-----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, DDnt72oYge/a0WwtnkETdEctf8LymjO5IYMmlQZfrfMs9A2Xah/m7uOLIXpotzK/ Yf9ffjCHoHTLteAToJXtww== /in/edgar/work/0000912057-00-048986/0000912057-00-048986.txt : 20001114 0000912057-00-048986.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-048986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORLAND MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000946428 STANDARD INDUSTRIAL CLASSIFICATION: [3826 ] IRS NUMBER: 061387931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26206 FILM NUMBER: 760388 BUSINESS ADDRESS: STREET 1: 106 CORPORATE PARK DRIVE STREET 2: SUITE 106 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146942285 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 10-Q 1 a2030386z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2000 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- -------------------- Commission file number 0-26206 -------------------------------------------------------- NORLAND MEDICAL SYSTEMS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1387931 --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 106 Corporate Park Drive, Suite 106 WHITE PLAINS, NEW YORK 10604 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (914) 694-2285 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 6, 2000, 27,045,166 shares of the registrant's Common Stock, $0.0005 par value, were outstanding. -1- NORLAND MEDICAL SYSTEMS, INC. TABLE OF CONTENTS FOR FORM 10-Q PAGE Title Page................................................................. 1 Document Table of Contents................................................. 2 Introduction............................................................... 3 PART I FINANCIAL INFORMATION......................................... 4 Item 1. Consolidated Financial Statements............................. 4 Consolidated Balance Sheets................................... 4 Consolidated Statements of Operations......................... 5 Consolidated Statements of Cash Flows......................... 6 Notes to Consolidated Financial Statements.................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risks... 13 PART II OTHER INFORMATION............................................. 14 Item 1. Legal Proceedings............................................. 14 Item 2. Changes in Securities......................................... 14 Item 3. Defaults Upon Senior Securities............................... 14 Item 4. Submission of Matters to a Vote of Security Holders........... 14 Item 5. Other Information............................................. 14 Item 6. Exhibits and Reports on Form 8-K.............................. 15 Signatures................................................................. 16 Exhibit Index.............................................................. 17 -2- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES I N T R O D U C T I O N THE STATEMENTS INCLUDED IN THIS REPORT REGARDING FUTURE FINANCIAL PERFORMANCE AND RESULTS AND THE OTHER STATEMENTS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVES," "INTENDS," "EXPECTS," "ANTICIPATES," "PROJECTS," "ESTIMATES," "PREDICTS," AND SIMILAR EXPRESSIONS ARE ALSO INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY CAUTIONS THE READER THAT ACTUAL RESULTS OR EVENTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AND RELATED ASSUMPTIONS DUE TO CERTAIN IMPORTANT FACTORS, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: (I) THE CONTINUED DEVELOPMENT OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT CAN BE MARKETED BY THE COMPANY; (II) THE IMPORTANCE TO THE COMPANY'S 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; (III) THE ACCEPTANCE AND ADOPTION BY PRIMARY CARE PROVIDERS OF NEW OSTEOPOROSIS THERAPIES AND THE COMPANY'S ABILITY TO EXPAND SALES OF ITS PRODUCTS TO THESE PHYSICIANS; (IV) THE COMPANY MAY BE ADVERSELY AFFECTED BY CHANGES IN THE REIMBURSEMENT POLICIES OF GOVERNMENTAL PROGRAMS (E.G., MEDICARE AND MEDICAID) AND PRIVATE THIRD PARTY PAYORS, INCLUDING PRIVATE INSURANCE PLANS AND MANAGED CARE PLANS; (V) THE HIGH LEVEL OF COMPETITION IN THE BONE DENSITOMETRY MARKET; (VI) CHANGES IN BONE DENSITOMETRY TECHNOLOGY; (VII) THE COMPANY'S ABILITY TO CONTINUE TO MAINTAIN AND EXPAND ACCEPTABLE RELATIONSHIPS WITH THIRD PARTY DEALERS AND DISTRIBUTORS; (VIII) THE COMPANY'S ABILITY TO PROVIDE ATTRACTIVE FINANCING OPTIONS TO ITS CUSTOMERS AND TO PROVIDE CUSTOMERS WITH FAST AND EFFICIENT SERVICE FOR THE COMPANY'S PRODUCTS; (IX) CHANGES THAT MAY RESULT FROM HEALTH CARE REFORM IN THE UNITED STATES MAY ADVERSELY AFFECT THE COMPANY; (X) THE COMPANY'S CASH FLOW AND THE RESULTS OF ITS ONGOING FINANCING EFFORTS; (XI) THE EFFECT OF REGULATION BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION AND OTHER AGENCIES; (XII) THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES; (XIII) THE OUTCOME OF PENDING LITIGATION; (XIV) THE COMPANY'S EFFORTS TO DIVERSIFY ITS PRODUCT LINE AND (XV) OTHER RISKS DESCRIBED ELSEWHERE IN THIS REPORT AND IN OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY IS ALSO SUBJECT TO GENERAL BUSINESS RISKS, INCLUDING ADVERSE STATE, FEDERAL OR FOREIGN LEGISLATION AND REGULATION, ADVERSE PUBLICITY OR NEWS COVERAGE, CHANGES IN GENERAL ECONOMIC FACTORS AND THE COMPANY'S ABILITY TO RETAIN AND ATTRACT KEY EMPLOYEES. NOTHING CONTAINED IN THE REPORT SHOULD BE VIEWED AS SUGGESTING THE EXISTENCE OF A TREND OR PROTECTION OF ANY FUTURE TREND WITH RESPECT TO ANY MATTER. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. -3- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES PART I FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
September 30, December 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 82,886 $ 67,666 Accounts receivable--trade, less allowance for doubtful accounts of $301,000 and $351,000, respectively 1,560,941 2,517,583 Inventories, net 2,558,327 2,244,317 Prepaid expenses and other current assets 136,534 201,370 Deferred income taxes -- 1,690,755 ------------- ------------ Total current assets 4,338,688 6,721,691 ------------- ------------ Property and equipment, net 1,014,730 1,175,947 Deferred income taxes, net -- 2,279,086 Goodwill, net -- 7,555,564 ------------- ------------ Total assets $5,353,418 $17,732,288 ------------- ------------ LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Bank borrowings $ -- $ 311,816 Accounts payable--related parties 1,047,607 372,244 Accounts payable--trade 1,826,202 2,218,639 Accrued expenses 1,729,209 1,633,641 Accrued warranty expenses 445,000 530,000 Unearned service revenue 493,346 387,598 Interest payable 133,807 143,720 ------------- ------------ Total current liabilities 5,675,171 5,597,658 ------------- ------------ Note payable, net of discount 1,146,405 1,106,562 Stockholders' (deficit) equity: Common stock--par value $.0005 per share, 45,000,000 shares authorized, 27,045,166 and 25,956,278 shares issued and outstanding, respectively 13,521 12,977 Additional paid-in capital 38,167,235 37,542,279 Accumulated deficit (39,648,914) (26,527,188) ------------- ------------ Total stockholders' (deficit) equity (1,468,158) 11,028,068 ------------- ------------ Total liabilities and stockholders' (deficit) equity $5,353,418 $17,732,288 ============= ============
See accompanying notes to consolidated financial statements. -4- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ -------------------------- 2000 1999 2000 1999 ---------- ----------- ----------- ------------ Revenue $2,824,507 $ 4,383,712 $10,650,378 $ 13,566,647 Cost of revenue 1,580,102 2,480,280 5,903,544 7,018,118 ---------- ----------- ----------- ------------ Gross profit 1,244,405 1,903,432 4,746,834 6,548,529 Sales and marketing expense 1,079,394 1,298,470 3,493,385 4,214,044 General and administrative expense 627,710 627,976 2,299,653 2,445,892 Research and development expense 137,732 306,507 517,202 1,073,436 Unusual charge -- -- 7,258,036 -- ---------- ----------- ----------- ------------ Operating loss (600,431) (329,521) (8,821,442) (1,184,843) Interest expense (50,289) (45,083) (187,447) (229,739) Interest income 1,381 11,451 5,670 30,173 ---------- ----------- ----------- ------------ Loss before income taxes (649,339) (363,153) (9,003,219) (1,384,409) Income tax expense 8,668 -- 4,118,507 -- ---------- ----------- ----------- ------------ Net loss $(658,007) $ (363,153) $(13,121,726) $(1,384,409) ========== =========== =========== ============ Basic and diluted weighted average shares 27,045,166 25,735,887 26,676,505 20,153,367 ========== =========== =========== ============ Basic and diluted loss per share $ (0.02) $ (0.01) $ (0.49) $ (0.07) ========== =========== =========== ============
See accompanying notes to consolidated financial statements. -5- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (13,121,726) $ (1,384,409) -------------- -------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization expense 346,244 534,145 Depreciation expense 403,430 412,496 Unusual Charge 7,258,036 -- Inventory obsolescence credit -- (791,780) Provision for doubtful accounts (50,000) 3,647 Deferred income taxes 3,969,841 (340,000) Other (8,871) 23,723 Changes in assets and liabilities: Accounts receivable 1,006,641 (693,141) Inventories 185,990 238,151 Prepaid expenses and other current assets 64,835 319,510 Accounts payable (392,437) 1,225,302 Accrued expenses 781,766 (563,411) -------------- -------------- Total adjustments 13,565,475 368,642 -------------- -------------- Net cash provided by operating activities 443,749 (1,015,767) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (242,213) (315,826) Other -- (3,590) -------------- -------------- Net cash used in investing activities (242,213) (319,416) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings 3,669,000 160,326 Payments on bank borrowings (3,980,816) -- Issuance of common stock 125,500 500,002 -------------- -------------- Net cash used in financing activities (186,316) 660,328 -------------- -------------- Net increase (decrease) in cash 15,220 (674,855) Cash and cash equivalents at beginning of period 67,666 1,105,140 -------------- -------------- Cash and cash equivalents at end of period $ 82,886 $ 430,285 ============== ==============
See accompanying notes to consolidated financial statements. -6- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The consolidated financial statements of Norland Medical Systems, Inc. and Subsidiaries (the "Company") presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1999, and included in the Company's Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2000. In the opinion of management, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for these interim periods. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2000. (2) BANK BORROWINGS On August10, 1999, the Company entered into a $2 million bank line of credit in which the Company made borrowings according to an accounts receivable based formula. Interest on the borrowings accrued at a variable rate based on the prime rate plus 1.25%. Borrowings under the agreement were collateralized by the Company's assets. In connection with such agreement, the Company granted to the bank warrants to purchase 20,000 shares of the Company's Common Stock at a price of $0.01 per share. As of September 30, 2000 and December 31, 1999, the Company had outstanding borrowings of $0 and $311,816 with interest accruing at 0% and 9.75% respectively. The line expired on August 11, 2000 and was repaid in full prior to its termination. (3) INVENTORIES As of September 30, 2000 and December 31, 1999 inventories consisted of the following:
SEPTEMBER 30,2000 DECEMBER 31, 1999 ----------------- ----------------- Raw materials, product kits, spare parts and Sub-assemblies $1,478,844 $2,093,351 Work in progress 282,439 380,511 Finished goods 1,447,044 420,455 Inventory reserve (650,000) (650,000) ----------------- ----------------- $2,558,327 $2,244,317 ================= =================
-7- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued): (Unaudited) (4) CASH FLOWS In March 1999, income taxes receivable of $340,000 were reclassified to deferred income taxes and the Company elected to pay $4,310,000 of Note principal by the issuance of 11,122,580 shares of its Common Stock. During the first quarter of fiscal 2000, $200,000 of current deferred income taxes was reclassified to long term. On February 17, 2000, the Company exchanged 888,888 shares of its common stock (fair market value of $500,000) for a marketing credit of $500,000. The credit was utilized by the Company to purchase inventory through an affiliate, Bionix LLC (5) UNUSUAL CHARGE The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses for eleven consecutive quarters. Although the losses have declined substantially as a result of cost containment measures taken by the Company, gross revenues have continued to decline. Sales of new products associated with the Company's diversification program have not met Company expectations and have not offset the decline in the Company's bone densitometry equipment lines. Further, sales of the Company's Orbasone product (less than 10% of gross sales) have been impacted by FDA review of the product. As a result of the above noted factors, Company's management evaluated its financial position and determined that it would be appropriate to charge to operations the remaining unamortized costs of goodwill, and fully reserve against its deferred tax assets due to impairment. Such second quarter charges aggregated $11,367,877; $7,258,036 for goodwill and $4,109,841 for deferred taxes. The impairment was based on the excess of the carrying value of the assets over the assets' fair value. The fair value of the assets was generally determined as the estimates of future discounted cash flows from operations necessary to realize those assets. (6) ACCOUNTING PRONOUNCEMENT In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company for fiscal years beginning January 1, 2001. The Company does not anticipate that the adoption of this statement will have a material effect on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2000. The Company anticipates that the adoption of SAB 101 will have an insignificant impact on the Company's financial statements. -8- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES Item 2. 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 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED IN ITEM 1 OF THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES, SOME OF WHICH ARE DESCRIBED IN THE INTRODUCTION TO THIS REPORT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED IN THE INTRODUCTION. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had cash of $67,666. At September 30, 2000, the Company had cash of $82,886. The Company's current cash position is not sufficient to sustain the Company's current operating activities. If revenues do not increase the Company will become insolvent without additional funding. The Company has experienced declining revenue for the last five consecutive quarters and operating losses for the last eleven quarters. As a result, the Company's operations have been negatively impacted. The Company initiated two efforts to return to profitability. One, a product diversification program was launched during the first quarter of 2000. Two, during fiscal 1999 substantial efforts were made to reduce the Company's cost structure. Costs have been reduced but not to a level that would allow the Company to achieve profitability at the current revenue level. Sales of new products during the first nine months ended September 30, 2000 have been below targeted levels and have not offset the decline in sales in the other product lines offered. If sales volumes during the next six-month period continue at current levels the Company will sustain additional losses and require additional financing to remain a going concern. The Company is exploring financing alternatives, which may include additional equity issuances, a merger, sale or other divestiture of one or more of the Company's assets or product lines. The Company makes no representation that it will be successful in obtaining such financing. The nature of the Company's business is such that it is subject to changes in technology, government approval and regulation, and changes in third-party reimbursement in the United States and numerous foreign markets. Significant changes in one or more of these factors in a major market for the Company's products could significantly affect the Company's cash needs. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses for eleven consecutive quarters. Although the losses have declined as a result of cost containment measures taken by the Company, gross revenues have continued to decline. Sales of new products associated with the Company's -9- diversification program have not met Company expectations and have not offset the decline in the Company's bone densitometry equipment lines. Further, sales of the Company's Orbasone product (less than 10% of gross sales) have been negatively impacted due to FDA review of the product. As a result of the above noted factors, Company's management evaluated its financial position and determined that it would be appropriate to charge to operations the remaining unamortized costs of goodwill, and fully reserve against its deferred tax assets due to impairment. Such second quarter charges aggregated $11,367,877; $7,258,036 for goodwill and $4,109,841 for deferred taxes. The impairment was based on the excess of the carrying value of the assets over the assets' fair value. The fair value of the assets was generally determined as the estimates of future discounted cash flows from operations necessary to realize those assets. Revenue for the nine months ended September 30, 2000 decreased $2,916,269 (21.5%) to $10,650,378 from $13,566,647 from the comparable period of 1999. The decrease in revenue was the result of significantly decreased sales of the Company's DXA-based bone densitometry systems in the United States. Sales of complete bone densitometry systems represented 83% and 89% of total revenue for the nine months ended September 30, 2000 and 1999, respectively. Sales of parts and services and rental income comprised the balance of revenues for such periods. Sales in the United States have been adversely affected by changes in the Medicare reimbursement rates for bone densitometry tests. Revenues and the mix of products sold are expected to continue to be influenced by the relative degree of difference in reimbursement rate levels for peripheral and central systems. They will also be influenced by the Company's ability to bring to the market systems that can be operated more profitably by end users at the applicable reimbursement levels. With the osteoporosis market having remained flat for the past twelve months, especially in the U.S., and management's expectation that conditions in the osteoporosis market may not change in the short-term, the Company announced in November 1999 a product diversification program into musculoskeletal therapy systems. The Company launched the distribution of new lines of products in several musculoskeletal market segments, including sports medicine, pain management and rehabilitation. The Company is exploring other opportunities to distribute new products as part of its sales diversification program. There can be no assurance that the Company will be able to successfully distribute such products or any other new products and in fact, has had limited success to date. Norland's new musculoskeletal products include three models of the GALILEO, a patent-pending exercise system designed for use in sports medicine to improve muscle strength and in rehabilitation to improve mobility through the rebuilding of muscles. The Company's diversification program includes another musculoskeletal product, the ORBASONE, a therapeutic device designed for use in pain management to treat muscles, tendons and ligaments. Sales of the Orbasone have been suspended pending FDA review of the product. The Company further expanded its product diversification program into urology by signing an agreement that provides Norland the exclusive U.S. distribution rights to a Lithotripsor the GENESTONE 190. Sales of the new products have not met Company objectives during the nine months ended September 30, 2000. Cost of revenue as a percentage of revenue was 55.4% and 51.7% for the nine months ended September 30, 2000 and 1999, respectively, resulting in a gross margin of 44.6% for the nine months ended September 30, 2000 compared to 48.3% for the comparable period of 1999. The gross margin for the third quarter of 1999 benefited from a $791,780 inventory obsolescence credit and by -10- $339,000 in sales of refurbished demonstration systems, which had been carried at relatively low costs. In addition, because the Company has certain fixed manufacturing costs each quarter, to the extent that revenues are lower in any given quarter, such fixed costs have a more negative impact on gross margins. Sales and marketing expense decreased $720,659 (17.1%) to $3,493,385 for the nine months ended September 30, 2000 from $4,214,044 for the nine months ended September 30, 1999, and increased as a percentage of revenue to 32.8% from 31.1%. The dollar decrease was primarily due to a reduction in personnel and decreased advertising, marketing, promotion and travel related expenses incurred by sales and customer service personnel. General and administrative expense decreased $146,239 (6%) to $2,299,653 for the nine months ended September 30, 2000 from $2,445,892 for the nine months ended September 30, 1999 and increased as a percentage of revenue to 21.6% from 18%. The decrease was principally attributable to a reduction in professional fees. Research and development expense decreased $556,234 (51.8%) to $517,202 for the nine months ended September 30, 2000 from $1,073,436 for the nine months ended September 30, 1999, and also decreased as a percentage of revenue to 4.9% from 7.9%. The decrease was primarily attributable to a reduction in personnel. Interest expense decreased $42,292 (18.4%) to $187,447 for the nine months ended September 30, 2000 from $229,739 for the nine months ended September 30, 1999. Interest expense for both periods represents interest on a Note payable issued by the Company in connection with the acquisition of Norland Corporation on September 11, 1997. The decrease in interest expense reflects the reduced outstanding principal balance of the Note payable. The decrease was offset by borrowings under the Company's credit facility during the nine months ended September 30, 2000. Interest income in the nine-month periods ended September 30, 2000 and 1999 consisted primarily of interest earned on the Company's cash balances. The decrease in interest income in the nine-month period ended September 30, 2000 as compared to September 30, 1999 reflects the Company's reduced cash position. The Company had a net loss of ($13,121,726) ($0.49) per share based on weighted average shares for the nine months ended September 30, 2000 compared to a net loss of ($1,384,409) ($0.07) per share based on 20,153,367 weighted average shares for the nine months ended September 30, 1999. The increase in the loss was principally attributable to the unusual charge previously described. THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Revenue for the three months ended September 30, 2000 decreased $1,559,205 (35.6%) to $2,824,507 from $4,383,712 of the comparable period of 1999. The decrease in revenue was the result of significantly decreased sales of the Company's DXA-based bone densitometry systems in the United States. Sales of complete bone densitometry systems represented 81% and 89% of total revenue for the three months ended September 30, 2000 and 1999, respectively. Sales of parts and services and rental income comprised the balance of revenues for such periods. Cost of revenue as a percentage of revenue was 56.0% and 56.6% for the three months ended September 30, 2000 and 1999, respectively, resulting in a gross margin of 44.0% for the three months ended September 30, 2000 compared to 43.4% for the comparable period of 1999. -11- Sales and marketing expense decreased $219,076 (16.9%) to $1,079,394 for the three months ended September 30, 2000 from $1,298,470 for the three months ended September 30, 1999, and increased as a percentage of revenue to 38.2% from 29.6%. The dollar decrease was primarily due to a reduction in sales volume. General and administrative expense remained approximately the same decreasing $266 to $627,710 for the three months ended September 30, 2000 from $627,976 for the three months ended September 30, 1999 and increasing as a percentage of revenue to 22% from 14.3%. Research and development expense decreased $168,775 (55.1%) to $137,732 for the three months ended September 30, 2000 from $306,507 for the three months ended September 30, 1999, and also decreased as a percentage of revenue to 4.9% from 7.0%. The decrease was primarily attributable to a reduction in personnel. Interest expense increased $5,206 (11.5%) to $50,289 for the three months ended September 30, 2000 from $45,083 for the three months ended September 30, 1999. Interest expense for both periods represents interest on a Note payable issued by the Company in connection with the acquisition of Norland Corporation on September 11, 1997. The increase in interest expense reflects the reduced outstanding principal balance of the Note payable offset by borrowings under the Company's credit facility during the three months ended September 30, 2000. Interest income in the three-month periods ended September 30, 2000 and 1999 consisted primarily of interest earned on the Company's cash balances. The decrease in interest income in the three-month period ended September 30, 2000 as compared to September 30, 1999 reflects the Company's reduced cash position. The Company had a net loss of $(658,007) ($0.02) per share based on 27,045,166 weighted average shares for the three months ended September 30, 2000 compared to a net loss of $(363,153) ($0.01) per share based on 25,735,887 weighted average shares for the three months ended September 30, 1999. FORWARD-LOOKING STATEMENTS As indicated in the Introduction to this Report, forward-looking statements, including those contained in this Management's Discussion and Analysis section, are subject to risks and uncertainties. This section includes forward-looking statements with respect to the effect of reimbursement rates on future sales and product mix, the Company's ability to realize deferred tax assets as recorded, future capital expenditures and the Company's plans for funding its ongoing operations. Such forward-looking statements are subject to the factors cited in the Introduction. -12- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The table below provides information about the Company's market sensitive financial instruments and constitutes a "forward-looking statement". The Company's major financial market risk exposure is changing interest rates, primarily in the Unites States. The Company's policy has been to manage its interest rate risks through use of a fixed rate debt. All items described are non-trading and are stated in U.S. dollars.
FAIR VALUE Expected Maturity Dates ------------ ---------------------------------------------------------- SEPTEMBER 2000 2001 2002 2003 THEREAFTER TOTAL 30, 2000 ---------- ---------- ----------- ----------- ------------ --------- ------------ CASH AND CASH EQUIVALENTS Bank deposits-non interest bearing $82,886 $ 82,886 $ 82,886 NOTE PAYABLE Fixed interest rate--6.5% $1,250,000 $1,250,000 $1,146,405
-13- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The shareholders' class action settlement agreement (previously disclosed in the Company's annual report on Form 10-K, December 31, 1999) was approved by the U.S. District Court, as submitted, on March 30, 2000. On March 31, 2000 the Company received a summons alleging patent infringement regarding the distribution of one of the Company's product lines. The Company is a distributor of the product and does not manufacture or assemble the product. The Company's distribution agreement with the manufacturer of the product provides indemnification to the Company from any claim of a third party arising from patent infringement. At this time the Company is unable to determine the merits of the summons and any possible outcome or impact on the Company, if any. The manufacturer has informed the Company that it intends to vigorously defend the claim. Sales of the product accounted for approximately 2.6% of the Company's revenue for the six months ended September 30, 2000. On October 11, 2000 the Company received a "Warning Letter" from the Food and Drug Administration "FDA" concerning the labeling and marketing of the Company's Orbasone product. The Company formally responded to the FDA on October 18, 2000. Sales of the Orbasone (less than 10% of gross sales) have been suspended pending resolution of the matter. In the normal course of business, the Company is a party to lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 2. CHANGE IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None -14- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished: 27 Financial Data Schedule (b) Reports on Form 8-K: None -15- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORLAND MEDICAL SYSTEMS, INC. (Registrant) Date: November 10, 2000 /S/ REYNALD G. BONMATI ------------------------ Reynald G. Bonmati President Date: November 10, 2000 /S/ ROBERT J. LARSON ---------------------- Robert J. Larson Chief Financial Officer (Principal Financial and Accounting Officer) -16- NORLAND MEDICAL SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX NUMBER DESCRIPTION - ------ ----------- 27 Financial Data Schedule -17- EX-27 2 a2030386zex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-2000 SEP-30-2000 82,886 0 1,560,941 301,000 2,558,327 4,338,688 1,014,730 0 5,353,418 5,675,171 0 0 0 13,521 (1,481,679) 5,353,418 10,650,378 10,650,378 5,903,544 13,568,276 0 0 187,447 (9,003,219) 4,118,507 (13,121,726) 0 0 0 (13,121,726) (0.49) (0.49)
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