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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
[ ] 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 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: (310) 645-8200
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 $279,000,000 as of February 26, 1999.
The number of shares of Common Stock, no par value, outstanding as of
February 26, 1999, was 13,676,129.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1999 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 which utilize state-of-the-art
technology derived from immunology and molecular biology, and automated
laboratory instruments which perform the tests. The Company's products are used
by hospital, 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 400 assays (tests) relate to the diagnosis and
management of thyroid disorders, anemia, reproductive disorders, diabetes,
allergies, bone metabolism, infectious diseases, substance abuse and certain
types of cancer. 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 over
100 countries.
Unless the context otherwise requires, the terms "DPC" and the "Company"
include the Company's consolidated subsidiaries.
For information regarding forward looking statements contained in this report
and risks associated with the Company's business, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Statements."
IMMUNODIAGNOSTIC TEST KITS
DPC manufactures more than 400 immunodiagnostic test kits or "assays" which
utilize various technologies to detect and measure substances in a patient's
body fluids and tissues. The technologies used in DPC's assays include
chemiluminescence, which is used in the DPC IMMULITE system; radioimmunoassay
(RIA), which uses double antibody, coated tube and IRMA formats; enzyme
immunoassay (EIA), used in microplate and tube formats featuring a proprietary
liquid technology for allergy; immunohistochemistry; immunofluorescence; and
latex agglutination. Prior to 1992, DPC's core business was based on RIA
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 early 1980's, the RIA market
increased significantly, and the Company developed one of the most extensive
lines of RIA kits available.
In the 1980's, the market began to shift to non-isotopic systems based mainly
on fluorescence (FIA) and enzyme (EIA) labels. Non-isotopic technologies have
the advantages of longer shelf life, no safety issues associated with the use
and disposal of radioactive materials, and ease of automation. Currently,
non-isotopic systems account for approximately 90% of the market. DPC's major
entry into this market was the IMMULITE system which uses assays based on
chemiluminescence technology. As a result of the growth in sales of IMMULITE
systems, sales of RIA products as a percentage of total sales have been steadily
declining for several years, to 22% of sales in 1998.
IMMULITE assays and instruments represented 46%, 54% and 63% of sales in
1996, 1997 and 1998. This upward trend is expected to continue. Because IMMULITE
is a closed system (it will not perform other manufacturers' tests), 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.
DPC believes that it has the most extensive menu offering of any automated
instrument on the market, especially those tests that when grouped together
constitute a decision-making panel for a specific disease state, such as thyroid
and fertility. At December 31, 1998, DPC had 85 IMMULITE assays available in the
international markets, of which 53 had been cleared for marketing by the FDA in
the U.S. In addition, 32 of the most important assays on the newly developed
second generation IMMULITE 2000 have been released for sale in the U.S. The
Company's research and development activities continue to be focused on
expanding the IMMULITE menu.
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DPC has concentrated on creating the most complete panels of tests for
specific disease states. Many of these disease states represent high-volume
opportunities in the marketplace, or unique and under-served disease categories
that allow DPC to fill a market niche. Many of DPC's tests are available in both
RIA and non-isotopic formats. Major clinical applications of DPC's test kits
include:
THYROID - The most frequent utilization of immunoassay techniques is for the
determination and monitoring of thyroid function. The IMMULITE system has the
advantage of having the most extensive and unique thyroid panel consisting of 12
tests.
FERTILITY/INFERTILITY - DPC has been a longtime market leader in fertility
and infertility assays due, in great part, to the high degree of difficulty in
developing these challenging assays. To maintain its traditional advantage in
this field, a total of 10 tests that fall in this category are currently
available on the IMMULITE automated instrument.
CANCER - Tumor markers are being widely accepted as an important diagnostic
tool. The most successful tumor marker is prostate specific antigen (PSA), which
is used for the diagnosis of prostate cancer in males. DPC is the only company
that offers three PSA markers in fully automated format on the IMMULITE,
including the unique 3rd Generation PSA assay, which has an order-of-magnitude
greater sensitivity than any other PSA assay currently available. In addition to
PSA, DPC offers a total of 11 tumor markers on the IMMULITE, a larger menu than
any competitor.
INFECTIOUS DISEASES - A relatively new area for DPC is the development of
assays for the detection of infectious diseases, which is one of the fastest
growing segments of immunoassays. The Company has developed 12 such assays on
the IMMULITE system.
ALLERGY - Allergy testing comprises a worldwide market of approximately $250
million with one company, Pharmacia-Upjohn, dominating the field for the last 30
years. DPC, with its unique patented liquid technology, has established itself
as the second leading supplier of these test kits. DPC has approximately 300
tests for specific allergens (and panels) available in a semi-automated
microplate format. In response to requests from European customers for complete
automation of allergy tests, DPC has added the major large volume allergy
screening assays to the IMMULITE menu, bringing full automation to 13 allergy
tests and panels as of December 31, 1998. These include such unique assays as
Latex and ECP assay, the latter an important tool for the diagnosis and
management of asthma. In 1998, DPC decided to focus on continuing to convert key
allergen panels to IMMULITE format and to discontinue work on a separate allergy
system. Modifications to the IMMULITE 2000 will allow, for the first time, fully
automated testing in walk-away mode.
CYTOKINES - A new line of potentially important disease markers currently
under intensive investigation by researchers are the cytokines, often referred
to as "the hormones of the immune system." DPC is the only company that offers
these assays in automated format, and currently has five cytokine assays on the
IMMULITE system, with others in development. Studies in Europe have indicated
that certain cytokines are valuable tools for the management of sepsis, a
bacterial infection that often occurs in intensive care units. As a result,
these cytokine assays are being used routinely in intensive care units in
Germany, and the Company anticipates that interest in these assays will spread
to other parts of the world.
AUTOMATED LABORATORY INSTRUMENTATION
In addition to an extensive line of diagnostic test kits, DPC designs and
manufactures automated laboratory instruments which perform the tests and which
provide fast, accurate results, while reducing labor and reagent costs.
The IMMULITE system is an automated, random-access, computer-based instrument
which performs immunoassays utilizing chemiluminescent technology. The IMMULITE
system is totally automated with
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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. 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 commenced shipments of the next generation IMMULITE 2000 in the first
quarter of 1998. The IMMULITE 2000 is a high speed analyzer with a throughput of
up to 200 tests per hour which offers the medium to high-volume laboratory
increased efficiency in streamlining its testing workload. The IMMULITE 2000 can
run for a full 8-hour shift without the necessity of replenishing the on-board
supplies. This increased throughput will allow DPC to participate in a higher
volume segment of the market where the average reagent use per analyzer exceeds
that of the original IMMULITE unit. The IMMULITE 2000 includes advanced features
such as primary tube sampling and proprietary auto-dilution capability. The
system can also be interfaced with robotic laboratory sample-handling systems
and can be connected to the customer's computer for specification of the tests
to be run on each sample as well as recording the results. Another innovative
feature of the IMMULITE 2000 is a remote diagnostic capability which permits
DPC's service facility to access any IMMULITE 2000 worldwide for the purpose of
diagnosing system problems. The Company believes that the IMMULITE 2000 will
complement the existing IMMULITE and extend its life cycle.
In response to customers' needs, DPC is developing the IMMUGOLD, a smaller
instrument which can provide test results within five minutes for point-of-care
applications, such as at the hospital bed site, in intensive care units or in
emergency rooms, where rapid results are critical. The IMMUGOLD will utilize
innovative, patented proprietary technology which will offer a number of
advantages over current immunodiagnostic technologies. The assays used in this
system are homogeneous, eliminating the need for a wash step, which is common to
other immunoassay systems. The biosensor and all necessary reagents are included
in a single, self-contained cartridge. The hands-off nature of the technology
makes it possible to design an inexpensive and simple to operate analyzer
requiring minimal training. The Company expects to begin limited customer
testing of this new system in late 1999.
In addition to the IMMULITE family of products, DPC also manufactures and
sells the following automated instruments:
AlaSTAT Microplate Allergy System - This system consists of a variety of
instruments which can be configured to provide the customer with varying degrees
of automation and test capacity. A totally automated walk-away system consists
of the MARK 5 robotic pipettor with BCR barcode reader, a computer with
proprietary WinMAX software and a MAX automated microplate processor. This
system can process up to 768 wells in microplate format in an 8-hour shift. The
WinMAX software performs data reduction, manages patient data and interfaces
with the customer's information system. The AlaSTAT system also offers a manual,
low-cost allergy testing system for small volume testing.
MARK 5 Robotic Pipettor - The MARK 5 is an open system which accommodates
tubes or plates in a limitless range of pipetting applications, such as serial
dilutions and multiple test combinations. The instrument uses four probes to
process up to 600 samples per hour.
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. R&D
capabilities in the United States include fully staffed departments in organic
synthesis, biochemistry, antisera/ hybridoma, protein chemistry, molecular
biology and infectious disease, method development, instrumentation and
software. The Company also conducts research and development activities at
facilities located in the United Kingdom, Germany, Japan (a 50%-owned joint
venture), and Italy (through its 45%-owned subsidiary). During the years ended
December 31, 1996, 1997 and 1998, the Company spent $17,758,000, $19,710,000 and
$22,342,000 on research and development, representing approximately 10%, 11% and
11% of sales.
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MANUFACTURING AND SERVICE
The Company's principal test kit manufacturing facility is located in Los
Angeles, California. Approximately 25% 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 DPC affiliates in Germany
and China.
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 systems are 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.
The EURO/DPC Instrumentation Division in the United Kingdom manufactures
diagnostic instrumentation and develops associated software used in the allergy
product lines. These instruments include the TipTech; 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 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.
DPC's Los Angeles and New Jersey facilities are ISO 9001 certified. 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.
DPC provides technical support for all its products, including reagents,
instruments and software, via telephone and on-site service.
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 U.S. 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.
The Company's products are sold on a world-wide basis through distributors in
over 100 foreign countries. These distributors, including consolidated
distributors, also sell other manufacturer's products which are not directly
competitive with the Company's products. Foreign sales (including export sales,
sales to non-consolidated foreign affiliates and sales of consolidated
subsidiaries) represented approximately 80% of total sales in the last three
fiscal years. Europe accounted for approximately 51%, 48%and 46% of total sales
in 1996, 1997 and 1998 respectively. See Notes 5 and 12 of Notes to Consolidated
Financial Statements for information regarding foreign operations.
Sales of test kits to customers and distributors are made against individual
purchase orders as well as through volume purchase arrangements. 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, leases or rents the IMMULITE
instrumentation to hospitals and reference laboratories which perform volume
testing. The Company's backlog at any date is usually insignificant and not a
meaningful indicator of future sales.
The Company's foreign operations are subject to various risks, including
exposure to currency fluctuations, political and economic instability and trade
restrictions. Because the Company's consolidated
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foreign distributors' 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.
PROPRIETARY AND OTHER RIGHTS
Substantially all of the Company's products are based on proprietary
technologies and know-how. In 1998 the Company received notices that the U.S.
Patent office intends to grant patents on the biosensor technology used in the
IMMUGOLD instrument and on certain features of the IMMULITE 2000. The Company
holds various U.S. and foreign patents including patents on the washing process
used in the IMMULITE system which expire in 2009 and for its novel liquid-based
amplification methodology which forms the basis of the AlaSTAT product lines.
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 that it will either use an alternate
technology or that 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 and Japan, aimed at containing
the cost of medical services. These regulations have generally had the effect of
inhibiting the growth rate of the immunodiagnostic industry.
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 automated systems
address 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 it is cleared for marketing by the FDA. Most of the
Company's products fall within the "substantially equivalent" category. Certain
medically critical in vitro diagnostic products and totally new in vitro
diagnostic products for which there are no equivalents on the market, must be
cleared 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
clearance in most foreign countries. Japan and France have their own review
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.
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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. The Company's major competitors are broad-based health
care companies such as Roche Diagnostics, Abbott Diagnostics (Abbott
Laboratories), Bayer, Johnson & Johnson, and Pharmacia/Upjohn (Sweden). The
Company believes that competition with respect 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, Bayer and
Roche Diagnostics. All 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, 1998, the Company (including its consolidated subsidiaries)
had 1601 employees, including 668 in manufacturing, 288 in research and
development, 381 in marketing and sales and 264 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.
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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, 1998:
<TABLE>
<CAPTION>
Location Size Owned/Leased Uses
- ----------------------- --------------- ------------ ---------------------------------
<S> <C> <C> <C>
Los Angeles, California 116,000 sq. ft. Leased(1) 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 80 acres Owned Raw material processing
Randolph, New Jersey 38,500 sq. ft. Leased(2) Research, manufacturing and
distribution
Glyn Rhonwy, Wales, UK 110,000 sq. ft. Owned Research, manufacturing and
distribution
Bad Nauheim, Germany 56,500 sq. ft. Owned Research and distribution
Humbeek-Grimbergen, Belgium 5,000 sq. ft. Owned Distribution
Apeldoorn, Netherlands 10,500 sq. ft. Owned Distribution
Breda, Netherlands 7,000 sq. ft. Leased Distribution
Madrid, Spain 10,161 sq. ft. Leased Distribution
Melbourne, Australia 10,400 sq. ft. Owned Distribution
</TABLE>
- ----------
(1) Lease payments of $966,000 in 1998. Lease expires at December 31, 2002.
See "Item 13. Certain Relationships and Related Transactions".
(2) Annual lease payments of $244,000. Lease expires in 2002.
In late 1998, the Company acquired land in The Netherlands and commenced
construction of a 28,600 square foot building to replace the existing
properties. Occupancy is scheduled for April 1, 1999. In 1999 the Company
intends to purchase land in New Jersey on which it will build a new 80,000
square foot manufacturing facility for the IMMULITE instrumentation. The
construction is expected to be completed by the time the current New Jersey
lease expires. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." With
these additions, the Company believes that its facilities will be adequate to
meet its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material 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 1998 and
1997.
<TABLE>
<CAPTION>
1998
--------------------------------------
High Low Dividend
--------- ------- --------
<S> <C> <C> <C>
First Quarter $30 13/16 $26 1/2 $.12
Second Quarter 32 7/8 26 5/8 .12
Third Quarter 29 3/8 24 3/8 .12
Fourth Quarter 31 1/8 20 3/8 .12
1997
--------------------------------------
High Low Dividend
--------- ------- --------
<S> <C> <C> <C>
First Quarter $33 1/2 $25 1/2 $.12
Second Quarter 31 5/8 27 7/8 .12
Third Quarter 32 15/16 27 1/4 .12
Fourth Quarter 31 1/4 27 1/8 .12
</TABLE>
As of February 26, 1999, the Company had 428 holders of record of its Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, except per Share Data)
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $126,453 $159,649 $176,832 $186,264 $196,643
Net income 16,700 24,169 22,947 18,248 20,213
Earnings per share:
Basic 1.28 1.83 1.69 1.34 1.47
Diluted 1.20 1.75 1.65 1.32 1.46
Weighted average shares outstanding:
Basic 13,002 13,209 13,554 13,641 13,746
Diluted 13,902 13,847 13,926 13,876 13,881
Dividends per share $ .40 $ .46 $ .48 $ .48 $ .48
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 60,704 $ 70,539 $ 81,563 $ 83,031 $ 81,001
Total assets 152,735 189,462 207,002 222,180 246,224
Shareholders' equity 135,100 163,350 182,287 186,295 200,172
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report and the
following discussion in particular contain forward looking statements
(identified by the words "estimate," "project," "anticipate," "plan," "expect,"
"intend," "believe," "hope" and similar expressions) which are based upon
Management's current expectations and speak only as of the date made. These
forward looking statements are subject to risks, uncertainties and factors that
could cause actual results to differ materially from the results anticipated in
the forward looking statements. These risks and uncertainties include the degree
of customer demand for the Company's products, customer acceptance of the
IMMULITE 2000 and other new products, the Company's ability to keep abreast of
technological innovations, the risks inherent in the development and release of
new products (such as delays, unforeseen costs and technical difficulties),
competitive pressures, currency risks based on the relative strength or weakness
of the U.S. dollar, health care regulation and cost containment measures, Year
2000 issues and political and economic instability in certain foreign markets.
RESULTS OF OPERATIONS
The Company's sales increased 6% in 1998 to $196.6 million compared to sales
of $186.3 million in 1997, a 5% increase over 1996 sales. 1998 sales of all
IMMULITE products (instruments and reagents) were $123.9 million, a 24% increase
over 1997. Sales of IMMULITE products represented 63% of 1998 sales, 54% of 1997
sales and 46% of 1996 sales.
1998 sales of the Company's original IMMULITE instrument, the IMMULITE One,
and related reagents were $109.7 million, a 12% increase over 1997. Sales of
IMMULITE One reagents were up 20% to $87.7 million, while instrument sales were
down 16% to $18.3 million, reflecting the stage of the life cycle of the first
generation IMMULITE One instrument which was introduced in 1993. The next
generation IMMULITE 2000 instrument, which became commercially available in
March 1998, had sales of $14.2 million in 1998. Sales of other DPC products,
including allergy reagents, increased 23% to $18.7 million in 1998, compared to
$15.2 million in 1997.
The Company believes that sales growth in both 1997 and 1998 was restrained
due to delays in the release of the IMMULITE 2000 and a longer than originally
expected sales process for this instrument. The IMMULITE 2000 has a longer sales
process than the IMMULITE One (four to six months compared to an average of 60
days) due to the higher sales price and because prospective customers were
waiting to compare the IMMULITE 2000 with competitive systems which had not yet
been released. The Company has also experienced a longer time delay between
instrument placement and the ramp-up of reagent sales.
As of December 31, 1998, 1997 and 1996, the Company had shipped on a
cumulative basis approximately 4,000, 3,200 and 2,400 IMMULITE instruments,
respectively. This installed base of instruments and an expanding test kit menu
are expected to support continued growth in the coming years.
Sales of the Company's mature RIA products declined approximately 13% in
1998, and represented 22% of 1998 sales compared to 26% of 1997 sales and 33% of
1996 sales. This trend is expected to continue. The Company also experienced a
significant decrease in sales of non-DPC products through its consolidated
international affiliates from $21.7 million in 1997 to $11.4 million in 1998,
due to the discontinuation of non-DPC OEM products previously sold by those
affiliates.
Sales in Brazil accounted for approximately 11% of total sales in 1998, which
was an increase of 22% over 1997. As a result of the devaluation of the
Brazilian currency in January 1999, the Company's products are currently about
50% more expensive in Brazil than they were prior to the devaluation. As a
result, the Company expects the devaluation to slow down the Company's rapid
sales expansion in that country and to limit the earnings contribution from
Brazil until the economy adjusts to the new currency exchange ratios. Sales to
Asia, which represented less than 10% of total sales in 1998, declined
approximately 7% compared to 1997, due to the economic instability of that
region.
Foreign sales as a percentage of total sales were approximately 80% in each
of 1998, 1997 and 1996. Europe, the Company's principal foreign market,
represented 46%, 48% and 51% of sales in 1998, 1997
9
<PAGE> 11
and 1996, respectively. Due to the significance of foreign sales, the Company is
subject to currency risks based on the relative strength or weakness of the U.S.
dollar. In periods when the U.S. dollar is strengthening the effect of the
translation of the financial statements of consolidated foreign affiliates is
that of lower sales and net income. Based on comparative exchange rates in the
immediately preceding year, the translation adjustments due to the strong U.S.
dollar had a less than 1% negative impact on 1998 sales, compared to a 5%
negative impact on 1997 sales and 1% negative impact on 1996 sales. Due to
intense competition, the Company's foreign distributors are unable to increase
prices to offset the negative effect when the U.S. dollar is strong.
Cost of sales have remained stable at approximately 44% of sales in 1998 and
1997, and 43% of sales in 1996.
Total operating expenses (selling, R&D, and G&A) as a percentage of sales
decreased slightly from 43% in 1997 to 42% in 1998, reflecting the end of
pre-launch expenses for the IMMULITE 2000 and modest operating leverage. Such
expenses represented 40% of sales in 1996. The increase in 1997 over 1996
related to development and marketing of the IMMULITE line, currency exchange
transaction losses in 1997, and start-up costs of the French distributor.
Included in general and administrative expenses is the amortization of the
excess of cost over net assets acquired and minority interest.
Equity in income of affiliates represents the Company's share of earnings of
non-consolidated affiliates, principally the 45%-owned Italian distributor. This
amount decreased 7% in 1998 and 15% in 1997 primarily due to reduced earnings by
the Italian distributor.
Net interest income represents the excess of interest income and interest on
equipment contracts over interest expense. Net interest income declined 52% in
1998 and 54% in 1997 due to increased borrowings.
The Company's effective tax rate (28% in 1998; 29% in 1997 and 28% in 1996)
includes Federal, state and foreign taxes.
Net income for 1998 (10% of sales) increased 11% over 1997 (10% of sales) due
to lower operating expenses as a percentage of sales and less of a negative
impact from foreign currency transaction and translation adjustments. Net income
for 1997 decreased 20% from 1996 net income (13% of sales) due to the effects of
the strong U.S. dollar, costs and expenses related to the launch of the IMMULITE
2000 and start-up costs and operating losses associated with the French
distributor.
LIQUIDITY
The Company has adequate working capital and sources of capital to carry on
its current business and to meet its existing capital requirements. Net cash
flow from operating activities was $33.2 million in 1998, $28.7 million in 1997
and $18.7 million in 1996. Additions to property, plant and equipment in 1998
were $11.2 million compared to $10.5 million in 1997 and $8 million in 1996. The
increase in 1997 was due to the expansion of the German affiliate. Cash used for
the placement of IMMULITE systems under sales-type and operating leases (for
periods of generally three to five years) increased 44% from $11.6 million in
1997 to $16.7 million in 1998, reflecting increased placements of IMMULITE
instruments.
In late 1998, the Company acquired land in the The Netherlands and commenced
construction of a 28,600 square foot building to replace the existing
properties. The total cost of the land and building is estimated to be $2.4
million. Occupancy is scheduled for April 1, 1999. The Company expects to
purchase land in New Jersey in 1999 at a cost of approximately $2.8 million. The
Company plans to construct an 80,000 square foot manufacturing facility on this
property over the next several years at a cost of approximately $5 million. The
Company has no other material commitments for capital expenditures in 1999.
The Company has a $20 million unsecured line of credit under which there were
no borrowings outstanding at December 31, 1998, 1997 and 1996. Standby letters
of credit under the line of credit totaled $3,125,000 at December 31, 1997 and
$2,045,000 at December 31, 1998. The Company had notes payable (consisting of
bank borrowings by the Company's foreign consolidated subsidiaries payable in
the local currency which are guaranteed by the U.S. parent company) of $21.2
million at December 31, 1998 compared to $15.5 million at December 31, 1997 and
$4 million at December 31, 1996. The terms of the loans are described in Note 6
of the Notes to Consolidated Financial Statements.
The Company's foreign operations, particularly, at this time, its operations
in Brazil, are subject to risks, such as currency devaluations, associated with
political and economic instability.
10
<PAGE> 12
The Company has paid a quarterly cash dividend of $.12 per share since 1995.
On October 14, 1998 the Company announced a plan under which it could
repurchase up to 1 million shares of its common stock from time to time in open
market transactions. At December 31, 1998 the Company had repurchased 208,288
shares at a cost of $4,304,000. The Company utilized existing cash to finance
the purchases.
EURO CONVERSION
The Company has significant sales to European countries (the "participating
countries") which began converting to a common legal currency (the "euro") on
January 1, 1999. During the transition period of January 1, 1999 to January 1,
2002, public and private parties may pay for goods and services using either the
euro or the local currency. During the transition period, conversion rates will
not be computed directly from one local currency to another. Instead, local
currencies will be converted first to a euro denomination and then to the second
local currency.
The Company is in the early stages of assessing the potential impact of the
euro conversion on its business and operations. The Company has created a price
list of its products in each participating country based on the euro to
facilitate purchases in euro or local currency. The Company is also reviewing
its information and business systems, and those of its European affiliates, to
determine the modifications that will be necessary to process orders in the euro
currency. Due to the existence of many unknown variables at this early stage, it
is not at this time possible for the Company to predict the precise implications
of the euro conversion on its operations.
YEAR 2000
The Company has a program to address Year 2000 readiness of its information
and business systems. This program is more than half-way completed. The Company
has tested all critical systems and has performed routine testing of work
stations. Work stations that require corrective software have been identified
and the Company's goal, subject to timely software manufacturer support, is to
complete the remediation efforts by July 1999. The costs incurred to date and
expected to be incurred in the future related to the evaluation and remediation
efforts are not material. Independent of the Year 2000 issue, over the last 16
months the Company has been engaged in an ongoing program to upgrade its
information systems.
The Company has instituted a comprehensive vendor/supplier compliance
verification program to assure that the Company will have an uninterrupted
supply of goods, services and materials. The Company has requested compliance
verification from all vendors/suppliers and will require compliance verification
from those deemed critical or significant to its operations.
The Company presently believes that, with modifications to existing software,
the Year 2000 issue will not pose significant operational problems for the
Company or its affiliates. However, if such modifications are not completed
timely by the Company or any of its affiliates, or by significant third parties
with whom the Company does business, such as communications and power providers,
the Year 2000 issue could have a material impact on the operations of the
Company. The Company maintains business continuity plans in all major sites to
deal with potential business interruptions that could occur as a result of power
or communications failures.
The Company also has a program to determine whether its instrumentation
products are Year 2000 compliant. The Company's website contains a regularly
updated product compliance status page which customers can access to obtain
information regarding the compliance status of their DPC products. The Company
is also providing customer support and customer satisfaction services to all of
its customers regarding Year 2000 issues. The IMMULITE 2000 instrument, which
the Company began shipping in March 1998, is Year 2000 compliant. The Company
has determined that the IMMULITE One instrument is not Year 2000 compliant and
has so informed the FDA. The software used in the IMMULITE One has a two-digit
year field which must be changed to a four-digit field. As part of its routine,
on-going software development, the Company is developing software for the
IMMULITE One that will be Year 2000 compliant. The Company's goal is to be able
to offer to its customers software and hardware upgrades to make all its
products compliant by June 30, 1999. A relatively few older products are not
compliant and will not be upgraded due to obsolescence. The costs incurred to
date and expected to be incurred to upgrade products are not material.
11
<PAGE> 13
While the Company currently expects that it will be able to bring its own
systems and products into Year 2000 compliance on a timely basis, if the Company
encounters unforeseen problems or delays it could be subject to legal claims
(with or without merit), increased warranty costs, or customer dissatisfaction
which could result in a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks arising from transactions in
the normal course of its business, principally risk associated with interest
rate and foreign currency fluctuations.
INTEREST RATE RISK
The Company periodically invests its excess cash in short-term high-quality
commercial paper. At December 31, 1998, the Company had $12,500,000 invested in
such securities with yielding an average annual return of 5.23%. The average
maturity of these investments is less than one month.
Additionally, the Company has debt obligations at its foreign subsidiaries
that have fixed interest rates and mature on various dates. Substantially all of
the Company's debt obligations are denominated in European currencies. The table
below presents principal cash flows and related interest rates by fiscal year of
maturity:
NOTES PAYABLE INFORMATION DECEMBER 31, 1998 (Dollars in Thousands)
<TABLE>
<CAPTION>
Expected Year of Maturity Fair Value
------------------------------------------------------------------------------- December 31,
1999 2000 2001 2002 2003 Thereafter Total 1998
------ ------ ------ ------ ------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany - Mark:
Variable rate notes payable $2,644 $1,447 $1,397 $1,347 $1,347 $4,145 $12,327 $12,327
Average interest rate 5.0% 5.0% 5.0% 4.9% 4.9% 4.9%
France - Franc:
Fixed rate notes payable 1,777 963 209 170 113 3,232 3,400
Average interest rate 5.0% 5.0% 7.0% 12.0% 12.0%
Netherlands - Guilder:
Fixed rate notes payable 45 90 90 90 90 1,576 1,981 1,990
Average interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Spain - Peseta:
Fixed rate notes payable 920 189 199 209 219 329 2,065 2,130
Average interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
</TABLE>
FOREIGN CURRENCY RISK
The Company may periodically enter into foreign currency contracts in order
to manage or reduce foreign currency market risk. The Company's policies do not
permit active trading of or speculation in, derivative financial instruments.
The Company's policy is to hedge major foreign currency cash exposures through
foreign exchange forward contracts. The Company enters into these contracts with
only major financial institutions, which minimizes its risk of credit loss. A
discussion of the Company's primary mar-
12
<PAGE> 14
ket risk exposures and the management of those exposures is presented below.
The Company generates revenues and costs that can fluctuate with changes in
foreign currency exchange rates when transactions are denominated in currencies
other than the local currency. The Company manufactures its products principally
in the United States and the United Kingdom, and sells product to distributors,
many of which are owned by the Company, throughout the world. Products sold from
the United States are denominated in US dollars and products sold from the
United Kingdom are denominated in pound sterling. The distributors in turn have
foreign currency risk related to their product purchases. Many of the Company's
owned distributors purchase forward currency contracts to offset currency
exposures related to these purchase commitments.
The table below provides information as of December 31, 1998 concerning the
Company's forward currency exchange contracts related to certain commitments of
its subsidiaries denominated in foreign currencies. The table presents the
contractual amount, the weighted-average expiration date, the weighted-average
contract exchange rates and the fair value for its currency contracts
outstanding. Foreign Currency Exchange Contracts Outstanding December 31, 1998
<TABLE>
<CAPTION>
(000's)
(000's) U.S. Dollar
U.S. Dollar Weighted-Average Fair Value at Weighted-
Amount Buy Forward Contract December 31, Average
Local Currency (Sell) Rate per U.S. Dollar 1998 Maturity Date
-------------- ----------- -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Contracts for
Purchase of U.S.
Dollars:
Deutsche Mark $12,000 1.62 DEM $11,730 July 29, 1999
Dutch Guilder 5,400 1.86 NLG 5,325 June 30, 1999
Spanish Peseta 1,500 136.6 ESP 1,452 June 30, 1999
French Franc 500 5.49 FRF 493 February 11, 1999
</TABLE>
<TABLE>
<CAPTION>
(000's)
(000's) U.S. Dollar
U.K. Pound Weighted-Average Fair Value at Weighted-
Amount Buy Forward Contract December 31, Average
Local Currency (Sell) Rate per U.K. Pound 1998 Maturity Date
-------------- ----------- -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Contracts for
Purchase of
U.K. Pounds:
French Franc L. 349 9.22 FRF 574 May 22, 1999
</TABLE>
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.
13
<PAGE> 15
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 1999 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 and Related Translactions" of the Company's Proxy
Statement for the 1999 Annual Shareholders Meeting.
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 1999 Annual Shareholders Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is hereby incorporated herein by reference to the
section entitled "Compensation and Stock Option Committee Interlocks and Insider
Participation and Related Transactions" of the Company's Proxy Statement for the
1999 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, 1997, and 1998.
Consolidated Statements of Income for the three years ended
December 31, 1998.
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1998.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998.
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.
14
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of Diagnostic
Products Corporation and its subsidiaries (the "Company") as of December 31,
1997 and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 18, 1999
15
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,372 $ 18,650
Accounts receivable--net of allowance
for doubtful accounts of $131 and $136 45,798 50,440
Inventories 49,038 54,078
Prepaid expenses and other current assets 405 580
Deferred income taxes 3,303 3,305
---------- ----------
Total current assets 118,916 127,053
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 30,854 35,878
Machinery and equipment 50,005 60,196
Leasehold improvements 7,075 7,135
Construction in progress 736 351
---------- ----------
Total 88,670 103,560
Less accumulated depreciation and amortization 41,576 49,348
---------- ----------
Property, plant and equipment -- net 47,094 54,212
SALES-TYPE AND OPERATING LEASES 26,875 33,372
DEFERRED INCOME TAXES 1,442 2,005
INVESTMENTS IN AFFILIATED COMPANIES 13,905 15,509
EXCESS OF COST OVER NET ASSETS ACQUIRED --
Net of amortization of $7,368 and $8,478 13,948 14,073
---------- ----------
TOTAL ASSETS $ 222,180 $ 246,224
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 15,547 $ 21,178
Accounts payable 14,562 15,306
Accrued liabilities 5,986 6,218
Income taxes payable (210) 3,350
---------- ----------
Total current liabilities 35,885 46,052
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock-no par value, authorized
30,000,000 shares at December 31,
1997 and 1998; outstanding 13,717,072
shares and 13,661,594 shares 38,527 37,531
Retained earnings 159,278 172,900
Accumulated other comprehensive income (11,510) (10,259)
---------- ----------
Total shareholders' equity 186,295 200,172
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 222,180 $ 246,224
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE> 18
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
SALES $ 176,832 $ 186,264 $ 196,643
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 76,698 83,078 87,068
Selling 35,135 37,520 37,757
Research and development 17,758 19,710 22,342
General and administrative 18,605 22,258 22,856
Equity in income of affiliates (1,605) (1,363) (1,262)
Interest income-net (1,486) (687) (331)
--------- --------- ---------
Total costs and expenses 145,105 160,516 168,430
--------- --------- ---------
INCOME BEFORE INCOME TAXES 31,727 25,748 28,213
PROVISION FOR INCOME TAXES 8,780 7,500 8,000
--------- --------- ---------
NET INCOME $ 22,947 $ 18,248 $ 20,213
========= ========= =========
EARNINGS PER SHARE:
BASIC $ 1.69 $ 1.34 $ 1.47
DILUTED 1.65 1.32 1.46
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 13,554 13,641 13,746
DILUTED 13,926 13,876 13,881
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
17
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
---------------------- Retained Accumulated Other Comprehensive
Shares Amount Earnings Comprehensive Income Income
---------- ------- -------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 13,524,051 $35,179 $131,136 $(2,965)
Comprehensive income:
Net income 22,947 $22,947
Other comprehensive income
Foreign currency translation adjustment 1,089 1,089
-------
Total comprehensive income $24,036
=======
Issuance of shares upon exercise
of stock options 73,073 1,405
Cash dividends ($.48 per share) (6,504)
---------- ------ -------- --------
BALANCE, DECEMBER 31, 1996 13,597,124 36,584 147,579 (1,876)
Comprehensive income:
Net income 18,248 $18,248
Other comprehensive income
Foreign currency translation adjustment (9,634) (9,634)
-------
Total comprehensive income $ 8,614
=======
Issuance of shares upon exercise
of stock options 119,948 1,943
Cash dividends ($.48 per share) (6,549)
---------- ------ -------- --------
BALANCE, DECEMBER 31, 1997 13,717,072 38,527 159,278 (11,510)
Comprehensive income:
Net income 20,213 $20,213
Other comprehensive income
Foreign currency translation adjustment 1,251 1,251
-------
Total comprehensive income $21,464
=======
Issuance of shares upon exercise
of stock options 152,810 3,308
Repurchase and cancellation of shares (208,288) (4,304)
Cash dividends $(.48 per share) (6,591)
---------- ------- -------- --------
BALANCE, DECEMBER 31, 1998 13,661,594 $37,531 $172,900 $(10,259)
========== ======= ======== =========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,947 $ 18,248 $ 20,213
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 14,440 15,270 19,364
Equity in undistributed income of
unconsolidated affiliates (1,906) 1,761 (1,604)
Deferred income taxes 216 1,690 (565)
Accounts receivable (5,373) (2,543) (3,426)
Inventories (6,956) (7,475) (4,165)
Prepaid expenses and other current assets (17) (30) (175)
Accounts payable (3,490) 3,375 (264)
Accrued liabilities 349 (71) 232
Income taxes payable (1,767) (1,725) 3,288
Income tax benefit received upon exercise
of certain stock options 294 150 300
-------- -------- --------
Net cash flows from operating activities 18,737 28,650 33,198
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,010) (10,542) (11,174)
Sales-type and operating leases (11,923) (11,572) (16,687)
Investment in affiliated companies (481) (46) (2,612)
-------- -------- --------
Net cash from (used for) investing activities (20,414) (22,160) (30,473)
CASH FLOWS FROM (USED FOR)
FINANCING ACTIVITIES:
Borrowing 4,086 9,021 3,685
Repurchase of common stock (4,304)
Proceeds from exercise of stock options 1,111 1,793 3,008
Cash dividends paid (6,504) (6,549) (6,591)
-------- -------- --------
Net cash from (used for) financing activities (1,307) 4,265 (4,202)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 246 (4,164) (245)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,738) 6,591 (1,722)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 16,519 13,781 20,372
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 13,781 $ 20,372 $ 18,650
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 9,863 $ 7,202 $ 6,035
Cash paid during the year for interest $ 225 $ 797 $ 1,824
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE> 21
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 clearance 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 may not be reliable indicators of future
financial performance.
FINANCIAL INSTRUMENTS
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.
The fair value of the Company's financial instruments approximates cost due
to their short term nature, or, in the case of notes payable, because the notes
are at interest rates competitive with those that would be available to the
Company in the current market environment.
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, 1997 and 1998 is $14,500,000 and $12,500,000 of
short-term commercial paper.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstance indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized when the future cash flows is less than the carrying amount of the
asset.
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 translation adjustments are accumulated in a separate
component of shareholders' equity.
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, 1997 and 1998, the Company had approximately
$8,950,000 and $19,900,000 of foreign exchange contracts outstanding, the
carrying value of which does not differ significantly from their fair value.
REVENUE RECOGNITION
The Company recognizes sales of its instruments and kits upon shipment to the
customer. Service contract revenue is recognized over the related contract life.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "Board") issued
Statement of Financial Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes requirements for
recording and reporting derivative financial instruments including hedging
transactions and is effective for financial statements issued for periods after
June 15, 1999. The Company is in the process of evaluating the impact, if any,
that will result from implementing SFAS No. 133.
NOTE 2 - BUSINESS ACQUISITIONS
As of March 1, 1996, the company acquired a 50% equity interest in D.P. C. -
N. Tsakiris S.A., the Company's Greek distributor.
As of April 1, 1997, the Company acquired a 100% interest in DPC France, SAS,
the Company's French distributor for the IMMULITE product line.
As of January 1, 1998, the Company acquired a 100% interest in Diagnostic
Products DPC Norway, AS, the Company's Norwegian distributor.
As of July 1, 1998, the Company's Brazilian distributor acquired a majority
interest in DPC Medlab Centroamerica S.A., the Company's distributor in Costa
Rica, Honduras, El Salvador, Guatemala and Panama.
NOTE 3 - INVENTORIES
Inventories by major categories are summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- -------
<S> <C> <C>
Raw materials $17,814 $19,235
Work in process 18,073 19,317
Finished goods 13,151 15,526
------- -------
$49,038 $54,078
======= =======
</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 their estimated life, three to five years.
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales-type and operating leases are summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Sales-type leases $ 4,441 $ 3,390
Operating leases 45,477 64,172
Less accumulated amortization 23,043 34,190
------- -------
Net 22,434 29,982
------- -------
Total $26,875 $33,372
======= =======
</TABLE>
NOTE 5 - INVESTMENT IN AFFILIATED COMPANIES
The Company has equity interests in four 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%; Sweden, 50%; and Greece, 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 its joint
venture in Japan, and the results of their operations.
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current assets $45,764 $43,726 $48,609
Property and other assets 40,587 34,498 39,244
------- ------- -------
Total assets $86,351 $78,224 $87,853
======= ======= =======
Current liabilities $34,945 $36,754 $43,199
Non-current liabilities 19,998 18,292 24,065
Shareholders' equity 31,408 23,178 20,589
------- ------- -------
Total liabilities and
shareholders' equity $86,351 $78,224 $87,853
======= ======= =======
Sales $63,340 $60,501 $62,227
======= ======= =======
Net income $ 2,507 $ 804 $ 470
======= ======= =======
</TABLE>
The Company had sales to non-consolidated affiliates of $21,409,000 in 1996,
$21,993,000 in 1997, and $22,318,000 in 1998 including sales to one affiliate
(Italy) of $11,251,000 in 1996, $11,352,000 in 1997, and $11,889,000 in 1998.
Included in the Company's accounts receivable are trade receivables from
non-consolidated affiliates of $7,124,000 at December 31, 1997 and $5,766,000 at
December 31, 1998.
The Company's cumulative equity in undistributed earnings of non-consolidated
affiliated companies at December 31, 1998 is $12,523,000. Additional income
taxes payable on earnings of foreign affiliates, if remitted, would be
substantially offset by U.S. tax credits for foreign taxes paid.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
Notes payable consist of borrowings by certain of the Company's foreign
subsidiaries and are payable in the subsidiaries' local currency. The notes are
summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Notes payable to a bank in Germany, at an average
interest rate of approximately 5%, payable through 2006 $ 11,318 $ 12,327
Notes payable to a bank in France, at an interest rate
of approximately 7%, payable through 2003 3,290 3,232
Notes payable to a bank in Spain at an interest rate
of approximately 5% payable through 2004 2,065
Notes payable to a bank in the Netherlands at an
interest rate of approximately 5.7% payable through 2019 1,981
Other 939 1,573
-------- --------
Total $ 15,547 $ 21,178
======== ========
</TABLE>
Aggregate future maturities of long-term debt outstanding at December 31, 1998
are $6,260,000 in 1999, $2,761,000 in 2000, $1,952,000 in 2001, $1,849,000 in
2002, $1,802,000 in 2003, and $6,554,000 thereafter. Interest expense was
$225,000 in 1996, $797,000 in 1997 and $ 1,824,000 in 1998.
NOTE 7 - PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 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
$2,202,000 in 1996, $2,365,000 in 1997, and $2,484,000 in 1998.
The Company has a defined contribution 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 were no contributions in 1996, 1997 or 1998.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The provision for income taxes is summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
CURRENT:
Federal $6,157 $3,992 $ 5,937
State 730 708 421
Foreign 1,677 1,110 2,207
Deferred federal and
state income taxes 216 1,690 (565)
------ ------ --------
Total provision for income taxes $8,780 $7,500 $ 8,000
====== ====== ========
</TABLE>
Temporary differences comprising the net deferred taxes shown on the
consolidated balance sheets are as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- ------
<S> <C> <C>
State income taxes $ 247 $ 147
DPC Cirrus' net operating losses 639 62
Inventory 2,363 2,520
Depreciation 923 990
DPC Cirrus' research and development
credit carry forwards 841 1,081
Other (268) 510
-------- ------
Total $ 4,745 $5,310
======== ======
</TABLE>
Included in the net deferred income taxes shown on the consolidated balance
sheets for 1998 and 1997 are deferred income tax assets of $5,348,000 and
$4,814,000 and deferred income tax liabilities of $38,000 and $69,000.
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:
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 % 1997 % 1998 %
-------- ---- ------- ---- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at statutory rate $ 11,104 35 $ 9,012 35 $ 9,875 35
State income taxes, net of federal tax benefit 397 1 456 2 (141) (1)
Foreign income subject to tax other than
federal statutory rate (487) (2) 40 (35)
Non-taxable earnings of FSC (1,073) (3) (952) (4) (943) (3)
Research and development tax credit (188) (403) (2) (866) (3)
Net foreign tax credit (244) (1) (566) (2) (195) (1)
Equity in income of affiliates (562) (2) (477) (2) (442) (2)
Other (167) 390 2 747 3
-------- ---- ------- ---- ------- ---
Provision for income taxes $ 8,780 28 $ 7,500 29 $ 8,000 28
======== ==== ======= ==== ======= ===
</TABLE>
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An income tax benefit during 1998, 1997 and 1996 related to the exercise or
early disposition of certain stock options reduced income taxes currently
payable by $300,000, $150,000 and $294,000 and was credited directly to
shareholders' equity.
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company has 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,
2002. Approximately $879,000 in 1996, $879,000 in 1997, and $966,000 in 1998 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,
2002, with a five-year renewal option. Future minimum lease commitments as of
December 31, 1998 for both leases are as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 Total
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$1,210 $1,210 $1,210 $1,190 $4,820
</TABLE>
Rental expense under operating leases approximated $1,783,000 in 1996,
$2,187,000 in 1997, and $2,673,000 in 1998.
The Company has a supply contract with a vendor for chemical compounds which
are key components in the IMMULITE system. The Company has agreed to guaranty
the vendor's minimum payment obligations to another company in the annual amount
of $600,000 through 2004.
NOTE 10 - EARNINGS PER SHARE
Earnings per share ("EPS") is presented in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The following table is a reconciliation of the weighted-average shares
used in the computation of basic and diluted EPS for the income statements
presented herein.
(Shares in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Basic 13,554 13,641 13,746
Assumed exercise of stock options 372 235 135
------ ------ ------
Diluted 13,926 13,876 13,881
====== ====== ======
</TABLE>
Net income as presented in the consolidated income statement is used as the
numerator in the EPScalculation for both the basic and diluted computations.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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). Additionally 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 after one
year in installments (3 to 9 years) 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.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective as
of January 1, 1996, the fair value of option grants is estimated on the date of
grant using the Black-Scholes option-pricing model for proforma footnote
purposes with the following assumptions used for grants in all years; dividend
yield of 1.6%, risk-free interest rate of from 4.4% to 5.9% and expected option
life of 3 to 10 years. Expected volatility was assumed to be 22.7% in 1996,
38.6% in 1997 and 36.9% in 1998. Forfeiture rate was assumed to be 16.4% in 1996
and 5% in 1997 and 1998.
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Exercise Fair
Shares Price Value
--------- -------- -------
<S> <C> <C> <C>
Options outstanding,
December 31, 1995
(315,562 exercisable) 959,610 $21.79
Granted 104,500 33.36 10.35
Exercised (53,073) 16.22
Canceled (29,524) 25.47
--------
Options outstanding,
December 31, 1996
(379,453 exercisable) 981,513 23.21
Granted 413,500 29.46 13.79
Exercised (119,948) 14.94
Canceled (54,525) 27.91
--------
Options outstanding,
December 31, 1997
(349,656 exercisable) 1,220,540 25.92
Granted 222,000 26.83 10.87
Exercised (152,810) 19.69
Canceled (66,540) 30.46
--------
Options outstanding,
December 31, 1998
(350,373 exercisable) 1,223,190 26.62
</TABLE>
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/98 Price
----------- ----------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$10.00-19.99 67,400 5.00 years $18.41 29,000 $18.39
20.00-29.99 969,290 6.74 years 25.54 215,873 22.48
30.00-39.99 230,500 4.55 years 34.26 104,700 33.38
40.00-49.99 6,000 4.97 years 41.33 800 41.88
</TABLE>
At December 31, 1998 the Company had a non-qualified option outstanding for
50,000 shares under a separate agreement at an exercise price of $30.75 per
share.
Pursuant to the plans and the separate agreement, 1,722,190 shares of common
stock are reserved for issuance upon the exercise of options.
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation expense has
been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the
tax-effected impact would be as follows:
(Dollars in Thousands, except per Share Data)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income as reported $ 22,947 $ 18,248 $ 20,213
Compensation expense from
stock options 89 318 740
-------- -------- --------
Net income adjusted $ 22,858 $ 17,930 $ 19,473
Adjusted earnings per share-diluted $ 1.64 $ 1.29 $ 1.40
</TABLE>
This proforma impact only takes into account options granted since January 1,
1995 and is likely to increase in future years as additional options are granted
and amortized ratably over the vesting period.
NOTE 12 - SEGMENT AND PRODUCT LINE INFORMATION
The Company considers its manufactured instruments and medical
immunodiagnostic test kits as one operating segment as defined under SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" as the
kits are required to run the instruments and utilize similar technology and
instrument manufacturing processes. The Company manufacturers its instruments
and kits principally from facilities in the United States and the United
Kingdom. Kits and instruments are sold to hospitals, medical centers, clinics,
physicians, and other clinical laboratories throughout the world through a
network of distributors including consolidated distributors located in the
United Kingdom, Germany, Czech Republic, Poland, Spain, The Netherlands,
Belgium, Luxembourg, Finland, Norway, France, Australia, China, Brazil, Uruguay,
Venezuela, Costa Rica, Honduras, El Salvador, Guatemala and Panama.
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company sells its instruments and immunodiagnostic test kits under
several product lines. Product line sales information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Sales:
IMMULITE $ 80,490 $100,127 $123,861
Radioimmunoassay ("RIA") 57,673 48,936 42,565
Other 38,669 37,201 30,217
-------- -------- --------
$176,832 $186,264 $196,643
======== ======== ========
</TABLE>
The Company is organized and managed by geographic area. Transactions between
geographic segments are accounted for as normal sales for internal reporting and
management purposes with all intercompany amounts eliminated in consolidation.
Sales are attributed to geographic area based on the location from which the
instrument or kit is shipped to the customer. Information reviewed by the
Company's chief operating decision maker on significant geographic segments, as
defined under SFAS 131, is prepared on the same basis as the consolidated
financial statements and is as follows: (Dollars in Thousands) December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------
Euro/DPC DPC DPC
Limited Biermann Medlab Less:
United (United (German (Brazilian Intersegment
States Kingdom) Group) Group) Other Elimination Total
-------- -------- -------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $127,936 $ 27,468 $ 34,425 $ 24,081 $ 38,926 $ (56,193) $196,643
Operating expenses 46,875 6,070 9,465 7,638 12,907 82,955
Interest income
(expense), net 4,508 (800) (970) (1,675) (732) 331
Provision (benefit) for
income taxes expense 5,793 1,269 (253) 358 833 8,000
Net income (loss) 16,214 2,820 (417) 471 1,325 (200) 20,213
Segment assets:
Long-lived assets 52,937 16,869 19,138 12,851 20,871 (5,500) 117,166
Total assets 239,509 36,230 32,753 19,704 41,896 (123,868) 246,224
Capital expenditures 4,293 3,305 9,869 4,594 11,879 (3,500) 30,440
</TABLE>
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------
Euro/DPC DPC DPC
Limited Biermann Medlab Less:
United (United (German (Brazilian Intersegment
States Kingdom) Group) Group) Other Elimination Total
-------- -------- -------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $114,797 $ 24,033 $ 38,789 $ 19,672 $ 32,342 $ (43,369) $186,264
Operating expenses 46,016 4,178 11,787 6,734 10,773 79,488
Interest income
(expense), net 4,013 (700) (728) (1,233) (665) 687
Provision (benefit) for
income taxes expense 6,390 487 (609) 222 1,010 7,500
Net income (loss) 15,601 1,917 (919) 730 219 700 18,248
Segment assets:
Long-lived assets 52,060 15,715 13,421 10,847 14,779 (5,000) 101,822
Total assets 219,081 31,277 24,766 25,690 32,345 (110,979) 222,180
Capital expenditures 6,595 1,339 1,175 4,261 5,041 (2,800) 15,611
</TABLE>
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------
Euro/DPC DPC DPC
Limited Biermann Medlab Less:
United (United (German (Brazilian Intersegment
States Kingdom) Group) Group) Other Elimination Total
-------- -------- -------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $110,934 $ 16,828 $ 39,144 $ 15,800 $ 33,688 $ (39,562) $176,832
Operating expenses 39,659 3,995 11,714 5,854 10,276 71,498
Interest income
(expense), net 4,070 (692) (475) (1,029) (388) 1,486
Provision (benefit) for
income taxes expense 7,103 35 51 1,591 8,780
Net income (loss) 19,140 644 429 653 2,781 (700) 22,947
Segment assets:
Long-lived assets 52,094 16,741 14,138 8,849 12,130 (6,000) 97,952
Total assets 216,965 29,133 26,640 13,475 28,729 (107,940) 207,002
Capital expenditures 4,688 5,440 4,898 4,037 4,923 (3,500) 20,486
</TABLE>
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's export sales to unaffiliated customers are summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
Western South Other Total
Europe America Exports Exports
------- -------- ------- -------
<S> <C> <C> <C> <C>
1996 $5,949 $7,171 $12,929 $26,049
1997 3,466 8,277 14,509 26,252
1998 2,794 8,406 13,701 24,901
</TABLE>
SUPPLEMENTARY FINANCIAL DATA
Unaudited quarterly financial information for the years December 31, 1997 and
1998 is summarized as follows:
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, Year Ended
1997 1997 1997 1997 1997
--------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales $44,400 $46,763 $46,399 $48,702 $186,264
Gross profit 24,718 26,594 25,914 25,960 103,186
Income taxes 1,710 1,790 1,460 2,540 7,500
Net income 4,663 4,892 5,122 3,571 18,248
Earnings per share:
Basic .34 .36 .38 .26 1.34
Diluted .34 .35 .37 .26 1.32
Weighted Average
Shares Outstanding:
Basic 13,605 13,622 13,646 13,690 13,641
Diluted 13,867 13,872 13,901 13,869 13,876
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, Year Ended
1998 1998 1998 1998 1998
--------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales $46,104 $49,278 $48,773 $52,488 $196,643
Gross profit 25,709 27,849 27,319 28,698 109,575
Income taxes 1,720 2,190 2,090 2,000 8,000
Net income 4,104 5,194 5,395 5,520 20,213
Earnings per share:
Basic .30 .38 .39 .40 1.47
Diluted .30 .37 .39 .40 1.46
Weighted Average
Shares Outstanding:
Basic 13,746 13,779 13,792 13,669 13,746
Diluted 13,907 13,944 13,923 13,749 13,881
</TABLE>
31
<PAGE> 33
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 23, 1999
-----------------------------------------
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 23, 1999
- ------------------------- and Chief Executive
Sigi Ziering Officer (Principal
Executive Officer)
/s/ Michael Ziering Director March 23, 1999
- -------------------------
Michael Ziering
/s/ Sidney A. Aroesty Director March 23, 1999
- -------------------------
Sidney A. Aroesty
/s/ Maxwell H. Salter Director March 23, 1999
- -------------------------
Maxwell H. Salter
/s/ James D. Watson Director March 23, 1999
- -------------------------
James D. Watson
/s/ Frederick Frank Director March 23, 1999
- -------------------------
Frederick Frank
/s/ Julian R. Bockserman Vice President-- March 23, 1999
- ------------------------- Finance (Principal
Julian R. Bockserman Financial and Accounting
Officer)
</TABLE>
32
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<S> <C>
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 1997 Stock Option Plan(7)
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule (For EDGAR filing only)
</TABLE>
- ----------
* 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. (File No. 1-9957)
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991. (File No. 1-9957)
(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. (File No. 1-9957)
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990. (File No. 1-9957)
(6) Incorporated by reference to Registrant's Quarterly Report on From 10-Q
for the quarter ended June 30, 1992. (File No. 1-9957)
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996. (File No. 1-9957)
33
<PAGE> 1
EXHIBIT 21
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%
DPC Holding GmbH Germany 100%
DPC Biermann GmbH Germany 100%
DPC Czech s.r.o. Czech Republic 100%
DPC d.o.o. Zagreb Croatia 50%
DPC Polska sp.z.o.o. Poland 100%
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.
Diagnostic Products Corporation Finland 100%
DPC Finland Oy
Bio-Mediq DPC Pty. Ltd. Australia 100%
DPC Dipesa, S.A. Spain 100%
DPC France, SAS France 100%
Tianjin De Pu (DPC) China 100%
Biotechnological and Medical
Products, Inc.
Diagnostic Products DPC Norway, AS Norway 100%
DPC Medlab Produtos Medico Brazil 56%
Hospitalares Ltda.
DPC Venezuela C.A. Venezuela 56%
DPC Medlab de Uruguay S.A. Uruguay 56%
DPC Medlab Centroamerica S. A. Costa Rica 56%
Nippon DPC Corporation USA/California 50%
DPC Skafte AB Sweden 50%
D.P.C.-N. Tsakiris S.A. Greece 50%
Medical Systems, S.p.A. Italy 45%
Amerlab, Lda. Portugal 40%
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
2-81631, 33-17575, 33-43043 and 333-34665 on Form S-8 of our report dated
February 18, 1999, included in this Annual Report on Form 10-K of Diagnostic
Products Corporation for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,650
<SECURITIES> 0
<RECEIVABLES> 50,440
<ALLOWANCES> 136
<INVENTORY> 54,078
<CURRENT-ASSETS> 127,053
<PP&E> 103,560
<DEPRECIATION> 49,348
<TOTAL-ASSETS> 246,224
<CURRENT-LIABILITIES> 46,052
<BONDS> 0
0
0
<COMMON> 37,531
<OTHER-SE> 162,641
<TOTAL-LIABILITY-AND-EQUITY> 246,224
<SALES> 196,643
<TOTAL-REVENUES> 196,643
<CGS> 87,068
<TOTAL-COSTS> 87,068
<OTHER-EXPENSES> 81,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,213
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 20,213
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,213
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.46
</TABLE>
