EX-99.2 4 d510463dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

Index to Unaudited Financial Statements

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011 (Audited)

     2   

Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012 and 2011 (Unaudited)

     3   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)

     4   

Notes to Unaudited Financial Statements

     5-9   

 

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NDSSI HOLDINGS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)

 

     (Unaudited)     (Audited)  
     September 30, 2012     December 31, 2011  

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 3,750      $ 4,634   

Accounts receivable, net of allowance of $82 and $215, respectively

     11,585        14,578   

Inventories

     12,137        9,550   

Deferred tax assets

     21        21   

Prepaid expenses and other current assets

     1,687        965   
  

 

 

   

 

 

 

Total current assets

     29,180        29,748   

Property and equipment, net

     2,840        3,514   

Other assets

     1,049        942   

Intangible assets, net

     16,605        19,519   

Goodwill

     38,728        38,728   
  

 

 

   

 

 

 

Total assets

   $ 88,402      $ 92,451   
  

 

 

   

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

    

Current Liabilities

    

Current portion of long-term debt

   $ 59,728      $ 59,728   

Redeemable Series D preferred stock

     6,185        4,873   

Line of credit

     3,500        3,500   

Accounts payable

     6,189        8,762   

Deferred revenue

     723        784   

Accrued expenses and other current liabilities

     3,962        3,920   

Warranty reserve

     1,002        1,057   

Liabilities of discontinued operations

     144        189   
  

 

 

   

 

 

 

Total current liabilities

     81,433        82,813   

Deferred tax liabilities

     3,363        3,363   

Long term liabilities of discontinued operations

     —          74   

Deferred revenue

     898        858   
  

 

 

   

 

 

 

Total liabilities

     85,694        87,108   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

    

Members’ Equity

    

Common units

     14,105        13,462   

Preferred units

     26,955        26,955   

Accumulated deficit

     (38,428     (35,152

Accumulated other comprehensive income

     76        78   
  

 

 

   

 

 

 

Total members’ equity

     2,708        5,343   
  

 

 

   

 

 

 

Total liabilities and members’ equity

   $ 88,402      $ 92,451   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


NDSSI HOLDINGS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars)

(Unaudited)

 

     Nine Months Ended  
     September 30, 2012     September 30, 2011  

Sales

   $ 62,502      $ 61,332   

Cost of goods sold

     34,981        34,879   
  

 

 

   

 

 

 

Gross profit

     27,521        26,453   
  

 

 

   

 

 

 

Operating expenses:

  

Research and development and engineering

     6,080        6,590   

Selling, general and administrative

     16,599        18,883   
  

 

 

   

 

 

 

Total operating expenses

     22,679        25,473   
  

 

 

   

 

 

 

Income from operations

     4,842        980   

Interest expense, net

     (7,796     (7,713

Foreign exchange transaction gains (losses), net

     17        (98
  

 

 

   

 

 

 

Loss from operations before income taxes

     (2,937     (6,831

Income tax provision

     339        494   
  

 

 

   

 

 

 

Net loss

   $ (3,276   $ (7,325
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


NDSSI HOLDINGS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

     Nine Months Ended  
     September 30,
2012
    September 30,
2011
 

Cash flows from operating activities:

    

Net loss

   $ (3,276   $ (7,325

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     3,994        4,155   

Unit-based compensation

     643        23   

Amortization of debt issuance costs as interest expense

     —          1,178   

Deferred income taxes

     —          (1

Accretion of mandatorily redeemable preferred stock

     1,312        —     

Other non-cash items

     (70     (8

Changes in operating assets and liabilities:

    

Changes in operating assets and liabilities

     (3,218     585   
  

 

 

   

 

 

 

Cash used in operating activities

     (615     (1,393

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (458     (657

Proceeds from the sale of property, plant and equipment

     149        19   

Changes in restricted cash

     43        22   
  

 

 

   

 

 

 

Cash used in investing activities

     (266     (616

Cash flows from financing activities:

    

Repayments of long-term debt

     —          (1,144

Proceeds from issuance of preferred units

     —          4,500   
  

 

 

   

 

 

 

Cash provided by financing activities

     —          3,356   

Effect of exchange rates on cash and cash equivalents

     (3     42   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (884     1,389   

Cash and cash equivalents, beginning of period

     4,634        3,430   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 3,750      $ 4,819   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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NDSSI HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2012

(Unaudited)

Note 1. Nature of Business and Summary of Significant Accounting Policies

NDSSI Holdings, LLC and its subsidiaries (collectively referred to as “NDSSI” or the “Company”) designs, develops, and manufactures high definition visualization solutions and imaging informatics products for the surgical and radiology end-markets. NDS serves the medical sector, with a focus on surgery, radiology, neurosurgery, and other medical imaging disciplines.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), applied on a consistent basis, and include the consolidated financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The accounting policies underlying these unaudited condensed consolidated financial statements are those set forth in Note 1 to Consolidated Financial Statements included in the Company’s Consolidated Financial Report for the year ended December 31, 2011. Those policies are not presented herein, except to the extent that new policies have been adopted, or there is material current period activity or changes to our policies.

The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s consolidated financial statements for the year ended December 31, 2011.

In the opinion of management, these interim consolidated financial statements include all significant adjustments and accruals necessary for a fair presentation of the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, the Company’s management evaluates the estimates, including those related to inventory obsolescence, warranty obligations, allowances for doubtful accounts, fair value of goodwill and intangible assets, and unit-based compensation. Management bases its estimates on historical experience and various other assumptions believed to be reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment” (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 became effective for the Company in the second quarter of 2012. The adoption of ASU 2011-08 did not have an impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. Similar to goodwill impairment testing guidance under ASU 2011-08, the revised standard allows entities to use a qualitative approach to test

 

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indefinite-lived intangible assets for impairment. ASU 2012-02 permits entities to perform a qualitative assessment by considering events and circumstances which would impact the fair value of the entity’s indefinite-lived intangible assets to determine whether it is more likely than not that the fair value of the entity’s indefinite-lived intangible assets are impaired. If it is determined that this is the case, it is necessary to perform the currently prescribed two-step impairment test. Otherwise, the two-step impairment test is not required. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 addresses the presentation of comprehensive income (loss) in consolidated financial statements and footnotes. The standard requires the Company to present the components of other comprehensive income either in a continuous statement or two separate but consecutive statements. The standard is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

Note 2. Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities, are as follows:

 

   

Level 1: Inputs that are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

 

   

Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

   

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, certain other accrued liabilities and debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate their fair values due to the short-term nature of those instruments.

 

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Note 3. Goodwill and Intangible Assets

The gross carrying amount and net book value of intangible assets as of September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

     September 30, 2012      December 31, 2011  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Amortizable intangible assets:

               

Customer relationship and noncompete agreement

   $ 17,986       $ (12,983   $ 5,003       $ 17,986       $ (11,487   $ 6,499   

Marketing related, trade name and trademarks

     4,100         (1,708     2,392         4,100         (1,401     2,699   

Technology related, developed technology

     14,963         (13,739     1,224         14,963         (12,628     2,335   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortizable intangible assets

     37,049         (28,430     8,619         37,049         (25,516     11,533   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Non-amortizable intangible assets:

               

Trade names and trademarks

     7,986         —          7,986         7,986         —         7,986   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 45,035       $ (28,430   $ 16,605       $ 45,035       $ (25,516   $ 19,519   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill as of September 30, 2012 and December 31, 2011 was $38.7 million. The Company did not recognize an impairment during the nine months ended September 30, 2012 and 2011.

Intangibles assets (except for corporate names, certain of the Company’s trade names and goodwill) have finite lives and, as such, are subject to amortization. The Company generally amortizes intangible assets on a straight-line basis over their remaining useful life. Customer relationships assets are amortized on an accelerated basis to reflect the pattern in which the economic benefits of the intangible assets are consumed. Amortization expense relating to intangible assets totaled $2.9 million and $3.1 million for the nine months ended September 30, 2012 and 2011.

Note 4. Supplementary Balance Sheet Information

Inventories

Inventories at September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Raw materials

   $ 6,910       $ 7,746   

Work-in-process

     15         2   

Finished goods

     5,212         1,802   
  

 

 

    

 

 

 

Total inventories

   $ 12,137       $ 9,550   
  

 

 

    

 

 

 

 

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Accrued Expenses and Other Current Liabilities

The following table summarizes accrued expenses and other current liabilities as of the periods indicated (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Accrued compensation and benefits

   $ 1,427       $ 1,904   

Accrued interest

     462         —    

Accrued taxes

     119         388   

Other

     1,954         1,628   
  

 

 

    

 

 

 

Total accrued expenses and other current liabilities

   $ 3,962       $ 3,920   
  

 

 

    

 

 

 

Accrued Warranty

The change in warranty accrual for the nine months ended at September 30, 2012 and 2011 are as follows (in thousands):

 

     Nine Months Ended  
     September 30,
2012
    September 30,
2011
 

Balance at beginning of the period

   $ 1,057      $ 1,024   

Provision charged to cost of goods sold

     84        75   

Use of provision

     (139     (47
  

 

 

   

 

 

 

Balance at end of period

   $ 1,002      $ 1,052   
  

 

 

   

 

 

 

Note 5. Debt and Financing Obligations

Debt at September 30, 2012 and December 31, 2011 consists of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Term Loan A

   $ 43,728       $ 43,728   

Term Loan B

     16,000         16,000   

Line of Credit

     3,500         3,500   
  

 

 

    

 

 

 

Total debt

   $ 63,228       $ 63,228   
  

 

 

    

 

 

 

On May 3, 2010, the Company entered into an amended and restated senior credit facility (the “2010 Credit Facility”) with two lenders. The 2010 facility provided for a Term Loan A of $61.0 million and a line-of-credit facility with maximum borrowings of $5.0 million. The 2010 Credit Facility replaced the Company’s previous debt facility. The 2010 Credit Facility is secured by substantially all of the Company’s assets.

On September 2, 2011, the Company entered into a second amendment to the 2010 Credit Facility (the “Second Amendment”). The Second Amendment changed the maturity date of Term Loan A and the line-of-credit facility to December 31, 2012, established revised financial and operating covenants, and waived certain covenant violations as of and for the period ended June 30, 2011. The lenders also approved the issuance of Series D Preferred Units, of which 4,000 units were issued to the lenders for proceeds of $4.0 million.

On December 31, 2011 the Company entered into a third amendment to the 2010 Credit Facility (the “Third Amendment”). The Third Amendment served to reduce the line of credit commitment from $5.0 million to $3.5 million, amend certain terms of the Term A loan and to retranch $16.0 million of Term Loan A into Term Loan B.

The 2010 Credit Facility, and subsequent amendments, required the Company to comply with certain restrictions and covenants. On December 9, 2011 the Company received a notice of default from the lender. Non-compliance with the covenants has not been waived. The lender did not exercise their rights under the default notice.

 

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Note 6. Unit-Based Compensation

Compensation expense of $0.6 million and less than $0.1 million was recorded for the nine months ended September 30, 2012 and 2011, respectively, in conjunction with these awards vesting, of which none is expected to be deductible for tax purposes. The Company did not exercise its repurchase rights under its unit restriction agreements for the awards vested.

Note 7. Income Taxes

NDSSI and its wholly owned subsidiary, NDS Surgical Imaging, LLC are limited liability companies. As such, taxable income or loss is included in the tax returns of the members. Except for the minimum California state taxes, no U.S. federal or state income tax expense or benefit for NDSSI and NDS Surgical Imaging, LLC has been provided in the Company’s interim condensed consolidated financial statements. Additionally, the Company operates in the Netherlands and Japan through three wholly owned foreign corporations. The Company’s provision for income taxes represents foreign income taxes related to the Netherlands and Japanese operations of NDSSI and U.S. federal and state taxes payable related to NDS Surgical Imaging, Inc. The Company’s reported effective tax rate was 11.5% and 7.2% for the nine months ended September 30, 2012, and 2011, respectively.

Note 8. Restructuring

In April and August 2012, the Company initiated a consolidation of marketing and sales and research and development operations to the Waltham, MA, location. As a result, fourteen employees were terminated at a cost of $0.4 million.

In June 2012, the Company initiated a restructuring of its finance operations to the San Jose, CA location. As a result, two employees were terminated at a cost of $0.1 million.

In September 2011, the Company initiated a consolidation of various operational positions to the San Jose, CA and Waltham, locations. As a result ten employees were terminated at a cost of $0.1 million.

Note 9. Commitments and Contingencies

The Company leases certain equipment and facilities under operating lease agreements. There have been no material changes to the Company’s operating leases or other commitments through September 30, 2012 from those discussed in Note 8 to the Consolidated Financial Statements in the Company’s Consolidated Financial Report for the year ended December 31, 2011.

From time to time, the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Certain of the Company’s sales agreements with its customers indemnify those customers for liabilities resulting from any infringement of the patent, trademark, or copyright of third parties by any intellectual property content of the Company’s products. Certain of these indemnification provisions are perpetual from execution of the agreement. As of September 30, 2012, the Company has not paid any such claims or been required to defend any lawsuits with respect to a claim.

Note 10. Related Party Transactions

On December 7, 2005, the Company entered into a limited liability company agreement and a management services agreement with its main investor. In accordance with the management services agreement, the investor will provide professional services to the Company and any subsidiary with regard to overall business affairs and long-term strategy. Pursuant to the management services agreement, the Company incurred management fees and expenses of approximately $0.5 million for the nine months ended September 30, 2012 and 2011, respectively. Accrued management fees due to this investor were $1.2 million and $0.8 million at September 30, 2012 and December 31, 2011, respectively.

 

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