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, 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 the registrant's Common Stock, $.01 par value,
outstanding on November 7, 1997 was 6,494,136 shares.
Exhibit Index on page 15 of 41 pages
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996. 3
Consolidated Statements of Operations for
the three month and nine month periods ended
September 30, 1997 and 1996. 4
Consolidated Statements of Stockholders'
Equity for the nine months ended
September 30, 1997 and 1996. 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and 1996. 6
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 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPT. 30, DECEMBER 31,
1997 1996
-----------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,150,602 $ 7,488,590
Accounts receivable, net of allowances of $1,085,076 and
$1,056,920, respectively 14,506,148 15,426,221
Prepaid expenses and employee advances 1,069,257 1,189,139
Prepaid and refundable income taxes 150,233 329,371
Inventory 765,544 662,567
Deferred income tax asset 677,277 677,277
-----------------------------
Total current assets 28,319,061 25,773,165
-----------------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 13,244,119 12,233,989
Leasehold improvements 3,832,539 3,612,198
Less - accumulated depreciation and amortization (10,364,768) (8,606,176)
-----------------------------
6,711,890 7,240,011
-----------------------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,153,499 and $2,991,286, respectively 442,100 604,131
DEFERRED INCOME TAX ASSET 458,465 458,465
OTHER ASSETS 327,443 459,696
=============================
TOTAL ASSETS $ 36,258,959 $ 34,535,650
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 808,720 $ 2,123,661
Accrued employee bonuses, commissions and payroll 2,022,468 1,504,430
Accrued employee stock purchase plan 963,309 549,540
Current portion of capitalized lease obligations 40,854 26,107
Current portion of note payable -- 650,154
Other accrued expenses 4,640,465 2,861,268
-----------------------------
Total current liabilities 8,475,816 7,715,160
-----------------------------
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 115,876 69,611
DEFERRED INCOME TAX LIABILITY 201,951 201,951
-----------------------------
Total liabilities 8,793,643 7,986,722
-----------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 6,782,894 and 6,712,774 shares issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively 67,829 67,128
Additional paid-in capital 28,270,841 27,965,560
Accumulated earnings/(deficit) 1,714,347 (554,317)
Common stock held in treasury, at cost - 310,814 and 117,196
shares at September 30, 1997 and December 31, 1996, respectively (2,587,701) (929,443)
-----------------------------
Total stockholders' equity 27,465,316 26,548,928
=============================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,258,959 $ 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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------------------------------------------------------------------
NET REVENUES $14,512,373 $13,863,408 $46,169,947 $39,956,557
COST OF GOODS 7,621,207 6,799,712 23,376,222 19,419,522
---------------------------------------------------------------------
Gross Profit 6,891,166 7,063,696 22,793,725 20,537,035
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,224,120 5,222,176 17,822,103 15,891,036
RESEARCH & DEVELOPMENT
EXPENSES 381,681 722,157 1,350,246 2,304,239
---------------------------------------------------------------------
Income from Operations 1,285,365 1,119,363 3,621,376 2,341,760
INTEREST INCOME 158,622 50,573 382,749 280,365
INTEREST EXPENSE 5,192 18,038 24,013 62,779
---------------------------------------------------------------------
Income Before Provision for Income Taxes 1,438,795 1,151,898 3,980,112 2,559,346
PROVISION FOR INCOME TAXES 618,682 495,316 1,711,448 1,100,519
---------------------------------------------------------------------
Net Income $ 820,113 $ 656,582 $ 2,268,664 $ 1,458,827
=====================================================================
Weighted Average Shares Outstanding 6,835,636 6,295,106 6,844,341 6,228,925
---------------------------------------------------------------------
Primary and Fully Diluted Earnings Per Share $0.12 $0.10 $0.33 $0.23
=====================================================================
The accompanying notes to consolidated financial
statements are an integral part of these statements.
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Common Stock Common Stock
Additional Acquired for Acquired for Shareholder
Common Stock Paid-In Earnings/ 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 12,847 128 58,454 -- -- -- -- 58,582
Common stock acquired for
treasury -- -- -- -- (371,000) (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) (421,000) ($2,283,078) ($296,000) $22,886,670
====================================================================================================
BALANCE, December 31, 1996 6,712,774 $67,128 $27,965,560 ($ 554,317) (117,196) ($ 929,443) $ -- $26,548,928
Stock options exercised 44,503 445 212,011 -- -- -- -- 212,456
Employee stock purchase plan
options exercised -- -- (127,753) -- 33,382 277,772 -- 150,019
Stock grants 25,617 256 221,023 -- -- -- -- 221,279
Common stock acquired for
treasury -- -- -- -- (227,000) (1,936,030) -- (1,936,030)
Net Income -- -- -- 2,268,66 -- -- -- 2,268,664
====================================================================================================
BALANCE, September 30, 1997 6,782,894 $67,829 $28,270,841 $1,714,347 (310,814) ($2,587,701) $ -- $27,465,316
====================================================================================================
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 MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
SEPTEMBER 30,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
-------------------------------
Net income $ 2,268,664 $1,458,827
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 2,216,659 1,690,047
Stock compensation expense 221,279 --
Loss on the disposal of fixed assets 40,914 19,337
Investment write-down -- 61,846
Changes in other current assets and liabilities
Decrease (increase) in accounts receivable 920,073 (2,836,940)
Decrease (increase) in prepaid expenses and
employee advances 299,020 (322,668)
(Increase) in inventory (102,977) (79,296)
Decrease (increase) in other assets 112,361 (3,788)
Increase in accounts payable and accrued liabilities 1,433,843 884,617
-------------------------------
Net cash provided by operating activities 7,409,836 871,982
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,650,368) (3,315,215)
Proceeds from the sale of stock held for investment 9,064 73,661
Proceeds from the disposal of fixed assets -- 7,500
-------------------------------
Net cash (used in) investing activities (1,641,304) (3,234,054)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (650,154) (681,790)
Borrowings (repayments) of capitalized lease obligations, net 117,189 39,406
Purchase of common stock acquired for treasury (1,936,030) (2,083,078)
Stock options exercised 212,456 58,582
Employee stock purchase plan options exercised 150,019 --
-------------------------------
Net cash (used in) financing activities (2,106,520) (2,666,880)
-------------------------------
Net increase (decrease) in cash and cash equivalents 3,662,012 (5,028,952)
CASH AND CASH EQUIVALENTS, beginning of period 7,488,590 10,990,231
-------------------------------
CASH AND CASH EQUIVALENTS, end of period $11,150,602 $5,961,279
===============================
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $24,795 $63,174
Income Taxes 1,475,089 1,299,005
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, 1997, the
related consolidated statements of operations for the three and nine month
periods ended September 30, 1997 and 1996, the related consolidated
statements of cash flow for the nine months ended September 30, 1997 and
1996, and the related consolidated statements of stockholders' equity for
the nine months ended September 30, 1997 and 1996 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 September 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 nine months ending September 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 nine months, and the three months, ended
September 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 Nine Months 1997" - nine months ended September 30, 1997 "First Nine
Months 1996" - nine months ended September 30, 1996
"Third Quarter 1997" - three months ended September 30, 1997 "Third Quarter
1996" - three months ended September 30, 1996
3. IMPACT OF ACCOUNTING PRONOUNCEMENTS, NOT YET ADOPTED BY THE COMPANY -
Earnings Per Share ("EPS"): In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share," which requires
public companies to present basic EPS and, if applicable, diluted EPS,
instead of primary and diluted EPS. Basic EPS is calculated by dividing the
net income by the weighted average number of shares outstanding for the
period, without consideration for common stock equivalents. Diluted EPS is
computed similarly to fully diluted EPS under the provisions of APB Opinion
No. 15. Revision of the EPS standard had two objectives - to simplify the
EPS calculation and to make the EPS standard applicable to US entities
comparable to the standard of most other countries and to the international
standard, which was also recently revised. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company's basic and diluted EPS (which are not yet reflected in the
consolidated financial statements included herein because the Company has
not yet adopted SFAS No. 128) are stated below:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Basic EPS $0.13 $0.11 $0.35 $.25
Diluted EPS $0.12 $0.10 $0.33 $.23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
RESULTS OF OPERATIONS
- ---------------------
O NET REVENUES
Net revenues were $46.2 million during the First Nine Months 1997, an increase
of $6.2 million or 16% from the First Nine Months 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 Nine Months 1997 over the comparable period of 1996 was offset to some
extent by a decline in reimbursements in clinical chemistry and esoteric testing
services.
Net revenues were $14.5 million during the Third Quarter 1997, an increase of
$649,000 or 5% from the Third 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 $23.4 million during the First Nine Months 1997, an
increase of $4.0 million or 20% from the First Nine Months 1996. Salaries and
wages were $8.0 million in the First Nine Months 1997, an increase of $1.9
million or 30% from the First Nine Months 1996. This increase was principally
due to increased laboratory and physician employment incurred to support
increased anatomic pathology testing services. Laboratory supplies were $4.1
million for the First Nine Months ended 1997 and 1996. Laboratory supplies
decreased to 8.9% of net revenues in the First Nine Months 1997 from 10.2% in
the First Nine Months 1996. This decrease was the result of cost efficiencies.
Logistics were $4.5 million in the First Nine Months 1997, an increase of $1.5
million or 48% from the First Nine Months 1996. The increase in logistic costs
was principally due to supporting new anatomic pathology testing services. As a
percentage of net revenues, cost of goods increased to 51% during the First Nine
Months 1997 from 49% during the First Nine Months 1996.
Cost of goods was $7.6 million during the Third Quarter 1997, an increase of
$821,000 or 12% from the Third Quarter 1996. As a percentage of net revenues,
cost of goods increased to 53% in the Third Quarter 1997 from 49% in the Third
Quarter 1996.
O GROSS PROFIT
Gross profits were $22.8 million during the First Nine Months 1997, an increase
of $2.3 million or 11% from the First Nine Months 1996. The Company's gross
profit margin decreased to 49% in the First Nine Months 1997 from 51% in the
First Nine Months 1996. The decrease in gross profit margin was due to the
continued erosion of the average unit price reimbursed for certain clinical
chemistry and esoteric testing services and the higher costs associated with
providing anatomic pathology testing services.
Gross profits were $6.9 million during the Third Quarter 1997, a decrease of
$173,000 or 2% from the Third Quarter 1996. The Company's gross profit margin
decreased to 47% in the Third Quarter 1997 from 51% in the Third Quarter 1996.
The decrease in gross profit margin was partly due to the decline in
reimbursements for certain clinical chemistry and esoteric testing services and
the higher costs associated with providing anatomic pathology testing services.
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. 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 Balanced Budget Act of 1997
("BBA"), 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 BBA would freeze fee schedule payments for the 1998 -
2002 period.
In addition, 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. In some
cases, government payors such as Medicare also may seek to recoup payments
previously made for services determined not to be reimbursable. Any such action
by payors would have an adverse affect on the Company's revenue and earnings.
The BBA 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, effective January 1, 1998; as well as
coverage for annual prostate cancer screening, including a prostate-specific
antigen blood test, for beneficiaries over age 50, effective January 1, 2000.
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 non-surgical
services, including pathology, is currently $33.8454, the BBA includes a
provision that merges the three existing conversion factors into one for all
types of services provided. This single factor will be $36.69 - an increase of
8.3% over the 1997 conversion factor applicable to pathology services.
There was an overall decrease of 5.7% between 1996 and 1997 in payments per RVUs
for pathology services, plus an additional decrease in Connecticut due to the
Health Care Financing Administration's ("HCFA") 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 this modification to reflect 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 BBA, 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 BBA would revise the Medicare program substantially to permit
beneficiaries to choose between traditional fee-for-service Medicare as well as
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 BBA 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.
In addition, the BBA 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.
Finally, in recent months the federal government has become more aggressive in
examining billing by laboratories, and in seeking repayments and even penalties,
based on how services were billed (e.g., the billing codes used), regardless of
whether carriers had furnished clear guidance on this subject. The primary focus
of this initiative has been on hospital laboratories, and on routine clinical
chemistry tests which provide only a small part of the Company's revenues. While
it is possible that this initiative could expand, it is not possible to predict
whether or in what direction this might occur. The Company believes its
practices differ materially from those now being examined. However, no
assurances can be given that the government will not broaden its initiative to
focus on the type of services furnished by the Company or, if this were to
happen, on how much money, if any, the Company might have to pay.
Because of the uncertainties about how the Medicare developments such as those
described above 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, or if the government were to seek any substantial repayments
or penalties from the Company, such developments 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 $17.8 million during the First
Nine Months 1997, an increase of $1.9 million or 12% from the First Nine Months
1996. As a percentage of net revenues, selling, general and administrative
expenses decreased to 39% in the First Nine Months 1997 from 40% in the First
Nine Months 1996.
Selling, general and administrative expenses were $5.2 million during the Third
Quarter 1997 and the Third Quarter 1996. As a percentage of net revenues,
selling, general and administrative expenses decreased to 36% in the Third
Quarter 1997 from 38% in the Third Quarter 1996.
Severance costs of approximately $259,000 were recorded in the First Nine Months
1997 compared with $148,000 recorded in the First Nine Months 1996. Severance
costs of approximately $100,000 were recorded in the Third Quarter 1997 compared
with $102,000 recorded in the Third Quarter 1996.
Investment write-downs of $62,000 were recorded in the First Nine Months 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 Nine Months 1997. The
Company sold its remaining shares in the first quarter of 1997.
O RESEARCH AND DEVELOPMENT
Research and development expenses were $1.4 million in the First Nine Months
1997, a decrease of $954,000 or 41% from the First Nine Months 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.
Research and development expenses were $382,000 in the Third Quarter 1997, a
decrease of $340,000 or 47% from the Third Quarter 1996.
O INTEREST INCOME
The Company's interest income was $383,000 for the First Nine Months 1997, an
increase of $102,000 or 37% from the First Nine Months 1996. Interest income for
the First Nine Months 1997 was earned on an average investment of $9.4 million
compared with $8.3 million in the First Nine Months 1996. Interest income was
$159,000 for the Third Quarter 1997, an increase of $108,000 or 214% from the
Third Quarter 1996. Interest income for the Third Quarter 1997 was earned on an
average investment of $11.0 million compared with $5.4 million in the Third
Quarter 1996.
O INTEREST EXPENSE
Interest expense was $24,000 for the First Nine Months 1997, a decrease of
$39,000 or 62% from the First Nine Months 1996. The decrease in interest expense
was due to the on-going pay-down of the $3.5 million term loan obtained in July
of 1993 which bears interest at 6% per year. Interest expense was $5,000 for the
Third Quarter 1997, a decrease of $13,000 or 71% from the Third Quarter 1996. As
of the end of the Third Quarter 1997 this term loan has been completely paid
off.
O PROVISION FOR INCOME TAXES
Provision for income tax expense was $1.7 million for the First Nine Months
1997, an increase of $611,000 or 56% from the First Nine Months 1996. The
effective tax rate was 43% during both the First Nine Months 1997 and 1996.
Provision for income tax expense was $619,000 for the Third Quarter 1997, an
increase of $123,000 or 25% from the Third Quarter 1996. The effective tax rate
was 43% during both the Third Quarter 1997 and 1996.
O NET INCOME
As a result of the foregoing, net income was $2.3 million for the First Nine
Months 1997, an increase of $810,000 or 56% from the First Nine Months 1996. Net
income was $820,000 during the Third Quarter 1997, an increase of $164,000 or
25% from the Third Quarter 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1997, the Company had total cash and cash equivalents of
approximately $11.2 million of which $10.5 million was invested in a fund
holding U. S. Treasury securities with maturities of less than three months.
The Company had working capital of $19.8 million at September 30, 1997 compared
to $18.1 million at December 31, 1996, and the working capital ratio was 3.3 to
1 at September 30, 1997 compared to 3.4 to 1 at December 31, 1996.
Domestic trade receivables, net, were $14.5 million as of September 30, 1997, a
decrease of $713,000 or 5% from December 31, 1996. The average number of days
sales has decreased from 94 days for the month of December 1996 to 92 days for
the month of September 1997.
Capital expenditures during the First Nine Months 1997 were approximately $1.7
million compared to $3.3 million for the First Nine Months 1996.
As of September 30, 1997, the Company had in its treasury 310,814 shares of
Common Stock allocated for the Company's Employee Stock Purchase Plan at a total
cost of $2.6 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
(3.3) Restated By-Laws of the Company, as amended through February 2, 1997
(filed herewith).
(10.42) Non-Compete Agreement dated September 3, 1997, by the Registrant and
Vernon L. Wells (filed herewith).
(10.43) Severance Agreement dated September 15, 1997, by the Registrant and
Robert C. Verfurth (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 September 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.
November 13, 1997 /S/ KEVIN C. JOHNSON
--------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
November 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.
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(3.3) Restated By-Laws of the Company, as amended through February 2, 1997 (filed herewith). 16
(10.42) Non-Compete Agreement dated September 3, 1997, by the Registrant and Vernon L. Wells 31
(filed herewith).
(10.43) Severance Agreement dated September 15, 1997, by the Registrant and Robert C. Verfurth (filed 34
herewith).
(27.1) Financial Data Schedule (filed herewith). 41