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, 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 July 24, 2002 was 12,338,059 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001. 3
Consolidated Statements of Operations for the three month
and six month periods ended June 30, 2002 and 2001. 4
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 2002 and 2001. 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001. 6
Notes to Consolidated Financial Statements. 7-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
2
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 20,614,850 $ 41,229,353
Available-for-sale securities 43,726,339 1,071,778
Accounts receivable, net of allowances 34,281,347 29,863,129
Prepaid expenses and other current assets 3,291,334 3,767,086
Prepaid / refundable income taxes 6,568,938 5,753,944
Inventory 2,283,044 1,932,713
Deferred income taxes 6,203,010 6,560,564
------------- -------------
Total current assets 116,968,862 90,178,567
------------- -------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 21,380,858 19,539,228
Leasehold improvements 9,151,842 8,967,113
Less - accumulated depreciation and
amortization (19,549,397) (17,650,512)
------------- -------------
10,983,303 10,855,829
------------- -------------
INTANGIBLE ASSETS, net of accumulated
amortization of $4,554,501 and
$3,662,150, respectively 182,965,666 183,167,116
DEFERRED INCOME TAXES -- 2,429,417
OTHER ASSETS 713,504 787,230
------------- -------------
TOTAL ASSETS $ 311,631,335 $ 287,418,159
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,838,257 $ 1,621,689
Accrued employee compensation 5,194,993 6,961,747
Current portion of capitalized lease
obligations 104,913 300,102
Other accrued expenses 12,008,333 12,459,309
------------- -------------
Total current liabilities 19,146,496 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 20,534,264 21,781,876
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per
share, 20,000,000 shares authorized,
12,340,029 and 11,896,140 shares
issued and outstanding at June 30,
2002 and December 31, 2001,
respectively 123,400 118,961
Additional paid-in capital 256,313,144 242,987,849
Retained earnings 34,391,280 22,620,561
Common stock held in treasury, at cost
- 7,502 and 9,511 shares at June 30,
2002 and December 31, 2001,
respectively (71,847) (91,088)
Accumulated other comprehensive income 341,094 --
------------- -------------
Total stockholders' equity 291,097,071 265,636,283
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 311,631,335 $ 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 MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 2002 and 2001
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ----------- ------------ -----------
Net revenues $ 49,257,121 $28,762,405 $ 93,880,496 $55,565,012
Cost of sales 24,574,729 15,841,271 46,872,878 30,836,069
------------ ----------- ------------ -----------
GROSS PROFIT 24,682,392 12,921,134 47,007,618 24,728,943
Selling, general and administrative expenses 14,184,362 8,363,286 26,912,828 16,233,123
Special credit for bad debts (710,957) -- (710,957) --
Amortization of intangible assets 425,412 422,031 892,351 677,399
Research and development expenses 326,576 315,943 767,216 667,532
------------ ----------- ------------ -----------
INCOME FROM OPERATIONS 10,456,999 3,819,874 19,146,180 7,150,889
Interest income, net 443,608 158,666 636,541 272,800
------------ ----------- ------------ -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 10,900,607 3,978,540 19,782,721 7,423,689
Provision for income taxes 4,414,746 1,611,309 8,012,002 3,006,594
------------ ----------- ------------ -----------
NET INCOME $ 6,485,861 $ 2,367,231 $ 11,770,719 $ 4,417,095
============ =========== ============ ===========
EARNINGS PER SHARE
BASIC $ .53 $ .32 $ .97 $ .60
DILUTED $ .50 $ .29 $ .91 $ .55
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 12,247,154 7,418,827 12,114,307 7,403,437
DILUTED 12,937,998 8,041,804 12,876,107 8,024,641
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Accumulated
Common Stock Additional Other
---------------------- Paid-In Comprehensive
Total Shares Amount Capital Income
------------ ---------- -------- ------------ -------------
BALANCE, December 31, 2000 $ 52,258,738 7,397,323 $ 73,974 $ 35,877,828 $ --
Net income 4,417,095 -- -- -- --
Unrealized gain on securities -- -- -- -- --
Comprehensive income -- -- -- -- --
Stock options exercised 318,345 42,815 428 317,917 --
Tax effect for stock options exercised 469,721 -- -- 469,721 --
Employee stock purchase plan / other 78,046 -- -- 59,506 --
Stock grants 19,782 580 6 19,776 --
------------ ---------- -------- ------------ --------
BALANCE, June 30, 2001 $ 57,561,727 7,440,718 $ 74,408 $ 36,744,748 $ --
============ ========== ======== ============ ========
BALANCE, December 31, 2001 $265,636,283 11,896,140 $118,961 $242,987,849 $ --
Net income 11,770,719 -- -- -- --
Unrealized gain on securities 341,094 -- -- -- 341,094
Comprehensive income -- -- -- -- --
Stock options exercised 5,671,205 446,955 4,470 5,666,735 --
Return of stock held in escrow (113,825) (3,066) (31) (113,794) --
Tax effect for stock options exercised 7,693,147 -- -- 7,693,147 --
Employee stock purchase plan / other 98,448 -- -- 79,207 --
------------ ---------- -------- ------------ --------
BALANCE, June 30, 2002 $291,097,071 12,340,029 $123,400 $256,313,144 $341,094
============ ========== ======== ============ ========
Common Stock
Acquired for Treasury
Retained --------------------- Comprehensive
Earnings Shares Amount Income
----------- ------- --------- -------------
BALANCE, December 31, 2000 $16,427,788 (12,620) $(120,852)
Net income 4,417,095 -- -- $ 4,417,095
Unrealized gain on securities -- -- -- --
-------------
Comprehensive income -- -- -- $ 4,417,095
=============
Stock options exercised -- -- --
Tax effect for stock options exercised -- -- --
Employee stock purchase plan / other -- 1,936 18,540
Stock grants -- -- --
----------- ------- ---------
BALANCE, June 30, 2001 $20,844,883 (10,684) $(102,312)
=========== ======= =========
BALANCE, December 31, 2001 $22,620,561 (9,511) $ (91,088)
Net income 11,770,719 -- -- $ 11,770,719
Unrealized gain on securities -- -- -- 341,094
-------------
Comprehensive income -- -- -- $ 12,111,813
=============
Stock options exercised -- -- --
Return of stock held in escrow -- -- --
Tax effect for stock options exercised -- -- --
Employee stock purchase plan / other -- 2,009 19,241
----------- ------- ---------
BALANCE, June 30, 2002 $34,391,280 (7,502) $ (71,847)
=========== ======= =========
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
JUNE 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,770,719 $ 4,417,095
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 2,805,801 2,354,476
Special credit for bad debts (710,957) --
Tax effect of stock options exercised 7,693,147 469,721
Deferred tax provision 3,723,527 --
Stock compensation expense -- 19,782
Bond premium amortization 72,427 --
Loss (gain) on disposal of fixed assets 34,592 (600)
Changes in other current assets and
liabilities
Accounts receivable (3,707,261) (66,205)
Prepaid / refundable income taxes (814,994) 1,710,857
Prepaid expenses and other current assets 475,752 (308,360)
Inventory (350,331) (159,093)
Other assets and other (124,465) 6,479
Accounts payable and other accrued
liabilities (2,001,162) 710,535
------------ ------------
Net cash provided by operating
activities 18,866,795 9,154,687
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,084,017) (1,105,292)
Purchases of available-for-sale securities (42,719,094) --
Redemption of available-for-sale securities 1,073,564 --
Investment and acquisition of marketing rights (1,000,000) --
Acquisition of UroCor, Inc. (114,725) --
Proceeds from the sale of fixed assets 8,500 600
------------ ------------
Net cash used in investing activities (44,835,772) (1,104,692)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable -- (2,500,000)
Employee stock purchase plan / other 98,448 78,046
Exercise of stock options 5,671,205 318,345
Net repayments of capitalized lease
obligations (415,179) (2,556)
------------ ------------
Net cash provided by (used in)
financing activities 5,354,474 (2,106,165)
------------ ------------
Net (decrease) increase in cash and
cash equivalents (20,614,503) 5,943,830
CASH AND CASH EQUIVALENTS, beginning of
period 41,229,353 12,515,424
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 20,614,850 $ 18,459,254
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period:
Interest $ 11,871 $ 54,631
Income Taxes Paid, Net of Refunds 185,819 1,018,350
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 and six months ended June 30, 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 and six months ended June
30, 2002 and 2001 are not necessarily indicative of the operating results
for the full years.
Acquisitions - In the second quarter of 2002, the Company received 3,066
shares of its stock from the escrow account established by the Escrow
Agreement dated October 2, 2000 related to the acquisition in October 2000
of John H. Altshuler, M.D., P.C., a pathology practice located in
Englewood, Colorado. The Company also accelerated the amortization of the
customer list by approximately $205,000, in the second quarter of 2002, to
reflect the remaining useful life.
In the second quarter of 2002, relating to the acquisition in November
2001 of UroCor, Inc. ("UroCor"), an anatomic pathology laboratory located
in Oklahoma City, Oklahoma, the Company reversed approximately $711,000 of
allowance for bad debts, as this was the portion of the $5.5 million
special bad debt provision that the Company recorded in the fourth quarter
of 2001 that was determined to be no longer required.
Pro forma historical results (unaudited) for the three month and six month
periods ended June 30, 2001, adjusted as if UroCor had been acquired on
January 1, 2001 approximates $44.6 million and $86.8 million in revenue,
respectively, $3.0 million and $9.1 million in net income, respectively,
and $0.25 and $0.75 in diluted earnings per share, respectively. The $9.1
million pro forma net income for the six months ended June 30, 2001,
stated above, includes a one-time, special credit for bad debts of $4.6
million (or $0.38 diluted earnings per share) recorded by UroCor. 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 a medical
records search tool for 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.
7
2. Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") 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. In the second quarter of
2002, the Company completed the initial test for impairment and determined
that no goodwill impairment had occurred. The following table provides a
reconciliation for the prior year's reported net income to adjusted net
income had SFAS No. 142 been applied as of the beginning of fiscal 2001
for the three month and six month periods ended June 30, 2001.
For the three months ended For the six months ended
June 30, 2001 June 30, 2001
---------------------------------- ----------------------------------
BASIC DILUTED BASIC DILUTED
Income -------- -------- Income -------- --------
available to Earnings Earnings available to Earnings Earnings
common per per common per per
stockholders share share stockholders share share
------------ -------- -------- ------------ -------- --------
Reported net income
attributed to DIANON common
stock $2,367,231 $0.319 $0.294 $4,417,095 $0.597 $0.550
Add back amortization of
goodwill, net of income tax $27,702 $0.004 $0.003 $55,404 $0.007 $0.007
Adjusted net income
attributed to DIANON common
stock $2,394,933 $0.323 $0.297 $4,472,499 $0.604 $0.557
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.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Statement No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of
this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
8
Company does not believe that the adoption of Statement No. 146 will have
a material impact on its 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
period. Diluted earnings per share have been computed based on the
weighted average number of common shares and common equivalent shares
outstanding during each period. 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 2002 and 2001.
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ----------- ----------
BASIC EARNING PER SHARE:
Weighted-average number of
common shares outstanding 12,247,154 7,418,827 12,114,307 7,403,437
DILUTIVE EFFECT OF:
Stock options 690,844 622,977 761,800 621,204
---------- ---------- ----------- ----------
DILUTED EARNINGS PER SHARE:
Weighted-average number of
common shares outstanding 12,937,998 8,041,804 12,876,107 8,024,641
========== ========== =========== ==========
NET INCOME $6,485,861 $2,367,231 $11,770,719 $4,417,095
========== ========== =========== ==========
BASIC EARNINGS PER SHARE $0.53 $0.32 $0.97 $0.60
========== ========== =========== ==========
DILUTED EARNINGS PER SHARE $0.50 $0.29 $0.91 $0.55
========== ========== =========== ==========
For the six months ended June 30, 2002, outstanding options to purchase
17,500 shares of common stock, at prices ranging from $62.08 to $63.59 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.
For the six months ended June 30, 2001, outstanding options to purchase
345,015 shares of common stock, at prices ranging from $35.75 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
4. Investment Securities - As of June 30, 2002, the Company had investment
securities of $43.7 million. The portfolio consisted primarily of U.S.
Government Agency Bullet Securities with maturities of less than three
years. The Company has evaluated its investment policies consistent with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and determined that all of its investment securities are to
be classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in
Stockholders' Equity under the caption "Accumulated Other Comprehensive
Income." The Company views its available-for-sales securities as available
to support its current operations and to fund the Company's stock
repurchase program and accordingly classifies them as current assets on
the balance sheet. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. The cost of securities sold
is based on the specific identification method. Interest on
available-for-sale securities is included in interest income.
The following is a summary of investment securities classified as
"available-for-sale" securities as required by SFAS 115 as of June 30,
2002 and December 31, 2001:
June 30, December 31,
2002 2001
----------- ------------
Debt investments:
Cost $43,225,499 $1,071,778
Gross unrealized gains 500,840 --
----------- ----------
Estimated fair value $43,726,339 $1,071,778
=========== ==========
5. Legal Proceedings - The Company is involved in certain legal matters
including professional liability claims which periodically arise in the
normal course of business. Management believes that the outcome of these
legal matters will not have a material adverse effect on the financial
position and results of operations of the Company. Furthermore, management
believes the Company maintains adequate insurance coverage or has
established adequate reserves for known contingencies.
The Company received a subpoena dated November 16, 2000, issued by the
United States Attorney's Office for Connecticut, requesting the production
of a variety of documents, with a particular focus on documents relating
to billing for tumor biomarkers, DNA testing and screening tests. The
Company is cooperating with the Department of Justice representatives
handling this matter and has substantially completed its production of
documents under the subpoena.
As part of the purchase of UroCor, the Company assumed responsibility and
liability for certain pre-acquisition contingencies which include expenses
relating to the previously announced UroCor Department of Justice ("DOJ")
investigation, including without limitation, compliance with the UroCor
corporate integrity agreement and any potential indemnification of legal
and other fees and costs for current and past directors, officers and
employees of UroCor in connection with the criminal investigation related
to the UroCor settlement. The Company currently estimates the probable
indemnification expenses to be $1.0 million, but there is no assurance
that this amount will not increase significantly.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and six months ended June 30, 2002 ("Second Quarter-2002" and "Six
Months-2002", respectively) to the three months and six months ended June 30,
2001 ("Second Quarter-2001" and "Six Months-2001", respectively).
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 71% to $49.3 million in the Second Quarter-2002 from
$28.8 million in the Second Quarter-2001, and 69% to $93.9 million in the Six
Months-2002 from $55.6 million in the Six Months-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
the Company's most commonly performed tests. The Oklahoma facility (formerly
UroCor) represents approximately $11.9 million in revenues in the Second
Quarter-2002 and $23.4 million in revenues in the Six Months-2002.
Anatomic pathology services involve the preparation and pathologic
interpretation of tissue from biopsy specimens for the diagnosis of cancer and
other significant diseases. Anatomic pathology net revenues increased to $34.3
million in the Second Quarter-2002 from $19.8 million in the Second
Quarter-2001, representing a 74% increase, and increased to $65.9 million in the
Six Months-2002 from $38.3 million in the Six Months-2001, representing a 72%
increase. The revenue growth reflects the UroCor acquisition as well as
increased market penetration in the anatomic pathology area.
Genetics services consists primarily of cytogenetics, fluorescent in situ
hybridization, and molecular analysis primarily for leukemias, lymphomas,
infectious disease and inherited disorders. Genetics net revenues increased to
$6.3 million in the Second Quarter-2002 from $4.9 million in the Second
Quarter-2001, representing a 27% increase, and increased to $11.7 million in the
Six Months-2002 from $9.4 million in the Six Months-2001, representing a 25%
increase. The revenue growth reflects increased market penetration.
Clinical chemistry testing consists of tumor markers, cultures, specialized
urine testing and routine tests for general health conditions. Clinical
chemistry net revenues increased to $8.7 million in the Second Quarter-2002 from
$4.1 million in the Second Quarter-2001, representing a 114% increase, and
increased to $16.3 million in the Six Months-2002 from $7.9 million in the Six
Months-2001, representing a 106% 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
11
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.
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 that
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 Medicare 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%.
As a result of Congress' concerns about the significant decrease in the
conversion factor in 2002, and anticipating further decreases in future years,
legislation has been passed by the House of Representatives that would require a
conversion factor increase of 6% over the next three years, and make changes in
the way the conversion factor is calculated in future years. It is not yet known
whether this, or similar, legislation will be passed by the Senate and signed
into law, or what the final form of such law would be.
On June 28, 2002, the proposed 2003 Medicare physician fee schedule was
published. The proposed changes, if finalized, could result in significant
decreases in Medicare reimbursement for some of the pathology services most
frequently billed by Dianon. These decreases would be the result of both a
decrease in the conversion factor, based on the current methodology for updating
it, and on proposed changes in the data and methodology used to calculate the
RVUs for certain pathology services. As noted above, the House of
Representatives has approved legislation that would require an increase in the
conversion factor in each of the next three years, but the Senate has not yet
addressed the issue. CMS is accepting comments on the proposed 2003 physician
fee schedule, and the final rule will not be published until November 2002. It
is not yet known whether the changes proposed by CMS will be implemented, or the
final effect such changes, and any changes in the conversion factor, will have
on reimbursement for the pathology services provided by Dianon. However, the
outcome could have a material adverse effect on the Company's revenues.
12
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 "grand fathering"
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.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $24.6 million in the
Second Quarter-2002 from $15.8 million in the Second Quarter-2001, and to $46.9
million for the Six Months-2002 from $30.8 million for the Six Months-2001. As a
percentage of revenues, cost of sales improved to 50% in the Second Quarter-2002
from 55% in the Second Quarter-2001, as well as improving to 50% in the Six
Months-2002 from 56% in the Six Months-2001. These improvements are a result of
cost control initiatives due to the effective management of fixed costs.
o GROSS PROFIT
Gross profit totaled $24.7 million in the Second Quarter-2002 versus $12.9
million in the Second Quarter-2001, reflecting a gross profit margin of 50% and
45%, respectively. Gross profit for the Six Months-2002 totaled $47.0 million
versus $24.7 million in the prior year, representing margins of 50% and 44%,
respectively. The increases in gross profits are a result of increased revenues,
cost control initiatives, favorable product line mix and the effective
management of fixed costs.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $14.2 million in the
Second Quarter-2002 from $8.4 million in the Second Quarter-2001, and to $26.9
million for the Six Months-2002 from $16.2 million for the Six Months-2001.
These increases are 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
13
constant, as a percentage of sales, at 29% for both the Second Quarter-2002 and
the Second Quarter-2001 and the Six Months-2002 and Six Months-2001.
o SPECIAL CREDIT FOR BAD DEBTS
In the second quarter of 2002, in connection with the acquisition of UroCor, the
Company reversed approximately $711,000 of allowance for bad debts, as this was
the portion of the $5.5 million special bad debt provision that the Company
recorded in the fourth quarter of 2001 that was determined to be no longer
required.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $425,000 in the Second
Quarter-2002 from $422,000 in the Second Quarter-2001, and to $892,000 in the
Six Months-2002 from $677,000 in the Six Months-2001. These increases for both
the Second Quarter-2002 and the Six Months-2002 are primarily a result of the
amortization of the UroCor customer list, the marketing rights from MDdatacor
and the accelerated amortization of the Colorado facility customer list,
partially offset by the reversal of amortization in connection with the return
of 3,066 shares of the Company's common stock relating to the finalization of
the John H. Altshuler, M.D., P.C. acquisition Escrow Agreement dated October 2,
2000 as well as the Response Genetics amortization that was fully amortized as
of December 31, 2001 and therefore no longer being amortized in 2002.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $327,000 in the Second
Quarter-2002 from $316,000 in the Second Quarter-2001, and to $767,000 in the
Six Months-2002 from $668,000 in the Six Months-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. CarePath(TM) services include
material for patients to better understand their pathology results, aggregate
data on pathology for physician practices and information to assist health plans
in managing patients with significant diseases diagnosed by the Company.
o INCOME FROM OPERATIONS
Income from operations, before the $711,000 special credit for bad debts,
increased to $9.7 million in the Second Quarter-2002 from $3.8 million in the
Second Quarter-2001, and to $18.4 million in the Six Months-2002 from $7.2
million in the Six Months-2001. These increases are a result of increased
revenues, cost control initiatives and the effective use of operating leverage.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
before the special credit for bad debts, increased to $11.1 million in the
Second Quarter-2002 from $5.1 million in the Second Quarter-2001, and to $21.2
million in the Six Months-2002 from $9.5 million in the Six Months-2001. As a
percentage of sales, EBITDA, before the special credit for bad debts, increased
to 22.6% in the Second Quarter-2002 from 17.8% in the Second Quarter-2001, and
to 22.6% in the Six Months-2002 from 17.1% in the Six Months-2001.
EBITDA is defined as income before interest expense, income tax expense and
depreciation and amortization. Adjusted EBITDA excludes the non-recurring
$711,000 special credit for bad debts. This item is excluded from adjusted
EBITDA as this item does not impact operating results on a recurring basis.
Management considers adjusted EBITDA to be one measure of the cash flows from
operations of Dianon before debt service that provides a relevant basis for
comparison, and adjusted 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 adjusted EBITDA may be different from the calculation used by
other companies and, therefore, comparability may be limited.
14
Adjusted EBITDA for the second quarter and six months ended 2002 and 2001 are as
follows:
Second Quarter Six Months Ended
------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Adjusted EBITDA $11,123,028 $5,114,296 $21,241,024 $9,505,365
Adjusted EBITDA as a percentage of sales 22.6% 17.8% 22.6% 17.1%
o INTEREST INCOME, NET
Net interest income increased to $444,000 in the Second Quarter-2002 from
$159,000 in the Second Quarter-2001, and to $637,000 in the Six Months-2002 from
$273,000 in the Six Months-2001, due to investments in available-for-sale
securities that are yielding higher interest rates 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 both the
three month and six month periods ended 2002 and 2001, totaling $4.4 million in
the Second Quarter-2002 and $1.6 million in the Second Quarter-2001 and $8.0
million in the Six Months-2002 and $3.0 million in the Six Months-2001.
o NET INCOME
Net income increased 174% to $6.5 million in the Second Quarter-2002 from $2.4
million in the Second Quarter-2001, and 166% to $11.8 million in the Six
Months-2002 from $4.4 million in the Six Months-2001. Basic earnings per share
increased 66% to $0.53 per share in the Second Quarter-2002 from $0.32 per share
in the Second Quarter-2001, and 62% to $0.97 per share in the Six Months-2002
from $0.60 per share in the Six Months-2001, while diluted earnings per share
increased 72% to $0.50 per share in the Second Quarter-2002 from $0.29 per share
in the Second Quarter-2001, and 66% to $0.91 per share in the Six Months-2002
from $0.55 per share in the Six Months-2001.
On a Pro forma basis before the special credit for bad debts of $711,000
($423,000 after tax), net income increased 156% to $6.1 million in the Second
Quarter-2002 from $2.4 million in the Second Quarter-2001, and 157% to $11.3
million in the Six Months-2002 from $4.4 million in the Six Months-2001. On a
Pro forma basis before the special credit for bad debts of $711,000, basic
earnings per share increased 56% to $0.50 per share in the Second Quarter-2002
from $0.32 per share in the Second Quarter-2001, and 57% to $0.94 per share in
the Six Months-2002 from $0.60 per share in the Six Months-2001, while diluted
earnings per share increased 62% to $0.47 per share in the Second Quarter-2002
from $0.29 per share in the Second Quarter-2001, and 60% to $0.88 per share in
the Six Months-2002 from $0.55 per share in the Six Months-2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, Dianon had total cash and cash equivalents and investment
securities of $64.3 million, comprising of $20.6 million in cash and cash
equivalents, substantially all of which was invested in a fund holding U.S.
Treasury securities with maturities of less than three months and $43.7 million
in available for sale securities, consisting of high grade, fixed income
securities with maturities of less than three years. Working capital was $97.8
million and $68.8 million as of June 30, 2002 and December 31, 2001,
respectively, and the current ratios (current assets divided by current
liabilities) were 6.1:1 and 4.2:1, respectively.
Accounts receivable totaled $34.3 million as of June 30, 2002 representing
approximately 64 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 Second Quarter-2002 and Six Months-2002 totaled
approximately $1.0 million and $2.1 million, respectively. 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
15
covenants. In December 2000, the loan was extended to August 2003, and certain
covenants were modified. As of June 30, 2002, no debt was outstanding on the
line of credit and the Company was compliant with all covenants.
In July 2002, Dianon's Board of Directors authorized the repurchase of an
additional $20.0 million of Dianon's Common Stock on the open market or in
private transactions in addition to the previously approved amount of $12.0
million. As of July 31, 2002, Dianon had cumulatively repurchased approximately
624,000 shares of Dianon's Common Stock for approximately $12.9 million leaving
$19.1 million remaining for authorized repurchases from the current and
previously approved stock repurchase plans.
In July 2002, Dianon's shareholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the number of shares of
authorized Common Stock from 20,000,000 shares to 55,000,0000 shares. Such
additional shares may be issued in connection with capital raising efforts.
Dianon believes that cash flows from operations and available cash and cash
equivalents are adequate to fund Dianon's operations for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies and methods used in the preparation
of the Company's consolidated financial statements are described in Note 3 to
the Company's annual report on Form 10-K for the year ended December 31, 2001,
previously filed with the Securities and Exchange Commission. The following is a
brief discussion of the Company's more significant accounting policies and
methods.
Use of Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual amounts could differ significantly from these estimates.
Revenue Recognition -
Revenues are recognized in the period in which services are provided. Revenues
subject to Medicare and Medicaid, direct physician and hospital billing are
based on fixed reimbursement fee schedules. All remaining revenues subject to
third-party reimbursement are recorded at the expected net realizable value.
Such estimates are revised periodically based upon the Company's actual
reimbursement experience.
Intangible Assets -
Intangible assets are amortized on a straight-line basis over the respective
economic life as follows:
Years
----------
Customer lists 7 - 15
Tradename Indefinite
The Company periodically reviews the anticipated revenues related to intangible
assets to determine whether any adjustments to their carrying values are
necessary.
Income Taxes -
The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred income taxes are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates and regulations. The Company
records a valuation allowance against deferred tax assets when it is more likely
than not that the assets will not be realized.
16
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 30, 2002 the Company held its 2002 Annual Meeting of Shareholders at
which the following actions were approved: the directors were elected, the 2002
Stock Incentive Plan was approved, the appointment of Ernst & Young LLP as the
Company's independent public accountants for the calendar year ended December
31, 2002 was ratified and the amendment to the Company's restated certificate of
incorporation was approved. The directors elected were Messrs. Bruce K.
Crowther, John P. Davis, E. Timothy Geary, Kevin C. Johnson, David R. Schreiber
and Jeffrey L. Sklar. The table below represents the votes cast:
Director In Favor Against
-------- -------- -------
Bruce K. Crowther 10,241,788 367,693
John P. Davis 10,241,788 367,693
E. Timothy Geary 10,241,788 367,693
Kevin C. Johnson 10,241,788 367,693
David R. Schreiber 10,241,788 367,693
Jeffrey L. Sklar 10,241,788 367,693
Other actions and the results taken at the Company's 2002 Annual Meeting of
Shareholders were as follows:
Votes Votes Unvoted
Action For Against Abstentions Shares
------ ----- ------- ----------- -------
Approval of 2002 Stock Incentive Plan 7,714,198 2,843,860 51,423 --
Ratify appointment of Ernst & Young LLP 10,146,131 458,098 5,252 --
Approval of an amendment to the Company's
Restated Certificate of Incorporation 8,699,978 1,900,230 9,273 --
17
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 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
Pursuant to the Company's investment policy, idle and excess funds are invested
in high grade, fixed income securities generally for no more than three years
and are classified as available-for-sale. Investment securities as of June 30,
2002 consisted of debt securities primarily invested in U.S. Government Agency
Bullet Securities with maturities of less than three years. The Company
considers any net unrealized gain or loss on these investments to be temporary,
and reflects such gains or losses as a component of stockholders' equity.
18
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.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports:
One Form 8-K Current Report was filed with the Securities and Exchange
Commission on May 23, 2002 and a corresponding 8-K/A Current Report was
filed with the Securities and Exchange Commission on May 30, 2002.
19
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, 2002 /s/ KEVIN C. JOHNSON
----------------------------------------
By: Kevin C. Johnson Chairman of the
Board, President and Chief Executive
Officer
(Principal Executive Officer)
August 13, 2002 /s/ DAVID R. SCHREIBER
----------------------------------------
By: David R. Schreiber Senior Vice
President, Finance and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
20