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, 1999
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 November 10, 1999 was 6,846,967 shares.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of
September 30, 1999 and December 31, 1998. 3
Income Statements for the three month
and nine month periods ended September 30, 1999 and 1998. 4
Statements of Stockholders' Equity
for the nine months ended September 30, 1999 and 1998. 5
Statements of Cash Flows for
the nine months ended September 30, 1999 and 1998. 6
Notes to Financial Statements. 7-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
Part II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
2
DIANON SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $9,071,517 $12,126,076
Accounts receivable, net of allowances of $1,547,666 and
$1,033,059, respectively 17,532,169 14,403,878
Prepaid expenses and employee advances 1,007,577
1,048,197
Inventory 1,013,062 981,647
Deferred income tax asset 699,504 1,047,118
--------------- ---------------
Total current assets 29,364,449 29,566,296
--------------- ---------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 11,902,322 10,367,848
Leasehold improvements 4,344,520 3,786,759
Less - accumulated depreciation and amortization (8,620,122)
(10,655,506)
--------------- ---------------
5,591,336 5,534,485
--------------- ---------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,635,064 and $3,181,779, respectively 13,845,877 377,751
DEFERRED INCOME TAX ASSET 1,327,687 1,005,869
OTHER ASSETS 262,110 218,714
=============== ===============
TOTAL ASSETS $50,391,459 $36,703,115
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,234,716 $ 1,260,620
Accrued employee compensation 1,957,455 576,335
Accrued KMD acquisition costs 1,317,723 --
Current portion of capitalized lease obligations 2,471 42,334
Other accrued expenses 3,626,602 3,360,087
--------------- ---------------
Total current liabilities 8,138,967 5,239,376
--------------- ---------------
LONG-TERM LIABILITIES:
Long-term note payable 6,000,000 --
Long-term portion of capitalized lease obligations 100,747 80,675
Long-term deferred tax liability 11,599 --
--------------- ---------------
Total long-term liabilities 6,112,346 80,675
--------------- ---------------
Total Liabilities 14,251,313 5,320,051
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000 shares authorized,
6,880,801 and 6,808,729 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively 68,809 68,088
Additional paid-in capital 28,018,118 27,398,120
Accumulated earnings 8,587,957 5,697,710
Common stock held in treasury, at cost - 55,834 and 222,019
shares at September 30, 1999 and December 31, 1998, respectively (534,738) (1,780,854)
----------- ---------------
Total stockholders' equity 36,140,146 31,383,064
=========== ===============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,391,459 $36,703,115
=========== ===============
The accompanying notes to consolidated
financial statements are an integral part of
these balance sheets.
3
DIANON SYSTEMS, INC.
INCOME STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 and 1998
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- --------------- ------------- ---------------
Net revenues $20,408,961 $15,750,655 $55,318,911 $46,050,714
Cost of sales 11,911,150 9,275,302 31,995,124 26,375,753
-------------- --------------- ------------- ---------------
GROSS PROFIT 8,497,811 6,475,353 23,323,787 19,674,961
Selling, general and administrative expenses 6,333,567 5,242,990 17,827,593 15,783,368
Amortization of intangible assets 234,350 50,551 453,284 173,659
Research & development expenses 124,580 146,313 352,806 474,336
-------------- --------------- ------------- ---------------
INCOME FROM OPERATIONS 1,805,314 1,035,499 4,690,104 3,243,598
Interest income, net 22,490 184,852 250,490 516,092
-------------- --------------- ------------- ---------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,827,804 1,220,351 4,940,594 3,759,690
Provision for income taxes 758,539 533,830 2,050,347 1,625,746
-------------- --------------- ------------- ---------------
NET INCOME $1,069,265 $686,521 $2,890,247 $2,133,944
============== =============== ============= ===============
EARNINGS PER SHARE
BASIC .16 .10 .43 .32
DILUTED .15 .10 .42 .31
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 6,778,915 6,774,514 6,671,964 6,710,714
DILUTED 7,118,725 6,914,163 6,931,918 6,970,969
The accompanying notes to consolidated
financial statements are an integral part of
these statements.
4
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Additional Common Stock
Common Stock Paid-In Retained Acquired for Treasury
Shares Amount Capital Earnings Shares Amount
--------------------------- ---------------- -------------- ---------------------------
BALANCE, December 31, 1997 6,791,320 $67,914 $27,880,223 $2,743,380 (197,617) ($1,645,273)
Stock options exercised 37,490 374 199,451 -- -- --
Employee stock purchase plan -- -- (499,193) -- 131,498 1,094,800
Stock grants 18,160 182 176,045 -- -- --
Net income -- -- -- 2,133,944 -- --
============= ============ =============== =============== ============= ===============
BALANCE, September 30, 1998 6,846,970 $68,470 $27,756,526 $4,877,324 (66,119) ($550,473)
============= ============ =============== =============== ============= ===============
BALANCE, December 31, 1998 6,808,729 $68,088 $27,398,120 $5,697,710 (222,019) ($1,780,854)
Stock options exercised 38,866 389 299,537 -- -- --
Issuance of common stock 79,981 800 700,516 -- 222,019 1,780,854
Employee stock purchase plan -- -- (16,648) -- 33,386
3,666
Stock grants 3,225 32 -- -- --
29,843
Common stock acquired for treasury -- -- -- -- (109,500) (961,874)
Retired shares (500) (393,250) -- 50,000 393,750
(50,000)
Net income -- -- -- 2,890,247 -- --
============= ============ =============== =============== ============= ===============
BALANCE, September 30, 1999 6,880,801 $68,809 $28,018,118 $8,587,957 (55,834) ($534,738)
============= ============ =============== =============== ============= ===============
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(continued)
Total
--------------
BALANCE, December 31, 1997 $29,046,244
Stock options exercised 199,825
Employee stock purchase plan 595,607
Stock grants 176,227
Net income 2,133,944
===============
BALANCE, September 30, 1998 $32,151,847
===============
BALANCE, December 31, 1998 $31,383,064
Stock options exercised 299,926
Issuance of common stock 2,482,170
Employee stock purchase plan 16,738
Stock grants 29,875
Common stock acquired for treasury
(961,874)
Retired shares --
Net income 2,890,247
===============
BALANCE, September 30, 1999 $36,140,146
===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIANON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(UNAUDITED)
SEPTEMBER 30,
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,890,247 $2,133,944
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 2,494,371 2,103,042
Stock compensation expense 176,227
29,875
Changes in other current assets and liabilities
Increase (decrease) in accounts payable and accrued 2,021,193 (3,141,866)
liabilities
(Increase) decrease in accounts receivable (2,778,429) 867,956
(Increase) in prepaid expenses and employee advances (31,699) (40,158)
(Increase) in inventory (21,665) (235,572)
(Increase) decrease in other assets (17,602) 175,803
--------------- ---------------
Net cash provided by operating activities 4,586,291 2,039,376
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of assets, net (13,740,082) (359,590)
Capital expenditures (1,719,253) (1,493,341)
Proceeds from the sale of fixed assets 1,316 --
--------------- ----------------
Net cash (used in) investing activities (15,458,019) (1,852,931)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of note payable 6,000,000 --
Issuance of common stock 2,482,170 --
Purchase of common stock acquired for treasury (961,874) --
Employee stock purchase plan 16,738 595,607
Stock options exercised 299,926 199,825
Borrowings (repayments) of capitalized lease obligations (19,791) 2,065
--------------- ----------------
Net cash provided by financing activities 7,817,169 797,497
--------------- ----------------
Net (decrease) increase in cash and cash (3,054,559) 983,942
equivalents
CASH AND CASH EQUIVALENTS, beginning of period 12,126,076 12,401,062
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $9,071,517 $13,385,004
=============== ================
Supplemental cash flow disclosures: Cash paid during the period:
Interest $172,462 $22,997
Income Taxes 1,947,467 2,164,552
The accompanying notes to consolidated
financial statements are an integral part of
these statements.
6
DIANON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company - The consolidated financial statements as of and for the three
months and nine months ended September 30, 1999 and 1998 have been prepared
by DIANON Systems, Inc. (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 the Company's annual report for
the year ended December 31, 1998, previously filed on Form 10-K with the
Securities and Exchange Commission (the "Annual Report").
Certain information and footnote 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 the Company's Annual Report for the year ended December 31, 1998.
The results of operations for the three months and nine months ended
September 30, 1999 and 1998 are not necessarily indicative of the operating
results for the full years.
2. Acquisitions -
Effective February 1, 1998, the Company acquired certain assets of a
pathology laboratory in Tampa, Florida ("Pathologists Reference Laboratory"
or "PRL"). The acquisition price was approximately $558,000 (including
acquisition costs), of which $359,590 was paid in cash and the balance was
satisfied through the assumption of certain liabilities. The purchase price
was primarily allocated to trade receivables ($265,000) and customer lists
($164,000), and the acquisition has been accounted for pursuant to the
purchase method of accounting.
Effective May 1, 1999, the Company acquired substantially all the assets of
an outpatient OB/Gyn laboratory with locations in Woodbury and New City, New
York ("Kyto Meridien Diagnostics, L.L.C." or "KMD"). The acquisition price
was approximately $13.7 million and was financed through a combination of
available cash and drawdowns of the Company's credit line, as well as through
the issuance of Common Stock. Approximately $12.9 million was paid to the
sellers through September 30, 1999, and the balance will be paid through cash
and assumption of certain liabilities. The purchase price was primarily
allocated to customer lists ($7.5 million), goodwill ($6.4 million), lab and
office equipment ($400,000), and client receivables ($400,000), partially
offset by accrued liabilities ($930,000, of which $270,000 has been paid as
of September 30, 1999). The acquisition has been accounted for pursuant to
the purchase method of accounting.
Pro forma net revenues for the three months and nine months ended September
30, 1999 and 1998, adjusted as if the acquisitions for KMD and PRL had
occurred January 1, 1999 and 1998, respectively, approximate $20.4 million
and $18.6 million, and $58.9 million and $54.8 million respectively. Pro
forma consolidated net income and earnings per share would not differ
materially from the reported amounts.
3. Earnings per share - Basic earnings per share have been computed based on the
weighted average number of common shares outstanding during each year.
Diluted earnings per share have been computed based on the weighted average
number of common shares and common equivalent shares outstanding during each
year. Common equivalent shares outstanding include the common equivalent
shares calculated for warrants and stock options under the treasury stock
method. Below is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the third quarter and nine month
periods ended September 30, for both 1999 and 1998:
7
Third quarter ended Nine months ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
BASIC EARNINGS PER SHARE
Weighted-average number of
common shares outstanding 6,778,915 6,774,514 6,671,964 6,710,714
DILUTED EFFECT OF:
Stock options 339,810 139,649 259,954 260,255
---------- ------------ ---------- ----------
DILUTED EARNINGS PER SHARE
Weighted-average number of
common shares outstanding 7,118,725 6,914,163 6,931,918 6,970,969
---------- ------------ --------- ----------
NET INCOME $1,069,265 $686,521 $2,890,247 $2,133,944
---------- ------------ ---------- ----------
BASIC EARNINGS PER SHARE $0.16 $0.10 $0.43 $0.32
---------- ------------ ---------- ----------
DILUTED EARNINGS PER SHARE $0.15 $0.10 $0.42 $0.31
---------- ------------ ---------- ----------
Options to purchase 35,055 shares of common stock at prices ranging from
$10.75 and $12.25 per share were outstanding as of September 30, 1999 but
were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of
common shares.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and nine months ended September 30, 1999 ("Third Quarter-1999" and
"Nine Months-1999", respectively) to the three months and nine months ended
September 30, 1998 ("Third Quarter-1998" and "Nine Months-1998", respectively).
The Company's results of operations in the Third Quarter-1999 and Nine
Months-1999 reflect favorable volume and mix increases in certain product lines,
continued reductions in selling, general, administrative and other operating
expenses, and the acquisition of Kyto Meridien Diagnostics, L.L.C. ("KMD").
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 30% to $20.4 million in the Third Quarter-1999 from $15.8
million in the Third Quarter-1998, and 20% to $55.3 million in the Nine
Months-1999 from $46.1 million in the Nine Months-1998. These increases reflect
the acquisition of KMD on May 1, 1999, as well as volume increases in certain
product lines, and the successful negotiation and introduction in 1999 of
several capitated contracts.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $11.9 million in the
Third Quarter-1999 from $9.3 million in the Third Quarter-1998, and to $32.0
million for the Nine Months-1999 from $26.4 million for the Nine Months-1998. As
a percentage of revenues, cost of sales were 58% and 59% for the third quarter
periods 1999 and 1998, respectively; and 58% and 57% for the nine month periods
1999 and 1998, respectively.
For the third quarters 1999 and 1998, while percentages were similar, salaries
and wages increased to $5.4 million in 1999 from $3.9 million in 1998, primarily
reflecting the acquisition of KMD. Overhead expenses (including building rent,
utilities, and depreciation) increased to $2.8 million in 1999 from $2.6 million
in 1998. Logistics expenses increased to $1.6 million from $1.5 million in 1999
and 1998, respectively and lab supplies increased to $2.0 million from $1.3
million for the corresponding periods.
For the nine month periods ended September 1999 and 1998, salaries and wages
increased to $13.9 million in 1999 from $10.8 million in 1998, again reflecting
the acquisition of KMD. Overhead expenses increased to $8.3 million in 1999 from
$7.4 million in 1998, primarily relating to acquisitions in February 1998 and
May 1999, respectively. Logistics expenses increased to $4.7 million in 1999
from $4.3 million in 1998, while cost of lab supplies increased to $5.1 million
in 1999 from $3.8 million in 1998.
o GROSS PROFIT
Gross profit totaled $8.5 million in Third Quarter-1999 versus $6.5 million in
Third Quarter-1998, reflecting a gross profit margin of 42% and 41%,
respectively. Gross profit for the Nine Months-1999 totaled $23.3 million versus
$19.7 million in the prior year, representing margins of 42% and 43%,
respectively. The increases in gross profits are a direct result of increased
revenues.
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. Over time, Congress
has reduced the national cap on Medicare laboratory fee schedules (under which
the Company's clinical chemistry services are reimbursed) to 74% of the national
median. The President's fiscal year 2000 budget proposes to reduce this cap even
further to 72% of the national median. In addition, the Balanced Budget Act of
1997 ("BBA") freezes fee schedule payments (i.e., no updates) for the 1998-2002
period. Payment for services such as those provided
9
by the Company also is and will likely continue to be affected by periodic
reevaluations made by payers concerning which services to reimburse or cease
reimbursing.
On June 29, 1999, President Clinton announced a plan to strengthen and modernize
Medicare. The plan would update lab fee schedule payments for the 2003-2009
period at the rate of growth in the consumer price index ("CPI") minus one
percentage point. It also would eliminate beneficiary cost sharing for all
Medicare covered screening and preventative services, including lab procedures
such as pap smears, but would reinstate the 20 percent beneficiary copayment for
all other lab services. Furthermore, the President's plan would make the
Medicare program more competitive through the use of more market-oriented
purchasing, including competitive bidding.
This fall Congress also has been considering Medicare legislation. On November
5, 1999, a bill passed the House that would require a minimum payment amount of
$14.60 for diagnostic or screening pap smears furnished on or after January 1,
2000. Currently, the national payment cap for a pap smear is approximately
$7.15. In addition, the bill would modify the physician payment update mechanism
so that future updates would be based on more accurate estimates and would not
oscillate severely, as is the case under current law. Finally, the bill would
require the Secretary of Health and Human Services ("HHS") to establish a
process by which she would use data collected by outside entities and
organizations to supplement HHS data in refining the practice expense values for
services reimbursed under the physician fee schedule, including anatomic
pathology services performed by the Company. A bill reported by the Senate
Finance Committee contains similar provisions on pap smear payment and the
physician update mechanism. It does not contain a legislative provision relating
to the use of outside data in practice expense refinement but does include
report language on this issue.
It is not clear whether the bills passed by the House and the Senate Finance
Committee will be enacted this year. In addition, the President may negotiate to
include some of his Medicare modernization and reform provisions as a condition
to signing this Medicare legislation. Overall, changes in government and other
third-party payor reimbursement which may result from the enactment of this
health care reform or of deficit reduction or balanced budget legislation are
difficult to predict; however, they likely will continue the downward pressure
on prices and make the market for clinical laboratory services more competitive.
With respect to the Company's anatomic pathology services, which are not
reimbursed under the Medicare laboratory fee schedules, the Medicare fees also
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. In 1998, HCFA recalculated physician practice expenses, a key
component of the RBRVS, to reflect resource consumption rather than historical
charge data. The resulting new practice expense values are being phased in over
the period 1999 to 2002.
Under the Balanced Budget Act, HCFA is required to recalculate the malpractice
expense component of the RBRVS to make it resource-based, effective January 1,
2000. With the implementation of resource-based malpractice relative value units
("RVUs") and full implementation of resource-based practice expense RVUs in
2002, all physician fee schedule RVUs will be resource-based. The current
malpractice RVUs are charge-based from Medicare claims data accumulated in 1989.
The proposed resource-based malpractice RVUs are based on actual malpractice
premium data and current Medicare payment data on allowed services and charges,
RVUs, and specialty payment percentages. Because malpractice expenses are the
least significant component of the RBRVS formula (representing about 3.2 percent
of the Medicare payment amount), the implementation of resource-based
malpractice expense is not expected to make a significant difference in
reimbursement amounts.
On November 2, 1999, HCFA published its final Medicare physician fee schedule
regulation for the year 2000. This final rule includes several changes in the
payment methodology for physician services. Of most significance to pathology
services, however, was adoption of a modification in methodology specific to
pathology. In 1998, HCFA created a separate practice expense pool for all
services where the physician work RVUs are equal to zero. Reimbursement of
pathology services was negatively affected by placement of such services in this
pool. HCFA received comments requesting that these services be taken out of this
special pool and be treated like the vast majority of codes. This change was
adopted in the final rule, mitigating HCFA's original estimate that pathology
services would decrease 13% as a result of the fully implemented practice
expense RVUs. HCFA now estimates the combined impact of the proposed changes in
the malpractice RVUs and the fully implemented practice expense RVUs will be
only a 6% decrease for pathology services. However, based on the November 2,
1999 revisions to payment policies under the physician fee schedule, the RBRVS
fee schedule payment amounts for the most common pathology codes the Company has
historically performed are scheduled for an increase effective January 1, 2000.
The actual impact on the Company's
10
Medicare pathology revenues will depend on the precise mix of pathology services
furnished.
In addition, HCFA has announced that effective January 1, 2001, independent labs
may no longer bill for the technical component ("TC") of physician 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 physician
pathology services provided to beneficiaries who are hospital outpatients or who
are in other settings, but for the TC of services provided to a hospital
inpatient, the independent lab will have to make arrangements with the hospital
in order to receive payment.
The Company's Form 10-K for the year ended December 31, 1998, previously filed
with the Securities and Exchange Commission, contains additional information
regarding the complex area of reimbursement.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the Third quarters 1999 and 1998, selling, general and administrative
expenses increased to $6.3 million in 1999 from $5.2 million in 1998. While
absolute expenses increased, they decreased as a percentage of sales to 31% in
the Third Quarter-1999 from 33% in the Third Quarter-1998.
For the nine-month periods ended September 1999 and 1998, selling, general and
administrative expenses increased to $17.8 million in 1999 from $15.8 million in
1998. Again, although expenses increased, they decreased as a percentage of
sales to 32% in the Nine Months-1999 from 34% in the Nine Months-1998.
The expense increases in the third quarter and the nine month periods ended
September 1999 versus corresponding periods in 1998 were primarily due to higher
commissions associated with obtaining new sales; and from increased risk
management, medical and other insurance costs due to the acquisition of
additional facilities and employees.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $234,000 in the Third
Quarter-1999 from $51,000 in the Third Quarter-1998, and to $453,000 in the Nine
Months-1999 from $174,000 in the Nine Months-1998. These increases were
associated with the acquisition of KMD.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $125,000 in the Third
Quarter-1999 from $146,000 in the Third Quarter-1998, and to $353,000 for the
Nine Months-1999 from $474,000 for the Nine Months-1998.
o INCOME FROM OPERATIONS
Income from operations increased to $1.8 million in the Third Quarter-1999 from
$1.0 million in the Third Quarter-1998, and to $4.7 million for the Nine
Months-1999 from $3.2 million for the Nine Months-1998. The increase in
operating income reflects the increase in sales.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the Third Quarter-1999 and 1998 and the Nine Months-1999 and 1998 are as
follows:
3rd Qtr 1999 3rd Qtr 1998 Nine Months 1999 Nine Months 1998
------------ ------------ ---------------- ----------------
EBITDA $2,769,796 $1,696,297 $7,184,474 $5,346,639
EBITDA as a percentage of sales 13.6% 10.8% 13.0% 11.6%
o PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 41.5% and 43.7% effective tax rate in
Third Quarter-1999 and Third Quarter-1998, respectively, totaling $759,000 and
$534,000. The lower effective tax rate is due to reduced miscellaneous and state
taxes. The provision totaled $2.1 million and $1.6 million for the Nine
Months-1999 and Nine Months-1998, respectively, reflecting rates of 41.5% and
43.2%.
11
o NET INTEREST INCOME
Net interest income decreased to $22,000 in the Third Quarter-1999 from $185,000
in the Third Quarter-1998, and to $250,000 in the Nine Months-1999 from $516,000
for the prior year, due to lower income received on less cash invested, and the
beginning of interest payments on borrowings drawn from the Company's line of
credit.
o NET INCOME
For the Third quarters 1999 and 1998, net income increased 56% to $1.1 million
in 1999 from $687,000 in 1998. Basic earnings per share increased to $0.16 per
share in 1999 from $0.10 per share in 1998, while diluted earnings per share
increased to $0.15 per share in 1999 from $0.10 per share in 1998.
For the nine-month periods ended September 1999 and 1998, net income increased
35% to $2.9 million in 1999 from $2.1 million in 1998. Basic earnings per share
increased to $0.43 in the same period in 1999 from $0.32 per share in 1998,
while diluted earnings per share increased to $0.42 in 1999 from $0.31 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had total cash and cash equivalents of $9.1
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. Working capital was $21.2
million and $24.3 million as of September 30, 1999 and December 31, 1998,
respectively, and the current ratios were 3.6:1 and 5.6:1, respectively.
Accounts receivable (net of allowances) totaled $17.5 million as of September
30, 1999 representing approximately 82 days of sales outstanding, compared to
$14.4 million or 82 days as of December 31, 1998. Days sales outstanding as of
September 30, 1998 approximated 81 days.
Capital expenditures during the Third Quarter-1999 and Nine Months-1999 totaled
$765,000 and $1,699,000, respectively.
Effective February 17, 1998, the Company 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 those related to financial
covenants. As of September 30, 1999, $6.0 million had been drawn down against
this line for the acquisition of KMD.
As of September 30, 1999, the Company holds 55,834 shares of Common Stock in
treasury. In October 1998, the Company's Board of Directors authorized the
repurchase of up to an additional 1.5 million shares of the Company's Common
Stock, on the open market or in a private transaction, subject to total
expenditures for share repurchases limited to an additional $10.0 million, for a
total authorization of approximately 1.7 million shares and $12.0 million in
total expenditures. The remaining authorized repurchases as of September 30,
1999 are approximately 1.3 million shares and $8.9 million in total
expenditures. During the third quarter and first nine months of 1999, the
Company purchased 28,000 and 109,500 shares at an average price of $9.87 and
$8.78, respectively.
The Company believes that cash flows from operations and available cash and cash
equivalents are adequate to fund the Company's operations for the foreseeable
future.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900, rather than the year 2000. Such a recognition
error could result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, issue bills, or engage in similar normal business activities.
The Company believes all of its computer hardware and software is currently Year
2000 compliant. The remedial measures necessary to address the Company's Year
2000 issues were not material and required minimal resources to
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resolve (less than $50,000). Currently, 100% of the Company's software has been
remediated, unit tested, and implemented. The Company used internal resources to
reprogram, or replace, test, and implement the software for Year 2000
modifications.
In addition, the Company has queried its important customers, suppliers and
vendors to assess their Year 2000 readiness, and has found no significant
problems. As to customers, the most significant exposure is that associated with
the federal government's Medicare and Medicaid programs and with major insurance
companies. These customers in aggregate represent a material portion of the
Company's revenues and corresponding cash flow. As to suppliers and vendors, the
most significant exposure is that associated with air transportation
(substantially all specimens are flown in overnight and the resulting reports
overnighted back to the customer) and laboratory supplies. To date, the Company
is not aware of any problems that would materially impact results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that these customers, suppliers and vendors will be Year 2000 compliant. The
inability of those parties to complete their Year 2000 resolution process could
materially impact the Company. As discussed above, the Company is unaware of any
Year 2000 issues related to air transportation. Accordingly, the Company has not
developed a contingency plan in the event its vendors for air transportation are
not Year 2000 compliant. The Company will strive to maintain liquidity, through
its credit line and cash position, to mitigate any cash flow risks associated
with the aforementioned Year 2000 exposures.
While the Company believes all of its computer hardware and software is
currently Year 2000 compliant, if any of its systems are noncompliant there
could be a material impact on the operations of the Company.
RISK FACTORS; FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis contains forward looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company'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 the Company to beneficiaries of
the Medicare program; the possibility of being deemed to be not in compliance
with Federal or state regulatory requirements; the uncertainties relating to the
ability of the Company to convince physicians and/or managed care organizations
to use the Company as a provider of anatomic pathology testing services; the
ability of the Company to maintain superior quality relative to its competitors;
the ability of the Company 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 national laboratories, together with the competitive pressures
from small specialized laboratories and well established local pathologists; and
the uncertainties which would arise if integrated delivery systems closed to
outside providers emerged as the dominant form of health care delivery.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to market risk with respect to its cash and cash
equivalents since substantially all amounts are invested in a fund holding U.S.
Treasury securities with maturities of less than three months.
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PART II OTHER INFORMATION
Item 4 Submission of matters to vote of security holders
On October 21, 1999 the Company held its 1999 Annual Meeting of
Shareholders at which the following actions were approved: directors
were elected, the Employee Stock Purchase Plan was approved, the 1999
Stock Incentive Plan was approved, and the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the
calendar year ended December 31, 1999 was ratified. The directors
elected were Messrs. Kevin C. Johnson, John P. Davis, Bruce K.
Crowther, E. Timothy Geary, G.S. Beckwith Gilbert, Jeffrey L. Sklar and
David R. Schreiber. The table below represents the votes cast:
Director In Favor Against
-------- -------- -------
Kevin C. Johnson 5,841,963 15,797
John P. Davis 5,838,928 18,832
Bruce K. Crowther 5,841,963 15,797
E. Timothy Geary 5,841,236 16,524
G.S. Beckwith Gilbert 5,841,536 16,224
Jeffrey L. Sklar 5,841,963 15,797
David R. Schreiber 5,839,118 18,642
Other actions and the results taken at the Company's 1999 Annual
Meeting of Shareholders were as follows:
Unvoted
Action Votes For Votes Against Abstentions Shares
------ --------- ------------- ----------- ------
Approval of Employee Stock Purchase Plan 4,566,000 51,911 6,062 1,233,787
Approval of 1999 Stock Incentive Plan 4,269,201 347,849 6,923 1,233,787
Ratify appointment of Arthur Andersen LLP 5,845,458 7,440 4,862 0
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.
(27.1) Financial Data Schedule (filed herewith).
(b) Reports:
No reports on Form 8-K were filed during the Third Quarter 1999.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIANON Systems, Inc.
/s/ KEVIN C. JOHNSON
November 10, 1999 --------------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID R. SCHREIBER
November 10, 1999 --------------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15