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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1995
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-9957
DIAGNOSTIC PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2802182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 WEST 96TH STREET
LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
Registrant's telephone number: (213) 776-0180
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, no par value New York Stock Exchange
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/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $386,000,000 as of March 15, 1996.
The number of shares of Common Stock, no par value, outstanding as of March
15, 1996, was 13,533,156.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1996 Annual Shareholders Meeting are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
Diagnostic Products Corporation ("DPC" or the "Company") develops, manufactures
and markets medical immunodiagnostic test kits and related instrumentation which
utilize state-of-the-art technology derived from immunology and molecular
biology. The Company's products are used by hospitals, clinical, veterinary,
research, and forensic laboratories and doctors' offices to obtain precise and
rapid identification and measurement of hormones, drugs, viruses, bacteria and
other substances present in body fluids and tissues at infinitesimal
concentrations. The principal clinical applications of the Company's more than
300 assays (tests) relate to diagnosis of thyroid conditions and anemia; testing
for pregnancy, fertility and fetal well-being; management of diabetes and
certain types of cancer; drugs of abuse testing; rapid diagnosis of infectious
diseases, including sexually transmitted diseases; allergy testing; and
diagnosis of a variety of disorders due to hormone and steroid imbalances. The
Company believes that it is the market leader in fertility testing, with the
most comprehensive line of kits currently available. The Company's kits are used
for in vitro testing, meaning the tests are performed outside of the body,
typically in a test tube. The Company, with its affiliated research and
development and manufacturing facilities in the United Kingdom, Japan, Germany,
China and Italy, markets its products through a national sales force and through
a worldwide distribution network covering 100 countries.
Unless the context otherwise requires, the terms "DPC" and the "Company"
include the Company's consolidated subsidiaries.
THE MATURE RIA MARKET
Since its inception in 1971, DPC's core business has been based on RIA
(radioimmunoassay) technology, which utilizes radioisotopes to achieve high
levels of test specificity and sensitivity. RIA tests are labor intensive and
must be performed by skilled technicians. During the 1970's and 1980's, the RIA
market increased significantly and the Company developed one of the most
extensive lines of RIA kits available.
In the early 1980's, the market began to shift to nonisotopic systems based
mainly on florescence (FIA) and enzyme (EIA) labels. Currently, nonisotopic
systems account for approximately 90% of the market. Although nonisotopic
techniques, such as the IMMULITE products, account for a growing percentage of
the Company's total sales, RIA test kits continue to generate the majority of
the Company's sales.
While the immunoassay market is increasing worldwide, the RIA segment of
this market has been decreasing. This decline reflects concerns regarding the
disposal of radioactive materials used in RIA tests and demands for
labor-saving, automated immunodiagnostic systems which utilize nonisotopic
tests. Even though the worldwide market for RIA is contracting, DPC has
continued to achieve good sales levels in this segment and expects RIA to
continue to be an important market for the Company. The Company's strategy for
the RIA market includes the following:
- Exploit markets which have been abandoned by competitors;
- Exploit niche markets by developing products aimed at readily identified
market needs; and
- Exploit certain foreign markets, such as South America and certain less
industrialized countries, where demand for RIA tests is still growing due
to the lower labor and reagent costs and the availability of the gamma
counting equipment necessary to perform the tests.
The Company continues to expand its RIA product line. During 1995, the
Company obtained FDA approval for 5 RIA test kits, including a test for
measuring PSA (prostate specific antigen). The total worldwide market for PSA,
which is the most useful available tumor marker for prostate cancer, is
estimated to be approximately $200 million per year.
IMMULITE -- TRANSITION TO A FULLY INTEGRATED SYSTEMS COMPANY
With the acquisition of Cirrus Diagnostics Inc. in May 1992, the Company was
able to enter the marketplace for fully automated, nonisotopic diagnostic
instrumentation systems, the most rapidly growing segment of the immunoassay
market. The IMMULITE system, which was developed by Cirrus, is an auto-
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mated, random-access, computer-based instrument which performs immunoassays
utilizing chemiluminescent technology. The IMMULITE system is totally automated
with respect to sample and conjugate handling, incubation, washing and substrate
addition. Printed reports are generated by the system's external computer for
each sample. The system has the potential for total random-access immunoassays
(meaning that the system can perform any test, or combination of tests, on any
patient sample at any time) with capacity for walk-away processing of up to 120
samples per hour.
Whereas DPC's RIA tests can be performed on equipment manufactured by many
different companies, IMMULITE is a closed system; that is, it can only
accommodate IMMULITE assays. Accordingly, one of the most important factors in
the successful marketing of the IMMULITE system is the ability to offer a broad
menu of assays which can be performed on the system. During 1995, the Company
developed 19 assays for the IMMULITE system, bringing the total number of
IMMULITE assays to 56, 28 of which have been approved by the FDA for marketing
in the United States. DPC currently offers the most complete panel of assays
available in the key areas of thyroid, fertility and cancer testing. Included in
the fertility panel are tests for estradiol and progesterone, both important
assays which are not yet available on many other automated systems. IMMULITE
products also include allergy panels and an initial group of assays for
infectious diseases was introduced in 1995.
The patented solid-phase wash technology and chemiluminescent detection
method employed in the IMMULITE system enables the Company to improve the
sensitivity of tests used on the IMMULITE system. An assay's sensitivity is the
smallest amount of a substance which it can detect. DPC's Third Generation TSH
assay is the only fully automated assay for TSH offering the level of
sensitivity required for TSH to serve as a first-line screen for thyroid
disorders, thus replacing the multiple tests previously required with a single
test. Because this assay provides physicians with a more cost effective,
accurate and useful diagnostic tool, approximately 90 percent of all IMMULITE
customers in the United States have adopted this assay for routine thyroid
testing. In 1995 the Company also developed a Third Generation PSA, one of the
most sensitive tests available for prostate specific antigen. This test is not
yet approved for sale in the United States, but is being sold in foreign
markets.
In 1995, DPC continued the development of its next generation IMMULITE
instrumentation. The IMMULITE 2000 will have almost double the throughput of the
current model and will incorporate new features such as primary tube sampling.
This feature, by which the instrument takes the test sample directly from the
patient's blood collection tube, will increase laboratory safety and
productivity. The IMMULITE 2000 will provide the Company with access to the
market represented by higher volume hospitals and laboratories. The IMMULITE
2000 will be introduced at the July 1996 Annual Meeting of the American
Association for Clinical Chemistry in Chicago and is expected to be available
for delivery to customers in early 1997.
ALLERGY TESTING
An important market segment to which the Company has devoted significant
development and marketing resources is the area of allergy testing. While this
market is dominated by Pharmacia of Sweden, the Company believes that its
technology is competitive in this large and growing market. DPC offers three
distinct methodologies for its AlaSTAT allergy product line based on a patented
liquid-handling technology: (i) the traditional RIA format, (ii) a tube
methodology for smaller laboratories preferring nonisotopic methodologies, and
(iii) a microplate-based system for larger laboratories desiring full
automation. In addition, the IMMULITE system offers a fully automated test for
total IgE as well as a pivotal screening test (AlaTOP), the most widely used
first line test for allergies.
The number of specific allergens which the DPC methodologies can handle is
rapidly expanding. During 1995, DPC obtained FDA approval to market 57 new tests
for specific allergens in microplate format. In addition, DPC obtained FDA
approval to market the first commercial test for determining sensitivity to
latex products in patients and health care professionals exposed to latex
products.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company devotes substantial resources to research and development to update
and improve its existing products, as well as to develop new products. Because
of the importance of being able to offer an
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extensive menu of assays on the IMMULITE system, approximately 80% of research
and development activities in 1995 related to the development of IMMULITE
assays. The Company expects similar levels in the coming year. The Company
conducts research and development activities at facilities located in Los
Angeles, Randolph, New Jersey, the United Kingdom, Germany, Japan (a 50%-owned
joint venture), and Italy (through its 45%-owned subsidiary). During the years
ended December 31, 1993, 1994 and 1995, the Company spent $12,768,000,
$13,404,000 and $16,135,000 on research and development, representing
approximately 12%, 11% and 10% of sales.
MANUFACTURING AND SERVICE
The Company's principal test kit manufacturing facility is located in Los
Angeles, California. Approximately 10% of test kit production is conducted at
the EURO/DPC facility in the United Kingdom. The Company's European
manufacturing facilities enable the Company to maintain its competitiveness in
the EEC by minimizing import duties and freight charges and by reducing the
effects of currency exchange fluctuations. Certain kits are also manufactured in
Japan by the Company's 50%-owned joint venture, and by the DPC Biermann GmbH
facility in Germany.
The IMMULITE system instrumentation is assembled at the Company's facility
in New Jersey. Component parts, such as computer hardware, are supplied by
original equipment manufacturers. The Company provides a one year warranty which
covers parts and labor. The IMMULITE system is certified by Underwriter's
Laboratories Inc. (UL). The Company's and its distributors' technical service
personnel install new units, train customers in the use of the system, and
provide maintenance and service for the instrumentation. During 1995 the Company
released the IMMULITE On-Line Reference Guide and Tutorial software which
provides customers with information on theory, operation and trouble-shooting
for the entire system, including instrument hardware, software and chemistry.
The EURO/DPC Instrumentation Division manufactures diagnostic
instrumentation and develops associated software used in the allergy product
lines. These instruments include the MARK 5, an automated pipettor; the
MicroLite 3 pipetting aid; and the MARK 5 BCR barcode reader. Certain components
of the IMMULITE instrument are also manufactured in Wales.
Certain of the Company's proprietary instruments and software are
manufactured by OEMs, including AlaSTAT Microplate instrumentation, gamma
counters used with RIA tests, and spectrophotometers used with certain EIA
tests. The Company is not dependent on any outside supplier and believes that
alternate sources are readily available.
In 1995, DPC Cirrus received ISO 9001 certification, an internationally
recognized manufacturing standard. In December 1990, Euro/DPC, the Company's
wholly owned manufacturing subsidiary in Wales, was the first immunodiagnostics
company in the world to be certified under British Standard BS 5750 (also known
as International Standard ISO 9002 and European Standard EN 29002), a rigorous
British quality assurance program which is the forerunner of a uniform
manufacturing code for the European Economic Community.
MARKETING AND SALES
The Company markets its diagnostic kits to hospital, clinical, forensic,
research, reference and veterinary laboratories, to doctors' offices, and to
U.S. government agencies. The Company markets its products in the United States
directly to laboratories and hospitals through its own sales force. The Company
sells to the doctors' office market through a network of independent
distributors as well as through its own sales force. Sales personnel and
distributors are trained to demonstrate the Company's product line in the
customer's laboratory and are supported by the Company's Los Angeles and New
Jersey-based technical services departments. Foreign sales are handled by the
Company's distributors including consolidated distributors.
The Company's products are sold on a world-wide basis through distributors
in 100 foreign countries. The Company's distributors, including consolidated
distributors, also sell other manufacturer's products which are not directly
competitive with the Company's products. Foreign sales (including sales of
consolidated subsidiaries) represented approximately 75% of sales in 1993, 76%
in 1994, and 79% in 1995, with
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sales in Europe accounting for approximately 53%, 54% and 55% of total sales
respectively. See Notes 5 and 10 of Notes to Consolidated Financial Statements
for information regarding foreign operations.
The Company owns equity interests in the following foreign distributors:
<TABLE>
<CAPTION>
Distributor Location % Ownership
- ---------------------------------------------- ---------------- -----------
<S> <C> <C>
Diagnostic Products Corporation Nederland B.V. Netherlands 100%
Diagnostic Products Corporation Belgium 100%
Belgium b.v.b.A./s.p.r.l.
DPC Biermann GmbH Germany 100%
Bio-Mediq DPC Pty. Ltd. Australia 100%
DPL, a division of EURO/DPC Limited United Kingdom 100%
DPC Dipesa, S.A. Spain 100%
Tianjin De Pu (DPC) Biotechnological and China 90%
Medical Products, Inc.
DPC Medlab Produtos Brazil 56%
Medico Hospitalares, Ltda.
Nippon DPC Corporation Japan 50%
DPC Skafte AB Sweden 50%
Medical Systems, S.p.A. Italy 45%
Amerlab, Lda. Portugal 40%
</TABLE>
The consolidated financial statements include the accounts of those distributors
in which the Company has a greater than 50% ownership interest. The Company had
sales to nonconsolidated affiliated distributors of $11,460,000 in 1993,
$12,119,000 in 1994 and $18,504,000 in 1995, including sales to Medical Systems
S.p.A. of $6,207,000 in 1993, $6,005,000 in 1994 and $10,034,000 in 1995.
Sales of test kits to customers and distributors are made against individual
purchase orders rather than through volume purchase arrangements. Because of the
typically short shelf life of diagnostic kits, the Company's customers and
distributors tend to order frequently, based on their short-term needs. Products
are shipped directly from the Company's facilities in Los Angeles and Wales and
are generally delivered domestically within 24 hours and overseas within 48
hours of receipt of order. The Company sells the IMMULITE instrumentation to
hospitals and reference laboratories which perform volume testing. Most of the
instruments are placed under a sales-type or operating lease basis. The
Company's backlog at any date is usually insignificant and not a meaningful
indicator of future sales.
Foreign sales are subject to inherent risks including exposure to currency
fluctuations, political and economic instability and trade restrictions. Because
the Company's consolidated foreign distributor's sales are in the local
currency, the Company's consolidated financial results are affected by foreign
currency translation adjustments (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements). In addition, the price competitiveness of
the Company's products abroad is impacted by the relative strength or weakness
of the U.S. dollar.
The 1984 GATT agreement on tariffs specifically targets medical diagnostic
devices for a five year elimination of all duties. This took effect on January
1, 1995 in the major countries in Europe and Japan. The Company believes that
the elimination of duties will have a positive impact on foreign sales.
PROPRIETARY AND OTHER RIGHTS
Substantially all of the Company's products are based on proprietary
technologies and know-how. The Company holds patents on the washing process used
in the IMMULITE system which expire in 2009. In
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1988, the Company was issued a U.S. patent for its novel liquid-based
amplification methodology which forms the basis of the AlaSTAT product lines.
The Company also holds a patent for its neonatal test kit procedure which
expires in 1998. The Company also obtains licenses for chemical components and
technologies used in certain of its assays.
Patents which may be granted to others in the future could inhibit the
Company's expansion or entry into certain areas, or require it to pay royalty
fees to do so. Because of rapid technological developments in the
immunodiagnostic industry with concurrent extensive patent coverage and the
rapid rate of issuance of new patents, certain of the Company's products may
involve controversy concerning infringement of existing patents or patents which
may be issued in the future.
The Company purchases certain chemical compounds which are key components in
the IMMULITE system pursuant to agreements effective February 9, 1995 with
Lumigen, Inc. and Tropix, Inc. The Company has the right for ten years to
purchase certain specified chemical compounds from Lumigen or, in certain
circumstances, from Tropix, which are the sole suppliers of these chemical
compounds. Tropix also agreed to supply the Company with certain other chemical
compounds for use in veterinary kits for ten years. Upon expiration of the ten
year supply agreement, the Company believes it will either use an alternate
technology or it will enter into a new supply arrangement.
GOVERNMENT REGULATION
The Company's business is affected by government regulations both in the United
States and abroad, in particular Western Europe, aimed at containing the cost of
medical services. For example, the profitability of the Company's Italian
distributor (in which the Company has a 45% interest) has been adversely
affected by government reductions in health care cost reimbursements. Similar
reductions could affect other major European markets. The Company believes that
in vitro diagnostic (IVD) testing is an important tool for reducing health
expenditures. By providing early diagnosis and therapy management, IVD tests can
reduce the high costs of hospitalization, surgery and recovery. In response to
cost containment measures, hospitals and laboratories have consolidated and have
sought to increase productivity by replacing high cost labor with automated
testing systems. The Company's IMMULITEsystem addresses these market needs. The
Company also seeks to develop more rapid and sensitive tests which can eliminate
the need for redundant testing, such as DPC's Third Generation TSH assay.
Manufacturers of immunodiagnostic tests and other clinical products intended
for use as human diagnostics are governed by FDA regulations as well as
regulations of state agencies and foreign countries. A new in vitro product that
is "substantially equivalent" to one already on the market can generally be sold
in the United States after the FDA's Center for Devices and Radiological Health
approval. Most of the Company's products fall within the "substantially
equivalent" category. Certain medically critical in vitro diagnostic products,
such as the Company's kits for cancer therapy management, and totally new in
vitro diagnostic products for which there are no equivalents on the market, must
be approved by the FDA after in-depth review which normally takes about two
years prior to marketing. The Company's products can be marketed without
regulatory approval in most foreign countries. Japan and France have their own
approval procedures.
The Company's Los Angeles manufacturing facilities are licensed by the
California Department of Health Services and must be operated in conformance
with the FDA's Good Manufacturing Practices governing medical devices. The
Company is regulated by the California Department of Health Services with
respect to its possession and use of radioactive substances and by the U.S. Drug
Enforcement Agency with respect to the use and storage of controlled drugs and
pharmaceuticals.
COMPETITION
The Company competes on a worldwide basis with a number of large corporations
which sell diversified lines of products, including immunodiagnostic products,
for laboratory, medical and hospital use, and which have substantially greater
resources than the Company. There are currently over 30 domestic suppliers of
immunodiagnostic kits. Most of the leading suppliers are broad-based health care
companies such as Abbott Diagnostics (Abbott Laboratories), Chiron and Johnson &
Johnson. The Company's major competitors in Europe include Serono Laboratories,
Inc. (Italy), Pharmacia/Upjohn (Sweden), Hoffman-La Roche (Switzerland) and
Boehringer Mannheim (Germany). The Company believes that competition with
respect
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to immunoassay tests is based on quality, service, product convenience and
price, and that product innovation is an important source for change in market
share.
Many companies worldwide manufacture and sell automated immunodiagnostic
systems. The Company's principal competitors are Abbott Diagnostics, Chiron,
Sanofi, and Tosoh Medics. Abbott Diagnostics is the market leader in nonisotopic
assays and semiautomated instruments. Most of these companies are substantially
larger and have greater resources than the Company. The principal competitive
factors in automated systems are size of menu (the number of assays which can be
performed on the system), ease of use, and price (equipment cost, service and
reagent cost). The Company's IMMULITE System currently offers one of the widest
menus of any automated system and the Company is focusing its development
efforts on expanding this menu.
EMPLOYEES
As of December 31, 1995, the Company (including its consolidated subsidiaries)
had 1182 employees, including 508 in manufacturing, 225 in research and
development, 272 in marketing and sales and 177 in administration. None of the
Company's employees are represented by a labor union and the Company considers
its employee relations to be good. The Company has experienced no significant
problems in recruiting qualified technical and operational personnel.
ITEM 2. PROPERTIES
The following is a list of significant properties owned and leased by the
Company and its consolidated subsidiaries as of December 31, 1995:
<TABLE>
<CAPTION>
Location Size Owned/Leased Uses
- ---------------------------- --------------- ------------ ----------------------------------------------
<S> <C> <C> <C>
Los Angeles, California 116,000 sq. ft. Leased * Corporate offices, manufacturing, warehousing,
distribution, and research and development
Los Angeles, California 48,000 sq. ft. Owned Adjacent to Corporate Offices,
manufacturing and warehousing
Gorman, California 40 acres Owned Raw material processing
Randolph, New Jersey 27,500 sq. ft. Leased Research, manufacturing and
distribution
Glyn Rhonwy, Wales, UK 110,000 sq. ft. Owned Research, manufacturing and
distribution
Bad Nauheim, Germany 28,675 sq. ft. Owned Research and distribution
Humbeek-Grimbergen, Belgium 5,000 sq. ft. Owned Distribution
Apeldoorn, Netherlands 5,100 sq. ft. Owned Distribution
Madrid, Spain 10,161 sq. ft. Leased Distribution
Melbourne, Australia 7,600 sq. ft. Owned Distribution
</TABLE>
- --------------------
*Lease payments of $849,000 in 1995. Lease expires in 1997, with a five-year
renewal option. See "Item 13. Certain Relationships and Related
Transactions".
The Company believes that its facilities are adequate to meet its
foreseeable needs.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the last fiscal year, no matter was submitted to a
vote of the security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange and is
traded under the symbol DP.
The following table sets forth the quarterly high and low price of the
Company's Common Stock and quarterly dividends per share paid during 1995 and
1994.
<TABLE>
<CAPTION>
1995
----------------------------------------------
High Low Dividend
-------- -------- --------
<S> <C> <C> <C>
First Quarter $ 34 3/4 $ 24 1/4 $ .10
Second Quarter 40 3/8 34 .12
Third Quarter 44 7/8 35 3/4 .12
Fourth Quarter 39 1/4 33 1/2 .12
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------
High Low Dividend
-------- -------- --------
<S> <C> <C> <C>
First Quarter $ 20 7/8 $ 17 3/4 $ .10
Second Quarter 22 1/4 17 3/4 .10
Third Quarter 24 1/2 21 .10
Fourth Quarter 26 5/8 20 3/8 .10
</TABLE>
As of March 15, 1996, the Company had 641 holders of record of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, except per Share Data)
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 90,065 $103,489 $106,791 $126,453 $159,649
Net income 16,260 17,289 14,166 16,700 24,169
Net income per share 1.20 1.26 1.04 1.24 1.75
Average shares outstanding 13,502 13,706 13,627 13, 508 13,847
Dividends per share $ .32 $ .32 $ .40 $ .40 $ .46
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Working capital $ 53,024 $ 55,534 $ 54,260 $ 60,704 $70,539
Total assets 135,006 134,323 137,149 152,735 189,462
Shareholders' equity 110,849 119,544 123,273 135,100 163,350
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's sales increased 26% in 1995 to $160 million, following an 18%
increase in 1994 to $126 million. Notwithstanding the severe restrictions placed
worldwide on health care expenditures, the Company reported double-digit 1995
and 1994 sales increases principally as a result of the increased worldwide
acceptance of the fully automated, random access IMMULITE system. The Company
doubled the number of IMMULITE systems placed in 1995 compared to the total
placed in the prior two years and shipments of IMMULITE reagents more than
doubled in 1995 compared to 1994. The IMMULITE system is expected to continue to
account for the greatest amount of growth of all the Company's product lines for
the foreseeable future. Although RIA kits continue to generate profitable sales,
this product line has matured and on a worldwide basis is experiencing a slow
decline. Sales growth from IMMULITE products in 1994 and 1995 were, and in the
future are expected to be, partially offset by declines in RIA sales. In 1995,
approximately 79% of the Company's sales were non-US (compared to 76% in 1994
and 75% in 1993), with Europe being the Company's principal foreign market,
accounting for 55% of total sales (compared to 54% in 1994 and 53% in 1993).
In periods when the US dollar is weakening, the effect of the translation of
the financial statements of the consolidated foreign affiliates is that of
higher sales, costs and net income. The weaker US dollar in 1995 (when compared
to 1994) has resulted in higher reported sales of approximately 5% and higher
reported net income of 3%. The weaker US dollar in 1994 when compared to 1993
resulted in less than 1% translation effect on sales and net income.
In 1995 and 1994, cost of sales as a percentage of sales was 44% compared to
40% in 1993. In 1995 and 1994, the cost of sales percentages were higher due to
the higher cost of sales for IMMULITE instruments compared to reagents. Because
instrument sales as a percentage of total sales will continue to increase, it is
unlikely that the gross margin will ever fully return to the historical levels
achieved when the Company was primarily a reagent manufacturer.
Selling expense as a percentage of sales was 18% in 1995 and 19% in 1994 and
1993. The dollar amount continues to increase primarily as a result of the
continual expansion of the marketing and sales effort, especially for the
IMMULITE system.
Research and development expenditures as a percentage of sales were 10% in
1995, 11% in 1994 and 12% in 1993. The dollar amount of these expenditures have
increased to support the IMMULITE system.
General and administrative expenses as a percentage of sales were 9% in
1995, 11% in 1994 and 12% in 1993. Included in general and administrative
expenses is the amortization of the excess of cost over net assets acquired.
Equity in income of affiliates represents the Company's share of earnings of
nonconsolidated affiliates, principally the 45%-owned Italian affiliate whose
1995 net income was substantially lower than in 1994 and previous years.
Profitability in Italy was adversely influenced by a combination of (1) reduced
sales caused by current serious economic problems and reductions in health care
cost reimbursements and (2) the impact of a substantial weakening of the Italian
currency in relation to the US dollar in 1993.
Investment income consists of interest income on the Company's cash and cash
equivalents.
The Company's effective tax rate includes Federal, state and foreign taxes.
The 1995 rate of 26% compares to 26% in 1994 and 29% in 1993. The lower rate in
1995 and 1994 is the result of higher income levels generated in lower tax rate
jurisdictions and the increased utilization of foreign tax credits.
Additionally, in 1995, the Company determined it would realize the benefit of
available state net operating loss carryforwards, resulting in the reversal of a
previously established valuation allowance.
The Company has adequate working capital and sources of capital to carry on
its current business and to meet its existing capital requirements. Cash flow
from operating activities was $18.5 million in 1995, $18.5 million in 1994 and
$10 million in 1993. Cash flow used for plant and equipment additions and
renovations was $8.1 million in 1995, $4.5 million in 1994 and $7.6 million in
1993. Cash flow used for sales-type and operating leases was $6.4 million in
1995, $4 million in 1994 and $3.7 million in 1993.
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During 1994 and the first quarter of 1995, the Company paid a cash dividend
of $.10 per share. Commencing with the second quarter of 1995, the quarterly
dividend was increased to $.12 per share. During 1994, the Company repurchased
190,800 shares of its Common Stock in the open market at a cost of $3,728,000.
During 1993, the Company repurchased 93,000 shares of its common stock in the
open market at a cost of $1,689,000.
The Company will be required to adopt new accounting standards in the
future. In 1996, the Company will be required to adopt Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company
anticipates that SFAS No. 121 will not have a material impact on the Company's
financial statements. In addition, in 1996 the Company will be required to adopt
SFAS No. 123, "Accounting for Stock-Based Compensation." The primary impact of
this standard will relate to certain disclosure about the Company's stock option
plan. The Company will continue to account for employee stock options under
Accounting Principles Board Opinion No. 25.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a listing of the consolidated financial statements and
supplementary data filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The required information is hereby incorporated herein by reference to the
sections entitled "Election of Directors" and "Executive Officers" of the
Company's Proxy Statement for the 1996 Annual Shareholders Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The required information is hereby incorporated herein by reference to the
sections entitled "Election of Directors Compensation of Directors", "Executive
Compensation" and "Compensation and Stock Option Committee Interlocks and
Insider Participation" of the Company's Proxy Statement for the 1996 Annual
Shareholders Meeting.
10
<PAGE> 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is hereby incorporated herein by reference to the
section entitled "Ownership of Common Stock" of the Company's Proxy Statement
for the 1996 Annual Shareholders Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is hereby incorporated herein by reference to the
second paragraph of the section entitled "Compensation and Stock Option
Committee Interlocks and Insider Participation" of the Company's Proxy Statement
for the 1996 Annual Shareholders Meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of Report:
1. Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1994, and 1995.
Consolidated Statements of Income for the three years ended
December 31, 1995.
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1995.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995.
Notes to Consolidated Financial Statements
2. Supplementary Financial Data.
3. Exhibits - See "Exhibit Index" which appears after the signature page
of this report.
(b) Reports on Form 8-K - None.
11
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of Diagnostic
Products Corporation and its subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Diagnostic Products Corporation and
its subsidiaries at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 20, 1996
12
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1994 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,833 $ 16,519
Accounts receivable -- net of allowance
for doubtful accounts of $76 and $77 32,076 40,802
Inventories 28,324 35,521
Prepaid expenses and other current assets 983 358
Deferred income taxes 2,123 3,451
--------- ---------
Total current assets 78,339 96,651
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 26,224 27,553
Machinery and equipment 31,040 38,607
Leasehold improvements 6,175 6,635
Construction in progress 162 836
--------- ---------
Total 63,601 73,631
Less accumulated depreciation and amortization 26,337 31,707
--------- ---------
Property, plant and equipment -- net 37,264 41,924
SALES-TYPE AND OPERATING LEASES 8,005 18,128
DEFERRED INCOME TAXES 2,537 3,200
INVESTMENTS IN AFFILIATED COMPANIES 12,775 13,279
EXCESS OF COST OVER NET ASSETS ACQUIRED --
Net of amortization of $4,453 and $5,373 13,815 16,280
--------- ---------
TOTAL ASSETS $ 152,735 $ 189,462
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,667 $ 16,969
Accrued liabilities 5,124 5,708
Income taxes payable 844 3,435
--------- ---------
Total current liabilities 17,635 26,112
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock - no par value, authorized 30,000,000
shares at December 31, 1994 and 1995; outstanding
12,952,880 shares and 13,524,051 shares 27,334 35,179
Retained earnings 113,041 131,136
Foreign currency translation adjustments (5,275) (2,965)
--------- ---------
Total shareholders' equity 135,100 163,350
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 152,735 $ 189,462
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
SALES $ 106,791 $ 126,453 $ 159,649
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 43,175 55,836 70,528
Selling 20,163 23,481 29,188
Research and development 12,768 13,404 16,135
General and administrative 12,632 13,303 14,454
Equity in income of affiliates (1,346) (1,592) (1,407)
Investment income (547) (619) (1,828)
--------- --------- ---------
Total costs and expenses 86,845 103,813 127,070
--------- --------- ---------
INCOME BEFORE INCOME TAXES 19,946 22,640 32,579
PROVISION FOR INCOME TAXES 5,780 5,940 8,410
--------- --------- ---------
NET INCOME $ 14,166 $ 16,700 $ 24,169
========= ========= =========
NET INCOME PER SHARE $ 1.04 $ 1.24 $ 1.75
WEIGHTED AVERAGE SHARES
AND EQUIVALENTS OUTSTANDING 13,627 13,508 13,847
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
14
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Retained
------------------------------
Shares Amount Earnings
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1993 13,127,295 $ 31,870 $ 92,645
Issuance of shares upon exercise of stock options 50,585 442
Repurchase and retirement of shares (93,900) (1,689)
Cash dividends ($.40 per share) (5,265)
Net income 14,166
----------- ----------- -----------
BALANCE, DECEMBER 31, 1993 13,083,980 30,623 101,546
Issuance of shares upon exercise of stock options 59,700 439
Repurchase and retirement of shares (190,800) (3,728)
Cash dividends ($.40 per share) (5,205)
Net income 16,700
----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 12,952,880 27,334 113,041
Issuance of shares upon exercise of stock options 571,171 7,845
Cash dividends ($.46 per share) (6,074)
Net income 24,169
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 13,524,051 $ 35,179 $ 131,136
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
----------------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,166 $ 16,700 $ 24,169
Adjustments to reconcile net income to net cash
flows from operating activities (net of effect from
1995 purchase of Brazilian distributor):
Depreciation and amortization 4,228 5,904 6,085
Equity in undistributed income of
unconsolidated affiliates 839 (1,524) (504)
Accounts receivable (3,620) (5,423) (6,343)
Inventories (4,121) (655) (6,715)
Prepaid expenses and other current assets (955) 228 625
Deferred income taxes (218) 441 (1,991)
Accounts payable (315) 940 (5,545)
Accrued liabilities 396 1,448 584
Income taxes payable (377) 404 2,564
Income tax benefit received upon exercise
of certain stock options 5,604
-------- -------- --------
Net cash flows from operating activities 10,023 18,463 18,533
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES:
Marketable securities 11,000
Additions to property, plant and equipment (7,627) (4,528) (8,060)
Sales-type and operating leases (3,718) (3,998) (6,440)
Purchase of Brazilian distributor (1)
-------- -------- --------
Net cash from (used for) investing activities (345) (8,526) (14,501)
CASH FLOWS FROM (USED FOR)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 442 439 2,241
Cash dividends paid (5,265) (5,205) (6,074)
Repurchase of common stock (1,689) (3,728)
-------- -------- --------
Net cash from (used for) financing activities (6,512) (8,494) (3,833)
EFFECT OF EXCHANGE RATE
-------- -------- --------
CHANGES ON CASH (1,991) 506 1,487
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,175 1,949 1,686
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 11,709 12,884 14,833
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 12,884 $ 14,833 $ 16,519
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 6,217 $ 4,754 $ 3,098
======== ======== ========
BUSINESSACQUISITION:
Fair value of assets acquired $ 10,741
Liabilities assumed (10,740)
Cash paid $ 1
========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Diagnostic
Products Corporation and its majority-owned subsidiaries after elimination of
intercompany accounts and transactions. Investments in non-majority-owned
companies are accounted for using the equity method.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are dependent on its ability to research,
develop, manufacture and market innovative products that meet customers' needs.
Inherent in this process are a number of risks that the Company must
successfully manage in order to achieve favorable operating results.
The Company's products which are sold in the United States, whether
manufactured in the United States or elsewhere require product approval by the
United States Food and Drug Administration.
The operations of the Company involve the use of substances regulated under
various Federal, state and international laws governing the environment.
Environmental costs are presently not material in the Company's operations or
financial position.
A portion of the Company's research and development activities, its
corporate headquarters and other manufacturing operations are located near major
earthquake faults. The ultimate impact on the Company is unknown, but operating
results could be materially affected in the event of a major earthquake. The
Company is partially insured for such losses and interruptions caused by
earthquakes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Although the Company believes that it has the products and resources needed
for continuing success, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its operations. Because of the
foregoing factors, recent trends should not be considered reliable indicators of
future financial performance.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents and trade receivables. The Company's
cash equivalents are in high quality securities placed with major banks.
Concentrations of credit risk with respect to receivables are limited due to the
large number of customers and their dispersion across worldwide geographic
areas. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
NET INCOME PER SHARE
Net income per share has been computed using the weighted-average number of
common shares and common share equivalents outstanding during each period.
Common share equivalents represent the dilutive effect of outstanding stock
options.
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Included in cash and cash
equivalents at December 31, 1994 and 1995 is $9,300,000 and $12,600,000 of
short-term commercial paper. The carrying value of the cash and cash equivalents
approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, less accumulated depreciation
and amortization which is computed using straight-line and declining-balance
methods over the estimated useful lives (5 to 50 years) of the related assets.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the lease.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies represent equity investments in foreign
distributors in which the Company owns a 50% or less equity interest. The
investments are stated at cost plus advances, plus the Company's equity in the
undistributed net income since acquisition, less amortization of the excess of
cost over the net assets acquired.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired arose as a result of the purchase of
certain of the Company's foreign distributors. The excess of cost over net
assets acquired is being amortized over 20 years using the straight-line method.
The Company periodically reviews excess cost over net assets acquired to assess
recoverability; impairments would be recognized in operating results if a
permanent diminution in value were to occur.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries and affiliates are translated
into U.S. dollars at the exchange rate prevailing at the balance sheet date, and
income and expense accounts at the weighted average rate in effect during the
year.
FOREIGN EXCHANGE INSTRUMENTS
The Company hedges specific foreign currency exposures by purchasing foreign
exchange contracts. Such foreign exchange contracts are generally entered into
by the Company's European subsidiaries. The subsidiaries purchase forward dollar
contracts to hedge firm commitments to acquire inventory for resale. The Company
does not engage in speculation. The Company's foreign exchange contracts do not
subject the Company to exchange rate movement risk as any gains or losses on
these contracts are offset by gains or losses on the transactions being hedged.
The foreign exchange contracts have varying maturities which generally do not
exceed one year. At December 31, 1994 and 1995, the Company had approximately
$10,000,000 and $15,000,000 of foreign exchange contracts outstanding, the
carrying value of which does not differ significantly from their fair value.
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
Deferred income taxes represent the tax consequences on future years of
differences between the income tax basis of assets and liabilities and their
basis for financial reporting purposes.
NOTE 2 - BUSINESS ACQUISTION
As of September 1, 1995, the Company acquired a 56% equity interest in DPC
Medlab Produtos Medico Hospitalares Ltda., the Company's Brazilian distributor.
NOTE 3 - INVENTORIES
Inventories by major categories are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
----------------------------
1994 1995
------- -------
<S> <C> <C>
Raw materials $ 9,259 $11,414
Work in process 11,233 14,567
Finished goods 7,832 9,540
------- -------
$28,324 $35,521
======= =======
</TABLE>
NOTE 4 - SALES-TYPE AND OPERATING LEASES
In addition to outright sales, the Company places IMMULITE instruments with
customers under sales-type and operating leases for periods generally from three
to five years.
For operating leases, the cost of the equipment is amortized on a
straight-line basis over three to five years.
Sales-type and operating leases are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
----------------------------
1994 1995
------- -------
<S> <C> <C>
Sales-type leases $3,057 $ 5,472
Operating leases 7,919 25,397
Less accumulated amortization 2,971 12,741
------- -------
Net 4,948 12,656
------- -------
Total $8,005 $18,128
======= =======
</TABLE>
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN AFFILIATED COMPANIES
The Company has equity interests in three non-consolidated foreign affiliates.
The affiliates distribute the Company's products in their countries. The
countries and the Company's ownership interest are as follows: Portugal, 40%;
Italy, 45%; and Sweden, 50%.
The Company has a joint venture formed for the purpose of marketing and
manufacturing the Company's immunodiagnostic test kits in Japan. The joint
venture (Nippon DPC Corporation), owned equally by the Company and Dainippon Ink
and Chemicals, Incorporated is being funded with capital contributed and debt
guaranteed by Dainippon Ink and Chemicals, Incorporated and technology by the
Company.
The following represents condensed financial information for all of the
Company's investments in non-consolidated affiliated companies, and the results
of their operations.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------------------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current assets $ 42,821 $ 41,595 $ 45,577
Property and other assets 24,097 26,653 33,377
-------- -------- --------
Total assets $ 66,918 $ 68,248 $ 78,954
======== ======== ========
Current liabilities $ 38,126 $ 31,084 $ 37,019
Non-current liabilities 11,540 14,626 14,771
Shareholders' equity 17,252 22,538 27,164
-------- -------- --------
Total liabilities and
shareholders' equity $ 66,918 $ 68,248 $ 78,954
======== ======== ========
Sales $ 58,104 $ 58,471 $ 61,218
Net income 3,893 3,971 3,619
======== ======== ========
</TABLE>
The Company had sales to non-consolidated affiliates of $11,460,000 in 1993,
$12,119,000 in 1994 and $18,504,000 in 1995, including sales to one affiliate
(Italy) of $6,207,000 in 1993, $6,005,000 in 1994 and $10,034,000 in 1995.
Included in the Company's accounts receivable are trade receivables from
non-consolidated affiliates of $3,376,000 at December 31, 1994 and $6,016,000 at
December 31, 1995.
The Company received dividends in 1993 and 1994 of $1,916,000 and $872,000
from its Italian affiliate. The Company's cumulative equity in undistributed
earnings of non-consolidated affiliated companies at December 31, 1995 is
$11,628,000. Deferred taxes are not provided for undistributed earnings as these
amounts are intended to be reinvested.
NOTE 6 - PENSION AND PROFIT SHARING PLANS
The Company has a money purchase pension plan covering substantially all U.S.
employees over 21 years of age. Contributions under the pension plan are made
annually in an amount equal to 10% of the compensation of all participants for
such year. Contributions to the pension plan were $1,341,000 in 1993, $1,469,000
in 1994 and $1,883,000 in 1995.
The Company has a profit sharing plan covering substantially all U.S.
employees over 21 years of age. Contributions under the profit sharing plan for
any year are made at the discretion of the Board of Directors of the Company,
but not in excess of 15% of the compensation of all participants for such year.
There was no contribution in 1993. The contribution to the profit sharing plan
was $479,000 in 1994 and $391,000 in 1995.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
----------------------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
CURRENTLY PAYABLE:
Federal $ 2,555 $ 3,194 $ 7,076
State 1,153 737 220
Foreign 2,290 1,568 3,105
Deferred federal and
state income taxes (218) 441 (1,991)
------- ------- -------
Total provision for income taxes $ 5,780 $ 5,940 $ 8,410
======= ======= =======
</TABLE>
Temporary differences comprising the net deferred taxes shown on the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
---------------------------
1994 1995
------- -------
<S> <C> <C>
State income taxes $ 163 $ 19
Cirrus' net operating losses 3,211 2,501
Inventory 1,367 2,650
Depreciation 345 612
Other 631 869
Total 5,717 6,651
Valuation allowance (1,057)
------- -------
Total $ 4,660 $ 6,651
======= =======
</TABLE>
Included in the net deferred income taxes shown on the consolidated balance
sheets for 1994 and 1995 are deferred tax assets of $4,723,000 and $6,832,000
and deferred tax liabilities of $63,000 and $181,000.
At December 31, 1995, DPC Cirrushad net operating loss carryforwards for
Federal and state income tax purposes of approximately $5,018,000 and $9,463,000
expiring at varying dates through 2001. Utilization of the Federal net operating
losses are subject to annual limitations of approximately $2,000,000.
The Federal and state income tax asset related to DPC Cirrus' net operating
losses has been recorded in the accompanying consolidated financial statements.
This reflects the Company's belief, on the basis of available evidence, that the
DPC Cirrus net operating loss carry forwards will be realized.
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the provision for income taxes computed by applying
the federal statutory tax rate to income before income taxes and the actual
provision for income taxes is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
----------------------------------------------
1993 % 1994 % 1995 %
------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at statutory rate $ 6,911 35 $ 7,924 35 $11,403 35
State income taxes, net of federal tax benefit 855 4 479 2 (1,440) (4)
Foreign income subject to tax other than
federal statutory rate 525 3 577 2 23
Non-taxable earnings of FSC (521) (3) (904) (4) (1,013) (3)
Research and development tax credit (225) (1) (175) (1) (247) (1)
Net foreign tax credit (1,625) (8) (1,768) (8) (111)
Equity in income of affiliates (466) (2) (557) (2) (492) (2)
Tax benefit from sale of French distributor
Other 326 1 364 2 287 1
------------- ------------- ------------
Provision for income taxes $ 5,780 29 $ 5,940 26 $ 8,410 26
============= ============= ============
</TABLE>
An income tax benefit during 1995 related to the exercise or early disposition
of certain stock options reduced income taxes currently payable by $5,604,000
and was credited directly to shareholders' equity.
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into a noncancelable operating lease for a portion of
its Los Angeles manufacturing facility with a partnership comprised of two
officers/shareholders of the Company and their four children, who are also
shareholders and one of whom is an officer and a director. The agreement extends
through December 31, 1997, with a five-year renewal option. Approximately
$818,000 in 1993 and 1994 and $849,000 in 1995 was paid under the facility lease
agreement.
DPC Cirrus has entered into a noncancelable operating lease for its
Randolph, New Jersey manufacturing facility. The agreement extends through
November 30, 2000, with a five-year renewal option, at a current average annual
rental of approximately $172,000.
Future minimum lease commitments as of December 31, 1995 for both leases are as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1997 1998 1999 2000 Total
------- ------- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
$ 1,045 $ 1,051 $ 172 $ 172 $ 158 $ 2,598
</TABLE>
Rental expense under operating leases approximated $1,379,000 in 1993,
$1,340,000 in 1994 and $1,527,000 in 1995.
The Company has a supply contract with a vendor for chemical compounds,
which are key components in the IMMULITE system. For several years the vendor
had been involved in multiple legal proceedings both domestically and
internationally with another company, which had challenged the vendor's patent
and other rights to these compounds and other technology. Pursuant to a
settlement agreement, the Company will have the right for ten years to purchase
the chemical compounds currently in use. As part of the agreement, the Company
will guaranty the vendor's minimum payment obligations to the other company in
the amount of $1,000,000 in each of 1995 and 1996 and $600,000 in each of the
next eight years. There were no amounts disbursed in 1995 under the guaranty.
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTION PLANS
Under the Company's stock option plans, incentive stock options may be granted
and are exercisable at prices not less than 100% of the fair market value on the
date of the grant (110% with respect to optionees who are 10% or more
shareholders of the Company). Under the plans, non-qualified stock options may
be granted and are exercisable at prices not less than 85% of fair market value
at the date of grant. Options become exercisable in installments and may be
exercised on a cumulative basis at any time before expiration. Options expire no
later than ten years from the date of grant (five years with respect to
optionees who are 10% or more shareholders). The following table summarizes
option activity for the plans:
<TABLE>
<CAPTION>
Option prices Shares
--------------- ---------
<S> <C> <C>
OPTIONS OUTSTANDING, JANUARY 1, 1993 $ 3.16 - 42.625 1,146,202
Options granted 17.625 - 25.375 602,350
Options exercised 3.16 - 19.00 (48,585)
Options canceled 15.375 - 42.625 (678,996)
--------------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 1993 3.16 - 39.125 1,020,971
Options granted 18.50 - 23.50 107,500
Options exercised 4.375 - 19.00 (59,700)
Options canceled 7.625 - 28.50 (73,450)
--------------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 1994 3.16 - 39.125 995,321
Options granted 25.25 - 40.00 152,000
Options exercised 3.16 - 28.375 (158,491)
Options canceled 16.25 - 28.375 (29,220)
--------------- ---------
OPTIONS OUTSTANDING, DECEMBER 31, 1995 $10.375 - 40.00 959,610
=============== =========
</TABLE>
In November 1993, the Board of Directors approved an offer to all optionees to
cancel certain options with exercise prices which ranged from $24.50 to $40.00
per share and to replace such options with options to purchase common stock with
an exercise price of $20.00 per share, a price which was not less than the fair
market value of the Company's common stock at the date of grant. Pursuant to
this offer 626,600 shares of common stock were cancelled and replaced with
options to purchase 463,350 shares of common stock.
In November 1985, the Company granted to its Chief Executive Officer, a
non-qualified, 10-year stock option for 500,000 shares at $7.50 per share (fair
market value at date of grant). The option was exercised during 1995.
During 1995, 103,320 shares of outstanding Common Stock were received by the
Company as consideration for the exercise of options for 509,800 shares.
At December 31, 1995 the Company had non-qualified options outstanding for
70,000 shares under separate agreements at exercise prices of $12.50 and $30.75
per share.
Pursuant to the plans and the separate agreements, 1,144,327 shares of
common stock are reserved for issuance upon the exercise of options and options
for 385,562 shares were exercisable at December 31, 1995.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SEGMENT INFORMATION
The Company manufactures and sells medical diagnostic kits and related
instrumentation. The kits and instruments are sold to hospitals, medical
centers, clinics, physicians, and other clinical laboratories. The Company's
operating locations include the United States, Europe (United Kingdom, Germany,
Spain, Netherlands, Belgium, Luxembourg), and Rest of World (Australia, China
and Brazil from September 1, 1995). The Company's operations and identifiable
assets by geographical area are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1993
--------------------------------------------------------------------------
Rest
United States Europe of World Eliminations Consolidated
------------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 54,676 $ 46,141 $ 5,974 -- $ 106,791
Transfer between geographical areas 15,375 1,040 (16,415)
--------- --------- --------- --------- ---------
Net sales $ 70,051 $ 47,181 $ 5,974 $ (16,415) $ 106,791
========= ========= ========= ========= =========
Operating income (loss),
before equity in income of affiliates $ 15,403 $ 3,459 $ (262) $ 18,600
========= ========= ========= ========= =========
Identifiable assets $ 62,922 $ 59,052 $ 9,336 $ (5,412) $ 125,898
========= ========= ========= =========
Investment in affiliates 11,251
---------
$ 137,149
=========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1994
--------------------------------------------------------------------------
Rest
United States Europe of World Eliminations Consolidated
------------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 67,716 $ 52,933 $ 5,804 $ 126,453
Transfer between geographical areas 18,620 2,040 (20,660)
--------- --------- --------- --------- ---------
Net sales $ 86,336 54,973 $ 5,804 $ (20,660) $ 126,453
========= ========= ========= ========= =========
Operating income,
before equity in income of affiliates $ 19,837 $ 691 $ 520 $ 21,048
========= ========= ========= ========= =========
Identifiable assets $ 73,604 $ 65,370 $ 9,889 $ (8,903) $ 139,960
========= ========= ========= =========
Investment in affiliates 12,775
---------
$ 152,735
=========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1995
--------------------------------------------------------------------------
Rest
United States Europe of World Eliminations Consolidated
------------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 78,293 $ 70,081 $ 11,275 -- $ 159,649
Transfer between geographical areas 25,165 3,930 -- (29,095) --
--------- --------- --------- --------- ---------
Net sales $ 103,458 $ 74,011 $ 11,275 $ (29,095) $ 159,649
========= ========= ========= ========= =========
Operating income,
before equity in income of affiliates $ 24,041 $ 6,117 $ 1,014 -- $ 31,172
========= ========= ========= ========= =========
Identifiable assets $ 93,423 $ 75,750 $ 22,246 $ (15,236) $ 176,183
========= ========= ========= ========= =========
Investment in affiliates 13,279
---------
$ 189,462
=========
</TABLE>
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's export sales to unaffiliated customers are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Western South Other Total
Europe America Exports Exports
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1993 $ 4,797 $ 5,286 $ 6,238 $16,321
1994 7,964 8,968 8,128 25,060
1995 7,381 6,907 13,047 27,335
</TABLE>
25
<PAGE> 27
SUPPLEMENTARY FINANCIAL DATA
Unaudited quarterly financial information for the years December 31, 1994 and
1995 is summarized as follows:
(Dollars in Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
1995 1995 1995 1995 Year
-------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 39,201 $ 38,534 $ 40,530 $ 41,384 $159,649
Gross profit 21,939 21,563 21,464 24,155 89,121
Income taxes 2,150 2,060 2,050 2,150 8,410
Net income 5,805 6,105 5,891 6,368 24,169
Net income per share .42 .44 .43 .46 1.75
Average shares outstanding 13,683 13,986 13,846 13,874 13,847
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
March 31 June 30 September 30 December 31
1994 1994 1994 1994 Year
-------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 27,773 $ 30,132 $ 30,643 $ 37,905 $126,453
Gross profit 15,956 16,866 17,368 20,427 70,617
Income taxes 1,220 1,400 1,430 1,890 5,940
Net income 3,468 3,900 4,318 5,014 16,700
Net income per share .26 .29 .32 .37 1.24
Average shares outstanding 13,529 13,403 13,592 13,527 13,508
</TABLE>
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
DIAGNOSTIC PRODUCTS CORPORATION
By: /s/ Sigi Ziering March 25, 1996
-----------------------------------------------
Sigi Ziering, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------- --------------------- --------------
<S> <C> <C>
/s/ Sigi Ziering Chairman of the Board March 25, 1996
- ----------------------------
Sigi Ziering and Chief Executive
Officer (Principal
Executive Officer)
/s/ Michael Ziering Director March 25, 1996
- ----------------------------
Michael Ziering
/s/ Marilyn Ziering Director March 25, 1996
- ----------------------------
Marilyn Ziering
/s/ Sidney A. Aroesty Director March 25, 1996
- ----------------------------
Sidney A. Aroesty
/s/ Maxwell H. Salter Director March 25, 1996
- ----------------------------
Maxwell H. Salter
/s/ James D. Watson Director March 25, 1996
- ----------------------------
James D. Watson
/s/ Frederick Frank Director March 25, 1996
- ----------------------------
Frederick Frank
/s/ Julian R. Bockserman Vice President -- March 25, 1996
- ----------------------------
Julian R. Bockserman Finance (Principal
Financial and Accounting
Officer)
</TABLE>
27
<PAGE> 29
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation (6)
3.2 Bylaws, as amended (6)
4.1 Stock Certificate (4)
*10.1 1981 Employee Stock Option Plan, as amended (2)
*10.2 Retirement Benefits Agreement with Sigi Ziering (3)
10.3 Form of Indemnification Agreement with Officers and
Directors (1)
*10.4 1990 Stock Option Plan (5)
10.5 Standard Industrial Lease with 5700 West 96th Street,
general partnership, dated February 18, 1991 (5)
*10.6 Consulting Agreement with Sidney Aroesty dated
December 14, 1994 (7)
*10.7 Description of Consulting Arrangement with Dr. James D.
Watson (7)
10.8 Description of Consulting Arrangement with Frederick Frank
11 Computation of Net Income per share
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule (For EDGAR filing only)
- ---------------------------------
* Management contracts, compensation plans or
arrangements
(1) Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1988.
(2) Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1991.
(3) Incorporated by reference to Registrant's Registration
Statement on Form S1 (File No. 2-77287) filed on
May 3, 1982.
(4) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1988.
(5) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1990.
(6) Incorporated by reference to Registrant's Quarterly
Report on From 10-Q for the quarter ended June 30, 1992.
(7) Incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
28
<PAGE> 1
DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
EXHIBIT 10.8
DESCRIPTION OF CONSULTING ARRANGEMENT
WITH FREDERICK FRANK
Frederick Frank, a director of the Company, provides consulting services with
respect to technology, product development and corporate matters. He is paid
$1,000 per month for such services. There is no written agreement and this
arrangement may be terminated at any time by either party.
EXHIBIT 10.8
<PAGE> 1
DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Primary earnings per share:
Average common stock outstanding 13,149,609 13,002,218 13,208,942
Average dilutive common stock
options outstanding 1,145,645 1,176,009 1,274,127
Shares assumed to be repurchased
under treasury stock method at
an average market price of:
22.03 (667,926)
20.91 (670,258)
35.93 (635,816)
------------ ------------ -----------
TOTAL 13,627,328 13,507,969 13,847,253
============ ============ ===========
NET INCOME $ 14,166,000 $ 16,700,000 $24,169,000
============ ============ ===========
PER COMMON SHARE AMOUNT $ 1.04 $ 1.24 $1.75
============ ============ ===========
</TABLE>
EXHIBIT 11
<PAGE> 1
DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Place of Incorporation % Ownership
- ------------------------------ --------------------------- ---------------
<S> <C> <C>
DPC Cirrus Inc. USA/Delaware 100%
EURO/DPC Limited United Kingdom 100%
Diagnostic Products International, Inc. Barbados 100%
DPCHolding GmbH Germany 100%
DPC Biermann GmbH Germany 100%
Genoclin Diagnostica GmbH Germany 80%
Diagnostic Products Corporation Netherlands 100%
Benelux B.V.
Diagnostic Products Corporation Netherlands 100%
Nederland B.V.
Diagnostic Products Corporation Belgium 100%
Belgium b.v.b.A./s.p.r.l.
Bio-Mediq DPC Pty. Ltd. Australia 100%
DPC Dipesa, S.A. Spain 100%
Tianjin De Pu (DPC) China 90%
Biotechnological and Medical
Products, Inc.
DPC Medlab Produtos Medico Brazil 56%
Hospitalares Ltda.
Nippon DPC Corporation USA/California 50%
DPC Skafte AB Sweden 50%
Medical Systems, S.p.A. Italy 45%
Amerlab, Lda. Portugal 40%
</TABLE>
EXHIBIT 21
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-81631, 33-17575 and 33-43043 on Form S-8 of our report dated February 20,
1996, included in this Annual Report on Form 10-K of Diagnostic Products
Corporation for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 25, 1996
EXHIBIT 23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,519
<SECURITIES> 0
<RECEIVABLES> 40,802
<ALLOWANCES> 77
<INVENTORY> 35,521
<CURRENT-ASSETS> 96,651
<PP&E> 73,631
<DEPRECIATION> 31,707
<TOTAL-ASSETS> 189,462
<CURRENT-LIABILITIES> 26,112
<BONDS> 0
0
0
<COMMON> 35,179
<OTHER-SE> 128,171
<TOTAL-LIABILITY-AND-EQUITY> 189,462
<SALES> 159,649
<TOTAL-REVENUES> 159,649
<CGS> 70,528
<TOTAL-COSTS> 70,528
<OTHER-EXPENSES> 56,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,579
<INCOME-TAX> 8,410
<INCOME-CONTINUING> 24,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,169
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 0
</TABLE>
