<PAGE>
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, 1998
-------------------------------------------------
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
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Norland Medical Systems, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1387931
- - -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 13, 1998, 7,164,031 shares of the registrant's Common Stock,
$0.0005 par value, were outstanding.
1
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NORLAND MEDICAL SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Title Page...................................................................................................1
Document Table of Contents...................................................................................2
Introduction.................................................................................................3
PART I FINANCIAL INFORMATION (Unaudited) ..............................................................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......................................................................12
PART II OTHER INFORMATION..............................................................................16
Item 1. Legal Proceedings..............................................................................16
Item 2. Changes in Securities..........................................................................17
Item 3. Defaults Upon Senior Securities................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................17
Item 5. Other Information..............................................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................18
Signatures ...............................................................................................19
Exhibit Index...............................................................................................20
</TABLE>
2
<PAGE>
Norland Medical Systems, Inc.
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 and the acceptance of such products and enhancements in
the marketplace; (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 payers, 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 results of the Company's financing
efforts; (xi) the effect of the Company's accounting policies; and (xii) 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. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
Nothing contained in the Report should be viewed as suggesting the existence of
a trend or the 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.
On March 16, 1998, the Company announced that it would restate its revenues
downward for the fourth quarter of 1996 and for the first, second, and third
quarters of 1997. Financial statements and related disclosures contained in this
Report with respect to the three- and nine-months ended September 30, 1997,
reflect the restated financial statements for such periods (see Note 6 to the
Condensed Consolidated Financial Statements in Item 1 of this Report). The
balance sheet and related disclosures with respect to the year ended December
31, 1997 reflect the restated consolidated financial statements for the first
three quarters of the year.
3
<PAGE>
Norland Medical Systems, Inc.
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Norland Medical Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,397,483 $ 3,082,202
Accounts receivable - trade, less allowance for
doubtful accounts of $2,600,000 at September 30, 1998
and $2,200,000 at December 31, 1997 2,934,031 6,165,467
Income taxes receivable 140,347 1,774,314
Inventories, net 3,709,812 5,131,431
Officer's loan receivable 90,094 86,504
Prepaid expenses and other current assets 204,257 207,221
Deferred income taxes 2,793,210 2,559,758
---------- ----------
Total current assets 11,269,234 19,006,897
---------- ----------
Demonstration systems, net 398,823 99,845
Investment in Vitel, Inc. -- 260,000
Property and equipment, net 814,429 807,572
Deferred income taxes 2,149,751 458,535
Goodwill, net 8,299,384 8,745,676
---------- ----------
Total assets $ 22,931,621 $ 29,378,525
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ 1,113,846 $ 1,122,788
Accounts payable - related party 276,562 584,779
Accounts payable - trade 1,372,998 2,021,904
Accrued expenses 1,770,122 1,923,938
Accrued warranty expenses 920,000 890,000
Accrued interest payable 715,978 284,375
Customer deposits -- 500,000
---------- ----------
Total current liabilities 6,169,506 7,327,784
---------- ----------
Note payable, net of discount 14,551,704 14,439,756
Stockholders' equity:
Common stock, par value of $0.0005 per share, 20,000,000
shares authorized, 7,164,031 and 7,162,531 shares issued
at September 30, 1998 and December 31, 1997, respectively 3,581 3,580
Additional paid-in capital 22,245,686 22,245,686
Accumulated deficit (20,038,856) (14,638,281)
---------- ----------
Total stockholders' equity 2,210,411 7,610,985
---------- ----------
Total liabilities and stockholders' equity $ 22,931,621 $ 29,378,525
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Norland Medical Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 4,130,592 $ 5,338,508 $ 11,039,655 $ 14,807,735
Cost of revenue 2,066,503 3,123,219 6,591,184 8,427,799
------------- ------------- ------------- -------------
Gross profit 2,064,089 2,215,289 4,448,471 6,379,936
Sales and marketing expense 1,610,729 1,530,528 5,096,924 4,034,205
General and administrative expense 1,494,809 1,165,574 4,438,365 2,386,856
Research and development expense 393,529 165,502 1,415,945 353,289
In-process research and development charge -- 7,900,000 -- 7,900,000
Other non-recurring charges -- 9,909,880 -- 9,909,880
------------- ------------- ------------- -------------
3,499,067 20,671,484 10,951,234 24,584,230
Operating loss (1,434,978) (18,456,195) (6,502,763) (18,204,294)
Loss on investment in Vitel, Inc. (260,000) -- (260,000) --
Interest expense (327,285) (66,096) (968,984) (66,096)
Interest income 15,991 75,764 75,172 326,238
------------- ------------- ------------- -------------
Loss before income taxes (2,006,272) (18,446,527) (7,656,575) (17,944,152)
Benefit for income taxes -- 2,342,709 2,256,000 2,138,709
------------- ------------- ------------- -------------
Net loss $ (2,006,272) $ (16,103,818) $ (5,400,575) $(15,805,443)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares:
Basic 7,163,531 7,154,161 7,163,795 7,140,071
Diluted 7,163,531 7,154,161 7,163,795 7,140,071
Loss per share:
Basic $(0.28) $(2.25) $(0.75) $(2.21)
Diluted $(0.28) $(2.25) $(0.75) $(2.21)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
Norland Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,400,575) $ (15,805,443)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development charge -- 7,900,000
Other non-recurring charges -- 9,909,880
Amortization expense 629,253 419,594
Depreciation expense 207,621 97,532
Gain on sale of investment -- (47,364)
Loss on investment in Vitel, Inc. 260,000 --
Provision for doubtful accounts 1,121,531 429,000
Inventory obsolescence expense 325,000 252,660
Deferred income taxes (2,256,000) (2,437,000)
Changes in assets and liabilities, net of business
acquired:
Accounts receivable 2,109,905 253,906
Inventories 717,686 (3,329,472)
Prepaid expenses and other current assets 2,964 67,837
Accounts payable (957,123) (4,176,523)
Accrued expenses 307,787 436,683
Income taxes receivable 1,965,299 108,105
Customer deposits (500,000) --
------------ ------------
Net cash used in operating activities (1,466,652) (5,920,605)
------------ ------------
Cash flows from investing activities:
Purchase of Norland Corporation, net of cash acquired -- (2,017,509)
Purchase of property and equipment (214,478) (120,468)
Loans to officers (3,590) (1,908,363)
Repayment of loans to officers -- 2,404,773
Sale of investment -- 1,996,403
Product development loan to affiliate -- (252,261)
Repayment of product development loan to affiliate -- 32,046
------------ ------------
Net cash (used in) provided by investing activities (218,068) 134,621
------------ ------------
Cash flows from financing activities:
Proceeds from stock options exercised 1 37,643
------------ ------------
Net decrease in cash (1,684,719) (5,748,341)
Cash at beginning of period 3,082,202 8,133,468
------------ ------------
Cash at end of period $ 1,397,483 $ 2,385,127
------------ ------------
------------ ------------
Non-cash investing and financing activities:
Note payable issued to acquire Norland Corporation,
net of discount -- $ 15,522,461
Cash paid for:
Income taxes $ -- $ 190,186
Interest 150,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of Norland Medical Systems,
Inc. (the "Company") presented herein, have been prepared pursuant to the
rules of the Securities and Exchange Commission for quarterly reports on Form
10-Q and do not include all of the information and footnote disclosures
required by generally accepted accounting principles. These statements should
be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997, and included in the Company's
Form 10-K for such year.
The condensed consolidated financial statements included herein are unaudited
but, in the opinion of management, include all adjustments (consisting of
normal, recurring adjustments) necessary for a fair presentation of the
financial position, results of operations and cash flows for these interim
periods.
The results of operations for the three- and nine-month periods ended September
30, 1998 are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1998.
(2) INVENTORIES
As of September 30, 1998 and December 31, 1997 inventories consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials, product kits,
spare parts and sub-assemblies $ 2,345,092 $ 2,201,268
Work in progress 322,112 191,069
Finished goods 2,642,608 4,014,094
Inventory reserve (1,600,000) (1,275,000)
------------- -------------
$ 3,709,812 $ 5,131,431
------------- -------------
------------- -------------
</TABLE>
7
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
(3) NOTE PAYABLE
On September 11, 1997, the Company acquired Norland Corporation ("Norland
Corp.") from Norland Medical Systems B.V. ("NMS BV") in a transaction
accounted for under the purchase method of accounting. The condensed
consolidated financial statements reflect the acquisition of all of the
issued and outstanding stock of Norland Corp. for $17,500,000 from the date
of acquisition. The $17,500,000 consideration consisted of a $1,250,000 cash
payment made on September 11, 1997 and a $16,250,000 Purchase Note (the
"Note") bearing interest at the rate of 7% per annum which is payable
quarterly. A $1,250,000 portion of the Note principal was originally payable
in cash on March 11, 1998. The Note has been amended to provide that such
payment will not be due until such time as the Company receives at least
$2,000,000 in proceeds from a debt or equity financing. The remaining
principal is due and payable on September 11, 2002. The Company may prepay
the Note at any time, pay the principal (except for the $1,250,000 payment
referred to above) with shares of Company common stock valued at the time of
payment and may extend the September 11, 2002 maturity date by up to two
years (at increasing interest rates). In October 1998 interest on the Note
was paid through June 30, 1998. The Company and NMSBV have agreed that the
$292,252 of interest for the period from July 1, 1998 through September 30,
1998 will be payable on December 31, 1998. The Note is collateralized by a
pledge of the shares of Norland Corp.
(4) PER SHARE RESULTS
Basic per share figures are computed using the weighted average number of common
shares outstanding. Diluted per share figures are computed using the weighted
average number of common shares outstanding, after giving effect to dilutive
options, using the treasury stock method. The September 30, 1997 per share
figures have been restated to reflect the provisions of SFAS No. 128 for all
periods presented.
The calculations of per share results for the three- and nine-month periods
ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Numerator:
Loss available to common stockholders $ 16,103,818 $ 15,805,443
Denominator:
Basic weighted average shares outstanding 7,154,161 7,140,071
Effect of dilutive stock options 0 0
Dilutive weighted average shares outstanding 7,154,161 7,140,071
Basic and diluted loss per share $(2.25) $(2.21)
</TABLE>
8
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited
Certain options to purchase shares of Company common stock were outstanding,
but were not included in computations of dilutive loss per share figures as
their effects would be anti-dilutive. As of September 30, the numbers for
such options for the three- and nine-month periods then ended are as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Three months 849,500 612,000
Nine months 849,500 586,000
</TABLE>
(5) LITIGATION
A shareholder's class action and derivative complaint, entitled Irwin J. Miller
v. Reynald G. Bonmati et. al. Defendants, and Norland Medical Systems, Inc.,
Nominal Defendant, was filed in the Court of Chancery of the State of Delaware,
New Castle County, on August 1, 1997, against four members of the Company's
Board of Directors, Reynald G. Bonmati, Albert S. Waxman, James J. Baker, and
Michael W. Huber (the "Individual Defendants"), NMS BV, and the Company. The
action relates to the acquisition of Norland Corp. by the Company from NMS BV.
The complaint alleged that the Individual Defendants breached their fiduciary
duties in connection with the pending acquisition, and that the Company's proxy
statement relating to the stockholders' meeting to vote on the acquisition did
not contain full and fair disclosure. Plaintiff sought, among other things: to
enjoin the consummation of the acquisition; to require that the Company make
additional disclosures to its stockholders in connection with the acquisition;
damages in unspecified amounts; and costs, disbursements, and counsel and expert
fees. An agreement in principle was reached to settle this action. The Company
delayed its 1997 Annual Meeting of Stockholders and supplemented its proxy
statement with respect to the acquisition and the plaintiff withdrew his
application for a preliminary injunction against the acquisition. The other
terms of the agreement in principle were described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The acquisition was
approved by the Company's stockholders at the Annual Meeting of Stockholders
held on September 8, 1997, and the acquisition was consummated on September 11,
1997. A definitive Stipulation of Settlement was executed, subject to the
approval by the Court of Chancery. As a result of the restatement of the
Company's financial statements referred to elsewhere in this Report, the
plaintiff withdrew his support for the Stipulation of Settlement and moved for
leave to file an amended and supplemental complaint that seeks, among other
things: to rescind the acquisition of Norland Corp.; to recover compensation for
injuries allegedly suffered by the Company and the members of the stockholder
class; and costs, disbursements, and counsel and expert fees. Defendants
consented to the filing of such amended and supplemental complaint. All
defendants have filed answers to the amended and restated complaint.
On April 12, 1998 a complaint entitled Wesley D. Johnson and Pamela S. T.
Johnson v. Reynald G. Bonmati, Kurt W. Streams, and Norland Medical Systems,
Inc., was filed in the United States District Court for the Southern District of
New York against the Company, Reynald G. Bonmati, its Chief Executive Officer,
and Kurt W. Streams, its Chief Financial Officer. The complaint made claims
under Sections 10(b) and 20 of the Securities Exchange Act of 1934, arising from
the
9
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Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
Company's announcement on March 16, 1998 that it would be restating its
financial statements with respect to the fourth quarter of 1996, and the first,
second, and third quarters of 1997. The claims were made on behalf of a
purported class of certain persons who purchased the Company's Common Stock from
February 25, 1997 through March 16, 1998. Plaintiffs seek compensatory damages
in an unspecified amount, together with prejudgement interest, costs and
expenses (including attorneys' fees and disbursements). On August 10, 1998,
prior to the expiration of the defendants time to respond to the complaint, the
lead plaintiff filed an amended complaint purporting to expand the class period
through March 31, 1998. The defendants' time to respond to the amended complaint
has not yet expired.
On June 30, 1998, Lunar Corporation and Stanford University commenced a patent
infringement action against the Company and Norland Corp., a subsidiary of the
Company. The action, entitled Lunar Corporation and The Board of Trustees of the
Leland Stanford Junior University v. Norland Corporation and Norland Medical
Systems, Inc, was filed in the U.S. District Court for the Western District of
Wisconsin. The complaint alleges that the dual-energy x-ray absorptiometry (DXA)
bone densitometers manufactured by Norland Corp. and sold by the Company
infringe on U.S. Patent No. 4,686,695 (the "Patent"), owned by Stanford
University and licensed to Lunar. Plaintiffs seek a declaration that the
defendants have infringed the Patent, a permanent injunction restraining
defendants from infringing the Patent, damages, treble damages, costs and
expenses (including attorneys' fees). The Company and Norland Corp. have filed
an answer to the complaint denying any infringement and a counterclaim seeking a
declaration that the defendants have not infringed the Patent and that the
Patent is invalid and unenforceable. The parties have been having settlement
discussions.
In addition, in the normal course of business, the Company is named in 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.
(6) RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the quarters ended
September 30, 1997, June 30, 1997 and March 31, 1997. A review of sales
transactions recorded in the quarters revealed that certain transactions that
the Company treated as sales, and with respect to which it recognized revenue,
should not have been treated as sales for purposes of revenue recognition. As a
result, the financial statements were restated to eliminate the transactions
that should not have been treated as sales.
10
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
All material adjustments necessary to correct the financial statements have been
recorded. The impact of these adjustments on the Company's financial results for
the three- and nine-month periods ended September 30, 1997 as originally
reported is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------------------- -------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue $ 6,360,537 $ 5,338,508 $ 19,491,446 $14,807,735
Gross profit 3,379,581 2,215,289 9,079,279 6,379,936
Operating loss (17,529,810) (18,456,195) (15,919,528) (18,204,294)
Net loss (15,466,142) (16,103,818) (14,361,386) (15,805,443)
Loss per share - diluted $(2.15) $(2.25) $(2.00) $(2.21)
Total assets 33,380,973 31,813,415
Total current liabilities 6,611,922 6,206,241
Accumulated deficit 10,002,143 11,164,020
</TABLE>
(7) IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," requires that comprehensive
income and its components be reported in the financial statements. Comprehensive
income represents the change in net assets of a business enterprise as a result
of non-owner transactions. The Company adopted this standard during the first
quarter of 1998 with no impact on the financial statements as there were no
other comprehensive income components.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that publicly traded companies report financial and
descriptive information about its reportable operating segments. The Company is
required to adopt this standard in the fourth quarter of 1998 and is currently
evaluating the impact of this standard.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity,"
becomes effective for fiscal years beginning January 1, 2000. The Company has
not yet determined the impact, if any, that the adoption of this statement
may have on the Company's financial statements.
11
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
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 Financial Statements and the
related Notes thereto included elsewhere in this Report.
RESULTS OF OPERATIONS
Revenue for the three months ended September 30, 1998 decreased $1,207,916
(22.6%) to $4,130,592 from $5,338,508 for the comparable period of 1997.
Revenue for the nine months ended September 30, 1998 decreased $3,768,080
(25.4%) to $11,039,655 from $14,807,735 for the comparable period in 1997.
The decreases were largely the result of lower sales of densitometry systems
especially in the United States, and lower revenue from sales of parts and
services. The decreases in U.S. sales were partially offset by a large third
quarter single order sale of peripheral systems in the Pacific Rim. Sales in
the United States and Pacific Rim represented 60.3% and 24.5%, respectively,
of total revenue for the three months ended September 30, 1998 and 77.1% and
3.4%, respectively, of total revenue for the three months ended September 30,
1997. Sales in the United States and Pacific Rim represented 66.1% and 15.0%,
respectively, of total revenue for the nine months ended September 30, 1998
and 72.0% and 11.1%, respectively, of total revenue for the nine months ended
September 30, 1997. A majority of the Company's revenue for the nine-month
periods ended September 30, 1998 and 1997 was derived from sales of the
Eclipse and XR36 central systems. Sales of complete bone densitometry systems
represented 90.8% and 88.3% of total revenue for the three months ended
September 30, 1998 and 1997, respectively, and 91.7% and 88.7% of total
revenues for the nine months ended September 30, 1998 and 1997. Sales of
parts and services and rental income comprised the balance of revenue for
such periods.
Sales in the United States have been affected by changes in the Medicare
reimbursement rates for 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 June 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 are subject to further
changes. Several regional Medicare carriers did not allow any reimbursement for
peripheral bone densitometry tests. However, effective July 1, 1998, HCFA's
national policy mandates Medicare coverage of bone density diagnostic tests for
qualified individuals. 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.
12
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
Cost of revenue as a percentage of revenue was 50.0% and 58.5% for the three
months ended September 30, 1998 and 1997, respectively, resulting in a gross
margin of 50.0% for the three months ended September 30, 1998 compared to 41.5%
for the comparable period of 1997. The increase in gross margin is primarily
attributable to the third quarter 1998 sale of certain systems that had been
written off in prior periods and the adverse affect of a $253,000 inventory
reserve charge taken in the quarter ended September 30, 1997. Cost of revenue as
a percentage of revenue was 59.7% and 56.9% for the nine months ended September
30, 1998 and 1997, respectively, resulting in a gross margin of 40.3% for the
nine months ended September 30, 1998 compared to 43.1% for the comparable period
of 1997. The gross margin for the nine months ended September 30, 1998 was
adversely affected by a $325,000 charge taken in the first quarter for an
increased inventory reserve. In addition, because Norland Corp. has certain
fixed manufacturing costs each quarter, to the extent that revenues are lower
for any particular period, such fixed costs have a more negative impact on gross
margin.
Sales and marketing expense increased $80,201 (5.2%) to $1,610,729 for the three
months ended September 30, 1998 from $1,530,528 for the three months ended
September 30, 1997, and increased as a percentage of revenue to 39.0% from
28.7%. Sales and marketing expense increased $1,062,719 (26.3%) to $5,096,924
for the nine months ended September 30, 1998 from $4,034,205 for the nine months
ended September 30, 1997, and increased as a percentage of revenue to 46.2% from
27.2%. The dollar increases were primarily due to increased expenses of the
Company's customer service department required to support the expanding
installed base of systems in the United States, expenses of sales and marketing
personnel hired during the second half of 1997, and the continuing cost of
marketing efforts that were expanded during the second half of 1997.
General and administrative expense increased $329,235 (28.2%) to $1,494,809 for
the three months ended September 30, 1998 from $1,165,574 for the three months
ended September 30, 1997 and increased as a percentage of revenue to 36.2% from
21.8%. General and administrative expense increased $2,051,509 (86.0%) to
$4,438,365 for the nine months ended September 30, 1998 from $2,386,856 for the
nine months ended September 30, 1997, and increased as a percentage of revenue
to 40.2% from 16.1%. The largest component of these increases was an increase in
charges for doubtful accounts, including a $730,000 charge taken in the second
quarter with respect to one of its dealers whose dealer agreement expired during
the quarter. Other contributing factors were higher professional fees and the
inclusion of general and administrative expenses of Norland Corp., including
goodwill amortization expenses related to the Company's acquisition of Norland
Corp. on September 11, 1997. The increases were partially offset by the
elimination of expenses for the Company's Dove Medical Systems subsidiary, whose
Newbury Park, California facility was closed in September 1997.
Research and development expense increased $228,027 (137.8%) to $393,529 for the
three months ended September 30, 1998 from $165,502 for the three months ended
September 30, 1997, and also increased as a percentage of revenue to 9.5% from
3.1%. Research and development expense increased $1,062,656 (300.8%) to
$1,415,945 for the nine months ended September 30, 1998 from $353,289 for the
nine months ended September 30, 1997, and increased as a percentage of
13
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
revenue to 12.8% from 2.4%. The dollar increases were primarily the result of
the inclusion of research and development expenses of Norland Corp. that were
partially offset by the elimination of expenses of Dove Medical Systems.
The increases in expense as a percentage of revenues referred to in the three
preceding paragraphs are also attributable to the Company's reduced revenues for
the first three quarters of 1998.
The Company recognized non-recurring charges of $17,809,880 in the three
months ended September 30, 1997 in connection with the acquisition of Norland
Corp. ($9,360,735), including an in-process research and development charge,
the closing of the Company's Dove Medical Systems subsidiary facility and
related asset write-offs ($8,347,340) and the acquisition of certain
distribution rights for an ultrasound product ($101,805). In the three months
ended September 30, 1998, the Company wrote off its $260,000 minority
interest investment in Vitel, Inc.
Interest expense of $327,285 and $968,984 for the three- and nine-month periods
ended September 30, 1998, respectively, represent interest on the Purchase Note
issued by the Company in connection with the acquisition of Norland Corp. on
September 11, 1997. Interest income in the three- and nine-month periods ended
September 30, 1998 and 1997 consisted primarily of interest earned on the
Company's cash and loan balances, reduced by other expenses consisting primarily
of bank charges and other fees related to bank transfers. The decreases in
interest income in the three- and nine-month periods ended September 30, 1998 as
compared to September 30, 1997 reflect reduced interest income resulting from
the Company's reduced cash position.
The Company recognized a benefit for income taxes for the quarter ended
September 30, 1998 of $802,000 or 40.0% of the loss before income taxes, as
compared to a benefit for income taxes as a percentage of the loss before
income taxes of 12.7% for the same period in 1997. For the quarter ended
September 30, 1998, the Company also established a valuation reserve of
$802,000. Management believes that, based on the Company's history of
operating earnings, in prior years exclusive of nonrecurring charges in 1997
and its expected income, it is more likely than not that future levels of
income will be sufficient to realize all deferred tax assets, net of the
reserve.
The Company had a net loss of $2,006,272 ($0.28 per share) for the three
months ended September 30, 1998 compared to net loss of $16,103,818 ($2.25
per share) for the three months ended September 30, 1997. The Company had a
net loss of $5,400,575 ($0.75 per share) for the nine months ended September
30, 1998 compared to net loss of $15,805,443 ($2.21 per share) for the nine
months ended September 30, 1997. The non-recurring charges of $17,809,880
($2.49 per share) recognized in the quarter ended September 30, 1997
increased the net loss on an after tax basis by $15,725,660. Excluding the
after tax effect of this charge, the net loss for the quarter ended September
30, 1997 would be $378,168 ($0.05 per share) and the net loss for the nine
months ended September 30, 1997 would be $79,783 ($0.01 per share).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash of $3,082,202. At September 30, 1998,
the Company had cash of $1,397,483. The decrease in cash was primarily
attributed to the net use of cash in operating activities as a result of the net
operating loss.
The Company's accounts receivable decreased $3,231,436 (52.4%) to $2,934,031 at
September 30, 1998 from $6,165,467 at December 31, 1997, primarily reflecting
lower revenues over the nine-month period, a $400,000 net increase in the
14
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
allowance for doubtful accounts and more prompt payments by customers.
Property and equipment as of September 30, 1998 consisted of leasehold
improvements, computer and telephone equipment, a management information system,
office furniture, and tooling for the products manufactured by the Company. At
the present time, except for additional demonstration systems, no significant
capital expenditures for additional equipment or systems are planned.
The Purchase Note issued to NMS BV as part of the purchase price for Norland
Corp. was amended to provide that the $1,250,000 principal payment originally
due on March 11, 1998 will not be payable until such time as the Company
receives at least $2,000,000 from a debt or equity financing. The Company
may, at its sole option and discretion, pay the principal (except for the
$1,250,000 payment) with shares of Company common stock valued at the time of
payment. Depending on when such principal payment is made, interest payments
on the Purchase Note will range from approximately $295,000 to $265,000 per
quarter. In October 1998 interest on the Note was paid through June 30, 1998.
The Company and NMSBV have agreed that the $292,252 of interest for the
period from July 1, 1998 through September 30, 1998 will be payable on
December 31, 1998.
The Company plans to fund its ongoing operations from its cash position and cash
flow from operations. In order to increase its cash flow, the Company is
continuing its efforts to stimulate sales and reduce inventory levels. The
Company will be required to use working capital to build up inventory of its
recently introduced Apollo DXA, a peripheral system that measures bone density
at the heel. The Company is also continuing to focus its efforts on improving
the aging of its accounts receivable. To do so, the Company has implemented
higher credit standards for its customers and is emphasizing the receipt of down
payments from customers at the time their purchase orders are received. The
Company is also continuing to be more aggressive in seeking to collect
outstanding receivables.
The Company has been seeking equity 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. The failure to do so 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.
READINESS FOR YEAR 2000
The Company believes that all of the products it currently ships are Year
2000 compliant. The Company has reviewed its existing financial and other
information systems and believes that its computer systems are or will be
Year 2000 compliant. As planned following its acquisition of Norland Corp. in
September of 1997, the Company is replacing Norland Corp.'s information
sysytems with systems compatible with those of the Company. The Company
anticipates that these new Norland Corp. systems will be in place by
January 1, 1999 and that they will be Year 2000 compliant. It is possible that
third parties with whom the Company deals, including suppliers, banks and
payroll and other service providers may have noncompliant computer systems or
programs. The Company is requesting information from key third parties as to
their Year 2000 compliance and readiness.
The Company currently anticipates that the expenses and capital expenditures
associated with its Year 2000 compliance program will not have a material
effect on its financial position or results of operations.
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, 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
15
<PAGE>
Norland Medical Systems, Inc.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
A shareholder's class action and derivative complaint, entitled
Irwin J. Miller v. Reynald G. Bonmati et. al. Defendants, and
Norland Medical Systems, Inc., Nominal Defendant, was filed in
the Court of Chancery of the State of Delaware, New Castle
County, on August 1, 1997, against four members of the Company's
Board of Directors, Reynald G. Bonmati, Albert S. Waxman,
James J. Baker, and Michael W. Huber (the "Individual
Defendants"), NMS BV, and the Company. The action relates to the
acquisition of Norland Corp. by the Company from NMS BV. The
complaint alleged that the Individual Defendants breached their
fiduciary duties in connection with the pending acquisition, and
that the Company's proxy statement relating to the stockholders'
meeting to vote on the acquisition did not contain full and fair
disclosure. Plaintiff sought, among other things: to enjoin the
consummation of the acquisition; to require that the Company make
additional disclosures to its stockholders in connection with the
acquisition; damages in unspecified amounts; and costs,
disbursements, and counsel and expert fees. An agreement in
principle was reached to settle this action. The Company delayed
its 1997 Annual Meeting of Stockholders and supplemented its
proxy statement with respect to the acquisition and the plaintiff
withdrew his application for a preliminary injunction against the
acquisition. The other terms of the agreement in principle were
described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The acquisition was approved by the
Company's stockholders at the Annual Meeting of Stockholders held
on September 8, 1997, and the acquisition was consummated on
September 11, 1997. A definitive Stipulation of Settlement has
been executed, subject to the approval by the Court of Chancery.
As a result of the restatement of the company's financial
statements referred to elsewhere in this Report, the plaintiff
withdrew his support for the Stipulation of Settlement and moved
for leave to file an amended and supplemental complaint that
seeks, among other things, to rescind the acquisition of Norland
Corp.; recover compensation or injuries allegedly suffered by the
Company and the members of the stockholder class; and recover
costs, disbursements, and counsel and expert fees. Defendants
consented to the filing of such amended and supplemental
complaint. All defendants have filed answers to the amended and
restated complaint.
On April 12, 1998 a complaint entitled Wesley D. Johnson and
Pamela S. T. Johnson v. Reynald G. Bonmati, Kurt W. Streams, and
Norland Medical Systems, Inc., was filed in the United States
District Court for the Southern District of New York against the
Company, Reynald G. Bonmati, its Chief Executive Officer, and
Kurt W. Streams, its Chief Financial Officer. The complaint made
claims under Sections 10(b) and 20 of the Securities Exchange Act
of 1934, arising from the Company's announcement on March 16,
1998 that it would be restating its financial statements with
respect to the fourth quarter of 1996, and the first, second, and
third quarters of 1997. The claims were made on behalf of a
purported class of certain persons who purchased the Company's
Common Stock from February 25, 1997 through March 16, 1998.
Plaintiffs seek compensatory damages in an unspecified amount,
together with
16
<PAGE>
Norland Medical Systems, Inc
Item 1. Legal Proceedings (continued)
prejudgement interest, costs and expenses (including attorneys'
fees and disbursements). On August 10, 1998, prior to the
expiration of the defendants time to respond to the complaint,
the lead plaintiff filed an amended complaint purporting to
expand the class period through March 31, 1998. The defendants'
time to respond to the amended complaint has not yet expired.
On June 30, 1998, Lunar corporation and Stanford University
commenced a patent infringement action against the Company and
Norland Corp., a Subsidiary of the Company. The action, entitled
Lunar Corporation and The Board of Trustees of the Leland
Stanford Junior University v. Norland Corporation and Norland
Medical Systems, Inc, was filed in the U.S. District Court for
the Western District of Wisconsin. The complaint alleges that the
dual-energy x-ray absorptiometry (DXA) bone densitometers
manufactured by Norland Corp. and sold by the Company infringe in
U.S. Patent No. 4,686,695 (the "Patent"), owned by Stanford
University and licensed to Lunar. Plaintiffs seek a declaration
that the defendants have infringes the Patent, a permanent
injunction restraining defendants from infringing the Patent,
damages, treble damages, costs and expenses (including attorneys'
fees). The Company and Norland Corp. have filed an answer to the
complaint denying any infringement and a counterclaim seeking a
declaration that the defendants have not infringed the Patent and
that the Patent is invalid and unenforceable. The parties have
been having settlement discussions.
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
On November 13, 1998, the Company engaged Deloitte & Touche LLP
("Deloitte") as its independent auditors. During the two most
recent fiscal years, and the subsequent interim period prior to
engaging Deloitte, neither the Company nor anyone on its behalf,
consulted Deloitte regarding (i) either the application of
accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements, where either a
written report was provide to the Company or oral advice was
provided, which advice was an important factor considered by the
Company in
17
<PAGE>
Norland Medical Systems, Inc
reaching a decision as to the accounting, auditing or financial
recording issue; or (ii) any matter that was the subject of a
disagreement (as defined in paragraph 304(a) (1) (iv) of
Regulation S-K) or a reportable event (as defined in paragraph
304 (a) (1) (v) of Regulation S-K). Prior to the Company's
September 11, 1997 acquisition of Norland Corporation, Deloitte
served as Norland Corporation's independent auditors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits furnished:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on September 24, 1998
reporting that the Company's Common Stock was delisted from
The Nasdaq Stock Market effective with the close of business
September 23, 1998.
The Company filed a Report on Form 8-K on September 29, 1998
reporting that PricewaterhouseCoopers L.L.P. had resigned as
the Company's independent auditors.
18
<PAGE>
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 16, 1998 ------------------------------
Reynald G. Bonmati
President
Date: November 16, 1998 -------------------------------
Kurt W. Streams
Vice President, Finance
(Principal Financial and Accounting Officer)
19
<PAGE>
Norland Medical Systems, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Number Description
<S> <C>
27 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,397,483
<SECURITIES> 0
<RECEIVABLES> 5,624,125
<ALLOWANCES> 2,600,000
<INVENTORY> 3,709,812
<CURRENT-ASSETS> 11,269,234
<PP&E> 2,534,539
<DEPRECIATION> 1,720,110
<TOTAL-ASSETS> 22,931,621
<CURRENT-LIABILITIES> 6,169,506
<BONDS> 14,551,704
0
0
<COMMON> 3,581
<OTHER-SE> 2,206,830
<TOTAL-LIABILITY-AND-EQUITY> 22,931,621
<SALES> 10,778,147
<TOTAL-REVENUES> 11,039,655
<CGS> 6,591,184
<TOTAL-COSTS> 6,591,184
<OTHER-EXPENSES> 10,951,234
<LOSS-PROVISION> 260,000
<INTEREST-EXPENSE> 968,984
<INCOME-PRETAX> (7,656,575)
<INCOME-TAX> (2,256,000)
<INCOME-CONTINUING> (5,400,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,400,575)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
