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, 1996
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 33-41226
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 06497
(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 8, 1996 was 6,707,680 shares.
Exhibit Index is on page 15 of 69 pages.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 3
1996 and December 31, 1995.
Consolidated Income Statements for the three month 4
and nine month periods ended September 30, 1996
and 1995.
Consolidated Statements of Stockholders' Equity 5
for the twelve month periods ended December 31,
1995 and the nine month periods ended September
30, 1996.
Consolidated Statements of Cash Flows for the nine 6
month periods ended September 30, 1996 and 1995.
Notes to Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8-12
Part II OTHER INFORMATION
- -------------------------
Item 5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
ASSETS ------------- ------------
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents $ 5,961,279 $ 10,990,231
Accounts receivable, net of allowances of $786,920
for each of the periods 12,490,911 9,653,971
Prepaid expenses and employee advances 1,128,987 1,071,963
Prepaid and refundable income taxes 434,064 168,420
Inventory 633,694 554,398
Deferred income tax asset 652,328 652,328
Investment in common stock -- 135,508
------------ ------------
Total current assets 21,301,263 23,226,819
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Leasehold improvements 3,631,986 1,717,606
Laboratory and office equipment 12,105,424 11,068,949
Less - accumulated depreciation (8,026,792) (6,879,799)
------------ ------------
7,710,618 5,906,756
------------ ------------
INTANGIBLE ASSET - CUSTOMER LISTS, net of
accumulated amortization of $2,731,009 and $2,606,291, respectively 614,595 739,308
INTANGIBLE ASSET - NON COMPETE AGREEMENT, net of
accumulated amortization of $162,500 and $125,000, respectively 87,500 125,000
DEFERRED INCOME TAX ASSET 178,575 178,575
OTHER ASSETS 239,419 278,948
------------ ------------
TOTAL ASSETS $ 30,131,970 $ 30,455,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 5,925,583 $ 4,922,514
Current portion of capitalized lease obligations 36,760 38,466
Current portion of note payable 884,514 916,150
Severance costs 101,683 209,121
Restructuring reserves 155,584 166,598
------------ ------------
Total current liabilities 7,104,124 6,252,849
------------ ------------
LONG-TERM PORTION OF CAPITALIZED LEASE
OBLIGATIONS 75,525 34,413
LONG-TERM NOTE PAYABLE -- 650,154
DEFERRED INCOME TAX LIABILITY 65,651 65,651
------------ ------------
Total Liabilities 7,245,300 7,003,067
------------ ------------
STOCKHOLDERS' EQUITY:
Commonstock, par value $.01 per share, 20,000,000 shares
authorized, 6,324,298 and 6,311,451 shares issued
and outstanding at September 30, 1996 and
December 31, 1995, respectively 63,243 63,115
Additional paid-in capital 26,668,111 26,609,657
Accumulated deficit (1,265,606) (2,724,433)
Common stock held in treasury, at cost - 421,000 shares
at September 30, 1996 and 50,000 shares at December 31, 1995 (2,283,078) (200,000)
Shareholder note receivable (296,000) (296,000)
------------ ------------
Total stockholders' equity 22,886,670 23,452,339
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,131,970 $ 30,455,406
============ ============
The accompanying notes to consolidated
financial statements are an integral
part of these balance sheets.
DIANON SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
NET REVENUES $13,863,408 $11,328,790 $39,956,557 $33,195,191
COST OF SALES 6,799,712 4,949,934 19,419,522 14,587,558
----------- ----------- ----------- -----------
Gross Profit 7,063,696 6,378,856 20,537,035 18,607,633
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,222,176 4,598,822 15,891,036 15,014,253
RESEARCH AND DEVELOPMENT
EXPENSES 722,157 1,399,874 2,304,239 3,585,935
----------- ----------- ----------- -----------
Income from Operations 1,119,363 380,160 2,341,760 7,445
INTEREST INCOME 50,573 81,734 280,365 181,074
INTEREST EXPENSE 18,038 32,750 62,779 107,396
----------- ----------- ----------- -----------
Income Before Provision for
Income Taxes 1,151,898 429,144 2,559,346 81,123
PROVISION FOR INCOME TAXES 495,316 185,819 1,100,519 35,126
----------- ----------- ----------- -----------
Net Income $ 656,582 $ 243,325 $ 1,458,827 $ 45,997
=========== =========== =========== ===========
Weighted Average Shares
Outstanding 6,295,106 5,335,878 6,228,925 5,312,865
Primary and Fully Diluted
Earnings Per Share $ 0.10 $ 0.05 $ 0.23 $ 0.01
=========== =========== =========== ===========
The accompanying notes to consolidated
financial statements are an integral part of
these statements.
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Common
Unrealized Foreign Stock
Additional Holdings Currency Held in Shareholder
Common Stock Paid-in Accumulated Gains/ Translation Treasury, Note
Shares Amount Capital Deficit (Losses) Adjustment at Cost Receivable Total
------ ------ ------- ------- -------- ---------- ------- ---------- -----
BALANCE, December 31, 1994 5,296,879 $52,969 $21,591,942 $(2,831,529) $(90,383) $(58,938) $ -- $ -- $18,664,061
Stock options exercised 14,572 146 59,286 -- -- -- -- -- 59,432
Issuance of common stock
and warrants net of
issuance costs 1,000,000 10,000 4,976,443 -- -- -- -- -- 4,986,443
Common stock held in treasury -- -- -- -- -- -- (200,000) -- (200,000)
Shareholder note receivable -- -- -- -- -- -- -- (296,000) (296,000)
Stock compensation expense -
stock options -- -- (18,014) -- -- -- -- -- (18,014)
Write-off of unrealized
holding losses -- -- -- -- 90,383 -- -- -- 90,383
Write-off of foreign currency
translation adjustment -- -- -- -- -- 58,938 -- -- 58,938
Net Income -- -- -- 107,096 -- -- -- -- 107,096
--------- ------ ---------- ---------- --------- ------ ---------- -------- ----------
BALANCE, December 31, 1995 6,311,451 63,115 26,609,657 (2,724,433) -- -- (200,000) (296,000) 23,452,339
Stock options exercised 12,847 128 58,454 -- -- -- -- -- 58,582
Common stock held in treasury -- -- -- -- -- -- (2,083,078) -- (2,083,078)
Net Income -- -- -- 1,458,827 -- -- -- -- 1,458,827
--------- ------ ---------- ---------- --------- ------ ---------- -------- ----------
BALANCE, September 30, 1996 6,324,298 $63,243 $26,668,111 $(1,265,606) $ -- $ -- $(2,283,078) $(296,000) $22,886,670
========= ======= =========== =========== ========= ======= =========== ========== ===========
The accompanying notes to consolidated
financial statements are an integral part of
these statements.
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,458,827 $ 45,997
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 1,690,047 2,244,086
Stock compensation expense -- 2,364
Loss on the sale of fixed assets 19,337 17,919
Investment write-down 61,846 365,698
Changes in other current assets
and liabilities
(Increase) decrease in accounts receivable (2,836,940) 2,375,405
(Increase) in prepaid expenses
and employee advances (322,668) (624,312)
(Increase) in inventory (79,296) (26,509)
(Increase) in other assets (3,788) (77,703)
Increase in accounts payable and accrued liabilities 895,631 589,588
(Decrease) increase in restructuring reserves (11,014) 66,025
------------ ------------
Net cash provided by operating activities 871,982 4,978,558
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,315,215) (1,943,477)
Proceeds from the sale of stock held for investment 73,661 --
Proceeds from the sale of fixed assets 7,500 1,500
------------ ------------
Net cash (used in) investing activities (3,234,054) (1,941,977)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (681,790) (641,841)
Repayments of capitalized lease obligations 39,406 (32,990)
Purchase of common stock held in treasury (2,083,078) --
Exercise of stock options 58,582 59,426
------------ ------------
Net cash (used in) financing activities (2,666,880) (615,405)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,028,952) 2,421,176
CASH AND CASH EQUIVALENTS,
beginning of year 10,990,231 3,534,093
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 5,961,279 $ 5,955,269
============ ============
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $ 63,174 $ 107,250
Income Taxes 1,299,005 581,800
The accompanying notes to consolidated
financial statements are an integral part of
these statements.
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company - The consolidated balance sheet as of September 30, 1996, the
related consolidated income statements for the three month and nine month
periods ended September 30, 1996 and 1995, the related consolidated
statements of stockholders' equity for the twelve month period ended
December 31, 1995 and nine month period ended September 30, 1996 and the
consolidated statements of cash flows for the nine month periods ended
September 30, 1996 and 1995, 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. During the interim periods
reported on, the accounting policies followed are in conformity with
generally accepted accounting principles and are consistent with those
applied for annual periods and described in the Company's Annual Report
filed on Form 10-K with the Securities and Exchange Commission on March 29,
1996 (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,
1995. The results of operations for the three month and nine month periods
ended September 30, 1996 and 1995 are not necessarily indicative of the
operating results for the full year.
2. Definitions - The descriptive analysis contained herein compares the
financial results of the first nine months ended September 30 and the
current three months ended September 30 for the years 1996 and 1995. To
accommodate the comparison of pertinent financial information the following
terms will be used to describe certain aspects of the Company's business:
"First Nine Months of 1996" - nine months ended September 30, 1996
"First Nine Months of 1995" - nine months ended September 30, 1995
"Third Quarter of 1996" - three months ended September 30, 1996
"Third Quarter of 1995" - three months ended September 30, 1995
"Clinical chemistry" or "clinical laboratory" services - the Oncosite
cancer-related blood test service and the Neocyte birth-risk-related blood
test service. In general, these test services are performed by DIANON, and
the test result is interpreted by the physician who ordered the test.
"Anatomic pathology" or "pathology" services - all other testing services
performed by the Company including, but not limited to, genetic, molecular
and immunohistochemistry testing services as well as traditional histology
and morphology evaluations. In general, these tests are performed by DIANON
and are interpreted by a physician or other licensed laboratory professional
employed by DIANON. Some clinical chemistry services associated with certain
anatomic pathology services are classified by the Company as pathology
services although they may be regulated and reimbursed as clinical chemistry
services.
3. Reclassifications - Certain reclassifications have been made to the 1995
amounts to conform to the classifications used in 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Results of Operations
- ---------------------
o Net Revenues
Net revenues were $40.0 million during the First Nine Months of 1996, an
increase of $6.8 million or 20% from the First Nine Months of 1995. Increased
revenues in the First Nine Months of 1996 over the comparable period of 1995
were attributable to increased market penetration by the Company's anatomic
pathology testing services and were offset to some extent by a decrease in
clinical chemistry and hospital-originated pathology services.
Net revenues were $13.9 million during the Third Quarter of 1996, an increase of
$2.5 million or 22% from the Third Quarter of 1995. Increased revenues were
attributable to increased market penetration by the Company's anatomic pathology
testing services.
o Cost of Sales
Cost of sales, which consists primarily of salaries and wages, laboratory
supplies, outside services, logistics (primarily shipping and handling), and
depreciation expense, was $19.4 million during the First Nine Months of 1996, an
increase of $4.8 million or 33% from the First Nine Months of 1995. Salaries and
wages were approximately $6.2 million during the First Nine Months of 1996, an
increase of $2.0 million or 48% from the First Nine Months of 1995. This
increase was principally due to increased laboratory and physician employment
incurred to support new anatomic pathology testing services. Laboratory supplies
were approximately $4.1 million during the First Nine Months of 1996, an
increase of $499,000 or 14% from the First Nine Months of 1995. This increase
was the result of increased sales volume and increased costs for reagents used
for some of the Company's testing services. Logistics were $3.0 million in the
First Nine Months of 1996, an increase of $167,000 or 6% from the First Nine
Months of 1995. As a percentage of net revenues, cost of sales increased to 49%
during the First Nine Months of 1996 from 44% during the First Nine Months of
1995.
Cost of sales was $6.8 million during the Third Quarter of 1996, an increase of
$1.8 million or 37% from the Third Quarter of 1995. As a percentage of net
revenues, cost of sales increased to 49% during the Third Quarter of 1996 from
44% during the Third Quarter of 1995.
o Gross Profit
Gross profits were $20.5 million during the First Nine Months of 1996, an
increase of $1.9 million or 10% from the First Nine Months of 1995. The
Company's gross profit margin decreased to 51% for the First Nine Months of 1996
from 56% for the First Nine Months of 1995. The decrease in gross profit margin
was due to the continued reduction of the average unit price reimbursed for
certain clinical chemistry services and the increased costs necessary to provide
an increased range of anatomic pathology testing services.
Gross profits were $7.1 million during the Third Quarter of 1996, an increase of
$685,000 or 11% from the Third Quarter of 1995. The Company's gross profit
margin decreased to 51% for the Third Quarter of 1996 from 56% for the Third
Quarter of 1995.
The clinical laboratory industry has seen steady downward pressure on prices
exerted by both government and private third-party payers. Also, payment for
services such as those provided by the Company is and likely will continue to be
affected by periodic reevaluations made by payers concerning which services to
reimburse and which to cease reimbursing. The reduction in reimbursement rates,
particularly by Medicare, has generally decreased the average unit price, and
thus the average gross profit, for many of the Company's clinical laboratory
services each year. In keeping with this trend, as part of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA '93"), Congress reduced over time the national
cap on Medicare clinical laboratory fee schedules. OBRA '93 was fully
implemented in 1996 and has reduced the cap on Medicare clinical laboratory fee
schedules to 76% of the national median. It also eliminated the annual updates
of such fee schedules for the years 1994 and 1995.
With respect to the Company's tissue testing services, which are not reimbursed
under the Medicare clinical laboratory fee schedules, the Medicare fees for
these services also generally declined with the implementation of the resource
based relative value scale ("RBRVS") system which went into effect on January 1,
1992. This program was also fully implemented in 1996 and has had the effect of
reducing reimbursement for pathology testing services although not to the same
extent as the Medicare reimbursement reduction for clinical laboratory services.
Any future changes in government and other third-party payer reimbursement which
may come about as a consequence of an enactment of health care reform or deficit
reduction legislation will also be likely to continue the downward pressure on
prices and make the markets for all of the Company's services more competitive.
H.R. 2491, the Balanced Budget Act of 1995, would have made substantial changes
to the Medicare program; however, it was vetoed by President Clinton in
December, 1995. Nevertheless, this bill as well as President Clinton's Medicare
counterproposal contained in his fiscal year 1997 budget offer some insight into
future Medicare reform legislation. H.R. 2491 would have further reduced the
national cap on Medicare clinical laboratory fee schedules to 65% of the
national median in 1997. It also would have eliminated annual updates in the
Medicare clinical laboratory fee schedules until fiscal year 2002. However, H.R.
2491 would have implemented a new "conversion factor" that may have favorably
affected the Company's physician pathology service reimbursements by less than
five percent.
Both H.R. 2491 and the President's Medicare proposal would have revised the
Medicare program substantially to permit beneficiaries to choose between
traditional fee-for-service Medicare and several non-traditional Medicare
options, including managed care plans and provider-sponsored organization plans.
These non-traditional Medicare plans would have considerable discretion in
determining whether and how to cover and reimburse all of the Company's services
and to limit the number of laboratories with which they deal. Although neither
proposal would have required Medicare beneficiaries to pay 20% of the fee for
each clinical laboratory service, nothing in the proposals would have prohibited
non-traditional Medicare plans from implementing such a requirement.
In addition, H.R. 2491 proposed that a fail-safe budget mechanism be used if
projected savings were not realized in Medicare laboratory service expenditures.
This fail-safe mechanism might have further reduced reimbursement for Medicare
clinical laboratory services and physician services (including the Company's
pathology services). The President's original Medicare counterproposal would
have established competitive bidding for clinical laboratory services instead.
Although these competitive bidding provisions were not included in the Medicare
section of President Clinton's fiscal year 1997 budget proposal, they could
resurface in future Medicare proposals if there is a need to generate more
savings from the Medicare program. Furthermore, the President's support for
competitive bidding has rekindled efforts within the Health Care Financing
Administration ("HCFA") to initiate a Medicare demonstration project to test the
savings potential of competitive bidding for Part B clinical laboratory
services. If ultimately adopted, either through federal legislation or through
HCFA policy, these changes would have an adverse impact on the Company's
revenues.
Medicare reform is a major unpredictable factor for the Company's business.
During any budget reconciliation process and if and when Medicare reform
legislation is considered by Congress, the reforms mentioned above or others are
likely to be considered again. Because of the uncertainties about the nature,
content and timing of legislative initiatives and the market's response to them,
the Company currently is unable to predict their ultimate impact on the clinical
laboratory or anatomic pathology markets generally or on the Company in
particular. Even without definitive federal legislative action, however, reforms
are likely to occur at the state level and/or in response to market pressures.
In the past the Company has offset a substantial portion of the impact of price
decreases and coverage changes through the achievement of economies of scale and
other strategies such as more favorable purchase contracts and the introduction
of alternative technologies. However, depending upon whether and how the price
decreases and other changes which could occur as a result of federal or state
legislation are implemented, they could have an adverse impact on gross profits
from the Company's testing services until management is able to mitigate such
impact; provided, however, that there can be no assurance that management would
be able to mitigate such impact. Furthermore, as a general trend, it should be
expected that gross profit margins will continue to decline over the long term.
o Selling, General and Administrative Expenses
Selling, general and administrative expenses were $15.9 million during the First
Nine Months of 1996, an increase of $877,000 or 5.8% from the First Nine Months
of 1995. As a percentage of net revenues, selling, general and administrative
expenses decreased to 40% for the First Nine Months of 1996 from 45% for the
First Nine Months of 1995. Levels of these expenditures in 1995 were abnormally
elevated as a result of one-time charges for amortization, severance costs and
investment write-downs incurred in the First Nine Months of 1995.
Selling, general and administrative expenses were $5.2 million during the Third
Quarter of 1996, an increase of $623,000 or 14% from the Third Quarter of 1995.
As a percentage of net revenues, selling, general and administrative expenses
decreased to 38% for the Third Quarter of 1996 from 41% for the Third Quarter of
1995. Levels of these expenditures in 1995 were abnormally elevated as a result
of one-time charges for amortization and investment write-downs incurred in the
Third Quarter of 1995.
Amortization expense, severance costs, international restructuring costs and
investment write-downs of approximately $2.1 million previously reported
separately in 1995 were combined with the appropriate selling, general and
administrative and research and development expenses beginning in 1996.
Amortization expense was $206,000 in the First Nine Months of 1996, a decrease
of $954,000 or 82% from the First Nine Months of 1995. This decrease is
primarily a result of the Company recording a one-time accelerated amortization
charge of approximately $765,000 during the second quarter of 1995 based on
management's revised estimate of future benefits anticipated from a customer
list. Amortization expense was $69,000 during the Third Quarter of 1996, a
decrease of $38,000 or 35% from the Third Quarter of 1995.
Severance costs were $148,000 in the First Nine Months of 1996, a decrease of
$259,000 or 64% from the First Nine Months of 1995. The severance costs were due
primarily to the resignation of officers in 1995 and 1996. Severance costs were
$102,000 during the Third Quarter of 1996. No similar charges were recorded in
the Third Quarter of 1995.
Investment write-downs were $62,000 in the First Nine Months of 1996, a decrease
of $304,000 or 83% from the First Nine Months of 1995. This decrease is a result
of the Company recording in the First Nine Months of 1995 (and, other than as
described in the last sentence of this paragraph, not in the First Nine Months
of 1996) a write-down to market value of the investment in common stock of a
publicly traded company as the loss in value was deemed other than temporary in
accordance with the Statement of Financial Accounting Standard 115, "Accounting
for Certain Investments on Debt and Equity Securities". Investment write-downs
were $50,000 in the Third Quarter of 1996. The write-down in the Third Quarter
of 1996 represented the remaining investment in that common stock.
International restructuring costs of approximately $118,000 were recorded in the
First Nine Months of 1995 relating to anticipated severance expenses and
associated costs to close-down the Company's remaining foreign branches. No
similar charges were recorded in the First Nine Months of 1996.
o Research and Development
Research and development expenses were $2.3 million in the First Nine Months of
1996, a decrease of approximately $1.3 million or 36% from the First Nine Months
of 1995. Research and development expenses during 1995 were higher than normal
because they included the costs of developing the Company's new anatomic
pathology services, building the Company's database and reviewing, analyzing and
clinically evaluating existing as well as new technologies. The decrease in such
expenses in the First Nine Months of 1996 was principally caused by the
completion in 1995 of the major portion of such expenditures for the development
of the new anatomic pathology services. It should be expected that such research
and development expenses will decline as a percentage of sales in 1996 as
compared to 1995.
Research and development expenses were $722,000 in the Third Quarter of 1996, a
decrease of approximately $678,000 or 48% from the Third Quarter of 1995.
o Interest Income
During the First Nine Months of 1996 interest income was earned on an average of
$5.5 million of cash and cash equivalents for the period. Interest income was
approximately $280,000 for the First Nine Months of 1996, an increase of
$100,000 or 56% from the First Nine Months of 1995 which was caused both by
higher interest rates and by investing over $4.6 million in net cash proceeds
from a private placement of the Company's securities completed in October 1995.
Interest income was approximately $51,000 for the Third Quarter of 1996, a
decrease of $31,000 or 38% from the Third Quarter of 1995.
o Interest Expense
Interest expense was approximately $63,000 for the First Nine Months of 1996, a
decrease of $45,000 or 42% from the First Nine Months of 1995. The decrease in
interest expense was due to the periodic monthly repayments required on the $3.5
million term loan obtained in July of 1993 which bears interest at 6% per year.
Interest expense was approximately $18,000 for the Third Quarter of 1996, a
decrease of $15,000 or 45% from the Third Quarter of 1995.
o Provision for Income Taxes
Provision for income tax expense was $1.1 million for the First Nine Months of
1996, representing an increase of approximately $1.1 million from the First Nine
Months of 1995. The effective tax rate was approximately 43% during both the
First Nine Months of 1996 and 1995.
o Net Income
As a result of the foregoing, for the First Nine Months of 1996 net income was
$1.5 million, an increase of approximately $1.4 million from the First Nine
Months of 1995. For the Third Quarter of 1996, net income was $657,000, an
increase of approximately $413,000 from the Third Quarter of 1995.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1996, the Company had total cash and cash equivalents of
approximately $6 million which were invested in U.S. Treasury money market
mutual
funds.
The Company had working capital of $14 million at September 30, 1996 and $17
million at December 31, 1995. The working capital ratio was 3.0 to 1 at
September 30, 1996 compared to 3.7 to 1 at December 31, 1995. The decrease in
working capital is primarily attributable to treasury shares acquired and to
increased capital expenditures in 1996 over 1995.
As of September 30, 1996, the Company has purchased 421,000 shares of its common
stock, for an aggregate consideration of approximately $2.1 million. The
Company's Board of Directors has authorized open market purchases for the
Employee Stock Purchase Plan requirements totaling 300,000 shares and further
additional open market purchases of up to 379,000 shares.
Capital expenditures during the First Nine Months of 1996 were approximately
$3.3 million compared to $1.9 million during the First Nine Months of 1995,
mainly for expansion of the Company's laboratory facilities as well as
replacements in the normal course of operations and automation of certain
existing laboratories.
Domestic trade receivables, net, were $12.3 million as of September 30, 1996, an
increase of $2.8 million or 30% from December 31, 1995. The increase in trade
receivables was due to the increase in revenues during the First Nine Months of
1996 over the comparable period of 1995. During the Third Quarter of 1996, the
average number of days sales in domestic trade receivables was approximately 77
days as compared to 72 days for the comparable period of 1995.
In July 1993, the Company obtained a $3.5 million term loan from a bank that
bears interest at 6% per year. This term loan and accrued interest is repayable
in 47 monthly installments of approximately $82,000 which commenced in September
1993 plus one final payment in August 1997 equal to the remaining unpaid
principal and interest. During 1995, the term loan agreement was modified to
revise certain financial covenants, including those with respect to tangible net
worth and debt service coverage requirements and limitations on certain
expenditures. During the Third Quarter of 1996, there were no changes in the
Company's existing debt agreements. Under such term loan, the Company has
outstanding principal in the amount of approximately $885,000 as of September
30, 1996.
On October 5, 1995, the Company completed a $5,612,000 private placement with an
investor for 1 million shares of common stock and 800,000 two-year warrants
exercisable at $6.00 per share of common stock of the Company (except as
otherwise described below). The Company received cash of $5,316,000 and a
two-year promissory note for $296,000 bearing 7% interest. As a result of the
amendment to the warrants discussed below, some or all of the warrants can be
exercised at a price of $5.00 at any time on or before October 31, 1996. Upon
such election the Company shall extinguish as an adjustment to the purchase
price paid for such warrants, for each such warrant for which such election has
been made, $0.37 of the principal amount of the note upon payment of the
interest due on such extinguished amount for the outstanding period. If the
800,000 warrants are all exercised on or before October 31, 1996, the two year
promissory note for $296,000 will be fully extinguished. On August 20, 1996, the
Company's Board of Directors approved an amendment to the terms of the warrants
to extend from October 4, 1996 to October 31, 1996, the date through which the
warrants can be exercised at $5.00 per share. The amendment was approved in
connection with the scheduling of the Company's Annual Meeting for October 24,
1996 to enable voting at such meeting on a proposal to enable the investor to
vote shares of the Company's common stock owned by such investor and certain
affiliates representing up to 20% of the total voting power of the Company's
voting securities outstanding from time to time to be completed prior to the
expiration of the $5.00 per share exercise price. Such proposal was approved at
the Company's Annual Meeting on October 24, 1996. On October 29, 1996, the
investor exercised all 800,000 warrants and in exchange for the payment of
approximately $4.0 million in cash representing the aggregate exercise price of
such warrants and interest on the principal amount of the two-year promissory
note for the outstanding period, the Company issued to the investor 800,000
shares of its common stock and fully extinguished and cancelled the promissory
note.
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.
Risk Factors; Forward Looking Statements
- ----------------------------------------
The Management's Discussion and Analysis contain 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 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 health care delivery; the
uncertainties relating to states erecting barriers to the performance of
anatomic pathology testing by out-of-state laboratories; the ability of the
Company to find, attract and retain above average medical, management and
technical personnel; the uncertainties associated with competitive pressures
from the large national laboratories, 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.
PART II OTHER INFORMATION
Item 5 Other Information
-----------------
In April 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"). The Plan authorizes 700,000 shares, of which 630,000 may be
issued to employees and 70,000 may be issued to outside Directors. The
Plan was approved at the Company's Annual Meeting on October 24, 1996.
The Company entered into executive employment agreements with Richard
A. Sandberg and with Dr. James B. Amberson (the "Employees") on
September 1, 1996. Each such agreement provides that in the event of a
"Change in Control of the Company", as defined in the agreements, if
the Employee's employment is terminated other than for "Cause", as
defined in the agreements, he is entitled to receive one year's salary
and bonus and all his stock options will vest completely. The
agreements expire in September 2001 and are subject to successive
automatic one-year renewals thereafter (unless certain notice is
given). The employment agreements are filed herewith as exhibits 10.38
and 10.39.
The Company has also entered into a employment agreement with Dr. James
B. Amberson on September 1, 1996. Pursuant to the agreement, Dr.
Amberson is entitled to a salary as determined by the Company and other
benefits of the Company. This agreement provides that in the event of a
termination of Dr. Amberson's employment for other than "Stated Cause"
(as defined in the agreement), he is entitled to receive six months
salary and other benefits. Subject to the foregoing, this agreement is
subject to termination at will by either party. The employment
agreement is filed herewith as exhibit 10.40.
The Company entered into an employment agreement with David R.
Schreiber on September 30, 1996 as the Chief Financial Officer and
Senior Vice President, Finance of the Company. Salary and other
compensation are disclosed in the employment agreement filed herewith
as exhibit 10.42.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a Exhibits
10.38 Employment Agreement, dated September 1, 1996, by the
registrant and Richard A. Sandberg.
10.39 Employment Agreement, dated September 1, 1996, by the
registrant and Dr. James B. Amberson.
10.40 Employment Agreement, dated September 1, 1996, by the
registrant and Dr. James B. Amberson.
10.41 Severance Agreement, dated September 27, 1996, by the
registrant and Carl R. Iberger.
10.42 Employment Agreement, dated September 30, 1996, by the
registrant and David R. Schreiber.
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.
b Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
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.
November 14, 1996 /s/ Kevin C. Johnson
-------------------------------
By: Kevin C. Johnson
President and
Principal Executive Officer
November 14, 1996 /s/ Richard A. Sandberg
-------------------------------
By: Richard A. Sandberg
Chairman,
Principal Financial Officer and
Principal Accounting Officer
EXHIBIT INDEX
Page
----
10.38 Employment Agreement, dated September 1, 1996, 16
by the registrant and Richard A. Sandberg
(filed herewith).
10.39 Employment Agreement, dated September 1, 1996, 23
by the registrant and Dr. James B. Amberson
(filed herewith).
10.40 Employment Agreement, dated September 1, 1996,
by the registrant and Dr. James B. Amberson
(filed herewith). 38
10.41 Severance Agreement, dated September 27, 1996,
by the registrant and Carl R. Iberger
(filed herewith). 45
10.42 Employment Agreement, dated September 30, 1996,
by the registrant and David R. Schreiber
(filed herewith). 50
27.1 Financial Data Schedule (filed herewith). 69