SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 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 000-19392
DIANON SYSTEMS, INC.
(exact name of registrant as specified in its charter)
Delaware 06-1128081
(State of incorporation) (IRS Employer Identification No.)
200 Watson Blvd, Stratford, CT 06497
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 381-4000
NOT APPLICABLE
(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 [ ]
The number of shares of Issuer's Common Stock, $.01 par value, outstanding on
May 6, 1998 was 6,723,644 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 3
1998 and December 31, 1997.
Consolidated Statements of Operations 4
for the three months ended
March 31, 1998 and 1997.
Consolidated Statements of Stockholders' 5
Equity for the twelve months ended
December 31, 1997 and the three months
ended March 31, 1998.
Consolidated Statements of Cash Flows for 6
the three months ended
March 31, 1998 and 1997.
Notes to Consolidated Financial Statements 7-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-11
Part II OTHER INFORMATION
- ------- -----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
2
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
------------------ -------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,971,002 $ 12,401,062
Accounts receivable, net of allowances of $1,311,322
and $1,292,095, respectively 16,056,795 14,444,767
Prepaid expenses and employee advances 1,062,959 529,887
Inventory 717,773 729,658
Deferred income tax asset 1,148,497 1,016,797
------------------ -------------------
Total current assets 28,957,026 29,122,171
------------------ -------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 9,034,012 8,489,323
Leasehold improvements 3,676,200 3,676,200
Less - accumulated depreciation and amortization (6,057,511)
(6,728,293)
------------------ -------------------
5,981,919 6,108,012
------------------ -------------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,267,627 and $3,207,569 respectively 541,902 388,030
DEFERRED INCOME TAX ASSET 670,191 670,191
OTHER ASSETS 540,951 600,657
================== ===================
TOTAL ASSETS $36,691,989 $36,889,061
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 884,028 $ 1,540,922
Accrued employee compensation 837,553 1,631,180
Accrued employee stock purchase plan 481,955 549,619
Accrued income taxes payable 247,397 747,564
Current portion of capitalized lease obligations 35,189 41,470
Other accrued expenses 3,901,719 3,224,613
------------------ -------------------
Total current liabilities 6,387,841 7,735,368
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 111,345 107,449
------------------ -------------------
TOTAL LIABILITIES 6,499,186 7,842,817
------------------ -------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000
shares authorized, 6,833,083 and 6,791,320 shares
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively 68,331 67,914
Additional paid-in capital 28,049,196 27,880,223
Accumulated earnings 3,483,120 2,743,380
Common stock held in treasury, at cost - 169,099 and
197,617 shares at March 31, 1998 and December 31,
1997, respectively (1,407,844) (1,645,273)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 30,192,803 29,046,244
================== ===================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,691,989 $36,889,061
================== ===================
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
3
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
NET REVENUES $15,081,473 $15,601,155
COST OF SALES 8,459,027 7,872,499
----------- -----------
GROSS PROFIT 6,622,446 7,728,656
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,341,554 6,217,482
RESEARCH AND DEVELOPMENT
EXPENSES 165,364 507,705
----------- -----------
INCOME FROM OPERATIONS 1,115,528 1,003,469
INTEREST INCOME, NET 182,260 81,087
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,297,788 1,084,556
PROVISION FOR INCOME TAXES 558,048 466,359
----------- -----------
NET INCOME $ 739,740 $ 618,197
=========== ==========
EARNINGS PER SHARE:
BASIC $ .11 $ .10
DILUTED $ .11 $ .09
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 6,624,120 6,391,093
DILUTED 6,978,126 6,772,036
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND
THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Additional Common Stock
Common Stock Paid-In Retained Acquired for Treasury
Capital Earnings Shares
Shares Amount (Deficit) Amount Total
------------- ---------- ------------- ------------- ------------------------ ------------
BALANCE, December 31, 1996 6,712,774 $67,128 $27,965,560 ($554,317) (117,196) ($929,443) $26,548,928
Stock options exercised 51,764 518 248,498 -- -- -- 249,016
Employee stock purchase
plan -- -- (564,822) -- 146,579 1,220,200 655,378
Stock grants 26,782 268 230,987 -- -- -- 231,255
Common stock acquired
for treasury -- -- -- -- (227,000) (1,936,030) (1,936,030)
Net income -- -- -- 3,297,697 -- -- 3,297,697
------------ ----------- ------------ ------------- ----------- ------------ -------------
BALANCE, December 31, 1997 6,791,320 67,914 27,880,223 2,743,380 (197,617) (1,645,273) 29,046,244
Stock options exercised 25,738 257 119,868 -- -- -- 120,125
Employee stock purchase
plan (106,978) -- 28,518 237,429 130,451
Stock grants 16,025 160 156,083 -- -- -- 156,243
Net income -- -- -- 739,740 -- -- 739,740
------------ ----------- ------------ ------------- ----------- ------------ -------------
BALANCE, March 31, 1998 6,833,083 $68,331 $28,049,196 $3,483,120 (169,099) ($1,407,844) $30,192,803
============ =========== ============ ============= =========== ============ =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
------------- ------------
Net income $739,740 $ 618,197
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 730,840 657,927
Provision for bad debts 300,000 --
Stock compensation expense 156,243 --
Loss on the disposal of fixed assets -- 28,378
Changes in other current assets and liabilities
(Increase) decrease in accounts receivable (1,615,863) 2,060,053
(Increase) decrease in prepaid expenses
and employee advances (506,429) 444,375
Decrease in inventory 51,832 58,208
Decrease in other assets 69,711 28,417
(Decrease) increase in accounts payable and
accrued liabilities (1,824,308) 499,213
------------- -----------
Net cash (used in) provided by operating activities (1,898,234) 4,394,768
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (420,428) (131,396)
Construction in progress -- (325,900)
Acquisition of PRL assets, net (359,590) --
----------- -----------
Net cash (used in) investing activities (780,018) (457,296)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock acquired for treasury -- (1,847,280)
Repayments of note payable and other (2,384) (244,365)
Employee stock purchase plan and stock options exercised 250,576 232,191
------------ ------------
Net cash provided by (used in) financing activities 248,192 (1,859,454)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,430,060) 2,078,018
CASH AND CASH EQUIVALENTS, beginning of period 12,401,062 7,488,590
------------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,971,002 $ 9,566,608
============= ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period:
Interest $ 16,131 $ 10,867
Income Taxes 1,056,790 200
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation - The consolidated financial statements at and for the
three months ended March 31, 1998 and 1997 have been prepared by DIANON
Systems, Inc. (the "Company") without audit. In the opinion of management,
all adjustments necessary to present fairly the financial position, results
of operations and cash flows for such periods have been made, and the
interim accounting policies followed are in conformity with generally
accepted accounting principles and are consistent with those applied for
annual periods as described in the Company's annual report for the year
ended December 31, 1997, previously filed on Form 10-K with the Securities
and Exchange Commission (the "Annual Report").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
included in the Company's Annual Report. The results of operations for the
three months ended March 31, 1998 and 1997 are not necessarily indicative of
the operating results for the full years.
2. Acquisition - Effective February 1, 1998, the Company acquired certain
assets of a pathology laboratory in Tampa, Florida ("Pathologists Reference
Laboratory" or "PRL"). The acquisition price was approximately $558,000
(including acquisition costs), of which $359,590 was paid in cash and the
balance was satisfied through the assumption of certain liabilities. The
purchase price was primarily allocated to trade receivables ($265,000) and
customer lists ($164,000), and the acquisition has been accounted for
pursuant to the purchase method of accounting. Pro forma consolidated net
revenues for the three months ended March 31, 1998 and 1997, adjusted as if
the acquisition had occurred January 1, 1998 and 1997, approximate $15.5
million and $16.9 million, respectively. Pro forma consolidated net income
and earnings per share would not differ materially from the reported
amounts.
3. Earnings per share - In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per share." Basic earnings per share
have been computed based on the weighted average number of common shares
outstanding during each year. Diluted earnings per share have been computed
based on the weighted average number of common shares and common equivalent
shares outstanding during each year. Common equivalent shares outstanding
include the common equivalent shares calculated for warrants and stock
options under the treasury stock method. Reported earnings per share for all
prior periods have been restated.
Below is a reconciliation of the numerators and denominators of the basic
and diluted EPS computations:
1998 1997
------ ----
BASIC EARNINGS PER SHARE
Weighted-average number of common shares outstanding 6,624,120 6,391,093
DILUTED EFFECT OF:
Stock options / ESPP 354,006 380,943
---------- ----------
DILUTED EARNINGS PER SHARE
Weighted-average number of common shares outstanding 6,978,126 6,772,036
========== ==========
NET INCOME $739,740 $618,197
========== ==========
BASIC EARNINGS PER SHARE $0.11 $0.10
========== ==========
DILUTED EARNINGS PER SHARE $0.11 $0.09
========== ==========
7
Options to purchase 41,770 shares of common stock at prices ranging from
$9.75 and $12.25 per share were outstanding as of March 31, 1998 but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of common
shares.
4. New accounting pronouncements - The adoption in 1998 of SFAS #130 -
"Reporting Comprehensive Income" had no impact on the Company's financial
statements.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months ended March 31, 1998 ("First Quarter-1998") to the three months
ended March 31, 1997 ("First Quarter-1997").
The Company's results of operations in the First Quarter-1998 reflects
reimbursement decreases which occurred subsequent to the First Quarter-1997, the
impact of which was controlled through cost savings in selling, general,
administrative and other operating expenses. In addition, the Company's revenue
base continues to shift toward anatomic pathology as opposed to clinical
chemistry.
RESULTS OF OPERATIONS
- NET REVENUES
Net revenues decreased 3.3% to $15.1 million in First Quarter-1998 from $15.6
million in First Quarter-1997. This decrease reflects the impact of price
reductions, offset only partially by the acquisition of PRL on February 1, 1998.
- COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $8.5 million in First
Quarter-1998 from $7.9 million in First Quarter-1997. As a percentage of sales,
cost of sales totalled 56.1% and 50.5%, respectively. The increased percentage
of revenue represented by cost of sales largely reflects the impact of price
decreases, the addition of PRL which is still in a period of integration, and
the Company's strategic focus on anatomic pathology, which requires a larger
laboratory work force versus the clinical chemistry market segment. Salaries and
wages increased from $2.6 million in First Quarter-1997 to $3.3 million in First
Quarter-1998. In addition, overhead expenses (primarily building rent,
utilities, and depreciation) increased from $2.1 million in First Quarter-1997
to $2.4 million in First Quarter-1998. Logistics expenses decreased from $1.7
million in First Quarter-1997 to $1.4 million in First Quarter-1998, while cost
of lab supplies decreased from $1.5 million to $1.2 million. Overall, the
Company was able to modestly reduce the impact of reimbursement decreases
through a focus on cost control and productivity.
- GROSS PROFIT
Gross profit totaled $6.6 million in First Quarter-1998 versus $7.7 million in
First Quarter-1997, while gross profit margins were 43.9% and 49.5%
respectively. The decrease in gross profit and margins reflects the
aforementioned factors, namely price decreases and the integration of PRL.
The clinical laboratory industry, which includes both clinical chemistry and
anatomic pathology, has seen steady and continuing downward pressure on prices
exerted by both government and private third party payors. Payment for services
such as those provided by the Company is and will likely continue to be affected
by periodic reevaluations made by payors concerning which services to reimburse
or cease reimbursing, and over time Congress has reduced the national cap on
Medicare laboratory fee schedules (under which the Company's clinical chemistry
services are reimbursed) to 74% of the national median. In addition, legislation
freezes fee schedule payments for the 1998-2002 period.
With respect to the Company's anatomic pathology services, which are not
reimbursed under the Medicare laboratory fee schedules, the Medicare fees also
generally declined with the implementation of the resource-based relative value
scale ("RBRVS") system which went into effect in 1992 and was fully phased in by
the end of 1996. In 1997, there was an overall decrease of 5.7% in payments for
pathology services due to a five-year review of the
9
work value component and a decrease in the 1997 conversion factor applicable to
pathology services, plus an additional decrease in Connecticut, where the
Company's primary operations are located, because of the Health Care Financing
Administration's reduction in the number of different payment localities
recognized for RBRVS purposes. Although the conversion factor (which is a
component of the reimbursement calculation) increased by 8.4% in 1998, the
overall impact on the Company's revenues will be only modestly positive due to,
among other factors, other changes in the RBRVS formula in 1998.
Other potential changes in government and third-party payor reimbursement,
resulting from federal, state or local legislation, the impact of managed care,
or other market pressures, are also likely to continue the downward pressure on
prices and make the market for clinical laboratory services more competitive,
which could in turn have an adverse impact on the Company's gross profits.
The Company's Annual Report on Form 10-K for the year ended December 31, 1997,
previously filed with the Securities and Exchange Commission, contains
additional information regarding the complex area of reimbursement under
"Business - Reimbursement."
- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $6.2 million in
First Quarter-1997 to $5.3 million in First Quarter-1998. As a percentage of
sales, selling, general and administrative expenses decreased from 39.9% in
First Quarter-1997 to 35.4% in First Quarter-1998, primarily due to decreased
selling expenses resulting from changes in the sales organization and lower
commission expense. Selling expenses were $2.6 million in First Quarter-1997, or
17.0% of sales, versus $1.9 million in First Quarter-1998, or 12.8% of sales.
The Company has completed a reorganization of its sales force begun in the
fourth quarter of 1997. Also, First Quarter-1997 includes severance costs of
$159,000.
- RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased from $508,000 in First Quarter-1997
to $165,000 in First Quarter-1998. This reduction reflects the shift of certain
test costs, previously developmental, into cost of sales as the tests have been
brought to market and reimbursement rates are currently being established.
- INCOME FROM OPERATIONS
Income from operations increased from $1.0 million in First Quarter-1997 to $1.1
million in First Quarter-1998, despite the larger drop in gross profit,
reflecting the cost control initiatives implemented in anticipation of
reimbursement reductions.
- NET INTEREST INCOME
Net interest income grew to $182,000 in First Quarter-1998 from $81,000 in First
Quarter-1997, due to higher average balances during the quarter and interest
earned on certain loan receivables.
- PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 43.0% effective tax rate in both
periods, totaling $558,000 in First Quarter-1998 and $466,000 in First
Quarter-1997.
- NET INCOME
Net income increased 20% from $618,000 in First Quarter-1997 to $740,000 in
First Quarter-1998, while basic earnings per share increased from $0.10 per
share to $0.11 per share, respectively, and diluted earnings per share increased
from $0.09 per share to $0.11 per share.
10
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had total cash and cash equivalents of $10.0
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. The $2.4 million decrease
in cash from December 31, 1997 is primarily attributable to income tax payments
and the acquisition of the assets of PRL. Working capital was $22.6 million and
$21.4 million as of March 31, 1998 and December 31, 1997, respectively, and the
current ratios were 4.5:1 and 3.8:1, respectively.
Accounts receivable (net of allowances) totaled $16.1 million as of March 31,
1998 representing approximately 96 days of sales outstanding ("DSO"), compared
to $14.4 million as of December 31, 1997 or 90 days. DSO as of March 31, 1997
approximated 82 days. The increase in DSO is a result of growth in the anatomic
pathology segment and its associated billing complexity.
Capital expenditures during the First Quarter-1998 totaled $420,000, while the
acquisition of the PRL assets represented a cash outlay of $360,000.
Effective February 17, 1998, the Company entered into a three-year, $15 million
line of credit agreement with a bank. The agreement includes various provisions
regarding borrowings under the facility, including those related to compliance
with financial covenants. As of March 31, 1998, there were no amounts
outstanding under this line.
As of March 31, 1998, the Company holds 169,099 shares of Common Stock in
treasury as required by its Employee Stock Purchase Plan ("ESPP"). The Company's
Board of Directors has authorized the expenditure of up to $2 million for
additional share repurchases.
The Company believes that cash flows from operations and available cash and cash
equivalents are adequate to fund the Company's operations for the foreseeable
future.
RISK FACTORS; FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis contains forward looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others, the uncertainties in reimbursement rates and
reimbursement coverage of various tests sold by the Company to beneficiaries of
the Medicare program; possibility of being deemed to be not in compliance with
Federal or state regulatory requirements; the uncertainties relating to the
ability of the Company to convince physicians and/or managed care organizations
to use the Company as a provider of anatomic pathology testing services; the
ability of the Company to maintain superior quality relative to its competitors;
the ability of the Company to maintain its hospital-based business in light of
the competitive pressures and changes occurring in hospital healthcare delivery;
the uncertainties relating to states erecting barriers to the performance of
anatomic national laboratories, small specialized laboratories and well
established local pathologists; and the uncertainties which would arise if
integrated delivery systems closed to outside providers emerged as the dominant
form of health care delivery.
11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a Exhibits
(11.1) Statement regarding computation of per share earnings is not required
because the relevant computation can be determined from the material
contained in the Financial Statements included herein.
(27.1) Financial Data Schedule
b Report on Form 8-K. No reports on Form 8-K were filed during the First
Quarter 1998.
12
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.
DIANON Systems, Inc.
May 8, 1998 /s/ KEVIN C.JOHNSON
----------------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
May 8, 1998 /s/ DAVID R. SCHREIBER
----------------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
May 8, 1998 /s/ JOHN S. FANUKO
----------------------------------------
By: John S. Fanuko
Vice President, Finance and
Corporate Controller
(Principal Accounting Officer)
13
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27.1 Financial Data Schedule
14