SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-41226
DIANON SYSTEMS, INC.
(exact name of registrant as specified in its charter)
Delaware 06-1128081
(State of incorporation) (IRS Employer Identification No.)
200 Watson Blvd, Stratford, CT 06497
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 381-4000
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports ) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of registrant's Common Stock, $.01 par value, outstanding
on August 1, 1996 was 5,943,338 shares.
<PAGE>
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION PAGE NO.
- - ------ --------------------- --------
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1996 and 3
December 31, 1995.
Consolidated Income Statements for the three month 4
and six month periods ended June 30, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for 5
the twelve month period ended December 31, 1995 and
the six month period ended June 30, 1996.
Consolidated Statements of Cash Flows for the six 6
month periods ended June 30, 1996 and 1995.
Notes to Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS.
Part II OTHER INFORMATION
- - ------- -----------------
Item 5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 7,051,335 $ 10,990,231
Accounts receivable, net of allowances of $786,920
for each of the periods 11,531,911 9,653,971
Prepaid expenses and employee advances 642,207 1,071,963
Prepaid and refundable income taxes 474,395 168,420
Inventory 568,534 554,398
Deferred income tax asset 652,328 652,328
Investment in common stock 50,483 135,508
------------ ------------
Total current assets 20,971,193 23,226,819
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Leasehold improvements 2,920,906 1,717,606
Laboratory and office equipment` 11,597,991 11,068,949
Construction in progress 300,699 --
Less - accumulated depreciation (7,475,684) (6,879,799)
------------ ------------
7,343,912 5,906,756
------------ ------------
INTANGIBLE ASSET - CUSTOMER LISTS, net of
accumulated amortization of $2,689,433 and 656,166 739,308
$2,606,291, respectively
INTANGIBLE ASSET - NON COMPETE AGREEMENT, net of accumulated 100,000 125,000
amortization of $150,000 and $125,000, respectively
DEFERRED INCOME TAX ASSET 178,575 178,575
OTHER ASSETS 254,163 278,948
------------ ------------
TOTAL ASSETS $ 29,504,009 $ 30,455,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,814,588 $ 4,922,514
Current portion of capitalized lease obligations 24,982 38,466
Current portion of note payable 944,534 916,150
Severance costs -- 209,121
Restructuring reserves 160,160 166,598
------------ ------------
Total current liabilities 5,944,264 6,252,849
------------ ------------
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 27,247 34,413
LONG-TERM NOTE PAYABLE 170,663 650,154
DEFERRED INCOME TAX LIABILITY 65,651 65,651
------------ ------------
Total Liabilities 6,207,825 7,003,067
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000
shares authorized, 6,317,082 and 6,311,451 shares
issued and outstanding at June 30, 1996 and at
December 31, 1995, respectively 63,171 63,115
Additional paid-in capital 26,635,279 26,609,657
Accumulated deficit (1,922,188) (2,724,433)
Common stock held in treasury, at cost - 221,000 shares (1,184,078) (200,000)
at June 30, 1996 and 50,000 shares at December 31, 1995
Shareholder note receivable (296,000) (296,000)
------------ ------------
Total stockholders' equity 23,296,184 23,452,339
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,504,009 $ 30,455,406
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S><C> <C> <C> <C> <C>
NET REVENUES $ 13,674,329 $ 11,384,013 $ 26,093,148 $ 21,866,401
COST OF SALES 6,480,922 4,943,987 12,619,810 9,637,624
------------ ------------ ------------ ------------
Gross Profit 7,193,407 6,440,026 13,473,338 12,228,777
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,601,680 5,886,656 10,668,861 10,415,431
RESEARCH AND DEVELOPMENT EXPENSES 775,180 1,196,195 1,582,081 2,186,060
------------ ------------ ------------ ------------
Income/(Loss) from Operations 816,547 (642,825) 1,222,396 (372,714)
INTEREST INCOME 105,247 55,389 229,792 99,340
INTEREST EXPENSE 20,539 35,447 44,740 74,646
------------ ------------ ------------ ------------
Income/(Loss) Before Provision for Income Taxes 901,255 (622,883) 1,407,448 (348,020)
PROVISION/(BENEFIT) FOR INCOME TAXES 387,540 (269,708) 605,203 (150,693)
------------ ------------ ------------ ------------
Net Income/(Loss) $ 513,715 $ (353,175) $ 802,245 $ (197,327)
============ ============ ============ ============
Weighted Average Shares Outstanding 6,142,743 5,299,634 6,195,835 5,301,358
Primary and Fully Diluted Earnings/(Loss)
Per Share $ .08 $ (.07) $ .13 $ (.04)
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Foreign
Unrealized Currency Common
Common Stock Additional Holdings Trans- Stock Held Shareholder
---------------- Paid-in Accumulated Gains/ lation in Treasury, Note
Shares Amount Capital Deficit (Losses) Adjustment at Cost Receivable Total
------ ------ ---------- ----------- ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 5,296,879 $52,969 $21,591,942 $(2,831,529) $(90,383) $(58,938) $ -- $ -- $18,664,061
Stock options exercised 14,572 146 59,286 -- -- -- -- -- 59,432
Issuance of common stock
and warrants net of
issuance costs 1,000,000 10,000 4,976,443 -- -- -- -- -- 4,986,443
Common stock held in
treasury -- -- -- -- -- -- (200,000) -- (200,000)
Shareholder note
receivable -- -- -- -- -- -- -- (296,000) (296,000)
Stock compensation
expense - stock
options -- -- (18,014) -- -- -- -- -- (18,014)
Write-off of unrealized -- -- -- -- 90,383 -- -- -- 90,383
holding losses
Write-off of foreign
currency translation
adjustment -- -- -- -- -- 58,938 -- -- 58,938
Net Income -- -- -- -- 107,096 -- -- -- 107,096
--------- ------- ----------- ----------- -------- --------- ----------- --------- -----------
BALANCE, December 31, 1995 6,311,451 63,115 26,609,657 (2,724,433) -- -- (200,000) (296,000) 23,452,339
Stock options exercised 5,631 56 25,622 -- -- -- -- -- 25,678
Common stock held in
treasury -- -- -- -- -- -- (984,078) -- (984,078)
Net Income -- -- -- 802,245 -- -- -- -- 802,245
--------- ------- ----------- ----------- -------- --------- ----------- --------- -----------
BALANCE, June 30, 1996 6,317,082 $63,171 $26,635,279 $(1,922,188) $ -- $ -- $(1,184,078) $(296,000) $23,296,184
========= ======= =========== =========== ======== ========= =========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
------------ -------------
<S> <C> <C> <C>
Net income/(loss) $ 802,245 $ (197,327)
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operations -
Non-cash charges
Depreciation and amortization 1,070,429 1,743,861
Stock compensation expense -- 2,364
Loss on the sale of fixed assets 20,322 2,455
Investment write-down 11,364 228,040
Changes in other current assets
and liabilities
(Increase) decrease in accounts receivable (1,877,940) 1,327,440
Decrease (increase) in prepaid expenses
and employee advances 123,781 (541,021)
(Increase) decrease in inventory (14,136) 15,132
(Increase) in other assets (4,092) (35,110)
(Decrease) increase in accounts payable and accrued liabilities (317,047) 153,514
(Decrease) increase in restructuring reserves (6,438) 90,968
------------ ------------
Net cash (used in) provided by operating activities (191,512) 2,790,316
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,097,689) (664,898)
Construction in progress (300,699) --
Proceeds from the sale of stock held for investment 73,661 --
Proceeds from the sale of fixed assets 7,500 1,500
------------ ------------
Net cash (used in) investing activities (2,317,227) (663,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (451,107) (424,855)
Repayments of capitalized lease obligations (20,650) (36,458)
Purchase of common stock held in treasury (984,078) --
Exercise of stock options 25,678 10,754
------------ ------------
Net cash (used in) financing activities (1,430,157) (450,559)
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,938,896) 1,676,359
CASH AND CASH EQUIVALENTS,
beginning of year 10,990,231 3,534,093
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,051,335 $ 5,210,452
============ ============
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $ 45,075 $ 74,957
Income Taxes 846,219 542,972
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company - The consolidated balance sheet as of June 30, 1996, the
related consolidated income statements and consolidated statements of
stockholders' equity and cash flows for the three month and six month
periods ended June 30, 1996 and 1995, have been prepared by DIANON Systems,
Inc. (the "Company") without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1996 and 1995 have been made. During
the interim periods reported on, the accounting policies followed are in
conformity with generally accepted accounting principles and are consistent
with those applied for annual periods and described in the Company's Annual
Report filed on Form 10-K with the Securities and Exchange Commission on
March 29, 1996 (the "Annual Report").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
included in the Company's Annual Report for the year ended December 31,
1995. The results of operations for the three month and six month periods
ended June 30, 1996 and 1995 are not necessarily indicative of the
operating results for the full year.
2. Definitions - The descriptive analysis contained herein compares the
financial results of the first six months ended June 30 and the current
three months ended June 30 for the years 1996 and 1995. To accommodate the
comparison of pertinent financial information the following terms will be
used to describe certain aspects of the Company's business:
"First Half of 1996" - six months ended June 30, 1996
"First Half of 1995" - six months ended June 30, 1995
"Second Quarter of 1996" - three months ended June 30, 1996
"Second Quarter of 1995" - three months ended June 30, 1995
"Clinical chemistry" or "clinical laboratory services" - the Oncosite
cancer-related blood test service and the Neocyte birth-risk-related blood
test service. In general, these test services are performed by DIANON, and
the test result is interpreted by the physician who ordered the test.
"Anatomic pathology" or "pathology" services - all other testing services
performed by the Company including, but not limited to genetic, molecular
and immunohistochemistry testing services as well as traditional histology
and morphology evaluations. In general, these tests are performed by DIANON
and are interpreted by a physician or other licensed laboratory
professional employed by DIANON. Some clinical chemistry services
associated with certain anatomic pathology services are classified by the
Company as pathology services although they may be regulated and reimbursed
as clinical chemistry services.
3. Reclassifications - Certain reclassifications have been made to the 1995
amounts to conform to the classifications used in 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
Results of Operations
- - ---------------------
o Net Revenues
Net revenues were $26.1 million during the First Half of 1996, an increase of
$4.2 million or 19% from the First Half of 1995. Increased revenues in the First
Half of 1996 over the comparable period of 1995 were attributable to increased
market penetration by the Company's anatomic pathology testing services and were
offset to some extent by a decrease in clinical chemistry and
hospital-originated pathology services.
Net revenues were $13.7 million during the Second Quarter of 1996, an increase
of $2.3 million or 20% from the Second Quarter of 1995. Increased revenues were
attributable to increased market penetration by the Company's anatomic pathology
testing services.
o Cost of Sales
Cost of sales, which consists primarily of salaries and wages, laboratory
supplies, outside services, logistics (primarily shipping and handling), and
depreciation expense, was $12.6 million during the First Half of 1996, an
increase of $3 million or 31% from the First Half of 1995. Salaries and wages
were approximately $3.9 million in the First Half of 1996, an increase of $1.4
million or 52% from the First Half of 1995. This increase was principally due to
increased laboratory and physician employment incurred to support new anatomic
pathology testing services. Laboratory supplies were approximately $2.7 million
in the First Half of 1996, an increase of $371,000 or 16% from the First Half of
1995. This increase was the result of increased sales volume and increased costs
for reagents used for some of the Company's testing services. Logistics were
$1.9 million in the First Half of 1996, an increase of $55,000 or 3% from the
First Half of 1995. As a percentage of net revenues, cost of sales increased to
48% during the First Half of 1996 from 44% during the First Half of 1995.
Cost of sales was $6.5 million during the Second Quarter of 1996, an increase of
$1.5 million or 31% from the Second Quarter of 1995. As a percentage of net
revenues, cost of sales increased to 47% during the Second Quarter of 1996 from
43% during the Second Quarter of 1995.
o Gross Profit
Gross profits were $13.5 million during the First Half of 1996, an increase of
$1.2 million or 10% from the First Half of 1995. The Company's gross profit
margin decreased to 52% in the First Half of 1996 from 56% in the First Half of
1995. The decrease in gross profit margin was due to the continued reduction of
the average unit price reimbursed for certain clinical chemistry services and
the increased costs necessary to provide anatomic pathology testing services.
Gross profits were $7.2 million during the Second Quarter of 1996, an increase
of $753,000 or 12% from the Second Quarter of 1995. The Company's gross profit
margin decreased to 53% in the Second Quarter of 1996 from 57% in the Second
Quarter of 1995.
The clinical laboratory industry has seen steady downward pressure on prices
exerted by both government and private third-party payers. Also, payment for
services such as those provided by the Company is and likely will continue to be
affected by periodic reevaluations made by payers concerning which services to
reimburse and which to cease reimbursing. The reduction in reimbursement rates,
particularly by Medicare, has generally decreased the average unit price, and
thus the average gross profit, for many of the Company's clinical laboratory
services each year. In keeping with this trend, as part of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA `93"), Congress reduced over time the national
cap on Medicare clinical laboratory fee schedules. OBRA `93 was fully
<PAGE>
implemented this year and has reduced the cap on Medicare clinical laboratory
fee schedules to 76% of the national median. It also eliminated the annual
updates of such fee schedules for the years 1994 and 1995.
With respect to the Company's tissue testing services, which are not reimbursed
under the Medicare clinical laboratory fee schedules, the Medicare fees for
these services also generally declined with the implementation of the resource
based relative value scale ("RBRVS") system which went into effect on January 1,
1992. This program was also fully implemented this year and has had the effect
of reducing reimbursement for pathology testing services although not to the
same extent as the Medicare reimbursement reduction for clinical chemistry
services.
Any future changes in government and other third-party payer reimbursement which
may come about as a consequence of an enactment of health care reform or deficit
reduction legislation will also be likely to continue the downward pressure on
prices and make the markets for all of the Company's services more competitive.
H.R. 2491, the Balanced Budget Act of 1995, would have made substantial changes
to the Medicare program; however, it was vetoed by President Clinton in
December, 1995. Nevertheless, this bill as well as President Clinton's Medicare
counterproposal contained in his fiscal year 1997 budget offer some insight into
future Medicare reform legislation. H.R. 2491 would have further reduced the
national cap on Medicare clinical laboratory fee schedules to 65% of the
national median in 1997. It also would have eliminated annual updates in the
Medicare clinical laboratory fee schedules until fiscal year 2002. However, H.R.
2491 would have implemented a new "conversion factor" that may have favorably
affected the Company's physician pathology service reimbursements by less than
five percent.
Both H.R. 2491 and the President's Medicare proposal would have revised the
Medicare program substantially to permit beneficiaries to choose between
traditional fee-for-service Medicare and several non-traditional Medicare
options, including managed care plans and provider-sponsored organization plans.
These non-traditional Medicare plans would have considerable discretion in
determining whether and how to cover and reimburse all of the Company's services
and to limit the number of laboratories with which they deal. Although neither
proposal would have required Medicare beneficiaries to pay 20% of the fee for
each clinical laboratory service, nothing in the proposals would have prohibited
non-traditional Medicare plans from implementing such a requirement.
In addition, H.R. 2491 proposed that a failsafe budget mechanism be used if
projected savings were not realized in Medicare laboratory service expenditures.
This failsafe mechanism might have further reduced reimbursement for Medicare
clinical laboratory services and physician services (including the Company's
pathology services). The President's original Medicare counterproposal would
have established competitive bidding for clinical laboratory services instead.
These competitive bidding provisions have not been included in the Medicare
section of President Clinton's fiscal year 1997 budget proposal. Because the
budget provisions are merely in an unfinalized, outline format, however, the
competitive bidding provisions may be added again when the proposal is converted
to legislative language or if there is a need to generate more savings from the
Medicare program. Furthermore, the President's support for competitive bidding
has rekindled efforts within the Health Care Financing Administration ("HCFA")
to initiate a Medicare demonstration project to test the savings potential of
competitive bidding for Part B clinical laboratory services. If ultimately
adopted, either through federal legislation or through HCFA policy, these
changes would have an adverse impact on the Company's revenues.
Medicare reform is a major unpredictable factor for the Company's business.
During any budget reconciliation process and if and when Medicare reform
legislation is considered by Congress, the reforms mentioned above or others are
likely to be considered again. Because of the uncertainties about the nature,
content and timing of legislative initiatives and the market's response to them,
the Company currently is unable to predict their ultimate impact on the clinical
laboratory or anatomic pathology markets generally or on the Company in
particular. Even without definitive federal legislative action, however, reforms
are likely to occur at the state level and/or in response to market pressures.
In the past the Company has offset a substantial portion of the impact of price
decreases and coverage changes through the achievement of economies of scale and
other strategies such as more favorable purchase contracts and the introduction
of alternative technologies. However, depending upon whether and how the price
decreases and other changes which could occur as a result of federal or state
legislation are implemented, they could have an adverse impact on gross profits
from the Company's testing services until management is able to mitigate such
<PAGE>
impact; provided, however, that there can be no assurance that management would
be able to mitigate such impact. Furthermore, as a general trend, it should be
expected that gross profit margins will continue to decline over the long term.
o Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.7 million during the First
Half of 1996, an increase of $253,000 or 2.4% from the First Half of 1995. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 41% in the First Half of 1996 from 48% in the First Half of 1995.
Levels of these expenditures in 1995 were abnormally elevated as a result of
one-time charges for amortization, severance costs and investment write-downs
such as those incurred in 1995.
Selling, general and administrative expenses were $5.6 million during the Second
Quarter of 1996, a decrease of $285,000 or 4.8% from the Second Quarter of 1995.
As a percentage of net revenues, selling, general and administrative expenses
decreased to 41% in the Second Quarter of 1996 from 52% in the Second Quarter of
1995. Levels of these expenditures in 1995 were abnormally elevated as a result
of one-time charges for amortization and investment write-downs such as those
incurred in 1995.
Amortization expense, severance costs, international restructuring costs and
investment write-downs of approximately $l.8 million previously reported
separately in 1995 were combined with the appropriate selling, general and
administrative and research and development expenses beginning in 1996.
Amortization expense was $137,000 in the First Half of 1996, a decrease of
$916,000 or 87% from the First Half of 1995. This decrease is primarily a result
of the Company recording a one-time accelerated amortization charge of
approximately $765,000 during the Second Quarter of 1995 based on management's
revised estimate of future benefits anticipated from a customer list.
Amortization expense was $69,000 during the Second Quarter of 1996, a decrease
of $842,000 or 92% from the Second Quarter of 1995.
Severance costs were $46,000 in the First Half of 1996, a decrease of $361,000
or 89% from the First Half of 1995. The severance costs were due primarily to
the resignation of an officer in 1995. All of these severance costs were paid by
the end of the First Half of 1996. Severance costs were $46,000 during the
Second Quarter of 1996, a decrease of $46,000 or 50% from the Second Quarter of
1995.
Investment write-downs were $11,000 in the First Half of 1996, a decrease of
$217,000 or 95% from the First Half of 1995. This decrease is a result of the
Company recording a write-down to market value of the investment in common stock
of a publicly traded company as the loss in value was deemed other than
temporary in accordance with the Statement of Financial Accounting Standard 115,
"Accounting for Certain Investments on Debt and Equity Securities". Investment
write-downs were $7,000 in the Second Quarter of 1996, a decrease of $221,000 or
97% from the Second Quarter of 1995. The Company sold 44,063 shares of this
stock in the First Half of 1996 and plans to sell the remaining shares in 1996.
International restructuring costs of approximately $118,000 were recorded in the
First Half of 1995 relating to anticipated severance expenses and associated
costs to close-down the Company's remaining foreign branches. No similar charges
were recorded in the First Half of 1996.
o Research and Development
Research and development expenses were $1.6 million in the First Half of 1996, a
decrease of approximately $604,000 or 28% from the First Half of 1995. Research
and development expenses during 1995 were higher than normal because they
included the costs of developing the Company's new anatomic pathology services,
building the Company's database and reviewing, analyzing and clinically
evaluating existing as well as new technologies. The decrease in such expenses
in the First Half of 1996 was principally caused by the completion of
expenditures for the development of the new anatomic pathology services. It
should be expected that such research and development expenses will decline as a
percentage of sales in 1996 as compared to 1995.
<PAGE>
Research and development expenses were $775,000 in the Second Quarter of 1996, a
decrease of approximately $421,000 or 35% from the Second Quarter of 1995.
o Interest Income
During the First Half of 1996 interest income was earned on an average of $9
million of cash and cash equivalents for the period. Interest income was
approximately $230,000 for the First Half of 1996, an increase of $130,000 or
131% from the First Half of 1995 which was caused both by higher interest rates
and by investing over $4.6 million net cash proceeds from a private placement of
the Company's securities completed in October 1995. Interest income was
approximately $105,000 for the Second Quarter of 1996, an increase of $50,000 or
90% from the Second Quarter of 1995.
o Interest Expense
Interest expense was approximately $45,000 for the First Half of 1996, a
decrease of $30,000 or 40% from the First Half of 1995. The decrease in interest
expense was due to the retirement of a portion of the $3.5 million term loan
obtained in July of 1993 which bears interest at 6% per year. Interest expense
was approximately $21,000 for the Second Quarter of 1996, a decrease of $15,000
or 42% from the Second Quarter of 1995.
o Provision/(Benefit) for Income Taxes
Provision for income tax expense was $605,000 for the First Half of 1996,
representing an increase of approximately $756,000 from the First Half of 1995.
The effective tax rate was approximately 43% during both the First Half of 1996
and 1995.
o Net Income/(Loss)
As a result of the foregoing, the First Half of 1996 net income was $802,000, an
increase of approximately $1 million from a net loss in the First Half of 1995
of $197,000. During the Second Quarter of 1996, net income increased
approximately $867,000 from a net loss in the Second Quarter of 1995 of
$353,000.
Liquidity and Capital Resources
- - -------------------------------
As of June 30, 1996, the Company had total cash and cash equivalents of $7
million which were invested in U.S. Treasury money market mutual funds.
The Company had working capital of $15 million at June 30, 1996 and $17 million
at December 31, 1995. The working capital ratio was 3.5 to 1 at June 30, 1996
compared to 3.7 to 1 at December 31, 1995.
Domestic trade receivables, net, were $11.4 million as of June 30, 1996, an
increase of $2 million or 21% from December 31, 1995. The increase in trade
receivables was due to the increase in revenues during the First Half of 1996
over the comparable period of 1995. During the Second Quarter of 1996, the
average number of days sales in domestic trade receivables was approximately 74
days as compared to 83 days for the comparable period of 1995. The decrease in
days sales in domestic trade receivables was mainly due to the improvements in
claim processing by the Company's local Medicare carrier.
Capital expenditures during the First Half of 1996 were approximately $2.4
million, mainly for expansion of the Company's laboratory facilities as well as
replacements in the normal course of operations and automation of certain
existing laboratories. Approximately $301,000 related to construction in
progress to expand the Company's laboratory and office facilities.
In July 1993, the Company obtained a $3.5 million term loan from a bank that
bears interest at 6% per year. This term loan and accrued interest is repayable
in 47 monthly installments of approximately $82,000 which commenced in September
<PAGE>
1993 plus one final payment in August 1997 equal to the remaining unpaid
principal and interest. During 1995, the term loan agreement was modified to
revise certain financial covenants, including those with respect to tangible net
worth and debt service coverage requirements and limitations on certain
expenditures. During the Second Quarter of 1996, there were no changes in the
Company's existing debt agreements. Under such term loan, the Company has
outstanding principal in the amount of approximately $1.1 million as of June 30,
1996.
On October 5, 1995, the Company completed a $5,612,000 private placement with an
investor for 1 million shares of common stock and 800,000 two-year warrants
exercisable at $6.00 per share of common stock of the Company (except as
otherwise described below). The Company received cash of $5,316,000 and a
two-year promissory note for $296,000 bearing 7% interest. Some or all of the
warrants can be exercised at a price of $5.00 at any time on or before October
4, 1996. Upon such election the Company shall extinguish as an adjustment to the
purchase price paid for such warrants, for each such warrant for which such
election has been made, $0.37 of the principal amount of the note upon payment
of the interest due on such extinguished amount for the outstanding period. If
the 800,000 warrants are all exercised on or before October 4, 1996, the two
year promissory note for $296,000 will be fully extinguished. No such warrants
have been exercised as of June 30, 1996.
As of June 30, 1996, the Company has purchased 221,000 shares of its common
stock. The Company's Board of Directors has authorized open market purchases for
the Employee Stock Purchase Plan requirements totaling 300,000 shares and
further additional open market purchases of up to 800,000 to cover the
outstanding investor warrants which will expire in 1997.
The Company believes that cash flows from operations and available cash and cash
equivalents are adequate to fund the Company's operations for the foreseeable
future.
Risk Factors; Forward Looking Statements
- - ----------------------------------------
The Management's Discussion and Analysis contain forward-looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others, the uncertainties in reimbursement rates and
reimbursement coverage of various tests sold by the Company to beneficiaries of
the Medicare program; the uncertainties relating to the ability of the Company
to convince physicians and/or managed care organizations to use the Company as a
provider of anatomic pathology testing services; the ability of the Company to
maintain superior quality relative to its competitors; the ability of the
Company to maintain its hospital-based business in light of the competitive
pressures and changes occurring in hospital health care delivery; the
uncertainties relating to states erecting barriers to the performance of
anatomic pathology testing by out-of-state laboratories; the ability of the
Company to find, attract and retain above average medical, management and
technical personnel; the uncertainties associated with competitive pressures
from the large national laboratories, small specialized laboratories and well
established local pathologists; and the uncertainties which would arise if
integrated delivery systems closed to outside providers emerged as the dominant
form of health care delivery.
<PAGE>
PART II OTHER INFORMATION
Item 5 Other Information
-----------------
In April 1996, subject to Shareholder approval at the Annual
Meeting the Company adopted the 1996 Stock Incentive Plan (the "Plan").
The Plan authorizes 700,000 shares, of which 630,000 may be issued to
employees and 70,000 may be issued to Outside Directors.
The Company entered into an employment agreement with Kevin C.
Johnson on May 3, 1996 as the President of the Company. Salary and
other compensation are disclosed in the employment agreement filed
herewith as exhibit 10.37.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a Exhibits
10.37 Employment Agreement, dated May 3, 1996, by the registrant
and Kevin C. Johnson.
11.1 Statement regarding computation of per share earnings is
not required because the relevant computation can be
determined from the material contained in the Financial
Statements included herein.
27.1 Financial Data Schedule.
b Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIANON Systems, Inc.
August 14, 1996 /s/ KEVIN C. JOHNSON
--------------------
By: Kevin C. Johnson
President and
Principal Executive Officer
August 14, 1996 /s/ RICHARD A. SANDBERG
-----------------------
By: Richard A. Sandberg
Chairman and
Principal Financial and
Accounting Officer
<PAGE>
EXHIBIT INDEX
10.37 Employment Agreement, dated May 3, 1996, by the registrant and Kevin C.
Johnson (filed herewith).
27.1 Financial Data Schedule (filed herewith).
<PAGE>
EXHIBIT 10.37
-------------
This AGREEMENT made effective May 3, 1996 between DIANON SYSTEMS, INC., a
Connecticut corporation, and any successor thereto, hereinafter referred to as
the "Company", and KEVIN JOHNSON, residing at 694 Terrace Heights, Wyckoff,
New Jersey.
WITNESSETH:
WHEREAS, the Company wishes to employ Kevin Johnson and Kevin Johnson
wishes to accept such employment, in each case on the terms and subject to the
conditions set forth below; and
WHEREAS, the services that Kevin Johnson should render hereunder to the
Company are unique and valuable; and
WHEREAS, the parties desire to reduce the terms and conditions of Kevin
Johnson's employment to writing;
NOW, THEREFORE, In consideration of the terms and conditions and the mutual
covenants contained in this Agreement, the Company and Kevin Johnson hereby
agree as follows:
1. Employment
----------
The Company hereby employs Kevin Johnson as of the first full day of
service he provides to the Company hereunder which shall be no later than June
15, 1996 and Kevin Johnson hereby accepts such employment upon the terms and
conditions hereinafter set forth. The parties acknowledge that Kevin Johnson's
employment with the Company is at will and terminable by either party at any
time for any reason.
2. Duties and Responsibilities
---------------------------
Kevin Johnson shall perform with continuous diligence those activities
assigned to Kevin Johnson by the Company's Chief Executive Officer or, in the
absence of a Chief Executive Officer, its Board of Directors. Commencing with
the first full day of service he provides to the Company hereunder Kevin Johnson
will be elected as President of the Company.
3. Directorship
------------
During the term of this Agreement, the Company will use its best efforts to
have Kevin Johnson elected to its Board of Directors. Upon any event of
Termination as set forth in paragraph 10, Kevin Johnson agrees to submit his
resignation as a director of the Company at the request of a majority of the
Board of Directors.
4. Term
----
This Agreement shall begin on the effective date hereof and continue until
terminated under the terms contained herein.
5. Salary and Incentive Compensation
---------------------------------
The Company shall compensate Kevin Johnson for his services during the term
of this Agreement commencing with the first full day of service he provides to
the Company hereunder on a salaried basis paid in installments at a rate
determined by the Company from time to time, provided that the initial base
salary shall be at an annualized rate of $275,000. Commencing with the first
full day of service he provides to the Company hereunder, Kevin Johnson shall
also participate, according to its terms, in any management incentive
<PAGE>
compensation program maintained by the Company for salaried Grade 19 management
employees of the Company during the term of this Agreement.
6. Fringe Benefits
---------------
During the terms of this Agreement, commencing with the first full day of
service he provides to the Company hereunder, the Company shall provide Kevin
Johnson benefits and emoluments as authorized for all other salaried Grade 19
management employees of the Company as they may be modified from time to time by
the Company during the term of this Agreement, including at the time of
execution of this Agreement, health and medical insurance, life insurance, sick
leave, vacation, holidays, retirement plan participation and stock purchase plan
participation.
7. Stock Options
-------------
Upon execution of this Agreement, the Company shall award Kevin Johnson
Non-Plan Non-ISO stock options to purchase 200,000 shares of common stock of the
Company at the fair market value on said date, on terms, conditions, vesting
schedules and expiration dates which are substantially equivalent to the stock
option award document attached to this Agreement as Exhibit A (3).
8. Loan and Signing Bonus
----------------------
Upon execution of this Agreement, Kevin Johnson shall earn, payable upon
his first day of employment, a signing bonus of $50,000 (subject to appropriate
withholding taxes) payable by the Company and the Company will lend him one
hundred fifty-thousand dollars ($150,000) for the purpose of purchasing a home.
Interest on said loan shall be paid by Kevin Johnson annually at the rate of
5.9% or according to Internal Revenue Service standards, whichever is less. The
Company shall make payments in addition to base salary payments in an amount
equal to Kevin Johnson's interest payment on such loan. This loan shall be
repayable at any time, but shall fall due in total principal amount on Kevin
Johnson's termination date; provided that, should Kevin Johnson's employment
with the Company continue without notice of intent to terminate having been
given by either party, the Company shall forgive said loan at the rate of $2,500
per complete month of employment commencing January 31, 1998 and continuing
through December 31, 2002 and shall adjust income tax withholding from Kevin
Johnson's salary as appropriate.
9. Stock Grants
------------
Provided Kevin Johnson's employment with the Company continues through the
dates below without notice of intent to terminate having given by either party,
the Company shall issue to Kevin Johnson 15,000 shares of common stock of the
Company on January 2, 1997 and 15,000 shares of common stock of the Company on
January 2, 1998. Kevin Johnson agrees not to sell any such stock for a period of
six months from the date of such grant.
10. Termination
-----------
(a) This Agreement shall terminate on any of the following occurrences:
(i) Kevin Johnson's death;
(ii) Kevin Johnson's disability for a period of 90 days or more
unless waived by the Board of Directors;
(iii) mutual agreement of the parties reduced to writing signed by
both parties;
(iv) voluntary resignation by Kevin Johnson;
(v) termination by the Company without Stated Cause;
<PAGE>
(vi) termination by the Company with Stated Cause.
(b) Cause shall mean Kevin Johnson's
(i) gross negligence
(ii) insubordination;
(iii) willful misconduct;
(iv) failure to commence full time employment on or before June 15,
1996 without the consent of the Company.
(c) "Stated Cause" shall mean Cause communicated to Kevin Johnson by the
Company in a Notice of Termination.
(d) "Notice of Termination" shall mean written notice given by either
party to the other of an intention to terminate this Agreement
pursuant to subparagraphs (a) (iv), (v) or (vi) of this Paragraph of
this Agreement.
(e) Notice of Termination shall be sent by certified mail or registered
mail, return receipt requested, first class postage prepaid, to the
residence in the case of Kevin Johnson, and to its principal office in
the Town of Stratford, Connecticut, to the attention of the Chief
Executive Officer and to each member of the Board of Directors in the
case of the Company.
(f) The "Termination Date" shall be the date Kevin Johnson ceases
providing services to the Company as an employee.
11. Compensation after Termination
------------------------------
(a) If Kevin Johnson terminates this Agreement any time after executing
this Agreement, and Kevin Johnson continues or resumes employment with
the company by which he was employed on April 5, 1996 or any successor
thereto within six months after such termination, then Kevin Johnson
shall pay the Company $175,000.
(b) Kevin Johnson will not receive any compensation from the Company
after the Termination Date other than accrued, unused vacation, except
as described under Paragraph (c) of this Section of this Agreement, if
applicable. Kevin Johnson's participation in all fringe benefits
offered by the Company to its employees will cease immediately on the
Termination Date except as described in Paragraph (c) of this Section
of this Agreement, if applicable. Nothing in this Agreement, however,
is intended to impair any rights vested under the law in any benefit
plan in the Company.
(c) If this Agreement and Kevin Johnson's employment with the Company
is terminated by the Company without Stated Cause:
(i) For a period of one year beginning with the Termination
Date the Company will pay Kevin Johnson at his rate of base
pay determined as of the day preceding the Termination Date.
(ii) During said one year period, Kevin Johnson shall act as a
consultant to the Company as requested by the Company for up
to six days per month.
<PAGE>
(iii) During said one year period, the Company will contribute
towards the premium cost of medical continuation coverage for
Kevin Johnson and/or his dependents on the same basis as it
then contributes towards the medical coverage of active
employees and/or their dependents, for any months in said
period during which Kevin Johnson and/or his dependents are
eligible and elect to continue such coverage.
(iv) During said one year period the Company will continue to
provide Kevin Johnson any car allowance Kevin Johnson was
receiving at the time of the Termination Date.
(v) During said one year period, the Company will not demand
repayment of the balance of the loan made pursuant to
Paragraph 8 of this Agreement.
(vi) During said one year period, the Company will pay up to
$10,000 for outplacement services for Kevin Johnson provided
by an outplacement provider of Kevin Johnson's choice.
12. Company Property
----------------
On the Termination Date, or at any earlier point in time after a Notice of
Termination is received when a request is made by the Company for same, Kevin
Johnson will turn over to the Company all notes, reports, memoranda, books,
records, chemicals, devices and documents, whether in written, typewritten,
computerized or any other form, which are in Kevin Johnson's possession or under
his control, whether prepared by him or others, related to the Company or
relating to the business of the Company. At the conclusion of the one year
period described in paragraph (c) of Section 11 of this Agreement, or at any
earlier point in time when a request is made by the Company for same, Kevin
Johnson shall also return to the Company any Company car, keys, parking card,
credit card, business cards or other materials related to this employment with
the Company or the operation of the Company.
13. Proprietary Information
-----------------------
Kevin Johnson hereby agrees to all the terms and conditions of the
Company's Employee Proprietary Information Agreement attached hereto as Exhibit
B and incorporated herein and has executed a copy thereof concurrently with this
Agreement.
14. Non-Competition
---------------
Kevin Johnson agrees that, to the fullest extent permitted by law, for the
period of one (1) year after his termination date (unless his termination
occurs, and payment to the Company is made, as described in paragraph (a) of
Section 11 of this Agreement), Kevin Johnson (a) will not solicit business on
behalf of any entity in the clinical chemistry business, which is performing or
marketing anatomic pathology services other than PAP tests ("Competing Entity"),
(b) will not solicit business from customers of the Company, (c) will not
solicit the employment or services of any of the employees of the Company and
(d) will not, directly or indirectly, participate in the ownership, management,
operation or control of any Competing Entity in the continental United States
other than California, Washington and Oregon, provided that nothing in this
Paragraph shall prevent investment ownership of less than 5% of the shares of a
publicly traded Competing Entity.
15. Remedy for Breach
-----------------
Kevin Johnson acknowledges:
(a) that he may be a director and officer of the Company and as such he
would be conversant with, and have access to, the business affairs,
records, trade secrets, customers and customer lists, suppliers,
supplier lists, patents, technical know-how, chemicals, devices, sales
or distribution agents and representatives, sales or distribution
agents and representatives' lists, and other confidential and
proprietary information of the Company; and
<PAGE>
(b) that his compliance with the covenants and agreements in this
Agreement is necessary to protect the goodwill and other proprietary
interest of the Company; and
(c) that a breach of his covenants and agreements in this Agreement will
result in continuing and irreparable damage to the Company for which
there will be no adequate remedy at law.
Both the parties recognize that the services to be rendered under this
Agreement by Kevin Johnson are special and unique and of an extraordinary
character, and that in the event there is a breach by Kevin Johnson of the terms
and conditions of this Agreement to be performed by him, then the Company shall
be entitled, if it so elects, to institute and prosecute proceedings in any
court of competent jurisdiction either in law or in equity, to obtain damages
for any breach of this Agreement, or to enforce the specific performance thereof
by Kevin Johnson, or to enjoin Kevin Johnson from performing services for any
Competing Entity. The parties further recognize and agree that breach by Kevin
Johnson of his obligations under Sections 12, 13 or 14 of this Agreement shall
relieve the Company of its obligations under paragraph (c) of Section 11 of this
Agreement but that such relief shall not be an adequate remedy at law.
16. Kevin Johnson's Representation
------------------------------
Kevin Johnson warrants and represents that neither the execution and
delivery nor the performance of this Agreement by him will in any way violate,
or conflict with, any other agreement by which he may be bound or any duty or
obligation to which he may be subject and that he will take all steps necessary
to comply with the representation.
17. Assignments
-----------
The rights and obligations of Kevin Johnson under this Agreement shall be
assignable to and binding upon the successors and assigns of the Company
including any corporation organized by the Company to carry on the business of
the Company.
18. Entire Agreement
----------------
This instrument contains the entire Agreement of the parties. It may not be
changed orally, but only by agreement in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes any verbal, written or other agreement(s) or
understanding(s) existing between Kevin Johnson and the Company relating to his
employment or the other matters covered herein.
19. Severability
------------
If any provision of this Agreement shall be held invalid, such invalidity
shall not affect any other provisions of this Agreement not held so invalid, and
only such provisions shall to the full extent consistent with the law remain in
full force and effect.
<PAGE>
20. Applicable Law
--------------
This Agreement shall be governed by the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties have executed or caused to be executed this
Agreement.
DIANON SYSTEMS, INC.
5/3/96 By: /s/ Richard A. Sandberg
- - ------ -----------------------
Date Richard A. Sandberg
5/3/96 By: /s/ Kevin Johnson
- - ------ -----------------------
Date Kevin Johnson
<PAGE>
Exhibit B
---------
AGREEMENT
THIS AGREEMENT, made this 3rd day of May, 1996 by and between DIANON
SYSTEMS, INC., its affiliates, subsidiaries, successors and assigns
(collectively called hereinafter "DIANON") and Kevin Johnson, an individual
residing at 694 Terrace Heights, Wyckoff, New Jersey 07481 (hereinafter called
"Employee").
In consideration of the commencement of Employee's employment with DIANON,
the payment of compensation and benefits for such employment, and access to
sensitive information, Employee and DIANON acknowledge, represent and agree to
the terms and conditions set forth in this Agreement.
1. Employee's employment with DIANON creates a relationship of trust and
confidence between the parties. Employee agrees that, during and after
his/her employment with DIANON, Employee will not use or disclose, or allow
anyone else to use or disclose any confidential information relating to the
products, sales and/or business affairs of DIANON or of any customer or
supplier of DIANON, or any information created, discovered, or developed by
or for DIANON, or acquired by DIANON, that has commercial value in DIANON's
present or future business ("Confidential Information"), except as may be
necessary in the performance of Employee's employment with DIANON or as may
be authorized in advance by appropriate officials of DIANON. By way of
illustration, but not limitation, Confidential Information includes
processes, formulas, data, know-how, inventions, improvements, techniques,
marketing plans, product plans, strategies, forecasts, customer lists and
any other information Employee has reason to know DIANON would like to
treat as confidential for any purpose. Employee agrees to keep Confidential
Information secret whether or not any document containing such information
is marked confidential.
2. All rights, title and interest in all records, documents, or files
concerning the business of DIANON, including, but not limited to,
biomaterials, processes, letters, trade secrets, laboratory notebooks or
other written or electronically recorded material, whether or not produced
by the Employee, shall be and remain the property of DIANON. Upon
termination of employment, the Employee shall not have the right to remove
any such records from the offices of DIANON. In addition, Employee agrees
to promptly return to DIANON all things of whatsoever nature that belong to
DIANON, and all records (in whatsoever form, format or medium) containing
or related to Confidential Information of DIANON.
3. Employee agrees to assign, and does hereby assign to DIANON, all of
his/her right, title and interest in and to all inventions, improvements,
discoveries or technical developments, whether or not patentable, which
he/she solely or jointly with others, may conceive or reduce to practice
during the term or his/her employment (a) which are related in whole or in
part, directly or indirectly, to DIANON's product line, research and
development, or field of technological or industrial specialization, or (b)
in the course of utilization by DIANON of Employee's services in a
technical of professional capacity in the areas of research, development,
marketing, management, engineering or manufacturing, or (c) pursuant to any
project of which Employee is or was a participant or member that is or was
either financed or directed by DIANON, or (d) at DIANON's expense, in whole
or in part.
4. Employee agrees to disclose promptly to DIANON's Chief Executive Officer
or his designee, all ideas, discoveries, and improvements conceived by
Employee alone or in collaboration with others, and to cooperate fully with
DIANON, both during and after employment, with respect to the procurement
of patents for the establishment and maintenance of DIANON's or its
designee's rights and interests in said invention, improvement, discoveries
or developments, and to sign all papers which DIANON may deem necessary or
desirable for the purpose of vesting DIANON or its designees with such
rights, the expenses thereof to be paid by DIANON.
<PAGE>
5. The Employee shall, while employed by DIANON, devote his/her best
efforts and his/her full-time to the business of DIANON.
6. In the event of a breach or threatened breach of the provisions in this
Agreement, DIANON shall be entitled to an injunction restraining such
breach, it being recognized that any injury arising form a breach would be
irreparable and could have no adequate remedy at law; but nothing herein
shall be construed as prohibiting DIANON from pursuing any other remedy
available for such breach or threatened breach. In the event that Employee
breaches or threatens of a breach of this Agreement, DIANON shall be
entitled to have its reasonable legal fees and costs paid by the Employee
for any legal services relating to the breach or threatened breach.
7. This Agreement is not intended, and should not be construed in any way ,
as a contract of employment for a defined period of time or to limit or
restrain DIANON's or the Employee's right to terminate the employment
relationship at any time.
8. In the event any provision or paragraph of this Agreement is declared to
be invalid or unenforceable, then the balance of this Agreement shall
remain in full force and effect.
9. This Agreement shall be construed and enforced in accordance with the
laws of the State of Connecticut.
10. The foregoing contains the entire Agreement between the parties
pertaining to confidential DIANON documents and information. No
modification thereof shall be binding upon the parties unless the same is
in a writing signed by the respective parties, This Agreement and all of
the terms and conditions contained herein shall remain in full force during
the period of employment notwithstanding any changes in compensation.
11. Employee represents and warrants that he/she has no other agreements or
commitments that would hinder or prevent performance of his/her job
responsibilities with DIANON. Unless authorized to do so, Employee agrees
not to disclose to DIANON or use in his/her employment with DIANON any
invention or confidential information belonging to any former employer or
to any other person other than DIANON.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date set forth below.
Employee: DIANON SYSTEMS, INC.
- - --------------------------------- By:------------------------------
Date: ----------------------- Date: -----------------
<PAGE>
EXHIBIT A(3)
------------
DIANON SYSTEMS, INC.
200 Watson Boulevard
Stratford, Connecticut 06497
SO Grant No.
NON-ISO STOCK OPTION GRANT
Optionee: Kevin C. Johnson Date of Grant: May 3, 1996
Termination Date: May 3, 2006 Total No. of Shares: 200,000
Exercise Price Per Share $5.69
We are pleased to inform you that the Compensation Committee of the Board of
Directors of DIANON Systems, Inc. (the "Company"), has granted you an option to
purchase an aggregate number of shares shown above of the Common Stock of the
Company. The capitalized terms used in this letter are used as defined in the
Company's 1996 Stock Incentive Plan (the "Plan") as adopted by the Board of
Directors. This option is not issued pursuant to such plan. This option is
issued on the following terms and conditions:
1. The purchase price per share of the shares of Common Stock subject to
this option is $5.69 per share.
2. This option shall expire at the close of business on May 2, 2006.
Subject to acceleration in the event of a Change of Control (as defined in the
Plan), you must remain in the employ of the Company or a Related Company (as
defined in the Plan) for two years from the date hereof before you can exercise
any part of this option. Thereafter this option will become exercisable in
installments as follows:
<TABLE>
<CAPTION>
Percentage of Shares Date of Earliest Exercise (Vesting)
-------------------- -----------------------------------
<S> <C>
40% 5/3/98
20% 5/3/99
20% 5/3/00
20% 5/3/01
</TABLE>
In the event of a Change of Control this option shall become
fully exercisable and vested.
3. This option is not intended to qualify as an "Incentive Stock Option"
within the provisions of Section 422 of the Internal Revenue Code.
4. The option price shall be payable by you at the time this option is
exercised, (i) in cash or (ii) by delivering shares of Common Stock of the
Company which you have owned for at least six months prior to such exercise, or
a combination of cash and such shares, having an aggregate value equal to the
aggregate option price of the shares as to which this option is exercised
(basing the value of any such shares of Common Stock on the fair market value of
the Common Stock on the date of exercise as set forth in the Plan). No shares of
Common Stock shall be issued pursuant to exercise of this option until full
payment therefor has been made.
5. This option may be exercised only by you and may not be transferred
except by will or the laws of descent and distribution. In the event of your
death, your legal representatives may exercise this option as to the shares of
Common Stock which were immediately purchasable by you at the date of death,
within ninety (90) days following the date of death (but in no event later than
May 2, 2006).
<PAGE>
6. If your employment with the Company terminates after reaching your
normal retirement date under the Company's retirement plan or for any reason
beyond your control other than your death, your option privileges shall be
limited to the shares of Common Stock which were immediately purchasable by you
at the date of such termination and such option privileges shall expire unless
exercised within ninety (90 days) days after the date of such termination and
prior to the close of business on May 2, 2006. If your employment is terminated
for reasons within your control, including without limitation, cause and
voluntary resignation, all rights under this option shall expire on the date of
such termination.
7. Your option is granted in tandem with a Limited Stock Appreciation Right
("LSAR") which may be exercised only within the 60-day period following a Change
of Control (as defined in the Plan). This means that with respect to each share
under option, you may exercise either the option or the Limited Stock
Appreciation Right, but not both. Upon exercise of the Limited Stock
Appreciation Right, you shall receive, for each share with respect to which the
Limited Stock Appreciation Right is exercised, an amount equal in value to (i)
the fair market value of a share of Common Stock on the date of exercise over
(ii) the exercise price of the related option. The Limited Stock Appreciation
Right shall be payable solely in cash. Such amount shall be paid within 30 days
of the exercise of the Limited Stock Appreciation Right.
8. The Company has the right to delay the exercise of your option if
listing registration or qualification of the Common Stock is required under any
federal or state securities law or stock exchange or similar rule and has not
been obtained.
9. Nothing herein shall restrict the right of the Company or any Related
Company to terminate your employment at any time, with or without cause, or to
withhold required amounts upon the exercise of your option or LSAR. The Company
shall have the right to require you to pay, or make other arrangements
satisfactory to the Committee to satisfy, all tax withholding obligations in
connection with the exercise of your option of LSAR.
10. This option shall be interpreted and administered by the Compensation
Committee of the Board of Directors, whose determinations shall be final and
binding.
Very truly yours,
DIANON Systems, Inc.
By: ---------------------------
Richard A. Sandberg
Chairman, President and CEO
Date:--------------------
- - -----------------------------------
(Signature)
- - -----------------------------------
(Address)
- - -----------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 7,051
<SECURITIES> 50
<RECEIVABLES> 11,532
<ALLOWANCES> 787
<INVENTORY> 569
<CURRENT-ASSETS> 20,971
<PP&E> 14,820
<DEPRECIATION> 7,476
<TOTAL-ASSETS> 29,504
<CURRENT-LIABILITIES> 5,944
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 23,233
<TOTAL-LIABILITY-AND-EQUITY> 29,504
<SALES> 26,093
<TOTAL-REVENUES> 26,093
<CGS> 12,620
<TOTAL-COSTS> 12,620
<OTHER-EXPENSES> 12,251
<LOSS-PROVISION> 0
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</TABLE>
