<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 June 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
incorporation or organization) (I.R.S. Employer 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 August 7, 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
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<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....................................................17
Item 1. Legal Proceedings....................................................17
Item 2. Changes in Securities................................................19
Item 3. Defaults Upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures .....................................................................20
Exhibit Index.....................................................................21
</TABLE>
2
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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 six-months ended June 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
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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>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,285,972 $ 3,082,202
Accounts receivable - trade, less allowance for
doubtful accounts of $2,500,000 at June 30, 1998
and $2,200,00 at December 31, 1997 3,611,962 6,165,467
Income taxes receivable 994,722 1,774,314
Inventories, net 4,730,488 5,163,682
Officer's loan receivable 88,884 86,504
Prepaid expenses and other current assets 181,288 207,221
Deferred income taxes 2,793,210 2,559,758
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Total current assets 13,686,526 19,039,148
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Demonstration systems inventory, net 129,472 67,594
Investment in Vitel, Inc. 260,000 260,000
Property and equipment, net 741,875 807,572
Deferred income taxes 2,289,808 458,535
Goodwill, net 8,448,148 8,745,676
------------- -----------------
Total assets $ 25,555,829 $ 29,378,525
------------- -----------------
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ 1,112,962 $ 1,122,788
Accounts payable - related party 581,532 584,779
Accounts payable - trade 1,840,759 2,021,904
Accrued expenses 1,847,612 1,923,938
Accrued warranty expenses 865,000 890,000
Accrued interest payable 573,726 284,375
Customer deposits -- 500,000
------------- -----------------
Total current liabilities 6,821,591 7,327,784
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Note payable, net of discount 14,517,555 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 June 30, 1998 and December 31, 1997, respectively 3,581 3,580
Additional paid-in capital 22,245,686 22,245,686
Accumulated deficit (18,032,584) (14,638,281)
------------- -----------------
Total stockholders' equity 4,216,683 7,610,985
------------- -----------------
Total liabilities and stockholders' equity $ 25,555,829 $ 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 Six Months Ended
--------------------------------- --------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 4,846,356 $ 5,132,024 $ 6,909,063 $ 9,469,227
Cost of revenue 2,718,767 2,821,706 4,524,681 5,304,580
------------- ------------- ------------- -------------
Gross profit 2,127,589 2,310,318 2,384,382 4,164,647
Sales and marketing expense 1,821,620 1,401,537 3,486,195 2,503,677
General and administrative expense 1,905,747 620,102 2,943,556 1,221,282
Research and development expense 602,574 74,500 1,022,416 187,787
------------- ------------- ------------- -------------
4,329,941 2,096,139 7,452,167 3,912,746
Operating (loss) income (2,202,352) 214,179 (5,067,785) 251,901
Interest expense (323,681) -- (641,699) --
Interest income 15,312 113,580 59,181 250,474
------------- ------------- ------------- -------------
(Loss) income before income taxes (2,510,721) 327,759 (5,650,303) 502,375
(Benefit) provision for income taxes (1,006,000) 133,000 (2,256,000) 204,000
------------- ------------- ------------- -------------
Net (loss) income $ (1,504,721) $ 194,759 $ (3,394,303) $ 298,375
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares:
Basic 7,164,031 7,149,800 7,163,675 7,132,909
Diluted 7,164,031 7,188,847 7,163,675 7,175,780
(Loss) earnings per share:
Basic $ (0.21) $ 0.03 $ (0.47) $ 0.04
Diluted $ (0.21) $ 0.03 $ (0.47) $ 0.04
</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 Six Months Ended
------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (3,394,303) $ 298,375
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Amortization expense 385,684 213,462
Depreciation expense 138,187 58,861
Provision for doubtful accounts 888,885 29,000
Inventory obsolescence expense 325,000 --
Deferred income taxes (2,256,000) --
Changes in assets and liabilities:
Accounts receivable 1,664,620 1,390,239
Inventories 26,133 (3,525,321)
Prepaid expenses and other current assets 25,933 (179,562)
Accounts payable (184,392) (1,826,200)
Accrued expenses 188,025 222,142
Income taxes receivable 970,867 49,286
Customer deposits (500,000) (40,150)
------------- -------------
Total adjustments 1,672,942 (3,608,243)
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Net cash used in
operating activities (1,721,361) (3,309,868)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (72,490) (86,554)
Loans to officers (2,380) (1,890,123)
Repayment of loans to officers -- 500,000
Product development loan to affiliate -- (242,261)
Sale of investment -- 1,996,403
Repayment of product development loan to affiliate -- 32,046
------------- -------------
Net cash (used in) provided by
investing activities (74,870) 309,511
------------- -------------
Cash flows from financing activities:
Proceeds from stock options exercised 1 143
Net cash provided by
financing activities 1 143
------------- -------------
Net decrease in cash (1,796,230) (3,000,214)
Cash at beginning of period 3,082,202 8,133,468
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Cash at end of period $ 1,285,972 $ 5,133,254
------------- -------------
------------- -------------
</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 as filed with
the Securities and Exchange Commission on April 9, 1998.
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 six-month periods ended June 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 June 30, 1998 and December 31, 1997 inventories consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials, product kits,
spare parts and sub-assemblies $ 2,604,851 $ 2,201,268
Work in progress 410,096 191,069
Rental systems, net 10,884 32,251
Finished goods 3,304,657 4,014,094
Inventory reserve (1,600,000) (1,275,000)
-------------- --------------
$ 4,730,488 $ 5,163,682
-------------- --------------
-------------- --------------
</TABLE>
Inventories are stated at the lower of cost or market; cost is determined
principally by the first-in, first-out method.
Systems used in the Company's short-term rental program are carried in inventory
at lower of cost or net realizable value until the time of sale.
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 beginning September 30,
1997. 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 extend the September
11, 2002 maturity date by up to two years (at increasing interest rates).
Accrued and unpaid interest on the Note as of June 30, 1998 was $573,726. The
Company made a $150,000 interest payment in July. The Company and NMS BV agreed
that the balance of $423,726 would be payable on September 30, 1998. The Note is
collateralized by a pledge of the shares of Norland Corp.
(4) EARNINGS (LOSS) PER SHARE
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 June 30, 1997 per share figures
have been restated to reflect the provisions of SFAS No. 128 for all periods
presented.
8
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
The calculations of per share results for the three- and six-month periods ended
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
Numerator:
Income available to common stockholders $ 194,759 $ 298,375
Denominator:
Basic weighted average shares outstanding 7,149,800 7,132,909
Effect of dilutive stock options 39,047 42,871
Dilutive weighted average shares outstanding 7,188,847 7,175,780
Basic earnings per share $ 0.03 $ 0.04
Diluted earnings per share 0.03 0.04
</TABLE>
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 June 30, the numbers for such options for
the three- and six-month periods then ended are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Three months 939,500 375,375
Six months 874,500 375,375
</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
9
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
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. Robert L. Piccioni and Joan Piccioni, plaintiffs in the action
referred to below, filed an objection to the settlement. As a result of the
restatement of the Company's financial statements referred to elsewhere in this
Report, the plaintiff has withdrawn his support for the Stipulation of
Settlement and has moved for leave to file an amended and supplemental complaint
that would seek, 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 have consented to the filing of such amended and
supplemental complaint. Defendants are presently scheduled to file their
response with the Court by September 15, 1998.
The Company and Norland Corp. were named as defendants in an action, entitled
Robert L. Piccioni, Ph.D. and Joan Piccioni v. Norland Medical Systems, et al.,
brought by Robert L. Piccioni, a former director of the Company, and Joan
Piccioni, the former President of the Company's subsidiary, Dove Medical
Systems, Inc.("Dove"), in the United States District Court for the Central
District of California. The action was commenced shortly after the Company made
claims for indemnification from Dr. and Mrs. Piccioni and certain other former
stockholders of Dove in connection with the Company's acquisition of Dove in
April of 1996. The complaint was subsequently amended to add Reynald G. Bonmati,
the Company's President and Chairman of the Board, and Albert S. Waxman, a
director of the Company, as defendants. This action has been settled pursuant to
a Settlement Agreement and Mutual General Release dated August 11, 1998. The
portion of the purchase price paid by the Company for Dove that has been held in
escrow (cash and shares of the Company's Common Stock) will be released to the
former owners of Dove, and the Company will make an additional payment of
$40,000 to Dr. and Mrs. Piccioni. Dr. and Mrs. Piccioni have agreed to end their
direct involvement in the Miller case and to withdraw their application for the
payment of their attorneys' fees incurred in connection with the Miller case.
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 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.
10
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
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 absorptiomety (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.
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) OTHER EVENTS
The Nasdaq Stock Market delisting hearing referred to in the Company's Report
on Form 10-Q for the quarter ended March 31, 1998, was completed on July 29,
1998. The hearing primarily addressed the Company's lack of compliance with
the Nasdaq National Market listing requirement to maintain net tangible
assets of at least $4,000,000 and the Company's restatement of its financial
statements for the quarters ended December 31, 1996, March 31, 1997, June 30,
1997 and September 30, 1997. The hearing panel has not yet rendered a
decision. In addition, on August 12, 1998 the Company was notified by Nasdaq
that the market value of the public float of the Company's Common Stock was
less than the $5,000,000 minimum required for continued listing on the Nasdaq
National Market. Nasdaq informed the Company that if the market value of the
public float does not equal or exceed $5,000,000 for ten consecutive trading
days during the period ending November 9, 1998, the Company's Common Stock
would be delisted from the Nasdaq National Market.
(7) RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the quarters ended 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.
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 six-month periods ended June 30, 1997 as originally reported is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
--------------- --------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 7,184,624 $ 5,132,024 $ 13,130,909 $ 9,469,227
Gross profit 3,138,285 2,310,318 5,699,698 4,164,647
Operating income 950,078 214,179 1,610,282 251,901
Net income 631,658 194,759 1,104,756 298,375
Earnings per share - diluted 0.09 0.03 0.15 0.04
Total assets 29,963,223 28,769,445
Total current liabilities 2,337,460 2,363,582
Retained earnings 5,463,999 4,244,099
</TABLE>
11
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
(8) 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 Activities,"
requires that a company recognize derivative instruments, including certain
derivative instruments embedded in other contracts, as either assets or
liabilities and measure those instruments at fair value. The Company is
required to adopt this standard in the first quarter of 2000. The Company
does not currently have any derivative instruments.
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 June 30, 1998 decreased $285,668 (5.6%) to
$4,846,356 from $5,132,024 for the comparable period of 1997. This decrease in
revenue was primarily the result of reduced revenues from sales of parts and
services. Total revenue from sales of bone densitometry systems was relatively
unchanged. Revenue for the six months ended June 30, 1998 decreased $2,560,164
(27.0%) to $6,909,063 from $9,469,227 for the comparable period in 1997.
The decrease was largely the result of significantly decreased sales of its
central DXA-based systems in the United States and Pacific Rim, especially in
the first quarter of 1998. Other factors that contributed to this decrease were
reduced revenue from sales of peripheral x-ray systems in the first quarter and
lower revenue from sales of parts and services. Sales in the United States and
Pacific Rim represented 73.4% and 7.8%, respectively, of total revenue for the
three months ended June 30, 1998 and 65.8% and 15.6%, respectively, of total
revenue for the three months ended June 30, 1997. Sales in the United States and
Pacific Rim represented 69.7% and 9.4%, respectively, of total revenue for the
six months ended June 30, 1998 and 69.2% and 15.5%, respectively, of total
revenue for the six months ended June 30, 1997. A majority of the Company's
revenue for the three- and six-month periods ended June 30, 1998 and 1997 was
derived from sales of the Eclipse and XR36 central systems. Sales of complete
bone densitometry systems represented 94.8% and 88.2% of total revenue for the
three months ended June 30, 1998 and 1997, respectively, and 92.2% and 88.9% of
total revenues for the six months ended June 30, 1998 and 1997. Sales of parts
and services and rental income comprised the balance of revenue for such
periods.
12
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
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.
Cost of revenue as a percentage of revenue was 56.1% and 55.0% for the three
months ended June 30, 1998 and 1997, respectively, resulting in a gross margin
of 43.9% for the three months ended June 30, 1998 compared to 45.0% for the
comparable period of 1997. Cost of revenue as a percentage of revenue was 65.5%
and 56.0% for the six months ended June 30, 1998 and 1997, respectively,
resulting in a gross margin of 34.5% for the six months ended June 30, 1998
compared to 44.0% for the comparable period of 1997. The gross margin for the
first half of 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 $420,083 (30.0%) to $1,821,620 for the
three months ended June 30, 1998 from $1,401,537 for the three months ended June
30, 1997, and increased as a percentage of revenue to 37.6% from 27.3%. Sales
and marketing expense increased $982,518 (39.2%) to $3,486,195 for the six
months ended June 30, 1998 from $2,503,677 for the six months ended June 30,
1997, and increased as a percentage of revenue to 50.5% from 26.4%. 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
1997, and the continuing cost of marketing efforts that were expanded during
1997.
General and administrative expense increased $1,285,645 (207.3%) to $1,905,747
for the three months ended June 30, 1998 from $620,102 for the three months
ended June 30, 1997 and increased as a percentage of revenue to 39.3% from
12.1%. General and administrative expense increased $1,722,274 (141.0%) to
$2,943,556 for the six months ended June 30, 1998 from $1,221,282 for the six
months ended June 30, 1997, and increased as a percentage of revenue to 42.6%
from 12.9%. 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
13
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
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 $528,074 (708.8%) to $602,574 for the
three months ended June 30, 1998 from $74,500 for the three months ended June
30, 1997, and also increased as a percentage of revenue to 12.4% from 1.5%.
Research and development expense increased $834,629 (444.5%) to $1,022,416 for
the six months ended June 30, 1998 from $187,787 for the six months ended June
30, 1997, and increased as a percentage of revenue to 14.8% from 2.0%. 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 two quarters of 1998.
Interest expense of $323,681 and $641,699 for the three- and six-month periods
ended June 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 six-month periods ended
June 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 six-month periods ended June 30, 1998 as compared to
June 30, 1997 reflect reduced interest income resulting from the Company's
reduced cash position.
The income tax benefit as a percentage of loss before income taxes was 40.1% for
the quarter ended June 30, 1998, as compared to a provision for income taxes of
40.6% for the same period in 1997. Management believes that, based on the
Company's history of operating earnings, 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 the deferred tax assets as recorded.
The Company had a net loss of $1,504,721 ($0.21 per share) for the three months
ended June 30, 1998 compared to net income of $194,759 ($0.03 per share) for the
three months ended June 30, 1997. The Company had a net loss of $3,394,303
($0.47 per share) for the six months ended June 30, 1998 compared to net income
of $298,375 ($0.04 per share) for the six months ended June 30, 1997. The change
was due primarily to the factors discussed above.
14
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash of $3,082,202. At June 30, 1998, the
Company had cash of $1,285,972. 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 $2,553,505 (41.4%) to $3,611,962 at
June 30, 1998 from $6,165,467 at December 31, 1997, primarily reflecting lower
revenues over the six-month period, as well as a $300,000 net increase in the
allowance for doubtful accounts. At June 30, 1998, the two largest balances,
11.5% and 10.2% of such outstanding trade receivables, were owed by two North
American distributors.
Property and equipment as of June 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 tooling, no significant capital expenditures
for additional equipment of systems are planned for 1998.
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. Depending on when
such principal payment is made, interest payments on the Purchase Note will
range from approximately $285,000 to $265,000 per quarter. Accrued and unpaid
interest on the Note as of June 30, 1998 was $573,726. The Company made a
$150,000 interest payment in July. The Company and NMS BV agreed that the
balance of $423,726 would be payable on September 30, 1998. The Note is
collateralized by a pledge of the shares of Norland Corp.
The Company plans to fund its ongoing operations from its cash position and cash
flow from operations (including tax refunds). 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 Nasdaq Stock Market delisting hearing referred to in the Company's Report
on Form 10-Q for the quarter ended March 31, 1998, was completed on July 29,
1998. The hearing primarily addressed the Company's lack of compliance with
the Nasdaq National Market listing requirement to maintain net tangible
assets of at least $4,000,000 and the Company's restatement of its financial
statements for the quarters ended December 31, 1996, March 31, 1997, June 30,
1997 and September 30, 1997. The hearing panel has not yet rendered a
decision. In addition, on August 12, 1998 the Company was notified by Nasdaq
that the market value of the public float of the Company's Common Stock was
less than the $5,000,000 minimum required for continued listing on the Nasdaq
National Market. Nasdaq informed the Company that if the market value of the
public float does not equal or exceed $5,000,000 for ten consecutive trading
days during the period ending November 9, 1998, the Company's Common Stock
would be delisted from the Nasdaq National Market.
15
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
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.
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,
and statements with respect to future capital expenditures and the Company's
plans for funding its ongoing operations. Such forward-looking statements are
subject to the factors cited in the Introduction.
16
<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. Robert L. Piccioni and Joan
Piccioni, plaintiffs in the action referred to below, filed an
objection to the settlement. As a result of the restatement of the
company's financial statements referred to elsewhere in this Report,
the plaintiff has withdrawn his support for the Stipulation of
Settlement and has moved for leave to file an amended and supplemental
complaint that would seek, 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 have consented to the filing of such amended and
supplemental complaint. Defendants are presently scheduled to file
their response with the Court by September 15, 1998.
The Company and Norland Corp. were named as defendants in an action,
entitled Robert L. Piccioni, Ph.D. and Joan Piccioni v. Norland Medical
Systems, Inc. and Norland Corp., brought by Robert L. Piccioni, a
former director of the Company, and Joan Piccioni, the former President
of the Company's Dove subsidiary, in the United States District Court
for the Central District of California. The action was commenced
shortly after the Company made claims for indemnification from Dr. and
Mrs. Piccioni and certain other former stockholders of Dove in
connection with the Company's
17
<PAGE>
Norland Medical Systems, Inc.
Item 1. Legal Proceedings (continued)
acquisition of Dove in April of 1996. The complaint was subsequently
amended to add Reynald G. Bonmati, the Company's President and Chairman
of the Board, and Albert S. Waxman, a director of the Company, as
defendants. This action has been settled pursuant to a Settlement
Agreement and Mutual General Release dated August 11, 1998. The portion
of the purchase price paid by the Company for Dove that has been held
in escrow (cash and shares of the Company's Common Stock) will be
released to the former owners of Dove, and the Company will make an
additional payment of $40,000 to Dr. and Mrs. Piccioni. Dr. and Mrs.
Piccioni have agreed to end their direct involvement in the Miller case
and to withdraw their application for the payment of their attorneys'
fees incurred in connection with the Miller case.
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
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 absorptiomety (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.
18
<PAGE>
Norland Medical Systems, Inc.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Norland Medical Systems,
Inc. was held on June 3, 1998.
(b) The following persons were elected as directors of the company
at the Annual Meeting: Jeremy C. Allen, James J. Baker, Reynald
G. Bonmati, Michael W. Huber, Andre-Jacques Neusy, and Albert S.
Waxman.
(c) The election of directors was the only matter voted on at the
Annual Meeting. The proposal to elect the six persons named in
Item 4(b) as directors of the Company for the ensuing year was
approved as follows:
Jeremy C. Allen - 5,072,784 shares in favor and 1,552,124 shares
withheld;
James J. Baker - 5,080,330 shares in favor and 1,544,578 shares
withheld;
Reynald G. Bonmati - 5,080,330 shares in favor and 1,544,578
shares withheld;
Michael W. Huber - 5,079,330 shares in favor and 1,545,578
shares withheld;
Andre-Jacques Neusy - 5,079,330 shares in favor and 1,545,578
shares withheld;
Albert S. Waxman - 5,080,330 shares in favor and 1,544,578
shares withheld;
There were no broker non-votes.
Item 5. Other Information
The Nasdaq Stock Market delisting hearing referred to in the
Company's Report on Form 10-Q for the quarter ended March 31, 1998,
was completed on July 29, 1998. The hearing primarily addressed the
Company's lack of compliance with the Nasdaq National Market listing
requirement to maintain net tangible assets of at least $4,000,000
and the Company's restatement of its financial statements for the
quarters ended December 31, 1996, March 31, 1997, June 30, 1997
and September 30, 1997. The hearing panel has not yet rendered a
decision. In addition, on August 12, 1998 the Company was notified
by Nasdaq that the market value of the public float of the Company's
Common Stock was less than the $5,000,000 minimum required for
continued listing on the Nasdaq National Market. Nasdaq informed the
Company that if the market value of the public float does not equal
or exceed $5,000,000 for ten consecutive trading days during the
period ending November 9, 1998, the Company's Common Stock would be
delisted from the Nasdaq National Market.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits furnished:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
19
<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)
/s/ Reynald G. Bonmati
Date: August 14, 1998 -------------------------------------------
Reynald G. Bonmati
President
/s/ Kurt W. Streams
Date: August 14, 1998 --------------------------------------------
Kurt W. Streams
Vice President, Finance
(Principal Financial and Accounting Officer)
20
<PAGE>
Norland Medical Systems, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,285,972
<SECURITIES> 0
<RECEIVABLES> 6,111,962
<ALLOWANCES> 2,500,000
<INVENTORY> 4,730,488
<CURRENT-ASSETS> 13,686,526
<PP&E> 2,392,551
<DEPRECIATION> 1,650,676
<TOTAL-ASSETS> 25,555,829
<CURRENT-LIABILITIES> 6,821,591
<BONDS> 14,517,555
0
0
<COMMON> 3,581
<OTHER-SE> 4,213,102
<TOTAL-LIABILITY-AND-EQUITY> 25,555,829
<SALES> 6,805,937
<TOTAL-REVENUES> 6,909,063
<CGS> 4,524,681
<TOTAL-COSTS> 4,524,681
<OTHER-EXPENSES> 7,452,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641,699
<INCOME-PRETAX> (5,650,303)
<INCOME-TAX> (2,256,000)
<INCOME-CONTINUING> (3,394,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,394,303)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
