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, 1999
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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.
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(Exact name of registrant as specified in its charter)
Delaware 06-1387931
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(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
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(Address of principal executive offices)
(Zip Code)
(914) 694-2285
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(Registrant's telephone number, including area code)
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(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 9, 1999, 25,286,611 shares of the registrant's Common Stock,
$0.0005 par value, were outstanding.
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<PAGE>
NORLAND MEDICAL SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-Q
Page
----
Title Page...................................................................1
Document Table of Contents...................................................2
Introduction.................................................................3
PART I FINANCIAL INFORMATION...............................................4
Item 1. Condensed Consolidated Financial Statements.........................4
Condensed Consolidated Balance Sheets...............................4
Condensed Consolidated Statements of Operations.....................5
Condensed Consolidated Statements of Cash Flows.....................6
Notes to Condensed Consolidated Financial Statements................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risks........14
PART II OTHER INFORMATION..................................................15
Item 1. Legal Proceedings..................................................15
Item 2. Changes in Securities..............................................15
Item 3. Defaults Upon Senior Securities....................................15
Item 4. Submission of Matters to a Vote of Security Holders................16
Item 5. Other Information..................................................16
Item 6. Exhibits and Reports on Form 8-K...................................16
Signatures..................................................................17
Exhibit Index...............................................................18
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<PAGE>
Norland Medical Systems, Inc.
I N T R O D U C T I O N
This Report contains certain statements that may be deemed to be "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements include information relating to, among
other matters, the Company's future financial performance and results. The words
"believes," "intends," "expects," "anticipates," "projects," "estimates,"
"predicts," and similar expressions are also intended to identify
forward-looking statements. These forward-looking statements are based on
current expectations and are subject to risks and uncertainties. Should one or
more risks or uncertainties materialize or underlying assumptions prove
incorrect, actual results or events could differ materially from those estimated
or projected due to certain important factors, including, without limitation,
the following: (i) the continued development of new products and product
enhancements that can be marketed by the Company; (ii) the importance to the
Company's sales growth that the efficacy of new therapies for the treatment of
osteoporosis and other bone disorders be demonstrated and that regulatory
approval of such therapies be granted, particularly in the United States; (iii)
the acceptance and adoption by primary care providers of new osteoporosis
therapies and the Company's ability to expand sales of its products to these
physicians; (iv) the Company may be adversely affected by changes in the
reimbursement policies of governmental programs (e.g., Medicare and Medicaid)
and private third party payors, including private insurance plans and managed
care plans; (v) the high level of competition in the bone densitometry market;
(vi) changes in bone densitometry technology; (vii) the Company's ability to
continue to maintain and expand acceptable relationships with third party
dealers and distributors; (viii) the Company's ability to provide attractive
financing options to its customers and to provide customers with fast and
efficient service for the Company's products; (ix) changes that may result from
health care reform in the United States may adversely affect the Company; (x)
the Company's cash flow and the results of its ongoing financing efforts; (xi)
the effect of regulation by the United States Food and Drug Administration and
other agencies; (xii) the effect of the Company's accounting policies; (xiii)
the outcome of pending litigation, particularly the class action lawsuit; (xiv)
potential Year 2000 compliance problems affecting the Company and third parties
with whom it deals; and (xv) other risks described elsewhere in this Report and
in other documents filed by the Company with the Securities and Exchange
Commission. The Company is also subject to general business risks, including
adverse state, federal or foreign legislation and regulation, adverse publicity
or news coverage, changes in general economic factors and the Company's ability
to retain and attract key employees. Nothing contained in the Report should be
viewed as suggesting the existence of a trend or 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.
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<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>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 818,597 $ 1,105,140
Accounts receivable - trade, less allowance for
doubtful accounts of $330,000 and $300,000 at
June 30, 1999 and December 31, 1998, respectively 2,534,572 1,877,271
Income taxes receivable -- 340,000
Inventories, net 2,667,147 2,521,345
Prepaid expenses and other current assets 120,981 187,354
Deferred income taxes 1,858,217 1,817,217
------------ ------------
Total current assets 7,999,514 7,848,327
------------ ------------
Officer's loan receivable 93,685 91,304
Property and equipment, net 1,459,804 1,392,032
Deferred income taxes, net 2,111,624 1,575,624
Goodwill, net 7,853,122 8,150,620
------------ ------------
Total assets $ 19,517,749 $ 19,057,907
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - related parties $ 436,842 $ 292,315
Accounts payable - trade 2,733,342 1,435,616
Accrued expenses 2,032,356 2,011,396
Accrued warranty expenses 862,500 920,000
Unearned service revenue 396,588 203,823
Accrued interest expense 293,664 577,184
------------ ------------
Total current liabilities 6,755,292 5,440,334
------------ ------------
Note payable, net of discount 1,080,000 4,685,690
Other -- 140,000
Stockholders' equity:
Common stock 12,642 7,081
Additional paid-in capital 37,042,612 33,136,343
Accumulated deficit (25,372,797) (24,351,541)
------------ ------------
Total stockholders' equity 11,682,457 8,791,883
------------ ------------
Total liabilities and stockholders' equity $ 19,517,749 $ 19,057,907
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 4,357,201 $ 4,846,356 $ 9,183,135 $ 6,909,063
Cost of revenue 2,006,140 2,718,767 4,538,038 4,524,681
------------ ------------ ------------ ------------
Gross profit 2,351,061 2,127,589 4,645,097 2,384,382
Sales and marketing expense 1,480,577 1,821,620 2,915,574 3,486,195
General and administrative expense 873,095 1,905,747 1,817,916 2,943,556
Research and development expense 372,803 602,574 766,929 1,022,416
------------ ------------ ------------ ------------
2,726,475 4,329,941 5,500,419 7,452,167
------------ ------------ ------------ ------------
Operating loss (375,414) (2,202,352) (855,322) (5,067,785)
Interest expense (39,651) (323,681) (184,656) (641,699)
Interest income 8,693 15,312 18,722 59,181
------------ ------------ ------------ ------------
Loss before income tax benefit (406,372) (2,510,721) (1,021,256) (5,650,303)
Income tax benefit -- (1,006,000) -- (2,256,000)
------------ ------------ ------------ ------------
Net loss $ (406,372) $ (1,504,721) $ (1,021,256) $ (3,394,303)
============ ============ ============ ============
Basic and diluted weighted average shares 20,332,175 7,164,031 17,315,843 7,163,675
Basic and diluted loss per share $ (0.02) $ (0.21) $ (0.06) $ (0.47)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Norland Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
---------------------------------
June 30, 1999 June 30, 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,021,256) $(3,394,303)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization expense 366,638 385,684
Depreciation expense 267,016 138,187
Provision for doubtful accounts 11,167 888,885
Inventory obsolescence expense (credit) (791,780) 325,000
Deferred income taxes (340,000) (2,256,000)
Changes in assets and liabilities:
Accounts receivable (668,468) 1,664,620
Inventories 645,978 26,133
Prepaid expenses and other current assets 66,373 25,933
Accounts payable 1,442,253 (184,392)
Accrued expenses (267,295) 188,025
Income taxes receivable 340,000 970,867
Customer deposits -- (500,000)
----------- -----------
Total adjustments 1,071,882 1,672,942
----------- -----------
Net cash provided by (used in)
operating activities 50,626 (1,721,361)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (334,788) (72,490)
Other (2,381) (2,379)
----------- -----------
Net cash used in investing activities (337,169) (74,869)
Net decrease in cash (286,543) (1,796,230)
Cash and cash equivalents at beginning of period 1,105,140 3,082,202
----------- -----------
Cash and cash equivalents at end of period $ 818,597 $ 1,285,972
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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, 1998, and included in the Company's Form 10-K as filed with
the Securities and Exchange Commission.
The condensed consolidated financial statements included herein are unaudited
but, in the opinion of management, include all adjustments (consisting of
normal, recurring adjustments) 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 months ended June 30, 1999 are
not necessarily indicative of the results to be achieved for the entire fiscal
year ending December 31, 1999.
(2) NOTE PAYABLE
As part of the original consideration paid by the Company to Norland Medical
Systems B.V. ("NMS BV") for the acquisition of Norland Corporation ("Norland
Corp.") in September of 1997, the Company issued a $16,250,000 note ("Note")
bearing interest at the rate of 7% per annum. Effective as of December 31, 1998,
the terms of the Norland Corp. acquisition were amended. The purchase price was
lowered by reducing the principal amount of the Note by $8,800,000 to
$7,450,000. In addition, the interest rate was reduced to 6.5%. Also on December
31, 1998, the Company paid $1,890,000 of the reduced principal amount by issuing
7,000,000 shares of its Common Stock to NMS BV, in accordance with provisions of
the Note that allowed the Company to pay principal in shares of its Common
Stock. The principal amount of the Note outstanding after such payment was
$5,560,000. In March 1999, the Company elected to pay an additional $4,310,000
of Note principal by the issuance of 11,122,580 shares of its Common Stock. The
Company issued 4,588,469 of these shares in March and the remaining 6,534,111
shares in June 1999.
The remaining $1,250,000 principal amount of the Note is subject to mandatory
prepayment at such time as the Company receives at least $2,000,000 in proceeds
from an equity financing. The Note has a maturity date of September 11, 2002,
subject to the Company's right to extend such maturity date by up to two years
(at increasing interest rates). NMS BV has transferred all of its interest in
the Note to current and former stockholders of NMS BV.
<PAGE>
Norland Medical Systems, Inc.
Notes to Condensed Consolidated Financial Statements (continued):
(Unaudited)
(3) STOCKHOLDERS' EQUITY
As of June 30, 1999, the Company had 45,000,000 shares of authorized Common
Stock and 25,286,611 shares issued and outstanding. In June 1999, the Company
increased its number of authorized shares of Common Stock from 20,000,000 to
45,000,000 following shareholder approval.
(4) INVENTORIES
As of June 30, 1999 and December 31, 1998 inventories consisted of the
following:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials, product kits,
spare parts and
sub-assemblies $ 1,998,564 $ 2,322,744
Work in progress 496,599 380,835
785,520 1,151,302
Finished goods 66,464 66,464
Rental systems (680,000) (1,400,000)
----------- -----------
Inventory reserve $ 2,667,147 $ 2,521,345
=========== ===========
(5) SUBSEQUENT EVENTS
On July 30, 1999, the Company issued 666,667 shares of its Common Stock to a
corporate investor in exchange for a $500,000 cash investment. Of the proceeds
from the share issuance, approximately $67,000 was paid to the investor in
satisfaction of previous purchases of a product component and the balance of
proceeds may be used for working capital and general corporate purposes.
In August 1999, the Company entered into a $2 million bank line of credit
agreement in which the Company may make borrowings according to an accounts
receivable based formula. Interest on any outstanding borrowings accrues at a
variable rate based on prime plus 1.25%. Borrowings under the agreement are
collateralized by substantially all of the Company's assets. In connection with
such agreement, the Company has granted to the bank warrants to purchase 20,000
shares of Company Common Stock at $0.01 per share.
<PAGE>
Norland Medical Systems, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included in Item 1 of this Report. The
following discussion contains forward-looking statements which involve various
risks and uncertainties, some of which are described in the Introduction to this
Report. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those discussed in the Introduction.
RESULTS OF OPERATIONS
Revenue for the three months ended June 30, 1999 decreased $489,155 (10.1%) to
$4,357,201 from $4,846,356 for the comparable period of 1998. The decrease in
sales was largely a result of decreased sales of DXA-based systems in the United
States. Revenue for the six months ended June 30, 1999 increased $2,274,072
(32.9%) to $9,183,135 from $6,909,063 for the comparable period in 1998. The
increase was largely the result of significantly increased first quarter sales
of DXA-based systems in the United States. Sales in the United States and
Pacific Rim represented 67.9% and 7.4%, respectively, of total revenue for the
three months ended June 30, 1999 and 73.4% and 7.8%, respectively, of total
revenue for the three months ended June 30, 1998. Sales in the United States and
Pacific Rim represented 72.0% and 9.4%, respectively, of total revenue for the
six months ended June 30, 1999 and 69.7% and 9.4%, respectively, of total
revenue for the six months ended June 30, 1998. A majority of the Company's
revenue for the three- and six-month periods ended June 30, 1999 and 1998 was
derived from sales of the Excell, Eclipse and XR36 DXA-based central systems.
Sales of complete bone densitometry systems represented 88.4% and 94.8% of total
revenue for the three months ended June 30, 1999 and 1998, respectively, and
89.1% and 92.2% of total revenue for the six months ended June 30, 1999 and
1998, respectively. Sales of parts and services and rental income comprised the
balance of revenue for such periods.
Sales in the United States over the periods presented herein have been affected
by changes in the Medicare reimbursement rates for both peripheral and central
bone densitometry tests. In November 1996 the Health Care Financing
Administration (HCFA) announced changes for 1997 that significantly reduced the
reimbursement rate for peripheral bone densitometry tests. In 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 remain, however, subject to further changes. It is not
possible to predict with certainty the nature and extent of any such changes,
but any future decreases in reimbursement rates may reduce demand for the
Company's products, and consequently could adversely affect the Company. Several
regional Medicare carriers did not allow any reimbursement for peripheral bone
densitometry tests. However, effective July 1, 1998, HCFA national policy
mandates Medicare coverage of bone density diagnostic tests for qualified
individuals. Revenue, gross margin and the mix of product models sold are
expected to continue to be influenced by the relative degree of
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
difference in reimbursement rate levels for peripheral and central systems. They
will also be influenced by the Company's ability to bring to the market systems
that can be operated more profitably by end users at the applicable
reimbursement levels. There can be no assurance that the Company will be able to
bring such systems to the market.
Cost of revenue as a percentage of revenue was 46.0% and 56.1% for the three
months ended June 30, 1999 and 1998, respectively, resulting in a gross margin
of 54.0% for the three months ended June 30, 1999 compared to 43.9% for the
comparable period of 1998. Cost of revenue as a percentage of revenue was 49.4%
and 65.5% for the six months ended June 30, 1999 and 1998, respectively,
resulting in a gross margin of 50.6% for the six months ended June 30, 1999
compared to 34.5% for the comparable period of 1998. The gross margins for the
three and six-month periods ended June 30, 1999 were benefited by the sale of
inventory previously partially reserved for as obsolete (reserves on such items
were $600,000 and $791,780, respectively) and by sales of refurbished
demonstration systems of $99,000 and $339,000, respectively, which had been
carried at relatively low costs. The gross margins for the three and six- month
periods ended June 30, 1998 were adversely affected by a $325,000 charge for an
increased inventory reserve taken in the first quarter. In addition, because
Norland Corp. has certain fixed manufacturing costs each quarter, to the extent
that revenue is lower, such fixed costs have a more negative impact on gross
margin.
Sales and marketing expense decreased $341,043 (18.7%) to $1,480,577 for the
three months ended June 30, 1999 from $1,821,620 for the three months ended June
30, 1998, and decreased as a percentage of revenue to 34.0% from 37.6%. Sales
and marketing expense decreased $570,621 (16.4%) to $2,915,574 for the six
months ended June 30, 1999 from $3,486,195 for the six months ended June 30,
1998, and decreased as a percentage of revenue to 31.7% from 50.5%. The dollar
decreases were primarily due to decreased advertising and marketing promotion
expenses, labor expenses and travel related expenses incurred by sales and
customer service personnel and third party representatives. The expense
reductions are attributed to improvements in the cost-effectiveness of the
sales, marketing and service functions and are not expected to adversely affect
future sales.
General and administrative expense decreased $1,032,652 (54.2%) to $873,095 for
the three months ended June 30, 1999 from $1,905,747 for the three months ended
June 30, 1998 and decreased as a percentage of revenue to 20.0% from 39.3%.
General and administrative expense decreased $1,125,640 (38.2%) to $1,817,916
for the six months ended June 30, 1999 from $2,943,556 for the six months ended
June 30, 1998, and decreased as a percentage of revenue to 19.8% from 42.6%. The
dollar decreases were primarily due to decreased bad debt expense in 1999 as a
result of improved credit and collections management in 1998.
Research and development expense decreased $229,771 (38.1%) to $372,803 for the
three months ended June 30, 1999 from $602,574 for the three months ended June
30, 1998, and also decreased as a percentage of revenue to 8.6% from 12.4%.
Research and development expense decreased $255,487 (25.0%) to $766,929 for the
six months ended June 30, 1999 from $1,022,416 for the six months ended June 30,
1998, and decreased as a percentage of revenue to 8.4% from 14.8%. The decreases
in 1999 expenses as compared to 1998 were primarily due to non-recurring
expenses in connection with certain development projects, including the Apollo
DXA that was introduced in May 1998.
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
The decreases in expenses as a percentage of revenues referred to in the three
preceding paragraphs are also attributable to the Company's significantly
increased revenue for the six-month periods ended June 30, 1999 as compared to
June 30, 1998.
Interest expense decreased $284,030 (87.7%) to $39,651 for the three months
ended June 30, 1999 from $323,681 for the three months ended June 30, 1998.
Interest expense decreased $457,043 (71.2%) to $184,656 for the six months ended
June 30, 1999 from $641,699 for the six months ended June 30, 1998. Interest
expense for the three- and six-month periods represents interest on the Note
payable issued by the Company in connection with the acquisition of Norland
Corp. on September 11, 1997. The decrease in interest expense reflects the
reduced outstanding principal balance of the Note payable. Interest income in
the three and six-month periods consisted primarily of interest earned on the
Company's cash balances, reduced by other expenses consisting primarily of bank
charges and other fees related to bank transfers. The decrease in interest
income in the three-month period ended June 30, 1999 as compared to June 30,
1998 reflects reduced interest income resulting from the Company's reduced cash
position.
For the three and six-month periods ended June 30, 1999 the Company did not
recognize a benefit for income taxes on the loss before income tax benefit. The
Company recognized a benefit for income taxes as a percentage of the loss before
income taxes of 40% for the corresponding periods in 1998. Management believes
that, based on the Company's history of operating earnings, exclusive of
nonrecurring charges in 1997 and 1998 and its expected income, it is more likely
than not that income in future periods, extending up to 19 years with respect to
deferred tax assets resulting from net operating loss carryforwards, will be
sufficient to realize all deferred tax assets, net of the valuation reserve.
The Company had a net loss of $406,372 ($0.02 per share based on 20,332,175
weighted average shares) for the three months ended June 30, 1999 compared to a
net loss of $1,504,721 ($0.21 per share based on 7,164,031 weighted average
shares) for the three months ended June 30, 1998. The Company had a net loss of
$1,021,256 ($0.06 per share based on 17,315,843 weighted average shares) for the
six months ended June 30, 1999 compared to net loss of $3,394,303 ($0.47 per
share based on 7,163,675 weighted average shares) for the six months ended June
30, 1998. The reduction in net loss and net loss per share was due primarily to
the factors discussed above and the issuance of a substantial number of
additional shares in connection with the reduction in the principal of the Note
payable.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $1,105,140.
At June 30, 1999, the Company had cash and cash equivalents of $818,597. The
decrease in cash was primarily the result of the payment of operating expenses,
increased accounts receivable, inventories and capital expenditures partially
offset by increased accounts payable.
At the present time, capital expenditures for the balance of 1999 are estimated
to be $100,000, and include additional demonstration systems, tooling and
continued upgrading of the Company's management information system.
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
The Company's accounts receivable increased $657,301 (35.0%) to $2,534,572 at
June 30, 1999 from $1,877,271 at December 31, 1998, reflecting the higher
revenues.
The Company's accounts payable increased $1,442,253 (83.5%) to $3,170,184 at
June 30, 1999 from $1,727,931 at December 31, 1998, reflecting a higher level of
purchases of parts and sub-assemblies primarily used to produce the recently
introduced Apollo DXA and Excell systems and less prompt payments.
The Company believes that its current cash position, together with cash flow
from operations and proceeds from insurance claims, as well as the net proceeds
from a recent $500,000 investment in the Company's Common Stock and the ability
to draw on a $2 million bank line of credit (as described in Note 5) will be
adequate to fund the Company's operations at least through March 31, 2000. In
order to increase its cash flow, the Company is continuing its efforts to
stimulate sales and reduce inventory levels. The Company is required to use
working capital to manufacture the Apollo DXA and Excell. The Company is also
continuing to focus its efforts on maintaining the improvements in the aging of
its accounts receivable. To do so, the Company has implemented higher credit
standards for its customers, emphasized the receipt of down payments from
customers at the time their purchase orders are received and entered into an
arrangement with a lease company that provides for prompt funding of its
purchase orders. The Company is also continuing to be more aggressive in seeking
to collect outstanding receivables.
The Company continues to seek additional financing. The Company does not have a
commitment for such financing, and there can be no guarantee that the Company
will be able to obtain such financing. 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.
YEAR 2000 READINESS
The year 2000 (Y2K) problem stems from the fact that many existing computer
programs use only the last two digits to refer to a year. As a result, such
programs do not recognize a year that begins with "20" instead of "19", and may
recognize a date using "00" as the year 1900 rather than the year 2000. If not
corrected, many computer applications could fail or produce erroneous results,
such as a temporary inability to process transactions, send invoices or engage
in many ordinary business activities. The Company is evaluating the Y2K problem
with respect to the Y2K readiness of its internal management information and
non-financial systems and the Company's product models and suppliers. At this
point in time, the Company is not aware of any Y2K problems that are reasonably
likely to have a material effect on the Company's business, results of
operations or financial condition.
The Company is completing its review of its internal management systems for Y2K
compliance. The Company believes that, with the following exceptions, its
information systems are Y2K compliant.
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
The Norland Corp. management information systems, as was planned following the
Company's September 1997 acquisition of Norland Corp., are being replaced by no
later than December 31, 1999 with systems that are compatible with the Company's
Y2K compliant management information systems.
The Company has identified certain other application hardware and software which
are not yet Y2K compliant. Upgrades for most of these systems are available as
part of an annual maintenance program. The Company believes that it already has
obtained and installed most of the necessary upgrades for these programs and
that the remaining upgrades will be available during 1999 without material
expense to the Company. The Company anticipates that it will be able to
complete, test and implement all software upgrades that may be material to its
business on a timely basis. There is always a risk that, if the Company has not
properly identified all Y2K compliance issues with respect to its internal
systems, the Company may not be able to implement all necessary changes to these
systems on a timely basis and within budget. This in turn could cause a material
disruption to the Company's business, including the inability to process orders
on a timely basis, which could have a material adverse effect on its business,
results of operations and financial condition.
The Company has evaluated the product models currently offered by the Company
for Y2K compliance. The Company believes that its peripheral and central
DXA-based systems are Y2K compliant. With respect to its pQCT and ultrasound
systems, certain Y2K compliance issues exist. The Company plans to make software
upgrades for these products available to its customers before January 1, 2000.
The costs to the Company, if any, are not expected to be material, as such
upgrades to products still under warranty should be provided by the product
manufacturers at no charge. Upgrades of non-warranty products will be provided
at the customer's expense. The Company has also identified certain older DXA,
SXA and pQCT products that will also require computer hardware and/or software
upgrades to become Y2K compliant. The Company plans to offer users of these
products the opportunity to purchase upgrade options.
The Company's ability to manufacture and sell systems on a timely basis could be
adversely affected by Y2K compliance problems that may be experienced by its
suppliers and customers. The Company has made inquiries of its major suppliers
in an effort to determine their year 2000 readiness. The Company cannot
presently estimate the nature or extent of any potential adverse impact
resulting from the failure of these third parties to achieve Y2K compliance.
Even if such third parties are themselves Y2K compliant, they may be adversely
affected by Y2K problems of third parties with whom they deal.
In addition to the actions described above, at the present time the Company does
not have a contingency plan to address the Y2K problem. The Company is
developing contingency plans to address potential Y2K problems affecting it and
third parties with whom it deals. The Company presently anticipates completing
such plans over the next three months. Should any significant Y2K problems arise
that are not adequately dealt with in such plan, the Company and its business,
financial condition and results of operations could be materially adversely
affected. The Company has reserved $180,000 to cover the estimated costs of
resolving remaining Y2K issues and contingency plans. If the Company does not
identify and effectively deal with material Y2K problems affecting the Company
or third parties, the most reasonably likely worst case scenario would be a
systemic failure beyond the control of the Company, such as a prolonged
<PAGE>
Norland Medical Systems, Inc.
Results of Operations (continued):
telecommunications or electrical failure, or a general disruption of business
activities that triggers a significant economic downturn. The Company believes
that the primary business risks to the Company in such event would include, but
not be limited to, loss of orders, increased operating costs, inability to
obtain inventory on a timely basis, disruptions in product shipments, or other
business interruptions of a material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract, any of which could have a material
adverse effect on the Company and its business, results of operations and
financial condition.
FORWARD-LOOKING STATEMENTS
As indicated in the Introduction to this Report, forward-looking statements,
including those contained in this Management's Discussion and Analysis section,
are subject to various risks and uncertainties. This section includes
forward-looking statements with respect to the effect of reimbursement rates and
decreased sales and marketing expenditures on future sales, gross margin and
product mix, the Company's ability to realize deferred tax assets as recorded,
future capital expenditures, Year 2000 readiness and the Company's plans for
funding its ongoing operations. Such forward-looking statements are subject to
the factors cited in the Introduction.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement". The
Company's major financial market risk exposure is changing interest rates,
primarily in the Unites States. The Company's investment policy has been to
manage its risks related to its portfolio of cash and cash equivalents by
holding such funds in interest bearing accounts and instruments that are liquid
and of high credit quality. The Company's borrowing policy has been to manage
its interest rate risks related to its borrowings through use of fixed rate debt
when possible (Note payable) or prime rate based variable rate debt (bank line
of credit). Any Company borrowings on the line of credit are subject to the risk
of increases in the bank's prime rate without limitation. See Note 2 and 5 for
descriptions of the Note payable and bank line of credit. All items described
below are non-trading and are stated in U.S. dollars.
<TABLE>
<CAPTION>
Expected Maturity Dates Fair Value
------------------------------------------------------------- -------------
1999 2001 2002 2003 Thereafter Total June 30, 1999
---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents
Bank deposits-non interest bearing $ 73,327 $ 73,327 $ 73,327
Money Market Mutual Fund Shares $ 745,270 $ 745,270 $ 745,270
Average interest rate - 4.5%
Note Payable
Fixed interest rate - 6.5% $1,250,000 $1,250,000 $1,080,000
</TABLE>
<PAGE>
Norland Medical Systems, Inc.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wesley D. Johnson and Pamela S. T. Johnson v. Reynald G. Bonmati, Kurt W.
Streams and Norland Medical Systems, Inc. Reference is made to the above
captioned legal proceeding against the Company and its Chief Executive Officer
and Chief Financial Officer as previously reported. By Order dated April 6,
1999, the defendant's motion to dismiss an amended complaint filed on August 10,
1998 was denied. On April 30, 1999, the defendants filed an answer to the
amended complaint, denying all substantive allegations.
The Company is party to other legal proceedings in the ordinary course of its
business but does not expect the outcome of any other proceedings, individually
or in the aggregate to have a material adverse effect on the Company's final
position, results of operations or cash flows.
Item 2. Changes In Securities And Use Of Proceeds.
(a) Increase In Authorization
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, par value $.0005 per share, from 20,000,000
to 45,000,000. A Certificate of Amendment effecting such change was filed with
the Secretary of State of Delaware on June 8, 1999.
(b) Recent Sales of Unregistered Securities
The Company issued a total of 4,588,469 shares of Common Stock in March 1999 and
6,534,111 shares of Common Stock in June 1999 to Norland Partners, L.P. and
Bones, L.L.C. for an aggregate consideration of an aggregate $4,310,000
reduction in the principal of the Note payable to such parties. Such transaction
was exempt from registration under Section 4(2) of the Securities Act of 1933.
On July 30, 1999, the Company issued 666,667 shares of Common Stock to a
corporate investor for an aggregate consideration of $500,000. Such transaction
was exempt from registration under Section 4(2) of the Securities Act of 1933.
In August 1999, the Company granted warrants to purchase 20,000 shares of Common
Stock at $0.01 per share to a bank in connection with and in consideration of a
line of credit. Such transaction was exempt from registration under Section 4(2)
of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None
<PAGE>
Norland Medical Systems, Inc.
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 2, 1999.
(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 following matters were voted on at the Annual Meeting:
(1) 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: 18,081,663 shares in favor of each candidate;
173,412 shares withheld for each candidate; no shares
abstaining; and no broker non-votes.
(2) The proposal to approve an amendment to the Company's
Restated Certificate of Incorporation increasing the amount of
authorized Common Stock was approved as follows: 17,994,527
shares for; 250,418 shares against; 10,100 shares abstaining;
and no broker non-votes.
(3) The proposal to ratify the selection of Deloitte & Touche
LLP as the Company's independent auditors for 1999 was
approved as follows: 18,233,693 shares for; 5,165 shares
against; 16,187 shares abstaining; and no broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Norland Medical
Systems, Inc., as amended on June 8, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on April 5, 1999 concerning
the Company's reduction of $4,310,000 in principal of the Note by
the issuance of shares of the Company's Common Stock.
<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: August 16, 1999 /s/ Reynald G. Bonmati
-----------------------------------
Reynald G. Bonmati
President
Date: August 16, 1999 /s/ Kurt W. Streams
-----------------------------------
Kurt W. Streams
Vice President, Finance
(Principal Financial and Accounting Officer)
<PAGE>
Norland Medical Systems, Inc.
Exhibit Index
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of Norland Medical Systems,
Inc. as amended on June 8, 1999.
27 Financial Data Schedule
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NORLAND MEDICAL SYSTEMS, INC.
Norland Medical Systems, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
1. The name of the Corporation is NORLAND MEDICAL SYSTEMS, INC.
2. The Restated Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on October 17, 1995. A
Certificate of Amendment of Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on October 24, 1997.
3. The first paragraph of Article Fourth of the Corporation's Restated
Certificate of Incorporation, as amended, is amended in its entirety to read as
follows:
"FOURTH: The total number of shares of all classes of capital
stock which the Corporation shall have authority to issue is
forty-six million (46,000,000) shares, consisting of the following
classes of stock: (A) one million (1,000,000) shares of Preferred
Stock, par value $.0005 per share ("Preferred Stock"); and (B)
forty-five million (45,000,000) shares of Common Stock, par value
$.0005 per share ("Common Stock")"
4. The amendment of the Corporation's Restated Certificate of
Incorporation set forth herein has been duly adopted by the Corporation's Board
of Directors and stockholders in accordance with the provisions of Section 742
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Norland Medical Systems, Inc. has caused this
Certificate to be signed and attested by its duly authorized officers this 2nd
day of June, 1999.
NORLAND MEDICAL SYSTEMS, INC.
By: /s/ Reynald G. Bonmati
----------------------------------
Name: Reynald G. Bonmati
Title: President
ATTEST:
/s/ Kurt W. Streams
- -------------------------
Name: Kurt W. Streams
Title: Secretary
<TABLE> <S> <C>
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 818,597
<SECURITIES> 0
<RECEIVABLES> 2,864,572
<ALLOWANCES> 330,000
<INVENTORY> 2,667,147
<CURRENT-ASSETS> 7,999,514
<PP&E> 3,619,118
<DEPRECIATION> 2,159,314
<TOTAL-ASSETS> 19,517,749
<CURRENT-LIABILITIES> 6,755,292
<BONDS> 1,080,000
0
0
<COMMON> 12,642
<OTHER-SE> 11,669,815
<TOTAL-LIABILITY-AND-EQUITY> 19,517,749
<SALES> 8,793,206
<TOTAL-REVENUES> 9,183,135
<CGS> 4,538,038
<TOTAL-COSTS> 4,538,038
<OTHER-EXPENSES> 5,500,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,656
<INCOME-PRETAX> (1,021,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,021,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,021,256)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
