-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WxScl7jkWd3VYzgzhSZxhUDggPBL7OseM9hWK7YYgbCNFzMS14M4n6fcqbZFTk6j Ui9aqWzYka+avMxnCghV5w== 0000912057-96-011671.txt : 19960607 0000912057-96-011671.hdr.sgml : 19960607 ACCESSION NUMBER: 0000912057-96-011671 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960606 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORLAND MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000946428 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 061387931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-05303 FILM NUMBER: 96577368 BUSINESS ADDRESS: STREET 1: 106 CORPORATE PARK DRIVE STREET 2: SUITE 106 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 914-694-2285 MAIL ADDRESS: STREET 1: 106 CORPORATE PARK DRIVE STREET 2: SUITE 106 CITY: WHITE PLAINS STATE: NY ZIP: 10604 FORMER COMPANY: FORMER CONFORMED NAME: OSTECH INC DATE OF NAME CHANGE: 19950608 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NORLAND MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 5047 06-1387931 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
-------------------------- 106 CORPORATE PARK DRIVE SUITE 106 WHITE PLAINS, NEW YORK 10604 (914) 694-2285 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- REYNALD G. BONMATI, PRESIDENT NORLAND MEDICAL SYSTEMS, INC. 106 CORPORATE PARK DRIVE SUITE 106 WHITE PLAINS, NEW YORK 10604 (914) 694-2285 (Name and address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: KEVIN J. CURLEY, Esq. MARK D. WHATLEY, Esq. Morgan, Lewis & Bockius LLP Howard, Rice, Nemerovski 101 Park Avenue Canady, Falk & Rabkin, a New York, New York 101783 Professional Corporation (212) 309-6000 Embarcadero Center San Francisco, California 94111 (415) 434-1600
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT -------------------------- If any of the securities being registered on this Form are to be offered on a delayed basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT TO AGGREGATE AGGREGATE TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE Common Stock, $0.0005 par value............. 2,587,500 $21.33 $55,191,375 $19,031.51
(1) Includes a total of 337,500 shares of Common Stock which the Underwriters may purchase to cover over-allotments. (2) Estimated in accordance with Rule 457 solely for the purpose of calculating the registration fee. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NORLAND MEDICAL SYSTEMS, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
REGISTRATION STATEMENT ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................... Cross Reference Page; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Prospectus Summary; The Company and Its Relationship with Norland Corp. and Stratec; Risk Factors 4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price...................... Underwriting 6. Dilution............................................. Not applicable 7. Selling Security Holders............................. Outside Front Cover Page; Principal and Selling Stockholders; Underwriting 8. Plan of Distribution................................. Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered........... Outside Front Cover Page; Prospectus Summary; Dividend Policy; Description of Capital Stock 10. Interests of Named Experts and Counsel............... Not applicable 11. Information with Respect to the Registrant........... Outside Front Cover; Prospectus Summary; Risk Factors; The Company and Its Relationship with Norland Corp. and Stratec; Use of Proceeds; Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JUNE 6, 1996 PROSPECTUS 2,250,000 Shares [LOGO] Common Stock ------------- Of the 2,250,000 shares of Common Stock offered hereby, 1,500,000 shares are being sold by Norland Medical Systems, Inc. (the "Company"), and 750,000 shares are being sold by Norland Partners, L.P. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of Common Stock by Norland Partners, L.P. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NRLD." On June 3, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $32.00 ($21.33 assuming the June 13, 1996 three-for-two stock split). See "Price Range of Common Stock." The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 6. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to Discounts and Proceeds to Selling Price to Public Commissions (1) Company (2) Stockholders Per Share ............ $ $ $ $ Total (3)............. $ $ $ $
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) Norland Partners, L.P., Novatech Ventures, L.P. (collectively, the "Selling Stockholders"), and the Company have granted the Underwriters an option, exercisable within 30 days from the date hereof, to purchase up to 337,500 additional shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. See "Principal and Selling Stockholders." If such option is exercised in full, the total Price to Public will be $ , the Underwriting Discounts and Commissions will be $ , the Proceeds to the Company will be $ and the Proceeds to Selling Stockholders will be $ . See "Underwriting." -------------------- The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about , 1996. -------------------- UBS Securities Pacific Growth Equities, Inc. , 1996 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports and other information with the Commission. The Registration Statement, the exhibits and schedules forming a part thereof, and the reports and other information filed by the Company with the Commission in accordance with the Exchange Act may be inspected without charge at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W, Washington, D.C. 20549, at regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 3040 Federal Building, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. The Company and/or the Manufacturers have rights to the following registered trademarks: pDEXA and pQCT. This Prospectus also includes trademarks of companies other than the Company. ------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10-B6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 Photo The pDEXA-Registered Trademark- X-Ray Bone Densitometer The easy-to-use pDEXA is compact and affordable, and brings well-established DXA technology to the physician office.
Photo The Eclipse-TM- X-Ray Bone Densitometer Traditional DXA systems (XR36 and Eclipse) are marketed primarily to hospitals and large clinics and can be used to perform axial, peripheral and whole body scans. These systems are installed in more than 40 countries.
Photo The OsteoAnalyzer-TM- SXA2000 X-Ray Bone Densitometer The OsteoAnalyzer line includes the new SXA3000 (not pictured here), the most affordable series of bone densitometer on the market today. The SXA3000 is a portable system which measures bone density at the heel with the push of a single button, eliminating the need for a separate computer system.
The XCT960 scans the forearm, providing true volumetric density and allowing more precise assessment of biomechanical soundness of bone. Photo The XCT960-TM- pQCT X-Ray Bone Densitometer
The XCT3000 scans the tibia, the femur and the entire femoral neck, providing assessment of hip fracture and monitoring of implants following hip Photo replacements. The XCT3000-TM- pQCT X-Ray Bone Densitometer
The Company also markets to phar- maceutical laboratories a series of pQCT-based research scanners such as the XCT Microscope capable of bone measurement IN VITRO at a maximum resolution of 20 microns. Photo The XCT Microscope-TM- X-Ray Bone Densitometer
PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II) REFLECTS A THREE-FOR-TWO STOCK SPLIT (THE "STOCK SPLIT") EFFECTIVE JUNE 13, 1996. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THE COMPANY Norland Medical Systems, Inc. (the "Company") markets, sells and distributes a broad range of bone densitometry systems for use in diagnosing and monitoring bone disorders, particularly osteoporosis, a disease that affects an estimated 25 million people in the United States and 200 million worldwide. Driven by the availability of new FDA-approved therapies for bone disorders, the Company is focusing on bringing affordable, state-of-the-art diagnostic products directly into physician offices. The Company offers two lines of proprietary, lower priced, easy to operate and compact products designed to address the diagnostic needs of gynecologists and family practice physicians. There are approximately 30,000 gynecologists and 450,000 family practice physicians in the United States alone. The Company has exclusive worldwide distribution rights to all present and future diagnostic products developed and manufactured by Norland Corporation ("Norland Corp.") and Stratec Medizintechnik GmbH ("Stratec", and together with Norland Corp., the "Manufacturers"), two leading manufacturers of bone densitometry products. These rights extend through 2015 and may be renewed for additional five-year periods. The Company offers four product lines utilizing three different types of technology. The Company markets a line of bone densitometry products based on dual-energy X-ray ("DXA") technology, which, since 1987, has been a standard for analyzing bone mass reduction, the primary indicator of osteoporosis. The Company's DXA products are highly effective and offer essential features at competitive prices. Because of the cost, space requirements and training required, these systems are generally found in hospitals, large clinics and research institutions, as opposed to physician offices, where patients would benefit from timely and easy access to osteoporosis testing. Recognizing a significant market opportunity for more affordable bone measurement technologies, Norland Corp. and Stratec developed the pDEXA system, a lower priced, high performance desktop system incorporating DXA technology. The pDEXA is targeted primarily at gynecologists and other specialty practitioners. It is the only FDA-approved desktop DXA-based system available today and was the largest contributor to the Company's revenues in 1995 and the three months ended March 31, 1996. In April 1996, the Company acquired Dove Medical Systems ("Dove"), a manufacturer of low-cost bone densitometry systems. The acquisition of Dove added a new product line of bone densitometers based on single-energy X-ray ("SXA") technology to the Company's product portfolio. Dove's main product, the OsteoAnalyzer SXA3000, utilizes SXA technology with single push-button operation to provide the family physician with the most affordable (under $20,000) densitometer currently on the market. This acquisition solidified the Company's position as a leading provider of low-cost bone densitometry products. The Company also markets a line of products based on peripheral quantitative computed tomography ("pQCT") technology. Unlike the DXA-based densitometers, pQCT systems permit separate, three-dimensional measurements of the cortical and trabecular bone, allowing a more detailed assessment of the biomechanical soundness of the bone. In addition, pQCT permits the detection of minute changes within bone that occur over short periods of time. Research versions of this product have been purchased by large pharmaceutical companies such as Eli Lilly & Co., Sandoz Ltd. and Glaxo to monitor the effectiveness of potential new therapies for the treatment of osteoporosis and related bone disorders. 3 The National Osteoporosis Foundation ("NOF") estimates that osteoporosis affects 25 million people in the United States, 80% of whom are women. In the United States alone, more than 1.3 million fractures are attributed to the disease. As a result, the estimated costs of osteoporosis and associated fractures in the United States during 1987 was more than $10 billion. Historically, treatment for osteoporosis has been inadequate. However, this is changing with the onset of new therapies brought to the market by several large pharmaceutical companies. In October 1995, Merck & Co., Inc. ("Merck") announced the launch of Fosamax, a new therapy for the treatment of osteoporosis. Merck and other pharmaceutical companies have launched extensive educational and marketing campaigns targeting gynecologists and family practice physicians to promote education and awareness that osteoporosis is now a treatable disease. These efforts are increasing the demand for widespread diagnosis and treatment of osteoporosis. The Company believes that over 50 pharmaceutical and biotechnology companies have programs to develop new therapies for the treatment of osteoporosis, and that additional new approved therapies will increase demand for low-cost densitometers. For the United States and Canada, the Company currently employs regional sales managers and third party distributors. The Company intends to increase its network of third party distributors in the United States to target the expanded market of gynecologists and family practice physicians and to increase the number of regional sales managers to supervise and support these distributors. For international markets, the Company uses third party distributors such as Nissho Iwai Corporation ("Nissho") for Japan. The Company typically uses a single distributor in each country in which it markets products, supported by United States-based sales managers. The Company's goal is to be the leading provider of affordable bone densitometry systems. The key elements of the Company's business strategy include: (i) expanding the bone densitometry market with lower priced systems, (ii) establishing strategic relationships with pharmaceutical companies that manufacture drugs to treat osteoporosis, (iii) expanding sales and marketing capabilities, (iv) offering the broadest range of diagnostic systems and (v) establishing pQCT as the leading technology for advanced systems. Following this offering, approximately 28.2% (24.2% if the overallotment option is exercised) of the Company's Common Stock will be owned by persons who control Norland Medical Systems B.V. ("NMS BV"), a holding company that owns the Manufacturers. Certain of the Company's officers and directors are officers and directors of NMS BV and Norland Corp. See "Certain Transactions." There can be no assurance that all arrangements between the Company and the Manufacturers will be as advantageous to the Company as they would be in the absence of the relationships among the officers, directors and controlling stockholders of the Company, NMS BV and the Manufacturers. See "Risk Factors -- Dependence on Norland Corp. and Stratec" and "-- Conflicts of Interest." THE OFFERING Common Stock Offered by the Company.......... 1,500,000 shares Common Stock Offered by Norland Partners, L.P......................................... 750,000 shares Common Stock Outstanding after this Offering.................................... 8,395,788 shares (1) Use of Proceeds.............................. To expand sales and marketing activities, for new product development, to expand manufacturing capabilities and for working capital and general corporate purposes, including potential acquisitions. Nasdaq National Market Symbol................ NRLD Risk Factors................................. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors."
- ------------------------------ (1) Excludes an aggregate of 701,250 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 1, 1996. Also excludes options for an aggregate of 364,500 shares of Common Stock available for issuance pursuant to the Amended and Restated 1994 Stock Option and Incentive Plan. See "Management -- Stock Option Plan." 4 SUMMARY FINANCIAL DATA
NORLAND MEDICAL SYSTEMS, INC. ------------------------------------------------ OSTECH B.V. (1) THREE MONTHS ENDED --------------- PRO FORMA --------------------------- THREE MONTHS YEAR ENDED ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------ ---------------------- DECEMBER 31, MARCH 31, 1993 1994 1995 1995 1996 1995 (2) 1996 (2) --------------- ----------- ----------- ---------- ---------- ------------ ------------ (UNAUDITED) (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenue................. $5,488,095 $10,041,548 $18,243,808 $3,895,921 $5,218,290 $20,104,737 $5,890,981 Cost of revenue......... 4,066,539 6,517,701 12,508,809 2,600,531 3,415,911 13,235,502 3,697,132 One-time distribution agreement costs........ 0 1,922,247 0 0 0 0 0 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Gross profit.......... 1,421,556 1,601,600 5,734,999 1,295,390 1,802,379 6,869,235 2,193,849 Operating expenses: Sales and marketing... 1,068,197 973,208 1,651,125 334,553 575,348 1,801,886 671,169 General and administrative....... 399,449 526,364 960,368 225,453 305,716 1,733,019 600,321 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Total operating expenses........... 1,467,646 1,499,572 2,611,493 560,006 881,064 3,534,905 1,271,490 Income (loss) from operations........... (46,090) 102,028 3,123,506 735,384 921,315 3,334,330 922,359 Liquidation loss -- net.................... (326,007) 0 0 0 0 0 0 Other income (expense).. (13,760) (6,984) 412,983 2,515 242,941 416,347 243,731 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Income (loss) before taxes................ (385,857) 95,044 3,536,489 737,899 1,164,256 3,750,677 1,166,090 Provision for taxes..... 60 27,000 1,436,000 299,587 473,000 1,570,632 486,088 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Net income (loss)..... $ (385,917) $ 68,044 $ 2,100,489 $ 438,312 $ 691,256 $ 2,180,045 $ 680,002 --------------- ----------- ----------- ---------- ---------- ------------ ------------ --------------- ----------- ----------- ---------- ---------- ------------ ------------ Earnings per share...... -- $ 0.02 $ 0.40 $ 0.11 $ 0.10 $ 0.40 $ 0.09 --------------- ----------- ----------- ---------- ---------- ------------ ------------ --------------- ----------- ----------- ---------- ---------- ------------ ------------ Shares used in computing earnings per share (3).................... -- 4,002,000 5,245,235 4,002,000 7,057,010 5,406,773 7,218,548
MARCH 31, 1996 (UNAUDITED) ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (4)(5) ----------- ------------- ------------------ BALANCE SHEET DATA: Cash and cash equivalents.......................................... $17,639,970 $14,207,033 $43,907,333 Working capital.................................................... 21,049,451 17,667,500 47,367,800 Total assets....................................................... 24,687,761 28,330,834 58,031,134 Long-term debt..................................................... -- -- -- Total stockholders' equity......................................... 21,209,370 24,520,899 54,221,199
- ------------------------------ (1) Figures presented for 1993 are those of Ostech B.V., a subsidiary of NMS BV that ceased all business activities at the end of 1993. In 1993, Ostech B.V. served as exclusive distributor of the Manufacturers' products in certain markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) Presented to give pro forma effect to the Dove acquisition as if such transaction had been consummated on January 1, 1995. See the Unaudited Pro Forma Combined Condensed Financial Statements contained herein. (3) Reflects the 2,000-for-1 split of the Common Stock in June 1995 and a three-for-two stock split of the Common Stock effective June 13, 1996. (4) Presented to give pro forma effect to the Dove acquisition as if such transaction had been consummated on March 31, 1996. See the Unaudited Pro Forma Combined Condensed Financial Statements contained herein. (5) Adjusted to give effect to the receipt of the net proceeds from the sale of the 1,500,000 shares of Common Stock offered by the Company (at an assumed public offering price of $21.33 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company). See "Use of Proceeds." 5 RISK FACTORS PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS. DEPENDENCE ON NORLAND CORP. AND STRATEC. The Company is dependent on contractual and other business relationships with Norland Corp. and Stratec for various aspects of its business, including for the supply of the DXA-based and pQCT-based products it markets, for the development of new products and product enhancements and for certain regulatory compliance relating to the Company's business. In 1995, the Company entered into a distribution agreement (the "Distribution Agreement") with the Manufacturers pursuant to which (i) the Company has rights to the exclusive worldwide distribution of all medical diagnostic products manufactured or developed by Norland Corp. or Stratec (subject to Stratec's right to distribute pQCT products in certain countries in Europe until such time as the Company elects to take over such distribution) and (ii) the Company must use its best efforts to promote the sale of those products and, with one exception, may not distribute products manufactured by any non-affiliate of the Company that compete with Norland Corp. or Stratec products. The Distribution Agreement has an initial term ending December 31, 2015 and may be extended by either party for successive five-year terms. The only products marketed and sold by the Company currently are the bone densitometry systems developed and manufactured by Norland Corp. and Stratec and the OsteoAnalyzer line of bone densitometers developed by Dove. Under the Distribution Agreement, the price at which the Company purchases each bone densitometry system is generally based on the difference between the price at which the Company sells that system and the "Manufacturer's Device Cost" for that system, as defined in the Distribution Agreement. The Manufacturer's Device Cost is set semi-annually based on the average cost of systems components and parts purchased during the preceding six-month period plus an allowance for other direct manufacturing costs. As a result, the Company's gross margins on products other than OsteoAnalyzer systems are partially dependent on the Manufacturers' abilities to procure components and manufacture their systems efficiently. See "Business -- Distribution Agreement." In addition, reliance on Stratec subjects the Company to certain risks inherent in foreign operations, including currency fluctuations and changes in the regulatory and tax environment in Germany. The Company is dependent to a significant extent on the Manufacturers to develop products and product enhancements that are marketable and competitive. In 1995, the Company entered into an agreement (the "Product Development Loan Agreement") with the Manufacturers under which the Company may make loans to the Manufacturers in installments up to an aggregate amount of $3.5 million during the period ending July 31, 1997 to fund specific development projects involving enhancements of existing products and the application of technologies to new products. The Company is not committed to make any particular loan. At May 1, 1996 there were outstanding loans of $75,906 from the Company to Norland Corp. In the future, the Company may provide funding to the Manufacturers for development projects other than through the Product Development Loan Agreement. See "The Company and its Relationship with Norland Corp. and Stratec." There can be no assurance that the Manufacturers' product development efforts will be adequate to provide the Company with products that have the features and capabilities, and can be sold at prices, that will allow the Company to compete effectively. See "Use of Proceeds" and "Business -- Product Development." The Company is also dependent on the Manufacturers to manufacture their products in amounts and at levels of quality necessary to meet demand and be competitive. If either of the Manufacturers fails to supply the Company with a sufficient quantity of any product on a timely basis or if the systems provided by the Manufacturers fail to meet the performance or other standards established for those products, the Company has been granted licenses that give it the right to make other arrangements for the manufacture of such products. While the Company believes alternative manufacturers capable of providing those products exist, there can be no assurance that the Company would be able to make alternative arrangements on a timely basis, that any such alternative arrangements would be adequate, or that they would be on terms as favorable 6 to the Company as the terms of the Distribution Agreement. If the Company were unable to make adequate alternative arrangements on a timely basis, its business and results of operations would be materially adversely affected. Should either of the Manufacturers file a petition in bankruptcy or be the subject of an involuntary bankruptcy proceeding, there can be no assurance that, under the United States Bankruptcy Code, the German Bankruptcy Code (KONKURSRECHT) or other applicable laws, the Company's rights against such Manufacturer would be enforceable. Among other things, such unenforceability could mean that the Company would lose its exclusive right to distribute such Manufacturer's products, would be unable to purchase products at the prices and on the other terms provided in the Distribution Agreement, would not have the license rights provided in the Distribution Agreement and/or would not be entitled to make alternative arrangements for the manufacture of such Manufacturer's products. The Company's rights to manufacture Norland Corp. products are subject to a blanket lien on Norland Corp.'s assets securing loans from a bank (balance of approximately $540,000 as of May 1, 1996) that are due by December 31, 1996. Should the Company's rights under the Distribution Agreement be avoided or limited in a bankruptcy-related proceeding, the Company's business and results of operations would be materially adversely affected. See "Business -- Manufacturing" and "-- Distribution Agreement." CONFLICTS OF INTEREST. Reynald G. Bonmati, the President and a Director of the Company is also the President and a Director of Norland Corp. and a Managing Director of NMS BV and may be considered the beneficial owner, through a partnership, of 41.2% of the outstanding capital stock of NMS BV, the parent holding company of Norland Corp. and Stratec. Albert S. Waxman, a Director of the Company, is also a Director of Norland Corp. and a Managing Director of NMS BV. He may also be considered the beneficial owner through the same partnership of the same 41.2% of the capital stock of NMS BV. Accordingly, Messrs. Bonmati and Waxman may face conflicts of interest in negotiating with and making decisions on behalf of the Company regarding transactions and arrangements with the Manufacturers. Officers and directors of a corporation have a fiduciary obligation to act in the interests of all the corporation's stockholders. The Company expects to submit all decisions regarding transactions and arrangements with the Manufacturers or NMS BV to the Company's board of directors. Two of the three other directors of the Company, who are not officers or employees of the Company, have small investments, indirectly, in NMS BV but are not officers or directors of, and do not otherwise owe fiduciary duties to, NMS BV. Under the terms of the distribution arrangement in effect with Norland Corp. for 1994, the Company was required to purchase at least $5.2 million of products from Norland Corp. for the year ended December 31, 1994. At the prices that would have applied in the absence of such minimum requirement, purchases from Norland Corp. during that period to fill customer orders totalled $3.3 million. The $1.9 million difference between the amount and the Company's minimum purchase requirement is reflected as "One-time distribution agreement costs" in the Company's statement of income for the year ended December 31, 1994. The Company did not acquire products from Norland Corp. in 1994 in excess of the amounts sold to customers, and the effect of the minimum requirement was to increase the aggregate cost of the products purchased from $3.3 million to $5.2 million. There is no minimum purchase requirement applicable to any period after 1994. There can be no assurance that all arrangements between the Company and the Manufacturers will be as advantageous to the Company as they would be in the absence of the relationships between the Company's officers, directors and controlling stockholders described above and elsewhere in this Prospectus. In addition, there can be no assurance that, in light of the relationships between the Company, NMS BV and the Manufacturers, taxing authorities will not challenge the appropriateness of the pricing and other arrangements between the Company and the Manufacturers. A successful challenge to those arrangements could result in additional tax obligations for the Company and could have a material adverse effect on the Company's results of operations and financial condition. See "The Company and its Relationship with Norland Corp. and Stratec," "Business -- Distribution Agreement" and "Certain Transactions." DEPENDENCE ON NEW THERAPIES FOR TREATMENT OF BONE DISORDERS. The Company believes it is essential to its sales growth that the efficacy of new therapies for the treatment of osteoporosis and other bone disorders be demonstrated and that regulatory approval of such therapies be granted, particularly in the United States. Although Fosamax and certain other drug therapies were approved by the FDA in 1995, and the Company 7 believes that over 50 pharmaceutical and biotechnology companies have programs to develop treatments for bone disorders, to date only a limited number of therapies are available in the United States. There can be no assurance that Fosamax will gain market acceptance or that any other new treatment will be approved or gain acceptance. The failure of one or more of these newly approved therapies to gain acceptance, or the failure of additional new therapies to be approved or gain acceptance, could have or material adverse effect on the Company's business. See "Business -- Therapies." DEPENDENCE ON PDEXA. Although the Company markets a broad range of products, it believes its near term growth potential will depend on the success of the pDEXA, a relatively new, low-cost bone densitometer sold to, among others, physician offices and small clinics. Sales of pDEXA systems have comprised an increasing percentage of the Company's revenues since its introduction in Japan in the third quarter of 1994 and, in the three months ended March 31, 1996, such sales accounted for the majority of the Company's revenues. Should a competitor introduce and successfully market a low-cost osteoporosis diagnostic device or screening tool, or should the pDEXA not gain acceptance in the market for any reason, the Company's revenues and results of operations would be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategy." DEVELOPING NEW MARKETS. The Company's continued success will depend upon broad acceptance and adoption by primary care providers, such as gynecologists and family practice physicians, of newly introduced and emerging drug therapies to treat osteoporosis, and the Company's ability to broaden sales of its products, particularly the pDEXA and OsteoAnalyzer lines, to these physicians. In order to penetrate this market more effectively, the Company has expanded its sales and marketing activities, including increasing its sales force, advertising and participation in trade shows. In addition, the Company has implemented short-term leasing and pay-per-scan programs to make its systems more available to physicians. There can be no assurance that these or other activities or programs will be successful in obtaining broader market acceptance for the Company's products. Failure to do so could have a material adverse effect on the Company's business. See "Business -- Marketing." DEPENDENCE ON THIRD PARTY REIMBURSEMENT. Future profitability of the Company may be materially adversely affected by changes in reimbursement policies of governmental and private third party payors. The products marketed by the Company are purchased principally by healthcare providers that typically bill third party payors such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for health care services provided to their patients. Governmental reimbursement policies are subject to rapid and significant changes in the United States at both the federal and state levels and in other countries. In addition, private third party payors are increasingly negotiating the prices charged for medical products and services. If healthcare providers respond to such pressures by substituting other products for the products marketed by the Company, the Company could be adversely affected. A third party payor may deny reimbursement if it determines that a device was not used in accordance with cost-effective treatment methods, or was experimental, or for other reasons. There can be no assurance that products marketed by the Company in the United States in the future will qualify for reimbursement by Medicare in accordance with guidelines established by the Health Care Financing Administration, by state government payors, or by commercial insurance carriers or that reimbursement will be available in other countries. See "Business -- Third Party Reimbursement." HIGHLY COMPETITIVE MARKET; TECHNOLOGICAL CHANGE. The bone densitometry market is highly competitive. Several companies have developed or are developing low-cost bone densitometers that compete or will compete directly with products marketed by the Company. Many of the Company's existing and potential competitors have substantially greater financial, marketing and technological resources, as well as established reputations for success in developing, manufacturing, selling and servicing products, than the Company and the Manufacturers. In addition, competitors that do not rely on third-party manufacturers may have more flexibility to compete effectively on price. The Company expects that existing and new competitors will continue to introduce products or services that are directly or indirectly competitive with those sold by the Company, including alternatives to absorptiometry and pQCT such as IN VITRO diagnostic tests and ultrasound. Such competitors may succeed in developing products that are more functional or less costly than those sold by the Company and may be more successful in marketing such products. These and other 8 innovations in medical technology may negatively affect the marketing and sales of the products marketed by the Company. There can be no assurance that the Company will be able to compete successfully in this market. See "Business -- Competition" and "-- Therapies." DEPENDENCE ON THIRD-PARTY DISTRIBUTORS. For its sales and service activities outside of the United States and Canada, the Company is primarily dependent on third-party distributors. The Company is also expanding its use of third-party distributors for sales in the United States and Canada. For sales to Japan of Norland Corp. and Stratec products, the Company has an exclusive subdistributor agreement with Nissho, and for sales to Korea, the Company has an exclusive subdistributor agreement with Meditec Co., Ltd. ("Meditec"). For the year ended December 31, 1995 and the three months ended March 31, 1996, sales to Nissho totaled approximately 68% and 51%, respectively, of total sales and sales to Meditec totaled approximately 9% and 8%, respectively. The Company typically uses an exclusive distributor in each country in which it does not directly market products through its own sales force. These distribution arrangements may typically be terminated by either the Company or the exclusive distributor upon sixty days' notice. There can be no assurance that such distributors will continue to provide sales and service for the Company at acceptable levels or that the Company would be able to replace any distributors on terms as advantageous to the Company should any of its existing arrangements terminate. Further, there can be no assurance that the Company will be able to make acceptable arrangements with additional distributors. Should any third-party distributors cease to promote the products the Company markets, or should the Company be unable to make acceptable arrangements with distributors in other markets, its sales and results of operations could be materially adversely affected. See "Business -- Sales and Marketing." LIMITED OPERATING HISTORY. The Company began operations in January 1994. Although Ostech B.V. ("OBV"), a subsidiary of NMS BV, marketed and sold the Manufacturers' systems prior to the Company's formation, OBV's management and sales organization were not identical to the Company's. Reynald G. Bonmati, the President (chief executive officer) and a Director of the Company, and Albert S. Waxman, a Director of the Company, were two of the Supervisory Directors of OBV, and James A. Sperlazza, Vice President, Latin American and Pacific Rim Sales, of the Company, was in charge of Latin American and Pacific Rim sales for OBV. However, the Managing Director of OBV, who was in charge of its overall business operations, and all other OBV managers and staff members were Dutch, Swiss and German nationals, none of whom has any relationship to the Company. The Company and its management therefore have only limited operating experience and history. There can be no assurance that recent operating results can be sustained on a quarterly or annual basis. See "The Company and Its Relationship with Norland Corp. and Stratec" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." POTENTIALLY SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Several factors may significantly affect the Company's revenues, expenses and results of operations from quarter to quarter, including the timing of new product introductions into specific markets by the Company or its competitors, developments regarding new treatments for osteoporosis, developments in government reimbursement policies, foreign currency fluctuations, product mix, the ability to obtain products to meet customer demand and fluctuations in manufacturing costs. Consequently, quarterly results of operations can be expected to fluctuate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK OF AND RELIANCE ON FOREIGN SALES. For the year ended December 31, 1995 and the three months ended March 31, 1996, foreign sales accounted for approximately 94% and 72%, respectively, of the Company's sales. For 1995 and the three months ended March 31, 1996, sales in Japan represented approximately 68% and 51%, respectively, of the Company's sales, and sales in Korea represented approximately 9% and 8%, respectively, of the Company's sales. Foreign sales are subject to certain inherent risks, including foreign currency fluctuations, trade restrictions and inconsistent and changing regulatory requirements. The loss of a key foreign subdistributor or the inability to maintain a foreign distribution network could have a material adverse impact on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." 9 DOVE ACQUISITION. On April 2, 1996, the Company acquired Dove, the manufacturer of the OsteoAnalyzer line of SXA-based bone densitometers. The integration of Dove will require special attention from management, which may distract its attention from the day-to-day business of the Company, and will require integration of Dove and the Company's product offerings and sales and marketing activities. In addition, the Company may be required to expand and enhance its financial and management controls, reporting systems and procedures as it integrates these operations. There can be no assurance that the Company will be successful in that integration. In addition, the operations acquired as part of the Dove acquisition include manufacturing and research and development. While some of the Company's management have been involved in such activities at Norland Corp., the Company has not previously engaged directly in those activities. The Company may pursue additional acquisitions of complementary technologies, product lines, or businesses in the future. The integration of acquired companies often results in unexpected costs and disruptions and sometimes in significant fluctuations in, or reduced predictability of, operating results from period to period. There can be no assurance that the Company will realize any future benefits as a result of the acquisition of Dove or any technologies, product lines or businesses it may acquire in the future or that the integration of Dove or any such other technologies, product lines or businesses will not result in unanticipated adverse consequences for the Company's results of operations and financial condition. GOVERNMENT REGULATION. The products the Company sells are subject to extensive regulation. Before products can be marketed commercially in the United States, they must receive FDA clearance or approval. The Company primarily relies on Norland Corp. to obtain such clearances in the United States. Products sold in the United States must also be manufactured in compliance with FDA Good Manufacturing Practices ("GMPs"), regulations relating to the methods used in, and the facilities and controls used for, the design, manufacture, packaging, storage, and installation of all finished devices intended for human use. Medical device products are also required to comply with FDA regulations relating to investigational research, labeling, and postmarket reporting. States may also regulate the manufacture, sale, and use of medical devices, particularly those that employ X-ray technology. In addition, many foreign countries, including some in which the Company markets products, have laws governing the marketing and manufacturing of medical devices, some of which are similar to laws in the United States. The Company generally relies on its local distributors to obtain required clearances in the countries in which they sell products marketed by the Company. Federal, state and foreign regulations regarding the manufacture and sale of medical devices are subject to change. In addition, product approvals could be withdrawn if a manufacturer or seller fails to comply with regulatory standards or if unforeseen problems occur following initial marketing. Extensive regulations or changes in regulations in countries in which the Company sells may increase operating expenses or make doing business in those countries impractical. In addition, the processes of obtaining regulatory clearances and approvals can be time consuming and expensive and there can be no assurance that all required clearances and approvals will be obtained or that the Company will not experience delays in those processes that would adversely affect the Company's marketing and sale of products. Delays in obtaining, or the inability to obtain, necessary domestic or foreign regulatory approvals or failures to comply with applicable regulatory requirements could have a material adverse effect on the Company. See "Business -- Government Regulation." UNCERTAINTY OF HEALTH CARE REFORM. Health care reform in the United States has been an area of national attention and a priority of many governmental officials. Certain reforms may influence customer purchases and, if adopted, could affect the markets for medical devices or impose limitations on the prices the Company will be able to charge in the United States for the products that the Company markets or on the amount of reimbursement available from governmental agencies and private third party payors for bone densitometry scans conducted with these products. PROPRIETARY RIGHTS PROTECTION. The Company believes its sales are dependent in part on certain proprietary features of the products it markets. The Company relies upon the Manufacturers for the protection of intellectual property pertaining to the proprietary features of their DXA-based and pQCT-based products. The Manufacturers rely primarily on know-how, trade secrets and trademarks to protect those intellectual property rights and have not sought patent protection for their products. The Company relies primarily upon 10 know-how, trade secrets, trademarks and a patent to protect the SXA-based technology used in the OsteoAnalyzer product line. There can be no assurance that these measures will be adequate to protect the rights of the Manufacturers and the Company. In addition, the laws of foreign countries may not protect their proprietary rights to the same extent as the laws of the United States. To the extent those rights are not adequately protected, the Company may be vulnerable to competitors who attempt to copy products the Company markets, or gain access to the trade secrets and know-how of the Company and the Manufacturers. Further, there can be no assurance that the Company's competitors will not independently develop substantially equivalent or superior technology. Neither the Manufacturers nor the Company are currently the subject of any litigation regarding proprietary rights, and the Company believes that the technologies used by the Manufacturers and the Company were developed independently. However, there can be no assurance that claims will not be brought alleging infringement by the Manufacturers or the Company or that such claims, if brought, would not have a material adverse effect on the Company's ability to market their products. In addition, the Company's business depends on proprietary information regarding customers and marketing, and there can be no assurance that the Company will be able to protect such information. See "Business -- Proprietary Rights." PRODUCT LIABILITY. The Company's business involves the risk of product liability claims inherent to the medical device business. If such claims arise in the future they could have a material adverse impact on the Company. The Company relies upon insurance maintained by the Manufacturers covering the products they produce and maintains product liability insurance with respect to the OsteoAnalyzer product line. Norland Corp. maintains product liability insurance on a "claims made" basis in the aggregate amount of $4 million, subject to certain deductibles and exclusions. Stratec maintains product liability insurance in the aggregate amount of DM6 million (approximately $3.9 million based on current exchange rates as of May 1, 1996), subject to certain deductibles and exclusions. The Company is an additional named insured on the Norland Corp. and Stratec policies. The Company maintains product liability insurance on a "claims made" basis in the aggregate amount of $1.0 million, subject to certain deductibles and exclusions. There is no assurance that such coverage will be sufficient to protect Norland Corp., Stratec and the Company from product liability claims, that product liability insurance will be available to Norland Corp., Stratec or the Company at a reasonable cost, if at all, in the future or that insurance maintained by Norland Corp. or Stratec will cover the Company. See "Business -- Product Liability Insurance." DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part on the continued services of certain key personnel at the Company, as well as certain key employees of the Manufacturers. The loss or interruption of the services of any of those individuals could have a material adverse effect on the Company. Neither the Company nor the Manufacturers maintain key man life insurance on any of their employees or have employment agreements with any key personnel. The Company's success also depends upon the ability to attract and retain additional qualified personnel. Competition exists for qualified personnel and there can be no assurance the Company or the Manufacturers will be successful in attracting or retaining such personnel. See "Business -- Employees" and "Management." UNCERTAIN ABILITY TO MANAGE GROWTH. The Company's growth strategy will require expanded sales, increased customer service and support, increased personnel throughout the Company, expanded operational and financial systems and the implementation of additional control procedures. There is no assurance that the Company will be able to attract qualified personnel or successfully manage expanded operations. If the Company expands, it may from time to time experience constraints that will adversely affect its ability to satisfy customer demands in a timely fashion. Failure to manage growth effectively could materially adversely affect the Company's financial condition and results of operations. Further, there can be no assurance that the Company will be able to sustain its recent rate of growth or continue its profitable operations. CONTROL BY EXISTING STOCKHOLDERS. Immediately after this offering, current officers and directors, together with persons and entities that may be deemed affiliates of or related to such persons, will own or control approximately 30.4% of the outstanding shares of Common Stock (26.4% if the Underwriter's over-allotment option is exercised in full). In addition, the Company's officers and directors hold options to purchase Common Stock, and their ownership will increase if outstanding stock options are exercised. Thus, 11 officers and directors will have significant influence over all matters requiring stockholder approval. See "Management -- Stock Option Plan," "Certain Transactions," "Principal and Selling Stockholders" and "Description of Capital Stock." POSSIBLE VOLATILITY OF STOCK PRICE. The market for securities of early stage, small market capitalization companies has been highly volatile in recent years, often as a result of factors unrelated to a company's operations. The Company believes factors such as quarterly fluctuations in financial results, announcements of new developments relating to bone disorder therapies and diagnostic technologies and developments in third party reimbursement policies could contribute to the volatility of the price of its Common Stock, causing it to fluctuate significantly. These factors, as well as general economic conditions, such as recessions or high interest rates or other events unrelated to the Company or the products it sells, may adversely affect the market price of the Common Stock. MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS. The Company currently has no specific plans for the use of a significant portion of the net proceeds of this offering and Company management will have broad discretion as to the application of such proceeds. The net proceeds will be available for working capital and general corporate purposes, including potential acquisitions and, possibly, providing financing for certain customers such as physician offices, group practices, hospitals, clinics and research facilities through leasing and other financing arrangements. See "Use of Proceeds." SHARES ELIGIBLE FOR FUTURE SALE. Sales of shares of Common Stock of the Company in the public market following this offering could adversely affect market prices and the Company's ability to raise capital. The 2,250,000 shares offered hereby will be freely tradeable, without restriction or further registration under the Securities Act. Upon completion of this offering, approximately 2,608,000 outstanding shares will be "restricted" securities within the meaning of Rule 144 under the Securities Act. Approximately 678,000 shares will be available for immediate sale in the public market in reliance upon Rule 144 or Rule 701 under the Securities Act, and the remaining approximately 1,961,500 restricted shares will not be transferable pursuant to Rule 144 until the expiration of their respective two-year holding periods. The Company intends to file a registration statement under the Securities Act to register Common Stock issuable upon exercise of options that have been or may be granted under the Amended Plan. See "Shares Eligible For Future Sale." ANTI-TAKEOVER CONSIDERATIONS. The Company's Restated Certificate of Incorporation and by-laws and the Delaware General Corporation Law contain certain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. In addition, the level of ownership by current directors and officers of the Company, together with persons and entities that may be deemed affiliates of or related to such persons, will enable them to have significant influence over or control the affairs of the Company which may have the effect of delaying, deferring or preventing a change in control of the Company. The Board of Directors will also have the authority, without further action by the stockholders, to fix the rights and preferences and issue "blank check" preferred stock. All of these factors could have the effect of deterring hostile takeovers or delaying, deferring or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then-current market prices. In addition, these provisions and this level of ownership also limit the ability of other stockholders to approve transactions that they may deem to be in their best interests and could adversely affect the voting and other rights of other stockholders. See "Control by Existing Stockholders" and "Description of Capital Stock." 12 THE COMPANY AND ITS RELATIONSHIP WITH NORLAND CORP. AND STRATEC The Company was formed in December 1993 by certain stockholders of NMS BV to market, sell and service a range of diagnostic products that address selected needs in women's healthcare. It began operations in January 1994 as the exclusive distributor throughout much of the world for all of the bone densitometry products manufactured by Norland Corp. and Stratec, manufacturing subsidiaries of NMS BV. As a subsidiary of Cordis Corporation, Norland Corp. introduced the first single photon absorptiometry ("SPA") bone densitometry device in the early 1970s, introduced a dual photon absorptiometry ("DPA") device in the early 1980s and introduced a DXA device in 1987. Before 1992, Norland Corp. distributed its products in North, South and Central America and the Pacific Rim through a direct sales force and local distributors, and for sales in Europe and the Middle East, Norland Corp. distributed its products through a subsidiary, Norland Scientific Instruments, B.V., using a small direct sales force and local distributors. Norland Corp. is located in Fort Atkinson, Wisconsin. Stratec was formed in 1987 to develop medical devices based on quantitative computed tomography ("QCT") technology. Stratec initially focused its development efforts on measurement of the forearm, naming the approach pQCT. In 1990, Stratec introduced a compact, high-resolution pQCT bone measurement system. Before 1992, Stratec sold its products exclusively in Germany using a small direct sales force and independent distributors. Stratec is located in Pforzheim, Germany. Before 1992, the Manufacturers were unrelated to each other. In early 1992, stockholders of the Manufacturers formed NMS BV to hold the two companies as wholly-owned subsidiaries. Norland Corp. has continued to develop and manufacture bone densitometry products using DXA technology and Stratec has continued to focus on pQCT technology. In 1993, the two companies jointly developed the pDEXA system marketed by the Company. Norland Corp. acts as contract manufacturer for all Stratec products sold in the United States. During 1992 and 1993, the Manufacturers began to combine their sales and marketing efforts. OBV, another subsidiary of NMS BV, was formed in 1992 to act as the exclusive distributor of Norland Corp.'s products outside the United States, Canada and Switzerland and Stratec's products outside Germany and Switzerland. Norland Corp. continued to distribute its products in the United States and Canada, Stratec continued to distribute its products in Germany and a separate subsidiary of NMS BV distributed both companies' products in Switzerland. For sales of Stratec products in the United States and Canada, Norland Corp. served as a subdistributor for OBV, until OBV ceased business activities at the end of 1993 when the Company was formed. In January 1994, the Company began performing the sales and marketing functions of NMS BV and its subsidiaries. The Manufacturers and the Company are parties to a Distribution Agreement under which the Company has the rights to exclusive worldwide distribution of all medical diagnostic products manufactured or developed by Norland Corp. or Stratec (subject to Stratec's right to distribute pQCT products in certain countries in Europe until such time as the Company elects to take over such distribution). The Company has entered into an agreement (the "Product Development Loan Agreement") with the Manufacturers under which the Company may make loans to the Manufacturers up to an aggregate amount of $3.5 million during the period ending July 31, 1997. See "Business -- Distribution Agreement," "-- Product Development" and "Certain Transactions." Prior to this offering, approximately 45.1% of the Company's outstanding stock was owned by persons who control NMS BV. The Company's President, Chief Executive Officer and Chairman of the Board, Reynald G. Bonmati, owns directly 562,500 shares of the Company's Common Stock and holds options to purchase an additional 217,500 shares. Mr. Bonmati is also a Director and the President of Norland Corp. and is one of three Managing Directors of NMS BV. Albert S. Waxman, a director of the Company, is also a Director of Norland Corp. and one of the Managing Directors of NMS BV. See "Management," "Certain Transactions" and "Principal and Selling Stockholders." The Company is a Delaware corporation whose principal office is located at 106 Corporate Park Drive, Suite 106, White Plains, New York 10604, and its telephone number is (914) 694-2285. 13 USE OF PROCEEDS Based on an assumed public offering price of $21.33 per share, the Company will receive approximately $29.7 million from the sale of the 1,500,000 shares of Common Stock being offered by the Company after deduction of underwriting discounts and commissions and estimated expenses payable by the Company in connection with this offering. The Company expects to use the net proceeds to expand sales and marketing activities, for new product development, to expand manufacturing capability of its newly-acquired Dove manufacturing facilities and for working capital and general corporate purposes, including potential acquisitions. The Company has no present understandings, commitments or agreements with respect to any such acquisitions. In addition, the Company may consider providing financing for certain customers such as physician offices, group practices, hospitals, clinics and research facilities through leasing or other financing arrangements. Pending the uses described above, the Company intends to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. The Company is undertaking the offering in part because it believes that the availability of adequate financial resources is important to the Company's competitive position. Management will have broad discretion as to the application of such net proceeds. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "NRLD". The Company's Common Stock was first issued to the public under a registration statement that became effective on August 1, 1995. August 2, 1995 was the first day of trading for the Company's Common Stock. The following table sets forth, for the periods indicated, the implied high and low sales prices per share of Common Stock, as reported by the Nasdaq National Market assuming (i) that the Stock Split had been consummated prior to the periods presented and (ii) that the sales prices would have been two-thirds of the actual sales prices as a consequence of the Stock Split.
HIGH LOW --------- ------------ PERIOD FROM AUGUST 2, 1995 THROUGH DECEMBER 31, 1995: Third Quarter..................................................................... $ 13.42 $ 9.33 Fourth Quarter.................................................................... 15.67 10.83 PERIOD FROM JANUARY 1, 1996 THROUGH MARCH 31, 1996: First Quarter..................................................................... 19.83 13.33
The last reported sale price of the Common Stock on the Nasdaq National Market on June 3, 1996 was $32.00 per share without adjustment for the Stock Split (giving effect to such Stock Split would imply a last sale price of $21.33). There were approximately 27 stockholders of record of the Company's Common Stock. This number excludes persons whose shares were held of record by a bank, broker or clearing agency. DIVIDEND POLICY The Company has not paid any dividends on its Common Stock and does not expect to pay any such dividends in the foreseeable future. The Company intends to reinvest earnings in the continued development and operation of its business. 14 CAPITALIZATION The following table sets forth at March 31, 1996 the (i) actual capitalization of the Company, (ii) the pro forma effect of the Dove acquisition, and (iii) the pro forma capitalization of the Company as adjusted to reflect the receipt of the estimated proceeds from the sale of 1,500,000 shares of Common Stock being offered by the Company hereby at the assumed initial public offering price of $21.33 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and the application of the estimated net proceeds as described in the "Use of Proceeds." This table should be read in conjunction with the Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1996 (UNAUDITED) ----------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA (1) ADJUSTED (1)(2) ------------- ------------- ----------------- Stockholders' equity: Preferred stock, $0.0005 par value; 1,000,000 shares authorized; no shares issued and outstanding................. $ 0 $ 0 $ 0 Common stock, $0.0005 par value; 10,000,000 shares authorized; 6,698,250 shares issued and outstanding; and 8,359,788 shares to be outstanding as adjusted (3)............................ 3,349 3,430 4,180 Additional paid-in capital.................................... 18,346,732 21,658,180 51,357,773 Retained earnings............................................. 2,859,289 2,859,289 2,859,289 ------------- ------------- ----------------- Total stockholders' equity.................................. $ 21,209,370 $24,520,899 $ 54,221,199 ------------- ------------- ----------------- ------------- ------------- -----------------
- ------------------------------ (1) Presented to give effect to the Dove acquisition. (2) Adjusted to give effect to the receipt of net proceeds from the sale of 1,500,000 shares of Common Stock offered by the Company (at an assumed public offering price of $21.33 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company). See "Use of Proceeds." (3) Excludes shares reserved for issuance under the Company's Amended and Restated 1994 Stock Option and Incentive Plan. See "Management -- Stock Option Plan." 15 SELECTED FINANCIAL DATA The following Selected Financial Data as of and for the periods ended December 31, 1992, 1993, 1994 and 1995 were derived from (i) the Company's financial statements for the years 1994 and 1995, which were audited by Coopers & Lybrand L.L.P., (ii) the financial statements of OBV for the year 1993, which were audited by Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG, and (iii) the audited financial statements of OBV for the period from April 1, 1992 (date of commencement of operations) through December 31, 1992. The financial data should be read in conjunction with the audited financial statements of the Company, and the notes thereto, and of OBV for the year ended December 31, 1993 and notes thereto, which are included elsewhere herein, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
OSTECH B.V. (1) ---------------------------- PERIOD FROM APRIL 1, 1992 TO NORLAND MEDICAL SYSTEMS, INC. ------------------------------------------------ THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------ ---------------------- 1992 1993 1994 1995 1995 1996 --------------- ---------- ----------- ----------- ---------- ---------- (UNAUDITED) STATEMENT OF INCOME (LOSS) DATA: Revenue.......... $4,094,964 $5,488,095 $10,041,548 $18,243,808 $3,895,921 $5,218,290 Cost of revenue......... 3,118,925 4,066,539 6,517,701 12,508,809 2,600,531 3,415,911 One-time distribution agreement costs........... 0 0 1,922,247 0 0 0 --------------- ---------- ----------- ----------- ---------- ---------- Gross profit..... 976,039 1,421,556 1,601,600 5,734,999 1,295,390 1,802,379 Operating expenses: Sales and marketing..... 747,292 1,068,197 973,208 1,651,125 334,553 575,348 General and administrative... 183,219 399,449 526,364 960,368 225,453 305,716 --------------- ---------- ----------- ----------- ---------- ---------- Income (loss) from operations...... 45,528 (46,090) 102,028 3,123,506 735,384 921,315 Liquidation loss -- net.......... 0 (326,007) 0 0 0 0 Other income (expense)....... 47,105 (13,760) (6,984) 412,983 2,515 242,941 --------------- ---------- ----------- ----------- ---------- ---------- Income (loss) before taxes.... 92,633 (385,857) 95,044 3,536,489 737,899 1,164,256 Provision for taxes........... 9,629 60 27,000 1,436,000 299,587 473,000 --------------- ---------- ----------- ----------- ---------- ---------- Net income (loss).......... $ 83,004 $ (385,917) $ 68,044 $ 2,100,489 $ 438,312 $ 691,256 --------------- ---------- ----------- ----------- ---------- ---------- --------------- ---------- ----------- ----------- ---------- ---------- Earnings per share (1)....... -- -- $ 0.02 $ 0.40 $ 0.11 $ 0.10 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Shares used in computing earnings per share (2)....... -- 4,002,000 5,245,235 4,002,000 7,057,010
AS OF DECEMBER 31, ----------------------- 1994 1995 ---------- ----------- AS OF MARCH 31, ----------- 1996 ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................................... $ 554,732 $19,218,865 $17,639,970 Working capital............................................................. 68,044 20,472,327 21,049,451 Total assets................................................................ 2,751,929 24,886,630 24,687,761 Long-term debt.............................................................. -- -- -- Total stockholders' equity.................................................. 68,044 20,520,846 21,209,370
- ------------------------------ (1) Figures presented for 1992 and 1993 are those of OBV, a subsidiary of NMS BV that ceased all business activities at the end of 1993. In 1992 and 1993, OBV served as exclusive distributor of the Manufacturers' products in certain markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) Reflects the 2,000-for-1 split of the Common Stock in June 1995 and the three-for-two stock split of the Common Stock effective June 13, 1996. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW The Company was formed in December 1993 and began operations in January 1994 as the exclusive distributor throughout much of the world for bone densitometry products developed and manufactured by the Manufacturers. Under the Distribution Agreement with the Manufacturers, the Company (i) has rights to exclusive worldwide distribution of all medical diagnostic products manufactured or developed by Norland Corp. or Stratec (subject to Stratec's right to distribute its pQCT products in certain countries in Europe until such time as the Company elects to take over such distribution) and (ii) with one exception, may not distribute products manufactured by any non-affiliate of the Company that directly compete with their products. The Distribution Agreement has an initial term ending December 31, 2015, with rights to extend for successive five-year periods. During 1992 and 1993, OBV, a subsidiary of NMS BV, served as exclusive distributor of Norland Corp.'s products for all locations outside the United States, Canada and Switzerland and of Stratec's products for all locations outside Germany and Switzerland. Some of the former officers and employees of OBV are officers and employees of the Company. OBV's financial information is presented for comparative purposes only; OBV ceased all business activities at the end of 1993. Revenues and costs of revenues for systems purchased by the Company from the Manufacturers for immediate resale and for spare parts are recognized at the time of shipment from the Manufacturers. Service revenue is recognized at the time the service is performed. Both purchases from the Manufacturers and sales to customers are generally made in U.S. dollars. Under the Distribution Agreement, the Company's cost of revenues on systems purchased for immediate resale is generally equal to (a) the Manufacturer's Device Cost as defined in the Distribution Agreement plus (b) 50% of the difference between the prices at which the Company sells systems and the Manufacturer's Device Cost. Cost of revenues on systems purchased for the Company's short-term rental and pay-per-scan programs or as demonstration systems is generally equal to 150% of Manufacturer's Device Cost. The Manufacturer's Device Cost is set semi-annually and is based on the average cost of system components and parts purchased by the Manufacturers during the preceding six-month period plus an allowance for other direct manufacturing costs. The Company's customers outside the U.S. are predominantly third-party distributors. Distributors often seek, and the Company may be willing to give, discounts based on volume. On April 2, 1996, the Company acquired Dove, which manufactured and sold the OsteoAnalyzer line of bone densitometers based on single X-ray absorptiometry technology, at a cost of approximately $6.9 million, consisting of $3.6 million in cash and 161,538 shares of the Company's Common Stock. For the year ended December 31, 1995, Dove had revenues and gross profit of $1.9 million and $1.0 million, respectively, and for the quarter ended March 31, 1996, it had revenues and gross profit of $672,691 and $343,470, respectively. The Unaudited Pro Forma Combined Condensed Financial Statements, included elsewhere in this Prospectus, reflect the Company's acquisition of Dove under the purchase method of accounting. 17 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain items from OBV's and the Company's Statements of Income (Loss) as a percentage of revenue:
OSTECH B.V. NORLAND MEDICAL SYSTEMS, INC. ------------- -------------------------------------------------- THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ------------- ----------- ----------- ----------- ----------- Revenue................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue........................................... 74.1 64.9 68.6 66.8 65.5 One-time distribution agreement costs..................... 0.0 19.1 0.0 0.0 0.0 ----- ----- ----- ----- ----- Gross profit............................................ 25.9 16.0 31.4 33.2 34.5 Sales and marketing expense............................... 19.5 9.7 9.1 8.6 11.0 General and administrative expense........................ 7.3 5.2 5.3 5.8 5.9 ----- ----- ----- ----- ----- Income (loss) from operations........................... (0.9) 1.1 17.0 18.8 17.6 Liquidation loss -- net................................... (5.9) 0.0 0.0 0.0 0.0 Other income (expense).................................... (0.2) (0.1) 2.3 0.1 4.7 ----- ----- ----- ----- ----- (7.0) 1.0 19.3 18.9 22.3 Provision for taxes....................................... 0.0 0.3 7.8 7.7 9.1 ----- ----- ----- ----- ----- Net income (loss)....................................... (7.0) 0.7 11.5 11.2 13.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
THREE MONTHS ENDED MARCH 31, 1996 AND 1995. Revenue for the three months ended March 31, 1996 increased $1.3 million (33.9%) to $5.2 million from $3.9 million for the comparable period of 1995. The increase was largely a result of increased sales of pDEXA systems in the United States following its introduction in the fourth quarter of 1995 and increased sales of the Company's other products offset by a decrease in pDEXA sales in Japan. Sales in Japan and the United States represented 50.9% and 28.5%, respectively, of total revenue for the three months ended March 31, 1996 compared to 81.5% and 6.3%, respectively, of total revenue for the three months ended March 31, 1995. Sales of complete bone densitometry systems represented 92.9% and 93.2% of total revenue for the three months ended March 31, 1996 and 1995, respectively. Sales of parts and services and, in the 1996 period, rental income, comprised the balance of revenues. Cost of revenue as a percentage of revenue was 65.5% and 66.8% for the three months ended March 31, 1996 and 1995, respectively, resulting in a gross margin of 34.5% for the three months ended March 31, 1996 compared to 33.2% for the comparable period of 1995. The increase was due primarily to a change in product mix. Sales and marketing expense increased $240,795 (72.0%) to $575,348 for the three months ended March 31, 1996 from $334,553 for the three months ended March 31, 1995, and increased as a percentage of revenue to 10.9% from 8.6%. The increases were primarily due to increased salaries, commissions and incentive payments related to increased sales staff and sales volume, increased expenses related to customer service and marketing expenses related to market introduction in the United States of the pDEXA. General and administrative expense increased $80,263 (35.6%) to $305,716 for the three months ended March 31, 1996 from $225,453 for the three months ended March 31, 1995 and increased as a percentage of revenue to 5.9% from 5.8%. The increases were primarily due to increased expenses of new and existing personnel and legal, accounting and other expenses attributable to the Company being a public company. Other income in the three months ended March 31, 1996 consisted primarily of interest earned on the initial public offering proceeds and other cash balances, reduced by other expenses, consisting primarily of bank charges and other fees related to bank transfers. In the three months ended March 31, 1995, other income consisted primarily of interest earned on cash balances reduced by charges and other fees related to bank transfers. 18 The provision for taxes for the three months ended March 31, 1996 increased by $173,413 (57.9%) to $473,000 from $299,587 for the three months ended March 31, 1995 and increased as a percentage of revenues to 9.1% from 7.7%. The Company has provided for income taxes at its current effective tax rate of 40.6% for the three months ended March 31, 1996 and 1995. The increase was entirely due to the relative increase in income before taxes. The Company had net income of $691,256 for the three months ended March 31, 1996 compared to net income of $438,312 for the three months ended March 31, 1995, an increase of $252,944 (57.7%). The increase was due primarily to increased sales and interest earned on cash balances. YEARS ENDED DECEMBER 31, 1995 AND 1994. Revenue for 1995 increased $8.2 million (82%) to $18.2 million from $10.0 million for 1994. The increase was due primarily to the increased sales of the pDEXA system. The pDEXA was introduced in Japan in the third quarter of 1994. The increase in revenue for 1995 reflects the fact that the pDEXA was sold in Japan during the entire year, as well as the fact that there were significant increases in the level of pDEXA sales in each quarter of 1995 over the corresponding period in 1994. Sales in the United States and Canada increased 53% to $1.2 million in 1995 from $750,739 in 1994, reflecting the effects of the introduction of the pDEXA in the United States in the fourth quarter of 1995 and increased customer interest in the Company's other products. Management expects 1996 sales in the United States and Canada to increase in terms of dollars and percentage of total revenues. Sales of complete bone densitometry systems represented 95% and 91% of total revenue for 1995 and 1994, respectively. Sales of parts and services and, in 1995, rental income, comprised virtually all of the other revenues for such periods. Cost of revenue as a percentage of revenue was 69% and 65% for 1995 and 1994 (before one-time distribution agreement costs), respectively, resulting in a gross margin of 31% for 1995 compared to 35% for the comparable period of 1994. This decline in gross margin (before one-time distribution agreement costs) was due principally to higher component costs and the relatively higher volume of pDEXA product that is subject to volume discounts granted to the Company's Japanese distributor. Under the terms of the distribution agreement in effect with Norland Corp. for 1994, the Company was required to purchase $5.2 million of products from Norland Corp. to satisfy a minimum requirement for the year ended December 31, 1994. At the prices that would have applied in the absence of such minimum requirement, purchases from Norland Corp. during that period to fill customer orders totaled $3.3 million. The $1.9 million difference between that amount and the Company's minimum purchase requirement is reflected as "one-time distribution agreement costs" for 1994. After giving effect to this payment, the Company's gross margin for 1994 was 16%. Sales and marketing expense increased $677,917 (70%) to $1.7 million for 1995 from $973,208 for 1994, and decreased as a percentage of revenue to 9.1% from 9.7%. The dollar increase was primarily due to increased sales commissions and incentive payments related to increased sales, increased expenses related to customer service and marketing expenses related to market introduction in the United States of pDEXA. The decrease as a percentage of revenue was due to the fact that revenues increased at a greater rate than selling expenses. General and administrative expense increased $434,004 (82%) to $960,368 for 1995 from $526,364 for 1994 and increased as a percentage of revenue to 5.3% from 5.2%. The increases were primarily due to the establishment of a $150,000 allowance for doubtful accounts, increased expenses of new and existing personnel and increased legal, accounting and other expenses attributable to the Company being a public company starting in August 1995. Other income in 1995 consisted of interest earned on the initial public offering proceeds and other cash balances, reduced by other expenses, consisting primarily of bank charges and other fees related to bank transfers. Other expense in 1994 consisted primarily of bank charges and other fees related to bank transfers. 19 The provision for taxes for 1995 increased to $1.4 million from $27,000 for 1994. The increase was due to the relative increase in income before taxes. The Company provided for income taxes at its effective tax rates of 40.6% for 1995 and 28.4% for 1994. The increase in the effective rate is attributable to the diminished impact of graduated federal income tax rates on 1995 income relative to 1994 income. The Company had net income of $2.1 million for 1995 compared to net income of $68,000 for 1994 ($1.2 million, without giving effect to the one-time distribution agreement costs). The increase was due primarily to increased revenues from sales of the Company's pDEXA system and interest earned on cash balances. THE COMPANY'S YEAR ENDED DECEMBER 31, 1994 AND OBV'S YEAR ENDED DECEMBER 31, 1993 The Company's revenue for the year ended 1994 was $10.0 million, an increase of $4.5 million (83%) over OBV's revenue of $5.5 million for the comparable period in 1993. The difference was due primarily to increases of $1.7 million of sales in Pacific Rim countries of the pDEXA introduced in January 1994, $2.5 million of sales of other products, and $0.3 million of sales of parts and services. In 1993 and 1994, OBV and the Company, respectively, were the exclusive distributors for the Manufacturers in the Pacific Rim. System sales accounted for 91% of the Company's revenue in 1994 and 91% of OBV's 1993 revenue. The Company's cost of revenue as a percentage of revenue was 65% of revenue in 1994 for a gross margin (before the one-time distribution agreement costs) of 35%, as compared to OBV's cost of revenue as a percentage of revenue of 74% of revenue in 1993, for a gross margin of 26%. The Company's higher gross margin (before the one-time distribution agreement costs) was primarily a result of a relatively higher margin product mix in 1994, particularly sales of pDEXA and pQCT systems. In addition, OBV's cost of revenue included a provision for bad debts of $160,615 (3% of revenue), while the Company had no provisions for bad debts in 1994. OBV's provision for bad debts reflected estimates based on OBV's collection experience. Sales and marketing expense for the Company was $973,208 in 1994, which was $94,989 (9%) less than sales and marketing expense of $1.1 million for OBV in 1993 and was 10% of the Company's revenue as compared to OBV's expense which was 20% of its revenue. The difference is primarily attributable to the fact that the Company had a smaller direct sales force in 1994 than did OBV in 1993. General and administrative expense for the Company was $526,364 in 1994, which was $126,915 (32%) more than general and administrative expense of $399,449 for OBV and was 5% of the Company's revenue as compared to OBV's expense which was 7% of revenue. The Company's higher expense was due primarily to the Company's addition of administrative personnel to support higher sales volume while the decrease as a percentage of revenue was due to the fact that sales revenues increased at a greater rate than general and administrative expenses. The Company provided $27,000 for income taxes in 1994, while, as a result of the 1993 loss from operations, OBV made no provision for such taxes in 1993. The Company had net income of $68,044 for 1994 compared to a net loss of OBV of $385,917 in 1993. The difference was primarily the result of the Company's substantial growth in sales in 1994 and the final liquidation of OBV which resulted in a net liquidation loss of $326,007. If the Company had not been subject to its minimum payment requirement to Norland Corp., it would have had income before taxes of $2.0 million. LIQUIDITY AND CAPITAL RESOURCES Since its inception in December 1993, the Company's operations have been financed primarily by loans from stockholders, cash flow from operations and proceeds of its initial public offering. The Company has no bank credit line and, other than $800,000 in stockholder loans and advances to fund the Company's first year of operations, has incurred no indebtedness. All stockholder loans and advances have been paid in full by the Company. On August 2, 1995, the Company issued 3,000,000 shares in an initial public offering that raised net proceeds of $18.4 million. The Company used a portion of such net proceeds for general corporate purposes and the acquisition of Dove. 20 Under the Distribution Agreement, except as to systems the Company purchases for use in its short-term rental and pay-per-scan programs, the Company is required to pay the Manufacturers for products only after receiving payment from its customers for those products. Accordingly, even during periods of rapid growth in sales of products purchased from the Manufacturers, the Company should not require substantial amounts of cash to finance its sales or accounts receivable relating to the Manufacturers' products. Similarly, an increase in the average duration of accounts receivable as to sales of Norland/Stratec products would not increase the Company's use of cash. The Company's accounts receivable increased 23.1% to $5.9 million at March 31, 1996 from $4.8 million at December 31, 1995. The Company's accounts receivable increased to $4.8 million at December 31, 1995 from $2.2 million at December 31, 1994. The increase in accounts receivable reflects higher sales volume. Cash decreased $1.6 million to $17.6 million in the three months ended March 31, 1996. The decrease in cash was primarily the result of the Company making nearly $1.3 million in payments of its corporate tax liabilities related to 1995 and the first quarter of 1996. Cash increased $18.7 million in 1995 to $19.2 million at December 31, 1995. The increase was primarily the result of the net proceeds from the initial public offering. Apart from such proceeds, the Company generated cash of approximately $300,000. At December 31, 1995, the Company had inventories amounting to $798,484 which consisted of product kits to be assembled and sold or rented, demonstration systems to support its marketing efforts, and spare parts and sub-assemblies used for providing services to its customers. At December 31, 1995, the Company employed no fixed assets other than leased computers and office furniture. Property and equipment as of March 31, 1996 consisted of computer equipment and a management information system that were obtained during the first quarter of 1996. Additional capital expenditures in 1996 are expected to include improvements to leased facilities. The Company also expects to purchase additional systems in 1996 for its short-term rental and pay-per-scan programs and as demonstration systems. The Company also expects to provide additional financing to the Manufacturers under the Product Development Loan Agreement. While new product efforts have historically been funded by the Manufacturers, the Company has recently established internal research and development and expects to expend additional funds on such effort. The Company believes that its current cash position, together with cash flow from operations and the proceeds of this offering, will be adequate to fund the Company's growth and operations for the foreseeable future. However, the nature of the Company's business is such that it is subject to changes in technology, government approval and regulation, and changes in third-party reimbursement in numerous foreign markets in addition to the United States. Significant changes in one or more of these factors in a major market for the Company's products could significantly affect the Company's ability to meet its cash needs through internal sources. 21 BUSINESS The Company markets, sells and distributes a broad range of bone densitometry systems for use in diagnosing and monitoring bone disorders, particularly osteoporosis, a disease that affects an estimated 25 million people in the United States and 200 million worldwide. Driven by the availability of new FDA-approved therapies for bone disorders, the Company is focusing on bringing affordable, state-of-the-art diagnostic products directly into physician offices. The Company offers two lines of proprietary, lower priced, easy to operate and compact products designed to address the diagnostic needs of gynecologists and family practice physicians. There are approximately 30,000 gynecologists and 450,000 family practice physicians in the United States alone. The Company has exclusive worldwide distribution rights to all present and future diagnostic products developed and manufactured by Norland Corp. and Stratec, two leading manufacturers of bone densitometry products. These rights extend through 2015 and may be renewed for additional five-year periods. The Company offers four product lines utilizing three different types of technology. The Company markets a line of bone densitometry products based on DXA technology, which, since 1987, has been a standard for analyzing bone mass reduction, the primary indicator of osteoporosis. The Company's DXA products are highly effective and offer essential features at competitive prices. Because of the cost, space requirements and training required, these systems are generally found in hospitals, large clinics and research institutions, as opposed to physician offices, where patients would benefit from timely and easy access to osteoporosis testing. Recognizing a significant market opportunity for more affordable bone measurement technologies, Norland Corp. and Stratec developed the pDEXA system, a lower priced, high performance desktop system incorporating DXA technology. The pDEXA is targeted primarily at gynecologists and other specialty practitioners. It is the only FDA-approved desktop DXA-based system available today and was the largest contributor to the Company's revenues in 1995 and the three months ended March 31, 1996. In April 1996, the Company acquired Dove, a manufacturer of low-cost bone densitometry systems. The acquisition of Dove added a new product line of bone densitometers based on SXA technology to the Company's product portfolio. Dove's main product, the OsteoAnalyzer SXA3000, utilizes SXA technology with single push-button operation to provide the family physician with the most affordable (under $20,000) densitometer currently on the market. This acquisition solidified the Company's position as a leading provider of low-cost bone densitometry products. The Company also markets a line of products based on peripheral quantitative computed tomography (pQCT) technology. Unlike the DXA-based densitometers, pQCT systems permit separate, three-dimensional measurements of the cortical and trabecular bone, allowing a more detailed assessment of the biomechanical soundness of the bone. In addition, pQCT permits the detection of minute changes within bone that occur over short periods of time. Research versions of this product have been purchased by large pharmaceutical companies such as Eli Lilly & Co., Sandoz Ltd. and Glaxo to monitor the effectiveness of potential new therapies for the treatment of osteoporosis and related bone disorders. The NOF estimates that osteoporosis affects 25 million people in the United States, 80% of whom are women. In the United States alone, more than 1.3 million fractures are attributed to the disease. As a result, the estimated costs of osteoporosis and associated fractures in the United States during 1987 was more than $10 billion. Historically, treatment for osteoporosis has been inadequate. However, this is changing with the onset of new therapies brought to the market by several large pharmaceutical companies. In October 1995, Merck announced the launch of Fosamax, a new therapy for the treatment of osteoporosis. Merck and other pharmaceutical companies have launched extensive educational and marketing campaigns targeting gynecologists and family practice physicians to promote education and awareness that osteoporosis is now a treatable disease. These efforts are increasing the demand for widespread diagnosis and treatment of 22 osteoporosis. The Company believes that over 50 pharmaceutical and biotechnology companies have programs to develop new therapies for the treatment of osteoporosis, and that additional new approved therapies will increase demand for low-cost densitometers. BACKGROUND OSTEOPOROSIS Osteoporosis is a disease generally associated with aging and characterized by excessive loss of bone mineral, resulting in decreased bone density over time. Bone is a dynamic organ which can be separated into two basic structural components, outer cortical bone and inner trabecular bone. This combination of a solid outer bone surrounding the inner bone is constantly broken down and regenerated through a process known as bone remodeling, which consists of bone resorption (removal) followed by bone formation. When remodeling does not function properly, the result is a net loss of bone mass, often causing the amount of bone to become deficient in meeting the body's needs. Factors contributing to this condition include low calcium intake, excessive alcohol consumption and certain drug therapies. Osteoporosis is a "silent disease" and typically has no overt symptoms in its early stages. The first sign of osteoporosis is often bone fracture. Osteoporosis leads to increased risk of fracture, chronic pain and immobility, usually at the hip, forearm or spine. According to the NOF, 25 million Americans and approximately 200 million people worldwide, the majority of whom are women, suffer from osteoporosis. The post-menopausal female population has the highest incidence of osteoporosis and the highest rate of morbidity (loss of quality life) and mortality due to osteoporosis. Hip fractures produce the most serious consequences. According to the NOF, there are 200,000 hip fractures per year in the United States and up to 20% of hip fracture patients die from complications within a year after fracture, 25% require long-term care and a higher percentage never return to an active and independent lifestyle. The NOF estimates that in the United States osteoporosis contributes to more than 1.3 million fractures annually, a majority of which were of the spine and hip, and that related direct health care and indirect productivity costs in 1987 were approximately $10 billion. Until recently, osteoporosis was thought to be an inevitable and untreatable consequence of aging. The Company believes that recent availability of more effective drug therapies, the aging of the population and an increased focus on women's health issues and preventive medical practices have created a growing awareness among patients and physicians that osteoporosis is in many cases a disease which can be treated. THERAPIES The Company believes that the historic limitations of treatment options in the United States contributed to a low level of demand for the diagnosis of osteoporosis and other bone disorders. Until 1995, available therapies for osteoporosis were limited. Most were classified as anti-resorptives and were designed to maintain bone mass by decreasing the effective rate of bone resorption. There was no proof that they promoted bone formation. Such therapies included calcitonin, hormone replacement therapy using estrogen and first-generation bisphosphonates. In the United States, available therapies were limited to calcitonin, estrogen and over-the-counter calcium and vitamin D supplements; only two therapies, calcitonin and estrogen, were approved specifically as therapies for bone disorders. However, women's concerns regarding the possible complications relating to the prolonged use of hormone replacement therapy using estrogen and the availability of calcitonin only in injectable form contributed to low patient acceptance. In September 1995, the FDA approved Merck's drug Fosamax for the treatment of established osteoporosis in post-menopausal women. Fosamax is a second generation bisphosphonate that acts by coating the bone surface and inhibiting bone resorption. Fosamax was shown in clinical trials to increase bone density without significant adverse side effects. Other therapies approved by the FDA in 1995 to treat osteoporosis include Miacalcin, an intra-nasal formulation of calcitonin developed by Sandoz Ltd.; and Premarin MPA, a one-tablet hormone replacement therapy combining estrogen and progestin developed by Wyeth-Ayerst Laboratories. In addition, an FDA advisory panel has recommended approval of slow-release fluoride (a combination of sodium fluoride and calcium citrate) for the treatment of osteoporosis. 23 The Company believes that worldwide there are more than 50 pharmaceutical and biotechnology companies with programs to develop new therapies for osteoporosis, some of which are in late-stage clinical trials. Therapeutic products under development include new anti-resorptive agents and bone-formation stimulators. New generations of bisphosphonates are being developed by Procter & Gamble (rasidronate), Sanofi (tiludronate) and Boehringer-Mannheim (ibandronate), while anti-estrogens (estrogen analogs) are being developed by Eli Lilly & Company (raloxifene) and Pfizer (draloxifene). The Company believes that advances in treatment options for osteoporosis will increase the demand for the diagnosis and monitoring of osteoporosis and other bone disorders. As pharmaceutical companies actively market their treatments for osteoporosis, patients and physicians will become increasingly aware of the importance of early diagnosis and treatment of osteoporosis. The Company believes that as this awareness increases, more people will be tested for osteoporosis and that primary care providers such as gynecologists and family practice physicians will play a key role in providing such tests. DIAGNOSIS AND MONITORING OF OSTEOPOROSIS Typically, there are no overt symptoms of early stage osteoporosis. Diagnostic efforts have focused on an individual's propensity for fracture by determining bone mass and comparing it to normal healthy and age-related reference populations, as well as monitoring bone mass over time for changes. Absorptiometry is the primary technique for measuring bone mass and is based on the principle that bone absorbs radiation at a different rate than does soft tissue. The inner trabecular region, which is a lattice-like structure crucial to the maintenance of bone strength, absorbs radiation at a rate different from the cortical region, enabling systems capable of separately measuring cortical and trabecular bone to more effectively assess biomechanical soundness. The primary targets for measurement of bone mass have historically been the hip, upper femur and spine. Systems to measure these testing sites are large, expensive and typically only available in hospitals and large clinics. In recent years, researchers have been investigating the predictive value of peripheral measurements, typically of the forearm or calcaneus (heel), in measuring bone density. A number of studies by independent researchers comparing peripheral testing with testing at the hip, femur or spine have concluded that peripheral site measurement has equivalent accuracy and precision in measuring bone density and is equally predictive of fracture risk. These findings were reaffirmed at the annual meeting of the NOF held in May 1996 in Amsterdam. There are a number of different types of absorptiometry devices. Single photon absorptiometry (SPA) uses a single energy radioactive source and has limited ability to measure bone in complex body regions. Dual photon absorptiometry (DPA) reduces measurement error through complex body regions by using a dual-energy radioactive source. X-ray-based systems provide improved precision, faster scan times and lower operating costs as compared to single and dual photon absorptiometry and have largely replaced SPA and DPA technology. SXA technology replaces the radioactive source with a single energy X-ray source. DXA, which has become the standard for bone mass analysis, uses a dual-energy X-ray source. Radiographic absorptiometry ("RA") measures bone density from two X-ray images of the hand. Although it does not require a dedicated bone densitometry system since it uses traditional X-ray equipment, RA does not provide point of care measurement of bone density, as the radiographs have to be sent out to a laboratory for interpretation. All of these technologies produce only two-dimensional (planar) measurements. Quantitative computed tomography (QCT) is capable of separate, three-dimensional measurement of cortical and trabecular bone, providing volumetric density and allowing more precise assessment of the biomechanical soundness of the bone. A limited number of alternatives to absorptiometry are currently available, including ultrasound and IN VITRO diagnostic testing (biochemical markers). Traditional ultrasound has not yet been proven as a reliable technique for assessing fracture risk. Its use for the detection of osteoporosis has not yet been approved by the FDA. IN VITRO testing measures the level of certain byproducts in body fluids to determine the rate of bone resorption and bone formation. However, these tests do not provide information about bone mass or bone structure and cannot be used independently to diagnose osteoporosis or assess fracture risk. The Company believes that biochemical marker testing may complement bone densitometry in monitoring the effectiveness of drug therapies. 24 DXA-based systems remain the standard for bone mass analysis. However, until recently, due to the high cost of purchasing traditional DXA-based systems, penetration beyond hospitals, large clinics and research institutions has been limited. THE BONE DENSITOMETRY MARKET The Company believes that the market for low-cost osteoporosis diagnostic and monitoring systems is expanding rapidly, primarily due to the recent development and introduction of new drug therapies to treat osteopororis, and the significant marketing efforts being undertaken by major pharmaceutical companies to promote education and awareness that osteoporosis is now a treatable disease. With three FDA-approved therapies currently on the market, Merck, Wyeth Ayerst Laboratories, and Sandoz Ltd. have all launched extensive educational and marketing campaigns targeting the point-of-care physicians, such as gynecologists and family practice physicians. Merck reports that it has hired 150 professionals in the United States alone dedicated to this effort. There are over 30,000 gynecologists and over 450,000 family practice physicians in the United States. It is estimated that there are appproximately 2,000 bone densitometers installed in the United States, consisting primarily of large DXA machines installed at hospitals, clinics and research facilities at prices ranging from $50,000 to $165,000. The Company believes there is less than 1% penetration of the potential gynecologist and family practice physician market. The Company's experience to date selling pDXA machines indicates that penetrating this market will require low-cost (under $30,000), simple to operate densitometers that are compact in size for use in physician offices. The Company also believes that the extensive educational and marketing campaigns being conducted by major pharmaceutical companies will promote the use of low-cost bone densitometers in physician offices. Developments in third party reimbursement may affect the markets for bone densitometers in the United States and other countries. In Japan and Europe, third party reimbursement for certain procedures recently has been reduced. The Company believes that, in keeping with the trend of containing healthcare costs, a similar reduction may occur in the United States. The Company believes that its emphasis on low-cost systems should allow it to compete effectively in the event of a general reduction in third party reimbursement in the United States. Merck's Fosamax is only approved for use by patients with established osteoporosis. Merck and other companies are currently conducting clinical trials to establish the efficacy of drug therapies to prevent the onset of osteoporosis in high-risk patients. The Company believes that if such therapies are approved and gain market acceptance, the need for testing and monitoring of pre-menopausal women may increase. The Company believes that this could result in additional demand for low-cost bone densitometers. THE NORLAND SOLUTION The Company is the leading provider of affordable bone densitometers designed specifically to take advantage of the market trends toward broader diagnosis and treatment of osteoporosis. The Company currently offers two lines of proprietary, lower priced, easy to operate and compact products designed to address the diagnostic needs of gynecologists and family practice physicians. The Company markets the pDEXA which is the only FDA-approved desktop DXA-based bone densitometry system. The pDEXA utilizes peripheral bone measurement techniques and is less expensive, easier to use, and much more compact in size than traditional DXA systems. The pDEXA is targeted for gynecologists and specialty practitioners. The Company also manufactures and markets the OsteoAnalyzer, a SXA-based system priced at under $20,000, which is the least expensive bone densitometer currently available on the market. The OsteoAnalyzer is operable with a single push-button, and was designed to provide affordable, easy-to-use osteoporosis testing to family physician offices and other point-of-care facilities. The Company believes it offers the most complete line of low-cost bone densitometry product offerings available. 25 THE COMPANY'S STRATEGY The Company's goal is to be the leading provider of affordable bone densitometry systems. Driven by the availability of new FDA-approved therapies for bone disorders, the Company is focusing on bringing affordable, state-of-the-art diagnostic products directly into physician offices. The key elements of the Company's business strategy include: - EXPAND THE BONE DENSITOMETRY MARKET WITH LOWER PRICED SYSTEMS. The Company believes that its pDEXA system, which brings affordable well-established DXA technology to the desktop, and the recently introduced, easy-to-use OsteoAnalyzer, operable by pushing a single button, will expand the market for bone densitometers beyond hospitals and large clinics, which constitute the primary market for traditional DXA-based systems. The pDEXA, priced at under $30,000, and the OsteoAnalyzer, priced at under $20,000, open the bone densitometer market to primary care providers such as gynecologists and family practice physicians. - ESTABLISH STRATEGIC RELATIONSHIPS WITH PHARMACEUTICAL COMPANIES. The Company is working to establish strategic relationships with pharmaceutical companies which have developed and are developing therapies for the treatment of osteoporosis and other bone disorders. For example, the Company has entered into an agreement with Merck which will assist the Company in its efforts to increase the accessibility of bone densitometry systems. The Company is also participating with pharmaceutical companies, including Merck and Wyeth-Ayerst Laboratories, in their marketing and educational campaigns and programs aimed at increasing patients' and physicians' awareness of the fact that osteoporosis is a treatable disease and of the importance of bone density testing. - EXPAND SALES AND MARKETING CAPABILITIES. The Company has developed key distribution and marketing alliances with leading distributors, such as Nissho in Japan and Meditec in Korea. The Company is also developing alliances to expand its sales and marketing capabilities in the United States and Europe. The Company currently employs regional sales managers and uses third party distributors for sales to end-users in the United States and Canada. The Company intends to increase its network of third-party distributors in the United States and internationally. - OFFER THE BROADEST RANGE OF DIAGNOSTIC SYSTEMS. The product lines marketed by the Company range from the low-cost OsteoAnalyzer and desktop pDEXA systems which scan peripheral sites, to the traditional DXA systems, which provide full body scans in a clinical setting and the sophisticated pQCT technology for advanced diagnostic and research functions. The Company intends to continue to offer a range of product prices and capabilities to fulfill a wide range of customer needs. - ESTABLISH PQCT AS THE LEADING TECHNOLOGY FOR ADVANCED SYSTEMS. The Company believes its pQCT systems are the only QCT systems available today dedicated to bone densitometry and capable of low-radiation peripheral measurement. QCT technology can differentiate between cortical and trabecular bone and permits measurement and quantitative analysis in three dimensions, capabilities that are important for research and advanced diagnostic and monitoring uses. The Company has sold systems to many leading pharmaceutical and biotechnology companies researching new therapies for osteoporosis and other bone disorders. The Company intends to build upon the popularity of the pQCT systems in the research environment to establish pQCT as the leading technology for advanced bone diagnostic and monitoring uses. There can be no assurance that the Company will be able to implement successfully any of its strategies on a timely basis, if at all, or if successfully implemented, that any of these strategies will enable the Company to maintain or enhance its growth. See "Risk Factors." PRODUCTS The Company believes it markets the broadest line of bone densitometers available today with a wide range of price points and capabilities to satisfy diverse customer needs. The Company currently offers four bone densitometry product lines and eleven models. All products marketed by the Company consist of an X-ray source, multiple photon detectors, specialized hardware and electronics, proprietary software and (for all products other than the OsteoAnalyzer SXA3000) a personal computer/printer. 26 The following table describes the product lines currently marketed by the Company:
PRODUCT LINES LIST PRICE (1) PRODUCT CHARACTERISTICS PRODUCT LINE BENEFITS PDEXA $25,000 - $30,000 Scan forearm, measures DXA precision BMD (bone mineral Affordable for physician density) and BMC (bone offices mineral content), and Compact and portable makes comparisons to Easy to use reference populations Low operating costs and to patient's prior Low patient radiation examinations. exposure Fast scanning time of 2 to 5 minutes Provides measurements at a site that is mostly cortical bone and another that is mostly trabecular. OSTEOANALYZER - SXA3000 $19,900 All models scan heel Affordable for physician - SXA2000 $20,000 - $30,000 (calcaneus), measure BMD offices - SXA3000C $20,000 - $30,000 and make comparisons to Compact and portable reference populations. Single push-button SXA2000 and SXA3000C operation models also measure BMC, Low operating costs make comparisons to Low patient radiation patient's prior exposure examinations, and can Fast scanning time of 2 assess RLFP (remaining to 3.5 minutes lifetime fracture probability). TRADITIONAL DXA - Eclipse $35,000 - $45,000 Both models scan hip, Lower priced compared to spine (appendicular and the competition lateral), forearm, Well established measure BMD and BMC, and technology make comparisons to Capable of axial, reference populations peripheral and full body and to patient's prior scans examinations. Low patient radiation exposure Fast scanning time of 2 to 6 minutes using QuikScan option - XR36 $40,000 - $55,000 XR36 also scans whole body, measures body composition and scans laboratory animals for research.
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PRODUCT LINES LIST PRICE (1) PRODUCT CHARACTERISTICS PRODUCT LINE BENEFITS PQCT DIAGNOSTIC - XCT960 $60,000 - $75,000 Scans forearm. All Capable of separate models measure true cortical and trabecular volumetric density of bone measurements in a trabecular, cortical and single site total bone, geometric Three-dimensional measurements (2), and measurements make comparisons to Precise detection of reference populations minute changes in bone (2) and patient's prior over short periods of examinations. time Low patient radiation exposure - XCT3000 (2) $95,000 - $125,000 Scans tibia, femur and Three-dimensional bone femoral neck. geometry analysis not available with any other technology RESEARCH - XCT960A $75,000 - $85,000 Developed for use in laboratory animal models with all analytical features of XCT960, plus automatic multi-slice capability. - XCT960M $80,000 - $95,000 Developed for use in laboratory mouse model with all analytical features of XCT960A, plus 50 micron resolution. - XCT Microscope $100,000 In vitro analysis with analytical benefits of XCT960M, plus 20 micron resolution.
(1) List prices are for basic models without options. Prices vary based on market conditions, territory, model and whether direct or distributor sale. (2) The pQCT XCT3000 is not yet approved for sale in the United States. It is expected that Norland Corp. will apply for Section 510(k) marketing clearance from the FDA in 1996. With respect to the XCT960, the specified use is not FDA-approved for the United States.
PDEXA The pDEXA brings DXA-based technology to the desktop in an affordable, easy-to-use model that is designed for physician offices, small clinics and other settings beyond large hospitals and clinics. The primary target market for the pDEXA is gynecologists and other specialty practitioners. Like traditional DXA systems, the pDEXA measures bone mass and compares it to a normal reference population to determine propensity for bone fracture. However, the pDEXA measures only the forearm, enabling it to be more compact, and therefore, more affordable than traditional DXA systems. The pDEXA measures the forearm at a site that is mostly cortical bone and at another site that is mostly trabecular bone. The pDEXA utilizes a miniaturized X-ray source using a dental X-ray tube which does not require a cooling system. The software used in the pDEXA systems provides quantitative analysis of bone mass, including BMD and BMC, as well 28 as comparisons to normal reference populations and to the patient's prior examinations. It also provides skeletal images of the region of interest as well as graphical presentation of the results. The pDEXA was the largest contributor to the Company's revenues in 1995. OSTEOANALYZER The OsteoAnalyzer product line brings to the primary care physician office SXA technology used by NASA to monitor loss of bone in space. The target market for the OsteoAnalyzer product line is family practice physician offices. The OsteoAnalyzer SXA3000, which sells for under $20,000, is fast and the easiest, least expensive bone densitometer available on the market today. This new device is a portable system which measures bone mineral density at the calcaneus (heel) with the push of a single button, eliminating the need for a separate computer system. The OsteoAnalyzer products utilize a miniature X-ray tube that does not require a cooling system. TRADITIONAL DXA The traditional DXA-based bone densitometers marketed by the Company are the compact Eclipse and the full size XR36. The target market for traditional DXA systems is hospitals and large clinics. DXA technology is well-established. The Company's DXA systems are capable of performing axial, peripheral and whole-body scans. Price and service are the primary competitive factors among DXA products offering similar basic capabilities. These systems have been sold in over forty countries. PQCT The XCT line of systems brings a new type of bone densitometer based on pQCT technology to the market for bone densitometers. Unlike DXA-based densitometers, pQCT systems permit separate, three-dimensional measurement of cortical and trabecular bone by taking multiple images in a 360-degree rotation around the scanned limb, providing true volumetric density and allowing more precise assessment of biomechanical soundness of the bone. The ability to measure trabecular bone precisely also permits detection over short periods of time of minute changes in bone, indicating changes in metabolic status. The pQCT systems use the same miniaturized low-radiation X-ray source as the pDEXA. The XCT960 scans the forearm and is marketed to hospitals, clinics and private practices. The XCT3000 can also scan the tibia, the femur and is capable of three-dimensional measurement of the entire femoral neck, providing more precise assessment of hip fractures and monitoring of implants following hip replacements. The Company expects to submit the XCT3000 for 510(k) marketing clearance from the FDA in 1996. The Company also markets a series of pQCT-based research scanners: the XCT960A and XCT960M, for research involving laboratory animals, and the XCT Microscope, for research IN VITRO at a maximum resolution of 20 microns. PRODUCT DEVELOPMENT Historically, the Company has been dependent on Norland Corp. and Stratec for refinements of existing products and creation of new bone densitometry applications. Recently the Company has begun to develop an internal research and development effort. The Company has hired a Vice President, Product Development, who is responsible for coordinating the product development programs at the Company and the Manufacturers. The Company further strengthened its research and development effort with the acquisition of Dove which had three employees engaged in research and development. The Company's employees are pursuing technological advances and additions to the OsteoAnalyzer product line, as well as other approaches to the bone assessment market. At May 1, 1996, the Company had five, and the Manufacturers had an aggregate of 16, persons engaged in research and development, respectively. Of the Manufacturers' personnel, an aggregate of nine persons were devoted to software development. Norland Corp. has historically focused its product development on DXA-based bone densitometry systems. In 1995, Norland Corp. introduced QuikScan, an upgrade to the existing Eclipse and XR36 systems that decreased scanning times from 5 to 8 minutes to 2 to 6 minutes. In early 1993, the Manufacturers began joint development of the pDEXA. The development effort was based on the software and hardware expertise of Norland Corp. and Stratec, respectively. The pDEXA was introduced in January 1994 and now accounts for the largest portion of the Company's revenues. A Japanese language version of the pDEXA software has been released in Japan. 29 Stratec focuses its product development efforts on pQCT-based systems. Stratec is developing enhancements of its pQCT products, including the XCT960, which performs a forearm scan, and the XCT3000, which scans weight-bearing bones such as the tibia and the femur and measures the bone directly at the femoral neck, enabling a more direct assessment of hip fracture risk and monitoring hip implants. It is expected that Norland Corp. will apply for 510(k) clearance for the pQCT XCT3000 in 1996. Stratec is also developing enhancements of its very high resolution pQCT scanner (XCT-Microscope), which is sold to research laboratories. In 1995, the Company entered into a Product Development Loan Agreement with the Manufacturers under which the Company may make loans to the Manufacturers in installments up to an aggregate amount of $3.5 million during the period ending July 31, 1997. At May 1, 1996, there were outstanding loans of $75,906 from the Company to Norland Corp. The proceeds of such loans are to be used by the Manufacturers for specific new product development involving enhancements of existing products and the application of pQCT technology to new products. Interest is payable at the rate of 10% per annum, and the principal is to be repaid over five years commencing September 30, 1997. If a new product covered by the Product Development Loan Agreement is introduced into the marketplace, the Company will be entitled to receive a royalty equal to 5% of the sales proceeds received by the Manufacturers with respect to such product. The Manufacturers have granted the Company rights of first refusal with respect to any additional financing for research and development work by the Manufacturers. On May 31, 1996, the Company entered into a Distribution Agreement with Vitel, Inc. of Dallas, Texas ("Vitel"), pursuant to which the Company has the worldwide rights to all products that may be developed by Vitel. The Company also made a $250,000 investment in Vitel. Vitel has not yet developed any products which are marketed. Vitel is currently developing bone diagnostic devices that use technology called Ultrasound Critical Angle Reflection (the "UCR Technology") under an exclusive license from the University of Texas Southwestern Medical Center at Dallas (the "University"). Traditional transmission and reflection ultrasound technologies have failed to provide a true quantitative assessment of bone quality. The Company believe the UCR Technology represents the first ultrasound technology able to provide true quantitative assessment of bone quality, permitting the independent assessment of both cortical and trabecular bone. With several large prototypes in use at the University, the UCR Technology has already been used in studies involving more than 500 patients, including normal subjects as well as treated and untreated patients diagnosed with osteoporosis. Vitel and the Company are currently working to refine prototype systems into a low-cost commercial unit. The Company anticipates that initial product marketing will take place outside the United States. Prior to sales in the United States, the Company and Vitel may need to conduct clinical trials and must receive FDA approval or clearance. There can be no assurance that Vitel and the Company will succeed in producing a low-cost commercial unit. SALES AND MARKETING UNITED STATES The Company currently employs nine regional managers and uses third party distributors for sales to end-users in the United States and Canada. The Company typically uses an exclusive distributor to cover one or more states, and each Company regional sales manager is responsible for the support and supervision of several distributors. Support includes participation in trade shows, symposiums, customer visits, product demonstrations, ongoing literature and publications, sales training and regular user group meetings. The Company sells directly to end-users in those regions where the Company does not currently have third party distributiors. The Company intends to increase its network of third-party distributors in the United States to exploit the expanded market of gynecologists and primary care physicians and to increase the number of regional sales managers to supervise and support these distributors. INTERNATIONAL The Company's customers outside the United States are primarily third party distributors. The Company typically uses an exclusive distributor in each country in which it markets products, supported by United States-based sales managers. Similar to the United States, support includes participation in trade shows, symposiums, customer visits, product demonstrations, ongoing literature and publications, sales training and 30 regular user group meetings. Except with respect to the Company's relationship with Nissho, which is described below, the Company's distribution arrangements with its foreign distributors may typically be terminated by either the Company or the exclusive distributor upon sixty days' notice. On June 1, 1996, the Company exercised its right to assume the distribution in Europe of the DXA line of products, including the pDEXA. Prior to this, European distribution of those products was controlled by Stratec. The Company intends to increase its network of third party distributors worldwide. In 1995, the Company sold products in over 20 countries. In 1995, 68% of the Company's revenue was derived from sales to Nissho, its Japanese subdistributor. The Company and Nissho are negotiating a new five-year distribution agreement. The loss of Nissho as a customer, a reduction in Nissho's sales efforts or any other adverse change in the Company's relationship with Nissho could have a material adverse effect on the Company. For a more detailed breakdown of the Company's 1995 sales by geographic territory, see Note 12 to the Company's Financial Statements contained elsewhere herein. MANUFACTURING Except for the OsteoAnalyzer, the Company does not manufacture its products. Manufacturing consists primarily of testing of components, final assembly and systems testing. The Company's manufacturing facilities for the OsteoAnalyzer product line are located in Newbury Park, California. Norland Corp. manufactures traditional DXA-based systems for sale worldwide and pDEXA and certain pQCT systems for sale in the United States and Canada. All establishments, whether foreign or domestic, manufacturing medical devices for sale in the United States are subject to periodic inspections by or under the authority of the FDA to determine whether the manufacturing establishment is operating in compliance with GMPs (good manufacturing practices). Norland Corp.'s manufacturing facilities are located in Fort Atkinson, Wisconsin. Stratec manufactures pDEXA and pQCT systems for sale outside the United States and Canada. Stratec's manufacturing facilities, which are ISO-9001 certified, are located in Pforzheim, Germany. The Company is dependent on Norland Corp. and Stratec to manufacture the DXA-based and pQCT-based products that the Company markets in amounts and at standards of quality necessary to meet demand and be competitive. Both Manufacturers are subsidiaries of NMS BV. See "Certain Transactions." Some components are manufactured in accordance with custom specifications and require substantial lead times. While efforts are made to purchase components from more than one source and to use generally available parts, certain components, including X-ray tubes and detectors, are available from only one or a limited number of sources. In the past there have been delays in the receipt of certain components, although to date no such delays have had a material adverse effect on the Company. The Company believes that the Manufacturers and the Company have sufficient capacity to supply the Company's product needs for at least the next twelve months. Manufacturing processes for the products marketed by the Company are subject to stringent federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of certain materials and wastes. In the United States, such laws and regulations include the occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, and the Resource Conservation and Recovery Act. The Company believes that it and Norland Corp. have complied in all material respects with such laws and regulations. There can be no assurance that the Company and the Manufacturers will not be required to incur significant costs in the future with respect to compliance with such laws and regulations. DISTRIBUTION AGREEMENT The Company's Distribution Agreement with the Manufacturers grants the Company exclusive distribution rights for all medical diagnostic devices which have been, or may during the term of the Distribution Agreement be, developed by Norland Corp. and Stratec. The distribution rights are worldwide, except that in the case of Stratec's pQCT products, certain countries in Europe are currently excluded. The Company has the option to become the exclusive distributor for Stratec in these countries at any time during the term of the Distribution Agreement on 90 days notice to Stratec. 31 The Company must use its best efforts to promote the sale of the Manufacturers' systems and may not distribute any products manufactured by any non-affiliate of the Company which compete with the Manufacturers' products, except for products which may be marketed by the Company pursuant to its distribution agreement with Vitel. See "-- Product Development." The Manufacturers are obligated to supply the Company with sufficient quantities of their systems on a timely basis to fill customer orders. Each system must meet all performance and other standards established by the Manufacturer for the system. The term of the Distribution Agreement extends until December 31, 2015. At the end of such term or any renewal term, the Manufacturers or the Company may renew the Distribution Agreement for an additional term of five years, provided that if the party electing to renew is in material breach of the Distribution Agreement at the time of renewal, the other party may reject such election to renew. The Distribution Agreement is also subject to termination in the event of the bankruptcy of a party or a continuing general failure by a party to fulfill its obligations. Under the Distribution Agreement, the price at which the Company purchases a system for immediate resale is the Manufacturer's Device Cost as defined in the Distribution Agreement plus 50% of the difference between the amount for which the Company sells such system and such Manufacturer's Device Cost. Thus, the gross margin between the Company's selling price and the Manufacturer's Device Cost is allocated 50% to the Company and 50% to Norland Corp. or Stratec. In the case of Norland Corp. products sold by Stratec in Europe as distributor for the Company, the gross margin between Stratec's selling price and the Manufacturer's Device Cost is allocated 50% to Stratec, 25% to Norland Corp. and 25% to the Company. The Company has recently introduced programs in which certain customers are offered short-term rentals of systems or the ability to use systems on a pay-per-scan basis, in each case with an option to purchase the system. Systems subject to these programs, as well as demonstration systems, are purchased by the Company from the Manufacturers for 150% of Manufacturer's Device Cost. The Manufacturer's Device Cost of a system is the aggregate of the standard costs of the components and parts used in such system plus an allowance for other direct manufacturing costs. Each Manufacturer maintains a list of standard costs which is revised at least twice annually. The standard cost of a component or part is the average cost to the Manufacturer of all units of such component or part purchased by the Manufacturer during the six months preceding the revision of such list. If at the time the list is to be revised, the aggregate standard costs of all components and parts used in a system would not increase or decrease by more than 5% from the aggregate standard costs of such components and parts then in effect, the standard costs of such components and parts (and, therefore, the Manufacturer's Device Cost) are not changed. The Distribution Agreement grants the Company licenses to manufacture and sell the Manufacturers' systems and to use all related technology, subject to a blanket lien on Norland Corp.'s assets securing loans from a bank (current balance as of May 1, 1996 of approximately $540,000) which are due to be paid in full by December 31, 1996. The Company may only exercise its rights under its license from a Manufacturer when such Manufacturer is not in compliance with its obligations under the Distribution Agreement. The only amount which a Manufacturer is entitled to receive with respect to systems manufactured pursuant to such licenses is a royalty of 5% of any sales proceeds received by the Company. COMPETITION The bone densitometry systems market is highly competitive. Several companies have developed or are developing bone densitometers or other technologies that compete or will compete with products marketed by the Company. Many of the Company's existing and potential competitors have substantially greater financial, marketing and technological resources, as well as established reputations for success in developing, selling and servicing products. The Company expects existing and new competitors will continue to introduce products that are directly or indirectly competitive with those marketed by the Company, including alternatives to absorptiometry such as ultrasound and IN VITRO diagnostics. Such competitors may succeed in developing products that are more functional or less costly than those sold by the Company and may be more successful in marketing such products. There can be no assurance that the Company will be able to continue to compete successfully in this market. In addition, competitors that do not rely on third party manufacturers may have more flexibility to compete effectively on price. 32 The Company's primary competitors for the sale of bone densitometry systems are Hologic, Inc., Lunar Corporation, Aloka, Hitachi, Panasonic and OsteoMeter A/S. These companies have products that compete directly with the products marketed by the Company and have their own manufacturing and research capabilities. There can be no assurance that the Company's competitors will not succeed in continuing to develop and market lower priced devices comparable to the Company's pDEXA and OsteoAnalyzer product lines. The Company believes the products it markets compete primarily on the basis of price/performance characteristics, accuracy and precision of results, ease and convenience of use, features and functions, quality of service and price. In the small clinic and physician's office market, price, ease of use and convenience are of particular importance. In the hospital and large clinic market, DXA machines are predominant and price is the primary competitive factor among products that provide similar basic capabilities. The Company believes that the DXA-based systems it markets are competitive. In the research market, the range, accuracy and precision of measurements are the principal competitive factors. The Company believes the pQCT-based products it markets provide measurement capabilities, such as three-dimensional measurements and separate measurement of cortical and trabecular bone, not available with traditional DXA-based technology, at prices competitive with systems using that technology. See "-- Products." THIRD PARTY REIMBURSEMENT Health care reform in the United States has been an area of national attention and a priority of many governmental officials. Certain reforms may influence customer purchases and, if adopted, could impose limitations on the prices the Company will be able to charge in the United States for the products that it markets or on the amount of reimbursement available from governmental agencies and private third party payors for bone densitometry scans conducted with these products. In the United States, the Health Care Financing Administration ("HCFA") establishes guidelines for the coverage and reimbursement of health care providers treating Medicare and Medicaid patients. Although there currently exist physician service reimbursement codes for DXA (including pDEXA) and pQCT bone densitometry scans, HCFA has not issued a national coverage policy with respect to these tests. As a result, it is currently within the discretion of the thirty-eight local Medicare carriers as to whether DXA (including pDEXA) and pQCT bone densitometry scans will be covered by Medicare and, if covered, the rate of reimbursement. Coverage and reimbursement decisions for SXA scans are also within the discretion of the local Medicare carriers, who generally approve reimbursements under the HCFA codes. As of December 1995, several local carriers provided no reimbursement or only partial reimbursement for bone densitometry scans. There can be no guarantee that scans using any of the products the Company markets will be covered by Medicare or other third party payors, and, if covered, there can be no guarantee as to the level of reimbursement that will be provided. In a number of European countries, Japan and several other countries, third party payors provide reimbursement for bone densitometry scans. In Japan and Europe, third party reimbursement for certain procedures recently has been reduced. The Company believes that, in keeping with the trend of containing the costs of healthcare, a similar reduction may occur in the United States. Currently scans generated by the Company's pDEXA, traditional DXA-based and pQCT systems are reimbursable. Scans generated by the OsteoAnalyzer are not reimbursable. The Company believes that its emphasis on low-cost systems should allow it to compete effectively in the event of a general reduction in third party reimbursement in the United States. GOVERNMENT REGULATION The development, testing, manufacturing and marketing of the products marketed by the Company are regulated by the FDA in the United States and by various foreign regulatory agencies. The testing for, preparation of, and subsequent FDA review of required applications is expensive, lengthy and uncertain. Moreover, regulatory approval, if granted, can include significant limitations on the indicated uses for which a product may be marketed. Failure to comply with applicable regulations can result in civil penalties, 33 suspensions of approvals, product seizures, injunctions, recalls, operating restrictions and criminal prosecutions. Delays in receipt of or failure to receive clearances or approvals for new products would adversely affect the marketing of such products and the results of future operations. All products currently marketed commercially by the Company in the United States are considered Class II medical devices subject to FDA clearance pursuant to the Section 510(k) premarket notification process. Section 510(k) submissions may be filed only for those devices that are "substantially equivalent" to a device that was legally marketed in the United States prior to 1978. FDA review times may vary depending upon FDA resources and workload demands and the complexity of product submissions. It is expected that Norland Corp. will apply for 510(k) clearance for the pQCT XCT3000 in 1996. All establishments, whether foreign or domestic, manufacturing medical devices for sale in the United States are subject to periodic inspections by or under authority of the FDA to determine whether the manufacturing establishment is operating in compliance with GMPs (good manufacturing practices). The FDA also requires that medical device manufacturers and distributors undertake postmarket reporting for serious injuries, deaths, or malfunctions associated with their products. Norland Corp. has had only one such reportable incident related to its bone densitometer products. Although not currently required for medical devices, the payment of user fees to the FDA for medical device product application review is currently being considered by the United States Congress. If medical device user fee legislation is enacted, this could significantly increase the costs associated with product development and marketing. Although legislation has been recently passed which permits the exportation of unapproved devices to Europe, Japan and certain other principal international markets, prior FDA export authorization continues to be required for devices intended for export to certain other non-industrialized countries. The Company currently exports unapproved devices only to those countries for which export is permitted by law, or for which Norland Corp. has obtained the necessary export authorization. Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in most foreign countries must be obtained prior to the commencement of marketing of the product in each such country. Requirements governing the conduct of clinical trials and product approvals vary significantly from country to country. The time required for approval may be longer or shorter than that required for FDA approval. The Company generally relies on its local distributors to obtain any required clearances in the countries in which they sell products marketed by the Company. There can be no assurance that the Manufacturers and the Company will not be required to incur significant costs in the future with respect to compliance with laws and regulations of such countries. In addition to the regulatory framework for product approvals, the Manufacturers and the Company are, and may be subject to, regulation under local, state, federal and foreign law, including requirements regarding occupational safety, laboratory practices, the use, handling and disposition of radiological materials, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation. There can be no assurance that the Manufacturers and the Company will not be required to incur significant costs in the future with respect to compliance with such laws and regulations. PROPRIETARY RIGHTS The Company believes that its sales are dependent in part on certain proprietary features of the products it markets. The Company relies upon the Manufacturers for the protection of intellectual property pertaining to proprietary features of their DXA-based and pQCT-based products. The Manufacturers rely primarily on know-how, trade secrets and trademarks to protect those intellectual property rights and have not sought patent protection for the products marketed by the Company. The Company relies primarily upon know-how, trade secrets, trademarks and a patent to protect the SXA-based technology used in the OsteoAnalyzer product line. The Company owns one patent relating to its SXA-based technology. There can be no assurance that these measures will be adequate to protect the rights of Norland Corp., Stratec and the Company. To the extent that intellectual property rights are not adequately protected, the Company may be vulnerable to competitors who attempt to copy the products the Company markets or gain access to the 34 trade secrets and know-how of the Manufacturers and the Company. Further, there can be no assurance that the Company's competitors will not independently develop substantially equivalent or superior technology. The Manufacturers and the Company are currently not the subject of any litigation regarding proprietary rights, and the Company believes that the technologies used by the Manufacturers and the Company were developed independently. In addition, the Company's business depends on proprietary information regarding customers and marketing, and there can be no assurance that the Company will be able to protect such information. BACKLOG Backlog consists of signed purchase orders received by the Company from its customers. Backlog as of May 1, 1996 and May 1, 1995 totaled approximately $4,277,413 and $3,916,500, respectively. The Company's ability to ship products depends on its production capacity and that of the Manufacturers. Purchase orders are generally cancelable. The Company expects to be able to ship products representing all of its backlog before the end of the current fiscal year. The Company believes that its backlog as of any date is not a meaningful indicator of future operations or net revenues for any future period. PRODUCT LIABILITY INSURANCE The Company's business involves the inherent risk of product liability claims. If such claims arise in the future they could have a material adverse impact on the Company. The Company relies upon insurance maintained by the Manufacturers covering the products they produce and maintains product liability insurance with respect to the OsteoAnalyzer product line. Norland Corp. maintains product liability insurance on a "claims made" basis in the aggregate amount of $4 million, subject to certain deductibles and exclusions. Stratec maintains product liability insurance in the aggregate amount of DM6 million (approximately $3.9 million based on current exchange rates as of May 1, 1996), subject to certain deductibles and exclusions. The Company is an additional named insured on the Norland Corp. and Stratec policies. The Company maintains product liability insurance on a "claims made" basis in the aggregate amount of $1.0 million, subject to certain deductibles and exclusions. There is no assurance that such coverage will be sufficient to protect Norland Corp., Stratec and the Company from risks to which they may be subject, including product liability claims, or that product liability insurance will be available to Norland Corp., Stratec or the Company at a reasonable cost, if at all, in the future or that insurance maintained by Norland Corp. or Stratec will cover the Company. CUSTOMER SUPPORT SERVICES The Manufacturers offer one-year warranties on both the hardware and software included in their systems. The Company provides warranty services to its customers on behalf of the Manufacturers. Any costs incurred by the Company in connection with a Manufacturer's warranty are borne by that Manufacturer. The Company offers one-year warranties on the OsteoAnalyzer product line. The Company has no obligation to provide any other services to its third-party distributors or its customers. However, the Company does offer non-warranty services and a range of other product support services in cooperation with its third-party distributors, including a telephone hotline for customer inquiries, product installation, product enhancements and maintenance releases. The Company also offers training at customer locations, the Company's facilities and the Manufacturers' facilities to both end-user customers and third-party distributors. EMPLOYEES At May 1, 1996, the Company had 40 employees, 18 of whom were engaged in direct sales and marketing activities. The remaining employees are in finance, administration, product development and customer service. No employees of the Company are covered by any collective bargaining agreements, and management considers its employee relations to be excellent. PROPERTIES The Company leases its principal executive offices, which are located at 106 Corporate Park Drive, Suite 106, White Plains, New York 10604. The Company sublets a portion of this office space to an affiliate of The EICON Group, Inc. ("EICON"). Both the lease and sublease expire on August 31, 2000. The Company 35 also subleases office space in New Haven, Connecticut, from other affiliates of EICON. The New Haven lease and sublease expire on August 31, 1996. The Company believes it would be able to find suitable replacements for these facilities, if necessary, on reasonable terms. See "Certain Transactions." The Company subleases office space from Norland Corp. in Fort Atkinson, Wisconsin. The lease and sublease expire on June 30, 1996. Effective July 1, 1996, the Company will lease approximately 18,000 square feet of space in the building where Norland Corp. presently leases space. The lease will have a term of ten years. The Company will sublet approximately 14,000 square feet of this space to Norland Corp. for the full term of the lease. The Company will use its portion of the space for sales and marketing, customer services, administration and warehousing. See "Certain Transactions." The Company leases approximately 3,500 square feet of office and manufacturing space in Newbury Park, California, under a lease which expires on February 1, 1998. Although the Company believes its existing facilities are adequate for the short-term, the Company anticipates opening additional sales offices to accommodate needs for increased sales personnel. 36 MANAGEMENT The Company's current directors and executive officers are as follows:
NAME AGE POSITION - ------------------------------ --- ----------------------------------------------------------------- Reynald G. Bonmati 48 Chairman of the Board; President; Treasurer; and Director Kurt W. Streams 34 Vice President, Finance; and Secretary Ralph G. Theodore 69 Vice President, Operations; and Assistant Secretary Thomas P. Regan 49 Vice President, U.S. Sales James A. Sperlazza 47 Vice President, Latin America and Pacific Rim Sales Lewis N. Harrold 48 Vice President, Product Development James J. Baker 63 Director Michael W. Huber 68 Director Robert L. Piccioni, Ph.D. 50 Director Albert S. Waxman, Ph.D. 54 Director
MR. BONMATI has served as a Director of the Company since its formation in December 1993 and has served as Chairman of the Board, President and Treasurer of the Company since January 1994. Mr. Bonmati has served since January 1992 as a Managing Director of NMS BV, a holding company that owns Norland Corp. and Stratec, manufacturers of bone densitometers marketed by the Company. He has served as a Director and President of Norland Corp. since June 1990 and July 1993, respectively. He has also served as President and Chairman of the Board of Directors of EICON, an environmental and infrastructure service company, since March 1991, as President of Novatech Resource Corporation, a private investment firm, since 1981 and as President of Novatech Management Corporation, a private investment firm, since 1990. Mr. Bonmati received BS and MS degrees from the Institute National Superieur de Chimie Industrielle, an MS degree from the Ecole Nationale Superieure du Petrole et des Moteurs and an MBA from the University of Paris. MR. STREAMS joined the Company in September 1995 and has served as Vice President, Finance and Secretary of the Company since February 1996. From 1988 to 1995, Mr. Streams was an Audit Manager and a Senior Audit Manager with Deloitte & Touche LLP in the United States and Deloitte & Touche Registeraccountants in the Netherlands. Mr. Streams holds a BA degree in economics from the University of Massachusetts. MR. THEODORE has served as Vice President, Operations of the Company since January 1994 and Assistant Secretary since May 1995. From 1980 to 1994, Mr. Theodore was a business consultant in Connecticut. He was Vice President of Kensington Management Consultants from 1981 to 1984. He then undertook a two-year assignment as Chairman of the Board of AID3 Group, a start-up, multinational computer development company. Between 1972 and 1980, he held a succession of senior management positions with ITT Corporation in Europe and the United States, including the position of Worldwide Product Line Manager for industrial products. Mr. Theodore holds BE and ME degrees in electrical engineering from Yale University. MR. REGAN has served as Vice President, U.S. Sales since January 1994. Mr. Regan has served as Vice President, U.S. Sales of Norland Corp. since January 1991. From December 1988 to January 1991, he was a Director of U.S. Sales and Service for Interspec, Inc., now Advanced Technology Laboratories. From August 1986 to November 1988, he was Vice President, Marketing and Sales of Ultrasonix Company. From February 1981 to December 1986, Mr. Regan was Vice President, Sales of Diasonics, Inc., a medical imaging company providing ultrasound and magnetic resonance imaging products. MR. SPERLAZZA has served as Vice President, Latin America and Pacific Rim Sales of the Company since January 1994. From December 1991 to the present, Mr. Sperlazza has been a partner of Sansper Trading Company, which sells medical devices. From April 1992 to December 1993, Mr. Sperlazza was Vice 37 President, Latin American and Pacific Rim Sales of OBV, and from February 1992 to March 1992, he was a Vice President of Norland Corp. From January 1986 to February 1992, Mr. Sperlazza was Vice President, Marketing and Vice President, International of Diasonics, Inc. MR. HARROLD joined the Company in November 1995 and serves as Vice President, Product Development. From 1976 to 1995, Mr. Harrold held various positions with Waters Medical Systems, serving most recently as Vice President of Engineering and General Manager from 1992 through 1995. He holds a BSEE from Carnegie Mellon University. MR. BAKER has served as a Director of the Company since May 1995. He has been a private investor for over twelve years, specializing in start-up venture capital. He is Vice President of Flight Landata, Inc., a company involved in multi-spectral remote sensing. Previously, Mr. Baker spent twelve years at Cullinet Software Corporation serving initially as Vice President in charge of technical development and later as Senior Vice President in charge of Customer Support. He holds a BS in Mathematics from the Massachusetts Institute of Technology. MR. HUBER has served as a Director of the Company since May 1995. He is retired Chairman and Chief Executive Officer and is currently a Director of J.M. Huber Corporation, a diversified family-owned company engaged in natural resource development, and specialty chemical and specialty equipment and wood product manufacturing. He is also a Director of Crompton and Knowles Corporation, a specialty chemical and equipment manufacturing company. DR. PICCIONI has served as a consultant to the Company since April 2, 1996. He was elected a director of the Company on May 30, 1996. He has been a consultant to OnTrak Systems, Inc. since March 1996. From June 1995 to March 1996, he was Chief Operating Officer of OnTrak Systems, Inc. From October 1993 to January 1995, Dr. Piccioni was President of the Thermco Systems Division of Silicon Valley Group. From December 1992 to October 1993 he was President of Dove, the company which was acquired by the Company in April 1996. Prior to founding Dove, Dr. Piccioni served as Chief Operating Officer and then as President and CEO of Osteon, Inc. Osteon, Inc. filed a petition in bankruptcy in November 1992. Mr. Piccioni and others purchased certain assets of Osteon, Inc. in such bankruptcy proceeding and licensed them to Dove until such assets were purchased by the Company in April 1996. Dr. Piccioni received a BS degree in Physics from California Institute of Technology and a Ph.D. degree in Physics from Stanford University. DR. WAXMAN has served as a Director of the Company since January 1994. Dr. Waxman has served as a Director of Norland Corp. since June 1990 and as a Managing Director of NMS BV since January 1992. He has also served as a Director of EICON since December 1994. Since 1993, Dr. Waxman has been Chairman and Chief Executive Officer of Merit Behavioral Care Corporation, the parent company of American Biodyne, Inc., which he co-founded in 1985 and for which he served as Chairman and Chief Executive Officer from 1988 to 1993. From 1983 to 1988, Dr. Waxman served as Chairman and Chief Executive Officer of Diasonics, Inc., which he founded. Dr. Waxman received a BSEE degree from City College of New York and MA and Ph.D. degrees from Princeton University. He serves on the Advisor Council of Princeton University's School of Engineering and Applied Sciences. BOARD COMMITTEES There are two standing committees of the Board of Directors: AUDIT COMMITTEE. The Audit Committee was established in June, 1995. The Audit Committee consists of James J. Baker, Michael W. Huber and Reynald G. Bonmati. The Audit Committee: (i) makes recommendations to the Board of Directors with respect to the independent auditors who conduct the annual examination of the Company's accounts; (ii) reviews the scope of the annual audit and meets periodically with the Company's independent auditors to review their findings and recommendations; (iii) approves major accounting policies or changes thereto; and (v) periodically reviews principal internal controls to assure that the Company is maintaining a sound and modern system of financial controls. 38 COMPENSATION COMMITTEE. The Compensation Committee was established in June, 1995. The Compensation Committee consists of Albert S. Waxman, James J. Baker and Michael W. Huber. The Compensation Committee periodically determines the amount and form of compensation and benefits payable to all principal officers and certain other management personnel. This committee also performs the duties of administration with respect to the Company's Amended Plan. DIRECTORS' REMUNERATION Each director of the Company who is not an employee of or consultant to the Company or any subsidiary (a "Non-Employee Director") receives $1,000 for each regular Board meeting attended and is reimbursed for all expenses relating to attendance at meetings. Under the Company's Amended and Restated 1994 Stock Option and Incentive Plan (the "Amended Plan"), each Non-Employee Director receives an automatic grant of options to acquire 30,000 shares of Common Stock, vesting in four equal annual installments, commencing on the first anniversary of the date of grant, at an exercise price per share equal to the market value on the date of grant. For Messrs. Baker, Huber and Waxman, such options were granted on January 3, 1996, the date the Amended Plan was approved by the Board. The exercise price for such options is $15.00 per share. For any future Non-Employee Director, such options will be deemed granted on the date such person becomes a Board member. Directors who are employees of or consultants to the Company do not receive compensation for serving as directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors currently consists of James J. Baker, Michael W. Huber and Albert S. Waxman. None of these individuals has ever served as an officer or an employee of the Company. Except as described below, no executive officer of the Company has ever served as (i) a member of the compensation committee or equivalent of another entity, one of whose executive officers served on the Company's Compensation Committee, (ii) a director of another entity, one of whose executive officers served on the Company's Compensation Committee, or (iii) a member of the compensation committee or equivalent of another entity, one of whose executive officers served as a director of the Company. Dr. Waxman is a director of Norland Corp. and EICON, and Reynald G. Bonmati is a director of Norland Corp. and a member of the Compensation Committee of the Board of Directors of EICON. Mr. Bonmati, President and a director of the Company, is also an executive officer of Norland Corp. and EICON. Mr. Bonmati is a Managing Director of NMS BV and President and a director of Novatech Management Corporation, the general partner of Norland Partners, L.P. and the voting trustee for 41.2% of the outstanding stock of NMS BV. Dr. Waxman is also a Managing Director of NMS BV, and the Chairman, a director and 50% stockholder of Novatech Management Corporation. Mr. Baker's wife and Mr. Huber are limited partners of Novatech Ventures, L.P., which is a limited partner in Norland Partners, L.P. See "Certain Transactions." 39 EXECUTIVE COMPENSATION The following table provides, for the periods indicated, certain summary information concerning the cash and non-cash compensation earned by or awarded to the Company's President (the Chief Executive Officer) and each of the four other most highly compensated executive officers who were serving as executive officers as of December 31, 1995 (collectively, the "named executive officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS -------------- ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) COMPENSATION ($) - ----------------------------------------------- --------- ---------- ---------- -------------- ---------------- Reynald G. Bonmati............................. 1995 $ 100,000 $ 100,000 0 $ 0 Chairman of the Board, 1994 100,000 0 750,000 0 President and Treasurer John W. Buckman................................ 1995 21,667 0 0 27,000(2) Vice President, Finance, and 1994 50,000 0 6,000 0 Secretary Ralph G. Theodore.............................. 1995 29,700 0 0 0 Vice President, Operations and 1994 26,000 0 6,000 0 Assistant Secretary Thomas P. Regan................................ 1995 155,529 0 0 0 Vice President, 1994 113,409 0 75,000 0 U.S. Sales James A. Sperlazza............................. 1995 326,602 0 0 0 Vice President, Latin American and Pacific Rim 1994 271,241 0 75,000 0 Sales
- ------------------------------ (1) Represents shares of Common Stock issuable upon exercise of options granted to the named executive officers. (2) Consists of a $15,000 interest-free loan forgiven by the Company in May 1995 and a $12,000 payment for a four-month rental by the Company of a house owned by Mr. Buckman. EMPLOYMENT AGREEMENTS The Company does not have employment agreements with any of the named executive officers. OPTION GRANTS/EXERCISES IN 1995 No stock options were granted to any named executive officer in 1995. The following tables set forth certain information concerning the exercise of options to purchase Common Stock of the Company during 1995 and the value at December 31, 1995 of outstanding options held by each of the named executive officers. The unexercisable portions of such options vest in two equal installments, the first of which vested on January 1, 1996 and the second of which vests on January 1, 1997, except for Mr. Buckman, all of whose options have become exercisable. 40 OPTION EXERCISES IN 1995 AND VALUE OF OPTIONS AT DECEMBER 31, 1995
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS HELD AT FISCAL IN-THE- MONEY (1) OPTIONS YEAR END (#) AT FISCAL YEAR END ($)(2) SHARES ACQUIRED ON VALUE -------------------------- --------------------------- NAME EXERCISE (#)(3) REALIZED ($)(4) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------ --------------------- ------------------- ----------- ------------- ------------ ------------- Reynald G. Bonmati 0 $ 0 375,000 375,000 $ 5,812,275 $ 5,812,350 John W. Buckman 0 0 3,000 3,000 46,498 46,498 Ralph G. Theodore 0 0 3,000 3,000 46,498 46,498 Thomas P. Regan 0 0 37,500 37,500 581,231 581,231 James A. Sperlazza 0 0 37,500 37,500 581,231 581,231
- ------------------------------ (1) Options are "in-the-money" if the closing market price of the Company's Common Stock exceeds the exercise price of the options. (2) The value of unexercised options represents the difference between the exercise price of such options and $15.50, the closing market price of the Company's Common Stock on December 31, 1995. (3) Represents the number of shares received upon exercise or, if no shares were received, the number of shares with respect to which the options were exercised. (4) The value of exercised options represents the difference between the exercise price of such options and the closing market price of the Company's Common Stock on the date of exercise. STOCK OPTION PLAN The Company was incorporated in December 1993 and commenced operations in January 1994. In January 1994, the Company's Board of Directors adopted the 1994 Stock Option Plan, which was approved by the Company's stockholders in May 1994. Certain amendments were approved in June 1994. On January 3, 1996, the Board adopted the Amended Plan, subject to stockholder approval. The Company's stockholders approved the Amended Plan at the Annual Meeting of Stockholders held on May 30, 1996. Under the Amended Plan, awards may be granted with respect to an aggregate of 1,800,000 shares of Common Stock. As of June 1, 1996, options had been granted with respect to 1,435,500 shares (of which options for 734,250 shares had been exercised and options for 701,250 shares were outstanding) and 364,500 shares were available for additional awards. The purpose of the Amended Plan is to provide directors, officers, key employees and consultants with additional incentives by increasing their ownership interests in the Company. Directors, officers and other key employees of and consultants to the Company and its subsidiaries are eligible to participate in the Amended Plan. Awards may be granted by the Compensation Committee of the Board of Directors and may include: (i) options to purchase shares of Common Stock, including incentive stock options ("ISOs"), non- qualified stock options or both; and (ii) stock appreciation rights ("SARs"), whether in conjunction with the grant of stock options or independent of such grant, or SARs that are only exercisable in the event of a change in control of the Company or upon other events. Awards are not assignable or transferable except by the laws of descent and distribution. Under the Amended Plan, each Non-Employee Director receives an automatic grant of options to purchase 30,000 shares of Common Stock. The Non-Employee Directors are not eligible for any other awards under the Amended Plan. See "Management -- Directors' Remuneration." The Compensation Committee of the Board of Directors, which administers the Amended Plan, is required to consist of two or more directors who qualify as disinterested persons within the meaning of Rule 16b-3 under the Exchange Act. The Compensation Committee has the authority, among other things, to: (i) select the officers and other key employees and consultants entitled to receive awards under the Amended Plan; (ii) determine the type or types of awards; (iii) determine the number of shares of Common Stock or rights covered by an award; and (iv) determine the terms and conditions of any awards granted under the Amended Plan, including any restrictions or limitations on transfer, any vesting schedules or the acceleration thereof and any forfeiture provisions or waivers thereof. The exercise price at which shares of Common Stock may be purchased pursuant to the grant of stock options under the Amended Plan and the 41 grant price of an SAR are determined by the Compensation Committee at the time of grant. In no event may any one individual receive in any one year options for, or SARs which relate to, more than 180,000 shares of Common Stock. The Amended Plan will remain in effect until terminated by the Board of Directors. The Amended Plan may be amended by the Board of Directors without the consent of the stockholders of the Company, except that any amendment, although effective when made, will be subject to stockholder approval at or before the annual meeting of stockholders following approval by the Board of Directors if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. The grant of an option or SAR will create no tax consequences for the grantee or the Company. A grantee will not have taxable income upon exercising an ISO (except that the alternative minimum tax may apply) and the Company will receive no deduction at that time. Upon exercising a non-qualified option, the participant must generally recognize ordinary income equal to the difference between the exercise price and fair market value of the stock received. Upon exercise of a SAR, the participants must generally recognize ordinary income equal to any cash received and the fair market value of any stock received. In each case, the Company will be entitled to a deduction equal to the amount recognized as ordinary income by the participant. A participant's disposition of shares acquired upon the exercise of an option or SAR generally will result in capital gain or loss measured by the difference between the sale price and the participant's tax basis in such shares (or the exercise price of the option in the case of shares acquired by exercise of an ISO and held for the applicable ISO holding periods). Generally, there will be no tax consequences to the Company in connection with a disposition of shares acquired under an option or other award, except that the Company will be entitled to a deduction (and the participant will recognize ordinary taxable income) if shares acquired upon exercise of an ISO are disposed of before the applicable ISO holding periods have been satisfied. Different tax rules may apply with respect to participants who are subject to Section 16 of the Exchange Act when they acquire stock in a transaction deemed to be a nonexempt purchase under Section 16, upon disposition of a derivative security or the underlying stock within six months after the exempt grant of such derivative security under the Amended Plan or in other kinds of transactions under the Amended Plan (such as payment of the exercise price of an option by surrender of previously acquired Common Stock). The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code, which generally disallows a public company's tax deduction for compensation to the chief executive officer and the four other most highly compensated executive officers in excess of $1 million in any tax year beginning on or after January 1, 1994. Compensation that qualifies as "performance-based compensation" is excluded from the $1 million deductibility cap, and therefore remains fully deductible by the company that pays it. The Company intends that options and SARs granted with an exercise price at least equal to 100% of fair market value of the underlying stock at the date of grant will qualify as such "performance-based compensation." RETIREMENT PLANS Pursuant to the Norland Medical Systems, Inc. 401(k) Profit Sharing Plan, eligible employees may elect to contribute a portion of their salary on a pre-tax basis. With respect to employee contributions of up to 7% of salary, the Company makes a contribution at the rate of 25 cents on the dollar. The Company may also make additional discretionary contributions for any year. Contributions are subject to applicable limitations contained in the Internal Revenue Code. Employees are at all times vested in their own contributions; Company matching contributions vest gradually over six years of service. 42 CERTAIN TRANSACTIONS TRANSACTIONS INVOLVING THE MANUFACTURERS The Company is a distributor of bone densitometers manufactured by the Manufacturers (Norland Corp. and Stratec). All of the outstanding stock of the Manufacturers is owned by NMS BV. Certain officers and directors of the Company, and certain other persons who have significant relationships with the Company, have direct and indirect material interests in or relationships with the Manufacturers and/or NMS BV. The Company has no ownership interest in NMS BV. The following is a list of those officers, directors and other persons who have specified relationships to the Company, a description of their relationships to the Company immediately prior to this offering and a description of the interests of those persons in NMS BV or the Manufacturers.
PERSON RELATIONSHIP TO COMPANY RELATIONSHIP TO MANUFACTURER/NMS BV - ------------------------ ------------------------------------------- ------------------------------------------- Norland Partners, L.P. -Owner of 11.4% of the Company's Common -Owner of 41.2% of outstanding capital Stock. stock of NMS BV. -Novatech Management Corporation ("Novatech -Novatech Management is a voting trustee Management") is the sole general partner. for the 41.2% of NMS BV held by Norland Partners and the 8.8% of NMS BV held by Nissho Iwai Corporation and Nissho Iwai American Corporation. Novatech Ventures, L.P. -Owner of 3.8% of the Company's Common -Limited partner of Norland Partners. Stock. -Novatech Resource Corporation ("Novatech Resource") is the sole general partner. -Limited partner of Norland Partners, L.P. ("Norland Partners"). Reynald G. Bonmati -President (chief executive officer), -One of three Managing Directors of NMS BV. Director and Treasurer. -Direct owner of 8.2% of the Company's -President and a Director of Norland Corp. Common Stock -President, Director and 50% stockholder of -President, Director and 50% stockholder of Novatech Management. Novatech Management. -President, Director and principal -President, Director and principal stockholder of Novatech Resource. stockholder of Novatech Resource. -Limited partner of Novatech Ventures. -Limited partner of Novatech Ventures. Albert S. Waxman -Director. -One of three Managing Directors -Chairman, Director and 50% stockholder of of NMS BV. Novatech Management. -Director of Norland Corp. -Chairman, Director and 50% stockholder of Novatech Management. Hans Schiessl -Owner of 21.8% of outstanding Common -One of three Managing Directors of NMS BV. Stock. -Owner of 50% of outstanding capital stock of NMS BV. -President of Stratec. James J. Baker -Wife is limited partner of Novatech -Wife is limited partner of Novatech Ventures. Ventures. Michael W. Huber -Limited partner of Novatech Ventures. -Limited partner of Novatech Ventures.
43 Under the Company's Distribution Agreement with the Manufacturers, the Company has rights to exclusive worldwide distribution of all current and future medical diagnostic products developed or manufactured by Norland Corp. or Stratec. The Company's purchases from Norland Corp. and Stratec in 1995 were $4,012,468 and $9,294,825, respectively. Sales of Norland Corp. products and services by the Company to Stratec in 1995 were $889,982. The Company is party to the Product Development Loan Agreement with Manufacturers, under which the Company may make loans to the Manufacturers in installments up to an aggregate amount of $3.5 million during the period ending July 31, 1997. The proceeds of any such loans are to be used by the Manufacturers for specific new product development involving enhancements of existing products and the application of pQCT technology to new products. The loans will bear interest at the rate of 10% per annum, and the principal will be payable in twenty equal quarterly installments commencing September 30, 1997. At May 1, 1996, there were outstanding loans of $75,906 from the Company to Norland Corp. If a new product covered by the Product Development Loan Agreement is introduced into the marketplace, the Company will be entitled to receive a royalty equal to 5% of the sales proceeds received by the Manufacturers with respect to such product. The Manufacturers have also granted the Company rights of first refusal with respect to any additional financing of research and development work by the Manufacturers. The Company subleases office space from Norland Corp. in Fort Atkinson, Wisconsin. Rent is allocated between Norland Corp. and the Company on a pro rata basis (based on square footage). The lease and sublease expire on June 30, 1996. Effective July 1, 1996, the Company will lease approximately 18,000 square feet of space in the building where Norland Corp. presently leases space. The lease will have a term of ten years. The Company will sublet approximately 14,000 square feet of this space to Norland Corp. for the full term of the lease, with the rent to be prorated on a square footage basis. In February 1996, Mr. Bonmati made a $1,000,000 loan to Stratec. This loan bears interest at the rate of 7% per annum payable quarterly and is payable in full on December 31, 1996. Mr. Bonmati and Mr. Schiessl are the owners of a building in Pforzheim, Germany, part of which will be leased to Stratec. LOANS AND ADVANCES In 1994, Novatech Ventures made loans to the Company in the aggregate principal amount of $500,000, payable on demand and bearing interest at 10% per annum. In addition to the relationships with regard to Novatech Ventures described above, Catherine Bonmati, the wife of Reynald G. Bonmati, is trustee of trusts for the benefit of Sandrine Bonmati and Chrystele Bonmati, which, together, own 20% of the outstanding capital stock of Novatech Resource, general partner of Novatech Ventures, and are limited partners in Novatech Ventures. The loan was repaid in January 1995. Also in 1994, Dr. Waxman lent $250,000 to the Company on the same terms as the loan by Novatech Ventures and Mr. Bonmati made $50,000 of interest-free advances to the Company. These loans and advances were repaid in full in June and December of 1995, respectively. On February 22, 1995, the Company made an interest-free loan to Mr. Buckman in the principal amount $15,000. Such loan was payable on demand and was forgiven by the Company in May 1995. OTHER TRANSACTIONS The Company leases its principal executive offices at 106 Corporate Park Drive, Suite 106, White Plains, New York 10604. The Company sublets a portion of this office space to an affiliate of EICON. Both the lease and sublease expire on August 31, 2000. The Company subleases office space in New Haven, Connecticut, from other affiliates of EICON. The New Haven lease and sublease expire on August 31, 1996. The White Plains and New Haven rents are and will be allocated between the EICON affiliates and the Company on a pro rata basis (based on square footage). Mr. Bonmati, President and a Director of the Company, is President and a Director of EICON. Dr. Waxman, a Director of the Company, is a Director of EICON. Novatech Ventures, L.P., which immediately prior to this offering owns 3.8% of the outstanding Common Stock of the Company and is a limited partner in Norland Partners, L.P. (the owner of 11.4% of the Company's outstanding Common Stock), is the owner of 24% of the outstanding stock of EICON. Novatech Ventures, L.P. and Mr. Bonmati hold warrants to purchase EICON stock. 44 In the year ended December 31, 1995, purchases by Nissho accounted for approximately 68% of the Company's revenues. Nissho received volume discounts for its purchases of systems in 1995. On April 2, 1996, Dove Medical Systems, which manufactured, marketed and sold the OsteoAnalyzer line of bone densitometers, was merged into a newly formed wholly-owned subsidiary of the Company (the "Merger"). Pursuant to the Merger, all of the issued and outstanding stock of Dove Medical Systems was exchanged for an aggregate of 161,538 shares of Common Stock. Following the Merger, the Company's subsidiary changed its name to Dove Medical Systems, Inc. At the time of the Merger, approximately 76% of the stock of Dove Medical Systems was owned by Robert L. Piccioni and Joan Piccioni, his wife. On April 2, 1996 the Company also entered into a Purchase Agreement with Dr. and Mrs. Piccioni, CHC, Inc. and Mirella Monti Belshe (the "Purchase Agreement") pursuant to which the Company purchased a patent and rights to technology and other property rights which were licensed to Dove in its business. The cash purchase price paid by the Company for such assets was $3,600,000. The Company transferred the purchased assets to Dove Medical Systems, Inc. Following the Merger, Joan Piccioni became President of, and Robert L. Piccioni became a consultant to, Dove Medical Systems, Inc. Dr. Piccioni became a director of the Company on May 30, 1996. Dr. and Mrs. Piccioni received 123,345 of the 161,538 shares of the Company's Common Stock issued in connection with the Merger. They also received an aggregate of $3,001,846 of the $3,600,000 paid by the Company pursuant to the Purchase Agreement. The holders of the Company's Common Stock issued in connection with the Merger, including Dr. and Mrs. Piccioni, received certain registration rights with respect to such stock. See "Description of Capital Stock -- Registration Rights." BYLAW PROVISION. The Company is in the process of amending its bylaws to provide that, before the Company may consummate certain "business combinations" with certain "related parties," the terms of the transaction must be approved by the affirmative vote of a majority of the Company's stockholders, including a majority of those stockholders who have no economic interest in such related party. See "Description of Capital Stock." 45 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of June 1, 1996 (except as otherwise indicated) by (i) each person known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) the Selling Stockholders, (iii) each of the Company's directors; (iv) each named executive officer and (v) all directors and named executive officers as a group. Except as otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING (1) AFTER OFFERING (1)(2) ----------------------- NUMBER OF SHARES ----------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT - -------------------------------------------------- ---------- ----------- ----------------- ---------- ----------- Reynald G. Bonmati (3) ........................... 1,612,500 23.3% 750,000 862,500 10.3 Premium Point New Rochelle, NY 10801 Albert S. Waxman (4), (5) ........................ 786,000 11.4 750,000 36,000 * 59 Wooster Street New York, NY 10012 Kurt W. Streams (5)............................... 0 -- 0 0 -- Ralph G. Theodore (6)............................. 4,500 * 0 4,500 * Thomas P. Regan (7)............................... 56,250 * 0 56,250 * James A. Sperlazza (8)............................ 0 -- 0 0 -- James J. Baker (5)................................ 0 -- 0 0 -- Michael W. Huber (5).............................. 0 -- 0 0 -- Robert L. Piccioni (9)............................ 123,345 1.8 0 123,345 1.5 All directors and officers of the Company as a group (9 persons) (3), (4), (7), (9)............. 1,796,595 26.1 750,000 1,046,595 12.5 Novatech Ventures, L.P. .......................... 264,000 3.8 0 264,000 3.1 Premium Point New Rochelle, NY 10801 Norland Partners, L.P. ........................... 786,000 11.4 750,000 36,000 * Premium Point New Rochelle, NY 10801 Hans Schiessl .................................... 1,500,000 21.8 0 1,500,000 17.9 Markgrafenstrasse 8 75117 Pforzheim Germany Oppenheimer Funds, Inc. (10) ..................... 459,000 6.7 0 459,000 5.5 Two World Trade Center Suite 3400 New York, NY 10048-0203 Strong Capital Management, Inc. (11) ............. 359,700 5.2 0 359,700 4.3 100 Heritage Reserve Menomonee Falls, Wisconsin 53051
- ------------------------ * Less than 1%. 46 (1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by any other person. (2) If the over-allotment option is exercised in full by the Underwriters, Norland Partners, L.P. would sell an additional 36,000 shares of Common Stock and Novatech Ventures, L.P. would sell 264,000 shares of Common Stock. (3) Excludes 217,500 shares which may be acquired upon the exercise of options not exercisable within 60 days. Amount prior to this offering includes 786,000 shares held of record by Norland Partners, L.P. and 264,000 shares held of record by Novatech Ventures, L.P. that Mr. Bonmati may be deemed to beneficially own due to his relationship with such entities. Number of shares being offered consists of 750,000 shares being offered by Norland Partners, L.P. Mr. Bonmati is President and a principal stockholder of (i) Novatech Management Corporation, the general partner of Norland Partners, L.P., and (ii) Novatech Resource Corporation, the general partner of Novatech Ventures, L.P. Mr. Bonmati is also a limited partner of Novatech Ventures, L.P. Such beneficial ownership is disclaimed by Mr. Bonmati, except to the extent of his proportionate interest in such limited partnerships. (4) Amount prior to this offering consists of 786,000 shares held of record by Norland Partners, L.P. that Dr. Waxman may be deemed to beneficially own due to his relationship with such entity. Number of shares being offered consists of 750,000 shares being offered by Norland Partners, L.P. Dr. Waxman is Chairman of the Board and a principal stockholder of Novatech Management Corporation, the general partner of Norland Partners, L.P. Such beneficial ownership is disclaimed by Dr. Waxman, except to the extent of his proportionate interest in such limited partnership. (5) Excludes 30,000 shares which may be acquired upon the exercise of options not exercisable within 60 days. (6) Excludes 1,500 shares which may be acquired upon the exercise of options not exercisable within 60 days. (7) Includes 3,750 shares of Common Stock issuable pursuant to stock options exercisable within 60 days. Excludes 18,750 shares which may be acquired upon the exercise of options not exercisable within 60 days. (8) Excludes 18,750 shares which may be acquired upon the exercise of options not exercisable within 60 days. (9) Shares owned by Robert L. Piccioni and Joan Piccioni, his wife. Excludes 30,000 shares which may be acquired upon the exercise of options granted to Mr. Piccioni and 37,500 shares which may be acquired upon the exercise of options granted to Mrs. Piccioni, none of which are exercisable within 60 days. (10) Information is as of December 31, 1995, based on Schedule 13D filed with the Securities and Exchange Commission. Oppenheimer Funds, Inc. reported shared dispositive power with respect to 459,000 shares, and Oppenheimer Discovery Fund reported sole voting power and shared dispositive power with respect to 450,000 shares. (11) Information as of December 31, 1995, based on Schedule 13D filed with the Securities and Exchange Commission. Strong Capital Management, Inc. and Richard S. Strong reported sole voting power with respect to 352,200 shares and sole dispositive power with respect to 359,700 shares. 47 DESCRIPTION OF CAPITAL STOCK The following description does not purport to be complete and is qualified in its entirety by this reference to the Company's Restated Certificate of Incorporation (the "Charter") and bylaws, copies of which are filed as an exhibit to the Registration Statement of which this Prospectus is a part. AUTHORIZED AND OUTSTANDING COMMON STOCK As of the date of this Prospectus, the Company is authorized to issue 10,000,000 shares of Common Stock, $0.0005 par value per share. As of May 1, 1996, there were an aggregate of 6,895,788 shares of Common Stock outstanding. After completion of the offering pursuant to this Prospectus, 8,395,788 shares of Common Stock will be issued and outstanding (8,433,288 shares if the Underwriters over-allotment option is exercised in full). The issued and outstanding shares of Common Stock are and, upon payment therefor, the shares being offered hereby will be, validly issued, fully paid and nonassessable. The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. The Company has not paid dividends on the Common Stock and does not currently anticipate paying dividends. See "Dividend Policy." The shares of Common Stock are neither redeemable nor convertible, and the holders thereof have no preemptive or subscription rights to purchase any securities of the Company. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the assets of the Company which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of holders of Preferred Stock, if any, then outstanding. Each outstanding share of Common Stock is entitled to one vote on all matters submitted to a vote of stockholders. There is no cumulative voting. PREFERRED STOCK As of the date of this Prospectus, the Company is authorized to issue 1,000,000 shares of Preferred Stock, $0.0005 par value per share, none of which are outstanding. The Charter of the Company expressly authorizes the Board of Directors, without further action by the Company's stockholders, from time to time, to issue authorized shares of Preferred Stock in one or more series and to determine the designations, preferences, qualifications, limitations or restrictions of any series, including without limitation, dividends rights, the price and terms and conditions on which shares may be redeemed, the amount payable in the event of voluntary or involuntary liquidation, the terms and conditions for conversion or voting rights and other terms. Any Preferred Stock so issued could dilute the voting power and equity of the holders of the Common Stock by, for example, reducing the amount of funds otherwise available for payment to holders of the Common Stock, either upon liquidation of the Company or as dividends, restricting the payment of dividends to holders of the Common Stock, and diluting the voting power of the holders of the Common Stock. UNISSUED AND UNRESERVED CAPITAL STOCK One of the effects of the existence of unissued and unreserved shares of capital stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of the Company's management. If, in the due exercise of its fiduciary obligations, for example, the Board of Directors were to determine that a takeover proposal were not in the Company's best interest, such shares could be issued by the Board of Directors without stockholder approval in one or more private placements or other transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquiror or insurgent stockholder group, by creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent Board of Directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS The Company has included in the Charter and in its by-laws provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the General Corporation Law of Delaware (the "DGCL") and (ii) indemnify its directors and 48 officers to the fullest extent permitted by the DGCL, including circumstances in which indemnification is otherwise discretionary. The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. The Company elected on June 2, 1995 to exclude itself from the provisions of Section 203 of the DGCL ("Section 203"). Section 203 restricts certain transactions between a corporation organized under Delaware law (or its majority-owned subsidiaries) and any "interested stockholder" (as defined in Section 203) which includes, among others, any person holding 15% or more of the corporation's outstanding voting stock, together with the affiliates or associates of that stockholder (an "Interested Stockholder"). Section 203 prevents, for a period of three years following the date that a person becomes an Interested Stockholder, the following types of transactions between the Company and the Interested Stockholder (subject to certain exceptions specified in Section 203): (i) mergers or consolidations, (ii) sales, leases, exchanges or other transfers of 10% or more of the aggregate assets of the Company, (iii) issuance or transfers by the Company of any stock of the Company which would have the effect of increasing the Interested Stockholder's proportionate share of stock of any class or series of the Company, (iv) any other transaction which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series of the Company which is owned by the Interested Stockholder, and (v) receipt by the Interested Stockholder of the benefit (except proportionately as a stockholder) of loans, advances, guarantees, pledges or other financial benefits provided by the Company. Among the exceptions specified in Section 203 are transactions approved by (i) the Board of Directors prior to the time the Interested Stockholder obtained such status or (ii) the holders of two-thirds of the outstanding shares of each class or series of stock entitled to vote generally in the election of directors, excluding shares owned by the Interested Stockholder. The Company is in the process of amending its bylaws to provide that, before the Company may consummate a "business combination" with certain "related parties," the terms of the transaction must be approved by the affirmative vote of a majority of the Company's stockholders, including a majority of those stockholders who have no economic interest in such related party. A "related party" is any entity more than 20% of the voting securities of which (including rights to acquire such voting securities) are owned beneficially directly or indirectly, in aggregate, by (i) any director of the Company and (ii) any person who benefically owns, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, 20% or more of the outstanding capital stock of the Company. The types of "business combinations" that will be subject to these requirements are any of the following transactions in which the total value of the consideration received by the related party or its equity owners exceeds the lesser of 20% of the value of the Company's assets (on a consolidated basis) as of the end of its most recently ended fiscal quarter or 20% of the Company's revenues (on a consolidated basis) for the four most recently ended fiscal quarters: (i) any merger or consolidation with the Company or any subsidiary; (ii) any acquisition by the Company or any subsidiary of securities issued by the related party; (iii) any acquisition of assets by the Company or any subsidiary from the related party; and (iv) any transaction that results in the issuance or transfer by the Company or any subsidiary of any securities of the Company or such subsidiary (including securities convertible or exchangeable into stock and options or other rights to purchase stock, but excluding stock issued upon the exercise of any such conversion or exchange rights or of the exercise of any such options or other rights). The term "business combination" shall not include transactions pursuant to the Distribution Agreement or the Product Development Loan Agreement. REGISTRATION RIGHTS The Company, Robert L. Piccioni and Joan Piccioni entered into a Registration Rights Agreement dated as of April 2, 1996 (the "Registration Rights Agreement") in connection with the Company's acquisition by merger of Dove. See "Certain Transactions." Under the Registration Rights Agreement, Robert L. Piccioni and Joan Piccioni and the other former stockholders of Dove (the "Holders") are entitled to demand and incidental registration rights with respect to the registration under the Securities Act of the 161,538 shares of Common Stock of the Company that they received in connection with the Dove acquisition. The Holders may exercise their demand and registration rights for a period beginning two years after the effective date of the Dove acquisition, or such earlier date, if any, as the termination without cause of the employment of Robert L. Piccioni or Joan Piccioni with the Company or a material adverse change by the 49 Company of the terms or location of their employment with the Company. The registration rights terminate at such time as the Common Stock acquired in the Dove acquisition may be sold by the Holders pursuant to Rule 144 under the Securities Act. TRANSFER AGENT AND REGISTER The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have approximately 8,395,788 shares of the Common Stock outstanding (8,433,288 shares if the over-allotment option is exercised in full). Of these shares, the 2,250,000 shares of Common Stock sold in this offering (2,587,500 shares if the over-allotment option is exercised in full), will be freely tradeable, without restriction under the Securities Act, except for any such shares which may be acquired by an affiliate of the Company (an "Affiliate"), as that term is defined in Rule 144, which shares will be subject to the resale limitations of Rule 144. After the completion of the offering approximately 2,639,538 outstanding shares (2,339,538 shares if the over-allotment option is exercised in full) are "restricted" securities within the meaning of Rule 144. Approximately 678,000 restricted shares will be available for immediate sale in the public market in reliance upon Rule 144 or Rule 701 promulgated under the Securities Act and the remaining approximately 1,961,538 restricted shares will not be transferable pursuant to Rule 144 until the expiration of their respective two-year holding periods. The Selling Stockholders and officers and directors of the Company (owning an aggregate of approximately 3,250,000 shares of Common Stock immediately prior to the offering) have agreed pursuant to lock-up agreements with the Underwriters not to offer, sell or otherwise dispose of any shares of Common Stock before 120 days after effectiveness of the Registration Statement for the shares of Common Stock offered hereby without the consent of UBS Securities LLC. See "Underwriting." In general, under Rule 144 as currently in effect, if a period of at least two years has elapsed between the later of the date restricted shares (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an Affiliate, then the holder of such restricted shares (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding shares of the Common Stock (approximately 83,400 shares immediately after this offering), and (ii) the average weekly reported volume of trading of the Common Stock during the four calendar weeks preceding the date on which the notice of such sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Under Rule 144(k), if a period of at least three years has elapsed between the later of the date on which restricted shares were acquired from the Company and the date on which they were acquired from an Affiliate, a holder of such restricted shares who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. Under proposed amendments to Rule 144, the two and three year holding periods referred to above would be reduced to one year and two years, respectively. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers up to the date the Company became subject to the reporting requirements of the Exchange Act pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, such securities may be sold (i) by persons other than Affiliates, subject only to the manner of sale provisions of Rule 144 and (ii) by Affiliates under Rule 144 without compliance with its 50 two-year minimum holding period requirements. An aggregate of 678,000 shares of Common Stock issuable upon exercise of outstanding options may, following exercise of such options, be sold immediately pursuant to Rule 701. An aggregate of 701,250 shares of Common Stock are subject to issuance upon exercise of outstanding stock options. The Company intends to file a registration statement on Form S-8 to register shares issuable under the Company's Amended Plan. See "Management -- Stock Option Plan." Options for approximately 26,250 shares of the outstanding options are vested. When such registration statement becomes effective, shares issued upon exercise of options pursuant to such plan will be freely tradeable in the public market, subject, in the case of Affiliates, to the volume, manner of sale, notice and public information requirements of Rule 144. Sales of significant amounts of the Common Stock could have an adverse impact on the market price of the Common Stock. 51 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom UBS Securities LLC and Pacific Growth Equities, Inc. are acting as representatives (the "Representatives"), have agreed to purchase from the Company and Norland Partners, L.P. the following respective number of shares of Common Stock:
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- ---------- UBS Securities LLC......................................................................... Pacific Growth Equities, Inc............................................................... Total..................................................................................
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriting Agreement contains certain provisions whereby if any Underwriter defaults in its obligation to purchase shares, and the aggregate obligations of the Underwriters so defaulting do not exceed 10% of the shares offered hereby, the remaining Underwriters, or some of them, must assume such obligations. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering of the shares of Common Stock, the offering price and other selling terms may be changed by the Underwriters. The Company and the Selling Stockholders have granted the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 337,500 additional shares of Common Stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company and the Selling Stockholders will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders pursuant to the Underwriters exercise (if any) of the over-allotment option. The Representatives have informed the Company that the Underwriters do not expect to confirm sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. 52 The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriter may be required to make in respect thereof. Pacific Growth Equities acted as Underwriter for the Company's initial public offering in August 1995. The Selling Stockholders and officers and directors of the Company (owning an aggregate of approximately 3,250,000 shares of Common Stock immediately prior to the offering) have entered into lock-up agreements with the Underwriters which provide that they will not offer, sell or otherwise dispose of any of the Company's Common Stock for a period of 120 days after effectiveness of the Registration Statement for the shares of Common Stock offered hereby without the prior written consent of UBS Securities LLC. The Company has agreed that it will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock for a period of 180 days after the date of this Prospectus, except that the Company may grant additional options under its stock option plans, or issue shares upon the exercise of outstanding stock options. See "Shares Eligible for Future Sale." Certain of the Underwriters that currently act as market makers for the Company's Common Stock may engage in "passive market making" in such securities on Nasdaq in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed to engage in limited market making transactions during the period when Rule 10b-6A under the Exchange Act would otherwise prohibit that activity (the "cooling off period"). It prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or effecting a purchase at a price that exceeds the highest bid for those securities displayed on Nasdaq by a market maker that is not participating in the distribution. Under Rule 10b-6A, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of that underwriter's or selling group member's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the registration statement under the Securities Act pertaining to the security to be distributed. Certain Underwriters intend to engage in passive market making in the Company's Common Stock during the cooling off period pursuant to Rule 10b-6A. LEGAL MATTERS The validity of the shares of the Common Stock offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, San Francisco, California. EXPERTS The financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited (i) by Coopers & Lybrand L.L.P. for the Company as of and for the years ended December 31, 1994 and 1995, (ii) by Schweizerische Treuhandgesellschaft - Coopers & Lybrand AG for OBV as of and for the year ended December 31, 1993, and (iii) by Hurley & Company for Dove Medical Systems as of and for the years ended December 31, 1994 and 1995, each independent public accountants, as indicated in their reports with respect thereto, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 53 INDEX TO FINANCIAL STATEMENTS
PAGE --------- AUDITED FINANCIAL STATEMENTS: NORLAND MEDICAL SYSTEMS, INC. Report of Independent Accountants.......................................................................... F-2 Financial Statements: Balance Sheets as of December 31, 1995 and 1994.......................................................... F-3 Statements of Income for the years ended December 31, 1995 and 1994...................................... F-4 Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1994............. F-5 Statements of Cash Flows for the years ended December 31, 1995 and 1994.................................. F-6 Notes to Financial Statements............................................................................ F-7 OSTECH B.V. Report of Independent Accountants.......................................................................... F-13 Financial Statements: Statement of Income (Loss) for the year ended December 31, 1993.......................................... F-14 Statement of Cash Flows for the year ended December 31, 1993............................................. F-15 Notes to Financial Statements............................................................................ F-16 DOVE MEDICAL SYSTEMS Report of Independent Accountants.......................................................................... F-20 Financial Statements: Balance Sheets as of December 31, 1995 and 1994.......................................................... F-21 Statements of Income for the years ended December 31, 1995 and 1994...................................... F-22 Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1994............. F-23 Statements of Cash Flows for the years ended December 31, 1995 and 1994.................................. F-24 Notes to Financial Statements............................................................................ F-25 UNAUDITED FINANCIAL STATEMENTS: NORLAND MEDICAL SYSTEMS, INC. Condensed Balance Sheets as of March 31, 1996 and 1995..................................................... F-29 Condensed Statements of Income for the three months ended March 31, 1996 and 1995.......................... F-30 Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and 1995...................................................................................................... F-31 Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1995...................... F-32 Notes to Condensed Financial Statements.................................................................... F-33 DOVE MEDICAL SYSTEMS Condensed Balance Sheets as of March 31, 1996 and 1995..................................................... F-34 Condensed Statements of Income for the three months ended March 31, 1996 and 1995.......................... F-35 Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and 1995...................................................................................................... F-36 Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1995...................... F-37 Notes to Condensed Financial Statements.................................................................... F-38 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS: NORLAND MEDICAL SYSTEMS, INC. Pro Forma Combined Condensed Balance Sheet as of March 31, 1996............................................ F-40 Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1995 and for the three months ended March 31, 1996............................................................................... F-41 Notes to the Pro Forma Combined Condensed Financial Statements............................................. F-42
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Norland Medical Systems, Inc.: We have audited the accompanying balance sheets of Norland Medical Systems, Inc. (formerly Ostech, Inc.) as of December 31, 1995 and 1994, and the related statements of income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Company, as disclosed in the financial statements, has extensive transactions and relationships with related parties. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Norland Medical Systems, Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 4, 1996, except for Note 14, for which the date is June 4, 1996. F-2 NORLAND MEDICAL SYSTEMS, INC. BALANCE SHEETS DECEMBER 31, 1995 AND 1994 ASSETS
1995 1994 ------------- ------------ Current assets: Cash and cash equivalents.......................................................... $ 19,218,865 $ 554,732 Accounts receivable, net (Note 3).................................................. 4,571,520 1,872,494 Accounts receivable -- affiliate (Note 3).......................................... 180,253 303,353 Inventories (Note 4)............................................................... 798,484 -- Prepaid expenses and other current assets.......................................... 68,989 21,350 ------------- ------------ Total current assets............................................................. 24,838,111 2,751,929 ------------- ------------ Product development loan receivable -- affiliate (Note 5)............................ 48,519 -- ------------- ------------ Total assets..................................................................... $ 24,886,630 $ 2,751,929 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable -- stockholders (Note 6)............................................. $ -- $ 750,000 Stockholder advances (Note 6)...................................................... -- 50,000 Accounts payable -- Stratec (Note 7)............................................... 2,139,656 605,995 Accounts payable -- Norland (Note 7)............................................... 493,424 1,086,163 Accounts payable -- trade.......................................................... 32,000 -- Accrued expenses................................................................... 361,003 46,727 Income taxes payable............................................................... 1,305,037 27,000 Customer deposits.................................................................. 34,664 118,000 ------------- ------------ Total current liabilities........................................................ 4,365,784 2,683,885 ------------- ------------ Stockholders' equity (Notes 8 and 14): Common stock, par value of $0.0005 per share -- 10,000,000 shares authorized, 6,000,000 shares issued and outstanding........................................... 3,000 1,500 Additional paid-in capital......................................................... 18,349,813 -- Stock subscriptions receivable..................................................... -- (1,000) Retained earnings.................................................................. 2,168,033 67,544 ------------- ------------ Total stockholders' equity....................................................... 20,520,846 68,044 ------------- ------------ Total liabilities and stockholders' equity....................................... $ 24,886,630 $ 2,751,929 ------------- ------------ ------------- ------------
The accompanying notes are an integral part of the financial statements. F-3 NORLAND MEDICAL SYSTEMS, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ------------- ------------- Revenue (including sales to an affiliate of $889,982 and $631,523 in 1995 and 1994, respectively)..................................................................... $ 18,243,808 $ 10,041,548 Cost of revenue.................................................................... 12,508,809 6,517,701 One-time distribution agreement costs (Note 2)..................................... -- 1,922,247 ------------- ------------- Gross profit................................................................... 5,734,999 1,601,600 Sales and marketing expense........................................................ 1,651,125 973,208 General and administrative expense (including an overhead charge from an affiliate of $22,360 and $150,000 in 1995 and 1994, respectively)........................... 960,368 526,364 ------------- ------------- Operating income................................................................... 3,123,506 102,028 Other income (expense): Interest income.................................................................. 443,653 -- Other expense.................................................................... (30,670) (6,984) ------------- ------------- 412,983 (6,984) ------------- ------------- Income before income taxes....................................................... 3,536,489 95,044 Provision for income taxes (Note 10)............................................... 1,436,000 27,000 ------------- ------------- Net income..................................................................... $ 2,100,489 $ 68,044 ------------- ------------- ------------- ------------- Net income per common and common equivalent share.................................. $ 0.40 $ 0.02 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements. F-4 NORLAND MEDICAL SYSTEMS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
COMMON PAID-IN STOCK RETAINED TOTAL SHARES STOCK CAPITAL SUBSCRIPTIONS EARNINGS ------------- ---------- ----------- ------------- ------------- ------------ Issuance of 1,000 shares of common stock.............................. $ -- 1,000 $ 10 $ 990 $ (1,000) $ -- 2,000-for-1 stock split on June 2, 1995 (Note 8)...................... -- 1,999,000 990 (990) -- -- 3-for-2 stock split on June 13, 1996 (Note 14).......................... -- 1,000,000 500 -- -- (500) Net income.......................... 68,044 -- -- -- -- 68,044 ------------- ---------- ----------- ------------- ------------- ------------ Balance as of December 31, 1994..... 68,044 3,000,000 1,500 -- (1,000) 67,544 Proceeds from common stock subscription....................... 1,000 -- -- -- 1,000 -- Issuance of 2,000,000 shares of common stock on August 2, 1995, net of costs and expenses directly related to the offering (Note 8)... 18,351,313 2,000,000 1,000 18,350,313 -- -- 3-for-2 stock split on June 13, 1996 (Note 14).......................... -- 1,000,000 500 (500) -- -- Net income.......................... 2,100,489 -- -- -- -- 2,100,489 ------------- ---------- ----------- ------------- ------------- ------------ Balance as of December 31, 1995..... $ 20,520,846 6,000,000 $ 3,000 $ 18,349,813 $ -- $ 2,168,033 ------------- ---------- ----------- ------------- ------------- ------------ ------------- ---------- ----------- ------------- ------------- ------------
The accompanying notes are an integral part of the financial statements. F-5 NORLAND MEDICAL SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ------------- ------------- Cash flows from operating activities: Net income........................................................................ $ 2,100,489 $ 68,044 ------------- ------------- Adjustments to reconcile net income to net cash used in operating activities: Provision for doubtful accounts................................................. 150,000 -- Amortization expense............................................................ 17,415 -- Changes in: Accounts receivable........................................................... (2,725,926) (2,175,847) Inventories................................................................... (815,899) -- Prepaid expenses and other current assets..................................... (47,639) (21,350) Accounts payable.............................................................. 972,922 1,692,158 Accrued expenses.............................................................. 314,276 46,727 Income taxes payable.......................................................... 1,278,037 27,000 Customer deposits............................................................. (83,336) 118,000 ------------- ------------- Total adjustments........................................................... (940,150) (313,312) ------------- ------------- Net cash provided by (used in) operating activities......................... 1,160,339 (245,268) ------------- ------------- Cash flows from financing activities: Product development loan to affiliate............................................. (48,519) -- ------------- ------------- Net cash used in investing activities......................................... (48,519) -- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock, net....................................... 18,351,313 -- Proceeds from common stock subscriptions.......................................... 1,000 -- Notes payable to stockholders..................................................... (750,000) 750,000 Stockholder advances.............................................................. (50,000) 50,000 ------------- ------------- Net cash provided by financing activities..................................... 17,552,313 800,000 ------------- ------------- Net increase in cash................................................................ 18,664,133 554,732 Cash and cash equivalents at beginning of year...................................... 554,732 -- ------------- ------------- Cash and cash equivalents at end of year............................................ $ 19,218,865 $ 554,732 ------------- ------------- ------------- ------------- Noncash financing activities: The $18,351,313 net proceeds of the initial public offering represents the $21,000,000 of gross proceeds less the costs and expenses directly related to the offering of $2,648,687. During 1994, the Company issued common stock having an aggregate par value of $1,000 in return for stock subscriptions receivable of $1,000. Cash paid for: 1995 1994 ------------- ------------- Income taxes...................................................................... $ 157,963 $ 0 ------------- ------------- ------------- ------------- Interest.......................................................................... $ 10,342 $ 0 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements. F-6 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: COMPANY'S ACTIVITIES Norland Medical Systems, Inc. ("NMS" or the "Company") distributes devices which aid in the detection and monitoring of bone diseases, and in the assessment of the effect of existing and potential therapies for the treatment of such diseases throughout the world to hospitals, clinics, research institutions, pharmaceutical companies and individual practitioners. The Company primarily sells through medical product distributors in foreign (non-U.S.) countries, and directly to end users in the United States. CORPORATE STRUCTURE NMS was incorporated on December 21, 1993 as Ostech, Inc. to be the exclusive marketer and distributor of certain medical products and technologies of Norland Corporation (U.S.) and Stratec Medizintechnik GmbH (Germany) ("Stratec") (jointly "manufacturers"). The Company commenced operations January 1, 1994 as the exclusive distributor of Norland Corporation products for all markets of the world and for Stratec products for all markets of the world except Europe and the Middle East. The Company changed its name to Norland Medical Systems, Inc. effective October 10, 1995. Both Norland Corporation and Stratec have been wholly-owned subsidiaries of Norland Medical Systems B.V. (Netherlands) since 1992. Certain shareholders of NMS are shareholders of Norland Medical Systems B.V. and own 91.2% of that company. Nissho Iwai American Corporation ("Nissho Iwai"), a major customer of NMS, and its affiliate own the remaining 8.8% of Norland Medical Systems B.V. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. REVENUE AND COST RECOGNITION NMS purchases merchandise and services from the manufacturers on the basis of sales orders in hand. NMS invoices customers and is invoiced by the manufacturers when the product is shipped. Revenue is recognized at the time of shipment. Management believes the gross profit recognized by NMS materially approximates that which would have been realized had the Company used unaffiliated suppliers. The manufacturers offer one-year warranties on both the hardware and software included in their systems. The Company provides warranty services on behalf of the manufacturers. Costs for returns and exchanges are borne by the respective manufacturer, not the Company. The Company invoices the manufacturer for the costs of performing such warranty services. The Company has no obligations to provide any other services to any of its sub-distributors or their customers. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. The Company had no such instruments and the cash reflected on the balance sheets reflects only cash in the Company's bank accounts, a short-term time deposit and an investment in a money market mutual fund. INVENTORY Based on the shipping terms and when product title is transferred with its suppliers and customers, NMS does not generally maintain finished goods inventory. F-7 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) From time to time, the Company may judge it desirable for marketing purposes to provide a device to a prominent scientist or research institution specializing in the study of bone disease until the device is eventually returned to be sold. In such cases, the Company will carry the device in inventory at cost less amortization expense calculated on a straight-line basis over thirty-six months. In addition, the Company will occasionally rent a device in anticipation of an eventual sale following satisfactory use by the customer. In such cases, the Company will carry the device in inventory at its net realizable value until the time of the sale. Inventory includes product kits purchased from Stratec which are recorded in inventory at purchase cost until the time of sale or rental of the assembled product. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Primary income per share is calculated by dividing net income by the average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are stock options, which have been included using the treasury stock method only when their effect is dilutive. The average common and common equivalent shares issued and under option was 5,245,235 shares and 4,002,000 shares for the years ended December 31, 1995 and 1994, respectively after giving effect to the 3-for-2 stock split described in Note 14. CONCENTRATION OF CREDIT RISK The Company generally sells on either sixty day terms or against irrevocable letters of credit. Any financing of the end user is the decision of, and dependent on, the distributor in each country. At December 31, 1995 and 1994, the largest balance, 58% and 42%, respectively, of the total outstanding trade receivables, was owed by a single distributor. FOREIGN EXCHANGE EXPOSURE All of the Company's purchases and sales of products and services are made in U.S. dollars. As a result, the Company has minimal exposure to foreign exchange risk in the short-term. However, a significant portion of the Company's products are supplied by Stratec and sold along with Norland Corporation products into foreign markets. Any significant and lasting change in the exchange rates between the U.S. dollar and the currencies of those countries could have a material effect on both the costs and sales of those products and services. 2. DISTRIBUTION AGREEMENT: In 1994, the Company entered into exclusive distribution agreements with the manufacturers. The invoice prices from the manufacturers to NMS are determined by using a pricing formula whereby the margin retained by NMS is equal to one-half of the difference between the price at which the product is sold to the distributor or end user and the direct cost of material, parts and labor of Stratec or Norland Corporation. The agreement with Norland Corporation provided that in 1994 the Company would purchase a minimum of $5,200,000 of products and services during the first year of the agreement, irrespective of the pricing formula described above. If the minimum purchase requirement had not been in effect for the first F-8 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. DISTRIBUTION AGREEMENT: (CONTINUED) year of this distribution agreement, the total purchases by the Company of products and services from Norland Corporation would have been $3,277,753. The excess of $1,922,247 paid by the Company over the pricing formula was, based on its materiality, charged to operations as a separate line item for fiscal 1994. Effective April 1, 1995, the Company entered into an amended distribution agreement which expires December 31, 2015. This agreement may be renewed for an indefinite number of successive five-year terms and contains no purchase obligation on the part of NMS. Under this agreement, the Company may not distribute devices manufactured by any non-affiliate of the Company which compete directly with the devices obtained from the manufacturers. Under the distribution agreement, the Company is not limited to products manufactured by the manufacturers. However, for the years ending December 31, 1995 and 1994, the manufacturers were the sole suppliers of products and services to NMS. 3. TRADE ACCOUNTS RECEIVABLE: Trade accounts receivable at December 31 were as follows:
1995 1994 ------------ ------------ Account receivable................................................ $ 4,901,733 $ 2,175,847 Less Allowance for doubtful accounts.............................. 150,000 -- ------------ ------------ $ 4,751,773 $ 2,175,847 ------------ ------------ ------------ ------------
Accounts receivable were entirely represented by sales of products and services purchased from Stratec and Norland Corporation. NMS does not currently distribute products manufactured by Stratec and Norland Corporation in Europe. Those products are distributed directly by Stratec through its own sales organization and through distributors. As a result, NMS is both a supplier of Norland Corporation products to Stratec and a purchaser of Stratec products. From time to time, the two companies issue compensating credit memos in payment of merchandise debt in order to minimize the costs of foreign exchange and bank transfers. The amount owed by Stratec to NMS at December 31, 1995 and 1994 was $180,253 and $303,353, respectively. During 1995 and 1994, the Company sold $889,982 and $631,523, respectively, of products and services to Stratec. 4. INVENTORIES: Inventories consist of the following as of December 31:
1995 1994 ---------- ---------- Products kits......................................................... $ 413,255 $ -- Spare parts........................................................... 170,007 -- Demonstration systems, net of $17,415 and $0 accumulated amortization at December 31, 1995 and 1994, respectively.......................... 146,274 -- Rental systems........................................................ 68,948 -- ---------- ---------- $ 798,484 $ -- ---------- ---------- ---------- ----------
5. PRODUCT DEVELOPMENT LOAN RECEIVABLE -- AFFILIATE: In accordance with the terms of a Product Development Loan Agreement dated June 1, 1995 between NMS and the manufacturers, the Company advanced $48,519 to Norland Corporation as of December 31, 1995. The loan accrues interest at 10% per annum payable quarterly beginning March 31, 1996. Principal payments are due in twenty equal quarterly installments beginning September 30, 1997. F-9 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. NOTES PAYABLE -- STOCKHOLDERS: During 1994, the Company entered into uncollateralized demand promissory notes payable in the amount of $750,000, with interest payable at 10%, with three beneficial stockholders of the Company to provide financing for the first year of operations. The notes were repaid in full during 1995. A certain beneficial stockholder advanced $50,000, without interest, in December 1994. The advance was repaid in full in December 1995. 7. TRADE ACCOUNTS PAYABLE: During 1995 and 1994, the Company purchased $4,012,468 and $5,200,000, respectively, of products and services from Norland Corporation and $9,294,825 and $3,239,948, respectively, from Stratec. The amounts owed at December 31, 1995 and 1994 by NMS to these two companies for such purchases were $493,424 and $2,139,656, and $1,086,163 and $605,995, respectively. 8. STOCKHOLDERS' EQUITY: On August 2, 1995, NMS sold 2,000,000 shares of common stock, having an aggregate par value of $1,000, at the initial public offering price of $10.50 per share. Deducted from the resulting gross proceeds of $21,000,000 are $2,648,687 in costs and expenses directly related to the offering, resulting in net proceeds of $18,351,313. On June 2, 1995, the Board authorized a 2,000-for-1 stock split which decreased par value to $0.0005 per share and increased authorized and issued shares to 10,000,000 and 2,000,000, respectively. 9. COMPENSATION PROGRAMS: STOCK OPTION PLAN The Company has a Stock Option Plan covering officers, key employees and consultants of the Company. The Company has authorized 1,200,000 shares for options under the plan after giving effect to the 3-for-2 stock split described in Note 14. Options outstanding as of December 31 were as follows:
SHARES ---------------------- OPTION PRICE 1995 1994 - ------------ ---------- ---------- $ 0.0005 252,000 252,000 0.0006 750,000 750,000 10.67 21,000 -- 10.83 30,000 -- 12.83 31,500 -- 13.33 3,000 -- 13.83 30,000 -- ---------- ---------- 1,117,500 1,002,000 ---------- ---------- ---------- ----------
The outstanding options at December 31, 1994 have an exercise price not less than the market value on January 3, 1994, the date on which such options were granted. Fifty percent of the options became exercisable in 1995. On January 1, 1996, an additional twenty-five percent became exercisable and the remaining twenty-five percent becomes exercisable on January 1, 1997. Of the 1,002,000 options granted in 1994, the term for 252,000 options is ten years and the term for 750,000 options is five years. Options granted in 1995 vest over a four year period and expire ten years from the granting date, or upon termination of employment. The option price was based on 100% of market value of the Company's stock on the dates the options were granted. F-10 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. COMPENSATION PROGRAMS: (CONTINUED) The following is a summary of options related to the plan as of December 31:
OPTION PRICE OPTION PRICE 1995 PER SHARE 1994 PER SHARE ---------- ---------------- ---------- ---------------- Options outstanding at beginning of year........... 1,002,000 $ 0.0005-0.0006 -- -- Granted............................................ 115,500 $ 10.67-13.83 1,002,000 $ 0.0005-0.0006 ---------- ---------- Options outstanding at end of year................. 1,117,500 $ 0.0005-13.83 1,002,000 $ 0.0005-0.0006 ---------- ---------- ---------- ---------- Options exercisable at end of year................. 501,000 -- ---------- ---------- ---------- ----------
The Company is currently evaluating its alternatives under the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" and plans on implementing the statement in 1996 in accordance with its effective date. 401(K) PLAN Pursuant to the Norland Medical Systems, Inc. Retirement Savings Plan, eligible employees may elect to contribute a portion of their salary on a pre-tax basis. With respect to employee contributions of up to 7% of salary, the Company makes a contribution at the rate of 25 cents on the dollar. The Company may also make additional discretionary contributions for any year. Contributions are subject to applicable limitations contained in the Internal Revenue Code. Employees are at all times vested in their own contributions; Company matching contributions vest gradually over six years of service. The Company's policy is to fund plan contributions as they accrue. Contribution expense was $1,776 and $0 for the years ended December 31, 1995 and 1994, respectively. 10. INCOME TAX: The components of the provision for income taxes as of December 31 were as follows:
1995 1994 ------------ --------- Current: Federal............................................................ $ 1,202,406 $ 17,500 State.............................................................. 233,594 9,500 Deferred-net....................................................... -- -- ------------ --------- $ 1,436,000 $ 27,000 ------------ --------- ------------ ---------
As of December 31, 1995 and 1994, the Company did not have any significant differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate for the years ended December 31 follows:
1995 1994 ----------- ----------- Statutory income tax rate................................................. 34.0% 34.0% State income taxes, net of federal tax effect............................. 6.6 6.6 Impact of graduated federal income tax rates.............................. -- (12.2) --- ----- Effective income tax rate................................................. 40.6% 28.4% --- ----- --- -----
F-11 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. OTHER RELATED PARTY TRANSACTIONS: The Company rents space and purchases administrative support services from another company in which certain beneficial stockholders of NMS are also stockholders. The cost of the space and services to NMS for the years ended December 31, 1995 and 1994 was $22,360 and $150,000, respectively. As of December 31, 1995 and 1994, no amount was due by the Company for these costs. 12. SUPPLEMENTAL SALES AND CUSTOMER INFORMATION: The Company's largest customers are medical distributors in countries with high incidence of bone disease, available therapies and significant third party reimbursement. Two such distributors accounted for 68% and 9%, and 34% and 30% of revenues, respectively, for the years ended December 31, 1995 and 1994, respectively. Sales by geographic territory for the years ended December 31 were as follows:
1995 1994 -------------------------- -------------------------- Pacific Rim............................... $ 15,998,238 87.7% $ 7,737,897 77.0% North America............................. 1,152,046 6.3 750,739 7.5 Europe/Middle East........................ 889,982 4.9 631,523 6.3 Latin America............................. 203,542 1.1 921,389 9.2 ------------- ----- ------------- ----- $ 18,243,808 100.0% $ 10,041,548 100.0% ------------- ----- ------------- ----- ------------- ----- ------------- -----
13. QUARTERLY FINANCIAL DATA: (UNAUDITED)
1994 QUARTERS ---------------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------------ ------------ ------------ ------------- ------------- Revenue.................................. $ 1,733,995 $ 2,366,798 $ 2,427,780 $ 3,512,975 $ 10,041,548 Gross profit (loss)...................... 679,247 815,950 873,955 (767,552) 1,601,600 Operating income (loss).................. 406,442 549,146 451,071 (1,304,631) 102,028 Net income (loss)........................ 240,526 325,136 267,173 (764,791) 68,044 Net income (loss) per Common and Common equivalent share........................ $ 0.06 $ 0.08 $ 0.07 $ (0.19) $ 0.02
1995 QUARTERS ---------------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------------ ------------ ------------ ------------- ------------- Revenue.................................. $ 3,895,921 $ 4,003,310 $ 5,230,527 $ 5,114,050 $ 18,243,808 Gross profit............................. 1,295,390 1,254,162 1,519,420 1,666,027 5,734,999 Operating income......................... 735,384 796,134 719,811 872,177 3,123,506 Net income............................... 438,312 475,666 505,364 681,148 2,100,490 Net income per Common and Common equivalent share........................ $ 0.11 $ 0.12 $ 0.08 $ 0.10 $ 0.40
14. SUBSEQUENT EVENTS: On April 2, 1996, the Company acquired Dove Medical Systems ("Dove") and certain assets that were licensed to Dove, and the Company gave as consideration 161,538 shares of its Common Stock, after giving effect to the 3-for-2 stock split effective June 13, 1996, and $3,600,000 in cash. On May 30, 1996, the Board authorized a 3-for-2 stock split to be effective June 13, 1996 which increased issued and outstanding shares to 6,000,000. The impact of the split has been reflected in the accompanying financial statements. F-12 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of Ostech B.V.: We have audited the accompanying statement of net assets in liquidation of Ostech B.V. as of December 31, 1993, not presented separately herein, and the related statement of income (loss) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides reasonable basis for our opinion. The Company, as disclosed in the financial statements, has extensive transactions and relationships with related parties. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. As described in Note 1 to the financial statements, the stockholders of Ostech B.V. decided to cease operations and to liquidate the assets and liabilities. As a result, the Company changed its basis of accounting from the going concern to a liquidation basis. SCHWEIZERISCHE TREUHANDGESELLSCHAFT -- COOPERS & LYBRAND AG Zurich, Switzerland June 5, 1995 F-13 OSTECH B.V. STATEMENT OF INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31, 1993 Revenue (including sales to affiliates of $672,396)............................. $5,488,095 Cost of revenue................................................................. 4,066,539 ---------- Gross Profit.................................................................. 1,421,556 Sales and marketing expense..................................................... 1,068,197 General and administration (including expense reimbursements from an affiliate of $2,000)................. 399,449 ---------- Operating Loss................................................................ (46,090) Other expense................................................................... (13,760) Liquidation loss -- net......................................................... (326,007) ---------- (339,767) ---------- Loss before taxes............................................................. (385,857) Provision for taxes............................................................. 60 ---------- Net Loss...................................................................... $ (385,917) ---------- ----------
The accompanying notes are an integral part of the financial statements. F-14 OSTECH B.V. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1993 OPERATING ACTIVITIES: Net loss......................................................................... $(385,917) --------- Adjustments to reconcile net loss to net cash used in operations: Depreciation................................................................... 27,326 Amortization................................................................... 29,502 Bad debts...................................................................... 160,615 Changes in assets and liabilities: Accounts receivable.......................................................... 543,270 Accounts receivable -- affiliates............................................ 38,327 Other current assets......................................................... (9,274) Inventory.................................................................... 745 Net assets in liquidation.................................................... (45,372) Accounts payable............................................................. (159,682) Accrued commissions and expenses............................................. 21,449 Accounts payable -- affiliates............................................... (463,979) --------- Total adjustments.......................................................... 142,927 --------- Net cash used in operating activities...................................... (242,990) --------- FINANCING ACTIVITIES: Repayment of advances from affiliates.......................................... (74,213) --------- Net cash used in financing activities...................................... (74,213) --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.......................................... 1,656 --------- NET DECREASE IN CASH............................................................. (315,547) CASH AT BEGINNING OF YEAR........................................................ 604,810 --------- CASH AT END OF YEAR.............................................................. $ 289,263 --------- ---------
Supplemental disclosure of non-cash financing activities: During 1993, Ostech B.V. settled outstanding assets and liabilities with affiliates of $333,732, which has been reflected as a contribution of capital by the common parent, Norland Medical Systems B.V. The accompanying notes are an integral part of the financial statements. F-15 OSTECH B.V. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CORPORATE STRUCTURE Ostech B.V. (Rotterdam, The Netherlands) ("OBV") was incorporated on May 7, 1992 to market and distribute the products and technologies of Norland Corporation (U.S.) ("Norland Corp.") outside of the U.S., Canada and Switzerland and of Stratec Medizintechnik GmbH (Germany) ("Stratec") outside of Germany and Switzerland through its branch operations located in Pfaffikon, Switzerland. Its branch operations represented all of the operating activity of OBV. OBV commenced operations on April 1, 1992. OBV, Norland Corp. and Stratec are wholly-owned subsidiaries of Norland Medical Systems B.V. (The Netherlands) ("NMS BV") since 1992. The sole founding shareholder of OBV was NMS BV, with an initial capital contribution of NLG 40,000 ($22,096) for 400 shares at par, constituting all of the issued and outstanding stock at the time. COMPANY'S ACTIVITIES OBV distributes devices to aid in the detection and monitoring of bone diseases, and in the assessment of the effect of existing and potential therapies for the treatment of those diseases. These devices are distributed throughout the world to hospitals, clinics, research institutions, pharmaceutical companies and individual practitioners. Sales are made generally to distributors of medical products in the foreign (non-U.S.) countries. Norland Corp. continued to distribute its products in the U.S. and Canada, Stratec continued to distribute its products in Germany and a separate subsidiary of NMS BV distributed both companies' products in Switzerland. For sales of Stratec products in the U.S. and Canada, Norland Corp. served as a subdistributor of OBV. BASIS OF PRESENTATION In December, 1993 the management of NMS BV decided to cease operations and adopted a plan to liquidate OBV's assets and liabilities. Accordingly, OBV changed its basis of accounting from a going concern basis as of December 31, 1993. That liquidation was substantially carried out through 1994, and the results of that liquidation have been reflected in OBV's accounts as of December 31, 1993 as "Liquidation loss -- net." The trade accounts receivable were transferred at their net book value to Stratec, which has the responsibility for collecting all open accounts. Fixed assets were sold or scrapped. All of the intercompany accounts receivable and payable were settled with the respective affiliate at their net realizable value. All outstanding third party obligations were paid utilizing the cash remaining in OBV's bank account. OBV incurred net operating losses on liquidation of $110,007, due primarily to severance payments and outstanding lease commitments offsetting sale of remaining inventory and committed sales and other wind-up activity of $104,880. OBV realized a gain on the liquidation of outstanding assets and liabilities with affiliates of $333,732, which has been reflected as a contribution of capital by the common parent, NMS BV. In addition, the company wrote-off organizational expenses totalling $320,880. The summation of these items resulting in a net loss as a result of winding up the company of $326,007. The statement of net assets in liquidation has not been presented as it bears no relationship to Norland Medical Systems, Inc. The "Liquidation loss -- net" for 1993 includes the following components: A. Write-off of the unamortized organizational expenses........ $(320,880) --------- B. Net operating losses on liquidation......................... (110,007) --------- C. Other wind-up activity after December 31, 1993 (i.e., sales 104,880 of inventory, fixed assets, etc.)........................... --------- Total....................................................... $(326,007) --------- ---------
F-16 OSTECH B.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE AND COST RECOGNITION OBV purchases merchandise and services from Norland Corp. and Stratec on the basis of firm orders in hand. OBV invoices customers and is invoiced by Norland Corp. and Stratec when the product is shipped. Revenue is recognized at the time of shipment. As both OBV and the customer are invoiced at the same time, costs of products and services are recognized at the time of shipment. The invoice prices from Norland Corp. and Stratec to OBV are determined by using a pricing formula whereby the direct cost of material, parts and labor of Stratec or Norland Corp. is multiplied by a standard markup coefficient which has been determined to provide gross margins to OBV and the supplying factories which are representative of other manufacturers and distributors in similar industries. Management believes the gross profit recognized by OBV materially approximates that which would have been realized had OBV used unaffiliated suppliers. The manufacturers offer one-year warranties on both the hardware and software included in their systems. OBV provides warranty services on behalf of the manufacturers. Costs for returns and exchanges are borne by the respective manufacturer, not OBV. OBV invoices the manufacturer for the costs of performing such warranty services. OBV has no obligations to provide any other services to any of its sub-distributors or their customers. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, OBV considers all highly liquid debt instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. INVENTORY As a result of the simultaneous invoice from the supplier and to the customer, OBV does not generally maintain any finished goods inventory on its books. OBV maintains a stock of replacement parts at its location in Pfaffikon, which also houses its service organization. Service is provided to customers in OBV's sales territories on the basis of the warranty provided by each manufacturer on both the hardware and software included in their systems. From time to time, OBV judged it desirable for marketing purposes to place a device at the disposal of a prominent scientist or research institution specializing in the study of bone disease. In such cases, OBV carried the device inventory at its net realizable value until it was eventually returned to be sold. In addition, OBV occasionally rented a device in anticipation of an eventual sale following satisfactory use by the customer. In such cases, OBV carried the device in inventory until the time of the sale. INCOME TAXES Effective January 1, 1993, OBV adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." At January 1, 1993, the cumulative effect of the change in accounting for income taxes is immaterial. Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Under SFAS No. 109, the provision for income taxes includes taxes payable for the current period plus the change in deferred tax assets and liabilities during the period. F-17 OSTECH B.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) MAJOR CUSTOMERS OBV's largest customers are medical distributors in countries with high incidence of bone disease, available therapies and significant third party reimbursement. These include Picker in Germany, Emsor in Spain, Cam Diagnostics in Italy, Dutoit Medical in Belgium, Nissho Iwai Corporation in Japan, Inderlec Australia in Australia and Meditec Co., Ltd. in Korea. Sales to Meditec totalled 12% of 1993 revenues. CONCENTRATION OF CREDIT RISK OBV generally sells on either thirty day terms or against irrevocable letters of credit. Any financing of the end user is the decision of, and dependent on, the distributor in each country. FOREIGN EXCHANGE The accounts of OBV are maintained in Dutch Guilders and Swiss Francs and are translated into U.S. dollars at the month-end exchange rate for the balance sheet and statement of net assets in liquidation and average exchange rate for the month for the income statement. Foreign currency gains and losses resulting from transactions are included in net income. OBV did not have the rights to distribute products manufactured by Stratec in Germany and Norland Corp. in the U.S. Those products were distributed directly by Norland Corp. and Stratec through their own sales organizations. As a result, OBV was both a supplier of Norland Corp. products to Stratec and a purchaser of Stratec products. From time to time, the two companies issue compensating credit memos in payment of merchandise debt in order to minimize the costs of foreign exchange and bank transfers. 2. CAPITAL TRANSACTIONS: Ostech B.V.-Paffikon is organized as a branch of Ostech B.V.-Rotterdam and is consolidated with that entity. OBV was capitalized upon incorporation on May 7, 1992 with $22,096 (NLG40,000 at $0.5524). There have been no capital contributions or dividends since that date. Upon adoption of the liquidation basis of accounting, the affiliate accounts were adjusted to ultimate settlement amounts resulting in a capital contribution of $333,732 at December 31, 1993. 3. INCOME TAX: OBV satisfied all of its Swiss tax obligations in 1994 and, as a result, has no further provision necessary for the Swiss branch. Ostech B.V.-Rotterdam performs all of its sales activities through its Swiss branch and incurs a tax obligation in the Netherlands based on the criteria of the available tax ruling in such circumstances. 4. OPERATING LEASES: OBV leased facilities and motor vehicles under noncancelable leases with terms in excess of one year. These leases were terminated during 1994, the cost of which has been included in liquidation gain-net in the accompanying statement of income (loss) and retained earnings. Rental expenses totaled $71,472 for the year ended December 31, 1993. 5. OTHER RELATED PARTY TRANSACTIONS: The Company purchased its products and services exclusively from Norland Corp. and Stratec. OBV's facilities were shared with an affiliate. During 1993, OBV received approximately $2,000 as a rent and administrative cost reimbursement. The basis for determining the allocation was the square feet occupied by the affiliate plus a portion of administrative support personnel based on usage, which is deemed reasonable by management. OBV's revenues include sales of merchandise to affiliates totaling $672,396 in 1993. F-18 OSTECH B.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. OTHER RELATED PARTY TRANSACTIONS: (CONTINUED) Management believes the revenues would not be materially different if the sales were to unaffiliated companies. 6. SALES BY GEOGRAPHIC TERRITORY: Sales by geographic territory for the year ended December 31, 1993 were as follows: Europe.................................................. $2,973,516 54.2% Latin America........................................... 1,177,453 21.5 Korea................................................... 644,579 11.7 North America........................................... 356,396 6.5 Pacific Rim, remaining.................................. 336,151 6.1 ---------- ------ $5,488,095 100.0% ---------- ------ ---------- ------
F-19 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors Dove Medical Systems: We have audited the accompanying balance sheets of Dove Medical Systems as of December 31, 1995 and 1994, and the related statements of income, changes in stockholders' equity and cash flows, for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dove Medical Systems as of December 31, 1995 and 1994, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. Hurley & Company Granada Hills, California May 10, 1996 F-20 DOVE MEDICAL SYSTEMS BALANCE SHEETS DECEMBER 31, 1995 AND 1994 ASSETS
1995 1994 ---------- ---------- Current assets: Cash and cash equivalents............................................................... $ 195,122 $ 158,696 Accounts receivable, net of allowance for doubtful accounts of $1,000 and $0 at December 31, 1995 and 1994, respectively........................................................ 160,366 19,396 Inventories............................................................................. 219,886 211,082 Prepaid expenses........................................................................ 3,487 3,338 ---------- ---------- Total current assets.................................................................. 578,861 392,512 ---------- ---------- Property and equipment: Equipment, furniture and fixtures....................................................... 39,364 23,914 Less accumulated depreciation........................................................... 13,498 7,536 ---------- ---------- 25,866 16,378 Other assets: Organization costs, net of accumulated amortization of $1,637 and $1,086 at December 31, 1995 and 1994, respectively............................................................ 1,118 1,669 Deposits................................................................................ 7,546 5,011 ---------- ---------- Total assets.......................................................................... $ 613,391 $ 415,570 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses................................................... $ 69,313 $ 71,859 Profit sharing contribution payable..................................................... 52,000 -- Accrued employee personal time.......................................................... 10,113 8,127 Product warranty reserve................................................................ 10,000 5,000 Service deposits........................................................................ 13,000 -- Income tax payable...................................................................... 1,374 2,534 ---------- ---------- Total current liabilities............................................................. 155,800 87,520 ---------- ---------- Commitments and contingencies............................................................. -- -- Stockholders' equity: Common Stock, no par value, authorized 100,000 shares, issued and outstanding 35,000 shares................................................................................. 35,000 35,000 Retained earnings....................................................................... 422,591 293,050 ---------- ---------- Total Stockholders' equity............................................................ 457,591 328,050 ---------- ---------- Total liabilities and stockholders' equity............................................ $ 613,391 $ 415,570 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements F-21 DOVE MEDICAL SYSTEMS STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ------------ ------------ Revenue, net of discounts and allowances.............................................. $ 1,860,929 $ 1,903,034 Cost of revenue....................................................................... 854,693 1,145,807 ------------ ------------ Gross profit...................................................................... 1,006,236 757,227 Sales and marketing expense........................................................... 150,761 33,569 General and administrative expense.................................................... 419,814 396,645 ------------ ------------ Operating income.................................................................. 435,661 327,013 Other income: Interest income..................................................................... 3,120 3,022 Other Income, net................................................................... 244 997 ------------ ------------ Income before income tax.......................................................... 439,025 331,032 Income tax............................................................................ 6,094 4,694 ------------ ------------ Net income........................................................................ $ 432,931 $ 326,338 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. F-22 DOVE MEDICAL SYSTEMS STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
SHARES ISSUED TOTAL AND COMMON RETAINED STOCKHOLDERS' OUTSTANDING STOCK EARNINGS EQUITY ------------- --------- ----------- ------------ Balance as of January 1, 1994............................... 35,000 $ 35,000 $ 96,722 $ 131,722 Net Income.................................................. -- -- 326,328 326,328 Stockholder Distributions................................... -- -- (130,000) (130,000) ------ --------- ----------- ------------ Balance as of December 31, 1994............................. 35,000 35,000 293,050 328,050 Net Income.................................................. -- -- 432,931 432,931 Stockholder Distributions................................... -- -- (303,390) (303,390) ------ --------- ----------- ------------ Balance as of December 31, 1995............................. 35,000 $ 35,000 $ 422,591 $ 457,591 ------ --------- ----------- ------------ ------ --------- ----------- ------------
The accompanying notes are an integral part of the financial statements. F-23 DOVE MEDICAL SYSTEMS STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ----------- Cash flows from operating activities: Net Income............................................................................ $ 432,931 $ 326,328 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 6,513 4,764 Product warranty reserve............................................................ 5,000 5,000 Changes in: Accounts receivable............................................................... (140,970) (7,796) Inventories....................................................................... (8,804) (148,214) Prepaid expenses.................................................................. (149) (1,386) Deposits.......................................................................... (2,535) (1,785) Accounts payable and other accrued expenses....................................... 51,440 (55,415) Service deposits.................................................................. 13,000 -- Income tax payable................................................................ (1,160) 1,188 ----------- ----------- Total adjustments............................................................... (77,665) (203,644) ----------- ----------- Net cash provided by operating activities....................................... 355,266 122,684 ----------- ----------- Cash flows from investing activities: Furniture and equipment expenditures................................................ (15,450) (2,245) ----------- ----------- Net cash used by investing activities:.......................................... (15,450) (2,245) ----------- ----------- Cash flows from financing activities: Distributions to stockholders......................................................... (303,390) (30,000) ----------- ----------- Net cash used by financing activities........................................... (303,390) (30,000) ----------- ----------- Net increase in cash and cash equivalents............................................... 36,426 90,439 Cash and cash equivalents at beginning of year.......................................... 158,696 68,257 ----------- ----------- Cash and cash equivalents at end of year................................................ $ 195,122 $ 158,696 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1994, the Company distributed to its stockholder a $100,000 note receivable from a debtor. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 1995 1994 ----------- ----------- Income taxes paid....................................................................... $ 7,254 $ 3,506 ----------- ----------- ----------- ----------- Interest paid........................................................................... $ 0 $ 3 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-24 DOVE MEDICAL SYSTEMS NOTES TO FINANCIAL STATEMENTS 1. BUSINESS ACTIVITY: Dove Medical Systems (the "Company") manufactures medical scanning devices (bone densitometers, known as the "OsteoAnalyzer") that are utilized by hospitals, medical clinics, research institutions, and individual practitioners throughout the world to help in the diagnosis of osteoporosis and other bone disorders. 2. ORGANIZATION AND BASIS OF PRESENTATION: The Company was incorporated in California on December 9, 1992. Through December 31, 1995, all the issued and outstanding common shares of the Company (totaling 35,000 shares) were owned by a single stockholder (a husband and wife) as community property. In April 1996, Norland Medical Systems, Inc. ("Norland"), a publicly held company, acquired all the outstanding common shares of the Company (including exercised stock options issued to other individuals) through an exchange of common stock. The financial statements of the Company as of December 31, 1995 and 1994 and for the years then ended do not reflect any amounts or valuations arising from this transaction. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand and on deposit and highly liquid debt instruments with original maturities of three months or less. Substantially all funds are on deposit with one financial institution. INVENTORIES Inventories represent raw material (parts and components), work-in-process (assemblies) and finished goods. Inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from five to seven years. ORGANIZATION COSTS Organization costs are amortized over sixty months using the straight-line method. REVENUE RECOGNITION Revenues are considered earned when all work on an inventoried system or replacement part intended for customer use has been completed and the unit has been shipped. INCOME TAXES Differences between financial statement and taxable income exist, due primarily to timing differences pertaining to depreciation. These differences are not material. The Company's stockholder has elected to be taxed as an S Corporation and pay taxes primarily at the shareholder level. As such, income taxes reflect only the 1.5% rate due California for S Corporations. In April 1996, the Company's S Corporation status was terminated prior to its merger with Norland. F-25 DOVE MEDICAL SYSTEMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES: Inventories consisted of the following:
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ Raw materials and component parts................................ $ 125,082 $ 106,163 Assemblies in process............................................ 33,534 76,616 Finished goods................................................... 65,270 32,303 ------------ ------------ 223,886 215,082 Less obsolescence reserve........................................ 4,000 4,000 ------------ ------------ $ 219,886 $ 211,082
5. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ Furniture and fixtures........................................... $ 4,243 $ 4,243 Equipment........................................................ 35,121 19,671 ------------ ------------ 39,364 23,914 Less accumulated depreciation.................................... 13,498 7,536 ------------ ------------ $ 25,866 $ 16,378 ------------ ------------ ------------ ------------
6. PROFIT SHARING PLAN: During the years ended December 31, 1995 and 1994, the Company had a defined contribution pension plan covering substantially all of its employees. The plan utilized an age weighted allocation, whereby the current year's contribution was allocated proportional to the participants' present value of a benefit payable at normal retirement date equal to 1% of pay, using annual pre-retirement interest of 8.00%. The Company contributed at approximately 15% of covered payroll (the maximum rate) during both of these years, resulting in pension plan costs of $52,000 and $34,391, respectively. The plan was subsequently terminated and vesting requirements waived (with employee accumulated benefit amounts transferred to individual IRA accounts) prior to the acquisition of 100% of the Company's common stock by Norland in April 1996. 7. RELATED PARTY TRANSACTIONS: (a) The Company was granted an exclusive worldwide license by the owners of intellectual property purchased from the bankruptcy estate of Osteon, Inc. pertaining to a U.S. patent employed in the manufacture and calibration of the Company's scanning devices, along with other software and technology. Approximately 83% of this intellectual property was owned by the Company's chairman and principal stockholder, 10% by his mother, and another 7% by an unrelated S corporation. As consideration for this license during the period January 1, 1994 through June 30, 1994, the Company paid its chairman $27,500 and issued a total of 17,700 options to the three intellectual property owners (15,000, 2,000, and 700 options, respectively) to purchase the Company's common stock at $6.00 per share over a term of five years. Another $100,000 was paid to the intellectual property owners as a use fee for the period July 1, 1994 through December 31, 1994. Extended agreements covering the 1995 calendar year and subsequent period dictated a use fee of $2,000 for every OsteoAnalyzer sold. Total use fees incurred, based upon shipment of 65 OsteoAnalyzers, amounted to $130,000 for the year ended December 31, 1995. F-26 DOVE MEDICAL SYSTEMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS: (CONTINUED) (b) The Company's president (and wife of the chairman) was paid a salary of $150,000 during each of the years ended December 31, 1995 and 1994, respectively. Under California's community property laws, she beneficially held 100% of the Company's outstanding stock throughout these periods. 8. COMMITMENTS AND CONTINGENCIES: (a) The Company has a two-year lease to rent warehouse and office space in Newbury Park, California. The lease expires in January 1998. Monthly payments are currently $2,052, with a 3% to 6% rent adjustment to be made in February 1997. From inception, the Company previously leased smaller facilities in its Newbury Business Park location, and for part of 1994, rented additional office space in Los Angeles. Future minimum lease payments required under its operating lease(s) are as follows: Year ended December 31: 1996..................................................... $ 23,634 1997..................................................... 25,312 1998..................................................... 2,115 --------- $ 51,061 --------- ---------
Rental expense for the years ended December 31, 1995 and 1994 was $12,744 and $23,423, respectively. (b) The Company warrants its products for a full year from date of sale, including all parts and on-site labor. The Company limits its risk by having similar arrangements in place with its primary component manufacturers and suppliers. A warranty liability reserve in the amount of $10,000 and $5,000 was recognized at December 31, 1995 and 1994, respectively, to cover estimated repair and replacement costs to be incurred after the balance sheet date related, respectively, to revenues generated during the respective annual periods. 9. STOCK OPTIONS: The following stock option computations are reflective of a 100:1 common stock split, which occurred in December, 1993: At December 31, 1995, there were 2,100 options outstanding to purchase the Company's common stock at a price of $1.00 per share. These stock options had been issued under the Company's 1992 Incentive Stock Option Plan. Additionally, there were another 2,500 stock options exercisable at $6.00 per share which had been issued to a consultant, as well as 17,700 more stock options issued to intellectual property owners, also exercisable at $6.00 per share, as described in Note 7(a) above. The total number of options outstanding at December 31, 1995 was therefore 22,300. In April 1996, prior to the consummation of the acquisition of 100% of the Company's common stock by Norland, 5,600 of the above stock options were exercised, bringing the total number of common shares outstanding to 40,600, including 35,000 shares of stock owned as community property by the Company's chairman and president, and representing 100% of previously issued common stock. The balance of 16,700 stock options, namely, 15,000 held by the Company's chairman, 1,000 hold by his mother, and 700 held by an unrelated intellectual property owner, were not exercised and were voided. The chairman did sell 4,000 of his personal shares to the unrelated intellectual property owner at a price of $6.00 each. 10. EXPORT SALES AND MAJOR CUSTOMERS/SUPPLIERS: During the years ended December 31, 1995 and 1994, export sales, predominantly to Japan, China (both Taiwan and the mainland), and Korea, accounted for greater than 90% of the Company's total revenues. These sales were transacted in U.S. dollars, so revenues were not affected by currency translations. One customer accounted for approximately 67% of sales during calendar 1995 and approximately 83% of sales F-27 DOVE MEDICAL SYSTEMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EXPORT SALES AND MAJOR CUSTOMERS/SUPPLIERS: (CONTINUED) during the 1994 year. Another customer accounted for approximately 17% of sales during 1995. No other customer accounted for 10% or more of sales during the years ended December 31, 1995 and 1994, respectively. While the Company believes it can develop alternate sources for all parts, there are currently three vendors that are the sole source for the items provided. During each of the years ended December 31, 1995 and 1994, respectively, these suppliers collectively accounted for approximately 60% of the Company's net purchases of parts and materials. 11. SUBSEQUENT EVENT: In April 1996, Norland acquired all the outstanding common stock of Dove Medical Systems (totalling 40,600 shares as detailed in Note 9 above), in a stock swap valued at approximately $3,311,000. F-28 NORLAND MEDICAL SYSTEMS, INC. CONDENSED BALANCE SHEETS MARCH 31, 1996 AND 1995 (UNAUDITED) ASSETS
1996 1995 ------------- ------------ Current assets: Cash............................................................................... $ 17,639,970 $ 480,046 Accounts receivable -- trade, less allowance for doubtful accounts of $150,000 at March 31, 1996.................................................................... 5,708,930 2,347,385 Accounts receivable -- affiliate................................................... 142,395 321,937 Inventories........................................................................ 879,132 0 Prepaid expenses and other current assets.......................................... 157,415 34,540 ------------- ------------ Total current assets............................................................. 24,527,842 3,183,908 Property and equipment............................................................. 84,013 0 Product development loan receivable -- affiliate................................... 75,906 0 ------------- ------------ Total assets..................................................................... $ 24,687,761 $ 3,183,908 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable -- stockholders...................................................... $ 0 $ 250,000 Stockholder advances............................................................... 0 50,000 Accounts payable -- Stratec........................................................ 1,685,351 1,045,838 Accounts payable -- Norland........................................................ 892,975 694,690 Accrued expenses................................................................... 374,156 202,000 Income taxes payable............................................................... 485,837 295,587 Customer deposits.................................................................. 40,072 138,937 ------------- ------------ Total current liabilities........................................................ $ 3,478,391 $ 2,677,052 ------------- ------------ ------------- ------------ Stockholders' equity: Common stock, par value of $.0005 per share -- 10,000,000 shares authorized, 6,698,250 shares issued at March 31, 1996 and 3,000,000 shares issued at March 31, 1995.............................................................................. 3,349 1,500 Subscriptions receivable........................................................... 0 (500) Additional paid-in capital......................................................... 18,346,732 0 Retained earnings.................................................................. 2,859,289 505,856 ------------- ------------ Total stockholders' equity....................................................... 21,209,370 506,856 ------------- ------------ Total liabilities and stockholders' equity....................................... $ 24,687,761 $ 3,183,908 ------------- ------------ ------------- ------------
The accompanying notes are an integral part of the condensed financial statements. F-29 NORLAND MEDICAL SYSTEMS, INC. CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1996 1995 ------------ ------------ Revenue............................................................................... $ 5,218,290 $ 3,895,921 Cost of revenue....................................................................... 3,415,911 2,600,531 ------------ ------------ Gross profit...................................................................... 1,802,379 1,295,390 Sales and marketing expense........................................................... 575,348 334,553 General and administrative expense.................................................... 305,716 225,453 ------------ ------------ Operating income.................................................................. 921,315 735,384 Other income.......................................................................... 242,941 2,515 ------------ ------------ Income before taxes................................................................... 1,164,256 737,899 Provision for taxes................................................................... 473,000 299,587 ------------ ------------ Net income........................................................................ $ 691,256 $ 438,312 ------------ ------------ Earnings per share.................................................................... $ .10 $ .11 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares........................ 7,057,010 4,002,000 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the condensed financial statements. F-30 NORLAND MEDICAL SYSTEMS, INC. CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
COMMON PAID-IN STOCK RETAINED TOTAL SHARES STOCK CAPITAL SUBSCRIPTIONS EARNINGS ------------- ---------- ----------- ------------- ------------- ------------ Balance as of December 31, 1995.......................... $ 20,520,846 6,000,000 $ 3,000 $ 18,349,813 -- $ 2,168,033 Issuance of shares for stock options exercised............. 270 698,250 349 (79) -- -- Cost and expenses directly related to the stock offering...................... (3,002) -- -- (3,002) -- -- Net income..................... 691,256 -- -- -- -- 691,256 ------------- ---------- ----------- ------------- ------------- ------------ Balance as of March 31, 1996... $ 21,209,370 6,698,250 $ 3,349 $ 18,346,732 -- $ 2,859,289 ------------- ---------- ----------- ------------- ------------- ------------ ------------- ---------- ----------- ------------- ------------- ------------ Balance as of December 31, 1994.......................... $ 68,044 3,000,000 $ 1,500 -- $ (1,000) $ 67,544 Proceeds from common stock subscriptions................. 500 -- -- -- 500 -- Net income..................... 438,312 -- -- -- -- 438,312 ------------- ---------- ----------- ------------- ------------- ------------ Balance as of March 31, 1995... $ 506,856 3,000,000 $ 1,500 -- $ (500) $ 505,856 ------------- ---------- ----------- ------------- ------------- ------------ ------------- ---------- ----------- ------------- ------------- ------------
See accompanying notes to condensed financial statements. F-31 NORLAND MEDICAL SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1996 1995 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income......................................................................... $ 691,256 $ 438,312 Adjustments to reconcile net income to net cash used in operating activities:...... 12,933 0 Amortization expense............................................................. Inventory obsolescence expense................................................... 15,000 0 Changes in: Accounts receivable............................................................ (1,099,552) (493,475) Inventories.................................................................... (108,581) 0 Prepaid expenses and other current assets...................................... (88,426) (13,190) Accounts payable............................................................... (86,754) 48,370 Customer deposits.............................................................. 5,408 20,937 Accrued expenses............................................................... 13,153 155,273 Income taxes payable........................................................... (819,200) 268,587 ------------- ----------- Total adjustments............................................................ (2,156,019) (13,498) ------------- ----------- Net cash (used in) provided by operating activities.......................... (1,464,763) 424,814 ------------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment................................................. (84,013) 0 Product development Loan to affiliate.............................................. (27,387) 0 ------------- ----------- Net cash used in investing activities........................................ (111,400) 0 ------------- ----------- FINANCING ACTIVITIES: Repayment of stockholder notes..................................................... 0 (500,000) Cost and expense of issuance of Common Stock....................................... (3,002) 0 Proceeds from stock options exercised.............................................. 270 0 Proceeds from common stock subscriptions........................................... 0 500 ------------- ----------- Net cash used in financing activities........................................ (2,732) (499,500) ------------- ----------- NET DECREASE IN CASH................................................................. (1,578,895) (74,686) CASH, BEGINNING OF PERIOD............................................................ 19,218,865 554,732 ------------- ----------- CASH, END OF PERIOD.................................................................. $ 17,639,970 $ 480,046 ------------- ----------- ------------- -----------
The accompanying notes are an integral part of the condensed financial statements. F-32 NORLAND MEDICAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 (UNAUDITED) 1. BASIS OF PRESENTATION The financial information included herein has been prepared by management without audit by independent certified public accountants who do not express an opinion thereon. The information furnished herein includes all adjustments which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations as of and for the three months ended March 31, 1996 and 1995, and all such adjustments are of a normal recurring nature. Management recommends the accompanying financial information be read in conjunction with the Company's audited financial statements and related notes set forth elsewhere herein. The results for the three-month period ended March 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 1996. 2. INVENTORIES As of March 31, 1996, inventories consist of the following: Rental systems.................................................... $ 433,680 Demonstration systems, less accumulated amortization of $30,348... 276,368 Spare parts and sub-assemblies, less an obsolescence reserve of $15,000.......................................................... 85,597 Product kits...................................................... 83,487 --------- $ 879,132 --------- ---------
Systems used in the Company's short-term rental and pay-per-scan programs are carried in inventory at the lower cost or net realizable value until the time of sale. The Company maintains an inventory of demonstration systems to support its marketing efforts. Such systems are carried in inventory at the lower of cost or net realizable value until the time of sale. From time to time, the Company may judge it desirable for marketing purposes to provide a device to a prominent scientist or research institution specializing in the study of bone disease. In such cases, the Company will carry the device in demonstration system inventory at cost less amortization expense calculated on a straight-line basis over thirty-six months. Spare parts and sub-assemblies are stated at the lower of cost or market; cost is determined principally by the first-in, first-out method. Inventory includes product kits purchased from Stratec which are recorded in inventory at purchase cost until the time of sale or rental of the assembled product. 3. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Primary income per share is calculated by dividing net income by the average shares of common stock and common stock equivalents outstanding during the period after giving effect to the Stock Split. Common stock equivalents are stock options which have been included using the treasury stock method only when their effect is dilutive. F-33 DOVE MEDICAL SYSTEMS CONDENSED BALANCE SHEETS MARCH 31, 1996 AND 1995 (UNAUDITED) ASSETS
1996 1995 ---------- ---------- Current assets: Cash and cash equivalents............................................................... $ 167,063 $ 296,027 Accounts receivable, net of allowance for doubtful accounts of $1,000 and $0 at March 31, 1996 and 1995, respectively........................................................ 139,174 149,825 Inventories............................................................................. 233,688 211,915 Prepaid expenses........................................................................ 9,668 3,214 ---------- ---------- Total current assets.................................................................. 549,593 660,981 ---------- ---------- Property and equipment: Equipment, furniture and fixtures....................................................... 51,188 24,772 Less accumulated depreciation........................................................... 15,770 9,027 ---------- ---------- 35,418 15,745 Other assets: Organization costs, net of accumulated amortization of $1,774 and $1,224 at March 31, 1996 and 1995, respectively............................................................ 981 1,531 Deposits................................................................................ 7,546 4,576 ---------- ---------- Total assets.......................................................................... $ 593,538 $ 682,833 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses................................................... $ 158,934 $ 122,062 Accrued employee personal time.......................................................... 12,400 8,127 Product warranty reserve................................................................ 10,000 5,000 Service deposits........................................................................ 24,500 50 Income tax payable...................................................................... 710 676 ---------- ---------- Total current liabilities............................................................. 206,544 135,915 ---------- ---------- Commitments and contingencies............................................................. -- -- Stockholders' equity: Common stock, no par value, authorized 100,000 shares, issued and outstanding 40,600 shares and 35,000 shares at March 31, 1996 and 1995, respectively...................... 58,100 35,000 Retained earnings....................................................................... 328,894 511,918 ---------- ---------- Stockholders' equity.................................................................. 386,994 546,918 ---------- ---------- Total liabilities and stockholders' equity............................................ $ 593,538 $ 682,833 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the condensed financial statements. F-34 DOVE MEDICAL SYSTEMS CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1996 1995 ---------- ---------- Revenue, net of discounts and allowances.................................................. $ 672,691 $ 594,705 Cost of revenue........................................................................... 329,221 269,427 ---------- ---------- Gross profit.......................................................................... 343,470 325,278 Sales and marketing expense............................................................... 95,821 15,647 General and administrative expense........................................................ 138,396 88,365 Staff service bonus....................................................................... 68,000 -- ---------- ---------- Operating Income...................................................................... 41,253 221,266 Other income: Interest income......................................................................... 790 902 ---------- ---------- Income before income tax.............................................................. 42,043 222,168 Income tax................................................................................ 2,240 3,300 ---------- ---------- Net income............................................................................ $ 39,803 $ 218,868 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the condensed financial statements. F-35 DOVE MEDICAL SYSTEMS CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
SHARES ISSUED TOTAL AND COMMON RETAINED STOCKHOLDERS' OUTSTANDING STOCK EARNINGS EQUITY ------------- --------- ----------- ------------ Balance as of December 31, 1995............................. 35,000 $ 35,000 $ 422,591 $ 457,591 Net Income.................................................. -- -- 39,803 39,803 Common Stock Issued Upon Exercise of Stock Options.......... 5,600 23,100 -- 23,100 Stockholder Distributions................................... -- -- (133,500) (133,500) ------ --------- ----------- ------------ Balance as of March 31, 1996................................ 40,600 $ 58,100 $ 328,894 $ 386,994 ------ --------- ----------- ------------ ------ --------- ----------- ------------ Balance as of December 31, 1994............................. 35,000 $ 35,000 $ 293,050 $ 328,050 Net Income.................................................. -- -- 218,868 218,868 ------ --------- ----------- ------------ Balance as of March 31, 1995................................ 35,000 $ 35,000 $ 511,918 $ 546,918 ------ --------- ----------- ------------ ------ --------- ----------- ------------
The accompanying notes are an integral part of the condensed financial statements. F-36 DOVE MEDICAL SYSTEMS CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 UNAUDITED
1996 1995 ----------- ----------- Cash flows for operating activities: Net income............................................................................ $ 39,803 $ 218,868 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 2,409 1,629 Changes in: Accounts receivable............................................................... (7,308) (130,429) Inventories....................................................................... (13,802) (833) Prepaid expenses.................................................................. (6,181) 124 Deposits.......................................................................... -- 435 Accounts payable and other accrued expenses....................................... 39,908 50,203 Service deposits.................................................................. 11,500 50 Income tax payable................................................................ (664) (1,858) ----------- ----------- Total adjustments............................................................... 25,862 (80,679) ----------- ----------- Net cash provided by operating activities:...................................... 65,665 138,189 ----------- ----------- Cash flows from investing activities: Furniture and equipment expenditures.................................................. (11,824) (858) ----------- ----------- Net cash used by investing activities:.......................................... (11,824) (858) ----------- ----------- Cash flows from financing activities: Issuance of common stock.............................................................. 23,100 -- Stockholder distributions............................................................. (105,000) -- ----------- ----------- Net cash used by financing activities........................................... (81,900) -- ----------- ----------- Net decrease in cash and cash equivalents............................................... (28,059) 137,331 Cash and cash equivalents at beginning of period........................................ 195,122 158,696 ----------- ----------- Cash and cash equivalents at end of period.............................................. $ 167,063 $ 296,027 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the three months ended March 31, 1996, the Company distributed to its principal stockholder a $28,500 account receivable from a major customer.
The accompanying notes are an integral part of the condensed financial statements. F-37 DOVE MEDICAL SYSTEMS NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 (UNAUDITED) 1. BASIS OF PRESENTATION The financial information included herein has been prepared by management without audit by independent certified public accountants who do not express an opinion thereon. The information furnished herein includes all adjustments which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations as of and for the three months ended March 31, 1996 and 1995, and all such adjustments are of a normal recurring nature. Management recommends the accompanying financial information be read in conjunction with the Company's audited financial statements and related notes set forth elsewhere herein. The results for the three-month period ended March 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 1996. 2. COMMITMENTS AND CONTINGENCIES (a) The Company has a two-year lease to rent warehouse and office space in Newbury Park, California. The lease expires in January 1998. Monthly payments are currently $2,052, with a 3% to 6% rent adjustment to be made in February 1997. Future minimum lease payments required under its operating lease are as follows: Twelve months ended March 31: 1997................................................................... $24,749 1998................................................................... 21,146 --------- $45,895 --------- ---------
Rental expense for the three month periods ended March 31, 1996 and 1995 was $5,166 and $3,186, respectively. (b) The Company warrants its products for a full year from date of sale, including all parts and on-site labor. The Company limits its risk by having similar arrangements in place with its primary component manufacturers and suppliers. A warranty liability reserve in the amount of $10,000 and $5,000, was recognized at March 31, 1996 and 1995, respectively, to cover estimated repair and replacement costs to be incurred after the balance sheet dates. F-38 PRO FORMA COMBINED FINANCIAL DATA UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements give effect to the merger of Norland Medical Systems, Inc. (the "Company") and Dove Medical Systems ("Dove") under the purchase method of accounting. These pro forma financial statements are presented for illustrative purposes only, and therefore, are not necessarily indicative of the operating results and financial position that might have been achieved had the merger occurred as of an earlier date, nor are they necessarily indicative of operating results and financial position which may occur in the future. A pro forma combined condensed balance sheet is provided as of March 31, 1996, giving effect to the merger as though it had been consummated on that date. Pro forma combined condensed income statements are provided for the three month period ended March 31, 1996, and the year ended December 31, 1995, giving effect to the merger as though it had occurred on January 1, 1995. The pro forma combined condensed financial statements are derived from the historical audited financial statements of the Company and Dove, and should be read in conjunction with the Company's separate 1995 Annual Report on Form 10-K and separate Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, as filed, incorporated herein by reference, and with Dove's audited financial statements for 1995 and 1994, included herein. F-39 NORLAND MEDICAL SYSTEMS, INC. PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1996 (UNAUDITED) ASSETS
HISTORICAL ----------------------------- NORLAND MEDICAL DOVE MEDICAL PRO FORMA PRO FORMA SYSTEMS, INC. SYSTEMS ADJUSTMENTS NOTE REF. COMBINED --------------- ------------ ------------- --------- ------------- Current Assets: Cash.................................... $ 17,639,970 $ 167,063 $ (3,600,000) (a) $ 14,207,033 Accounts receivable..................... 5,851,325 139,174 0 5,990,499 Inventories............................. 879,132 233,688 0 1,112,820 Other................................... 157,415 9,668 0 167,083 --------------- ------------ ------------- ------------- Total current assets.................. 24,527,842 549,593 (3,600,000) 21,477,435 Other Assets: Fixed assets, net......................... 84,013 35,418 0 119,431 Other non current assets................ 75,906 8,527 0 84,433 Patent, net............................. 0 0 407,200 (a)(i) 407,200 Other intangible assets, net............ 0 0 3,257,800 (a)(i) 3,257,800 Goodwill, net........................... 0 0 2,984,535 (d)(i) 2,984,535 --------------- ------------ ------------- ------------- Total other assets.................... 159,919 43,945 6,649,535 6,853,399 --------------- ------------ ------------- ------------- Total Assets.............................. $ 24,687,761 $ 593,538 $ 3,049,535 $ 28,330,834 --------------- ------------ ------------- ------------- --------------- ------------ ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable........................ $ 2,578,326 158,934 0 $ 2,737,260 Accrued expenses........................ 374,156 22,400 125,000 (i) 521,556 Income taxes payable.................... 485,837 710 0 486,547 Other current liabilities............... 40,072 24,500 64,572 --------------- ------------ ------------- ------------- Total current liabilities............. 3,478,391 206,544 125,000 3,809,935 --------------- ------------ ------------- ------------- Common stock............................ 3,349 58,100 (58,019) (b)(c) 3,430 Additional paid-in capital.............. 18,346,732 0 3,311,448 (b) 21,658,180 Retained earnings....................... 2,859,289 328,894 (328,894) (b)(c) 2,859,289 --------------- ------------ ------------- ------------- Total stockholder's equity............ 21,209,370 386,994 2,924,535 24,520,899 --------------- ------------ ------------- ------------- Total Liabilities & Stockholders' Equity............................... $ 24,687,761 $ 593,538 $ 3,049,535 $ 28,330,834 --------------- ------------ ------------- ------------- --------------- ------------ ------------- -------------
See notes to unaudited pro forma combined condensed financial statements. F-40 NORLAND MEDICAL SYSTEMS, INC. PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------------------------------------------------------- --------------- HISTORICAL HISTORICAL ----------------------------- --------------- NORLAND MEDICAL DOVE MEDICAL PRO FORMA PRO FORMA NORLAND MEDICAL SYSTEMS, INC. SYSTEMS ADJUSTMENTS NOTE REF. COMBINED SYSTEMS, INC. --------------- ------------ ----------- --------- ---------- --------------- Total revenues....................... $18,243,808 $1,860,929 $ 0 $20,104,737 $ 5,218,290 --------------- ------------ ----------- ---------- --------------- Expense (Income): Cost of revenue.................... 12,508,809 854,693 $(128,000) (e) 13,235,502 3,415,911 Sales and marketing expense........ 1,651,125 150,761 0 1,801,886 575,348 General and administrative expense........................... 960,368 419,814 352,837 (f) 1,733,019 305,716 Other (income) expense............. (412,983) (3,364) 0 (416,347) (242,941) --------------- ------------ ----------- ---------- --------------- Total Expenses................... 14,707,319 1,421,904 224,837 16,354,060 4,054,034 --------------- ------------ ----------- ---------- --------------- Earnings from continuing operations before income taxes................. 3,536,489 439,025 (224,837) 3,750,677 1,164,256 Provision for income taxes........... (1,436,000) (6,094) (128,538) (g) (1,570,632) (473,000) --------------- ------------ ----------- ---------- --------------- Earnings from continuing operations.......................... $ 2,100,489 $ 432,931 $(353,375) $2,180,045 $ 691,256 --------------- ------------ ----------- ---------- --------------- --------------- ------------ ----------- ---------- --------------- Earnings from continuing operations per common and common equivalent.... 0.40 0.40 0.10 Weighted average common and common equivalent shares outstanding....... 5,245,235 161,538 (h) 5,406,773 7,057,010 FOR THE THREE MONTHS ENDED MARCH 31, 1996 -------------------------------------------------- DOVE MEDICAL PRO FORMA PRO FORMA SYSTEMS ADJUSTMENTS NOTE REF. COMBINED ------------- ----------- --------- ----------- Total revenues....................... $ 672,691 $ 0 $5,890,981 ------------- ----------- ----------- Expense (Income): Cost of revenue.................... 329,221 $ (48,000) (e) 3,697,132 Sales and marketing expense........ 95,821 0 671,169 General and administrative expense........................... 206,396 88,209 (f) 600,321 Other (income) expense............. (790) 0 (243,731) ------------- ----------- ----------- Total Expenses................... 630,648 40,209 4,724,891 ------------- ----------- ----------- Earnings from continuing operations before income taxes................. 42,043 (40,209) 1,166,090 Provision for income taxes........... (2,240) (10,848) (g) (486,088) ------------- ----------- ----------- Earnings from continuing operations.......................... $ 39,803 $ (51,057) $ 680,002 ------------- ----------- ----------- ------------- ----------- ----------- Earnings from continuing operations per common and common equivalent.... 0.09 Weighted average common and common equivalent shares outstanding....... 161,538 (h) 7,218,548
See notes to unaudited pro forma combined condensed financial statements. F-41 NORLAND MEDICAL SYSTEMS, INC. AND DOVE MEDICAL SYSTEMS NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION: The unaudited pro forma combined condensed balance sheet reflects the issuance of 161,538 shares of the Company Common Stock, after giving effect to the Stock Split, in exchange for 40,600 shares of Dove Common Stock, based on the number of shares of Dove Common Stock outstanding as of April 2, 1996. In addition, the statement reflects a payment by the Company of $3,600,000 in exchange for certain patent and other intangible assets owned by the Dove majority shareholder and certain other investors. The purchase price also includes approximately $125,000 of direct costs related to the transaction. The acquisitions are accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, and are presented in the pro forma condensed combined balance sheet as though they had occurred on March 31, 1996. Earnings per share for each period is based on the weighted average number of shares of the Company's Common Stock outstanding, including common stock equivalents, and is presented on a combined basis giving effect to the issuance of the Company's shares in accordance with the terms of the merger as if the merger had occurred on January 1, 1995. NOTES TO PRO FORMA ADJUSTMENTS: Pro forma adjustments have been made to reflect the following: (a) Adjustment to reflect payment of $3,600,000 in cash in exchange for a patent and other intangible assets. (b) Adjustment to reflect the issuance of 161,538 shares of the Company's Common Stock after giving effect to the Stock Split, having an aggregate par value of $81 and a market value of $3,311,529 on April 2, 1996. (c) Adjustment to reflect the elimination of Dove's equity accounts. (d) Adjustment to record goodwill resulting from the transactions. (e) Adjustment to eliminate fees incurred by Dove according to various licensing arrangements acquired by NMS as part of the transaction. (f) Adjustment to reflect amortization expense related to goodwill, patent and other intangible assets, based on useful lives of 20, 10 and 20 years, respectively. (g) The tax provision calculated based on Dove's pretax earnings from continuing operations, giving effect on the pro forma adjustments, at the combined effective federal and state tax rate of 41%. (h) The number of new shares of common stock issued by the Company to owners of Dove, giving effect to the transaction on January 1, 1995 and after giving effect to the Stock Split. (i) Adjustment to reflect capitalization of acquisition costs. F-42 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. -------------------- TABLE OF CONTENTS
Page --------- Prospectus Summary............................. 3 Risk Factors................................... 6 The Company and Its Relationship with Norland Corp. and Stratec............................. 13 Use of Proceeds................................ 14 Price Range of Common Stock.................... 14 Dividend Policy................................ 14 Capitalization................................. 15 Selected Financial Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 Business....................................... 22 Management..................................... 37 Certain Transactions........................... 43 Principal and Selling Stockholders............. 46 Description of Capital Stock................... 48 Shares Eligible for Future Sale................ 50 Underwriting................................... 52 Legal Matters.................................. 53 Experts........................................ 53 Additional Information......................... 53 Index to Financial Statements.................. F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,250,000 Shares [LOGO] Common Stock --------------- PROSPECTUS , 1996 -------------------------- UBS Securities Pacific Growth Equities, Inc. - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate (except for the Commission registration fee, the Nasdaq listing fee and the National Association of Securities Dealers, Inc. ("NASD") filing fee) of the fees and expenses payable by the Company in connection with the distribution of Common Stock: Securities and Exchange Commission Registration Fee.................... $19,031.51 Nasdaq Listing Fee..................................................... 17,500.00 NASD Filing Fee........................................................ 6,019.13 Printing and Engraving Costs........................................... 100,000.00 Legal Fees............................................................. 150,000.00 Accountants' Fees...................................................... 50,000.00 Blue Sky Qualification Fees and Expenses............................... 10,000.00 Miscellaneous.......................................................... 22,449.36 ---------- Total................................................................ $375,000.00 ---------- ----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company has included in its Certificate of Incorporation and by laws provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the General Corporation Law of the State of Delaware (the "DGCL") and (ii) indemnify its directors and officers to the fullest extent permitted by the DGCL, including circumstances in which indemnification is otherwise discretionary. Section 145 of the DGCL permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by each in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses (including attorneys' fees) actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability. The Company's directors and officers are covered by insurance policies indemnifying them against certain civil liabilities, including liabilities under the federal securities laws, which might be incurred by them in such capacity. Reference is made to Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify officers and directors of the Company against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to the securities of the Company issued or sold within the past three years which were not registered under the Securities Act: (i) On January 3, 1994, the Company issued 412 shares of Common Stock to Norland Partners, L.P for $1.00 per share; (ii) On January 11, 1994, the Company issued 88 shares of Common Stock to Novatech Ventures, L.R for $1.00 per share; (iii) On May 27, 1994, the Company issued 250 shares of Common Stock to Hans Schiessl for $1.00 per share; and II-1 (iv) On May 27, 1994, the Company issued 250 shares of Common Stock to Hermann Leistner for $1.00 per share. (v) On June 2, 1995, the Company effected a 2,000-for-1 split of the Common Stock. (vi) On April 2, 1996, the Company issued 107,692 shares of Common Stock to the former stockholders of Dove in connection with the merger of Dove into a subsidiary of the Company. (vii) In 1996 to date, the Company issued an aggregate of 489,500 shares of Common Stock upon exercises of stock options by employees of the Company. (viii) On June 13, 1996, the Company effected a 3-for-2 split of the Common Stock. Each of these transactions was completed without registration of the relevant security under the Securities Act in reliance upon the exemptions provided by Section 4(2) of the Securities Act for transactions not involving a public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 1.1 Preliminary form of Underwriting Agreement. 2.1 Agreement and Plan of Merger by and among Dove Medical Systems, DMS Acquisition Corp. and Norland Medical Systems, Inc. (D) 2.2 Purchase Agreement by and among Robert L. Piccioni and Joan Piccioni, CHC, Inc., Mirella Monti Belshe and Norland Medical Systems, Inc. (D) 3.1 Restated Certificate of Incorporation of the Registrant. (B) 3.2 By-laws of the Registrant, as amended. (A) *5.1 Opinion of Morgan, Lewis & Bockius LLP as to the validity of the issuance of the securities registered hereby. +10.1 Distribution Agreement dated as of April 1, 1995 by and among Norland Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems, Inc. (A) +10.2 Product Development Loan Agreement dated as of June 1, 1995 by and among Stratec Medizintechnik GmbH, Norland Corporation and Norland Medical Systems, Inc. (A) 10.3 Amended and Restated 1994 Stock Option and Incentive Plan. (E) 10.4 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and Nissho Iwai American Corporation. (A) 10.5 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and Meditec Co., Ltd. (A) 10.6 Amendment No. 1 to Distribution Agreement by and among Norland Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems, Inc. (C) 11.1 Statement regarding computation of earnings per share 23.1 Consent of Coopers & Lybrand L.L.P 23.2 Consent of Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG. 23.3 Consent of Hurley & Company. *23.4 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1). 24.1 Power of attorney (included on signature page). (b) Financial Statement Schedules Schedule II: Valuation and Qualifying Accounts
- ------------------------ * To be filed by amendment. + Confidentiality requested as to certain provisions. (A) This Exhibit was previously filed as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-93220), effective August 1, 1995, and is incorporated herein by reference. II-2 (B) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 8-K dated October 20, 1995 and is incorporated herein by reference. (C) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-K dated March 27, 1996 and is incorporated herein by reference. (D) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 8-K dated April 15, 1996 and is incorporated herein by reference. (E) This Exhibit was previously filed as an Exhibit to the Company's Proxy Statement dated April 25, 1996 and is incorporated herein by reference. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes that: 1. For the purposes of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Registrant pursuant to the provisions described under Item 14 above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of White Plains, New York, on the 6th day of June, 1996. NORLAND MEDICAL SYSTEMS, INC. By: /s/ REYNALD G. BONMATI ----------------------------------- Name: Reynald G. Bonmati Title: PRESIDENT POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Reynald G. Bonmati, Kurt W. Streams and Ralph G. Theodore, or any one of them, his true and lawful attorney-in-fact, for him and in his name, place and stead to sign any and all amendments (including post-effective amendments) to this Registration Statement and to cause the same to be filed with the Securities and Exchange Commission, hereby granting to said attorneys-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue of these presents. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
CAPACITY IN SIGNATURE WHICH SIGNED DATE - ----------------------------------------------- ----------------------------------------------- --------------- /s/ REYNALD G. BONMATI Chairman of the Board and President (Principal ------------------------------------- Executive Officer); Treasurer and Director June 6, 1996 Reynald G. Bonmati /s/ KURT W. STREAMS Vice President, Finance (Principal Financial ------------------------------------- Officer and Principal Accounting Officer); June 6, 1996 Kurt W. Streams Secretary /s/ JAMES J. BAKER Director ------------------------------------- June 6, 1996 James J. Baker /s/ MICHAEL W. HUBER Director ------------------------------------- June 6, 1996 Michael W. Huber /s/ ROBERT L. PICCIONI Director ------------------------------------- June 6, 1996 Robert L. Piccioni /s/ ALBERT S. WAXMAN Director ------------------------------------- June 6, 1996 Albert S. Waxman
II-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Norland Medical Systems, Inc.: In connection with our audits of the financial statements of Norland Medical Systems, Inc. as of December 31, 1995 and 1994, and for each of the two years in the period ended December 31, 1995, which financial statements are included in the Registration Statement, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 4, 1996 NORLAND MEDICAL SYSTEMS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO COSTS BALANCE AT JANUARY 1, 1995 AND EXPENSES DEDUCTIONS DECEMBER 31, 1995 --------------- ---------------- ----------- ----------------- Allowance for Doubtful Accounts................ $ 0 $ 150,000 $ 0 $ 150,000 ------ -------- ----------- -------- ------ -------- ----------- --------
BALANCE AT CHARGED TO COSTS BALANCE AT JANUARY 1, 1994 AND EXPENSES DEDUCTIONS DECEMBER 31, 1994 --------------- ---------------- ----------- ----------------- Allowance for Doubtful Accounts................ $ 0 $ 0 $ 0 $ 0 ------ -------- ----------- -------- ------ -------- ----------- --------
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ 1.1 Preliminary form of Underwriting Agreement. 2.1 Agreement and Plan of Merger by and among Dove Medical Systems, DMS Acquisition Corp. and Norland Medical Systems, Inc. (D) 2.2 Purchase Agreement by and among Robert L. Piccioni and Joan Piccioni, CHC, Inc., Mirella Monti Belshe and Norland Medical Systems, Inc. (D) 3.1 Restated Certificate of Incorporation of Norland Medical Systems, Inc. (B) 3.2 By-laws of Norland Medical Systems, Inc., as amended (A) *5.1 Opinion of Morgan, Lewis & Bockius LLP as to the validity of the issuance of the securities registered hereby. +10.1 Distribution Agreement dated as of April 1, 1995 by and among Norland Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems, Inc. (A) +10.2 Product Development Loan Agreement dated as of June 1, 1995 by and among Stratec Medizintechnik GmbH, Norland Corporation and Norland Medical Systems, Inc. (A) 10.3 Amended and Restated 1994 Stock Option and Incentive Plan (E) 10.4 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and Nissho Iwai American Corporation (A) 10.5 Exclusive Distributor Agreement dated as of June 2, 1995 between Norland Medical Systems, Inc. and Meditec Co., Ltd. (A) 10.6 Amendment No. 1 to Distribution Agreement by and among Norland Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems, Inc. (C) 11.1 Statement regarding computation of earnings per share 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Schweizerische Treuhandgesellschaft-Coopers & Lybrand AG 23.3 Consent of Hurley & Company *23.4 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (included on signature page)
- ------------------------ * To be filed by amendment. + Confidentiality requested as to certain provisions. (A) This Exhibit was previously filed as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-93220), effective August 1, 1995, and is incorporated herein by reference. (B) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 8-K dated October 20, 1995 and is incorporated herein by reference. (C) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-K dated March 27, 1996 and is incorporated herein by reference. (D) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 8-K dated April 15, 1996 and is incorporated herein by reference. (E) This Exhibit was previously filed as an Exhibit to the Company's Proxy Statement dated April 25, 1996 and is incorporated herein by reference. EX-1.1 2 EXHIBIT 1.1 2,250,000 Shares NORLAND MEDICAL SYSTEMS, INC. Common Stock UNDERWRITING AGREEMENT June __, 1996 UBS Securities LLC Pacific Growth Equities, Inc. As Representatives of the Several Underwriters c/o UBS Securities LLC 299 Park Avenue New York, NY 10171 Ladies and Gentlemen: Norland Medical Systems, Inc., a Delaware corporation (the "Company"), proposes to issue and sell 1,500,000 shares (the "Company Shares") of its authorized but unissued Common Stock, $.0005 par value per share (the "Common Stock"), to the several Underwriters listed on SCHEDULE A to this Agreement (collectively, the "Underwriters"); and Norland Partners ("Norland Partners"), L.P., a stockholder, proposes to sell 750,000 shares of issued and outstanding Common Stock (the "Stockholder Shares") to the Underwriters. The Company, Norland Partners, and Novatech Ventures, L.P. also propose to grant to the Underwriters an option to purchase an aggregate of up to 337,500 additional shares (the "Option Shares") of Common Stock on the terms and for the purposes set forth in Section 4.c. Norland Partners and Novatech Ventures, L.P. are hereinafter individually referred to as a "Selling Stockholder" and collectively referred to as the "Selling Stockholders." The Company Shares and the Stockholder Shares are hereinafter collectively referred to as the "Firm Shares," and the Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The Company wishes to confirm as follows its agreements with you (the "Representatives") and the other Underwriters on whose behalf you are acting in connection with the several purchases by the Underwriters of the Shares. 1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File No. ________) including a prospectus relating to the Shares and each amendment thereto has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, -1- and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. There have been delivered to you two signed copies of such registration statement and amendments, of each related prospectus subject to completion and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. If such registration statement has not become effective, a further amendment or amendments to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus containing all Rule 430A Information (as hereinafter defined) will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations on or before the second business day after the date hereof (or such earlier time as may be required by the Rules and Regulations). The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes or became effective and, in the event any post-effective amendment thereto becomes effective prior to the Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include all Rule 430A Information or information included in a term sheet pursuant to Rule 434 of the Rules and Regulations and in each case deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A or Rule 434(d) of the Rules and Regulations. The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective; provided, however, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of UBS Securities LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares -2- (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall, if applicable, be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). If in reliance on Rule 434 of the Rules and Regulations and with the consent of UBS Securities LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. The term "Rule 430A Information" means information with respect to the Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. The term "Offering Memorandum" as used in this Agreement shall mean the offering memorandum consisting of the Prospectus and any Canadian wrap-around used in connection with the offering of the Shares in Canada. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Underwriters as follows: a. The Company has not received, and has no notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or any institution of proceedings for that purpose, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the Rules and Regulations. When the Registration Statement became or becomes, as the case may be, effective (the "Effective Date") and at all times subsequent thereto up to and at the Closing Date (as hereinafter defined), any later date on which Option Shares are to be purchased (the "Option Closing Date") and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, (i) the Registration Statement and Prospectus, and any amendments or supplements thereto, will contain all statements which are required to be stated therein by, and will comply with the requirements of, the Act and the Rules and Regulations, (ii) each Preliminary Prospectus and Prospectus, and any supplement thereto, delivered to the Underwriters for use in connection with the offering of Shares contemplated hereunder will be identical, if applicable, to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T and (iii) none of the Registration Statement, the Prospectus, the Offering Memorandum, or any amendment or supplement thereto, will include any -3- untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement and Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. The Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus, the Offering Memorandum or any other materials, if any, permitted by the Act and applicable Canadian securities legislation. b. Each of the Company, Dove Medical Systems, Inc. (the "Subsidiary"), Norland Corporation ("Norland") and Stratec Medizintech GmbH ("Stratec"; Norland and Stratec are together sometimes referred to herein as the "Manufacturers") has been duly incorporated and otherwise formed and is validly existing as a corporation or limited liability company (Gesellschaft mit beschrankter Haftung) in good standing (where such concept is legally relevant) under the laws of the jurisdiction of its formation, with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement. Each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). The Company has no subsidiaries (as defined in the Rules and Regulations) other than the Subsidiary. The Company owns all of the outstanding common stock of the Subsidiary. Other than the Subsidiary and as otherwise described in the Registration Statement, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the certificates of incorporation and of the bylaws of the Company and the Subsidiary and all amendments thereto have been delivered to the Representatives, and except as set forth in the exhibits to the Registration Statement no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. All of the outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable and are owned beneficially by the Company subject to no security interest, other encumbrance or adverse claims. c. The Company has full power and authority (corporate and otherwise) to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable laws, including without limitation, -4- federal and state securities laws, or equitable principles and except as enforcement hereof may be limited by applicable bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The performance of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company, the Subsidiary or, to the best of the Company's knowledge, either Manufacturer, is a party or by which any of their respective properties are bound, or (ii) the certificate of incorporation or bylaws of the Company, the Subsidiary or, to the best of the Company's knowledge, either Manufacturer, or (iii) any law, order, rule, regulation, writ, injunction or decree of any court or governmental agency or body to which the Company, the Subsidiary or, to the best of the Company's knowledge, either Manufacturer, is subject. The Company is not required to obtain or make (as the case may be) any consent, approval, authorization, order, designation or filing by or with any court or regulatory, administrative or other governmental agency or body as a requirement for the consummation by the Company of the transactions herein contemplated, except such as may be required under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or under state securities or blue sky ("Blue Sky") laws or under the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") or under applicable Canadian securities legislation. d. There is not pending or, to the Company's knowledge, threatened, any legal or governmental action, suit, claim, proceeding or investigation against the Company, the Subsidiary or either Manufacturer or to the Company's knowledge, any pending or threatened action, suit, claim or proceeding against any of their respective officers or any of their respective properties, assets or rights before any court or governmental agency or body or otherwise which, if adversely determined, is likely to result in any Material Adverse Effect or cause a material adverse change in its condition (financial or otherwise), properties, assets, business, results of operations or rights, or prevent consummation of the transactions contemplated hereby or materially adversely affect the rights of the Company under the Distribution Agreement or Loan Agreement. There are no statutes, rules, regulations, agreements, contracts, leases or documents that are required to be described in the Prospectus, or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations that have not been accurately described in all material respects in the Prospectus or filed as exhibits to the Registration Statement. e. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, resale right, right of first refusal or similar right. The authorized and outstanding capital stock of the Company conforms in all material respects to the description thereof contained in the Registration Statement, the Prospectus and the -5- Offering Memorandum (and such description correctly states the substance of the provisions of the instruments defining the capital stock of the Company). The Company Shares and Option Shares to be issued and sold by the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as set forth in the Registration Statement, no preemptive right, co-sale right, registration right, right of first refusal or other similar rights of security holders exists with respect to any of the Shares to be issued and sold by the Company or the issue and sale thereof other than those that have lapsed or been expressly waived prior to the date hereof. No further approval or authorization of any security holder, the Board of Directors or any duly appointed committee thereof or others is required for the issuance and sale or transfer of the Shares, except as may be required under the Act, the Exchange Act or state securities or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and the Offering Memorandum and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus and the Offering Memorandum accurately and fairly present, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights. All of the outstanding equity securities of Norland and Stratec are owned of record and beneficially by Norland Medical Systems, B.V. ("NMS"), a corporation organized under the laws of the Netherlands, and there are no outstanding options to purchase or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of equity securities of Norland or Stratec or any such options, rights, convertible securities or obligations. All of the outstanding equity securities of NMS are owned of record and beneficially by Hans Schiessl, Norland Partners, L.P., Nissho Iwai Corporation, and Nissho Iwai American Corporation, and there are no outstanding options to purchase or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of equity securities of NMS or any such options, rights, convertible securities or obligations, except pursuant to the NMS Stock Option Plan. f. Each of the Company, Norland, and Stratec, has full legal right, power and authority to enter into the distribution agreement among the Company, Norland and Stratec described in the Prospectus (as amended, the "Distribution Agreement"), the product development loan agreement among the Company, Norland and Stratec (the "Loan Agreement") and the applicable Promissory Notes attached as exhibits to the Loan Agreement (the "Notes") and to comply with and perform its respective obligations contemplated thereby, and NMS has full legal right, power, and authority to make the -6- covenants set forth directly below the signatures of the parties to the Distribution Agreement and the Loan Agreement in the manner set forth therein and to comply with and perform its obligations contained in such covenants. The Distribution Agreement and the Loan Agreement were duly authorized, executed and delivered by each of the Company, Norland, and Stratec, and the covenants of NMS set forth below the signatures of the parties to the Distribution Agreement and the Loan Agreement were duly authorized, executed and delivered by NMS. Each of the Distribution Agreement and the Loan Agreement constitutes and each of the Notes when executed and delivered will constitute a valid and binding obligation of each party thereto, enforceable in accordance with its terms, and NMS's covenants set forth below the signatures of the parties to the Distribution Agreement and the Loan Agreement constitute valid and binding obligations of NMS, enforceable in accordance with their terms. The Company's, Norland's, and Stratec's entering into and performing under the Distribution Agreement, the Loan Agreement, and Norland's and Stratec's execution, delivery, and performance of the Notes, will not violate any provisions of their respective certificates or articles of incorporation or bylaws, as amended or restated, or other organizational documents, nor will any such entering into, execution, delivery, or performance conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company, Norland or, to the best of the Company's knowledge, Stratec, respectively, is a party or by which the Company, Norland, or, to the best of the Company's knowledge, Stratec, or any properties of any of them, respectively, may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to any party to the Distribution Agreement, the Loan Agreement and the Notes when issued, or any of their properties. g. Coopers & Lybrand, LLP, who have examined the financial statements, together with the related schedules and notes, of the Company filed with the Commission as a part of the Registration Statement, which are included in the Prospectus; Schweizerische Treuhandgesellscshoft-Coopers & Lybrand AG, who have examined the financial statements, together with related schedules and notes, of Ostech BV ("OBV") filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, and Hurley & Company, who have examined the financial statements, together with related schedules and notes of the Subsidiary filed with the Commission, as a part of the Registration Statement, which are included in the Prospectus, are independent public accountants with respect to the Company, OBV and the Subsidiary, as the case may be, within the meaning of the Act and the Rules and Regulations. The financial statements of the Company, OBV and the Subsidiary, together with the related schedules and notes, forming part of the Registration Statement, the Prospectus and the Offering Memorandum, fairly present in all material respects the financial position and the results of operations of the Company, OBV and the Subsidiary, as the case may be, at the respective dates and for the respective periods to which they apply. All financial statements, together with the related schedules and notes, filed with the Commission as part of the Registration Statement have been prepared in accordance with generally accepted accounting principles -7- as in effect in the United States consistently applied throughout the periods involved except as may be otherwise stated in the Registration Statement. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements or schedules are required by the Act or the Rules and Regulations to be included in the Registration Statement. h. Subsequent to the respective dates as of which information is given in the Registration Statement, the Prospectus and the Offering Memorandum, there has not been (i) any material adverse change, or any development which, in the Company's reasonable judgment, is likely to result in a Material Adverse Effect or to cause a material adverse change in the condition (financial or otherwise) business, properties, results of operations or assets described or referred to in the Registration Statement of the Company and the Subsidiary taken as a whole, or, to the best of the Company's knowledge, either Manufacturer (except as to a Manufacturer changes that would not materially or adversely affect the condition (financial or otherwise), business, properties, assets or results of operations of the Company), (ii) any transaction which is material to the Company or the Subsidiary, except transactions in the ordinary course of business, (iii) any obligation, direct or contingent, which is material to the Company and the Subsidiary taken as a whole, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, the Subsidiary or, to the best of the Company's knowledge, either Manufacturer, or (vi) any loss or damage (whether or not insured) to the property of the Company, the Subsidiary or, to the best of the Company's knowledge, either Manufacturer, which has been sustained or will have been sustained which is material to the Company and the Subsidiary taken as a whole. Neither the Company nor the Subsidiary has any contingent obligation which is material to the Company and the Subsidiary taken as a whole which is not disclosed in the Registration Statement. i. Except as set forth in the Prospectus and the Offering Memorandum, (i) each of the Company and the Subsidiary has good and marketable title to all material properties and assets described in the Prospectus and Offering Memorandum as owned by them, and, to the best of the Company's knowledge, each Manufacturer has good and marketable title to the properties and assets necessary for the conduct of its business and the satisfaction of its obligations under the Distribution Agreement, in each case free and clear of any pledge, lien, security interest, charge, encumbrance, claim, equitable interest, or restriction, except those that are not material in amount and do not adversely affect the use made and proposed to be made of such property by the Company or affect the satisfaction of obligations under the Distribution Agreement by each Manufacturer, respectively, (ii) the agreements to which the Company, the Subsidiary and, to the best of the Company's knowledge, Norland or Stratec, is a party described in the Prospectus and the Offering Memorandum are valid agreements, enforceable against the Company, the Subsidiary, Norland or Stratec, as the case may be, in accordance with their terms, except -8- as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally or by general equitable principles, and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or default under any of such agreements and (iii) the Company, the Subsidiary, Norland and, to the best of the Company's knowledge, Stratec have valid and enforceable leases for the properties described in the Prospectus and the Offering Memorandum as leased by it, and such leases conform in all material respects to the description thereof, if any, set forth in the Registration Statement. Except as set forth in the Prospectus and the Offering Memorandum, the Company, the Subsidiary and, to the best of the Company's knowledge, each of the Manufacturers owns or leases all such properties as are necessary to its operations as now conducted or proposed to be conducted. j. Each of the Company, the Subsidiary, Norland and, to the best of the Company's knowledge, Stratec, now hold and at the Closing Date and any later Option Closing Date, as the case may be, will hold, all licenses, certificates, approvals and permits from all state, United States, foreign and other regulatory authorities, including but not limited to the United States Food and Drug Administration (the "FDA"), and any foreign regulatory authorities performing functions similar to those performed by the FDA, that are material to the conduct of the business of the Company (as such business is currently conducted), except for such licenses, certificates, approvals and permits the failure of which to hold would not have a Material Adverse Effect, all of which are valid and in full force and effect (and there is no proceeding pending or, to the knowledge of the Company, threatened which may cause any such license, certificate, approval or permit to be withdrawn, canceled, suspended or not renewed). Neither the Company nor the Subsidiary nor, to the best of the Company's knowledge, Norland or Stratec, is in violation of its certificate of incorporation or bylaws, or, except for defaults or violations which would not have a Material Adverse Effect, in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which it is a party or by which it or any of its properties are bound, or in violation of any law, order, rule, regulation, writ, injunction or decree of any court or governmental agency or body, including, but not limited to, the FDA (including, without limitation, all applicable statutes or regulations relating to: the development, testing, manufacture, labelling, advertising or sale of X- ray devices; the development, testing, manufacture, labelling, advertising or sale of medical devices generally; and the control of exports from the United States); and there does exist any state of facts that constitutes an event of default or violation on the part of the Company or, to the best of the Company's knowledge, either Manufacturer as defined in such documents or that, with notice or lapse of time or both, would constitute such an event of default or violation. All of the descriptions in the Registration Statement and Prospectus of the legal and governmental proceedings by or before the FDA or any foreign, state or local government body exercising comparable authority are true, complete and accurate in all material respects. -9- k. Each of the Company, the Subsidiary and Norland has filed on a timely basis all necessary federal, state and foreign income, franchise and other tax returns and has paid all taxes shown thereon as due, and the Company has no knowledge of any tax deficiency which has been or might be asserted against the Company, the Subsidiary or either Manufacturer which might have a Material Adverse Effect. All material tax liabilities are adequately provided for within the financial statements of the Company. l. Each of the Company and the Subsidiary maintain insurance (other than product liability and clinical trial liability insurance) of the types and in the amounts adequate for its business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. Each of the Manufacturers has product liability insurance (including clinical trial liability insurance) in full force and effect to the extent described in the Prospectus and Registration Statement, which insurance names the Company as an additional insured. m. Neither the Company, the Subsidiary nor, to the best of the knowledge of the Company, either Manufacturer, is involved in any labor dispute or disturbance nor, to the best of the knowledge of the Company, is any such dispute or disturbance threatened. No collective bargaining agreement exists with any of the Company's or the Subsidiary's employees and, to the best of the Company's knowledge, no such agreement is imminent. n. Each of the Company, the Subsidiary, Norland and, to the best of the Company's knowledge, Stratec, own or possess adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights, manufacturing processes, formulae, trade secrets, know-how, franchises, and other material intangible property and assets (collectively, "Intellectual Property") necessary to the conduct of their businesses as conducted and as proposed to be conducted as described in the Prospectus and the Offering Memorandum except as otherwise set forth in the Prospectus under the heading "Risk Factors--Proprietary Rights Protection." The Company has no knowledge that it, the Subsidiary or either Manufacturer lacks or will be unable to obtain any rights or licenses to use any of the Intellectual Property necessary to conduct the business now conducted or proposed to be conducted by it as described in the Prospectus, except as described in the Prospectus and the Offering Memorandum. The Prospectus fairly and accurately describes the Company's, the Subsidiary's, Norland's and, to the best of the Company's knowledge, Stratec's rights with respect to the Intellectual Property. The Company has not received any notice of, and has no knowledge of, infringement or of conflict with rights or claims of others with respect to any Intellectual Property. The Company is not aware of any asserted rights or patents of others which are infringed upon by potential products or processes referred to in the Prospectus and the Offering Memorandum in such a manner as to materially and adversely affect the Company and the Subsidiary taken as a whole, except as described in the Prospectus and the Offering Memorandum. -10- o. The Company is not an "investment company," or a "promoter" or "principal underwriter" for a registered investment company, as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). p. Neither the Company nor the Subsidiary has incurred any liability for a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement other than the underwriting discounts and commissions contemplated hereby. q. The Company is not aware of any state of facts that might reasonably be expected to result in Norland or Stratec, or any supplier to either, failing to deliver or delaying delivery of goods, services, or other products to the Company, except for failures or delays that would not materially adversely affect the condition (financial or otherwise), business or results of operations of the Company. r. Neither the Company nor the Subsidiary has received any notice, whether written or oral, from any of their respective distributor of termination of a distribution agreement between the Company or the Subsidiary and such distributor, and neither the Company nor the Subsidiary is aware of the revocation or impending revocation of any governmental permit necessary for the sale of the Company's or the Subsidiary's products in any country in which any such distributor has authority to sell such products, except such terminations or revocations as would not individually or in the aggregate have a material adverse effect on the Company. s. Neither the Company nor the Subsidiary has received any notice, whether written or oral, from any distributor, customer, or person or entity using any product marketed by the Company or the Subsidiary to return any such product, which notice or returns the Company or the Subsidiary knows arise from a defect or shortcoming in the products marketed by the Company or the Subsidiary, except such defects as would not individually or in the aggregate have a material adverse effect on the condition (financial or otherwise), business, or results of operations of the Company. t. Each of the Company, the Subsidiary, Norland and, to the best of the Company's knowledge, Stratec (i) is in compliance with any and all applicable United States, state and local and foreign environmental laws, rules, regulations, treaties, statutes and codes promulgated by any and all governmental authorities relating to the protection of human health and safety, the environment or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business as currently conducted, and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permit licenses or other approvals would not, individually or in the aggregate, have a Material Adverse Effect. No action, proceeding, revocation proceeding, writ, injunction or claim is pending or threatened relating to the Environmental Laws or to the Company's, the Subsidiary's, Norland's or to the best of the Company's -11- knowledge, Stratec's. activities involving Hazardous Materials. "Hazardous Materials" means any material or substance (i) that is prohibited or regulated by any environmental law, rule, regulation, order, treaty, statute or code promulgated by any governmental authority, or any amendment or modification thereto, or (ii) that has been designated or regulated by any governmental authority as radioactive, toxic, hazardous or otherwise a danger to health, reproduction or the environment. u. Neither the Company nor the Subsidiary nor Norland nor, to the best of the Company's knowledge, Stratec, has engaged in the generation, use, manufacture, transportation or storage of any Hazardous Materials on any of the Company's, the Subsidiary's, Norland's or Stratec's properties or former properties, except where such use, manufacture, transportation or storage is in material compliance with Environmental Laws. No Hazardous Materials have been treated or disposed of on any of the Company's, the Subsidiary's, Norland's, or to the best of the Company's knowledge, Stratec's, properties or on properties formerly owned or leased by the Company, the Subsidiary, Norland, or to the best of the Company's knowledge, Stratec, during the time of such ownership or lease, except in compliance with Environmental Laws. No spills, discharges, releases, deposits, emplacements, leaks or disposal of any Hazardous Materials have occurred on or under or have emanated from any of the Company's, the Subsidiary's, Norland's or to the best of the Company's knowledge, Stratec's, properties or former properties. v. The Company and the Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable and appropriate action is taken with respect to any differences. w. Neither the Company nor the Subsidiary nor, to the best of the Company's knowledge, either Manufacturer, has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any foreign, United States or state governmental officer or official, or other person charged with similar public of quasi-public duties, other than payments required or permitted by the laws of the United States. x. The Common Stock is registered pursuant to Section 12(g) of the Exchange Act. The Shares that are currently outstanding are quoted, and the Shares to be issued and sold under this Agreement have been duly authorized for quotation, on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System ("Nasdaq National Market"). The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under -12- the Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the Commission or the Nasdaq National Market is contemplating terminating such registration or listing. y. Neither the Company nor, to its knowledge, any of its officers, director or affiliates have taken, and at the Closing Date and at any later Option Closing Date, neither the Company nor, to its knowledge, any of its officers, directors or affiliates will have taken, directly or indirectly, any action which has constituted, or might reasonably be expected to constitute, the stabilization or manipulation of the price of sale or resale of the Shares. z. The Company has not distributed and will not distribute prior to the later of the (i) the Closing Date or any Option Closing Date, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectus, Prospectus, Offering Memorandum, Registration Statement and other materials, if any, permitted by the Act. aa. The Company has timely and properly filed with the Commission all reports and other documents required to have been filed by it with the Commission pursuant to the Act and the Rules and Regulations and the Exchange Act and the rules and regulations thereunder. True and complete copies of all such reports and other documents have been delivered to you. bb. The Company has complied with all provisions of Section 517.075, Florida statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. cc. The Company and the Subsidiary each had all corporate power and authority to execute, deliver and perform the Agreement and Plan of Reorganization dated as of April 2, 1996 (the "Acquisition Agreement"), and each of such corporations took all action required by law, their articles or certificates of incorporation and bylaws or otherwise, to authorize such execution and delivery and to approve the merger of Dove Medical Systems ("Dove") into the Subsidiary (the "Merger"). dd. The Company had all corporate power and authority to execute, deliver and perform the Purchase Agreement dated April 2, 1996 (the "Purchase Agreement") relating to the Merger, and the Company took all action required by law, its articles of incorporation and bylaws or otherwise, to authorize such execution and delivery and the performance of the transactions contemplated thereby. ee. The execution and delivery of the Acquisition Agreement and the consummation of the Merger and, in the case of the Company, the execution and delivery of the Purchase Agreement, did not contravene any provision of applicable law or the articles or certificates of incorporation or bylaws of the Company or the Subsidiary, or any -13- provision of any material agreement or instrument binding upon the Company or the Subsidiary or any order, writ, injunction or decree of any jurisdiction, court or governmental body. ff. Each of the Acquisition Agreement and the Purchase Agreement is a valid and binding agreement of each of the parties thereto, and the Merger has been duly consummated with the Subsidiary as the sole surviving corporation. gg. To the knowledge of the Company, no shareholders of Dove have exercised their rights of appraisal or other dissenter's rights with respect to the Merger or any of the actions that were conditions precedent to, or otherwise necessary to effect, the Merger. hh. The Merger qualified as a tax-free reorganization under the Internal Revenue Code of 1986, as amended. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING STOCKHOLDERS. a. Each Selling Stockholder hereby represents and warrants to, and covenants with, the Underwriters as follows: (1) It has, and on the Closing Date (as hereinafter defined) will have, good and marketable title to the Stockholder Shares and Option Shares to be sold by it and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Stockholder Shares and Option Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, security interests, restrictions and claims whatsoever; and upon delivery of and payment for such Stockholder Shares and Option Shares hereunder, the several Underwriters will acquire good and marketable title thereto, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts or other defects of title whatsoever. (2) It has executed and delivered a Power of Attorney and caused to be executed and delivered on its behalf a Custody Agreement (hereinafter collectively referred to as the "Stockholder's Agreement") and in connection herewith the Selling Stockholder further represents, warrants and agrees that it has deposited in custody, under the Stockholder's Agreement, with the agent named therein (the "Agent") as custodian, certificates in negotiable form for the Stockholder Shares and Option Shares to be sold by it, for the purpose of further delivery pursuant to this Agreement. The Selling Stockholder agrees that the Stockholder Shares and Option Shares on deposit with the Agent are subject to the interests of the Company and the several Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the Selling Stockholder's obligations hereunder shall not be terminated, except as provided in this Agreement or in the Stockholder's Agreement, by any act of the Selling Stockholder, by operation of law, by the insolvency or dissolution of the Selling Stockholder or by the occurrence of any other event. If the Selling Stockholder should be dissolved or -14- liquidated, or if any other such event should occur, before the delivery of the Stockholder Shares and Option Shares hereunder, the documents evidencing the Stockholder Shares and Option Shares then on deposit with the Agent shall be delivered by the Agent in accordance with the terms and conditions of this Agreement and the Stockholder's Agreement as if such event had not occurred, regardless of whether or not the Agent shall have received notice thereof. This Agreement and the Stockholder's Agreement have been duly executed and delivered by or on behalf of the Selling Stockholder and a copy of such Stockholder's Agreement has been delivered to you. (3) The performance of this Agreement and the Stockholder's Agreement and the consummation of the transactions contemplated hereby and by the Stockholder's Agreement will not result in a breach or violation by the Selling Stockholder of any of the terms or provisions of, or constitute a default by the Selling Stockholder under, any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder or any of its properties is bound, any statute, or any judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to the Selling Stockholder or any of its properties. (4) The Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that has constituted or might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (5) With respect to any statements in the Registration Statement, the Prospectus, or any amendment or supplement thereto that are made in reliance upon and in conformity with written information furnished to the Company by the Selling Stockholder specifically for use in the preparation of the Registration Statement, the Prospectus, or such amendment or supplement, at the time the Registration Statement becomes or became effective and at all times subsequent thereto up to and including the Closing Date (hereinafter defined) or any later Option Closing Date, neither the Registration Statement nor the Prospectus nor such amendment or supplement included or will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (6) The executive officers of the general partner of the Selling Stockholder have reviewed and are familiar with the Registration Statement as originally filed with the Commission and all amendments and supplements thereto, if any, filed with the Commission prior to the date hereof, with the Preliminary Prospectus contained therein and with the Offering Memorandum, as supplemented, if applicable, to the date hereof. To the best knowledge of the Selling Stockholder, the representations, warranties and agreements of the Company contained in Section 2 of this Agreement are true and correct. -15- b. The Selling Stockholder agrees with the Company and the several Underwriters that, without the prior written consent of UBS Securities LLC which may be withheld in your sole discretion, the Selling Stockholder will not, directly or indirectly, offer, sell, assign, transfer, encumber, contract to sell, grant any option to purchase, or otherwise dispose of, any Common Stock (including Common Stock that may be deemed to be beneficially owned by the Selling Stockholder in accordance with the Rules and Regulations) or any securities convertible into or exchangeable for any shares of Common Stock, until the one hundred twentieth (120th) day after the effective date of the Registration Statement. Notwithstanding the foregoing, this paragraph shall not prohibit any of the following types of transfers: (i) a private transfer by the Selling Stockholder to a partner of the Selling Stockholder or a retired partner of the Selling Stockholder, in accordance with the Selling Stockholder's partnership agreement; and (ii) following any transfer permitted in clause (i) of this sentence to an individual, any private transfer by gift, will or intestate succession from such individual to such individual's spouse or members of the immediate family of such individual or such individual's spouse, in each case described in clause (i) or (ii) if the transferee agrees in writing to be subject to the terms of this paragraph to the same extent as the Selling Stockholder. 4. PURCHASE OF THE SHARES BY THE UNDERWRITERS. a. On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell the Company Shares, and Norland Partners, L.P. agrees to sell the Stockholder Shares, to the several Underwriters. Each of the Underwriters agrees to purchase from the Company and Norland Partners, L.P. the respective aggregate number of Firm Shares set forth opposite its name on SCHEDULE A, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 4.b. hereof. The price at which such Firm Shares shall be sold by the Company and purchased by the several Underwriters shall be $_____ per share. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs b. and c. of this Section 4, the agreement of each Underwriter is to purchase only the respective number of Firm Shares specified on SCHEDULE A. b. If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 11 hereof) to purchase and pay for the number of Shares agreed to be purchased by such Underwriter or Underwriters, the non-defaulting Underwriters shall have the right within twenty-four (24) hours after such default to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the Shares which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such Shares and portion, the number of Shares which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis (as adjusted by you in -16- such manner as you deem advisable to avoid fractional shares) to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder. If the total number of Shares which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within twenty-four (24) hours next succeeding the 24-hour period referred to above, to make arrangements with other underwriters or purchasers reasonably satisfactory to you for purchase of such Shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 6 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 6 in order that any necessary changes in the Registration Statement, the Prospectus, the Offering Memorandum or any other documents or arrangements may be made. If the aggregate number of Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph b., and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. c. On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company and the Selling Stockholders grant an option to the several Underwriters to purchase all or any portion of the Option Shares from the Company at the same price per share as the Underwriters shall pay for the Firm Shares. Said option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option. If the Underwriters exercise their option as to fewer than all the Option Shares, the first 36,000 Option Shares will be sold by Norland Partners, L.P., the next 264,000 Option Shares will be sold by Novatech Ventures, L.P., and the remaining 37,500 Option Shares will be sold by the Company. Delivery of certificates for the shares of Option Shares, and payment therefor, shall be made as provided in Section 6 hereof. Each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, the exact number of shares to be adjusted by you in such manner as you deem advisable to avoid fractional shares. -17- 5. OFFERING BY UNDERWRITERS. a. The terms of the initial public offering in the United States and the private placement in Canada by the Underwriters of the Shares to be purchased by them shall be as set forth in the Prospectus and the Offering Memorandum, respectively. The Underwriters may from time to time change the public offering and private placement prices after the closing of the initial public offering and private placement and increase or decrease the concessions and discounts to dealers as they may determine. b. You, on behalf of the Underwriters, represent and warrant that (i) the information set forth in the last paragraph on the front cover page and under the caption "Underwriting" in the Registration Statement, any Preliminary Prospectus, the Prospectus and the Offering Memorandum relating to the Shares (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, the Prospectus and the Offering Memorandum, and that the statements made therein are correct and do not omit to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made not misleading, and (ii) the Underwriters have not distributed and will not distribute prior to the Closing Date or on any Option Closing Date, as the case may be, any offering material in connection with the offering and sale of the shares other than the Preliminary Prospectus, the Prospectus, the Registration Statement, the Offering Memorandum and other materials permitted by the Act. 6. DELIVERY OF AND PAYMENT FOR THE SHARES. a. Delivery of certificates for the Firm Shares and the Option Shares (if the option granted pursuant to Section 4.c. hereof shall have been exercised not later than 1:00 p.m., New York time, on the date at least two business days preceding the Closing Date), and payment therefor, shall be made at the office of Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10782 at 9:00 a.m., New York time, on the third business day after first day that Shares are traded or at such time on such other day, not later than seven full business days after the first day that Shares are traded, as shall be agreed upon in writing by the Company and you (the "Closing Date"). b. If the option granted pursuant to Section 4.c. hereof shall be exercised after 1:00 p.m., New York time, on the date two business days preceding the Closing Date, and on or before the 30th day after the date of this Agreement, delivery of certificates for the Option Shares, and payment therefor, shall be made at the office of Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 101783 at 9:00 a.m., New York time, on the third business day after the exercise of such option (the "Option Closing Date"). c. Payment for the Shares purchased from the Company and the Selling Stockholders shall be made to the Company or its order, at the Company's option -18- and the Agent, as their interests may appear, either by (i) certified or official bank check in same day funds (and the Company and the Agent agree not to deposit any such check in the bank on which drawn until the day following the date of its delivery to the Company and the Agent, respectively) or (ii) by same day wire transfer on terms to be agreed upon by the Underwriters and the Company and the Underwriters and the Agent. Such payment shall be made upon delivery of certificates for the Shares to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Shares to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least three business days before the Closing Date, in the case of Firm Shares, and at least two business days prior to the Option Closing Date, in the case of the Option Shares. Such certificates will be made available to the Underwriters for inspection, checking and packaging at a location in New York, New York, designated by the Underwriters not less than one full business day prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m., New York time, on the business day preceding the Option Closing Date. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later Option Closing Date. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. d. If the Representatives so elect, delivery of the Firm Shares and any Option Shares may be made by credit though full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. 7. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the Underwriters as follows: a. The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement or abbreviated registration statement has become effective or any supplement to the Prospectus or abbreviated registration statement has been filed. If the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and -19- Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations. If for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed. The Company will notify you promptly in writing of (i) the receipt of any comments of the Commission, (ii) any request by the Commission for the amending or supplementing of the Registration Statement (either before or after it becomes effective) or the Prospectus or for additional information and (iii) when the Registration Statement shall have become effective. Promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the reasonable opinion of counsel to the several Underwriters ("Underwriters Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters and shall use its reasonable best efforts to cause the same to become effective as promptly as possible. The Company will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In the event of any such amendments or supplements made or required to be made to the Registration Statement, the Prospectus or any amendments or supplements thereto, the Company shall promptly prepare an Offering Memorandum containing such amendment or supplement and provide the same forthwith to the Underwriters. In case any Underwriter is required to deliver a prospectus within the nine-month period referred to in Section 10(a)(3) of the Act in connection with the sale of the Shares, the Company will prepare promptly upon request, but at its own expense, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. Notwithstanding the foregoing, if such untrue statement or omission was made in reliance on and in conformity with written information provided by you specifically for inclusion in the Registration Statement or the Prospectus, such preparation and filing shall be at your expense. In case you are required to deliver a prospectus after such nine-month period, the Company, upon request, but at your expense, shall promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. The Company will file no amendment or supplement to the Registration Statement or Prospectus that shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing or which is not in compliance with the Act and Rules and Regulations or the provisions of this Agreement. -20- b. The Company will advise you, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any such stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. c. The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation, or to execute a general consent to service of process in any jurisdiction, or to make any undertaking with respect to the conduct of its business. In each jurisdiction in which the Shares shall have been qualified, the Company will make and file such statements, reports and other documents in each year as are or may be reasonably required by the laws of such jurisdictions so as to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Shares, or as otherwise may be required by law. The Company shall advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, shall use its reasonable best efforts to obtain the withdrawal thereof. d. The Company will furnish to you, as soon as available, copies of the Registration Statement (two of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus, the Offering Memorandum and any amendments or supplement to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. If applicable, the copies of the Registration Statement, any Preliminary Prospectus or Prospectus and each amendment or supplement thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. e. The Company will make generally available to its stockholders as soon as practicable, but in any event not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and covering a twelve-month period beginning after the effective date of the Registration Statement, and will advise you in writing when such statement has been made available. -21- f. During a period of five years after the date hereof, the Company, as soon as practicable after the end of each respective period, will furnish to its stockholders annual reports (including financial statements audited by independent certified public accountants) and will make available to its stockholders unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will, upon request, furnish to you and the other several Underwriters hereunder (i) concurrently with making such reports available to its stockholders, statements of operations of the Company for each of the first three quarters in the form made available to the Company's stockholders; (ii) concurrently with the furnishing thereof to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity and of cash flow of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of nationally recognized independent certified public accountants; (iii) concurrently with the furnishing of such reports to its stockholders, copies of all reports (financial or other) mailed to stockholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the Nasdaq National Market by the Company (except for documents for which confidential treatment is requested); and (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared for general release by the Company. During such five-year period, if the Company shall have any active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company are consolidated with any subsidiaries, and shall be accompanied by similar financial statements for any significant subsidiary that is not so consolidated. g. Prior to or simultaneously with the execution and delivery of this Agreement, the Company will obtain agreement from each beneficial owner of the Company's Common Stock listed on Schedule B to this Agreement providing that such person will not, for a period of 120 days after the date of the Prospectus, without the prior written consent of UBS Securities LLC, directly or indirectly, offer to sell, sell, hypothecate, contract to sell, grant any option to purchase, or otherwise dispose of, any shares of Common Stock beneficially owned as of the date such lockup is executed (including, without limitation, shares of Common Stock which may be deemed to be beneficially owned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of Common Stock which may be issued upon exercise of a stock option or warrant) or any securities convertible into or exercisable or exchangeable for such Common Stock except, (a) by operation of law or (b) pursuant to a bona fide gift to any person or other entity which agrees in writing to be bound by this restriction. Each such person or entity shall also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of shares of Common Stock held by such person or entity, except in compliance with the foregoing restriction. h. The Company shall not, during the 180 days following the effective date of the Registration Statement, except with the prior written consent of UBS -22- Securities LLC, file a registration statement covering any of its shares of capital stock, except that one or more registration statements on Form S-8 may be filed at any time following the effective date of the Registration Statement. i. The Company shall not, during the 180 days following the effective date of the Registration Statement, except with the prior written consent of UBS Securities LLC, issue, sell, offer or agree to sell, grant, distribute or otherwise dispose of, directly or indirectly, any shares of Common Stock, or any options, rights or warrants with respect to shares of Common Stock, or any securities convertible into or exchangeable for Common Stock, other than (i) the sale of Shares hereunder, (ii) the grant of options or the issuance of Shares of Common Stock under the Company's stock option plans or stock purchase plan, as the case may be, existing on the date hereof, (iii) the issuance of shares of Common Stock upon exercise of the currently outstanding options or warrants described in the Registration Statement. j. The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus and the Offering Memorandum. k. The Company will maintain a Transfer Agent and, if necessary under the laws of the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. l. For a period of five years after the date hereof, the Company shall use its reasonable best efforts to (i) maintain the listing of the Common Stock on the Nasdaq National Market, (ii) qualify or register its Common Stock for sale in non-issuer transactions under the Blue Sky laws of the State of California or (iii) obtain and maintain exemptions from the application of such Blue Sky laws to non-issuer transactions in the Common Stock. m. Prior to the earlier of (i) the Option Closing Date or (ii) 30 days after the first date any Shares are released for sale to the public, the Company shall not repurchase or otherwise acquire any of the Company's Common Stock or declare or pay any dividend or make any other distribution upon its Common Stock. n. The Company is familiar with the Investment Company Act, and the rules and regulations thereunder, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner so as to ensure that the Company was not and will not be an "investment company" within the meaning of the Investment Company Act, and the rules and regulations thereunder. o. If at any time during the 180-day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether -23- such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and, if you and the Company agree, disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. 8. EXPENSES. The Company agrees with each Underwriter that: a. The Company will pay and bear all costs, fees and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses, the Prospectus and the Offering Memorandum and any amendments or supplements thereto; the reproduction of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Memoranda and any Supplemental Blue Sky Memoranda and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any; the cost of all stock certificates representing the Shares and Transfer Agents' and Registrars' fees; the fees and disbursements of corporate, patent and regulatory counsel for the Company; all fees and other charges of the Company's independent public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectuses, the Prospectus and the Offering Memorandum and any amendments or supplements to any of the foregoing; NASD filing fees and expenses incident to securing any required review and the cost of qualifying the Shares under the laws of such jurisdictions within the United States as you may designate (including filing fees and fees and disbursements of Underwriters' counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. b. If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, the Company will, in addition to paying the expenses described in paragraph a. above, reimburse the several Underwriters for all out-of-pocket expenses (including reasonable fees and disbursements of Underwriters' counsel) incurred by the Underwriters in reviewing the Registration Statement and the Prospectus and in preparing the Offering Memorandum and in otherwise investigating, preparing to market or marketing the Shares. The Company will in no event be liable to any of the several Underwriters for any loss of anticipated profits from the sale by them of the Shares. c. Except to the extent paid by the Company pursuant to the preceding paragraph, each Selling Stockholder shall pay (directly or by reimbursement) all fees and expenses incident to the performance of its obligations under this Agreement, -24- including but not limited to (i) any fees and expenses of counsel for such Selling Stockholder; (ii) any fees and expenses of the Agent; and (iii) all expenses and taxes incident to the sale and delivery of the Option Shares, including any transfer and other stamp taxes applicable to the sale of the Option Shares to you or the public offering of such shares. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares, as provided herein, shall be subject to the accuracy, as of the date hereof and the Closing Date and any later Option Closing Date, as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: a. The Registration Statement shall have become effective not later than 9:00 a.m., New York City time, on the date following the date of this Agreement, or such later time or date as shall be consented to in writing by you. If the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of Underwriters' counsel. b. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement, the Prospectus, the Offering Memorandum and the registration, authorization, issue, sale and delivery of the Shares shall have been reasonably satisfactory to Underwriters' counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this subsection. c. You shall have received, at no cost to you, on the Closing Date and on any later Option Closing Date, as the case may be, in the forms attached hereto on Appendix A, the opinions of (i) Morgan, Lewis & Bockius, corporate counsel to the Company, (ii) Morgan, Lewis & Bockius, Frankfurt, Republic of Germany, special counsel to the Company, (iii) Quarles & Brady, special counsel for the Company, and (iv) Barents & Krans, The Hague, Netherlands, special counsel for the Company, in each case dated the Closing Date or such later Option Closing Date and addressed to the Underwriters and with signed counterparts thereof for the Representatives. d. You shall have received from Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, Underwriters' counsel, an opinion or opinions, -25- dated the Closing Date or on any later Option Closing Date, as the case may be, in form and substance reasonably satisfactory to you, with respect to the sufficiency of all corporate proceedings undertaken by the Company and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents as it may have reasonably requested for the purpose of enabling it to pass upon such matters. In connection with such opinion, such counsel may rely on representations or certificates of officers of the Company and governmental officials. e. You shall have received on the date Preliminary Prospectuses are first circulated, the date immediately preceding the date this Agreement is executed, the Closing Date and on any later Option Closing Date, a letter from each of Coopers & Lybrand, LLP, independent accountants, and Schweizerische Treuhandgesellscshaft-Coopers & Lybrand AG addressed to the Company and the Underwriters, dated the date of its delivery, confirming that it is an independent certified public accountant with respect to the Company within the meaning of the Act and the Rules and Regulations thereunder and based upon the procedures described in its letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five days prior to the Closing Date or any such later Option Closing Date, as the case may be, (i) confirming that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later Option Closing Date, as the case may be; and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter that are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company which, in your reasonable judgment, makes it impracticable or inadvisable to proceed with the public offer of the Shares as contemplated by the Prospectus. All such letters shall be in a form and substance reasonably satisfactory to the Representatives and their counsel. f. You shall have received on the Closing Date and on any later Option Closing Date, as the case may be, a certificate of the President or Chairman of the Board and the chief financial or accounting officer of the Company, dated the Closing Date or such later date, to the effect that as of such date (and you shall be satisfied that as of such date): (1) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later Option Closing Date, as the case may be; and the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later Option Closing Date, as the case may be; (2) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement or -26- preventing or suspending the use of the Prospectus has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of their knowledge, threatened under the Act; (3) They have carefully reviewed the Registration Statement, the Prospectus and the Offering Memorandum; and, when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus and any amendments or supplements thereto contained all statements and information required to be included therein or necessary to make the statements therein not misleading; and when the Registration Statement became effective, and at all times subsequent thereto up to the delivery of such certificate none of the Registration Statement, the Prospectus and the Offering Memorandum nor any amendment or supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus or Offering Memorandum that has not been so set forth; and (4) Subsequent to the respective dates as of which information is given in the Registration Statement, the Prospectus and the Offering Memorandum, there has not been (i) any material adverse change in the properties or assets described or referred to in the Registration Statement, the Prospectus and the Offering Memorandum or in the condition (financial or otherwise), operations, business, properties, results of operation, or prospects of the Company and the Subsidiary, (ii) any transaction which is material to the Company and the Subsidiary taken as a whole, except transactions entered into in the ordinary course of business, (iii) any liability or obligation, direct or contingent, incurred by the Company or the Subsidiary, which is material to the Company and the Subsidiary taken as a whole, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary which is material to the Company and the Subsidiary taken as a whole, (v) repurchase or other acquisition of its capital stock or any dividend or distribution of any kind declared, paid or made on the outstanding capital stock of the Company payable to stockholders of record, (vi) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary or, to the best of the signer's knowledge, either Manufacturer, which has been sustained or will have been sustained which is material to the Company and the Subsidiary taken as a whole, or, to the best of the Company's knowledge, either Manufacturer, or (vii) any legal or governmental action pending or threatened against the Company, the Subsidiary or, to the best of the signers' knowledge, either Manufacturer, that may result in a material adverse change in the condition (financial or otherwise), operations, business, properties, results of operations or prospects of the Company, whether or not arising from transactions in the ordinary course of business, or that may adversely affect the transactions contemplated by this Agreement. g. The Company shall have furnished to you such further certificates and documents as you shall reasonably request as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of its obligations -27- hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. h. The Shares that are currently outstanding are quoted, and the Shares to be issued and sold under this Agreement are duly authorized for quotation upon notice of issuance, on the Nasdaq National Market. i. On the Closing Date and on any later Option Closing Date a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each Selling Stockholder selling Common Stock as of such Closing Date or Option Closing Date, to the effect that the representations and warranties of such Selling Stockholder in this Agreement are true and correct, as if made at and as of such Closing Date, and such Selling Stockholder has complied with all the agreements and satisfied all the conditions on his part to be performed or satisfied prior to such Closing Date; j. On or before the Closing Date, letters from each person identified on Schedule B hereto who owns shares of Common Stock as of the date hereof, in form and substance satisfactory to you, confirming that, without the prior written consent of UBS Securities LLC, which may be withheld in the sole discretion of UBS Securities LLC, such person will not, directly or indirectly, offer, sell, assign, transfer, encumber, contract to sell, grant any option to purchase, or otherwise dispose of, any Common Stock (including Common Stock that may be deemed to be beneficially owned by such person in accordance with the Rules and Regulations) or any securities convertible into or exchangeable for any shares of Common Stock, until the one hundred twentieth (120th) day after the effective date of the Registration Statement. Notwithstanding the foregoing, this paragraph shall not prohibit any of the following types of transfers: (i) if such person is a partnership, a private transfer by such person to a partner of such or a retired partner of such person, in accordance with its partnership agreement; and (ii) following any transfer permitted in clause (i) of this sentence to an individual, any private transfer by gift, will or intestate succession from such individual to such individual's spouse or members of the immediate family of such individual or such individual's spouse, in each case described in clause (i) or (ii) if the transferee agrees in writing to be subject to the terms of this paragraph to the same extent as the transferor. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to you and Underwriters' counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. Any certificate signed by the Selling Stockholder or any officer of the Company and delivered to you or to your counsel shall be deemed to be a representation and warranty by the Selling Stockholder or the Company, as applicable, to you as to the statements made therein. -28- 10. INDEMNIFICATION AND CONTRIBUTION. a. Subject to the provisions of paragraph e. below, the Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof), if any, who controls any Underwriter within the meaning of Section 15 of the Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Act, the Exchange Act, or the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other out-of-pocket expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or in the Offering Memorandum or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or in the Offering Memorandum or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this paragraph a. shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission is contained in or made in reliance on or in conformity with the section of the Prospectus entitled "Underwriting" (except for the sixth and [directed shares] paragraphs thereof) or the last paragraph of text on the cover page of the Prospectus or in the section of the Offering Memorandum entitled "Representations by Purchasers," and (2) the indemnity agreement contained in this paragraph a. with respect to any Preliminary Prospectus or Offering Memorandum shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented), in the case of purchasers resident in Ontario, the revised Offering Memorandum was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus or Offering Memorandum was corrected in the Prospectus (or the Prospectus as amended or supplemented), in the case of purchasers resident in Ontario, the revised offering Memorandum unless the failure is the result of noncompliance by the Company with paragraph a. of Section 6 hereof. The indemnity agreements of the Company contained in this paragraph a. and the representations and warranties of the Company contained in -29- Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of any payment for the Shares. b. Subject to the provisions of paragraph e. below, each Selling Stockholder agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof), if any, who controls any Underwriter within the meaning of Section 15 of the Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Act, the Exchange Act, or the common law or otherwise, and the Selling Stockholder agrees to reimburse each such Underwriter and controlling person for any legal or other out-of-pocket expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) (A) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or in the Offering Memorandum or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (B) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or in the Offering Memorandum or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case specified in clause (A) and (B) to the extent any such statements or omissions were made in reliance upon and in conformity with written information furnished to the Company by the Selling Stockholder specifically for use in the preparation of the Registration Statement, the Preliminary Prospectus, the Offering Memorandum or the Prospectus, and (ii) any breach of any representation, warranty, agreement or covenant of the Selling Stockholder herein contained; provided, however, that the indemnity agreement contained in this paragraph b. with respect to any Preliminary Prospectus or Offering Memorandum shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented), in the case of purchasers resident in Ontario, the revised Offering Memorandum was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus or Offering Memorandum was corrected in the Prospectus (or the Prospectus as amended or supplemented), in the case of purchasers resident in Ontario, the revised offering Memorandum unless the failure is the result of noncompliance by the Company with paragraph a. of Section 6 hereof. The indemnity agreements of each Selling Stockholder contained in this paragraph b. and the representations and warranties of each -30- Selling Stockholder contained in Section 3 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of any payment for the Shares. c. Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its executive officers, each of its directors, each Selling Stockholder, each other Underwriter and each person (including each partner or officer thereof) who controls the Company, each Selling Stockholder or any such other Underwriter within the meaning of Section 15 of the Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Act, the Exchange Act, or the common law or otherwise, and to reimburse each of them for any legal or other out-of-pocket expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel), incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or in the Offering Memorandum or any post-effective amendment thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or in the Offering Memorandum or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that in the cases of clauses (ii) and (iii) above, such statement or omission is contained in or made in reliance on or in conformity with the Section of the Prospectus entitled "Underwriting" (except for the sixth paragraph thereof) or the last paragraph on the cover page of the Prospectus or in the section of the Offering Memorandum entitled "Representations by Purchasers." The indemnity agreement of each Underwriter contained in this paragraph c. shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. d. Each party indemnified under the provision of paragraphs a., b. and c. of this Section 10 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (a "Notice") of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given -31- was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled, at its or their own expense to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. It is understood that the indemnifying parties shall not, in respect of the legal defenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for all of the Underwriters and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act, and (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act and the Selling Stockholders. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs a. through d. of this Section 10 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses, incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the third sentence of this Section 10.d. and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or -32- proceeding. The indemnifying party or parties shall not be liable for any settlement of any proceeding effected without its or their written consent, provided such consent has not been unreasonably withheld. e. If the indemnification provided for in this Section 10 is unavailable or insufficient to hold harmless an indemnified party under paragraph a., b. or c. of this Section 10, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph a., b. or c. of this Section 10 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Underwriters, and each Selling Stockholder shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares received by the Company and each Selling Stockholder, respectively, and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph e. were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph e. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph e. shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparation to defend or defense against any action or claim which is the subject of this paragraph e. Notwithstanding the provisions of this paragraph e., no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph e. to contribute are several in proportion to their respective underwriting obligations and not joint. -33- Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph d. of this Section 10). f. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. g. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof, including without limitation the provisions of this Section 10 and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 10 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act, or in the Offering Memorandum. 11. TERMINATION. This Agreement may be terminated by you at any time on or prior to the Closing Date or on or prior to any later Option Closing Date, as the case may be, (i) if the Company shall have failed, refused or been unable, at or prior to the Closing Date, or on or prior to any later Option Closing Date, as the case may be, to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, or (ii) if trading on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market, by such trading exchanges or by order of the Commission or any other governmental authority having jurisdiction, or if a banking moratorium shall have been declared by federal or New York authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, accident or other calamity of such character as to have a Material Adverse Effect regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets in the United States as in the judgment of the Representatives makes it inadvisable -34- or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have occurred an outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or other national or international calamity, hostilities or crisis or the declaration by the United States of a national emergency which, in the judgment of the Representatives, adversely affects the marketability of the Shares, or (vi) if since the respective dates as of which information is given in the Registration Statement and the Prospectus and the Offering Memorandum, there shall have occurred any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the business affairs, management, or business prospects of the Company, whether or not arising in the ordinary course of business, or (vii) if any foreign, federal or state statute, regulation, rule or order of any court or other governmental authority shall have been enacted, published, decreed or otherwise promulgated which in the judgment of the Representatives materially and adversely affects or will materially and adversely affect the business or operations of the Company, or trading in the Common Stock shall have been suspended, or (viii) there shall have occurred a material adverse decline in the value of securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or (ix) action shall be taken by any foreign, federal, state or local government or agency in respect of its monetary or fiscal affairs which, in the judgment of the Representatives, has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated in accordance with this Section 11, there shall be no liability of the Company to the Underwriters and no liability of the Underwriters to the Company except, in each case, as provided in Sections 8, 10 and 12 hereof. If you elect to terminate this Agreement as provided in this Section 11, the Company shall be notified promptly by you by telephone, telecopy or telegram, confirmed by letter. 12. REIMBURSEMENT OF CERTAIN EXPENSES. a. In addition to their other obligations under Section 10 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph a. of Section 10 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 12 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. -35- b. In addition to their other obligations under Section 10 of this Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the Company for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph c. of Section 10 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 12 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the Company shall promptly refund it and (ii) the Company shall provide to the Underwriters, upon request, reasonable assurances of its ability to effect any refund, when and if due. c. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 10 hereof, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of said Section 10, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be faxed, mailed, telegraphed or delivered to UBS Securities LLC, 299 Park Avenue, New York, NY 10171, Attention: David H. MacCallum, with a copy to Mark D. Whatley, Esq., Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, Three Embarcadero Center, San Francisco, CA 94111; and if to the Company, shall be faxed, mailed, telegraphed or delivered to it at its office Attention: President, with a copy to Kevin Curley, Esq., Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 101783. All notices given by telegraph shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its respective directors of officers, and (ii) delivery of and payment for the Shares under this Agreement. -36- This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. You will act as Representatives of the several Underwriters in all dealings with the Company under this Agreement, and any action under or in respect of this Agreement taken by you, as Representatives, will be binding upon all of the Underwriters. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. [INTENTIONALLY LEFT BLANK] -37- Please sign and return to the Company the enclosed duplicate of this letter, whereupon this letter will become a binding agreement among the Company and the several underwriters in accordance with its terms. Very truly yours, NORLAND MEDICAL SYSTEMS, INC. By: __________________________ Reynald G. Bonmati President SELLING STOCKHOLDERS By: __________________________ [name] Attorney-in-Fact The foregoing Agreement is hereby confirmed and accepted as of the date first above written. UBS SECURITIES LLC PACIFIC GROWTH EQUITIES, INC. By: UBS SECURITIES LLC By:_____________________________ Title: Acting on behalf of the several Underwriters, including themselves, named on SCHEDULE A hereto. -38- SCHEDULE A UNDERWRITERS Number of Shares to be Underwriters Purchased ------------ --------- UBS Securities LLC Pacific Growth Equities, Inc. TOTAL 2,250,000 SCHEDULE B LOCK-UP AGREEMENTS NAME SHARES ---- ------ Reynald G. Bonmati Kurt W. Streams Ralph G. Theodore Thomas P. Regan James A. Sperlazza Lewis N. Harrold James J. Baker Michael W. Huber Robert L. Piccioni, Ph.D Albert S. Waxman, Ph.D. Novatech Ventures, L.P. Norland Partners, L.P. Hans Schiessl TOTAL APPENDIX A OPINION OF MORGAN, LEWIS & BOCKIUS. Morgan, Lewis & Bockius shall opine to the effect that: 1. a. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the States of Connecticut, New York, and Wisconsin, and has full corporate power and authority to own its properties and conduct its business as described in the Registration Statement; and the Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the State of California [OTHER STATES?] and has full corporate power to own its properties and conduct its business as described in the Registration Statement. b. The authorized, issued and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Registration Statement and the Prospectus; all necessary and proper corporate proceedings have been taken in order to authorize validly such Common Stock; all shares of Common Stock outstanding immediately prior to the sale of the Firm Shares on the Closing Date have been duly and validly issued, are fully paid and nonassessable, were not issued in violation of or subject to any preemptive rights under applicable law or the Company's certificate of incorporation or bylaws or to such counsel's knowledge any other rights to subscribe for or purchase any securities and conform to the description thereof contained in the Registration Statement and the Prospectus; and to such counsel's knowledge, except as described in the Prospectus, the Company does not own or control, directly or indirectly, any corporation, association or other entity. All of the outstanding shares of capital stock of the Subsidiary have been duly and validly issued, are fully paid and nonassessable and to such counsel's knowledge, have not been issued in violation of or subject to any preemptive rights under applicable law or the Subsidiary's certificate of incorporation or bylaws or, to our knowledge, any other rights to subscribe for or purchase any securities, and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance claim or equitable interest; c. The Shares to be issued by the Company pursuant to this Agreement have been duly authorized. The certificates evidencing such Shares to be delivered hereunder are in due and proper form under Delaware law and when duly countersigned by the Company's transfer agent and registrar and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Common Shares represented thereby will be validly issued, fully paid and nonassessable, will not have been issued in violation of or subject to any preemptive rights under applicable law or the Company's certificate of incorporation or bylaws or to such counsel's knowledge any other rights to subscribe for or purchase A-1 securities, co-sale right, right of first refusal or other similar right (which rights have not previously been waived in connection with the purchase of sale of such Shares) and will conform in all respects to the description thereof contained in the Prospectus; d. Except as disclosed in or specifically contemplated by the Prospectus, to such counsel's knowledge there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; e. The Company has full corporate power and authority to enter into this Agreement and to sell and deliver the Firm Shares or the Option Shares, as the case may be, to be sold by it to you; this Agreement has been duly and validly authorized by all necessary corporate action by the Company, has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution, as to which no opinion need be expressed; and no approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any court, regulatory, administrative or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such as may be required under applicable Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters and the clearance of such offering with the NASD; f. The execution and performance of this Agreement and the consummation of the transactions herein contemplated will not (i) conflict with, result in the breach of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary or any of its property may be bound or affected which is material to the Company or the Subsidiary, (ii) to the knowledge of such counsel, result in the creation or imposition of any lien or encumbrance upon any assets of the Company or the Subsidiary, (iii) violate any of the provisions of the certificate of incorporation or bylaws as amended or restated, of the Company or the Subsidiary or (iv) to the knowledge of such counsel, violate any statute, judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over the Company or the Subsidiary or any of its property; g. To such counsel's knowledge, neither the Company nor the Subsidiary is in violation of its certificate of incorporation or bylaws or to such counsel's knowledge in breach of or default with respect to any provision of any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument filed A-2 with the Registration Statement as an exhibit to which it is a party or by which it or any of its properties may be bound or affected, except where such default would not materially adversely affect the Company or the Subsidiary, as the case may be; h. To such counsel's knowledge, no holders of securities of the Company have rights which have not been waived to the registration of shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company or the offering contemplated hereby; i. (1) The Registration Statement has become effective under the Act, and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (2) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto (except for the financial statements and schedules, if any, and financial data included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; (3) To such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not disclosed or filed, as required; (4) To such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company or the Subsidiary that, if adversely determined, would have a Material Adverse Effect or would limit, revoke, cancel, suspend or cause not to be renewed any existing license, certificate, registration, approval or permit, known to such counsel, from any state, federal or regulatory authority that is material to the conduct of the business of the Company as currently conducted, or that are of a character otherwise required to be described in the Prospectus or Registration Statement that are not described as required; and (5) The statements in the Prospectus or the Registration Statement under the captions "Risk Factors--Government Regulation," "Risk Factors--Dependence on Third-Party Reimbursement," "Risk Factors--Proprietary Rights Protection," "Risk Factors--Product Liability," "The Company and its Relationship with Norland and Stratec," "Management's Discussion and Analysis-- General," "Business" (first paragraph), "Business--Distribution Agreement," "Business--Product Development," "Business-Third Party Reimbursement," "Business--Government Regulation," "Business-Property Rights," "Management-- Stock Option Plan," "Certain Transactions," "Description of Capital Stock," and "Shares Eligible for Future Sale," insofar as those statements A-3 constitute summaries of documents referred to therein, statutes, rules or regulations, including the Delaware General Corporation Law, or matters of law or legal conclusions, and the description of the Company's certificate of incorporation and bylaws, are accurate in all material respects and fairly present the information required to be shown in Form S-1 with respect to such documents and matters; and such counsel does not know of any statutes, rules or regulations required to be described in the Registration Statement that are not described therein. j. The Distribution Agreement is enforceable against Norland and Stratec, the covenant and agreement of NMS set forth on the signature page of the Distribution Agreement are enforceable against NMS, and the Loan Agreement is enforceable against Norland, Stratec, and the covenant and agreement of NMS set forth on the signature page of the Loan Agreement is enforceable against NMS, in each case except (i) as such enforceability may be limited by equitable principles, bankruptcy, insolvency, reorganization, moratorium, or other, similar laws affecting creditors' rights generally and (ii) as to the enforceability of provisions of the Distribution Agreement or the Loan Agreement granting to the Company security interests in certain property and provisions requiring arbitration of disputes, as to which such counsel need not express any opinion. k. To such counsel's knowledge, this Agreement and the Stockholder's Agreements have been duly authorized, executed and delivered by or on behalf of the Selling Stockholders; the Agent has been duly and validly authorized to act as the custodian of the Stockholder Shares and Option Shares to be sold by each Selling Stockholders; and the performance of this Agreement and the Stockholder's Agreements and the consummation of the transactions herein contemplated by each Selling Stockholder will not result in a breach of, or constitute a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit, or other instrument to which each Selling Stockholder is a party or by which each Selling Stockholder or any of its properties may be bound, or violate any statute, judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over each Selling Stockholder or any of its properties; and no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholder's Agreements or the consummation by each Selling Stockholder of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and the Exchange Act and such as may be required under applicable Blue Sky laws and the clearance of such offering with the NASD; l. To such counsel's knowledge, each Selling Stockholder has full right, power and authority to enter into this Agreement and the respective Stockholder's Agreement and to sell, transfer and deliver the Stockholder Shares and Option Shares to be sold by it on Closing Date or the Option Closing Date, and good and marketable title to such Stockholder Shares and Option Shares so sold, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts, or other defects of title whatsoever, has been transferred to you (whom counsel may assume to be a bona fide purchaser within the meaning of the Uniform Commercial Code); A-4 m. To such counsel's knowledge, this Agreement and the Stockholder's Agreements are valid and binding agreements of the Selling Stockholder that is party thereto in accordance with their terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except with respect to those provisions relating to indemnities or contribution, as to which no opinion need be expressed; n. No transfer taxes are required to be paid in connection with the sale and delivery of the Firm Shares or the Option Shares to you hereunder; o. The Company is not and, upon receipt of the net proceeds from the sale of the Firm Shares and the Option Shares to be sold by it in the manner described in the Prospectus, will not be for a period of one year from the Closing Date, an "investment company" within the meaning of the Investment Company Act of 1940, as amended; and p. Each of the Company and the Subsidiary had all corporate power and authority to execute, deliver and perform the Acquisition Agreement and, in the case of the Company, the Purchase Agreement, and each of them took all action required by law, their respective charters and bylaws or otherwise to authorize such execution, delivery and performance. The Acquisition Agreement was duly approved and adopted by the affirmative vote of a number of the outstanding shares of capital stock of the Subsidiary required to approve the Acquisition Agreement, the Merger, and all actions necessary to effect the Merger. The Certificate and Plan of Merger dated [April 2, 1996] has been filed with the Secretary of State of the State of Delaware and the Merger has become effective under applicable law. To such counsel's knowledge, no shareholders of Dove has exercised their rights of appraisal or other dissenter's rights with respect to the Merger or any of the actions that were conditions precedent to, or otherwise necessary to effect, the Merger. In rendering such opinions, such counsel may limit its opinion as to the foregoing matters to the federal laws of the United States, the laws of the State of New York and the Delaware General Corporate Law, and may rely as to matters of local law on opinions of local counsel addressed to you and, as to matters of fact, on certificates of officers of the Company, the Selling Stockholder, or governmental officials, provided that such counsel's opinion states that such counsel is so doing and that you are justified in relying on such opinions of local counsel or certificates and that copies of such certificates are attached to such counsel's opinion. Such counsel shall also include a statement to the effect that in connection with the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company and the independent accountants of the Company, at which conferences such counsel has made inquiries of such persons and others and discussed the contents of the Registration Statement and the Prospectus. While the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (except as specifically stated elsewhere in A-5 such opinion), nothing has come to such counsel's attention that would lead such counsel to believe that (except for the financial statements, related notes and schedules, if any, and schedules and financial data included therein, as to which such counsel need express no view), the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as amended or supplemented, if applicable, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 2. OPINION OF MORGAN, LEWIS & BOCKIUS, FRANKFURT, REPUBLIC OF GERMANY. Morgan, Lewis & Bockius, Frankfurt, shall opine to the effect that: a. Stratec has been duly incorporated (or otherwise formed) and is validly existing as a Gesellschaft mit beschrankter Haftung (limited liability company) in good standing (or whatever equivalent statement may be made under the laws of the jurisdiction of Stratec's formation) under the laws of the Republic of Germany; b. Stratec has full corporate power and authority to enter into the Distribution Agreement and the Loan Agreement and the officer of Stratec who executed and delivered the Distribution Agreement and the Loan Agreement on behalf of Stratec was duly authorized and empowered to do so; and c. The provisions of the Distribution Agreement and the Loan Agreement specifying that those agreements will be governed by New York law are enforceable against Stratec in accordance with their terms. In rendering such opinions, such counsel may limit its opinion as to the foregoing matters to the laws of the Federal Republic of Germany [and applicable provincial laws] and may rely as to matters of fact on certificates of officers of Stratec and/or governmental officials and records, provided that such counsel's opinion states that such counsel is so doing and that you are justified in relying on such certificates and/or public records and that copies of such certificates are attached to such counsel's opinion; 3. OPINION OF QUARLES & BRADY. Quarles & Brady shall opine to the effect that: a. Norland has been duly incorporated (or otherwise formed) and is validly existing as a corporation under the laws of the State of Wisconsin; b. Norland has full corporate power and authority to enter into the Distribution Agreement and the Loan Agreement and the Distribution Agreement and the Loan Agreement were duly and validly authorized by all necessary corporate action by Norland; and A-6 c. The provisions of the Distribution Agreement and the Development Agreement specifying that those agreements will be governed by New York law are enforceable against Norland in accordance with their terms; In rendering such opinions, such counsel may limit its opinion as to the foregoing matters to the laws of the State of Wisconsin and may rely as to matters of fact on certificates of officers of Norland and governmental officials, provided that such counsel's opinion states that such counsel is so doing and that you are justified in relying on such certificates and that copies of such certificates are attached to such counsel's opinion; 4. OPINION OF BARENTS & KRANS, THE HAGUE, NETHERLANDS. Barents & Krans shall opine to the effect that: a. NMS has been duly incorporated (or otherwise formed) and is validly existing as a private company with limited liability under the laws of the Netherlands; b. NMS has full corporate power and authority to make the covenants and agreements set forth on the signature page of the Distribution Agreement and the covenants and agreements set forth on the signature page of the Loan Agreement and the Distribution Agreement and the Loan Agreement were duly and validly authorized by all necessary corporate action by NMS; and c. The provisions of the Distribution Agreement and the Loan Agreement specifying that those agreements will be governed by New York law are, insofar as those provisions relate to the covenants and agreements of NMS set forth on the signature page of the Distribution Agreement and those set forth on the signature page of the Loan Agreement are enforceable against NMS in accordance with their terms; In rendering such opinions, such counsel may limit its opinion as to the foregoing matters to the laws of the Netherlands and may rely as to matters of fact on certificates of officers of NMS and/or governmental officials and records, provided that such counsel's opinion states that such counsel is so doing and that you are justified in relying on such certificates and/or public records and that copies of such certificates are attached to such counsel's opinion. A-7 EX-11 3 EXHIBIT 11 EXHIBIT 11 NORLAND MEDICAL SYSTEMS, INC. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- Primary Basis: Net income....................................................................... $ 691,256 $ 438,312 Weighted average shares outstanding.............................................. 6,345,288 3,000,000 Stock options.................................................................... 711,722 1,002,000 Weighted average number of common and common equivalent shares outstanding....... 7,057,010 4,002,000 Earnings per share............................................................... $ 0.10 $ 0.11 Fully Diluted Basis: Net income....................................................................... $ 691,256 $ 438,312 Weighted average shares outstanding.............................................. 6,345,288 3,000,000 Stock options.................................................................... 726,072 1,002,000 Weighted average number of common and common equivalent shares outstanding....... 7,071,360 4,002,000 Earnings per share............................................................... $ 0.10 $ 0.11
DECEMBER 31, DECEMBER 31, 1995 1994 -------------- -------------- Primary Basis: Net income....................................................................... $ 2,100,489 $ 68,044 Weighted average shares outstanding.............................................. 4,241,096 3,000,000 Stock options.................................................................... 1,004,139 1,002,000 Weighted average number of common and common equivalent shares outstanding..................................................................... 5,245,235 4,002,000 Earnings per share............................................................... $ 0.40 $ .02 Fully Diluted Basis: Net income....................................................................... $ 2,100,489 $ 68,044 Weighted average shares outstanding.............................................. 4,241,096 3,000,000 Stock options.................................................................... 1,007,088 1,002,000 Weighted average number of common and common equivalent shares outstanding..................................................................... 5,248,184 4,002,000 Earnings per share............................................................... $ 0.40 $ .02
EX-23.1 4 EXHIBIT 23.1 [COOPERS & LYBRAND LETTERHEAD] Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated March 4, 1996, except for Note 14, for which the date is June 4, 1996, on our audits of the financial statements and Financial Statement Schedule of Norland Medical Systems, Inc. (formerly Ostech, Inc.) as of and for the years ended December 31, 1995 and 1994. We also consent to the reference to our Firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. Hartford, Connecticut June 4, 1996 EX-23.2 5 EXHIBIT 23.2 [STG - COOPERS & LYBRAND LETTERHEAD] Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 5, 1995, on our audit of the financial statements of Ostech B.V. as of and for the year ended December 31, 1993. We also consent to the reference to our Firm under the caption "Experts". Schweizerische Treuhandgesellschaft - Coopers & Lybrand AG Zurich, Switzerland June 4, 1996 EX-23.3 6 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement on Form S-1 of Norland Medical Systems, Inc., of our report on the financial statements of Dove Medical Systems, as of and for the years ended December 31, 1995 and 1994, dated May 10, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the caption "Experts". /s/ Hurley & Company Hurley & Company Granada Hills, California June 5, 1996 -----END PRIVACY-ENHANCED MESSAGE-----