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 June 30, 2001
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 July 26, 2001 was 7,430,034 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 2001
and December 31, 2000. 3
Income Statements for the three month and
six month periods ended June 30, 2001 and 2000. 4
Statements of Stockholders' Equity for the six months
ended June 30, 2001 and 2000. 5
Statements of Cash Flows for the six months
ended June 30, 2001 and 2000. 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
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $18,459,254 $12,515,424
Accounts receivable, net of allowances of $1,302,096 and
$1,302,096, respectively 21,479,609 21,413,404
Prepaid expenses and employee advances 1,344,313 1,035,953
Refundable income taxes 535,037 2,245,894
Inventory 1,576,340 1,417,247
Deferred income tax asset 754,586 774,150
------------ ------------
Total current assets 44,149,139 39,402,072
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 15,838,195 14,930,672
Leasehold improvements 5,472,880 5,327,052
Less - accumulated depreciation and amortization (16,269,557) (14,644,420)
------------ ------------
5,041,518 5,613,304
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization of
$5,325,428 and $4,648,029, respectively 13,550,876 14,228,274
DEFERRED INCOME TAX ASSET 1,811,717 1,783,632
OTHER ASSETS 710,720 725,720
------------ ------------
TOTAL ASSETS $65,263,970 $61,753,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $935,510 $977,817
Accrued employee compensation 2,354,377 1,909,767
Current portion of capitalized lease obligations 44,682 31,811
Other accrued expenses 4,199,506 3,857,370
------------ ------------
Total current liabilities 7,534,075 6,776,765
------------ ------------
LONG-TERM LIABILITIES:
Long-term note payable -- 2,500,000
Long-term deferred tax liability 168,168 202,072
Long-term portion of capitalized lease obligations -- 15,427
------------ ------------
Total Liabilities 7,702,243 9,494,264
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000 shares authorized,
7,440,718 and 7,397,323 shares issued and
outstanding at June 30, 2001 and December 31, 2000, respectively 74,408 73,974
Additional paid-in capital 36,744,748 35,877,828
Retained earnings 20,844,883 16,427,788
Common stock held in treasury, at cost - 10,684 and 12,620
shares at June 30, 2001 and December 31, 2000, respectively (102,312) (120,852)
------------ ------------
Total stockholders' equity 57,561,727 52,258,738
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,263,970 $61,753,002
============ ============
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 SIX MONTH PERIODS ENDED
JUNE 30, 2001 and 2000
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenues $28,762,405 $24,426,166 $55,565,012 $46,505,079
Cost of goods 15,841,271 13,832,504 30,836,069 26,579,672
----------- ----------- ----------- -----------
GROSS PROFIT 12,921,134 10,593,662 24,728,943 19,925,407
Selling, general and administrative expenses 8,363,286 7,545,939 16,233,123 14,430,408
Amortization of intangible assets 422,031 197,939 677,399 400,655
Research and development expenses 315,943 271,028 667,532 442,838
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 3,819,874 2,578,756 7,150,889 4,651,506
Interest income, net 158,666 70,398 272,800 114,625
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,978,540 2,649,154 7,423,689 4,766,131
Provision for income taxes 1,611,309 1,072,907 3,006,594 1,930,283
----------- ----------- ----------- -----------
NET INCOME $2,367,231 $1,576,247 $4,417,095 $2,835,848
=========== =========== =========== ===========
EARNINGS PER SHARE
BASIC $.32 $.22 $.60 $.40
DILUTED $.29 $.20 $.55 $.37
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,418,827 7,083,258 7,403,437 7,070,926
DILUTED 8,041,804 7,701,026 8,024,641 7,660,361
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
Additional Common Stock
Common Stock Paid-In Retained Acquired for Treasury
Shares Amount Capital Earnings Shares Amount Total
---------- ------- ----------- ----------- -------- ---------- ------------
BALANCE, December 31, 1999 7,060,749 $70,608 $29,428,647 $9,828,769 (58,734) ($562,462) $38,765,562
Stock options exercised 128,481 1,285 866,478 -- -- -- 867,763
Employee stock purchase plan -- -- (35,912) -- 7,566 72,455 36,543
Stock grants 1,225 12 19,912 -- -- -- 19,924
Net income -- -- -- 2,835,848 -- -- 2,835,848
---------- ------- ----------- ----------- ------- --------- ------------
BALANCE, June 30, 2000 7,190,455 $71,905 $30,279,125 $12,664,617 (51,168) ($490,007) $42,525,640
========== ======= =========== =========== ======= ========= ============
BALANCE, December 31, 2000 7,397,323 $73,974 $35,877,828 $16,427,788 (12,620) ($120,852) $52,258,738
Stock options exercised 42,815 428 317,917 -- -- -- 318,345
Tax effect for stock options exercised -- -- 469,721 -- -- -- 469,721
Employee stock purchase plan / other -- -- 59,506 -- 1,936 18,540 78,046
Stock grants 580 6 19,776 -- -- -- 19,782
Net income -- -- -- 4,417,095 -- -- 4,417,095
---------- ------- ----------- ----------- ------- --------- ------------
BALANCE, June 30, 2001 7,440,718 $74,408 $36,744,748 $20,844,883 (10,684) ($102,312) $57,561,727
========== ======= =========== =========== ======= ========= ============
The accompanying notes to consolidated financial
statements are an integral part of these statements.
5
DIANON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
JUNE 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,417,095 $2,835,848
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 2,354,476 1,942,190
Provision for bad debts -- 200,000
Tax effect of stock options exercised 469,721 --
Stock compensation expense 19,782 19,924
Gain on disposal of fixed assets (600) --
Changes in other current assets and liabilities
Increase in accounts receivable (66,205) (1,621,448)
Decrease in refundable income taxes 1,710,857 --
(Increase) decrease in prepaid expenses and employee advances (308,360) 170,732
Increase in inventory (159,093) (542,677)
Decrease in other assets 6,479 153,823
Increase in accounts payable and accrued liabilities 710,535 529,729
5
------------ ------------
Net cash provided by operating activities 9,154,687 3,688,121
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,105,292) (1,734,914)
Proceeds from the sale of fixed assets 600 --
------------ ------------
Net cash used in investing activities (1,104,692) (1,734,914)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (2,500,000) (1,500,000)
Employee stock purchase plan / other 78,046 36,543
Stock options exercised 318,345 867,763
Repayments of capitalized lease obligations (2,556) (16,130)
------------ ------------
Net cash used in financing activities (2,106,165) (611,824)
------------ ------------
Net increase in cash and cash equivalents 5,943,830 1,341,383
CASH AND CASH EQUIVALENTS, beginning of period 12,515,424 9,761,047
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $18,459,254 $11,102,430
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $54,631 $208,495
Income Taxes 1,018,350 2,522,956
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 six months ended June 30, 2001 and 2000 have been prepared by
DIANON Systems, Inc. ("Dianon") 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 Dianon's annual report for the
year ended December 31, 2000, previously filed on Form 10-K with the
Securities and Exchange Commission (the "Annual Report").
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 Dianon's Annual Report for the year ended December 31, 2000.
The results of operations for the three months and six months ended June
30, 2001 and 2000 are not necessarily indicative of the operating results
for the full years.
2. Acquisitions - Dianon signed a definitive agreement to acquire UroCor, Inc.
in a stock-for-stock transaction with an equity value of approximately $180
million. The acquisition is subject to approval by both Dianon's and
UroCor's shareholders, regulatory approval and other closing conditions,
and is expected to close in the fourth quarter of this year.
3. Impact of Accounting Pronouncements, Not Yet Adopted By The Company - In
June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Statement No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the
purchase method, thus eliminating the use of the pooling-of-interests
accounting for business combinations. Statement No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach, whereby goodwill amortization will no longer be required after
December 31, 2001. The statement will require an annual assessment of
goodwill for impairment and more frequent assessments if circumstances
indicate a possible impairment. Additionally, Statement No. 142 will
require all acquired intangible assets be separately recognized if the
benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred,
licensed, rented, or exchanged, regardless of the acquirer's intent to do
so. Whereas, Statement No. 141 is effective for all business combinations
initiated after June 30, 2001, Statement No. 142 requires companies to
continue to amortize goodwill existing at June 30, 2001 through the end of
2001, ceasing goodwill amortization on January 1, 2002.
Amortization charges for the six-month period ended June 30, 2001 were
approximately $677,000, including approximately $125,000 related to
goodwill, with a similar charge expected for the last half of 2001,
excluding UroCor. Dianon is currently evaluating other impacts of adopting
Statement No. 142, but has not yet quantified the impact on its
consolidated financial position.
4. 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 three month and six month periods ended June 30, for both 2001 and
2000.
7
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------------------------- --------------------------
BASIC EARNING PER SHARE:
Weighted-average number of common shares outstanding 7,418,827 7,083,258 7,403,437 7,070,926
DILUTIVE EFFECT OF:
Stock options 622,977 617,768 621,204 589,435
-------------------------- --------------------------
DILUTED EARNINGS PER SHARE:
Weighted-average number of common shares outstanding 8,041,804 7,701,026 8,024,641 7,660,361
========================== ==========================
NET INCOME $2,367,231 $1,576,247 $4,417,095 $2,835,848
========================== ==========================
BASIC EARNINGS PER SHARE $0.32 $0.22 $0.60 $0.40
========================== ==========================
DILUTED EARNINGS PER SHARE $0.29 $0.20 $0.55 $0.37
========================== ==========================
Options to purchase 345,015 shares of common stock at prices ranging from $35.75
to $40.06 per share were outstanding as of June 30, 2001 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 1,200 shares of common stock at $20.75 per share were
outstanding as of June 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and six months ended June 30, 2001 ("Second Quarter-2001" and "Six
Months-2001", respectively) to the three months and six months ended June 30,
2000 ("Second Quarter-2000" and "Six Months-2000", respectivley).
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 18% to $28.8 million in the Second Quarter-2001 from
$24.4 million in the Second Quarter-2000, and 19% to $55.6 million in the Six
Months-2001 from $46.5 million in the Six Months-2000. These increases reflect
the effects of strong volume gains in pathology and genetics testing and a
favorable reimbursement climate for some of our most commonly performed tests.
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 Dianon is and will likely continue to be affected by
periodic reevaluations made by payers concerning the level of reimbursement for
services provided by Dianon. Over time, Congress has reduced the national cap on
Medicare laboratory fee schedules (under which Dianon'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
increases or decreases) for the 1998-2002 period.
The clinical laboratory industry has also recently experienced increases in the
payment rate for certain tests. 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 Centers for Medicare and
Medicaid Services ("CMS") (formerly known as the Health Care Financing
Administration or "HCFA") to institute an appropriate increase in the payment
rate for new cervical cancer screening technologies, such as the technologies
used by Dianon, that have been approved by the FDA as significantly more
effective than a conventional pap smear. In March 2001, CMS (formerly HCFA)
established a national limit of $28 for the new pap smear technologies used by
Dianon, which is nearly twice the level of reimbursement for the conventional
pap smear. Payments in states in which Dianon has laboratories that furnish
tests range from $25.60 to $28.00. The Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA), signed into law on December 21,
2000, require that the national limitation amount for new lab tests equal 100%
of the national median for such tests (versus the 74% applied to other tests).
In addition, BIPA included a provision to change the frequency of covered
screening pap smears from at least every three years to at least every two
years. The addition of Medicare coverage for more frequent pap tests and higher
reimbursement for certain types of pap tests have provided and are expected to
continue to provide additional revenues for Dianon.
With respect to Dianon's anatomic pathology services, which are not reimbursed
under the Medicare laboratory fee schedules, Medicare reimbursement amounts
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. Overall, anatomic pathology reimbursement rates declined
during the fee schedule phase-in period, despite an increase in payment rates
for certain pathology services performed by Dianon. Due to a five-year review,
in 1997 there was an overall decrease in the work value component used along
with practice and malpractice expenses to calculate the relative value units
(RVUs) established for services. Another five-year review of the work value
component was completed in 2001, was published in the Federal Register on June
8, 2001, and will go into effect on January 1, 2002. The changes recommended as
a result of this review are not expected to have any effect on payment for
pathology services.
9
In the final 2001 physician fee schedule, published in November 2000, CMS
(formerly HCFA) estimated that practice expense changes would result in a 3%
decrease in total allowed charges for pathology over the two-year period
2001-2002. However, the net effect of the changes with respect to the most
common pathology service currently provided by Dianon resulted in an increase in
payment to Dianon in 2001. In addition, in the proposed rule on the Medicare
physician fee schedule, published on August 2, 2001, CMS ("formerly HCFA")
proposed using new data to recalculate the practice expense component of the
RVUs, and this change is expected to result in an overall 2% increase in
payments to pathologists in the 2002 fee schedule. However, the Medicare
physician fee schedule payments for 2002 will not be finalized until early
November 2001.
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, Dianon believes that the new rule will bring more consistency to
reimbursement among providers of laboratory testing services.
CMS (formerly HCFA) had announced that effective January 1, 2001, independent
labs would no longer be allowed to bill Medicare 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 would have to make arrangements with the hospital
in order to receive payment. Also beginning on January 1, 2001, under new
regulations for hospital outpatient reimbursement (see following paragraph),
independent labs would be limited to billing the hospital for the TC of any
pathology services furnished to hospital outpatients. In other words, under the
regulation, independent laboratories that perform the technical component of
pathology services for hospital outpatient services would no longer be allowed
to bill Medicare for these services and must, instead, bill the hospital.
However, BIPA included a provision allowing independent labs to continue to bill
and be paid for the TC of services provided to both hospital inpatients and
outpatients for an additional two years. Since Dianon does only minimal testing
for hospital inpatients and outpatients, these changes are not expected to have
a material financial impact on Dianon.
The BBA 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 Dianon does only minimal clinical laboratory testing for home
health care and nursing facility patients, these changes are not expected to
materially affect Dianon's business.
Dianon's Form 10-K for the year ended December 31, 2000, 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 $15.8 million in the
Second Quarter-2001 from $13.8 million in the Second Quarter-2000, and to $30.8
million for the Six Months-2001 from $26.6 million for the Six Months-2000. As a
percentage of revenues, cost of sales was 55% and 57% for the Second
Quarter-2001 and the Second Quarter-2000, respectively, as well as for the Six
Months-2001 and for the Six Months-2000, respectively.
o GROSS PROFIT
Gross profit totaled $12.9 million in Second Quarter-2001 versus $10.6 million
in Second Quarter-2000, reflecting a gross profit margin of 45% and 43%,
respectively. Gross profit for the Six Months-2001 totaled $24.7 million versus
$19.9 million in the prior year, representing margins of 45% and 43%,
respectively. The increase in gross profits is a direct result of increased
revenues and favorable product line mix.
10
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the second quarters 2001 and 2000, selling, general and administrative
expenses increased to $8.4 million in 2001 from $7.5 million in 2000. While
absolute expenses increased, they decreased as a percentage of sales to 29% in
the Second Quarter-2001 from 31% in the Second Quarter-2000.
For the six month periods ended June 2001 and 2000, selling, general and
administrative expenses increased to $16.2 million in 2001 from $14.4 million in
2000. Again, although absolute expenses increased, they decreased as a
percentage of sales to 29% in the Six Months-2001 from 31% in the Six
Months-2000.
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 increased to $422,000 in the Second
Quarter-2001 from $198,000 in the Second Quarter-2000, and to $677,000 in the
Six Months-2001 from $401,000 in the Six Months-2000. These increases are a
result of acquisitions made in the fourth quarter of 2000.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $316,000 in the Second
Quarter-2001 from $271,000 in the Second Quarter-2000, and to $668,000 in the
Six Months-2001 from $443,000 in the Six Months-2000. 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 $3.8 million in the Second Quarter-2001 from
$2.6 million in the Second Quarter-2000, and to $7.2 million in the Six
Months-2001 from $4.7 million in the Six Months-2000. These increases in
operating income reflect the increase in sales and the containment of expenses.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $5.1 million in the Second Quarter-2001 from $3.6 million in the
Second Quarter-2000, and to $9.5 million in the Six Months-2001 from $6.6
million in the Six Months-2000. As a percentage of sales, EBITDA increased to
17.8% in the Second Quarter-2001 from 14.6% in the Second-Quarter-2000, and to
17.1% in the Six Months-2001 from 14.2% in the Six Months-2000.
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. Dianon had no such
items for the three and six months ended June 30, 2001 and 2000, respectively.
Management considers EBITDA to be one measure of the cash flows from operations
of Dianon before debt service that provides a relevant basis for comparison, and
EBITDA is presented to assist investors in analyzing the performance of Dianon.
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 Dianon. Dianon's calculation of EBITDA may be different
from the calculation used by other companies and, therefore, comparability may
be limited.
EBITDA for the second quarter and six months ended 2001 and 2000 are as follows:
Second Quarter Six Months Ended
-------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
EBITDA $5,114,000 $3,578,000 $9,505,000 $6,594,000
EBITDA as a percentage of sales 17.8% 14.6% 17.1% 14.2%
11
o NET INTEREST INCOME
Net interest income increased to $159,000 in the Second Quarter-2001 from
$70,000 in the Second Quarter-2000, and to $273,000 in the Six Months-2001 from
$115,000 in the Six Months-2000, due to the reduction of debt and the
corresponding interest expense, as well as higher cash balances earning interest
income.
o PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 40.5% effective tax rate for the three
month and six month periods ended 2001 and 2000, totaling $1.6 million in the
Second Quarter-2001 and $1.1 million in the Second Quarter-2000, and $3.0
million in the Six Months-2001 and $1.9 million in the Six Months-2000.
o NET INCOME
For the second quarters 2001 and 2000, net income increased 50% to $2.4 million
in 2001 from $1.6 million in 2000. Basic earnings per share increased to $0.32
per share in 2001 from $0.22 per share in 2000, while diluted earnings per share
increased to $0.29 per share in 2001 from $0.20 per share in 2000.
For the six-month periods ended 2001 and 2000, net income increased 56% to $4.4
million in 2001 from $2.8 million in 2000. Basic earnings per share increased to
$0.60 per share in 2001 from $0.40 per share in 2000, while diluted earnings per
share increased to $0.55 per share in 2001 from $0.37 per share in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, Dianon had total cash and cash equivalents of $18.5 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 $36.6
million and $32.6 million as of June 30, 2001 and December 31, 2000,
respectively, and the current ratios (current assets divided by current
liabilities) were 5.9:1 and 5.8:1, respectively.
Accounts receivable totaled $21.5 million as of June 30, 2001 representing
approximately 66 days of sales outstanding, compared to $21.4 million or 77 days
as of December 31, 2000.
Capital expenditures for the Second Quarter-2001 and Six Months-2001 totaled
approximately $551,000 and $1.1 million, respectively.
Effective February 17, 1998, Dianon 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 financial and negative
covenants. In December 2000, the line of credit was extended to August 2003, and
certain covenants were modified. As of June 30, 2001, no debt remained
outstanding on the line of credit.
Dianon's Board of Directors authorized the repurchase of approximately 1.7
million shares of Dianon's Common Stock on the open market or in private
transactions. Total expenditures for share repurchases is limited to $12.0
million. As of June 30, 2001, Dianon had repurchased approximately 336,000
shares of Dianon's Common Stock for approximately $2.8 million.
Dianon believes that cash flows from operations and available cash and cash
equivalents are adequate to fund Dianon's operations for the foreseeable future.
RISK FACTORS; FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis contains forward-looking statements
regarding Dianon's future plans, objectives, and expected performance. These
statements are based on assumptions that Dianon believes are reasonable, but are
subject to a wide range of risks and uncertainties, and a number of factors
could cause Dianon'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 Dianon to beneficiaries of the Medicare and Medicaid
programs; the possibility of being deemed to be not in compliance with Federal
or state regulatory
12
requirements; the uncertainties relating to the ability of Dianon to convince
physicians and/or managed care organizations to use Dianon as a provider of
anatomic pathology testing services; the ability of Dianon to maintain superior
quality relative to its competitors; the ability of Dianon 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
Dianon 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:
2.1 Agreement and Plan of Merger, dated as of June 28, 2001, among DIANON
Systems, Inc., UroCor, Inc. and UroCor Acquisition Corp. (incorporated
by reference to Exhibit 2.1 to the Form 8-K filed by the registrant on
June 28, 2001).
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.
(b) Reports:
One Form 8-K Current Report was filed with the Commission on June 28,
2001.
14
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.
August 13, 2001 /s/ KEVIN C. JOHNSON
-----------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
August 13, 2001 /s/ DAVID R. SCHREIBER
-----------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15