EXHIBIT 99.2
KYTO MERIDIEN DIAGNOSTICS, L.L.C.
FINANCIAL STATEMENTS
TOGETHER WITH AUDITORS' REPORT
AS OF DECEMBER 31, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Kyto Meridien Diagnostics, L.L.C.:
We have audited the accompanying balance sheet of Kyto Meridien Diagnostics,
L.L.C. as of December 31, 1998, and the related statements of income, members'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kyto Meridien Diagnostics,
L.L.C. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary schedules presented on
pages 9 and 10 are presented for purposes of additional analysis and are not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
March 19, 1999
KYTO MERIDIEN DIAGNOSTICS, L.L.C.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$932,175
Accounts receivable, net of allowance for doubtful
accounts of $1,120,086 3,331,435
Accrued interest 3,228
Prepaid expenses and other current assets 121,820
---------
Total current assets 4,388,658
PROPERTY AND EQUIPMENT, net 330,863
OTHER ASSETS:
Organization costs 33,397
----------
$4,752,918
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LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade
$ 471,640
Accrued expenses 646,524
----------
Total current liabilities 1,118,164
MEMBERS' EQUITY 3,634,754
----------
$4,752,918
==========
The accompanying notes are an integral part of this balance sheet.
KYTO MERIDIEN DIAGNOSTICS, L.L.C.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
NET REVENUES $14,631,433
COST OF OPERATIONS
7,035,159
---------
Gross profit 7,596,274
---------
OPERATING EXPENSES:
General and administrative expenses 5,063,585
Selling expenses 404,284
---------
5,467,869
---------
Income before members' salaries 2,128,405
MEMBERS' SALARIES 850,419
---------
Income from operations 1,277,986
OTHER INCOME (EXPENSE):
Interest income 15,631
Loss on disposal of fixed assets
(10,301)
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Net income $ 1,283,316
===========
The accompanying notes are an integral part of this financial statement.
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KYTO MERIDIEN DIAGNOSTICS, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
MEMBERS' EQUITY, January 1, 1998 $2,599,475
ADD: Net income
1,283,316
---------
3,882,791
LESS: Members' withdrawals 248,037
----------
MEMBERS' EQUITY, December 31, 1998 $3,634,754
----------
The accompanying notes are an integral part of this financial statement.
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KYTO MERIDIEN DIAGNOSTICS, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,283,316
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 128,910
Amortization 11,132
Loss on disposal of property and equipment 10,301
Provision for bad debts 1,296,815
Changes in operating assets and liabilities:
Increase in accounts receivable (1,818,948)
Increase in accrued interest (3,228)
Decrease in prepaid expenses 15,736
Increase in accounts payable 112,132
Decrease in accrued expenses (3,373)
---------
Net cash provided by operating activities 1,032,793
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (95,901)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' withdrawals (248,037)
Remaining payments on capital leases (56,481)
---------
Net cash used in financing activities (304,518)
---------
Increase in cash and cash equivalents 632,374
CASH AND CASH EQUIVALENTS, December 31, 1997 299,801
CASH AND CASH EQUIVALENTS, December 31, 1998 $ 932,175
---------
The accompanying notes are an integral part of this financial statement.
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KYTO MERIDIEN DIAGNOSTICS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
1. Organization and Summary of Significant Accounting Policies:
The following summary of significant accounting policies of Kyto Meridien
Diagnostics, L.L.C. (the "Company") is presented to assist in understanding
the Company's financial statements.
Business activity-
The Company operates two pathology laboratories. The laboratories are
located in Rockland County and Nassau County in New York State. The
Company primarily performs cytology and histology testing relative to
ob-gyn cancer screening. The Company also performs additional testing in
microbiology, hematology and other areas. The Company performs testing
for doctors throughout the United States.
Business formation-
The Company is a New York State limited liability company ("L.L.C."),
which was established on January 1, 1997, when Kyto Diagnostics, L.P. and
Meridien Diagnostic Labs, Inc. (the "Members") contributed their
operations and equipment into the new entity. As an L.L.C., the Company
has a finite life and will cease to exist on December 31, 2046. The
Members of the Company are not personally responsible for the Company's
debts, except to the extent of their investment.
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 disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents-
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less
to be cash equivalents.
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Property and equipment-
Property and equipment are stated at cost. They are depreciated using
straight-line and accelerated methods over the estimated useful lives of
5-7 years. Depreciation for the year ended December 31, 1998 was
$128,910.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Organization costs-
The organization costs are recorded as an asset and are being amortized
over five years on a straight-line basis.
Net revenues-
Provisions for estimated third-party payor settlements included in net
laboratory fees are provided in the period the related services are
rendered. Differences between the estimated amounts accrued and the final
settlements are reported in operations in the year of settlement.
Advertising and promotion expense-
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred.
Income taxes-
The Company is treated as a partnership for federal and New York State
income tax purposes and does not incur income taxes. The Company's net
income or loss is passed to the respective members and is required to be
reported by them on their income tax returns.
2. Related Party Transactions:
The Company conducts its Rockland County operations from facilities that
are leased from the sole stockholder of Kyto Diagnostics, Inc., a partner
of one of the Members of the Company. Rent expensed and paid to this
related party was $270,770 for the year ended December 31, 1998.
3. 401(k) Plan:
The Company has a 401(k) plan which covers substantially all full-time
employees who meet the plan's eligibility requirements and provides for a
tax-deferred profit-sharing contribution by the Company and an
employee-elective contribution. The matching contribution limit for the
Company includes 20% of salary reductions up to 5% of compensation. A
participant's
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contribution may not exceed 20% of annual compensation or the maximum
amount allowed as determined by the Internal Revenue Code, whichever is
smaller. The Company's contribution to the plan was $37,637 in 1998.
4. Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash.
The Company maintains cash balances at a bank located in the New York City
area. Accounts at the bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1998, the Company's uninsured
cash balances totaled $832,175.
5. Fair Value of Financial Instruments:
At December 31, 1998, the carrying value of financial instruments such as
cash, trade receivables and payables, approximated their fair values, based
on the short-term maturities of these instruments.
6. Leasing Arrangements:
The Company has two operating lease agreements involving their office and
laboratory facilities. The leases are noncancellable and expire in 1999 and
2003.
The following is a five-year schedule of future minimum rental payments
required under the operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1998:
Year Ended December 31, 1999 $269,967
Year Ended December 31, 2000 258,767
Year Ended December 31, 2001 263,942
Year Ended December 31, 2002 269,221
Year Ended December 31, 2003 135,943
Rent expense for the year ended December 31, 1998 was $470,691.
7. Contingencies:
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position of the Company, as any judgements
against the Company are expected to be substantially covered by insurance
in effect at the time the claim was incurred.
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8. Subsequent Events:
On January 6, 1999, the Company signed a Letter of Intent with Dianon
Systems, Inc. to sell substantially all of the assets used in connection of
the operation of the Company's business including its customer lists,
customer files and records, all tangible assets such as equipment,
furniture and fixtures, and the rights to the trade name "Kyto Meridien
Diagnostics." The Company's accounts receivable as of the date of sale are
to be excluded from the transaction.
It is projected that the sale will close on or about April 1, 1999.
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KYTO MERIDIEN DIAGNOSTICS, L.L.C.
SCHEDULE OF COST OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
LABOR $3,652,032
----------
LABORATORY SUPPLIES 1,434,474
----------
OUTSIDE LABORATORY SERVICES 397,672
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OTHER COSTS:
Payroll taxes 282,155
Group insurance 172,111
Workers' compensation insurance 35,640
401(k) plan contribution 22,697
Employee benefits 5,866
Education and seminars 5,338
Malpractice insurance 208,351
Licenses and permits 46,755
Postage, freight and delivery 697,150
Shipping supplies 30,465
Repairs and maintenance - Laboratory equipment 10,961
Hazardous waste removal 33,492
----------
1,550,981
----------
$7,035,159
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KYTO MERIDIEN DIAGNOSTICS, L.L.C.
SCHEDULE OF OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and wages
$2,088,635
Amortization 11,132
Auto expenses 26,418
Bad debts 1,296,815
Billing and reporting supplies 86,815
Collection agency fees 29,163
Computer supplies and support 116,997
Computer payroll service 7,943
Depreciation 128,910
Employee benefits 8,364
401(k) plan contributions 13,016
Group insurance 175,392
General insurance 14,140
New York State use tax 13,089
New York State L.L.C. annual fee 325
Office supplies and expense 92,987
Payroll taxes 206,775
Professional fees 47,310
Rent 470,691
Repairs and maintenance 43,949
Telephone 119,869
Travel and entertainment 14,935
Utilities 49,915
----------
$5,063,585
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SELLING EXPENSES:
Salaries and commissions
$330,053
Payroll taxes 18,631
Auto expenses 32,275
401(k) plan contributions 1,924
Group insurance 8,354
General insurance 717
Office supplies and expense 908
Telephone 4,021
Travel and entertainment 7,401
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$ 404,284
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