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 September 30, 2000
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 06615
(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 registrant's Common Stock, $.01 par value, outstanding
on November 7, 2000 was 7,293,513 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of September 30, 2000
and December 31, 1999. 3
Income Statements for the three month and
nine month periods ended September 30, 2000 and 1999. 4
Statements of Stockholders' Equity for the nine months
ended September 30, 2000 and 1999. 5
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999. 6
Notes to Financial Statements. 7-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
2
DIANON SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
-----------------------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 12,285,306 $ 9,761,047
Accounts receivable, net of allowances of $1,287,096 and
$1,010,266, respectively 21,603,049 19,477,904
Prepaid expenses and employee advances 839,671 1,074,877
Inventory 1,343,567 911,473
Deferred income tax asset 813,917 986,471
-----------------------------------
Total current assets 36,885,510 32,211,772
-----------------------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 14,318,827 12,142,415
Leasehold improvements 5,208,943 4,648,702
Less - accumulated depreciation and amortization (13,781,938) (11,433,539)
-----------------------------------
5,745,832 5,357,578
-----------------------------------
INTANGIBLE ASSETS, net of accumulated amortization of
$4,434,329 and $3,852,204 respectively 12,272,156 12,854,280
DEFERRED INCOME TAX ASSET 1,772,445 1,422,723
OTHER ASSETS 233,220 242,572
-----------------------------------
TOTAL ASSETS $ 56,909,163 $ 52,088,925
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,800,654 $ 1,642,065
Accrued employee compensation 1,337,070 1,103,903
Accrued income taxes payable 671,789 751,056
Current portion of capitalized lease obligations 31,183 31,109
Other accrued expenses 3,652,128 3,434,209
-----------------------------------
Total current liabilities 7,492,824 6,962,342
-----------------------------------
LONG-TERM LIABILITIES:
Long-term note payable 4,000,000 6,000,000
Long-term deferred tax liability 344,263 313,783
Long-term portion of capitalized lease obligations 23,619 47,238
-----------------------------------
Total Liabilities 11,860,706 13,323,363
-----------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000
shares authorized, 7,295,878 and 7,060,749 shares
issued and
outstanding at September 30, 2000 and December 31, 1999, respectively 72,959 70,608
Additional paid-in capital 31,006,985 29,428,647
Retained earnings 14,447,574 9,828,769
Common stock held in treasury, at cost - 50,025 and 58,734
shares at September 30, 2000 and December 31, 1999, respectively (479,061) (562,462)
Total stockholders' equity 45,048,457 38,765,562
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,909,163 $ 52,088,925
===================================
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
3
DIANON SYSTEMS, INC.
INCOME STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 and 1999
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-----------------------------------------------------------------------
Net revenues $23,593,617 $20,408,961 $70,098,697 $55,318,911
Cost of goods 13,343,607 11,911,150 39,923,279 31,995,124
-----------------------------------------------------------------------
GROSS PROFIT 10,250,010 8,497,811 30,175,418 23,323,787
Selling, general and 6,964,845 6,333,567 21,395,254 17,827,593
administrative expenses
Amortization of intangible assets 181,470 234,350 582,125 453,284
Research and development expenses 223,173 124,580 666,010 352,806
-----------------------------------------------------------------------
INCOME FROM OPERATIONS 2,880,522 1,805,314 7,532,029 4,690,104
Interest income, net 116,043 22,490 230,669 250,490
-----------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,996,565 1,827,804 7,762,698 4,940,594
Provision for income taxes 1,213,609 758,539 3,143,893 2,050,347
-----------------------------------------------------------------------
NET INCOME $ 1,782,956 $ 1,069,265 $ 4,618,805 $ 2,890,247
=======================================================================
EARNINGS PER SHARE
BASIC $ .25 $ .16 $ .65 $ .43
DILUTED $ .22 $ .15 $ .59 $ .42
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,189,820 6,778,915 7,110,576 6,671,964
DILUTED 7,952,156 7,118,725 7,784,103 6,931,918
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
-----------------------------------------------------------
BALANCE, December 31, 1998 6,808,729 $ 68,088 $ 27,398,120 $ 5,697,710
Stock options exercised 38,866 389 299,537 --
Issuance of common stock 79,981 800 700,516 --
Employee stock purchase plan -- -- (16,648) --
Stock grants 3,225 32 29,843 --
Common stock acquired for treasury -- -- -- --
Retired shares (50,000) (500) (393,250) --
Net income -- -- -- 2,890,247
--------- ------------ ------------ ------------
BALANCE, September 30, 1999 6,880,801 $ 68,809 $ 28,018,118 $ 8,587,957
========= ============ ============ ============
BALANCE, December 31, 1999 7,060,749 $ 70,608 $ 29,428,647 $ 9,828,769
Stock options exercised 233,524 2,335 1,570,875 --
Employee stock purchase plan -- -- (22,325) --
Stock grants 1,605 16 29,788 --
Net income -- -- -- 4,618,805
--------- ------------ ------------ ------------
BALANCE, September 30, 2000 7,295,878 $ 72,959 $ 31,006,985 $ 14,447,574
========= ============ ============ ============
Common Stock
Acquired for Treasury
Shares Amount Total
----------------------------------------
BALANCE, December 31, 1998 (222,019) ($ 1,780,854) $ 31,383,064
Stock options exercised -- -- 299,926
Issuance of common stock 222,019 1,780,854 2,482,170
Employee stock purchase plan 3,666 33,386 16,738
Stock grants -- -- 29,875
Common stock acquired for treasury (109,500) (961,874) (961,874)
Retired shares 50,000 393,750 --
Net income -- -- 2,890,247
-------- ------------ ------------
BALANCE, September 30, 1999 (55,834) ($ 534,738) $ 36,140,146
======== ============ ============
BALANCE, December 31, 1999 (58,734) ($ 562,462) $ 38,765,562
Stock options exercised -- -- 1,573,210
Employee stock purchase plan 8,709 83,401 61,076
Stock grants -- -- 29,804
Net income -- -- 4,618,805
-------- ------------ ------------
BALANCE, September 30, 2000 (50,025) ($ 479,061) $ 45,048,457
======== ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIANON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
SEPTEMBER 30,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,618,805 $ 2,890,247
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 2,930,522 2,494,371
Provision for bad debts 380,500 --
Stock compensation expense 29,804 29,875
Changes in other current assets and liabilities
(Increase) in accounts receivable (2,505,645) (2,778,429)
Decrease (increase) in prepaid expenses and employee advances 174,239 (31,699)
(Increase) in inventory (432,094) (21,665)
(Increase) in other assets (106,849) (17,602)
Increase in accounts payable and accrued liabilities 560,888 1,246,736
------------ ------------
Net cash provided by operating activities 5,650,170 3,811,834
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of KMD assets, net -- (10,500,000)
Capital expenditures (2,736,652) (1,719,253)
Proceeds from the sale of fixed assets -- 1,316
------------ ------------
Net cash used in investing activities (2,736,652) (12,217,937)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings of note payable (2,000,000) 6,000,000
Common stock acquired for treasury -- (961,874)
Issuance of common stock -- 16,545
Employee stock purchase plan 61,076 16,738
Stock options exercised 1,573,210 299,926
Repayments of capitalized lease obligations (23,545) (19,791)
------------ ------------
Net cash (used in) provided by financing activities (389,259) 5,351,544
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,524,259 (3,054,559)
CASH AND CASH EQUIVALENTS, beginning of period 9,761,047 12,126,076
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 12,285,306 $ 9,071,517
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 292,919 $ 172,462
Income Taxes 3,363,893 1,947,467
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common Stock of $2,465,625 was issued in connection with the acquisition of
KMD in 1999.
The accompanying notes to consolidated financial
statements are an integral part of these statements.
6
DIANON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY - The consolidated financial statements as of and for the three
months and nine months ended September 30, 2000 and 1999 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, 1999, previously filed on Form 10-K with the
Securities and Exchange Commission (the "Annual Report"). Certain amounts
in prior year statements have been reclassified to conform with current
year presentation.
Certain information and note 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 for the year ended December 31,
1999. The results of operations for the three months and nine months ended
September 30, 2000 and 1999 are not necessarily indicative of the operating
results for the full years.
2. ACQUISITIONS - Effective May 1, 1999, the Company acquired substantially
all the assets of an outpatient OB/GYN laboratory with locations in
Woodbury and New City, New York ("Kyto Meridien Diagnostics, L.L.C." or
"KMD"). The acquisition price was approximately $13.0 million and was
financed through a combination of available cash and drawdowns of the
Company's credit line, as well as through the issuance of Common Stock.
The purchase price was primarily allocated to customer lists ($7.5
million), goodwill ($5.6 million), lab and office equipment ($400,000),
and client receivables ($400,000), partially offset by accrued liabilities
($930,000). The acquisition has been accounted for pursuant to the
purchase method of accounting.
Pro forma net revenue for the three months and nine months ended September
30, 1999, adjusted as if the acquisition of KMD had occurred January 1,
1999 approximates $20.4 million and $58.9 million respectively. Pro forma
net income and earnings per share would not differ materially from
reported amounts.
Effective October 1, 2000, the Company acquired substantially all of the
assets of John H. Altshuler, M.D., P.C., a pathology physician practice
located in Englewood, Colorado, which specializes in dermatopathology and
GYN pathology. The acquisition price was approximately $1.4 million and
was financed through a combination of available cash and the issuance of
Common Stock. In addition to the purchase price paid, approximately
$300,000 is being held in trust pursuant to a contingent earn-out
agreement. The purchase price was primarily allocated to customer lists
($1.0 million), goodwill ($670,000), lab and office equipment ($73,000),
and client receivables ($67,000), partially offset by accrued liabilities
of ($110,000). The acquisition has been accounted for pursuant to the
purchase method of accounting.
3. 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. Below is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for
the third quarter and nine month periods ended September 30, for both 2000
and 1999.
7
DIANON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Third quarter ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------ -----------------------------------
BASIC EARNING PER SHARE:
Weighted-average number of common
shares outstanding 7,189,820 6,778,915 7,110,576 6,671,964
DILUTIVE EFFECT OF:
Stock options 762,336 339,810 673,527 259,954
------------------------------------ -----------------------------------
DILUTED EARNINGS PER SHARE:
Weighted-average number of common
shares outstanding 7,952,156 7,118,725 7,784,103 6,931,918
==================================== ===================================
NET INCOME $1,782,956 $1,069,265 $4,618,805 $2,890,247
==================================== ===================================
BASIC EARNINGS PER SHARE $0.25 $0.16 $0.65 $0.43
==================================== ===================================
DILUTED EARNINGS PER SHARE $0.22 $0.15 $0.59 $0.42
==================================== ===================================
Options to purchase 960 shares of common stock at $26.00 per share were
outstanding as of September 30, 2000 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.
Options to purchase 35,055 shares of common stock at prices ranging from
$10.75 to $12.25 per share were outstanding as of September 30, 1999 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and nine months ended September 30, 2000 ("Third Quarter-2000" and
"Nine Months-2000", respectively) to the three months and nine months ended
September 30, 1999 ("Third Quarter-1999" and "Nine Months-1999", respectively).
The Company's results of operations in the Third Quarter-2000 and Nine
Months-2000 reflect favorable volume and mix increases in certain product lines,
continued reductions in selling, general, administrative and other operating
expenses, as a percentage of sales, and the acquisition of Kyto Meridien
Diagnostics, L.L.C. ("KMD") in May 1999.
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 16% to $23.6 million in the Third Quarter-2000 from $20.4
million in the Third Quarter-1999, and 27% to $70.1 million in the Nine
Months-2000 from $55.3 million in the Nine Months-1999. These increases reflect
volume increases in certain product lines, the successful negotiation and
introduction in 1999 of two significant capitated contracts, and the effects of
an increase in Medicare reimbursement for certain of the Company's tests. In
addition, the acquisition of KMD in May of 1999, contributed to the increase
from the Nine Months-1999 to the Nine Months-2000.
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 payers. Payment for services
such as those provided by the Company is and will likely continue to be affected
by periodic reevaluations made by payers concerning the level of reimbursement
for services provided by the Company. 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, the Balanced Budget Act of 1997 ("BBA") freezes fee schedule payments
(I.E., no updates) for the 1998-2002 period.
Beginning in 1998, Medicare began covering screening pap smears for certain
Medicare beneficiaries, and the Balanced Budget Refinement Act of 1999 ("BBRA")
required the Secretary of the Department of Health and Human Services to
establish a national minimum payment amount equal to $14.60 for diagnostic or
screening pap smear laboratory tests furnished on or after January 1, 2000.
Previously, the national payment cap for a pap smear was approximately $7.15.
The BBRA also encouraged the Health Care Financing Administration ("HCFA") to
institute an appropriate increase in the payment rate for new cervical cancer
screening technologies, such as the technologies used by the Company, that have
been approved by the FDA as significantly more effective than a conventional pap
smear. As a result, the Medicare legislation currently pending before Congress
includes a provision that would establish a higher fee schedule payment for this
technology than would be established under the standard methodology for
determining fee schedule amounts. In addition, this legislation also includes a
provision to change the frequency of covered screening pap smears from at least
every three years to at least every two years. While these two provisions are
not considered controversial, it is not yet certain whether or when this
legislation will be enacted or its final form. The addition of Medicare coverage
for these tests and higher reimbursement for certain types of tests have
provided and are expected to continue to provide additional revenues for the
Company.
With respect to the Company's anatomic pathology services, which are not
reimbursed under the Medicare laboratory fee schedules, Medicare reimbursement
amounts 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.
Beginning with the Medicare physician fee schedule regulation that became
effective on January 1, 1999, HCFA recalculated physician practice expenses, a
key component of the RBRVS, to reflect resource consumption rather than
historical charge data. While the actual impact of this change, when fully
implemented, on the pathology revenues of any specific laboratory, including the
Company, will depend on the mix of pathology services furnished, HCFA had
9
estimated that the new system would decrease the Medicare revenue for
pathologists 13% once it was fully phased in at the end of 2002. However, more
recent changes in the physician fee schedule have had a positive impact on
Medicare payment for pathology services, and HCFA has estimated the impact of
the practice expense recalculation will ultimately result in only a 6% decrease
for pathology services. In addition, other revisions to payment policies under
the physician fee schedule for the years 2000 and 2001 have resulted in
increases in the RBRVS fee schedule payment amounts for the pathology codes for
some of the most common tests historically performed by the Company.
The BBA also required the Secretary of the Department of Health and Human
Services to use a negotiated rulemaking process to adopt uniform coverage,
administration and payment policies for lab tests. A proposed rule was published
on March 10, 2000, which would establish national coverage policies for many of
the most commonly ordered lab tests, thereby replacing local Medicare policies,
which sometimes vary. The rule also would establish other uniform requirements
related to submission of claims for lab tests. It is uncertain when a final rule
will be published or how it may differ from the proposed rule, but if adopted as
proposed, the Company believes that the new rule will bring more consistency to
reimbursement among providers of laboratory testing services.
On November 1, 2000, HCFA published its final Medicare physician fee schedule
regulation for the year 2001. HCFA has not proposed any major changes that would
affect pathology reimbursement as a whole; however, proposed adjustments in the
practice expense component of the relative value units ("RVUs") used to
calculate payment amounts will result in minor changes in reimbursement for many
medical specialties. Revisions in practice expense RVUs must be budget neutral,
meaning that increases for some services must be offset by decreases for others.
HCFA estimates that the practice expense changes would result in a 3% decrease
in total allowed charges for pathology over the period 2001-2002. However, the
net effect of the changes with respect to the most common pathology service
provided by the Company will result in an increase in payment for the Company.
HCFA also has announced that effective January 1, 2001, independent labs may no
longer bill Medicare or the patient for the technical component ("TC") of
pathology services furnished to Medicare beneficiaries who are hospital
inpatients. Independent labs would still be able to bill and be paid for the TC
of pathology services provided to beneficiaries who are in non-hospital
settings, but for the TC of services provided to a hospital inpatient, the
independent lab will have to make arrangements with the hospital in order to
receive payment. Also beginning on January 1, 2001, under new rules for hospital
outpatient reimbursement (see following paragraph), independent labs will be
limited to billing the hospital for the TC of any pathology services furnished
to hospital outpatients. In other words, independent laboratories that perform
the technical component of pathology services for hospital outpatient services
may no longer bill Medicare for these services and must, instead, bill the
hospital. However, Medicare legislation currently before Congress includes a
provision to allow independent labs to continue to be paid for the TC of
services provided to hospital inpatients and outpatients for an additional two
years, pending the completion of a study by the General Accounting Office. Since
the Company does only minimal testing for hospital inpatients and outpatients,
these changes are not expected to have a material financial impact on the
Company.
The BBA also contained measures to establish market-oriented purchasing for
Medicare, including prospective payment systems ("PPS") for hospital outpatient
services, home health care, and nursing home care. All of these systems have now
been implemented. Since the Company does only minimal clinical laboratory
testing for home health care and nursing facility patients, these changes are
not expected to materially affect the Company's business. Under the hospital
outpatient PPS, clinical laboratory and physician services are carved out from
the hospital outpatient PPS rates, and continue to be paid for under their
respective fee schedules. However, as discussed above, effective January 1,
2001, the technical component of pathology services will be included in the PPS
rate. As previously mentioned, this change is not expected to have an adverse
material impact on the Company.
The Company's Form 10-K for the year ended December 31, 1999, previously filed
with the Securities and Exchange Commission, contains additional information
regarding the complex area of reimbursement.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $13.3 million in the
Third Quarter-2000 from $11.9 million in the Third Quarter-1999, and to $39.9
million for the Nine Months-2000 from $32.0 million for the Nine Months-1999. As
a percentage of revenues, cost of sales was 57% and 58% for the Third
Quarter-2000 and the Third Quarter-1999, respectively, as well as 57% and 58%
for the nine-month periods 2000 and 1999, respectively.
10
For the third quarters 2000 and 1999, while percentages were similar, salaries
and wages increased to $5.9 million in 2000 from $5.4 million in 1999. Overhead
expenses (including building rent, utilities, and depreciation) increased to
$3.6 million in 2000 from $2.8 million in 1999. Logistics expenses increased to
$1.7 million from $1.6 million in 2000 and 1999, respectively, and lab supplies
increased to $2.2 million from $2.0 million for the corresponding periods. These
increases primarily reflect increased volume.
For the nine-month periods ended September 2000 and 1999, salaries and wages
increased to $17.7 million in 2000 from $14.0 million in 1999. Overhead expenses
increased to $10.7 million in 2000 from $8.3 million in 1999. Logistics expenses
increased to $5.2 million in 2000 from $4.7 million in 1999, while cost of lab
supplies increased to $6.3 million in 2000 from $5.1 million in 1999. These
increases primarily reflect the acquisition of KMD in May 1999 as well as
increased volume.
o GROSS PROFIT
Gross profit totaled $10.3 million in Third Quarter-2000 versus $8.5 million in
Third Quarter-1999, reflecting a gross profit margin of 43% and 42%,
respectively. Gross profit for the Nine Months-2000 totaled $30.2 million versus
$23.3 million in the prior year, representing margins of 43% and 42%,
respectively. The increase in gross profits are a direct result of increased
revenues and increased efficiencies.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarters 2000 and 1999, selling, general and administrative
expenses increased to $7.0 million in 2000 from $6.3 million in 1999. While
absolute expenses increased, they decreased as a percentage of sales to 30% in
the Third Quarter-2000 from 31% in the Third Quarter-1999.
For the nine-month periods ended September 2000 and 1999, selling, general and
administrative expenses increased to $21.4 million in 2000 from $17.8 million in
1999. Again, although expenses increased, they decreased as a percentage of
sales to 31% in the Nine Months-2000 from 32% in the Nine Months-1999.
The expense increases were primarily due to higher commissions associated with
obtaining new sales; and from increased risk management, medical and other
insurance costs due to the acquisition of additional facilities and employees.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased to $181,000 in the Third
Quarter-2000 from $234,000 in the Third Quarter-1999. This decrease was a result
of certain customer lists becoming fully amortized. Amortization of intangible
assets increased to $582,000 in the Nine Months-2000 from $453,000 in the Nine
Months-1999. This increase was associated with the acquisition of KMD.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $223,000 in the Third
Quarter-2000 from $125,000 in the Third Quarter-1999, and to $666,000 for the
Nine Months-2000 from $353,000 for the Nine Months-1999. These increases are
primarily the result of the continued development of the Carepath program, a
disease management information service for patients, physicians and managed care
organizations.
o INCOME FROM OPERATIONS
Income from operations increased to $2.9 million in the Third Quarter-2000 from
$1.8 million in the Third Quarter-1999, and to $7.5 million for the Nine
Months-2000 from $4.7 million for the Nine Months-1999. These increases in
operating income reflect the increase in sales and the containment of expenses.
11
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $3.9 million in the Third Quarter-2000 from $2.8 million in the
Third Quarter-1999, and to $10.5 million in the Nine Months-2000 from $7.2
million in the Nine Months-1999. As a percentage of sales, EBITDA increased to
16.4% in the Third Quarter-2000 from 13.6% in the Third-Quarter-1999, and to
14.9% in the Nine Months-2000 from 13.0% in the Nine Months-1999.
EBITDA is defined as income before interest expense, income tax expense and
depreciation and amortization. Non-recurring items and gains and losses from
sales of real estate and investments are also excluded from EBITDA as these
items do not impact operating results on a recurring basis. The Company had no
such items for the three months and the nine months ended September 30, 2000 and
1999, respectively. Management considers EBITDA to be one measure of the cash
flows from operations of the Company before debt service that provides a
relevant basis for comparison, and EBITDA is presented to assist investors in
analyzing the performance of the Company. This information should not be
considered as an alternative to any measure of performance as promulgated under
accounting principles generally accepted in the United States, nor should it be
considered as an indicator of the overall financial performance of the Company.
The Company's calculation of EBITDA may be different from the calculation used
by other companies and, therefore, comparability may be limited.
EBITDA for the third quarter and nine months ended 2000 and 1999 are as follows:
THIRD QUARTER NINE MONTHS ENDED
------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
EBITDA $3,869,000 $2,770,000 $10,463,000 $7,184,000
EBITDA as a percentage of sales 16.4% 13.6% 14.9% 13.0%
o NET INTEREST INCOME
Net interest income increased to $116,000 in the Third Quarter-2000 from $22,000
in the Third Quarter-1999, and decreased to $231,000 in the Nine Months-2000
from $250,000 in the Nine Months-1999, due to lower income received on less cash
invested, and the interest expense related to borrowings drawn from the
Company's line of credit which began in April 1999.
o PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 40.5% and 41.5% effective tax rate in
Third Quarter-2000 and Third Quarter-1999, respectively, totaling $1.2 million
and $759,000, respectively. The lower effective tax rate is due primarily to
state rate changes. The provision totaled $3.1 million and $2.1 million for the
Nine Months-2000 and Nine Months-1999, respectively, also reflecting rates of
40.5% and 41.5%.
o NET INCOME
For the third quarters 2000 and 1999, net income increased 67% to $1.8 million
in 2000 from $1.1 million in 1999. Basic earnings per share increased to $0.25
per share in 2000 from $0.16 per share in 1999, while diluted earnings per share
increased to $0.22 per share in 2000 from $0.15 per share in 1999.
For the nine-month periods ended September 2000 and 1999, net income increased
60% to $4.6 million in 2000 from $2.9 million in 1999. Basic earnings per share
increased to $0.65 per share in 2000 from $0.43 per share in 1999, while diluted
earnings per share increased to $0.59 per share in 2000 from $0.42 per share in
1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had total cash and cash equivalents of $12.3
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. Working capital was $29.4
million and $25.2 million as of September 30, 2000 and December 31, 1999,
respectively, and the current ratios were 4.9:1 and 4.6:1, respectivley.
Accounts receivable totaled $21.6 million as of September 30, 2000 representing
approximately 84 days of sales outstanding, compared to $19.5 million or 86 days
as of December 31, 1999.
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Capital expenditures for the Third Quarter-2000 and Nine Months-2000 totaled
$1.0 million and $2.7 million, respectively.
Effective February 17, 1998, the Company entered into a three year $15 million
Line of Credit Agreement with a bank. The Company has extended this Line of
Credit Agreement to August 31, 2003. The agreement includes various provisions
regarding borrowings under the facility, including those related to financial
covenants. As of September 30, 2000, $4.0 million had been drawn down against
this line for the acquisition of KMD. This is a reduction of $2.0 million from
the original amount of $6.0 million.
The Company's Board of Directors authorized the repurchase of approximately 1.7
million shares of the Company's Common Stock on the open market or in private
transactions. Total expenditures for share repurchases is limited to $12.0
million. As of September 30, 2000, the Company had repurchased approximately
336,000 shares of the Company's Common Stock for approximately $2.8 million.
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; the 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
national anatomic laboratories, together with the competitive pressures from
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to market risk with respect to its cash and cash
equivalents since substantially all amounts are invested in a fund holding U.S.
Treasury securities with maturities of less than three months.
13
PART II OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.01 Change-of-Control Agreement, dated April 24, 2000, by the registrant
and Kevin C. Johnson (filed herewith).
10.02 Change-of-Control Agreement, dated April 24, 2000, by the registrant
and David R. Schreiber (filed herewith).
10.03 Change-of-Control Agreement, dated April 24, 2000, by the registrant
and Christopher J. Rausch (filed herewith).
(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 (filed herewith).
(b) Reports:
No reports on Form 8-K were filed during the third quarter of 2000.
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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.
November 13, 2000 /s/ KEVIN C. JOHNSON
----------------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
November 13, 2000 /s/ DAVID R. SCHREIBER
----------------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15