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, 2002
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 April 16, 2002 was 12,132,671 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001. 3
Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001. 4
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2002 and 2001. 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001. 6
Notes to Financial Statements. 7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
Part II OTHER INFORMATION
- --------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
2
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
-------------------- -------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 49,459,444 $ 41,229,353
Short term investments 506,405 1,071,778
Accounts receivable, net of allowances 32,338,109 29,863,129
Prepaid expenses and employee advances 3,497,956 3,767,086
Refundable income taxes 5,474,498 5,753,944
Inventory 1,891,278 1,932,713
Deferred income taxes 6,435,183 6,560,564
-------------------- -------------------
Total current assets 99,602,873 90,178,567
-------------------- -------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 20,549,250 19,539,228
Leasehold improvements 8,978,960 8,967,113
Less - accumulated depreciation and amortization (18,599,352) (17,650,512)
--------------------- ------------------
10,928,858 10,855,829
--------------------- ------------------
INTANGIBLE ASSETS, net of accumulated amortization of
$4,129,089 and $3,662,150, respectively 183,450,177 183,167,116
DEFERRED INCOME TAXES -- 2,429,417
OTHER ASSETS 562,073 787,230
-------------------- -------------------
TOTAL ASSETS $ 294,543,981 $287,418,159
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,035,144 $ 1,621,689
Accrued employee compensation 2,608,627 6,961,747
Accrued income taxes 674,734 674,734
Current portion of capitalized lease obligations 138,986 300,102
Other accrued expenses 11,314,655 11,784,575
-------------------- -------------------
Total current liabilities 16,772,146 21,342,847
--------------------- ------------------
LONG-TERM LIABILITIES:
Deferred income taxes 1,168,729 --
Long-term portion of capitalized lease obligations 219,039 439,029
-------------------- -------------------
Total Liabilities 18,159,914 21,781,876
-------------------- -------------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 12,085,572 and 11,896,140 shares issued and
outstanding at March 31, 2002 and December 31, 2001,
respectively 120,855 118,961
Additional paid-in capital 248,444,313 242,987,849
Retained earnings 27,905,419 22,620,561
Common stock held in treasury, at cost - 9,034 and 9,511
shares at March 31, 2002 and December 31, 2001, respectively (86,520) (91,088)
--------------------- ------------------
Total stockholders' equity 276,384,067 265,636,283
--------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $294,543,981 $287,418,159
===================== ==================
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, 2002 AND 2001
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2002 2001
---------------- -----------------
Net revenues $44,623,375 $26,802,607
Cost of sales 22,298,149 14,994,798
---------------- -----------------
GROSS PROFIT 22,325,226 11,807,809
Selling, general and administrative expenses 12,728,466 7,869,837
Amortization of intangible assets 466,939 255,368
Research and development expenses 440,640 351,589
---------------- -----------------
INCOME FROM OPERATIONS 8,689,181 3,331,015
Interest income, net 192,933 114,134
---------------- -----------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,882,114 3,445,149
Provision for income taxes 3,597,256 1,395,285
---------------- -----------------
NET INCOME $ 5,284,858 $ 2,049,864
================ =================
EARNINGS PER SHARE
BASIC $.44 $.28
DILUTED $.41 $.26
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 11,979,661 7,387,647
DILUTED 12,812,417 8,006,625
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 THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
--------------------------- ------------------- ----------------
BALANCE, December 31, 2000 7,397,323 $ 73,974 $ 35,877,828 $ 16,427,788
Stock options exercised 9,500 95 79,467 --
Tax effect for stock options exercised -- -- 99,572 --
Employee stock purchase plan -- -- 13,904 --
Stock grants 245 2 9,813 --
Net income -- -- -- 2,049,864
------------ -------------- ------------------ -----------------
BALANCE, March 31, 2001 7,407,068 $ 74,071 $ 36,080,584 $ 18,477,652
============ ============== ================== =================
BALANCE, December 31, 2001 11,896,140 $ 118,961 $242,987,849 $ 22,620,561
Stock options exercised 189,432 1,894 3,220,759 --
Tax effect for stock options exercised -- -- 2,215,648 --
Employee stock purchase plan / other -- -- 20,057 --
Net income -- -- -- 5,284,858
------------ -------------- ------------------- ----------------
BALANCE, March 31, 2002 12,085,572 $ 120,855 $248,444,313 $ 27,905,419
============ ============== =================== ================
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(continued)
Common Stock
Acquired for Treasury
Shares Amount Total
---------------------------------- -----------------
BALANCE, December 31, 2000 (12,620) ($120,852) $52,258,738
Stock options exercised -- -- 79,562
Tax effect for stock options exercised -- -- 99,572
Employee stock purchase plan 502 4,807 18,711
Stock grants -- -- 9,815
Net income -- -- 2,049,864
--------------- ------------------ ------------------
BALANCE, March 31, 2001 (12,118) ($116,045) $54,516,262
=============== ================== ==================
BALANCE, December 31, 2001 (9,511) ($91,088) $265,636,283
Stock options exercised -- -- 3,222,653
Tax effect for stock options exercised -- -- 2,215,648
Employee stock purchase plan / other 477 4,568 24,625
Net income -- -- 5,284,858
---------------- ----------------- ------------------
BALANCE, March 31, 2002 (9,034) ($86,520) $276,384,067
================ ================= ==================
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, 2002 AND 2001
(UNAUDITED)
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,284,858 $ 2,049,864
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 1,428,816 1,060,052
Tax effect of stock options exercised 2,215,648 99,572
Deferred tax provision 3,723,527 93,928
Stock compensation expense -- 9,815
Loss on disposal of fixed assets 23,021 --
Changes in other current assets and liabilities
Accounts receivable (2,474,980) (1,560,203)
Refundable income taxes 279,446 1,345,118
Prepaid expenses and employee advances 269,130 (436,699)
Inventory 41,435 (5,077)
Other assets and other (33,034) 7,500
Accounts payable and other accrued liabilities (4,409,585) (442,630)
------------------ ------------------
Net cash provided by operating activities 6,348,282 2,221,240
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,066,427) (554,516)
Proceeds from sales of investment securities 1,073,564 --
Investment and acquisition of marketing rights (1,000,000) --
Proceeds from the sale of fixed assets 8,500 --
------------------ ------------------
Net cash used in investing activities (984,363) (554,516)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable -- (2,500,000)
Employee stock purchase plan / other 24,625 18,711
Exercise of stock options 3,222,653 79,562
Net repayments of capitalized lease obligations (381,106) (2,556)
------------------ ------------------
Net cash provided by (used in) financing activities 2,866,172 (2,404,283)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 8,230,091 (737,559)
CASH AND CASH EQUIVALENTS, beginning of period 41,229,353 12,515,424
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $49,459,444 $ 11,777,865
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 8,471 $ 47,174
Income Taxes 123,243 6,600
The accompanying notes to consolidated financial statements are
an integral part of these statements.
6
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company - The consolidated financial statements as of and for the
three months ended March 31, 2002 and 2001 have been prepared by DIANON
Systems, Inc. ("Dianon" or 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 Dianon's annual report for the
year ended December 31, 2001, previously filed on Form 10-K and 10-K/A
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, 2001.
The results of operations for the three months ended March 31, 2002 and
2001 are not necessarily indicative of the operating results for the full
years.
Acquisitions - 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 $1.7 million and was financed through a combination of
available cash and the issuance of Common Stock. Approximately $300,000 of
the purchase price 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. In the fourth quarter of 2001, after
the UroCor acquisition, the Company decided to close this facility and
consolidate testing in other regional laboratories including the newly
acquired UroCor facility in Oklahoma. As part of this decision, the
Company wrote-off the remaining goodwill of approximately $524,000 and
wrote-down the customer list by approximately $441,000. The shutdown was
completed early in the first quarter of 2002.
In the fourth quarter of 2000, the Company purchased preferred shares in
and exclusive sales and distribution rights from Response Genetics, an
applied genomic products and services company for an aggregate purchase
price of $1.0 million. The Company allocated the total investment to the
distribution rights ($500,000) and the preferred equity ($500,000) based
on management's estimates of future benefits from Response Genetics.
During 2001, the distribution rights were fully amortized. Additionally,
during the fourth quarter of 2001, the Company wrote off the investment
due to the uncertainty, in management's opinion, of the financial position
of the investee as a result of the uncertainty regarding the amount of
additional time required for that technology to gain widespread market
acceptance in the oncology community and for acceptable reimbursement
levels to be attained.
In the fourth quarter of 2001, the Company acquired all outstanding shares
of UroCor, Inc. ("UroCor"), an anatomic pathology laboratory located in
Oklahoma City, Oklahoma, specializing in services related to urology. This
acquisition has enhanced Dianon's position as a leader in the full-service
cancer diagnostics market and created a leading share in the urology
segment of this market. The acquisition price was approximately $202
million (including acquisition costs and assumed liabilities) and was
financed primarily through the issuance of approximately 3.9 million
shares of Common Stock ($171 million). In addition, the Company issued
approximately 644,000 stock options in exchange for existing UroCor stock
options ($21 million). The balance of the purchase price was paid using
existing cash. The purchase price was allocated to goodwill ($163
million), customer list ($4 million), trade name ($4 million), and the
fair value of net assets acquired ($31 million). Net assets consist
primarily of cash, accounts receivable, inventory, investments and
deferred income taxes. The acquisition has been accounted for pursuant to
the purchase method of accounting.
Pro forma historical results (unaudited) for the three months ended March
31, 2001, adjusted as if UroCor had been acquired on January 1, 2001
approximates $42.2 million in revenue, $6.1 million in net income and
$0.50 in diluted earnings per share. The pro forma revenue of $42.2
million, stated above, includes $0.6 million from the discontinued
therapeutics division. The $6.1 million pro forma net income, stated
above, includes a one-time, non-recurring gain on a termination of a
therapeutic distribution agreement of $4.6 million (or $0.38 diluted
7
earnings per share). The pro forma results are not necessarily indicative
of what actually would have occurred if the acquisition had been completed
as of January 1, 2001, nor are they necessarily indicative of future
results.
In the first quarter of 2002, the Company paid MDdatacor, Inc.
("MDdatacor") $1.0 million for exclusive marketing rights for patient
medical records to urology and gastroenterology physician practice group
customers and a 13.7% interest in MDdatacor. The Company allocated the
total investment to the marketing rights ($750,000) and equity ($250,000)
based on management's estimates of fair value.
2. Recent Accounting Pronouncements - 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 was no longer
required after December 31, 2001. The Statement requires an annual
assessment of goodwill for impairment and more frequent assessments if
circumstances indicate a possible impairment. The initial test for
impairment must be completed by June 30, 2002, but any impairment would be
reflected as an accounting change recorded retroactively in the first
quarter of 2002. The Company does not believe the adoption of Statement
No. 142 will have a material impact on its financial position.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," which is effective in 2003. It requires the
recording of an asset equal to the present value of the estimated costs
associated with the retirement of long-lived assets where a legal or
contractual obligation exists. The asset is required to be depreciated
over the life of the related equipment or facility, and the liability
accreted each year based on a present value interest rate. The Company
does not believe that the adoption of Statement No. 143 will have a
material impact on its financial position.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Statement No. 144 supersedes Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of". It establishes a single
accounting model for the impairment of long-lived assets to be held and
used or to be disposed of by sale or abandonment and broadens the
definition of discontinued operations. The provisions of this Statement
are effective for financial statements issued for fiscal years beginning
after December 15, 2001. The adoption of Statement No. 144 did not have a
material impact on the Company's financial position.
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 three month periods ended March 31, for both 2002 and 2001.
8
Three months ended
March 31,
2002 2001
---------------------
BASIC EARNING PER SHARE:
Weighted-average
number of common
shares outstanding 11,979,661 7,387,647
DILUTIVE EFFECT OF:
Stock options 832,756 618,978
----------- ----------
DILUTED EARNINGS PER SHARE:
Weighted-average
number of common
shares outstanding 12,812,417 8,006,625
=========== ==========
NET INCOME $5,284,858 $2,049,864
=========== ==========
BASIC EARNINGS PER
SHARE $0.44 $0.28
=========== ==========
DILUTED EARNINGS PER
SHARE $0.41 $0.26
=========== ==========
As of March 31, 2002, all outstanding options to purchase shares of common stock
were included in the computation of diluted earnings per share.
As of March 31, 2001, outstanding options to purchase 344,515 shares of common
stock, at prices ranging from $35.50 to $40.06 per share, were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of common shares.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months ended March 31, 2002 ("First Quarter-2002") to the three months
ended March 31, 2001 ("First Quarter-2001").
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 66% to $44.6 million in the First Quarter-2002 from $26.8
million in the First Quarter-2001. This increase reflects the acquisition of
UroCor as well as the effects of strong volume gains in pathology and genetics
testing and a favorable reimbursement climate for some of our most commonly
performed tests. UroCor represents approximately $11.5 million in revenues in
the First Quarter-2002.
Anatomic pathology net revenues increased to $31.6 million in 2002 from $18.6
million in 2001, representing a 70% increase. The revenue growth reflects the
UroCor acquisition as well as increased market penetration in the anatomic
pathology area.
Genetic net revenues increased to $5.4 million in 2002 from $4.4 million in
2001, representing a 23% increase. The revenue growth reflects increased market
penetration.
Clinical chemistry net revenues increased to $7.6 million in 2002 from $3.8
million in 2001, representing a 98% increase. This increase is primarily related
to the UroCor acquisition.
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, including some of those performed by the
Company. 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 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 the new pap smear tests range from $27.90 to
$28.00. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 ("BIPA"), signed into law on December 21, 2000, requires 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.
10
With respect to Dianon's anatomic pathology services, which are reimbursed under
the Medicare physician fee schedule rather than the Medicare laboratory fee
schedule, 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. Under
this system, relative value units ("RVUs") are established for the physician
work, practice expense and malpractice expense involved with each physician
service. Of these three, however, the physician work and practice expense
components comprise the vast majority of the value of a service. The RVUs for a
service may be changed from time to time, and once the RVUs are finalized each
year, they are multiplied by a "conversion factor" in order to calculate the
actual payment for a service. The conversion factor is a monetary amount which
changes from year to year based on a variety of factors, including changes in
health-related and overall economic indicators. Generally, 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
physician work RVUs established for pathology 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 went into effect on January 1, 2002. The changes
recommended as a result of this more recent review are not expected to have any
significant effect on payment for pathology services.
In the final 2002 physician fee schedule, published in November 2001, CMS
estimated that refinements and changes in the RVUs for physician work and
practice expense would result in a 3% increase in payments for pathology
services in 2002, compared to what would have occurred in 2002 had the rule not
been published. This estimate is primarily due to the use of new data to
calculate the practice expense component of the RVUs. However, due to budget
neutrality requirements and other economic factors, the conversion factor used
to calculate the fee schedule payments was reduced approximately 5.4% in 2002,
which offset some of the expected increase in payments for pathology services.
However, for Dianon's most frequently billed service, the 88305 surgical biopsy,
reimbursement from Medicare increased approximately 5.5%.
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, and the final rule was published on November 23, 2001. This
rule establishes national coverage policies for many of the most commonly
ordered lab tests, thereby replacing local Medicare policies, which sometimes
varied, and it establishes other uniform requirements related to submission of
claims for lab tests. The Company believes that the new rule will level the
playing field and result in more consistent reimbursement among providers of
laboratory testing services.
CMS 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, 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 "grandfathering"
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, until January 2003. 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
hospital outpatient, home health care and nursing facility patients, these
changes are not expected to have a material financial impact on Dianon.
Dianon's Form 10-K and 10-K/A for the year ended December 31, 2001, previously
filed with the Securities and Exchange Commission, contains additional
information regarding the complex area of reimbursement.
11
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $22.3 million in the
First Quarter-2002 from $15.0 million in the First Quarter-2001. As a percentage
of revenues, cost of sales improved to 50% in the First Quarter-2002 from 56% in
the First Quarter-2001, as a result of strong sales, cost control initiatives
and the effective use of operating leverage.
o GROSS PROFIT
Gross profit totaled $22.3 million in the First Quarter-2002 versus $11.8
million in the First Quarter-2001, reflecting a gross profit margin of 50% and
44%, respectively. The increase in gross profits is a result of increased
revenues, cost control initiatives and favorable product line mix.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $12.7 million in the
First Quarter-2002 from $7.9 million in the First Quarter-2001. This increase is
primarily the result of the acquisition of UroCor as well as insurance premiums
and commission expense associated with increased revenues. While absolute
expenses increased, they remained constant, as a percentage of sales, at 29% for
both the First Quarter-2002 and the First Quarter-2001.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $467,000 in the First
Quarter-2002 from $255,000 in the First Quarter-2001. These increases are
primarily a result of the amortization of the customer list acquired in the
UroCor acquisition and the amortization of the marketing rights from MDdatacor.
The amortization expense for the First Quarter-2002 is net of the effect of the
Company's adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", which resulted in a decrease of
amortization expense of approximately $47,000 for the First-Quarter-2002.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $441,000 in the First
Quarter-2002 from $352,000 in the First Quarter-2001. This increase is primarily
the result of the acquisition of UroCor and the continued development of
CarePath(TM), a proprietary disease management system designed for patients,
physicians and managed care organizations.
o INCOME FROM OPERATIONS
Income from operations increased to $8.7 million in the First Quarter-2002 from
$3.3 million in the First Quarter-2001. This increase is primarily due to
increased sales and cost control initiatives.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $10.1 million in the First Quarter-2002 from $4.4 million in the
First Quarter-2001. As a percentage of sales, EBITDA increased to 22.7% in the
First Quarter-2002 from 16.4% in the First Quarter-2001.
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 months ended March 31, 2002 and 2001, 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.
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EBITDA for the first quarters ended 2002 and 2001 are as follows:
First Quarter
-------------
2002 2001
---- ----
EBITDA $10,117,997 $4,391,067
EBITDA as a percentage of 22.7% 16.4%
sales
o INTEREST INCOME, NET
Net interest income increased to $193,000 in the First Quarter-2002 from
$114,000 in the First Quarter-2001, due to the reduction of debt and the
corresponding reduction in 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
months ended 2002 and 2001, totaling $3.6 million in the First Quarter-2002 and
$1.4 million in the First Quarter-2001.
o NET INCOME
Net income increased 158% to $5.3 million in the First Quarter-2002 from $2.0
million in the First Quarter-2001. Basic earnings per share increased to $0.44
per share in the First Quarter-2002 from $0.28 per share in the First
Quarter-2001, while diluted earnings per share increased to $0.41 per share in
the First Quarter-2002 from $0.26 per share in the First Quarter-2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, Dianon had total cash and cash equivalents of $49.5 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 $82.8
million and $68.8 million as of March 31, 2002 and December 31, 2001,
respectively, and the current ratios (current assets divided by current
liabilities) were 5.9:1 and 4.2:1, respectively.
Accounts receivable totaled $32.3 million as of March 31, 2002 representing
approximately 65 days of sales outstanding, compared to $29.9 million or 63 days
as of December 31, 2001. This increase is due to the UroCor acquisition.
Capital expenditures for the First Quarter-2002 totaled approximately $1.1
million. Expenditures were primarily related to building expansion and
information system enhancements.
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 loan was extended to August 2003, and certain
covenants were modified. As of March 31, 2002, no debt was outstanding on the
line of credit and the Company was compliant with all covenants.
Dianon's Board of Directors previously 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 are limited to
$12.0 million. As of March 31, 2002, 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
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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 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 healthcare delivery.
We qualify any forward-looking statements entirely by these cautionary factors,
and readers are cautioned not to place undue reliance on forward-looking
statements.
The words "believe," "may," "will," "could," "should," "would," "anticipate,"
"estimate," "expect," "intend," "project," "objective," "seek," "strive,"
"might," "seeks," "likely result," "build," "grow," "plan," "goal," "expand,"
"position," or similar words, or the negatives of these words, or similar
terminology, identify forward-looking statements.
The forward-looking statements contained in this report only speak as of the
date of this report. The Company disclaims any obligation or undertaking to
provide any updates or revisions to any forward-looking statements to reflect
any change in management's expectations or any change in events, conditions or
circumstances on which the forward-looking statements are based.
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.
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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.
(b) Reports:
No Form 8-K Current Report was filed with the Securities and Exchange
Commission during the first quarter of 2002.
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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.
/s/ KEVIN C. JOHNSON
--------------------
April 30, 2002
By: Kevin C. Johnson
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive
Officer)
/s/ DAVID R. SCHREIBER
----------------------
April 30, 2002
By: David R. Schreiber
Senior Vice President,
Finance and
Chief Financial Officer
(Principal Financial
Officer and
Principal Accounting
Officer)
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