SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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 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 August 7, 1997 was 6,456,480 shares.
Exhibit Index on page 15 of 35 pages.
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996. 3
Consolidated Statements of Operations for the three month and six month 4
periods ended June 30, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the twelve
months 5 ended December 31, 1996 and the six months ended June
30, 1997.
Consolidated Statements of Cash Flows for the six months ended June 30, 6
1997 and 1996.
Notes to Consolidated Financial Statements. 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 8-12
OF OPERATIONS
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 11,229,132 $ 7,488,590
Accounts receivable, net of allowances of $1,027,705
and $1,056,920, respectively .................................. 12,729,153 15,426,221
Prepaid expenses and employee advances ............................. 1,262,160 1,189,139
Prepaid and refundable income taxes ................................ 455,964 329,371
Inventory .......................................................... 785,689 662,567
Deferred income tax asset .......................................... 677,277 677,277
------------ ------------
Total current assets .................................................... 27,139,375 25,773,165
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment .................................... 13,051,161 12,233,989
Leasehold improvements ............................................. 3,691,400 3,612,198
Less - accumulated depreciation and amortization ................. (9,540,726) (8,606,176)
------------ ------------
7,201,835 7,240,011
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,099,436 and $2,991,286, respectively ............................ 496,171 604,313
DEFERRED INCOME TAX ASSET ............................................... 458,465 458,465
OTHER ASSETS ............................................................ 359,373 459,696
============ ============
TOTAL ASSETS ................................................... $ 35,655,219 $ 34,535,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 1,211,620 $ 2,123,661
Accrued employee bonuses, commissions and payroll .................. 1,234,039 1,504,430
Accrued employee stock purchase plan ............................... 916,728 549,540
Current portion of capitalized lease obligations ................... 40,910 26,107
Current portion of note payable .................................... 170,663 650,154
Other accrued expenses ............................................. 5,221,623 2,861,268
------------ ------------
Total current liabilities .................................... 8,795,583 7,715,160
------------ ------------
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS ...................... 126,450 69,611
DEFERRED INCOME TAX LIABILITY ........................................... 201,951 201,951
------------ ------------
TOTAL LIABILITIES ............................................ 9,123,984 7,986,722
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 6,759,857 and 6,712,774 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively ... .......... 67,599 67,128
Additional paid-in capital ......................................... 28,221,558 27,965,560
Accumulated earnings/(deficit) ..................................... 894,234 (554,317)
Common stock held in treasury, at cost - 319,206 and 117,196 shares
at June 30, 1997 and December 31, 1996, respectively ............... (2,652,156) (929,443)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ..................................... 26,531,235 26,548,928
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 35,655,219 $ 34,535,650
============ ============
The accompanying notes to consolidated
financial statements are an integral part of these balance sheets.
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
NET REVENUES ............................... $16,056,419 $13,674,329 $31,657,574 $26,093,148
COST OF GOODS .............................. 7,882,516 6,480,922 15,755,015 12,619,810
----------- ----------- ----------- -----------
Gross Profit ............................ 8,173,903 7,193,407 15,902,559 13,473,338
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,380,501 5,601,680 12,597,983 10,668,861
RESEARCH & DEVELOPMENT EXPENSES ............ 460,860 775,180 968,565 1,582,081
----------- ----------- ----------- -----------
Income from Operations .................. 1,332,542 816,547 2,336,011 1,222,396
INTEREST INCOME ............................ 132,237 105,247 224,127 229,792
INTEREST EXPENSE ........................... 8,018 20,539 18,821 44,740
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes 1,456,761 901,255 2,541,317 1,407,448
PROVISION FOR INCOME TAXES ................. 626,407 387,540 1,092,766 605,203
----------- ----------- ----------- -----------
Net Income .............................. $ 830,354 $ 513,715 $ 1,448,551 $ 802,245
=========== =========== =========== ===========
Weighted Average Shares Outstanding ........ 6,862,097 6,142,743 6,848,693 6,195,835
----------- ----------- ----------- -----------
Primary and Fully Diluted Earnings Per Share $ 0.12 $ 0.08 $ 0.21 $ 0.13
=========== =========== =========== ===========
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, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
Common Stock Common Stock
Additional Acquired for Acquired for Shareholder
Common Stock Paid-In Accumulated Treasury, Treasury, Note
Shares Amount Capital Deficit Shares at Cost Receivable Total
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 .... 6,311,451 $63,115 $ 26,609,657 ($2,724,433) (50,000) ($ 200,000) ($ 296,000) $23,452,339
Stock options exercised ... 23,621 236 107,476 -- -- -- -- 107,712
Exercise of warrants net of
exercise costs........... 377,702 3,777 1,536,540 -- 422,298 2,478,889 -- 4,019,206
Common stock acquired for
treasury ................ -- -- -- -- (489,494) (3,208,332) -- (3,208,332)
Extinguishment of share-
holder note receivable .. -- -- (296,000) -- -- -- 296,000 --
Stock compensation expense -
stock options ......... -- -- 7,887 -- -- -- -- 7,887
Net Income ................ -- -- -- 2,170,116 -- -- -- 2,170,116
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 .... 6,712,774 67,128 27,965,560 (554,317) (117,196) (929,443) -- 26,548,928
Stock options exercised ... 22,531 225 102,516 -- -- -- -- 102,741
Employee stock purchase
plan options exercised .. -- -- (57,568) -- 14,990 124,567 -- 66,999
Stock grants .............. 24,552 246 211,050 -- -- -- -- 211,296
Common stock acquired
for treasury ............ -- -- -- -- (217,000) (1,847,280) -- (1,847,280)
Net Income ................ -- -- -- 1,448,551 -- -- -- 1,448,551
---------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 ........ 6,759,857 $67,599 $28,221,558 $ 894,234 (319,206) ($2,652,156) $ -- $26,531,235
===================================================================================================
The accompanying notes to consolidated financial
statements are an integral part of these statements.
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
JUNE 30,
1997 1996
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,448,551 $288,530
Adjustments to reconcile net income to net cash provided by (used
in) operations -
Non-cash charges
Depreciation and amortization 1,338,546 497,088
Stock compensation expense 211,296 --
Loss on the disposal of fixed assets 40,914 18,845
Investment write-down -- 4,053
Changes in other current assets and liabilities
Decrease (increase) in accounts receivable 2,697,068 (1,328,664)
(Increase) decrease in prepaid expenses and employee advances (199,614) 433,819
(Increase) in inventory (123,122) (41,064)
Decrease (increase) in other assets 80,430 (4,443)
Increase (decrease) in accounts payable and accrued liabilities 1,582,892 (551,319)
--------------- ------------
Net cash provided by (used in) operating activities 7,076,961 (683,155)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,316,271) (541,080)
Proceeds from the sale of stock held for investment 9,064 57,530
Proceeds from the disposal of fixed assets -- 7,500
--------------- ------------
Net cash (used in) investing activities (1,307,207) (476,050)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (479,491) (223,939)
Borrowings (repayments) of capitalized lease obligations 127,819 (15,171)
Purchase of common stock acquired for treasury (1,847,280) (67,500)
Stock options exercised 102,741 --
Employee stock purchase plan options exercised 66,999 --
--------------- ------------
Net cash (used in) financing activities (2,092,212) (306,610)
--------------- ------------
Net increase (decrease) in cash and cash equivalents 3,740,542 (1,465,815)
CASH AND CASH EQUIVALENTS, beginning of period 7,488,590 10,990,231
--------------- ------------
CASH AND CASH EQUIVALENTS, end of period $11,229,132 $9,524,416
=============== ============
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $18,999 $24,272
Income Taxes 1,157,417 458
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 June 30, 1997, the
related consolidated statements of operations for the three and six month
periods ended June 30, 1997 and 1996, the related consolidated statements
of cash flow for the six months ended June 30, 1997 and 1996, and the
related consolidated statements of stockholders' equity for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997 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 at June 30, 1997
and 1996 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 31, 1997 (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,
1996. The results of operations for the six months ending June 30, 1997 and
1996 are not necessarily indicative of the operating results for the full
years.
2. DESCRIPTIVE ANALYSIS - The descriptive analysis contained herein compares
the financial results of the first six months ended June 30 for the years
1997 and 1996. To accommodate the comparison of pertinent financial
information the following terms will be used to denote the respective
periods:
"First Half 1997" - six months ended June 30, 1997 "First Half 1996" - six
months ended June 30, 1996
"Second Quarter 1997" - three months ended June 30, 1997 "Second Quarter
1996" - three months ended June 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
RESULTS OF OPERATIONS
- ---------------------
o NET REVENUES
Net revenues were $31.7 million during the First Half 1997, an increase of $5.6
million or 21% from the First Half 1996. Increased revenues were attributable to
increased market penetration by the Company's anatomic pathology testing
services. The increase in anatomic pathology testing services in the First Half
1997 over the comparable period of 1996 was offset to some extent by a decrease
in clinical chemistry and hospital based tissue testing services.
Net revenues were $16.1 million during the Second Quarter 1997, an increase of
$2.4 million or 17% from the Second Quarter 1996. Increased revenues were
attributable to increased market penetration by the Company's anatomic pathology
testing services.
o COST OF GOODS
Cost of goods, which consists primarily of salaries and wages, laboratory
supplies, outside services, logistics (primarily shipping and handling), and
depreciation expense, was $15.8 million during the First Half 1997, an increase
of $3.1 million or 25% from the First Half 1996. Salaries and wages were
approximately $5.3 million in the First Half 1997, an increase of $1.3 million
or 34% from the First Half 1996. This increase was principally due to increased
laboratory and physician employment incurred to support increased anatomic
pathology testing services. Laboratory supplies decreased to 8.8% of net
revenues in the First Half 1997 from 10.5% in the First Half 1996. This decrease
was the result of cost efficiencies. Logistics were $3.1 million in the First
Half 1997, an increase of $1.2 million or 59% from the First Half 1996. The
increase in logistic costs was principally due to supporting new anatomic
pathology testing services. As a percentage of net revenues, cost of sales
increased to 50% during the First Half 1997 from 48% during the First Half 1996.
Cost of goods was $7.9 million during the Second Quarter 1997, an increase of
$1.4 million or 22% from the Second Quarter 1996. As a percentage of net
revenues, cost of sales increased to 49% in the Second Quarter 1997 from 47% in
the Second Quarter 1996.
o GROSS PROFIT
Gross profits were $15.9 million during the First Half 1997, an increase of $2.4
million or 18% from the First Half 1996. The Company's gross profit margin
decreased to 50% in the First Half 1997 from 52% in the First Half 1996. The
decrease in gross profit margin was due to the continued erosion of the average
unit price reimbursed for certain clinical chemistry testing services and the
higher costs associated with providing anatomic pathology testing services.
Gross profits were $8.2 million during the Second Quarter 1997, an increase of
$980,000 or 14% from the Second Quarter 1996. The Company's gross profit margin
decreased to 51% in the Second Quarter 1997 from 53% in the Second Quarter 1996.
The clinical laboratory industry, which includes both clinical chemistry and
anatomic pathology, has seen steady downward pressure on prices exerted by both
government and private third party payors. Also, payment for services such as
those provided by the Company is and likely will continue to be affected by
periodic reevaluations made by payors concerning which services to reimburse and
which to cease reimbursing. A reduction in reimbursement rates, particularly by
Medicare, has generally decreased the average unit price for most of the
Company's clinical chemistry 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 laboratory fee schedules. This
national cap has been lowered each year and is now 76% of the national median.
Under the provisions of the Budget Reconciliation Act recently adopted by
Congress, the cap would be lowered further to 74% beginning in 1998. OBRA `93
also eliminated the annual updates of Medicare laboratory fee schedules for the
years 1994 and 1995. After updates of 3.2% in 1996 and approximately 2.7% in
1997, the terms of the Budget Reconciliation Act recently adopted would freeze
fee schedule payments for the 1998 - 2002 period.
The Budget Reconciliation Act does include the addition of coverage for a
yearly screening pap smear for Medicare beneficiaries at high risk of developing
cervical or vaginal cancer and for beneficiaries of childbearing age who had not
had a negative test in each of the preceding three years, as well as coverage
for annual prostate cancer screening, including a prostate-specific antigen
blood test, for beneficiaries over age 50. Although most women of childbearing
age and men under age 65 are not Medicare beneficiaries, the addition of
Medicare coverage for these tests could provide additional revenues for the
Company.
With respect to the Company's tissue testing services which are reimbursed
under the physician fee schedules rather than the Medicare 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 in 1992 and was fully phased in by the end of 1996. The
Medicare RBRVS payment for each service is calculated by multiplying the total
relative value units ("RVUs") established for the services by a conversion
factor that is set by law. The number of RVUs assigned to each service is in
turn calculated by adding three separate components, including one representing
the relative work values. Although the conversion factor for nonsurgical
services, including pathology, is currently $33.8454, the Budget Reconciliation
Act recently adopted by Congress includes a provision that merges the three
existing conversion factors into one, for all types of services provided. The
Health Care Financing Administration (the "HCFA") has estimated this single
factor will be $37.13 - an increase of 9.7% over the 1996 conversion factor
applicable to pathology services.
There was an overall decrease of 5.7% between 1996 and 1997 in payments for
pathology services, plus an additional decrease in Connecticut due to HCFA's
reduction of the number of different payment localities recognized for RBRVS
purposes, at the beginning of 1997, HCFA published proposed regulations which
recalculate a key component of the RBRVS fee schedule. This recalculation would
modify the practice expense RVUs to reflect resource consumption, rather than
the historical charge data used to establish the original practice expense RVUs.
Overall, HCFA's predicted impact of resource-based practice expense RVUs on
Medicare income of pathologists is an increase of 1%. Of course, the actual
impact on Medicare pathology revenues would depend on the mix of pathology
services furnished. Moreover, under the Budget Reconciliation Act recently
adopted by Congress, implementation of resource based practice expense RVUs will
not begin until 1999, and will be phased in over the period 1999 - 2002. In
addition, disclosure and evaluation of the methodology used by HCFA to support
its proposal will be required. In the past, RBRVS program implementation and
modification has had the effect of reducing prices, and thus the gross profit,
of the Company. Overall, the Company does not expect projected future RBRVS
adjustments to change this trend.
Other changes in government and other third-party payor reimbursement which may
come about as a consequence of the enactment of current and future health care
reform or deficit reduction measures are likely to continue the downward
pressure on prices and make the market for clinical laboratory services more
competitive.
For example, the Budget Reconciliation Act recently adopted by Congress would
revise 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 laboratory
services and also have discretion to limit the number of labs with which they
deal.
The Budget Reconciliation Act also includes provisions to implement competitive
bidding for certain Medicare items and services, including laboratory services,
on a three-site demonstration project basis. If later adopted on a widespread
basis, these changes likely would have an adverse impact on the Company's
revenues, and thus on its gross profit.
Finally, the Budget Reconciliation Act recently adopted contains measures to
establish market-oriented purchasing for Medicare, including prospective payment
systems for outpatient hospital services, home health care and nursing home
care, and the use of global payments and flexible purchasing. Although the
details of these measures are yet to be finalized, they probably would increase
pressure on pricing in the laboratory industry and may have an adverse impact on
the Company's revenues.
Because of the uncertainties about how the Medicare changes such as those just
described will be implemented, the Company currently is unable to predict their
ultimate impact on the laboratory industry generally or on the Company in
particular. Reforms may also occur at the state level as well as the federal
level and, in addition, changes are occurring in the marketplace as a result of
market pressures, as the number of patients covered by some form of managed care
is increasing. 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, more favorable purchase contracts and greater operational
efficiencies. However, if price decreases (for example arising from the proposed
Medicare changes discussed above) or coverage changes were to be rapidly and
fully implemented, they would be likely to have an adverse impact on gross
profits from the Company's testing services unless management had an opportunity
to mitigate such impact.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $12.6 million during the First
Half 1997, an increase of $1.9 million or 18% from the First Half 1996. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 40% in the First Half 1997 from 41% in the First Half 1996.
Selling, general and administrative expenses were $6.4 million during the Second
Quarter 1997, an increase of $779,000 or 14% from the Second Quarter 1996. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 40% in the Second Quarter 1997 from 41% in the Second Quarter 1996.
Severance costs of approximately $159,000 were recorded in the First Half 1997.
Severance costs of approximately $46,000 were recorded in the First Half 1996.
Investment write-downs of $11,000 were recorded in the First Half 1996 to
write-down the investment, held on the Company's balance sheet, in common stock
of a publicly traded company to market value 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". No similar charges were recorded in the First Half 1997. The
Company sold its remaining shares in the first quarter of 1997.
o RESEARCH AND DEVELOPMENT
Research and development expenses were $969,000 in the First Half 1997, a
decrease of $614,000 or 39% from the First Half 1996. Research and development
expenses include the costs of the review, analysis and clinical evaluation of
new technologies. This decrease in 1997 is primarily due to the completion in
1996 of the major one-time expenditures necessary for the development of the new
anatomic pathology services. During the first quarter of 1997, the Company
reorganized its research and development technology activities.
Research and development expenses were $461,000 in the Second Quarter 1997, a
decrease of $314,000 or 41% from the Second Quarter 1996.
o INTEREST INCOME
The Company's interest income was $224,000 for the First Half 1997, a decrease
of $6,000 or 2% from the First Half 1996. Interest income for the First Half
1997 was earned on an average investment of $8.7 million compared with $9.8
million in the First Half 1996. Interest income was $132,000 for the Second
Quarter 1997, an increase of $27,000 or 26% from the Second Quarter 1996.
Interest income for the Second Quarter 1997 was earned on an average investment
of $9.5 million compared with $9.0 million in the Second Quarter 1996.
o INTEREST EXPENSE
Interest expense was $19,000 for the First Half 1997, a decrease of $26,000 or
58% from the First Half 1996. The decrease in interest expense was due to the
pay-down of a portion of the $3.5 million term loan obtained in July of 1993
which bears interest at 6% per year. Interest expense was $8,000 for the Second
Quarter 1997, a decrease of $13,000 or 61% from the Second Quarter 1996.
o PROVISION FOR INCOME TAXES
Provision for income tax expense was $1.1 million for the First Half 1997, an
increase of $488,000 or 81% from the First Half 1996. The effective tax rate was
43% during both the First Half 1997 and 1996.
o NET INCOME
As a result of the foregoing, net income was $1.4 million for the First Half
1997, an increase of $646,000 or 81% from the First Half 1996. Net income was
$830,000 during the Second Quarter 1997, an increase of $317,000 or 62% from the
Second Quarter 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1997, the Company had total cash and cash equivalents of
approximately $11.2 million of which $10.2 million was invested in a fund
holding U. S. Treasury securities with maturities of less than three months.
The Company had working capital of $18.3 million at June 30, 1997 compared to
$18.1 million at December 31, 1996, and the working capital ratio was 3.9 to 1
at June 30, 1997 compared to 3.4 to 1 at December 31, 1996.
Domestic trade receivables, net, were $12.6 million as of June 30, 1997, a
decrease of $2.6 million or 17% from December 31, 1996. During the Second
Quarter 1997, the average number of days sales in domestic trade receivables was
approximately 75 days. The average number of days sales has decreased from 94
days for the month of December 1996 to 75 days for the month of June 1997. This
decrease was the result of improved collection efficiencies resulting in
significantly reducing domestic accounts receivable from $15.2 million as of
December 31, 1996 to $12.6 million as of June 30, 1997.
Capital expenditures during the First Half 1997 were approximately $1.3 million
compared to $541,000 for the First Half 1996.
In July 1993, the Company obtained a $3.5 million term loan from a bank that
bears interest at 6% per year and is payable over a 47 month period. 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 limitation on certain expenditures. The Company has
outstanding under such term loan principal in the amount of approximately
$171,000 as of June 30, 1997. During the Second Quarter 1997, there were no
changes in the Company's existing debt agreements.
As of June 30, 1997, the Company has in its treasury 319,206 shares of Common
Stock allocated for the Company's Employee Stock Purchase Plan at a total cost
of $2.7 million. The Company plans to continue to repurchase shares under its
previously authorized buyback program.
The Company believes that cash flows from operations as well as 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 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 health care
delivery; the uncertainties relating to states erecting barriers to the
performance of anatomic national laboratories; competition 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.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a Exhibits
(10.39) Amendment, dated April 30, 1997, by the
Registrant and Richard A. Sandberg (filed
herewith).
(10.40) Security Agreement dated April 30, 1997 by the
Registrant and Richard A. Sandberg (filed
herewith).
(10.41) Secured Promissory Note dated April 30, 1997
by Richard A. Sandberg in favor of the
Registrant (filed herewith).
(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 Report on Form 8-K. No reports on Form 8-K were filed
during the quarter ended June 30, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIANON Systems, Inc.
August 13, 1997 /s/ KEVIN C. JOHNSON
--------------------
By: Kevin C. Johnson
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 1997 /s/ DAVID R. SCHREIBER
----------------------
By: David R. Schreiber
Senior Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
Page No.
(10.39) Amendment, dated April 30, 1997, by the Registrant and Richard A. Sandberg (filed 16
herewith).
(10.40) Security Agreement dated April 30, 1997 by the Registrant and Richard A. Sandberg 18
(filed herewith).
(10.41) Secured Promissory Note dated April 30, 1997 by Richard A. Sandberg in favor of the 33
Registrant.(filed herewith)
(27.1) Financial Data Schedule (filed herewith). 35