-----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, HzxyI44QJI8995VZvis81PwrOXWa9QommVfWxfZVK517wESotcRC2tJvzJVuUcdj AHxnB4XKqqVVqQgpn29fNA== 0000912057-99-006052.txt : 19991117 0000912057-99-006052.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORLAND MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000946428 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [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: 99754861 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 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, 1999 -------------------------------------------------- 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 of incorporation (I.R.S. Employer or organization) Identification No.) 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 12, 1999, 25,956,278 shares of the registrant's Common Stock, $0.0005 par value, were issued and 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. Condensed Consolidated Financial Statements.......................4 Condensed Consolidated Balance Sheets.............................4 Condensed Consolidated Statements of Operations...................5 Condensed Consolidated Statements of Cash Flows...................6 Notes to Condensed 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......15 PART II OTHER INFORMATION................................................16 Item 1. Legal Proceedings................................................16 Item 2. Changes in Securities............................................16 Item 3. Defaults Upon Senior Securities..................................16 Item 4. Submission of Matters to a Vote of Security Holders..............16 Item 5. Other Information................................................16 Item 6. Exhibits and Reports on Form 8-K.................................16 Signatures....................................................................17 Exhibit Index.................................................................18
-2- NORLAND MEDICAL SYSTEMS, INC. I N T R O D U C T I O N THIS REPORT CONTAINS CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INCLUDE INFORMATION RELATING TO, AMONG OTHER MATTERS, THE COMPANY'S FUTURE FINANCIAL PERFORMANCE AND RESULTS. 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. SHOULD ONE OR MORE RISKS OR UNCERTAINTIES MATERIALIZE OR UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OR EVENTS COULD DIFFER MATERIALLY FROM THOSE ESTIMATED OR PROJECTED 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) MARKET ACCEPTANCE OF THE NEW MUSCULOSKELETAL PRODUCT LINES (VIII) THE COMPANY'S ABILITY TO CONTINUE TO MAINTAIN AND EXPAND ACCEPTABLE RELATIONSHIPS WITH THIRD PARTY DEALERS AND DISTRIBUTORS; (IX) 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; (X) CHANGES THAT MAY RESULT FROM HEALTH CARE REFORM IN THE UNITED STATES MAY ADVERSELY AFFECT THE COMPANY; (XI) THE COMPANY'S CASH FLOW AND THE RESULTS OF ITS ONGOING FINANCING EFFORTS; (XII) THE EFFECT OF REGULATION BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION AND OTHER AGENCIES; (XIII) THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES; (XIV) THE OUTCOME OF PENDING LITIGATION, PARTICULARLY THE CLASS ACTION LAWSUIT; (XV) POTENTIAL YEAR 2000 COMPLIANCE PROBLEMS AFFECTING THE COMPANY AND THIRD PARTIES WITH WHOM IT DEALS; AND (XVI) 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. UNLESS OTHERWISE INDICATED, NOTHING CONTAINED IN THE REPORT SHOULD BE VIEWED AS SUGGESTING THE EXISTENCE OF A TREND OR PROJECTION 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. PART I FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NORLAND MEDICAL SYSTEMS, INC. Condensed Consolidated Balance Sheets
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 430,285 $ 1,105,140 Accounts receivable - trade, less allowance for doubtful accounts of $330,000 and $300,000 at September 30, 1999 and December 31, 1998, respectively 2,566,765 1,877,271 Income taxes receivable -- 340,000 Inventories, net 3,074,974 2,521,345 Prepaid expenses and other current assets 202,382 187,354 Deferred income taxes 1,858,217 1,817,217 ------------ ------------ Total current assets 8,132,623 7,848,327 ------------ ------------ Officer's loan receivable 71,171 91,304 Property and equipment, net 1,295,362 1,392,032 Deferred income taxes, net 2,111,624 1,575,624 Goodwill, net 7,704,358 8,150,620 Total assets $ 19,315,138 $ 19,057,907 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank borrowings $ 160,326 $ -- Accounts payable - related parties 266,596 292,315 Accounts payable - trade 2,686,637 1,435,616 Accrued expenses 1,950,225 2,011,396 Accrued warranty expenses 821,250 920,000 Unearned service revenue 362,776 203,823 Accrued interest expense 154,741 577,184 ------------ ------------ Total current liabilities 6,402,551 5,440,334 ------------ ------------ Note payable, net of discount 1,093,281 4,685,690 Other -- 140,000 Stockholders' equity: Common stock 12,977 7,081 Additional paid-in capital 37,542,279 33,136,343 Accumulated deficit (25,735,950) (24,351,541) ------------ ------------ Total stockholders' equity 11,819,306 8,791,883 ------------ ------------ Total liabilities and stockholders' equity $ 19,315,138 $ 19,057,907 ------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements. -4- NORLAND MEDICAL SYSTEMS, INC. Condensed Consolidated Statements of Operations (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------ ------------ ------------ ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenue $ 4,383,712 $ 4,130,592 $ 13,566,647 $ 11,039,855 Cost of revenue 2,480,280 2,066,503 7,018,318 6,591,184 ------------ ------------ ------------ ------------ Gross profit 1,903,432 2,064,089 6,548,529 4,448,471 Sales and marketing expense 1,298,470 1,610,729 4,214,044 5,096,924 General and administrative expense 627,976 1,494,809 2,445,892 4,438,365 Research and development expense 306,507 393,529 1,073,436 1,415,945 ------------ ------------ ------------ ------------ 2,232,953 3,499,067 7,733,372 10,951,234 Operating loss (329,521) (1,434,978) (1,184,843) (6,502,763) Loss on investment in Vitel, Inc. -- (260,000) -- (260,000) Interest expense (45,083) (327,285) (229,739) (968,984) Interest income 11,451 15,991 30,173 75,172 ------------ ------------ ------------ ------------ Loss before income tax benefit (363,153) (2,006,272) (1,384,409) (7,656,575) Income tax benefit -- -- -- 2,256,000 ------------ ------------ ------------ ------------ Net loss $ (363,153) $ (2,006,272) $ (1,384,409) $ (5,400,575) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted weighted average shares 25,735,887 7,163,531 20,153,367 7,163,795 Basic and diluted loss per share $ (0.01) $ (0.28) $ (0.07) $ (0.75)
See accompanying notes to condensed consolidated financial statements. -5- NORLAND MEDICAL SYSTEMS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited)
FOR THE NINE MONTHS ENDED ------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ Cash flows from operating activities: Net loss $(1,384,409) $(5,400,575) Adjustments to reconcile net loss to net cash Provided by (used in) operating activities: Amortization expense 534,145 629,253 Depreciation expense 412,496 207,621 Other 23,723 -- Loss on investment in Vitel, Inc. -- 260,000 Provision for doubtful accounts 3,647 1,121,531 Inventory obsolescence expense (credit) (791,780) 325,000 Deferred income taxes (340,000) (2,256,000) Changes in assets and liabilities: Accounts receivable (693,141) 2,109,905 Inventories 238,151 717,686 Prepaid expenses and other current assets (20,490) 2,964 Accounts payable 1,225,302 (957,123) Accrued expenses (563,411) 307,787 Income taxes receivable 340,000 1,965,299 Customer deposits -- (500,000) ----------- ----------- Total adjustments 368,642 3,933,923 ----------- ----------- Net cash used in operating activities (1,015,767) (1,466,652) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (315,826) (214,478) Other (3,590) (3,590) ----------- ----------- Net cash used in investing activities (319,416) (218,068) ----------- ----------- Cash flows from financing activities: Proceeds from stock options exercised 2 1 Proceeds from issuance of common stock 500,000 -- Net bank borrowings 160,326 -- ----------- ----------- Net cash provided by financing activities 660,328 1 ----------- ----------- Net decrease in cash (674,855) (1,684,719) Cash and cash equivalents at beginning of period 1,105,140 3,082,202 ----------- ----------- Cash and cash equivalents at end of period $ 430,285 $ 1,397,483 ----------- ----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements. -6- NORLAND MEDICAL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The condensed consolidated financial statements of Norland Medical Systems, Inc. (the "Company") presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1998, and included in the Company's Form 10-K as filed with the Securities and Exchange Commission. The condensed consolidated financial statements included herein are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company for these interim periods. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be achieved for the entire fiscal year ending December 31, 1999. (2) INVENTORIES As of September 30, 1999 and December 31, 1998, inventories consisted of the following:
September 30, 1999 December 31, 1998 ------------------ ----------------- Raw materials, product kits, spare parts and sub-assemblies $ 2,251,724 $ 2,322,744 Work in progress 790,993 380,835 645,793 1,151,302 Finished goods 66,464 66,464 Rental systems (680,000) (1,400,000) ----------- ----------- Inventory reserve $ 3,074,974 $ 2,521,345 ----------- ----------- ----------- -----------
(3) LINE OF CREDIT In August 1999, the Company entered into a $2 million bank line of credit agreement in which the Company may make borrowings according to an accounts receivable based formula. Interest on any outstanding borrowings accrues at a variable rate based on prime plus 1.25%. Borrowings under the agreement are collateralized by the Company's assets. In connection with such agreement, the Company has granted to the bank warrants to purchase 20,000 shares of Company Common Stock at $0.01 per share. As of September 30, 1999, the Company had outstanding borrowings of $160,326 with interest accruing at 9.50%. -7- NORLAND MEDICAL SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (continued): (Unaudited) (4) NOTE PAYABLE As part of the original consideration paid by the Company to Norland Medical Systems B.V. ("NMS BV") for the acquisition of Norland Corporation ("Norland Corp.") in September of 1997, the Company issued a $16,250,000 note ("Note") bearing interest at the rate of 7% per annum. Effective as of December 31, 1998, the terms of the Norland Corp. acquisition were amended. The purchase price was lowered by reducing the principal amount of the Note by $8,800,000 to $7,450,000. In addition, the interest rate was reduced to 6.5%. Also on December 31, 1998, the Company paid $1,890,000 of the reduced principal amount by issuing 7,000,000 shares of its Common Stock to NMS BV, in accordance with provisions of the Note that allowed the Company to pay principal in shares of its Common Stock. The principal amount of the Note outstanding after such payment was $5,560,000. In March 1999, the Company elected to pay an additional $4,310,000 of Note principal by the issuance of 11,122,580 shares of its Common Stock. The Company issued 4,588,469 of these shares in March and the remaining 6,534,111 shares in June 1999. The remaining $1,250,000 principal amount of the Note is subject to mandatory prepayment at such time as the Company receives at least $2,000,000 in proceeds from an equity financing. The Note has a maturity date of September 11, 2002, subject to the Company's right to extend such maturity date by up to two years (at increasing interest rates). NMS BV has transferred all of its interest in the Note to current and former stockholders of NMS BV. (5) STOCKHOLDERS' EQUITY As of September 30, 1999, the Company had 45,000,000 shares of authorized Common Stock and 25,953,278 shares issued and outstanding. In June 1999, the Company increased its number of authorized shares of Common Stock from 20,000,000 to 45,000,000 following shareholder approval. On July 30, 1999, the Company issued 666,667 shares of its Common Stock to a corporate investor in exchange for a $500,000 cash investment. Of the proceeds from the share issuance, approximately $67,000 was paid to the investor in satisfaction of previous purchases of a product component and the balance of proceeds is being used for working capital and general corporate purposes. -8- NORLAND MEDICAL SYSTEMS, INC. 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 VARIOUS 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. RESULTS OF OPERATIONS Revenue for the three months ended September 30, 1999 increased $253,120 (6.1%) to $4,383,712 from $4,130,592 for the comparable period of 1998. The increase in third quarter sales was largely a result of increased sales of spare parts and services in connection with the larger installed base of DXA-based systems. The increase in revenue was moderated as a result of the inclusion in revenue for the third quarter of 1998 of a large single order sale of peripheral systems in the Pacific Rim. Revenue for the nine months ended September 30, 1999 increased $2,526,792 (22.9%) to $13,566,647 from $11,039,855 for the comparable period in 1998. The increase was largely the result of significantly increased first quarter sales of DXA-based systems in the United States. Sales in the United States and Pacific Rim represented 52.4% and 20.0%, respectively, of total revenue for the three months ended September 30, 1999 and 60.3% and 24.5%, respectively, of total revenue for the three months ended September 30, 1998. Sales in the United States and Pacific Rim represented 65.7% and 12.8%, respectively, of total revenue for the nine months ended September 30, 1999 and 66.1% and 15.0%, respectively, of total revenue for the nine months ended September 30, 1998. A majority of the Company's revenue for the third quarter of 1999 and for the nine-month periods ended September 30, 1999 and 1998 was derived from sales of the Excell, Eclipse and XR36 DXA-based central systems, while revenue for the third quarter of 1998 was equally comprised of sales of central and peripheral systems due to the large single order sale referred to above. Sales of complete bone densitometry systems represented 83.5% and 90.8% of total revenue for the three months ended September 30, 1999 and 1998, respectively, and 87.3% and 91.7% of total revenue for the nine months ended September 30, 1999 and 1998, respectively. Sales of parts and services and rental income comprised the balance of revenue for such periods. Sales in the United States over the periods presented herein have been and are expected to be affected by changes in the Medicare reimbursement rates for both peripheral and central bone densitometry tests. In November 1996 the Health Care Financing Administration (HCFA) announced changes for 1997 that significantly reduced the reimbursement rate for peripheral bone densitometry tests. In September 1997 HCFA published proposed changes for 1998 that would have increased the reimbursement rate for peripheral systems and significantly reduced the rate for central systems. These proposed reimbursement rates for 1998 were not adopted by HCFA. Instead, the 1998 rates for both peripheral and central systems, as finally adopted, were increased slightly over their applicable rates for 1997. Such reimbursement rates remain, however, subject to further changes. It is not possible to predict with certainty the nature and extent of any such changes, but any future decreases in reimbursement rates may reduce demand for the Company's products, and -9- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): consequently could adversely affect the Company. Several regional Medicare carriers did not allow any reimbursement for peripheral bone densitometry tests. However, effective July 1, 1998, HCFA national policy mandates Medicare coverage of bone density diagnostic tests for qualified individuals. Revenue, gross margin and the mix of product models 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. There can be no assurance that the Company will be able to bring such systems to the market. 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. The Company is launching 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. Norland's new 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, as well as the LEONARDO, a measurement device to monitor patients' progress. The diversification program includes another product, the OSSANOL, a novel therapeutic device designed for use in pain management to treat joints, muscles and ligaments. The first of five Ossanol flagship units was shipped recently to a leading orthopedic clinic in California. The distribution rights for these products were made available to Norland by Bionix L.L.C., in an effort to bolster sales through product diversification. Bionix is a limited liability company controlled by Norland's Chairman. Sales of these new products are expected shortly, however there can be no assurance that the Company will sell a material quantity of such products. Cost of revenue as a percentage of revenue was 56.6% and 50.0% for the three months ended September 30, 1999 and 1998, respectively, resulting in a gross margin of 43.4% for the three months ended September 30, 1999 compared to 50.0% for the comparable period of 1998. The gross margin for the three-months ended September 30, 1999 was benefited by $117,000 of new bone densitometry systems that were previously written off from the Company's inventory held by a former dealer and repossessed in the current quarter. The gross margin for the third quarter of 1999 was also benefited by $40,000 of sales of relatively low cost refurbished demonstration systems. The decline in gross margin in the three-month period ended September 30, 1999 compared to the comparable period of 1998 is primarily attributed to the relatively higher margin single order sale in September 1998 referred to above. Cost of revenue as a percentage of revenue was 51.7% and 59.7% for the nine months ended September 30, 1999 and 1998, respectively, resulting in a gross margin of 48.3% for the nine months ended September 30, 1999 compared to 40.3% for the comparable period of 1998. The improvement in gross margin for the nine-months ended September 30, 1999 as compared to the comparable period in 1998 was primarily the result of the benefits derived from the sale of inventory previously partially reserved for as obsolete (the reserve on such items was $791,780), by $379,000 in sales of relatively low carrying cost refurbished demonstration systems and by the $117,000 of repossessed new bone densitometry systems note above. In addition, the gross margin for the nine-month period ended September 30, 1998 was adversely affected by a $325,000 charge for an increased inventory reserve taken in the first quarter. Furthermore, because Norland Corp. has certain fixed manufacturing costs each quarter, to the extent that revenue is lower, as it was in the nine-months ended September 30, 1998 as compared to the comparable period in 1999, such fixed manufacturing costs have a more negative impact on gross margin. -10- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): Sales and marketing expense decreased $312,259 (19.4%) to $1,298,470 for the three months ended September 30, 1999 from $1,610,729 for the three months ended September 30, 1998, and decreased as a percentage of revenue to 29.6% from 39.0%. Sales and marketing expense decreased $882,880 (17.3%) to $4,214,044 for the nine months ended September 30, 1999 from $5,096,924 for the nine months ended September 30, 1998, and decreased as a percentage of revenue to 31.1% from 46.2%. The dollar decreases were primarily due to decreased advertising and marketing promotion expenses, labor expenses and travel related expenses incurred by sales and third party customer service representatives. The expense reductions are attributed to improvements in the cost-effectiveness of the sales, marketing and service functions and are not expected to adversely affect future sales. General and administrative expense decreased $866,833 (58.0%) to $627,976 for the three months ended September 30, 1999 from $1,494,809 for the three months ended September 30, 1998 and decreased as a percentage of revenue to 14.3% from 36.2%. General and administrative expense decreased $1,992,473 (44.9%) to $2,445,892 for the nine months ended September 30, 1999 from $4,438,365 for the nine months ended September 30, 1998, and decreased as a percentage of revenue to 18.0% from 40.2%. The dollar decreases were primarily due to decreased professional fees and $334,000 in proceeds received in August 1999 in connection with a directors and officers liability insurance claim and decreased bad debt expense in 1999 as a result of improved credit and collections management beginning in 1998. Research and development expense decreased $87,022 (22.1%) to $306,507 for the three months ended September 30, 1999 from $393,529 for the three months ended September 30, 1998, and also decreased as a percentage of revenue to 7.0% from 9.5%. Research and development expense decreased $342,509 (24.2%) to $1,073,436 for the nine months ended September 30, 1999 from $1,415,945 for the nine months ended September 30, 1998, and decreased as a percentage of revenue to 7.9% from 12.8%. The decreases in 1999 expenses as compared to 1998 were primarily due to non-recurring expenses in connection with certain development projects, including the Excell and Apollo DXA bone densitometers that were introduced in December and May 1998, respectively. The decreases in expenses as a percentage of revenues referred to in the three preceding paragraphs are also attributable to the Company's significantly increased revenue for the nine-month periods ended September 30, 1999 as compared to September 30, 1998. Interest expense decreased $282,202 (86.2%) to $45,083 for the three months ended September 30, 1999 from $327,285 for the three months ended September 30, 1998. Interest expense decreased $739,245 (76.3%) to $229,739 for the nine months ended September 30, 1999 from $968,984 for the nine months ended September 30, 1998. Interest expense for the three- and nine-month periods represents interest on the Note payable issued by the Company in connection with the acquisition of Norland Corp. on September 11, 1997 and on borrowings against the bank line of credit. The decrease in interest expense reflects the reduced outstanding principal balance of the Note payable (See Note 4). Interest income in the three and nine-month periods consisted primarily of interest earned on the Company's cash balances, reduced by other expenses consisting primarily of bank charges and other fees related to bank transfers. The decrease in interest income in the three-month period ended September 30, 1999 as compared to September 30, 1998 reflects reduced interest income resulting from the Company's reduced cash position. -11- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): For the three and nine-month periods ended September 30, 1999 and the three-month period ended September 30, 1998 the Company did not recognize a benefit for income taxes on the loss before income tax benefit. The Company recognized a benefit for income taxes as a percentage of the loss before income taxes of 29% for the nine-month period ended September 30, 1998. Management believes that, based on the Company's history of operating earnings, exclusive of nonrecurring charges and its expected income, it is more likely than not that income in future periods, with respect to deferred tax assets resulting from net operating loss carryforwards, will be sufficient to realize all deferred tax assets, net of the valuation reserve. The Company had 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 compared to a net loss of $2,006,272 ($0.28 per share based on 7,163,531 weighted average shares) for the three months ended September 30, 1998. The Company had 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 compared to net loss of $5,400,575 ($0.75 per share based on 7,163,795 weighted average shares) for the nine months ended September 30, 1998. The reduction in net loss and net loss per share was due primarily to the factors discussed above and the issuance of a substantial number of additional shares in connection with the reduction in the principal of the Note payable. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash and cash equivalents of $1,105,140. At September 30, 1999, the Company had cash and cash equivalents of $430,285. The decrease in cash was primarily the result of the payment of operating expenses, increased accounts receivable and capital expenditures partially offset by increased accounts payable, the $500,000 proceeds from a common stock issuance and net bank borrowings. At the present time, capital expenditures for the balance of 1999 are estimated to be $100,000, and include additional demonstration systems, tooling and continued upgrading of the Company's management information system. The Company's accounts receivable increased $689,494 (36.7%) to $2,566,765 at September 30, 1999 from $1,877,271 at December 31, 1998, reflecting the higher revenues. The Company's accounts payable increased $1,225,302 (70.9%) to $2,953,233 at September 30, 1999 from $1,727,931 at December 31, 1998, reflecting a higher level of purchases of parts and sub-assemblies primarily used to produce the recently introduced Apollo DXA and Excell systems and less prompt payments. The Company believes that its current cash position, together with cash flow from operations and the ability to draw on a $2 million bank line of credit (as described in Note 5) will be adequate to fund the Company's operations at least through March 31, 2000. In order to increase its cash flow, the Company is continuing its efforts to stimulate sales and reduce inventory levels. The Company is required to use working capital to manufacture the Apollo DXA and Excell. The Company is also continuing to focus its efforts on maintaining the improvements in the aging of its accounts receivable. To do so, the Company has implemented higher credit standards for its customers, -12- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): emphasized the receipt of down payments from customers at the time their purchase orders are received and entered into an arrangement with a lease company that provides for prompt funding of its purchase orders. The Company is also continuing to be more aggressive in seeking to collect outstanding receivables. The Company continues to seek additional financing. The Company does not have a commitment for such financing, and there can be no guarantee that the Company will be able to obtain such financing, particularly in view of the Company's existing debt load. The failure to obtain additional financing could materially adversely affect the Company and its operations. In addition, 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. YEAR 2000 READINESS The year 2000 (Y2K) problem stems from the fact that many existing computer programs use only the last two digits to refer to a year. As a result, such programs do not recognize a year that begins with "20" instead of "19", and may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, many computer applications could fail or produce erroneous results, such as a temporary inability to process transactions, send invoices or engage in many ordinary business activities. The Company is evaluating the Y2K problem with respect to the Y2K readiness of its internal management information and non-financial systems and the Company's product models and suppliers. At this point in time, the Company is not aware of any Y2K problems that are reasonably likely to have a material effect on the Company's business, results of operations or financial condition. The Company is completing its review of its internal management systems for Y2K compliance. The Company believes that, with the following exceptions, its information systems are Y2K compliant. The Norland Corp. management information systems, as was planned following the Company's September 1997 acquisition of Norland Corp., has been replaced with a system that is compatible with the Company's Y2K compliant management information systems. The Company has identified certain other application hardware and software which are not yet Y2K compliant. Upgrades for most of these systems are available as part of an annual maintenance program. The Company believes that it already has obtained and installed most of the necessary upgrades for these programs and that the remaining upgrades will be available during 1999 without material expense to the Company. The Company anticipates that it will be able to complete, test and implement all software upgrades that may be material to its business on a timely basis. There is always a risk that, if the Company has not properly identified all Y2K compliance issues with respect to its internal systems, the Company may not be able to implement all necessary changes to these systems on a timely basis and within budget. This in turn could cause a material disruption to the Company's business, including the inability to process orders on a timely basis, which could have a material adverse effect on its business, results of operations and financial condition. -13- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): The Company has evaluated the product models currently offered by the Company for Y2K compliance. The Company believes that its peripheral and central DXA-based, pQCT and McCue ultrasound systems are Y2K compliant. The Company has also identified certain older DXA, SXA and pQCT products that will also require computer hardware and/or software upgrades to become Y2K compliant. The Company is making upgrades for these products available to its customers. The Company's ability to manufacture and sell systems on a timely basis could be adversely affected by Y2K compliance problems that may be experienced by its suppliers and customers. The Company has made inquiries of its major suppliers in an effort to determine their year 2000 readiness. The Company cannot presently estimate the nature or extent of any potential adverse impact resulting from the failure of these third parties to achieve Y2K compliance. Even if such third parties are themselves Y2K compliant, they may be adversely affected by Y2K problems of third parties with whom they deal. In addition to the actions described above, at the present time the Company does not have a contingency plan to address the Y2K problem. The Company is developing contingency plans to address potential Y2K problems affecting it and third parties with whom it deals. The Company presently anticipates completing such plans over the next month. Should any significant Y2K problems arise that are not adequately dealt with in such plan, the Company and its business, financial condition and results of operations could be materially adversely affected. The Company has reserved $180,000 to cover the estimated costs of resolving remaining Y2K issues and contingency plans. If the Company does not identify and effectively deal with material Y2K problems affecting the Company or third parties, the most reasonably likely worst case scenario would be a systemic failure beyond the control of the Company, such as a prolonged telecommunications or electrical failure, or a general disruption of business activities that triggers a significant economic downturn. The Company believes that the primary business risks to the Company in such event would include, but not be limited to, loss of orders, increased operating costs, inability to obtain inventory on a timely basis, disruptions in product shipments, or other business interruptions of a material nature, as well as claims of mismanagement, misrepresentation, or breach of contract, any of which could have a material adverse effect on the Company and its business, results of operations and financial condition. 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 various risks and uncertainties. This section includes forward-looking statements with respect to the effect of reimbursement rates and decreased sales and marketing expenditures on future sales of bone densitometry systems, the effect of the Company's product diversification program on future sales of new products, gross margin and product mix, the Company's ability to realize deferred tax assets as recorded, future capital expenditures, Year 2000 readiness and the Company's plans for funding its ongoing operations. Such forward-looking statements are subject to the factors cited in the Introduction. -14- NORLAND MEDICAL SYSTEMS, INC. Results of Operations (continued): 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 investment policy has been to manage its risks related to its portfolio of cash and cash equivalents by holding such funds in interest bearing accounts and instruments that are liquid and of high credit quality. The Company's borrowing policy has been to manage its interest rate risks related to its borrowings through use of fixed rate debt when possible (Note payable) or prime rate based variable rate debt (bank line of credit). Any Company borrowings on the line of credit are subject to the risk of increases in the bank's prime rate without limitation. See Note 3 and 4 for descriptions of the Note payable and bank line of credit. All items described below are non-trading and are stated in U.S. dollars.
EXPECTED MATURITY DATES FAIR VALUE SEPTEMBER 1999 2002 TOTAL 30,1999 ---- ---- ----- ------- CASH AND CASH EQUIVALENT Money Market Mutual Fund Shares and Bank deposits-non interest bearing $430,285 $ 430,285 $ 430,285 Average interest rate-4.8% NOTE PAYABLE Fixed interest rate-6.5% $1,250,000 $1,250,000 $1,093,281
-15- NORLAND MEDICAL SYSTEMS, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS WESLEY D. JOHNSON AND PAMELA S. T. JOHNSON V. REYNALD G. BONMATI, KURT W. STREAMS AND NORLAND MEDICAL SYSTEMS, INC. Reference is made to the above captioned legal proceeding against the Company and its Chief Executive Officer and Chief Financial Officer as previously reported. The Company and the plaintiffs have an agreement in principal to settle the litigation as outlined in an October 13, 1999 Memorandum of Understanding. A Settlement Agreement is being reviewed by the parties and subject to its execution, the Agreement is to be presented for court approval. Under terms of the draft settlement, there is no additional material financial effect on the Company. The Company is party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate to have a material adverse effect on the Company's final position, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION In accordance with the Company's By-laws and Rules 14a-4(c) 14a-5(e) promulgated under the Securities Exchange Act of 1934, the Company hereby notifies its stockholders that if the Company does not receive notice by March 17, 2000 of a proposed matter to be submitted for stockholder vote at the Company's 2000 Annual Meeting, then any proxies held by members of the Company's management in respect of such Meeting may be voted in the discretion of such management members on such matter, without any discussion of such proposed matter in the proxy statement to be distributed in respect of such Meeting. In addition, the Company's By-laws contain other restrictions regarding the method by which a stockholder may present a matter to be submitted for stockholder vote at the Company's Annual Meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8-K: None -16- NORLAND MEDICAL SYSTEMS, INC. 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 12, 1999 /s/ Reynald G. Bonmati --------------------------------------------- Reynald G. Bonmati President Date: November 12, 1999 /s/ Kurt W. Streams --------------------------------------------- Kurt W. Streams Vice President, Finance (Principal Financial and Accounting Officer) -17- NORLAND MEDICAL SYSTEMS, INC. EXHIBIT INDEX NUMBER DESCRIPTION 27 Financial Data Schedule -18- EX-27 2 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Condensed Financial Statments and is qualified in its entirety by reference to such financial statements. 1 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 430,285 0 2,896,765 330,000 3,074,974 8,132,623 3,585,029 2,289,667 19,315,138 6,402,551 1,093,281 0 0 12,977 11,806,329 19,315,138 12,917,040 13,566,647 7,018,318 7,018,318 7,733,373 0 229,739 (1,384,409) 0 (1,384,409) 0 0 0 (1,384,409) (0.07) (0.07)
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