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, 1996
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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 July 31, 1996, 6,895,781 shares of the registrant's Common Stock,
$0.0005 par value, were outstanding.
-1-
NORLAND MEDICAL SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-Q
Page
----
Title Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Document Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Condensed Consolidated Financial Statements. . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income. . . . . . . . . . . . . 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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
PART II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .11
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .11
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
-2-
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
NORLAND MEDICAL SYSTEMS, INC.
Condensed Consolidated Balance Sheets
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash $ 11,676,698 $ 19,218,865
Accounts receivable - trade, less allowance for
doubtful accounts of $150,000 at June 30, 1996
and December 31, 1995 8,287,971 4,571,520
Accounts receivable - affiliate 266,955 180,253
Inventories 1,354,236 798,484
Prepaid expenses and other current assets 224,934 68,989
------------ ------------
Total current assets 21,810,794 24,838,111
------------ ------------
Investment in Vitel, Inc. 250,000 --
Property and equipment 204,075 --
Product development loan receivable - affiliate 75,906 48,519
Patent, net 397,020 --
Goodwill, net 3,217,288 --
Other intangible assets, net 2,947,229 --
------------ ------------
Total assets $ 28,902,312 $ 24,886,630
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - Stratec $ 1,108,088 $ 2,139,656
Accounts payable - Norland 1,708,132 493,424
Accounts payable - trade 185,207 32,000
Accrued expenses 476,100 361,003
Income taxes payable 123,245 1,305,037
Customer deposits 30,740 34,664
------------ ------------
Total current liabilities 3,631,512 4,365,784
------------ ------------
Stockholders' equity:
Common stock, par value of $0.0005 per share,
10,000,000 shares authorized, 6,895,781 shares issued
at June 30, 1996 3,448 3,000
Additional paid-in capital 21,658,170 18,349,813
Retained earnings 3,609,182 2,168,033
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Total stockholders' equity 25,270,800 20,520,846
------------ ------------
Total liabilities and stockholders' equity
$ 28,902,312 $ 24,886,630
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
-3-
NORLAND MEDICAL SYSTEMS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
Revenue $ 6,949,116 $ 4,003,310 $ 12,167,406 $ 7,899,231
Cost of revenue 4,380,130 2,749,148 7,796,041 5,349,679
------------ ------------ ------------ ------------
Gross profit 2,568,986 1,254,162 4,371,365 2,549,552
Sales and marketing expense 883,172 286,829 1,458,520 621,382
General and administrative expense 594,056 171,199 899,772 396,652
------------ ------------ ------------ ------------
Operating income 1,091,758 796,134 2,013,073 1,531,518
Other income 170,757 4,650 413,698 7,164
------------ ------------ ------------ ------------
Income before taxes 1,262,515 800,784 2,426,771 1,538,682
Provision for taxes 512,458 325,118 985,458 624,705
------------ ------------ ------------ ------------
Net income $ 750,057 $ 475,666 $ 1,441,313 $ 913,977
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share $ 0.10 $ 0.12 $ 0.20 $ 0.23
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common
and common equivalent shares 7,263,912 4,002,000 7,157,296 4,002,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements
-4-
NORLAND MEDICAL SYSTEMS, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
Common Paid-In Stock Retained
Total Shares Stock Capital Subscriptions Earnings
----------- --------- ------ ----------- ------------- -----------
Balance as of
December 31, 1995 $20,520,846 6,000,000 $3,000 $18,349,813 -- $ 2,168,033
Issuance of shares for
stock options exercised 288 734,250 367 (79) -- --
Issuance of shares to
acquire Dove Medical
Systems 3,311,519 161,538 81 3,311,438 -- --
Cost and expenses
directly related to the
stock offering (3,002) -- -- (3,002) -- --
Cash paid in lieu of
fractional shares on
3-for-2 stock split
on June 14, 1996 (164) (7) -- -- -- (164)
Net income 1,441,313 -- -- -- -- 1,441,313
----------- -------- ------ ----------- ------------- -----------
Balance as of
June 30, 1996 $25,270,800 6,895,781 $3,448 $21,658,170 -- $ 3,609,182
----------- --------- ------ ----------- ------------- -----------
----------- --------- ------ ----------- ------------- -----------
Balance as of
December 31, 1994 $68,044 3,000,000 $1,500 -- $ (1,000) $ 67,544
Proceeds from common
stock subscriptions 1,000 -- -- -- 1,000 --
Net income 913,977 -- -- -- -- $ 913,977
----------- --------- ------ ----------- ------------- -----------
Balance as of
June 30, 1995 $983,021 3,000,000 $1,500 -- $ -- $ 981,521
----------- --------- ------ ----------- ------------- -----------
----------- --------- ------ ----------- ------------- -----------
See accompanying notes to condensed consolidated financial statements.
-5-
NORLAND MEDICAL SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
---------------------------------
June 30, 1996 June 30, 1995
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Cash flows from operating activities:
Net income $ 1,441,313 $ 913,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts -- 40,000
Amortization expense 116,200 --
Depreciation expense 10,612 --
Inventory obsolescence expense 30,000 --
Changes in:
Accounts receivable (3,703,846) (15,077)
Inventories (380,055) (221,723)
Prepaid expenses and other current assets (138,680) (51,068)
Accounts payable 217,280 (55,652)
Accrued expenses (32,304) 127,142
Income taxes payable (1,181,792) 533,555
Customer deposits (28,424) (118,000)
----------- ----------
Total adjustments (5,091,009) 199,177
----------- ----------
Net cash (used in) provided by operating activities (3,649,696) 1,153,154
----------- ----------
Cash flows from investing activities:
Payment for purchase of certain, intangible assets of Dove Medical Systems,
net of cash acquired (3,432,937)
Investment in Vitel, Inc. (250,000)
Purchases of property and equipment (179,269) --
Product development loan to affiliate (27,387) --
----------- ----------
Net cash used in investing activities (3,889,593) --
----------- ----------
Cash flows from financing activities:
Notes payable to stockholders -- (750,000)
Cost and expenses of issuance of common stock (3,002) --
Cash paid for fractional shares (164) --
Proceeds from stock options exercised 288 --
Proceeds from common stock subscriptions -- 1,000
----------- ----------
Net cash used in financing activities (2,878) (749,000)
----------- ----------
Net decrease in cash (7,542,167) 404,154
Cash at beginning of period 19,218,865 554,732
----------- ----------
Cash at end of period $11,676,698 $ 958,886
----------- ----------
----------- ----------
Non-cash investing activities:
On April 2, 1996, the Company acquired Dove Medical Systems, issuing 161,538 shares of Common Stock valued at $3,311,519.
See accompanying notes to condensed consolidated financial statements.
-6-
NORLAND MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of Norland Medical Systems, Inc.
(the "Company") presented herein, have been prepared pursuant to the rules of
the Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and footnote disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1995, which were audited by Coopers & Lybrand L.L.P., and included
in the Company's Form 10-K as filed with the Securities and Exchange Commission
on March 28, 1996. The figures in these statements have been restated to
reflect the 3-for-2 stock split which was effective June 14, 1996.
The condensed consolidated balance sheet as of June 30, 1996, the condensed
consolidated statements of income for the three and six months ended June 30,
1996, and changes in stockholders' equity and cash flows for the six months then
ended are unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
of results for these interim periods.
The results of operations for the three and six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1996.
(2) INVENTORIES
As of June 30, 1996, inventories consist of the following:
Demonstration systems,
less accumulated amortization
of $45,406 $592,341
Rental systems 417,955
Raw materials, product kits
spare parts and sub-assemblies,
less an obsolescence reserve
of $30,000 231,162
Finished goods 86,664
Work in process 26,114
---------
$1,354,236
---------
---------
-7-
Notes to Condensed Consolidated Financial Statements, continued:
(2) INVENTORIES, continued:
Systems used in the Company's short-term rental and pay-per-scan programs are
carried in inventory at the lower of cost or net realizable value until the time
of sale.
The Company maintains an inventory of demonstration systems used for marketing
and customer service purposes. Such systems are carried in inventory at the
lower of cost or net realizable value until the time of sale. From time to
time, the Company may judge it desirable for marketing purposes to provide a
device to a prominent scientist or research institution specializing in the
study of bone disease. In such cases, the Company will carry the device in
demonstration system inventory at cost less amortization expense calculated on a
straight-line basis over thirty-six months.
Parts and sub-assemblies inventories are stated at the lower of cost or market;
cost is determined principally by the first-in, first-out method.
(3) ACQUISITION OF DOVE MEDICAL SYSTEMS
On April 2, 1996, the Company acquired Dove Medical Systems (Dove) in a
transaction accounted for under the purchase method of accounting. The
condensed consolidated financial statements reflect the issuance of 161,538
shares of Company Common Stock in exchange for all outstanding Dove shares. In
addition, the statements reflect a payment by the Company of $3,600,000 in
exchange for certain patent and other intangible assets owned by the Dove
majority shareholder and other investors. The goodwill, patent and other
intangible assets are amortized over their useful lives of 20, 10 and 20 years,
respectively.
(4) INVESTMENT IN VITEL, INC.
On May 31, 1996, the Company entered into a distribution agreement with Vitel,
Inc. of Dallas, Texas (Vitel), pursuant to which the Company has the worldwide
rights to all products that may be developed by Vitel. The Company also made a
$250,000 investment in Vitel which represents a minority interest that is
accounted for according to the cost method. Vitel has not yet developed any
products which are marketed. Vitel is currently developing bone diagnostic
devices that use technology called Ultrasound Critical Angle Reflection under an
exclusive license from the University of Texas Southwestern Medical Center of
Dallas.
(5) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Primary income per share is calculated by dividing net income by the average
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are stock options which have been included
using the treasury stock method only when their effect is dilutive.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the three months ended June 30, 1996 increased $2,945,806 (73.6%) to
$6,949,116 from $4,003,310 for the comparable period of 1995. Revenue for the
six months ended June 30, 1996 increased $4,268,175 (54.0%) to $12,167,406 from
$7,899,231 for the comparable period in 1995. The increases were largely a
result of increased sales of pDEXA systems in the United States following its
introduction in the fourth quarter of 1995, increased sales of the Company's
other products and sales by Dove (which was acquired by the Company on April 2,
1996). Sales of pDEXA systems in Japan declined due in part to increased
competition, reductions in reimbursement for certain densitometry sales in Japan
and recent operational difficulties experienced in pDEXA units installed in
Japan and the southeastern United States related to the effects of humidity on
one component. The Company believes that these operational difficulties have
been addressed. The Company anticipates that pDEXA sales in Japan will decline
further in the third quarter. Sales in Japan and the United States represented
31.7% and 43.1%, respectively, of total revenue for the three months ended June
30, 1996 and 62.1% and 7.2%, respectively, of total revenue for the three months
ended June 30, 1995. Sales in Japan and the United States represented 40.0% and
36.8%, respectively, of total revenue for the six months ended June 30, 1996 and
71.6% and 6.7%, respectively, of total revenue for the six months ended June 30,
1995. Sales of complete bone densitometry systems represented 94.1% and 96.0%
of total revenue for the three months ended June 30, 1996 and 1995,
respectively, and 93.6% and 94.6% of total revenues for the six months ended
June 30, 1996 and 1995, respectively. Sales of parts and services and rental
income comprised the balance of revenues for such periods.
Cost of revenue as a percentage of revenue was 63.0% and 68.7% for the three
months ended June 30, 1996 and 1995, respectively, resulting in a gross margin
of 37.0% for the three months ended June 30, 1996 compared to 31.3% for the
comparable period of 1995. Cost of revenue as a percentage of revenue was 64.1%
and 67.7% for the six months ended June 30, 1996 and 1995, respectively,
resulting in a gross margin of 35.9% for the six months ended June 30, 1996
compared to 32.3% for the comparable period of 1995. The increases in gross
margin are attributed primarily to second quarter sales of OsteoAnalyzer
Systems manufactured by Dove, for which the Company receives the entire margin
between the manufacturer's cost and the Company's sale price. A portion of
such margin on the Company's other products is paid to the manufacturers.
Sales and marketing expense increased $596,343 (207.9%) to $883,172 for the
three months ended June 30, 1996 from $286,829 for the three months ended June
30, 1995, and increased as a percentage of revenue to 12.7% from 7.2%. Sales
and marketing expense increased $837,138 (134.7%) to $1,458,520 for the six
month period ended June 30, 1996 from $621,382 for the six months ended June 30,
1995, and increased as a percentage of revenue to 12.0% from 7.9%. The
increases were primarily due to increased salaries and commissions related to
increased sales staff and sales volume, increased expenses related to customer
service, marketing expenses related to penetration of the United States market,
and inclusion of the sales expenses of Dove for the second quarter of 1996.
General and administrative expense increased $422,857 (247.0%) to $594,056 for
the three months ended June 30, 1996 from $171,199 for the three months ended
June 30, 1995 and increased as a percentage of revenue to 8.6% from 4.3%.
General and administrative expense increased $503,120 (126.8%) to $899,772 for
the six months period ended June 30,1996 from $396,652 for the six months ended
June 30, 1995 and increased as a percentage of revenue to 7.4% from 5.0%. The
increases were primarily due to increased expenses of new and existing
personnel, legal, accounting and other expenses attributable to the Company
being a public company, and the inclusion of Dove's operations for the second
quarter of 1996.
Other income in 1996 consisted primarily of interest earned on the proceeds of
the Company's initial public offering and on other cash balances, reduced by
other expenses consisting primarily of bank charges and other fees related to
bank transfers. Other income in 1995 consisted primarily of interest earned on
cash balances which was reduced by charges and other fees related to bank
transfers.
-9-
The provision for taxes for the three months ended June 30, 1996 increased by
$187,340 (57.6%) to $512,458 from $325,118 for the three months ended June 30,
1995. The provision for taxes for the six months ended June 30, 1996 increased
by $360,753 (57.7%) to $985,458 from $624,705 for the six months ended June 30,
1996. The Company has provided for income taxes at its current effective tax
rate of 40.6% for both the three months and six months ended June 30, 1996 and
1995. The increases were entirely due to the relative increase in income before
taxes.
The Company had net income of $750,057 for the three months ended June 30, 1996
compared to net income of $475,666 for the three months ended June 30, 1995, an
increase of $274,391 (57.7%). The Company had net income of $1,441,313 for the
six months ended June 30, 1996 compared to net income of $913,977 for the six
months ended June 30, 1995, an increase of $527,336 (57.7%). The increases were
due primarily to increased sales and interest earned on cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $7,542,167 to $11,676,698 in the six months ended June 30, 1996.
The decrease in cash was primarily the result of the Company acquiring Dove and
certain intangible assets used by Dove in exchange for shares of Company Common
Stock and $3.6 million in cash, accounts receivable increasing $3.8 million and
the payment of $1.9 million in corporate income taxes.
The Company's accounts receivable increased 80.0% to $8,554,926 at June 30, 1996
from $4,751,773 at December 31, 1995. The increase in accounts receivable
reflects both higher sales volume and less prompt payments by the Company's
customers. At June 30, 1996, the largest balance, 41.6% of total outstanding
trade receivables, was owed by Nissho Iwai, the Company's distributor in Japan.
At December 31, 1995, the Company employed no fixed assets other than leased
computers and office furniture. Property and equipment as of June 30, 1996
consisted of computer and telephone equipment and a management information
system that were obtained during 1996. Other capital expenditures in 1996 are
expected to include continued improvements to leased facilities and information
systems. The Company may also purchase additional systems in 1996 for its
short-term rental and pay-per-scan programs and as demonstration systems. In
addition, the Company expects to provide additional financing under its Product
Development Loan Agreement with Norland Corporation and Stratec Medizintechnik
GmbH.
In June of 1996, the Company filed a registration statement with the Securities
and Exchange Commission with respect to the offering of 2,250,000 shares of the
Company's Common Stock. As a result of the general stock market decline and the
decline in the price of the Company's Common Stock since June, the Company
determined that it was not in the Company's best interests to proceed with the
offering and requested that the registration statement be withdrawn. The
Company will recognize expenses incurred with respect to this offering in the
third quarter of 1996.
Management believes that its current cash position, together with cash flow from
operations, will be adequate to fund the Company's growth and operations for at
least the next twelve months. However the nature of the Company's business is
that it is subject to changes in technology, government approval and regulation,
and changes in third-party reimbursement in numerous foreign markets and the
United States. Significant changes in one or more of these factors in a major
market for the Company's products could significantly affect the Company's
ability to meet its cash needs through internal sources.
-10-
Norland Medical Systems, Inc.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES 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 May 30, 1996.
(b) The following persons were elected as directors of the Company at the
Annual Meeting: Reynald G. Bonmati, James J. Baker, Michael W. Huber,
Robert L. Piccioni and Albert S. Waxman.
(c) The following matters were voted on at the Annual Meeting:
(1) The proposal to elect the five persons named in Item 4(b) as
directors of the Company for the ensuing year was approved
as follows: 4,000,082 shares in favor of each candidate,
1,300 shares withheld for each candidate and no broker non-
votes.
(2) The proposal to approve and adopt the Company's Amended and
Restated 1994 Stock Option and Incentive Plan was approved
as follows: 3,023,156 shares for, 541,063 shares against,
2,742 shares abstaining and 434,421 shares broker non-votes.
(3) The proposal to ratify the selection of Coopers & Lybrand
L.L.P. as the Company's independent auditors for 1996 was
approved as follows: 4,001,182 shares for, 100 shares
against, 100 shares abstaining and no broker non-votes.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Furnished:
10.4 Distributorship Agreement between the Company, Nissho Iwai
Corporation and Nissho Iwai American Corporation
11 Statement Regarding Computation of Earnings Per Share
-11-
(b) Reports on Form 8-K:
On April 16 and June 6, 1996, the Company filed reports on Forms 8-K and 8-
K/A, respectively, relating to the acquisition of Dove Medical Systems.
The Form 8-K/A contained the following financial statements: audited
financial statements of Dove Medical Systems for the years ended December
31, 1995 and 1994; unaudited financial statements of Dove Medical Systems
for the three months ended March 31, 1996 and 1995; and unaudited pro forma
combined condensed financial statements giving effect to the acquisition of
Dove Medical Systems by the Company.
-12-
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/ Ralph G. Theodore
------------------------------
Date: August 13, 1996 Ralph G. Theodore
Vice President, Operations
/s/ Kurt W. Streams
------------------------------
Date: August 13, 1996 Kurt W. Streams
Vice President, Finance
(Principal Financial and Accounting Officer)
-13-
Exhibit Index
Number Description
- ------ -----------
10.4 Distributorship Agreement
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
-14-