SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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 October 24, 2002 was 12,058,646 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001. 3
Consolidated Statements of Operations for the three month
and nine month periods ended September 30, 2002 and 2001. 4
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 2002 and 2001. 5
Consolidated Statements of Cash Flows for the
nine months ended September 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
Item 4. CONTROLS AND PROCEDURES 18
Part II OTHER INFORMATION
- -------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
2
Part 1. Financial Information
Item 1. Financial Statement
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 8,884,226 $ 41,229,353
Available-for-sale securities 51,167,259 1,071,778
Accounts receivable, net of allowances 38,088,090 29,863,129
Prepaid expenses and other current assets 3,105,272 3,767,086
Prepaid / refundable income taxes 2,829,469 5,753,944
Inventory 2,189,042 1,932,713
Deferred income taxes 5,896,064 6,560,564
------------- -------------
Total current assets 112,159,422 90,178,567
------------- -------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 21,655,622 19,539,228
Leasehold improvements 9,394,342 8,967,113
Less - accumulated depreciation and amortization (20,494,175) (17,650,512)
------------- -------------
10,555,789 10,855,829
------------- -------------
INTANGIBLE ASSETS, net of accumulated amortization of
$5,194,879 and $3,662,150, respectively 182,581,174 183,167,116
DEFERRED INCOME TAXES -- 2,429,417
OTHER ASSETS 790,694 787,230
------------- -------------
TOTAL ASSETS $ 306,087,079 $ 287,418,159
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,926,461 $ 1,621,689
Accrued employee compensation 4,934,657 6,961,747
Current portion of capitalized lease obligations 217,562 300,102
Other accrued expenses 15,447,292 12,459,309
------------- -------------
Total current liabilities 22,525,972 21,342,847
------------- -------------
LONG-TERM LIABILITIES:
Deferred income taxes 1,168,729 --
Long-term portion of capitalized lease obligations 36,903 439,029
------------- -------------
Total Liabilities 23,731,604 21,781,876
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 55,000,000 shares authorized,
12,352,012 and 11,896,140 shares issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 123,520 118,961
Additional paid-in capital 256,539,509 242,987,849
Retained earnings 35,064,597 22,620,561
Common stock held in treasury, at cost - 294,289 and 9,511
shares at September 30, 2002 and December 31, 2001, respectively (10,164,191) (91,088)
Accumulated other comprehensive income 792,040 --
------------- -------------
Total stockholders' equity 282,355,475 265,636,283
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 306,087,079 $ 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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2002 and 2001
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net revenues $ 47,084,753 $ 28,940,906 $ 140,965,249 $ 84,505,918
Cost of sales 23,374,450 16,095,217 70,247,328 46,931,286
------------- ------------- ------------- -------------
GROSS PROFIT 23,710,303 12,845,689 70,717,921 37,574,632
Selling, general and administrative expenses 13,472,065 8,526,412 40,384,893 24,759,535
Special charge 5,450,000 -- 5,450,000 --
Special credit for bad debts -- -- (710,957) --
Amortization of intangible assets 640,378 338,701 1,532,729 1,016,100
Research and development expenses 270,523 286,899 1,037,739 954,431
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 3,877,337 3,693,677 23,023,517 10,844,566
Interest income, net 521,515 184,352 1,158,056 457,152
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,398,852 3,878,029 24,181,573 11,301,718
Provision for income taxes 3,725,535 1,570,602 11,737,537 4,577,196
------------- ------------- ------------- -------------
NET INCOME $ 673,317 $ 2,307,427 $ 12,444,036 $ 6,724,522
============= ============= ============= =============
EARNINGS PER SHARE
BASIC $ .06 $ .31 $ 1.03 $ .91
DILUTED $ .05 $ .28 $ .98 $ .83
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 12,120,732 7,437,078 12,117,361 7,414,584
DILUTED 12,488,387 8,150,277 12,747,779 8,059,785
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 NINE MONTHS ENDED SEPTEMBER 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 6,724,522 -- -- -- --
Unrealized gain on securities -- -- -- -- --
Comprehensive income -- -- -- -- --
Stock options exercised 439,565 58,235 582 438,983 --
Tax effect for stock options exercised 670,921 -- -- 670,921 --
Employee stock purchase plan / other 99,746 -- -- 75,795 --
Stock grants 31,662 850 8 31,654 --
------------- ------------- ------------- ------------- -------------
BALANCE, September 30, 2001 $ 60,225,154 7,456,408 $ 74,564 $ 37,095,181 $ --
============= ============= ============= ============= =============
BALANCE, December 31, 2001 $ 265,636,283 11,896,140 $ 118,961 $ 242,987,849 $ --
Net income 12,444,036 -- -- -- --
Unrealized gain on securities 792,040 -- -- -- 792,040
Comprehensive income -- -- -- -- --
Stock options exercised 5,845,522 458,938 4,590 5,840,932 --
Tax effect for stock options 7,693,147 -- -- 7,693,147 --
exercised
Return of common stock held in escrow (113,825) (3,066) (31) (113,794) --
Employee stock purchase plan / other 164,561 -- -- 131,375 --
Common stock acquired for treasury (10,106,289) -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, September 30, 2002 $ 282,355,475 12,352,012 $ 123,520 $ 256,539,509 $ 792,040
============= ============= ============= ============= =============
Common Stock
Acquired for Treasury
Retained ------------------------------ Comprehensive
Earnings Shares Amount Income
------------- ------------- ------------- -------------
BALANCE, December 31, 2000 $ 16,427,788 (12,620) $ (120,852)
Net income 6,724,522 -- -- $ 6,724,522
Unrealized gain on securities -- -- -- --
-------------
Comprehensive income -- -- -- $ 6,724,522
=============
Stock options exercised -- -- --
Tax effect for stock options exercised -- -- --
Employee stock purchase plan / other -- 2,501 23,951
Stock grants -- -- --
------------- ------------- -------------
BALANCE, September 30, 2001 $ 23,152,310 (10,119) $ (96,901)
============= ============= =============
BALANCE, December 31, 2001 $ 22,620,561 (9,511) $ (91,088)
Net income 12,444,036 -- -- $ 12,444,036
Unrealized gain on securities -- -- -- 792,040
-------------
Comprehensive income -- -- -- $ 13,236,076
=============
Stock options exercised -- -- --
Tax effect for stock options -- -- --
exercised
Return of common stock held in escrow -- -- --
Employee stock purchase plan / other -- 3,465 33,186
Common stock acquired for treasury -- (288,243) (10,106,289)
------------- ------------- -------------
BALANCE, September 30, 2002 $ 35,064,597 (294,289) $ (10,164,191)
============= ============= =============
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
SEPTEMBER 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,444,036 $ 6,724,522
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 4,396,871 3,354,747
Provision for bad debts 89,043 --
Tax effect of stock options exercised 7,693,147 670,921
Deferred tax provision 3,723,527 --
Stock compensation expense -- 31,662
Bond premium amortization 155,249 --
Loss (gain) on disposal of fixed assets 28,688 (24,077)
Changes in other current assets and liabilities
Accounts receivable (8,314,004) 434,668
Prepaid / refundable income taxes 2,924,475 2,245,894
Prepaid expenses and other current assets 661,814 (470,697)
Inventory (256,329) (18,298)
Other assets and other (76,655) (159,704)
Accounts payable and other accrued liabilities 1,265,665 1,405,195
------------ ------------
Net cash provided by operating activities 24,735,527 14,194,833
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,645,640) (1,575,284)
Purchases of available-for-sale securities (50,192,527) --
Redemption of available-for-sale securities 1,781,147 --
Investment and acquisition of marketing rights (1,500,000) --
Acquisition of UroCor, Inc., net 4,389 --
Proceeds from the sale of fixed assets 52,849 53,758
------------ ------------
Net cash used in investing activities (52,499,782) (1,521,526)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable -- (2,500,000)
Purchase of common stock acquired for treasury (10,106,289) --
Employee stock purchase plan / other 164,561 99,746
Exercise of stock options 5,845,522 439,565
Repayments of capitalized lease obligations (484,666) (47,238)
------------ ------------
Net cash used in financing activities (4,580,872) (2,007,927)
------------ ------------
Net (decrease) increase in cash and cash equivalents (32,345,127) 10,665,380
CASH AND CASH EQUIVALENTS, beginning of period 41,229,353 12,515,424
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 8,884,226 $ 23,180,804
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 17,132 $ 62,758
Income taxes paid, net of refunds 170,192 2,160,696
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 nine months ended September 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 accounting principles
generally accepted in the United States 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 accounting principles generally
accepted in the United States 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 nine months ended September 30, 2002 and 2001 are not necessarily
indicative of the operating results for the full years.
Acquisitions - In the second quarter of 2002, 3,066 shares of the
Company's common stock were distributed to the Company from the escrow
account established in connection with the Company's acquisition in
October 2000 of John H. Altshuler, M.D., P.C., a pathology practice
located in Englewood, Colorado. In the second quarter of 2002 the
Company also accelerated the amortization of the customer list related
to the Altshuler acquisition by approximately $205,000 to reflect the
remaining useful life.
In the second quarter of 2002, the Company reversed approximately
$711,000 of allowance for bad debts. This was the portion of the $5.5
million special bad debt provision that the Company recorded in the
fourth quarter of 2001 relating to the acquisition in November 2001 of
UroCor, Inc. ("UroCor") that was determined to be no longer required.
Pro forma historical results (unaudited) for the three month and nine
month periods ended September 30, 2001, adjusted as if UroCor had been
acquired on January 1, 2001, approximates $43.1 million and $129.9
million in revenue, respectively, $2.9 million and $11.9 million in net
income, respectively, and $0.24 and $0.98 in diluted earnings per
share, respectively. The $11.9 million pro forma net income for the
nine months ended September 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 the exclusive marketing rights for a
medical records search tool for urology and gastroenterology physician
practice group customers. The Company also acquired a 13.7% interest in
MDdatacor. The Company allocated the total investment in MDdatacor to
the marketing rights ($750,000) and equity ($250,000) based on
management's estimates of fair value. In the third quarter of 2002, the
Company contributed an additional $500,000 to MDdatacor, increasing the
Company's investment in MDdatacor to 16.6% as of September 30, 2002.
The Company allocated the additional investment to the marketing rights
($375,000) and equity ($125,000) 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 SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS 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. SFAS No. 142
revises the accounting for goodwill to eliminate amortization of
goodwill 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 nine month periods
ended September 30, 2001.
For the three months ended For the nine months ended
September 30, 2001 September 30, 2001
-------------------------------------- -----------------------------------
Income Basic Diluted Income Basic Diluted
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 $ 2,307,427 $ 0.31 $ 0.28 $ 6,724,522 $ 0.91 $ 0.83
Add back amortization of
goodwill, net of income tax 27,702 0.00 0.00 83,106 0.01 0.01
------------- ---------- ----------- ------------- --------- ---------
Adjusted net income
attributed to DIANON common
stock $ 2,335,129 $ 0.31 $ 0.28 $ 6,807,628 $ 0.92 $ 0.84
============= ========== =========== ============= ========= =========
In August 2001, the Financial Accounting Standards Board issued SFAS
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 SFAS No. 143 will have a material impact on its financial
position or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 supersedes SFAS 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 SFAS No. 144 did not have a material impact
on the Company's financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 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. Under EITF Issue No. 94-3, a liability
for an exit cost was recognized at the date of the entity committed to
an exit plan. The provisions of this statement are effective for exit
or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company does not believe that the
adoption of SFAS No. 146 will have a material impact on its financial
position or results of operations.
8
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 nine month periods ended
September 30, 2002 and 2001.
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
----------------------------- -------------------------------
BASIC EARNING PER SHARE:
Weighted-average number of
common shares outstanding 12,120,732 7,437,078 12,117,361 7,414,584
DILUTIVE EFFECT OF:
Stock options 367,655 713,199 630,418 645,201
----------------------------- -------------------------------
DILUTED EARNINGS PER SHARE:
Weighted-average number of
common shares outstanding 12,488,387 8,150,277 12,747,779 8,059,785
============================= ===============================
NET INCOME $673,317 $2,307,427 $12,444,036 $6,724,522
============================= ===============================
BASIC EARNINGS PER SHARE $0.06 $0.31 $1.03 $0.91
============================= ===============================
DILUTED EARNINGS PER SHARE $0.05 $0.28 $0.98 $0.83
============================= ===============================
For the three and nine months ended September 30, 2002, outstanding options
to purchase 563,447 and 18,250, respectively, shares of common stock, at
prices ranging from $39.80 to $63.59 and $56.70 to $63.59, respectively, 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 nine months ended September 30, 2001, outstanding options to
purchase 18,912 shares of common stock, at prices ranging from $40.06 to
$45.50 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. There were no options outstanding
that were not included in the computation of diluted earnings per share for
the three months ended September 30, 2001.
9
4. Investment Securities - As of September 30, 2002, the Company had
investment securities of $51.2 million. The portfolio consisted
primarily of U.S. Government agency 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, net. 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 September
30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
----------- -----------
Debt investments:
Cost $49,991,349 $ 1,071,778
Gross unrealized gains 1,175,910 --
----------- -----------
Estimated fair value $51,167,259 $ 1,071,778
=========== ===========
5. Legal Proceedings - 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. In the third quarter of 2002, the Company
recorded a special charge of $5.5 million to cover the anticipated
payment to be made to the government relating to the Department of
Justice ("D.O.J.") investigation discussed above. This amount includes
related legal costs. Although a final settlement has not yet been
reached, the Company, believes, based on recent discussions with
outside legal counsel and the government, the payment is probable and
reasonably estimable.
As part of the acquisitionof UroCor in November 2001, the Company
assumed responsibility and liability for certain pre-acquisition
contingencies including expenses relating to the previously announced
UroCor D.O.J. investigation, compliance with the UroCor corporate
integrity agreement and potential indemnification of legal and other
fees and costs for former directors, officers and employees of UroCor
in connection with any criminal investigation related to the UroCor
D.O.J. settlement. In connection with the preliminary Urocor purchase
price allocation in 2001, the Company estimated the probable
indemnification expenses to be $1.0 million, but there is no assurance
that this amount will not increase significantly.
The Company is involved in certain other 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.
6. Income Taxes - During the third quarter of 2002, the Company's
effective tax rate increased from 40.5% to 85%. The increase is because
the Company did not record an income tax benefit related to a portion
of the $5.5 million special charge discussed in Note 5, as the Company
cannot presently determine whether the amounts to be paid to the
government will be deductible for income tax purposes.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and nine months ended September 30, 2002 ("Third Quarter-2002" and
"Nine Months-2002", respectively) to the three months and nine months ended
September 30, 2001 ("Third Quarter-2001" and "Nine Months-2001", respectively).
RESULTS OF OPERATIONS
- ---------------------
o NET REVENUES
Net revenues increased 63% to $47.1 million in the Third Quarter-2002 from $28.9
million in the Third Quarter-2001, and 67% to $141.0 million in the Nine
Months-2002 from $84.5 million in the Nine 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. Our Oklahoma facility (formerly
UroCor) generated approximately $10.9 million in revenues in the Third
Quarter-2002 and $34.2 million in revenues in the Nine 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 $32.2
million in the Third Quarter-2002 from $20.0 million in the Third Quarter-2001,
representing a 61% increase, and increased to $98.1 million in the Nine
Months-2002 from $58.3 million in the Nine Months-2001, representing a 68%
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 Third Quarter-2002 from $4.9 million in the Third
Quarter-2001, representing a 28% increase, and increased to $18.0 million in the
Nine Months-2002 from $14.3 million in the Nine Months-2001, representing a 26%
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 $8.6 million in the Third Quarter-2002 from
$4.0 million in the Third Quarter-2001, representing a 113% increase, and
increased to $24.8 million in the Nine Months-2002 from $11.9 million in the
Nine Months-2001, representing a 108% 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 ("State Children's Health Insurance
Program") 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
smear tests and higher reimbursement for certain types of pap smear tests have
provided and are expected to continue to provide additional revenues for Dianon.
11
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, 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. The Senate is also
considering similar legislation. It is not yet known whether this, or similar,
legislation will be passed by Congress and signed into law before the 2003 fee
schedule goes into effect on January 1, 2003.
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, and similar legislation has
been introduced in the Senate. CMS accepted comments on the proposed 2003
physician fee schedule, and the final rule was expected be published at the
beginning of November 2002, but was delayed due to incomplete data used to
establish the RVUs for certain physician services, according to CMS. Therefore,
it is not yet known whether the changes proposed by CMS will be implemented, or
what 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.
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. 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. Although most of the provisions
of the rule went into effect only very recently, the Company believes that the
new rule will level the playing field and result in more consistent
reimbursement among providers of laboratory testing services.
12
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. Legislation to further extend this
deadline has been introduced in Congress. 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 have not had 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, contain additional
information regarding the complex area of reimbursement.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
laboratory services, logistics and depreciation expense, increased to $23.4
million in the Third Quarter-2002 from $16.1 million in the Third Quarter-2001,
and to $70.2 million for the Nine Months-2002 from $46.9 million for the Nine
Months-2001. As a percentage of revenues, cost of sales improved to 50% in the
Third Quarter-2002 from 56% in the Third Quarter-2001, as well as improving to
50% in the Nine Months-2002 from 56% in the Nine Months-2001. These improvements
are a result of cost control initiatives and to the effective management of
semi-variable and fixed costs such as, laboratory technician salaries and
instrumentation expenses, respectively.
o GROSS PROFIT
Gross profit totaled $23.7 million in the Third Quarter-2002 versus $12.8
million in the Third Quarter-2001, reflecting a gross profit margin of 50% and
44%, respectively. Gross profit for the Nine Months-2002 totaled $70.7 million
versus $37.6 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 semi-variable and fixed costs such as, laboratory technician
salaries and instrumentation expenses, respectively.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $13.5 million in the
Third Quarter-2002 from $8.5 million in the Third Quarter-2001, and to $40.4
million for the Nine Months-2002 from $24.8 million for the Nine Months-2001.
These increases are primarily the result of the acquisition of UroCor as well as
increased insurance premiums and commission expense associated with increased
revenues. As a percentage of sales, SG&A expenses decreased to 29% from 30% for
the Third Quarter-2002 and the Third Quarter-2001, respectively, and remained
constant at 29% for both the Nine Months-2002 and Nine Months-2001.
o SPECIAL CREDIT FOR BAD DEBTS
In the second quarter of 2002, the Company reversed approximately $711,000 of
allowance for bad debts. This was the portion of the $5.5 million special bad
debt provision that the Company recorded in the fourth quarter of 2001 relating
to the acquisition in November 2001 of UroCor, Inc. ("UroCor") that was
determined to be no longer required.
13
o SPECIAL CHARGE
In the third quarter of 2002, the Company recorded a special charge of $5.5
million to cover the anticipated payment to be made to the government relating
to the Department of Justice ("D.O.J.") investigation discussed above. This
amount includes related legal costs. Although a final settlement has not yet
been reached, the Company, believes, based on recent discussions with outside
legal counsel and the government, the payment is probable and reasonably
estimable.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $640,000 in the Third
Quarter-2002 from $339,000 in the Third Quarter-2001, and to $1.5 million in the
Nine Months-2002 from $1.0 million in the Nine Months-2001. These increases for
both the Third Quarter-2002 and the Nine 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 slightly decreased to $271,000 in the Third
Quarter-2002 from $287,000 in the Third Quarter-2001, and remained constant at
$1.0 million for both the Nine Months-2002 and the Nine Months-2001. Research
and development expenses consist primarily of CarePath(TM) services, 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 increased to $3.9 million in the Third Quarter-2002 from
$3.7 million in the Third Quarter-2001, and to $23.0 million from $10.8 million
for the Nine Months-2002 and the Nine Months-2001, respectively. These increases
reflect the effects of the Urocor acquisition offset by the $5.5 million special
charge relating to the D.O.J. investigation in the third quarter 2002 and
include $711,000 special credit for bad debts recorded in the second quarter of
2002.
Income from operations, before the $5.5 million special charge relating to the
D.O.J. investigation, increased to $9.3 million in the Third Quarter-2002 from
$3.7 million in the Third Quarter-2001. Income from operations for the Nine
Months-2002 and the Nine Months-2001, before both the $5.5 million special
charge relating to the D.O.J. investigation and the $711,000 special credit for
bad debts recorded in the second quarter of 2002, increased to $27.8 million
from $10.8 million, respectively. These increases are a result of increased
revenues, cost control initiatives and the effective management of semi-variable
and fixed costs.
EBITDA is defined as income before interest expense, income tax expense and
depreciation and amortization. Adjusted EBITDA excludes the non-recurring $5.5
million special charge relating to the D.O.J. investigation and the $711,000
special credit for bad debts. These items are excluded from Adjusted EBITDA as
these items do not impact operating results on a recurring basis. 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 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 calculations of EBITDA and Adjusted
EBITDA may be different from the calculations used by other companies and,
therefore, comparability may be limited.
14
EBITDA and Adjusted EBITDA for the third quarter and nine months ended 2002 and
2001 are as follows:
Third Quarter Nine Months Ended
------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
EBITDA $ 5,468,406 $4,693,950 $27,420,387 $14,199,315
Adjusted EBITDA $10,918,406 $4,693,950 $32,159,430 $14,199,315
Adjusted EBITDA as a percentage of sales 23.2% 16.2% 22.8% 16.8%
o INTEREST INCOME, NET
Net interest income increased to $522,000 in the Third Quarter-2002 from
$184,000 in the Third Quarter-2001, and to $1.2 million in the Nine Months-2002
from $457,000 in the Nine 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 includes an additional tax provision as all or
part of the anticipated payment to the government, related to the D.O.J.
investigation, may be deemed non-deductible for tax purposes. The provision,
before the additional amounts, reflects a 40.5% effective tax rate for both the
three month and nine month periods ended 2002 and 2001, totaling $3.7 million in
the Third Quarter-2002 and $1.6 million in the Third Quarter-2001 and $11.7
million in the Nine Months-2002 and $4.6 million in the Nine Months-2001.
o NET INCOME
Net income decreased 71% to $673,000 in the Third Quarter-2002 from $2.3 million
in the Third Quarter-2001, and increased 85% to $12.4 million in the Nine
Months-2002 from $6.7 million in the Nine Months-2001. Basic earnings per share
decreased 81% to $0.06 per share in the Third Quarter-2002 from $0.31 per share
in the Third Quarter-2001, and increased 13% to $1.03 per share in the Nine
Months-2002 from $0.91 per share in the Nine Months-2001, while diluted earnings
per share decreased 82% to $0.05 per share in the Third Quarter-2002 from $0.28
per share in the Third Quarter-2001, and increased 18% to $0.98 per share in the
Nine Months-2002 from $0.83 per share in the Nine Months-2001.
On a pro forma basis, before the $5.5 million ($5.2 million after tax) special
charge relating to the D.O.J. investigation and the $711,000 ($423,000 after
tax) special credit for bad debts recorded in the second quarter of 2002, net
income increased 154% to $5.9 million in the Third Quarter-2002 from $2.3
million in the Third Quarter-2001, and 156% to $17.2 million in the Nine
Months-2002 from $6.7 million in the Nine Months-2001. On a pro forma basis,
before the special charge relating to the D.O.J. investigation and the special
credit for bad debts, basic earnings per share increased 55% to $0.48 per share
in the Third Quarter-2002 from $0.31 per share in the Third Quarter-2001, and
56% to $1.42 per share in the Nine Months-2002 from $0.91 per share in the Nine
Months-2001, while diluted earnings per share increased 68% to $0.47 per share
in the Third Quarter-2002 from $0.28 per share in the Third Quarter-2001, and
63% to $1.35 per share in the Nine Months-2002 from $0.83 per share in the Nine
Months-2001.
15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 2002, Dianon had total cash and cash equivalents and
available-for-sale securities of $60.1 million, comprising of $8.9 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
$51.2 million in available-for-sale securities, consisting of high grade, fixed
income securities with maturities of less than three years. Working capital was
$89.6 million and $68.8 million as of September 30, 2002 and December 31, 2001,
respectively, and the current ratios (current assets divided by current
liabilities) were 5.0:1 and 4.2:1, respectively.
Accounts receivable totaled $38.1 million as of September 30, 2002, representing
approximately 73 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 as well
as the installation, during the third quarter, of the Company's laboratory
information system in the Oklahoma City facility, which required a temporary
interruption in claims processing to ensure the quality and integrity of data
transferred between the laboratory and billing system.
Capital expenditures for the Third Quarter-2002 and Nine Months-2002 totaled
approximately $562,000 and $2.6 million, respectively. Expenditures were
primarily related to building expansion, the new Port Washington, NY facility
and information system enhancements.
Dianon has a three-year, $15 million line of credit agreement with a bank which
expires in August 2003. The agreement includes various provisions regarding
borrowings under the facility, including financial and negative covenants. As of
September 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 September 30, 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 under the
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.
The Company's current medical malpractice insurance coverage expires as of
December 1, 2002. The Company expects that the renewal or replacement of its
medical malpractice insurance coverage for the next policy year will result in
significantly increased premium and deductible levels as a result of current
conditions in the insurance market for such coverage.
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.
16
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.
RISK FACTORS; FORWARD-LOOKING STATEMENTS
- ----------------------------------------
This report 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.
17
Item 3. 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 September
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.
Item 4. CONTROLS AND PROCEDURES
Based on an evaluation of the disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-Q, the Chairman of
the Board and Chief Executive Officer, Kevin C. Johnson, and the Senior Vice
President, Finance and Chief Financial Officer, David R. Schreiber, have
concluded that the disclosure controls and procedures are effective.
There were no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of our
most recent evaluation thereof.
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 on Form 8-K:
During the period ending September 30, 2002, the Company filed the
following current Reports on Form 8-K:
(i) Currrent Report on Form 8-K dated July 19, 2002, pertaining
to a proposed amendment to the Company's 2002 Stock Incentive
Plan.
(ii) Current Report on Form 8-K dated July 24, 2002, outlining the
proposed amendment to the Company's 2002 Stock Incentive
Plan.
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.
/s/ KEVIN C. JOHNSON
November 8, 2002 ------------------------------------
By: Kevin C. Johnson
Chairman of the Board,
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ DAVID R. SCHREIBER
November 8, 2002 ------------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
20
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kevin C. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dianon Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 8, 2002
By: /s/ Kevin C. Johnson
----------------------------
Kevin C. Johnson
Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David R. Schreiber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dianon Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 8, 2002
By: /s/ David R. Schreiber
----------------------------
David R. Schreiber
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description
- ------- -----------
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.