20.2% for the six months ended June 30, 1997 compared to 38.5% for the six
months ended June 30, 1996. The decrease in gross margin is primarily attributed
to the impact of the Amended Pricing Provisions. If the Amended Pricing
Provisions had not been in effect during the six months ended June 30, 1997, the
gross margin would have been 35.9%. In addition, during the six months ended
June 30, 1997, Norland Corp. expanded its manufacturing facilities, and costs
related thereto had a negative impact on gross margin.
Research and development expense increased $398,835 (90.6%) to $838,820
for the six months ended June 30, 1997 from $439,985 for the six months ended
June 30, 1996, and also increased as a percentage of revenue to 11.8% from 8.8%.
The increases were due primarily to higher levels of expenditures, including
expenses of additional personnel, directed toward new research and development
projects that are currently in process.
F-7
<PAGE>
General and administrative expense increased $91,482 (34.7%) to $354,812
for the six months ended June 30, 1997 from $263,330 for the six months ended
June 30, 1996. The increase was due primarily to increased fees for accounting
services and expenses for additional office space and related office costs.
General and administrative expense decreased as a percentage of revenue to 5.0%
for the six months ended June 30, 1997 from 5.3% for the six months ended June
30, 1996. The decrease reflects the significant sales growth for which general
and administrative expenses did not increase in direct proportion.
Other expense decreased $14,928 (40.2%) to $22,182 for the six months
ended June 30, 1997 from $37,110 for the six months ended June 30, 1996 and also
decreased as a percentage of revenue to 0.3% from 0.7%. Other expense consists
primarily of interest expense on Norland Corp.'s bank loan (in 1996), the
product development loan from the Company and capital leases. The dollar and
percentage decreases were primarily due to the elimination of the interest
expense on the bank loan that was paid in full during 1996.
Norland Corp. recognized income tax expense of $57,340 for the six months
ended June 30, 1997 as a result of providing for income taxes at its current
effective rate of 40% and recognizing certain refundable Dutch corporate income
taxes for which no benefit had been previously recognized by Norland Scientific
Instruments B.V., an inactive subsidiary which is in the process of being
liquidated. Norland Corp. had no income tax provision for the six months ended
June 30, 1996 as it had sufficient available net operating loss carryforwards to
offset its regular taxable income for the period.
Net income decreased $1,018,897 to $154,671 for the six months ended June
30, 1997 from $1,173,568 for the six months ended June 30, 1996 and decreased as
a percentage of revenue to 2.2% from 23.6%. The decreases were due primarily to
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Norland Corp. was funded in the six months ended June 30, 1997 and 1996
primarily by cash flows from operations and borrowings from the Company under
the Product Development Loan Agreement. In 1997, Norland Corp. used cash
generated from its earnings and more rapid collection of accounts receivable to
increase inventory levels and reduce trade accounts payable. In 1996, the cash
generated from Norland Corp.'s earnings and increase in its trade accounts
payable was used to increase inventory levels and carry higher accounts
receivable resulting from increased sales volume and to repay its bank debt.
In the six months ended June 30, 1997, certain research and development
activities performed by Norland Corp. were funded in part with borrowings from
the Company under the Product Development Loan Agreement.
Property and equipment at June 30, 1997 consisted primarily of machinery
and equipment, tooling, furniture and fixtures. Norland Corp. has expanded its
leased space to increase production and warehouse capacity, and expects to
purchase additional tooling and materials in support of research and development
projects and production of new products and to improve its management
information systems. Norland Corp. expects to use cash flows from operations to
fund these plans and its ongoing operations. Should the proposed acquisition of
Norland Corp. be approved by the Company's stockholders, the Company will
benefit from cash flows provided by Norland Corp.'s operations and become
responsible for financing the Norland Corp. manufacturing and research and
development activities.
F-8
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,133,254 $ 8,133,468
Investment - 1,949,039
Accounts receivable - trade, less allowance for
doubtful accounts of $250,000 at June 30, 1997
and $221,000 at December 31, 1996 11,455,816 9,182,488
Income taxes recoverable 192,999 794,285
Inventories, net 2,006,563 616,865
Officers' loans receivable 1,971,827 581,704
Current portion of product development loan 100,000 38,685
receivable - affiliate
Prepaid expenses and other current assets 541,464 361,902
------------- -------------
Total current assets 21,401,923 21,658,436
------------- -------------
Demonstration systems inventory, net 1,211,667 1,234,848
Investment in Vitel, Inc. 260,000 260,000
Property and equipment, net 434,068 406,375
Product development loan receivable - affiliate 400,000 251,100
Goodwill, net 3,142,607 3,183,961
Other intangible assets, net 3,201,791 3,248,658
------------- -------------
Total assets $ 29,963,223 $ 30,243,378
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts Payable - Norland $ 201,172 $ 2,220,816
Accounts Payable - Stratec 521,757 714,127
Accounts Payable - trade 467,230 81,416
Accrued expenses 1,139,601 658,304
Customer deposits 7,700 47,850
------------- -------------
Total current liabilities 2,337,460 3,722,513
============= =============
Stockholders' equity: 3,575 3,452
Common stock, par value of $0.0005 per share,
10,000,000 shares authorized, 7,150,031 shares
issued at June 30, 1997
Additional paid-in capital 22,158,189 22,158,170
Retained earnings 5,463,999 4,359,243
------------- -------------
Total stockholders' equity 27,625,763 26,520,865
------------- -------------
Total liabilities and stockholders' equity $ 29,963,223 $ 30,243,378
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-9
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Revenue $ 13,130,909 $ 12,167,406
Cost of revenue 7,431,211 7,796,041
------------ ------------
Gross Profit 5,699,698 4,371,365
Sales and marketing expense 2,680,347 1,458,520
General and administrative expense 1,409,069 899,772
------------ ------------
Operating income 1,610,282 2,013,073
Other income 250,474 413,698
------------ ------------
Income before income taxes 1,860,756 2,426,771
Provision for income taxes 756,000 985,458
------------ ------------
Net income $ 1,104,756 $ 1,441,313
============ ============
Net income per common share $ 0.15 $ 0.20
============ ============
Weighted average number of common and common
equivalent shares 7,175,780 7,157,296
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-10
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
TOTAL SHARES STOCK CAPITAL EARNINGS
------------ ---------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance as of
December 31, 1996 $ 26,520,865 6,904,781 $ 3,452 $ 22,158,170 $ 4,359,243
Issuance of shares for
stock options exercised 142 245,250 123 19 --
Net income 1,104,756 -- -- -- 1,104,756
------------ --------- -------- ------------ -----------
Balance as of $ 27,625,763 7,150,031 $ 3,575 $ 22,158,189 $ 5,463,999
============ ========= ======== ============ ===========
June 30, 1997
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 288 734,250 367 (79) --
options exercised
Issuance of shares to acquire 3,311,519 161,538 81 3,311,438 --
Dove Medical Systems
Cost and expenses directly (3,002) -- -- (3,002) --
related to the stock offering
Cash paid in lieu of fractional (164) (7) -- -- (164)
shares on 3-for-2 stock split on
June 14, 1996
Net income 1,441,313 -- -- -- 1,441,313
------------ --------- -------- ------------ -----------
Balance as of
June 30, 1996 $ 25,270,800 6,895,781 $ 3,448 $ 21,658,170 $ 3,609,182
============ ========= ======== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-11
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,104,756 $ 1,441,313
Adjustments to reconcile net income to net cash
used in operating activities:
Inventory obsolescence expense -- 116,200
Amortization expense 213,462 10,612
Depreciation expense 58,861 --
Provision for doubtful accounts receivable 29,000 --
Changes in:
Accounts receivable (2,302,328) (3,703,846)
Inventories (1,450,290) (380,055)
Prepaid expenses and other current assets (179,562) (133,680)
Accounts payable (1,826,200) 217,280
Accrued expenses 481,297 (32,304)
Income taxes 601,286 (1,181,792)
Customer deposits (40,150) (28,424)
-------------- -------------
Total adjustments (4,414,624) (5,091,009)
-------------- -------------
Net cash used in operating activities (3,309,968) (3,649,696)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (86,554) (179,269)
Loans to officers (1,890,123) --
Repayment of loans to officers 500,000 --
Sale of investment 1,996,403 --
Product development loan to affiliate (242,261) (27,387)
Repayment of product development loan to affiliate 32,046 --
Payment for purchase of certain intangible assets of -- (3,432,937)
Dove Medical Systems, net of cash acquired
Investment in Vitel, Inc. -- (250,000)
-------------- -------------
Net cash provided by (used in)
investing activities 309,511 (3,889,593)
-------------- -------------
Cash flows from financing activities:
Proceeds from stock options exercised 143 288
Cost and expenses of issuance of common stock -- (3,002)
Cash paid for fractional shares -- (164)
-------------- -------------
Net cash provided by (used in)
financing activities 143 (2,878)
-------------- -------------
Net decrease in cash (3,000,214) (7,542,167)
Cash at beginning of period 8,133,468 19,218,865
-------------- -------------
Cash at end of period $ 5,133,254 $ 11,676,698
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-12
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of Norland Medical Systems, Inc.
(the "Company") presented herein, have been prepared pursuant to the rules of
the Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and footnote disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1996, which were audited by Coopers & Lybrand L.L.P., and included
in the Company's Form 10-K as filed with the Securities and Exchange Commission
on March 31, 1997. The figures in these statements have been restated to reflect
the 3 for 2 stock split which was effective June 14, 1996.
The condensed consolidated balance sheet as of June 30, 1997 and the condensed
consolidated statements of income, changes in stockholders' equity and cash
flows for the six months then ended are unaudited but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1997.
(2) INVENTORIES
As of June 30, 1997, inventories consist of the following:
Raw materials, product kits spare parts and sub-
assemblies $ 612,825
Work in progress 33,962
Rental systems, net of accumulated amortization
of $26,840 195,844
Finished goods 1,205,827
Obsolescence reserve (41,895)
-----------
$2,006,563
===========
Inventories are stated at the lower of cost or market; cost is determined
principally by the first-in, first-out method.
Systems used in the Company's short-term rental program are carried in inventory
at cost less amortization expense calculated on a straight-line basis over
thirty-six months.
(3) DEMONSTRATION SYSTEMS INVENTORY
The Company maintains an inventory of demonstration systems used for marketing
and customer service purposes. Such systems are carried 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
F-13
<PAGE>
carry the device in demonstration systems inventory at cost less amortization
expense calculated on a straight-line basis over thirty-six months.
As of June 30, 1997, demonstration systems inventories consist of the following:
Demonstration systems inventory $1,330,718
Less accumulated depreciation (119,051)
----------
$1,211,667
==========
(4) ACQUISITION OF DOVE MEDICAL SYSTEMS
On April 2, 1996, the Company acquired all of the outstanding shares of Dove
Medical Systems (Dove) and a certain patent and other intangible assets owned by
the Dove majority shareholder and certain other investors. The Company paid
consideration of $6,911,529, consisting of $3,600,000 in cash and 161,538 shares
of the Company Common Stock valued at $3,311,529. The acquisition has been
accounted for using the purchase method of accounting, and, accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based on the fair values at the date of acquisition. The excess purchase
price over the fair values of the net assets was $3,308,011 and has been
recorded as goodwill. The goodwill and other intangible assets are being
amortized using the straight-line method over twenty years. The patent is being
amortized using the straight-line method over the remaining patent period which
is ten years as of the date of its acquisition.
(5) ACQUISITION OF NORLAND CORPORATION
On February 26, 1997, the Company signed an agreement to acquire all of the
issued and outstanding stock of Norland Corporation for $17.5 million with a
possible additional purchase price of up to $2.5 million based on the level of
the Company's 1997 revenues. For each full $1,000,000 of 1997 revenues above
$32,000,000, the purchase price will be increased by $312,500 (up to the maximum
increase of $2.5 million). The $17.5 million will be payable at closing as
follows: $1,250,000 in cash and a $16,250,000 Purchase Note which will bear
interest at the rate of 7% per annum. A $1,250,000 portion of the principal will
be payable six months after closing, and the remaining principal will be due and
payable on the fifth anniversary of the closing. The Company may prepay the
Purchase Note at any time. The amount of any additional purchase price will be
determined following the completion of the audit of the Company's financial
statements for the year ending December 31, 1997. This amount will be paid by an
Additional Note which will bear interest at 7% per annum and which will be due
five years after the closing. The transaction is subject to approval by the
Company's stockholders at its 1997 Annual Meeting.
(6) 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
is effective for the Company's year ending December 31, 1997. The Company does
not expect a material impact on its net income per share resulting from the
implementation of this Statement.
F-14
<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 SUPPLEMENT AND IN THE PROXY
STATEMENT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES, SOME OF WHICH ARE DESCRIBED IN THE INTRODUCTION
TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996. SUCH INTRODUCTION IS INCORPORATED HEREIN BY REFERENCE. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS.
RESULTS OF OPERATIONS
Revenue for the six months ended June 30, 1997 increased $963,503 (7.9%) to
$13,130,909 from $12,167,406 for the comparable period of 1996. The increases
were largely a result of increases in sales in the United States, Europe and
Latin America, offset by a decrease in sales to the Pacific Rim and to Japan in
particular. First quarter 1997 sales by Dove (which was acquired by the Company
on April 2, 1996) contributed to the increase in sales for the six months ended
June 30, 1997. Sales in Japan declined due in part to increased competition,
reductions in reimbursement for certain densitometry tests in Japan and the
effects of operational difficulties experienced with pDEXA units during part of
1996. The Company believes that these operational difficulties have been
addressed. Sales in the United States and Japan represented 74.0% and 1.8%,
respectively, of total revenue for the six months ended June 30, 1997 and 36.8%
and 40.0% respectively, of total revenue for the six months ended June 30, 1996.
Sales of complete bone densitometry systems represented 91.6% and 93.6% of total
revenue for the six months ended June 30, 1997 and 1996, respectively. Sales of
parts and services and rental income comprised the balance of revenues for such
periods. Revenues have been affected by the reduction in the Medicare
reimbursement rate for peripheral bone densitometry tests announced in November
1996. The mix of products sold has changed in that the majority of the Company's
revenues are now derived from sales of the larger Eclipse and XR36 systems that
scan the hip and spine and for which the Medicare reimbursement rate was not
significantly decreased, as compared to the pDEXA system that performs
peripheral bone densitometry tests. Revenues and the mix of products sold are
expected to continue to be influenced by the degree of difference in Medicare
reimbursement rate levels for peripheral and larger systems. They will also be
influenced by the Company's ability to bring to the market lower cost peripheral
systems that can be operated more profitably by end users at the lower
reimbursement levels. The Health Care Financing Administration (HCFA) recently
published proposed changes to the Medicare reimbursement rates that would
increase the reimbursement rate for peripheral systems and reduce the
reimbursement rate for the larger systems. No new rates will be adopted until
after the comment period on the proposed changes.
Cost of revenue as a percentage of revenue was 56.6% and 64.1% for the three
months ended June 30, 1997 and 1996 respectively, resulting in a gross margin of
43.4% for the six months ended June 30, 1997 compared to 35.9% for the
comparable period of 1996. The increase in gross margin is primarily attributed
to the impact of price reductions under the Distribution Agreement with Norland
Corporation and Stratec Medizintechnik GmbH which became effective during the
fourth quarter of 1996.
Sales and marketing expense increased $1,221,827 (83.8%) to $2,680,347 for the
six months ended June 30, 1997 from $1,458,520 for the six months ended June 30,
1996, and increased as a percentage of revenue to 20.4% from 12.7%. The
increases were primarily due to increased expenses of new sales and marketing
personnel, the cost of expanded marketing efforts and increased expenses related
to customer service.
F-15
<PAGE>
General and administrative expense increased $509,297 (56.6%) to $1,409,069 for
the six months ended June 30, 1997 from $899,772 for the six months ended June
30, 1996 and increased as a percentage of revenue to 10.7% from 7.4%. These
increases were primarily due to expenses of new personnel and increased expenses
of existing personnel, other expenses attributed to increased levels of business
(including, in the quarter ended June 30, 1997, increased provision for doubtful
accounts receivable), and the inclusion of Dove's operations for the quarter
ended March 31, 1997.
Other income in the six month periods ended June 30,1997 and 1996 consisted
primarily of interest earned on the proceeds of the Company's initial public
offering and on other cash and loan balances, reduced by other expenses
consisting primarily of bank charges and other fees related to bank transfers.
The decrease in other income in the six month period ended June 30, 1997 as
compared to June 30, 1996 reflects reduced interest income resulting from
utilization of such offering proceeds.
The provision for taxes for the six months ended June 30, 1997 decreased by
$229,458 (23.3%) to $756,000 from $985,458 for the six months ended June 30,
1996. The Company has provided for income taxes at its current effective tax
rate of 40.6% for the six months ended June 30, 1997 and 1996. The decrease in
the provision for taxes was entirely due to the relative change in income before
taxes.
The Company had net income of $1,104,756 for the six months ended June 30, 1997
compared to net income of $1,441,313 for the six months ended June 30, 1996, a
decrease of $336,567 (23.4%). The decrease was due primarily to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash of $8,133,468 and a $1,949,039 U.S.
Treasury bill. The Treasury bill was converted to cash during the quarter ended
June 30, 1997. At June 30, 1996, the Company had cash of $5,133,254. The
decrease in cash was primarily the result of increased accounts receivable,
decreased accounts payable, increased pDEXA and OsteoAnalyzer inventories, and
increased officer loans, and to a lesser extent cash loaned to Norland Corp.
under the product development loan.
The Company's accounts receivable increased 24.8% to $11,455,816 at June 30,
1997 from $9,182,488 at December 31, 1996, which reflects both higher sales
volume and less prompt payment by the Company's customers. At June 30, 1997, the
two largest balances, 18.8% and 9.6% of total outstanding trade receivables,
were owed by U.S. distributors.
Property and equipment as of June 30, 1997 consisted of computer and telephone
equipment, a management information system, office furniture and improvements to
leased facilities. At the present time, no significant expenditures for
additional equipment or systems are planned for 1997.
Should the proposed acquisition of Norland Corp. be approved by the Company's
stockholders, the Company's cash requirements with respect to the transaction
will consist of a $1,250,000 cash payment at close, a second $1,250,000 cash
payment six months thereafter, plus interest payments on the Purchase Note and
the Additional Note which will range from approximately $250,000 to $300,000 per
quarter, depending upon the final amount of the purchase price. Following the
acquisition, the Company will receive the entire margin on systems manufactured
by Norland Corp. and will become responsible for financing manufacturing and
research and development on the Norland Corp. product line. Any sales growth of
the OsteoAnalyzer product line will also be financed by the Company.
F-16
<PAGE>
The Company believes that its current cash position, together with cash flow
from operations, will be adequate to fund the Company's operations, including
the proposed acquisition of Norland Corp., for at least the next twelve months.
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 the United States and numerous foreign markets.
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. Moreover, the Company will also continue to
consider the possibility of obtaining funds from other sources, including bank
credit arrangements and stock offerings.
F-17
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements give
effect to the acquisition by Norland Medical Systems, Inc. (the "Company" or
"NMS") of the stock of Norland Corporation ("Norland Corp.") under the purchase
method of accounting. These pro forma financial statements are not necessarily
indicative of the operating results that might have been achieved had the
acquisition occurred as of the beginning of fiscal 1996, nor are they
necessarily indicative of operating results which may be achieved in the future.
An unaudited pro forma condensed combined balance sheet is provided as of June
30, 1997, giving effect to the acquisition as though it had been consummated on
that date. Unaudited pro forma combined condensed income statements are provided
for the year ended December 31, 1996 and for the six months ended June 30, 1997,
giving effect to the acquisition as though it had occurred on January 1, 1996,
but before a $7,900,000 non-recurring charge for in-process research and
development.
Pro forma adjustments include fair value adjustments required under purchase
accounting for the acquired assets and liabilities of Norland Corp. and are
subject to revision when final analyses of such values are completed. In
management's opinion, such adjustments are not expected to materially differ
from the final fair value adjustments.
The unaudited pro forma condensed combined financial statements are derived from
the historical audited financial statements and notes of the Company and Norland
Corp., and should be read in conjunction with the Company's separate 1996 Annual
Report and Form 10-K, incorporated herein by reference, and with Norland Corp.'s
audited financial statements for 1996 and 1995, included herein.
F-18
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
-------
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------
NORLAND MEDICAL NORLAND PRO FORMA NOTE PRO FORMA
SYSTEMS, INC. CORPORATION ADJUSTMENTS REF. COMBINED
---------------- -------------- --------------- ------- ---------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,133,254 $ 82,590 $(1,250,000) (a) $ 3,965,844
Accounts receivable 11,455,816 291,532 (201,172) (e) 11,546,176
Inventories, net 2,006,563 3,632,594 (218,419) (f) 5,420,738
Current portion of product
development loan receivable 100,000 - (100,000) (e) -
Other 2,706,290 361,315 - 3,067,605
----------- ----------- ------------ -----------
Total current assets 21,401,923 4,368,031 (1,769,591) 24,000,363
----------- ----------- ------------ -----------
Other assets:
Demonstration systems inventory, net 1,211,667 - (350,665) (f) 861,002
Property and equipment, net 434,068 373,920 - 807,988
Product development loan
receivable 400,000 - (400,000) (e) -
Other non current assets 260,000 - - 260,000
Goodwill, net 3,101,260 - 6,681,561 (c) 9,782,821
Other intangible assets, net 3,154,305 - - 3,154,305
----------- ----------- ------------ -----------
Total other assets 8,561,300 373,920 5,930,896 14,866,116
----------- ----------- ------------ -----------
Total assets $29,963,223 $4,741,951 $4,161,305 $38,866,479
=========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,190,159 $1,404,171 $ (201,172) (e) $ 2,393,158
Accrued expenses 1,147,301 213,371 750,000 (c) 2,110,672
Current portion of product
development loan payable - 100,000 (100,000) (e) -
----------- ----------- ------------ -----------
Total current liabilities 2,337,460 1,717,542 448,828 4,503,830
----------- ----------- ------------ -----------
Other liabilities:
Note payable, net of discount - - 14,486,862 (a) 14,486,862
Product development loan payable - 400,000 (400,000) (e) -
Other liabilities - 3,274 715,834 (c) 719,108
----------- ----------- ------------ -----------
Total other liabilities - 403,274 14,802,696 15,205,970
----------- ----------- ------------ -----------
Common stock 3,575 8,457 (8,457) (b) 3,575
Additional paid-in capital 22,158,189 454,379 (454,379) (b) 22,158,189
Retained earnings (deficit) 5,463,999 2,011,613 (10,480,697) (b),(d),(f) (3,005,085)
Foreign currency translation adjustment - 146,686 (146,686) (b) -
----------- ----------- ------------ -----------
Total stockholders' equity 27,625,763 2,621,135 (11,090,219) 19,156,679
----------- ----------- ------------ -----------
Total liabilities and
stockholders' equity $29,963,223 $4,741,951 $ 4,161,305 $38,866,479
=========== ========== ============ ===========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-19
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(Unaudited)
---------
<TABLE>
<CAPTION>
For the year ended December 31, 1996
------------------------------------------------------------------------
Historical
------------------------------
Norland Medical Norland Pro Forma Note Pro Forma
Systems, Inc. Corporation Adjustments Ref. Combined
--------------- ------------ ------------- ---- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $25,309,977 $13,138,280 $(13,489,603) (f) $24,958,654
----------- ----------- ------------- -----------
Expenses (income):
Cost of revenue 16,248,469 9,008,969 (13,119,928) (f) 12,137,510
Sales 3,505,666 - - 3,505,666
General 2,570,212 732,897 445,437 (g) 3,748,546
Research and
development - 1,016,801 - 1,016,801
Other (income)
expense (703,744) 69,116 1,388,200 (h) 753,572
Total
expenses 21,620,603 10,827,783 (11,286,291) 21,162,095
Income from continuing operations
before income
taxes and non
recurring charge
for in-process
research and
development 3,689,374 2,310,497 (2,203,312) 3,796,559
(Provision)
benefit for
incomme taxes (1,498,000) 33,000 713,697 (i) (751,303)
Income from
continuing
operations before
nonrecurring charge
for in-process
research and
development $ 2,191,374 $ 2,343,497 $ (1,489,615) $ 3,045,256
============ ============ ============== ============
Income from
continuing operations
before non-recurring
charge for in-process
research and development
per common and common
equivalent share $ 0.31 $ 0.42
Weighted average common
and common equivalent
shares outstanding 7,168,871 7,168,871
<CAPTION>
For the six months ended June 30, 1997
------------------------------------------------------------------------
Historical
--------------------------------
Norland Medical Norland Pro Forma Note Pro Forma
Systems, Inc. Corporation Adjustments Ref. Combined
---------------- ------------ ------------- ---- ------------
<S> <C> <C> <C> <C> <C>
Total revenues $13,130,909 $7,084,885 $(7,290,913) (f) $12,924,881
----------- ---------- ------------ -----------
Expenses (income):
Cost of revenue 7,431,211 5,657,060 (7,091,504) (f) 5,996,767
Sales 2,680,347 - - 2,680,347
General 1,409,069 354,812 222,719 (g) 1,986,600
Research and
development - 838,820 - 838,820
Other (income)
expense (250,474) 22,182 678,460 (h) 450,168
Total
expenses 11,270,153 6,872,874 (6,190,325) 11,952,702
Income from continuing operation
before income
taxes and non
recurring charge
for in-process
research and
development 1,860,756 212,011 (1,100,588) 972,179
(Provision)
benefit for
incomme taxes (756,000) (57,340) 356,415 (i) (456,925)
Income from
continuing
operations before
nonrecurring charge
for in-process
research and
development $ 1,104,756 $ 154,671 $ (744,173) $ 515,254
============ ============ =========== ==========
Income from
continuing operations
before non-recurring
charge for in-process
research and development
per common and common
equivalent share $ 0.15 $ 0.07
Weighted average common
and common equivalent
shares outstanding 7,175,780 7,175,780
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-20
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO THE PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION:
1. The unaudited pro forma combined condensed balance sheet reflects the
acquisition of Norland Corp. for $17,500,000 under the purchase
method of accounting in accordance with Accounting Principles Board
Opinion No. 16, BUSINESS COMBINATIONS, and is presented as though the
acquisition had occurred on June 30, 1997. The acquisition agreement
requires a cash payment of $1,250,000 at closing and the issuance of
a note payable in the amount of $16,250,000 bearing interest at 7%
per annum. In accordance with Accounting Principles Board Opinion No.
21, INTEREST ON RECEIVABLES AND PAYABLES, interest has been imputed
at 10% per annum. The acquisition agreement also calls for an
additional purchase price of up to $2,500,000 which is contingent
upon the Company's total sales for 1997. The amount of any additional
purchase price will be determined upon completion of the audit of the
Company's financial statements for the year ending December 31, 1997.
For each full $1,000,000 of Company 1997 sales above $32,000,000, the
Company will be obligated to pay an additional $312,500 in purchase
price, up to the maximum additional purchase price of $2,500,000. Any
such additional purchase price will be paid by an additional 7%
promissory note. The unaudited pro forma combined condensed financial
statements do not include any adjustments for this contingent
consideration. Any additional purchase price (net of any discount on
the Additional Note) will be recorded when the amount is determined
and accounted for as additional goodwill.
2. The unaudited pro forma combined condensed income statements for
the year ended December 31, 1996 and for the six months ended June
30, 1997 reflect the acquisition as if it had occurred on January 1,
1996, after elimination of all intercompany activity.
3. Earnings per share are based on the weighted average number of shares
of NMS Common Stock outstanding, including common stock equivalents.
NOTES TO PRO FORMA ADJUSTMENTS
The pro forma adjustments have been made to reflect the following:
(a) Adjustment to reflect the payment of $1,250,000 in cash and the
issuance of a note payable for $16,250,000 in exchange for Norland
Corp.'s issued and outstanding stock. The note is shown as
$14,486,862, which is net of a discount of $1,763,138 arising from a
difference between the note's stated interest rate of 7% per annum
and the prevailing market rate of 10% per annum.
(b) Adjustment to reflect the elimination of the following Norland
Corp. equity accounts as of June 30, 1997:
Common Stock $ 8,457
Additional paid-in capital 454,379
Retained earnings 2,011,613
Foreign currency translation adjustment 146,686
F-21
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO THE PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(c) Adjustment to record the purchase price allocation, including
goodwill and in-process research and development charge, calculated
as follows:
Purchase price, net of discount of $1,763,138 $15,736,862
Net assets acquired, at fair value (2,621,135)
In-process research and development (7,900,000)
Deferred income tax liability 715,834
Acquisition costs 750,000
-----------
Goodwill $ 6,681,561
===========
Acquisition costs are primarily legal, accounting and investment
banking fees directly related to the transaction.
(d) Adjustment to record the in-process research and development
charge valued at $7,900,000. The Norland Corp. research and
development efforts related to this charge are directed at
alterations of, adaptations of, and enhancements to existing products
and technologies, have not achieved technological feasibility and
have no future alternative uses. It is currently estimated that the
success or failure of these research and development efforts will be
determined within the next two years. There can be no assurances that
these efforts will lead to the introduction of one or more new
products. The estimated remaining costs of these efforts of
approximately $1,200,000 will be funded from the Company's ongoing
operations and working capital. The in-process research and
development charge is not reflected in the unaudited pro forma
combined condensed income statement as it represents a non-recurring
charge directly related to the acquisition. This charge, amounting to
$1.10 per share, will be reflected in the Company's financial
statements for the period during which the acquisition is
consummated.
(e) Adjustment to eliminate the intercompany account receivable and
account payable of $201,172, and current and long-term portions of
the Product Development Loan of $100,000 and $400,000, respectively.
(f) Adjustment to eliminate the intercompany sales of $13,489,603 for the
year ended December 31, 1996 and $7,290,913 for the six months ended
June 30, 1997, cost of sales of $13,119,928 for the year ended
December 31, 1996 and $7,091,504 for the six months ended June 30,
1997. In addition, gross profit of $569,084 consisting of $369,675
related to the year ended December 31, 1996 and $199,409 related to
the six months ended June 30, 1997 is eliminated from the Company's
pro forma combined condensed statements of income. The $569,084 in
gross profit is also eliminated from the pro forma combined condensed
balance sheet as of June 30, 1997 through adjustments to ending
inventory balances consisting of $218,419 with respect to finished
goods inventory and $350,665 with respect to demonstration systems
inventory.
F-22
<PAGE>
(g) Adjustment to reflect amortization expense of $445,437 for the year
ended December 31, 1996 and $222,719 for the six months ended June
30, 1997 related to goodwill based on a period of 15 years.
(h) Adjustment to reflect interest expense and amortization of the
discount on the note payable using the effective interest method of
$1,388,200 for the year ended December 31, 1996 and $678,460 for the
six months ended June 30, 1997.
(i) The income tax benefit calculated based on the income tax impact of
the pro forma adjustments at the combined effective federal and state
income tax rate of 40.6% after taking into consideration the
nondeductible goodwill amortization and the imputed interest expense
in excess of 7%.
F-23
