SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-19392
DIANON SYSTEMS, INC.
(exact name of registrant as specified in its charter)
Delaware 06-1128081
(State of incorporation) (IRS Employer Identification No.)
200 Watson Blvd, Stratford, CT 06497
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 381-4000
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of registrant's Common Stock, $.01 par value, outstanding
on August 7, 1997 was 6,456,480 shares.
Exhibit Index on page 15 of 35 pages.
<PAGE>
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
Item 1. FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996. 3
Consolidated Statements of Operations for the three month and six month 4
periods ended June 30, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the twelve
months 5 ended December 31, 1996 and the six months ended June
30, 1997.
Consolidated Statements of Cash Flows for the six months ended June 30, 6
1997 and 1996.
Notes to Consolidated Financial Statements. 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 8-12
OF OPERATIONS
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 11,229,132 $ 7,488,590
Accounts receivable, net of allowances of $1,027,705
and $1,056,920, respectively .................................. 12,729,153 15,426,221
Prepaid expenses and employee advances ............................. 1,262,160 1,189,139
Prepaid and refundable income taxes ................................ 455,964 329,371
Inventory .......................................................... 785,689 662,567
Deferred income tax asset .......................................... 677,277 677,277
------------ ------------
Total current assets .................................................... 27,139,375 25,773,165
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment .................................... 13,051,161 12,233,989
Leasehold improvements ............................................. 3,691,400 3,612,198
Less - accumulated depreciation and amortization ................. (9,540,726) (8,606,176)
------------ ------------
7,201,835 7,240,011
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,099,436 and $2,991,286, respectively ............................ 496,171 604,313
DEFERRED INCOME TAX ASSET ............................................... 458,465 458,465
OTHER ASSETS ............................................................ 359,373 459,696
============ ============
TOTAL ASSETS ................................................... $ 35,655,219 $ 34,535,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 1,211,620 $ 2,123,661
Accrued employee bonuses, commissions and payroll .................. 1,234,039 1,504,430
Accrued employee stock purchase plan ............................... 916,728 549,540
Current portion of capitalized lease obligations ................... 40,910 26,107
Current portion of note payable .................................... 170,663 650,154
Other accrued expenses ............................................. 5,221,623 2,861,268
------------ ------------
Total current liabilities .................................... 8,795,583 7,715,160
------------ ------------
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS ...................... 126,450 69,611
DEFERRED INCOME TAX LIABILITY ........................................... 201,951 201,951
------------ ------------
TOTAL LIABILITIES ............................................ 9,123,984 7,986,722
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 6,759,857 and 6,712,774 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively ... .......... 67,599 67,128
Additional paid-in capital ......................................... 28,221,558 27,965,560
Accumulated earnings/(deficit) ..................................... 894,234 (554,317)
Common stock held in treasury, at cost - 319,206 and 117,196 shares
at June 30, 1997 and December 31, 1996, respectively ............... (2,652,156) (929,443)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ..................................... 26,531,235 26,548,928
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 35,655,219 $ 34,535,650
============ ============
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these balance sheets.
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES ............................... $16,056,419 $13,674,329 $31,657,574 $26,093,148
COST OF GOODS .............................. 7,882,516 6,480,922 15,755,015 12,619,810
----------- ----------- ----------- -----------
Gross Profit ............................ 8,173,903 7,193,407 15,902,559 13,473,338
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,380,501 5,601,680 12,597,983 10,668,861
RESEARCH & DEVELOPMENT EXPENSES ............ 460,860 775,180 968,565 1,582,081
----------- ----------- ----------- -----------
Income from Operations .................. 1,332,542 816,547 2,336,011 1,222,396
INTEREST INCOME ............................ 132,237 105,247 224,127 229,792
INTEREST EXPENSE ........................... 8,018 20,539 18,821 44,740
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes 1,456,761 901,255 2,541,317 1,407,448
PROVISION FOR INCOME TAXES ................. 626,407 387,540 1,092,766 605,203
----------- ----------- ----------- -----------
Net Income .............................. $ 830,354 $ 513,715 $ 1,448,551 $ 802,245
=========== =========== =========== ===========
Weighted Average Shares Outstanding ........ 6,862,097 6,142,743 6,848,693 6,195,835
----------- ----------- ----------- -----------
Primary and Fully Diluted Earnings Per Share $ 0.12 $ 0.08 $ 0.21 $ 0.13
=========== =========== =========== ===========
</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, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Common Stock
Additional Acquired for Acquired for Shareholder
Common Stock Paid-In Accumulated Treasury, Treasury, Note
Shares Amount Capital Deficit Shares at Cost Receivable Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 .... 6,311,451 $63,115 $ 26,609,657 ($2,724,433) (50,000) ($ 200,000) ($ 296,000) $23,452,339
Stock options exercised ... 23,621 236 107,476 -- -- -- -- 107,712
Exercise of warrants net of
exercise costs........... 377,702 3,777 1,536,540 -- 422,298 2,478,889 -- 4,019,206
Common stock acquired for
treasury ................ -- -- -- -- (489,494) (3,208,332) -- (3,208,332)
Extinguishment of share-
holder note receivable .. -- -- (296,000) -- -- -- 296,000 --
Stock compensation expense -
stock options ......... -- -- 7,887 -- -- -- -- 7,887
Net Income ................ -- -- -- 2,170,116 -- -- -- 2,170,116
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 .... 6,712,774 67,128 27,965,560 (554,317) (117,196) (929,443) -- 26,548,928
Stock options exercised ... 22,531 225 102,516 -- -- -- -- 102,741
Employee stock purchase
plan options exercised .. -- -- (57,568) -- 14,990 124,567 -- 66,999
Stock grants .............. 24,552 246 211,050 -- -- -- -- 211,296
Common stock acquired
for treasury ............ -- -- -- -- (217,000) (1,847,280) -- (1,847,280)
Net Income ................ -- -- -- 1,448,551 -- -- -- 1,448,551
---------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 ........ 6,759,857 $67,599 $28,221,558 $ 894,234 (319,206) ($2,652,156) $ -- $26,531,235
===================================================================================================
</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 MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,448,551 $288,530
Adjustments to reconcile net income to net cash provided by (used
in) operations -
Non-cash charges
Depreciation and amortization 1,338,546 497,088
Stock compensation expense 211,296 --
Loss on the disposal of fixed assets 40,914 18,845
Investment write-down -- 4,053
Changes in other current assets and liabilities
Decrease (increase) in accounts receivable 2,697,068 (1,328,664)
(Increase) decrease in prepaid expenses and employee advances (199,614) 433,819
(Increase) in inventory (123,122) (41,064)
Decrease (increase) in other assets 80,430 (4,443)
Increase (decrease) in accounts payable and accrued liabilities 1,582,892 (551,319)
--------------- ------------
Net cash provided by (used in) operating activities 7,076,961 (683,155)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,316,271) (541,080)
Proceeds from the sale of stock held for investment 9,064 57,530
Proceeds from the disposal of fixed assets -- 7,500
--------------- ------------
Net cash (used in) investing activities (1,307,207) (476,050)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable (479,491) (223,939)
Borrowings (repayments) of capitalized lease obligations 127,819 (15,171)
Purchase of common stock acquired for treasury (1,847,280) (67,500)
Stock options exercised 102,741 --
Employee stock purchase plan options exercised 66,999 --
--------------- ------------
Net cash (used in) financing activities (2,092,212) (306,610)
--------------- ------------
Net increase (decrease) in cash and cash equivalents 3,740,542 (1,465,815)
CASH AND CASH EQUIVALENTS, beginning of period 7,488,590 10,990,231
--------------- ------------
CASH AND CASH EQUIVALENTS, end of period $11,229,132 $9,524,416
=============== ============
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $18,999 $24,272
Income Taxes 1,157,417 458
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY - The consolidated balance sheet as of June 30, 1997, the
related consolidated statements of operations for the three and six month
periods ended June 30, 1997 and 1996, the related consolidated statements
of cash flow for the six months ended June 30, 1997 and 1996, and the
related consolidated statements of stockholders' equity for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997 have
been prepared by DIANON Systems, Inc. (the "Company") without audit. In the
opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows at June 30, 1997
and 1996 have been made. During the interim periods reported on, the
accounting policies followed are in conformity with generally accepted
accounting principles and are consistent with those applied for annual
periods and described in the Company's annual report filed on Form 10-K
with the Securities and Exchange Commission on March 31, 1997 (the "Annual
Report").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
included in the Company's Annual Report for the year ended December 31,
1996. The results of operations for the six months ending June 30, 1997 and
1996 are not necessarily indicative of the operating results for the full
years.
2. DESCRIPTIVE ANALYSIS - The descriptive analysis contained herein compares
the financial results of the first six months ended June 30 for the years
1997 and 1996. To accommodate the comparison of pertinent financial
information the following terms will be used to denote the respective
periods:
"First Half 1997" - six months ended June 30, 1997 "First Half 1996" - six
months ended June 30, 1996
"Second Quarter 1997" - three months ended June 30, 1997 "Second Quarter
1996" - three months ended June 30, 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
RESULTS OF OPERATIONS
- ---------------------
o NET REVENUES
Net revenues were $31.7 million during the First Half 1997, an increase of $5.6
million or 21% from the First Half 1996. Increased revenues were attributable to
increased market penetration by the Company's anatomic pathology testing
services. The increase in anatomic pathology testing services in the First Half
1997 over the comparable period of 1996 was offset to some extent by a decrease
in clinical chemistry and hospital based tissue testing services.
Net revenues were $16.1 million during the Second Quarter 1997, an increase of
$2.4 million or 17% from the Second Quarter 1996. Increased revenues were
attributable to increased market penetration by the Company's anatomic pathology
testing services.
o COST OF GOODS
Cost of goods, which consists primarily of salaries and wages, laboratory
supplies, outside services, logistics (primarily shipping and handling), and
depreciation expense, was $15.8 million during the First Half 1997, an increase
of $3.1 million or 25% from the First Half 1996. Salaries and wages were
approximately $5.3 million in the First Half 1997, an increase of $1.3 million
or 34% from the First Half 1996. This increase was principally due to increased
laboratory and physician employment incurred to support increased anatomic
pathology testing services. Laboratory supplies decreased to 8.8% of net
revenues in the First Half 1997 from 10.5% in the First Half 1996. This decrease
was the result of cost efficiencies. Logistics were $3.1 million in the First
Half 1997, an increase of $1.2 million or 59% from the First Half 1996. The
increase in logistic costs was principally due to supporting new anatomic
pathology testing services. As a percentage of net revenues, cost of sales
increased to 50% during the First Half 1997 from 48% during the First Half 1996.
Cost of goods was $7.9 million during the Second Quarter 1997, an increase of
$1.4 million or 22% from the Second Quarter 1996. As a percentage of net
revenues, cost of sales increased to 49% in the Second Quarter 1997 from 47% in
the Second Quarter 1996.
o GROSS PROFIT
Gross profits were $15.9 million during the First Half 1997, an increase of $2.4
million or 18% from the First Half 1996. The Company's gross profit margin
decreased to 50% in the First Half 1997 from 52% in the First Half 1996. The
decrease in gross profit margin was due to the continued erosion of the average
unit price reimbursed for certain clinical chemistry testing services and the
higher costs associated with providing anatomic pathology testing services.
Gross profits were $8.2 million during the Second Quarter 1997, an increase of
$980,000 or 14% from the Second Quarter 1996. The Company's gross profit margin
decreased to 51% in the Second Quarter 1997 from 53% in the Second Quarter 1996.
The clinical laboratory industry, which includes both clinical chemistry and
anatomic pathology, has seen steady downward pressure on prices exerted by both
government and private third party payors. Also, payment for services such as
those provided by the Company is and likely will continue to be affected by
periodic reevaluations made by payors concerning which services to reimburse and
which to cease reimbursing. A reduction in reimbursement rates, particularly by
Medicare, has generally decreased the average unit price for most of the
Company's clinical chemistry services each year. In keeping with this trend, as
part of the Omnibus Budget Reconciliation Act of 1993 ("OBRA `93"), Congress
reduced over time the national cap on Medicare laboratory fee schedules. This
national cap has been lowered each year and is now 76% of the national median.
Under the provisions of the Budget Reconciliation Act recently adopted by
Congress, the cap would be lowered further to 74% beginning in 1998. OBRA `93
<PAGE>
also eliminated the annual updates of Medicare laboratory fee schedules for the
years 1994 and 1995. After updates of 3.2% in 1996 and approximately 2.7% in
1997, the terms of the Budget Reconciliation Act recently adopted would freeze
fee schedule payments for the 1998 - 2002 period.
The Budget Reconciliation Act does include the addition of coverage for a
yearly screening pap smear for Medicare beneficiaries at high risk of developing
cervical or vaginal cancer and for beneficiaries of childbearing age who had not
had a negative test in each of the preceding three years, as well as coverage
for annual prostate cancer screening, including a prostate-specific antigen
blood test, for beneficiaries over age 50. Although most women of childbearing
age and men under age 65 are not Medicare beneficiaries, the addition of
Medicare coverage for these tests could provide additional revenues for the
Company.
With respect to the Company's tissue testing services which are reimbursed
under the physician fee schedules rather than the Medicare laboratory fee
schedules, the Medicare fees for these services also generally declined with the
implementation of the resource based relative value scale ("RBRVS") system which
went into effect in 1992 and was fully phased in by the end of 1996. The
Medicare RBRVS payment for each service is calculated by multiplying the total
relative value units ("RVUs") established for the services by a conversion
factor that is set by law. The number of RVUs assigned to each service is in
turn calculated by adding three separate components, including one representing
the relative work values. Although the conversion factor for nonsurgical
services, including pathology, is currently $33.8454, the Budget Reconciliation
Act recently adopted by Congress includes a provision that merges the three
existing conversion factors into one, for all types of services provided. The
Health Care Financing Administration (the "HCFA") has estimated this single
factor will be $37.13 - an increase of 9.7% over the 1996 conversion factor
applicable to pathology services.
There was an overall decrease of 5.7% between 1996 and 1997 in payments for
pathology services, plus an additional decrease in Connecticut due to HCFA's
reduction of the number of different payment localities recognized for RBRVS
purposes, at the beginning of 1997, HCFA published proposed regulations which
recalculate a key component of the RBRVS fee schedule. This recalculation would
modify the practice expense RVUs to reflect resource consumption, rather than
the historical charge data used to establish the original practice expense RVUs.
Overall, HCFA's predicted impact of resource-based practice expense RVUs on
Medicare income of pathologists is an increase of 1%. Of course, the actual
impact on Medicare pathology revenues would depend on the mix of pathology
services furnished. Moreover, under the Budget Reconciliation Act recently
adopted by Congress, implementation of resource based practice expense RVUs will
not begin until 1999, and will be phased in over the period 1999 - 2002. In
addition, disclosure and evaluation of the methodology used by HCFA to support
its proposal will be required. In the past, RBRVS program implementation and
modification has had the effect of reducing prices, and thus the gross profit,
of the Company. Overall, the Company does not expect projected future RBRVS
adjustments to change this trend.
Other changes in government and other third-party payor reimbursement which may
come about as a consequence of the enactment of current and future health care
reform or deficit reduction measures are likely to continue the downward
pressure on prices and make the market for clinical laboratory services more
competitive.
For example, the Budget Reconciliation Act recently adopted by Congress would
revise the Medicare program substantially to permit beneficiaries to choose
between traditional fee-for-service Medicare and several non-traditional
Medicare options, including managed care plans and provider-sponsored
organization plans. These non-traditional Medicare plans would have considerable
discretion in determining whether and how to cover and reimburse laboratory
services and also have discretion to limit the number of labs with which they
deal.
The Budget Reconciliation Act also includes provisions to implement competitive
bidding for certain Medicare items and services, including laboratory services,
on a three-site demonstration project basis. If later adopted on a widespread
basis, these changes likely would have an adverse impact on the Company's
revenues, and thus on its gross profit.
<PAGE>
Finally, the Budget Reconciliation Act recently adopted contains measures to
establish market-oriented purchasing for Medicare, including prospective payment
systems for outpatient hospital services, home health care and nursing home
care, and the use of global payments and flexible purchasing. Although the
details of these measures are yet to be finalized, they probably would increase
pressure on pricing in the laboratory industry and may have an adverse impact on
the Company's revenues.
Because of the uncertainties about how the Medicare changes such as those just
described will be implemented, the Company currently is unable to predict their
ultimate impact on the laboratory industry generally or on the Company in
particular. Reforms may also occur at the state level as well as the federal
level and, in addition, changes are occurring in the marketplace as a result of
market pressures, as the number of patients covered by some form of managed care
is increasing. In the past, the Company has offset a substantial portion of the
impact of price decreases and coverage changes through the achievement of
economies of scale, more favorable purchase contracts and greater operational
efficiencies. However, if price decreases (for example arising from the proposed
Medicare changes discussed above) or coverage changes were to be rapidly and
fully implemented, they would be likely to have an adverse impact on gross
profits from the Company's testing services unless management had an opportunity
to mitigate such impact.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $12.6 million during the First
Half 1997, an increase of $1.9 million or 18% from the First Half 1996. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 40% in the First Half 1997 from 41% in the First Half 1996.
Selling, general and administrative expenses were $6.4 million during the Second
Quarter 1997, an increase of $779,000 or 14% from the Second Quarter 1996. As a
percentage of net revenues, selling, general and administrative expenses
decreased to 40% in the Second Quarter 1997 from 41% in the Second Quarter 1996.
Severance costs of approximately $159,000 were recorded in the First Half 1997.
Severance costs of approximately $46,000 were recorded in the First Half 1996.
Investment write-downs of $11,000 were recorded in the First Half 1996 to
write-down the investment, held on the Company's balance sheet, in common stock
of a publicly traded company to market value as the loss in value was deemed
other than temporary in accordance with the Statement of Financial Accounting
Standard 115, "Accounting for Certain Investments on Debt and Equity
Securities". No similar charges were recorded in the First Half 1997. The
Company sold its remaining shares in the first quarter of 1997.
o RESEARCH AND DEVELOPMENT
Research and development expenses were $969,000 in the First Half 1997, a
decrease of $614,000 or 39% from the First Half 1996. Research and development
expenses include the costs of the review, analysis and clinical evaluation of
new technologies. This decrease in 1997 is primarily due to the completion in
1996 of the major one-time expenditures necessary for the development of the new
anatomic pathology services. During the first quarter of 1997, the Company
reorganized its research and development technology activities.
Research and development expenses were $461,000 in the Second Quarter 1997, a
decrease of $314,000 or 41% from the Second Quarter 1996.
o INTEREST INCOME
The Company's interest income was $224,000 for the First Half 1997, a decrease
of $6,000 or 2% from the First Half 1996. Interest income for the First Half
1997 was earned on an average investment of $8.7 million compared with $9.8
million in the First Half 1996. Interest income was $132,000 for the Second
Quarter 1997, an increase of $27,000 or 26% from the Second Quarter 1996.
Interest income for the Second Quarter 1997 was earned on an average investment
of $9.5 million compared with $9.0 million in the Second Quarter 1996.
<PAGE>
o INTEREST EXPENSE
Interest expense was $19,000 for the First Half 1997, a decrease of $26,000 or
58% from the First Half 1996. The decrease in interest expense was due to the
pay-down of a portion of the $3.5 million term loan obtained in July of 1993
which bears interest at 6% per year. Interest expense was $8,000 for the Second
Quarter 1997, a decrease of $13,000 or 61% from the Second Quarter 1996.
o PROVISION FOR INCOME TAXES
Provision for income tax expense was $1.1 million for the First Half 1997, an
increase of $488,000 or 81% from the First Half 1996. The effective tax rate was
43% during both the First Half 1997 and 1996.
o NET INCOME
As a result of the foregoing, net income was $1.4 million for the First Half
1997, an increase of $646,000 or 81% from the First Half 1996. Net income was
$830,000 during the Second Quarter 1997, an increase of $317,000 or 62% from the
Second Quarter 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1997, the Company had total cash and cash equivalents of
approximately $11.2 million of which $10.2 million was invested in a fund
holding U. S. Treasury securities with maturities of less than three months.
The Company had working capital of $18.3 million at June 30, 1997 compared to
$18.1 million at December 31, 1996, and the working capital ratio was 3.9 to 1
at June 30, 1997 compared to 3.4 to 1 at December 31, 1996.
Domestic trade receivables, net, were $12.6 million as of June 30, 1997, a
decrease of $2.6 million or 17% from December 31, 1996. During the Second
Quarter 1997, the average number of days sales in domestic trade receivables was
approximately 75 days. The average number of days sales has decreased from 94
days for the month of December 1996 to 75 days for the month of June 1997. This
decrease was the result of improved collection efficiencies resulting in
significantly reducing domestic accounts receivable from $15.2 million as of
December 31, 1996 to $12.6 million as of June 30, 1997.
Capital expenditures during the First Half 1997 were approximately $1.3 million
compared to $541,000 for the First Half 1996.
In July 1993, the Company obtained a $3.5 million term loan from a bank that
bears interest at 6% per year and is payable over a 47 month period. During
1995, the term loan agreement was modified to revise certain financial
covenants, including those with respect to tangible net worth and debt service
coverage requirements and limitation on certain expenditures. The Company has
outstanding under such term loan principal in the amount of approximately
$171,000 as of June 30, 1997. During the Second Quarter 1997, there were no
changes in the Company's existing debt agreements.
As of June 30, 1997, the Company has in its treasury 319,206 shares of Common
Stock allocated for the Company's Employee Stock Purchase Plan at a total cost
of $2.7 million. The Company plans to continue to repurchase shares under its
previously authorized buyback program.
The Company believes that cash flows from operations as well as available cash
and cash equivalents are adequate to fund the Company's operations for the
foreseeable future.
<PAGE>
RISK FACTORS; FORWARD LOOKING STATEMENTS
- ----------------------------------------
The Management's Discussion and Analysis contain forward looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others, the uncertainties in reimbursement rates and
reimbursement coverage of various tests sold by the Company to beneficiaries of
the Medicare program; the possibility of being deemed to be not in compliance
with federal or state regulatory requirements; the uncertainties relating to the
ability of the Company to convince physicians and/or managed care organizations
to use the Company as a provider of anatomic pathology testing services; the
ability of the Company to maintain superior quality relative to its competitors;
the ability of the Company to maintain its hospital-based business in light of
the competitive pressures and changes occurring in hospital health care
delivery; the uncertainties relating to states erecting barriers to the
performance of anatomic national laboratories; competition from small
specialized laboratories and well established local pathologists; and the
uncertainties which would arise if integrated delivery systems closed to outside
providers emerged as the dominant form of health care delivery.
<PAGE>
<TABLE>
<CAPTION>
PART II OTHER INFORMATION
<S> <C>
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
a Exhibits
(10.39) Amendment, dated April 30, 1997, by the
Registrant and Richard A. Sandberg (filed
herewith).
(10.40) Security Agreement dated April 30, 1997 by the
Registrant and Richard A. Sandberg (filed
herewith).
(10.41) Secured Promissory Note dated April 30, 1997
by Richard A. Sandberg in favor of the
Registrant (filed herewith).
(11.1) Statement regarding computation of per share
earnings is not required because the relevant
computation can be determined from the
material contained in the Financial Statements
included herein.
(27.1) Financial Data Schedule (filed herewith).
b Report on Form 8-K. No reports on Form 8-K were filed
during the quarter ended June 30, 1997.
</TABLE>
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIANON Systems, Inc.
August 13, 1997 /s/ KEVIN C. JOHNSON
--------------------
By: Kevin C. Johnson
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 1997 /s/ DAVID R. SCHREIBER
----------------------
By: David R. Schreiber
Senior Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
(10.39) Amendment, dated April 30, 1997, by the Registrant and Richard A. Sandberg (filed 16
herewith).
(10.40) Security Agreement dated April 30, 1997 by the Registrant and Richard A. Sandberg 18
(filed herewith).
(10.41) Secured Promissory Note dated April 30, 1997 by Richard A. Sandberg in favor of the 33
Registrant.(filed herewith)
(27.1) Financial Data Schedule (filed herewith). 35
</TABLE>
Exhibit 10.39
-------------
AMENDMENT TO AGREEMENT
Amendment dated as of April 30, 1997 to the Agreement made effective
February 27, 1997 (the "Employment Agreement") between DIANON Systems, Inc., a
Connecticut Corporation (the "Company"), and Richard A. Sandberg, residing at
233 Brushy Ridge, New Canaan, Connecticut ("Richard A. Sandberg").
WHEREAS, the Company and Richard A. Sandberg desire to amend the Employment
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Amendment, the Company and Richard A. Sandberg hereby agree as follows:
1. Section 2 of the Employment Agreement is hereby amended by deleting the
third sentence thereof so that as so amended Section 2 shall read in its
entirety as follows:
"2. STOCK OPTIONS
All options to buy Company stock held by Richard A. Sandberg as
of February 22, 1997, ("Options") to the extent not previously vested will
vest in full effective February 27, 1997, provided that Richard A. Sandberg
does not revoke this Agreement pursuant to Section 24 of this Agreement. A
revocation by Richard A. Sandberg of this Agreement pursuant to Section 24
of this Agreement shall not affect (i) any Option (or portion thereof) that
was not vested pursuant to this Section 2 and (ii) any Option that was
exercised or sold by Richard A. Sandberg prior to the date of such
revocation. The options will otherwise be exercisable according to the
terms of their initial grant(s)."
2. The Employment Agreement is hereby amended by adding a new Section 27
entitled "Secured Loan" which shall read in its entirety as follows:
"27. SECURED LOAN
Immediately upon execution hereof, the Company shall loan to
Richard A. Sandberg Three Hundred Thousand Dollars ($300,000.00) ("the
Loan") and in exchange therefore Richard A. Sandberg shall execute and
deliver to the Company the Secured Promissory Note attached hereto as
Exhibit A and the Security Agreement attached hereto as Exhibit B. As set
forth in the Secured Promissory Note, the Loan shall be repayable in full
in two years and shall bear interest at the rate of 9.5% per annum, payable
annually, and shall be secured by the Options, the shares of stock of the
Company issuable upon exercise of the Options and 30,000 shares of stock of
Milkhaus Laboratory, Inc. ("Milkhaus") owned by Richard A. Sandberg. As set
forth in the Security Agreement, Richard A. Sandberg shall have the right
<PAGE>
to exercise the Options and to sell from time to time any or all of the
shares of the Company or Milkhaus held as collateral under the Security
Agreement provided that 60% of the gain realized by Richard A. Sandberg
from any such sale is paid to the Company in satisfaction of Richard A.
Sandberg's obligations under the Secured Promissory Note."
3. Except as amended hereby, the Employment Agreement shall continue in
full force and effect in accordance with its terms.
DIANON SYSTEMS, INC.
By /S/ KEVIN JOHNSON
------------------
Kevin Johnson
/S/ RICHARD A. SANDBERG
------------------------
Richard A. Sandberg
Exhibit 10.40
-------------
SECURITY AGREEMENT dated April 30, 1997 made by Richard A. Sandberg
(the "Pledgor") in favor of DIANON Systems, Inc. (the "Secured Party" or the
"Company").
W I T N E S S E T H:
WHEREAS the Pledgor is the obligor under a Secured Promissory Note,
dated the date hereof, payable to the Secured Party in the principal amount of
$300,000 (the "Secured Promissory Note");
WHEREAS the Pledgor is the holder of options ("Options") to purchase
common stock, par value $.01 per share ("Common Stock") of the Company and is
the owner of 30,000 shares of common stock of Milkhaus Laboratories, Inc., a
Delaware corporation ("Milkhaus"); and
WHEREAS in order to secure the obligations of the Pledgor under the
Secured Promissory Note the Secured Party has requested and the Pledgor has
agreed to execute and deliver this Security Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Pledgor hereby agrees with the Secured Party as follows: 1.
SECURITY INTEREST. As security for the Obligations (as hereinafter defined), the
Pledgor pledges, assigns, sets over and delivers to the Secured Party, and
grants to the Secured Party a continuing security interest in, all of the
Pledgor's right, title and interest (whether now existing or hereafter created
or acquired by the Pledgor) in (a) the Options held by Pledgor listed on
Schedule I, including all rights arising under the agreements evidencing such
Options, (b) all shares of Common Stock issuable upon the exercise of the
Options and the certificates representing all such shares (the "Company
Shares"), (c) 30,000 shares of common stock of Milkhaus and the certificates
representing all such shares listed on Schedule I hereto (the "Milkhaus Shares"
and, together with the Company Shares, the "Pledged Stock"), (d) subject to
Section 8, all payments of principal or interest, dividends, cash, instruments
and other property from time to time received, receivable or otherwise
distributed, in respect of, in exchange for or upon the conversion of the
securities referred to in clauses (b) and (c), (e) subject to Section 8, all
rights and privileges of the Pledgor with respect to the securities and other
property referred to in clauses (b), (c) and (d) above, and (f) all proceeds of
any of the foregoing (the items referred to in clauses (a) through (f) above
being collectively referred to as the "Collateral"). Upon delivery to the
Secured Party, (a) any stock certificates or other securities now or hereafter
included in the Collateral (the "Pledged Securities") shall be accompanied by
stock powers duly executed in blank or other instruments of transfer
satisfactory to the Secured Party and by such other instruments and documents as
the Secured Party may reasonably request and (b) all other property comprising
part of the Collateral shall be accompanied by proper instruments of assignment
<PAGE>
duly executed by the Pledgor and such other instruments or documents as the
Secured Party may reasonably request. Each delivery of Pledged Securities shall
be accompanied by a schedule describing the securities theretofore and then
being pledged hereunder, which schedule shall be attached hereto as Schedule I
and made a part hereof. Each schedule so delivered shall supersede any prior
schedules so delivered. If Borrower delivers a certificate (the "Excess
Certificate") for more than 30,000 Milkhaus Shares to the Secured Party,
Borrower shall have the right at any time to deliver or cause to be delivered a
certificate for 30,000 Milkhaus Shares in exchange for such Excess Certificate,
together with stock powers duly executed in blank or other instruments of
transfer satisfactory to the Secured Party.
2. DELIVERY OF THE COLLATERAL. The Pledgor agrees promptly to deliver
or cause to be delivered to the Secured Party any and all Pledged Securities,
and any and all certificates or other instruments or documents representing the
Collateral, including any Company shares received upon the exercise of Options.
3. OBLIGATIONS SECURED. The security interest granted by this Security
Agreement is to secure the payment and performance of the Pledgor's obligations
to the Secured Party under this Security Agreement and the Secured Promissory
Note, whether for principal, interest, fees or other amounts, secured or
unsecured, absolute or contingent, due or to become due, now existing or
hereafter arising, and whether or not evidenced by any instrument (all of the
foregoing collectively, the "Obligations").
4. UNCONDITIONAL GRANT OF SECURITY INTEREST. (a) The Pledgor agrees
that this Security Agreement shall be binding upon the Pledgor and that the
grant of the security interest in the Collateral shall be irrevocable and
unconditional, irrespective of the validity, legality or enforceability of the
Obligations, the absence of any action to enforce the same, any waiver or
consent by the Secured Party with respect to any provisions thereof, or any
action to enforce the same or any other similar circumstances. The Pledgor's
obligations and liabilities hereunder shall not be conditioned or contingent
upon the Secured Party's pursuit at any time of any right or remedy against any
other person or entity that may be or become liable in respect of all or any
part of the Obligations or against any collateral security or guaranty therefor
or right of offset with respect thereto. The Pledgor hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
the Pledgor's merger or bankruptcy, protest or notice with respect to any notes
evidencing the Obligations and all demands whatsoever. This Security Agreement
shall remain in full force and effect and be binding in accordance with and to
the extent of its terms upon the Pledgor until the Obligations have been paid in
full.
(b) The Pledgor agrees that without notice to or further assent
by the Pledgor, the liability of any other party for or upon any of the
Obligations may, from time to time, in whole or in part, be renewed, extended,
modified, accelerated, compromised or released by the Secured Party as the
Secured Party may deem advisable, and that any other collateral or liens for any
of the Obligations may, from time to time, in whole or in part, be exchanged,
sold or surrendered by the Secured Party, as the Secured Party may deem
advisable, all without impairing, abridging, affecting or diminishing this
Security Agreement or the Secured Party's rights hereunder or with respect to
the Collateral.
<PAGE>
5. RIGHT TO SELL COLLATERAL. Unless and until a default shall have
occurred, notwithstanding any other provision of this Security Agreement,
Pledgor shall have the right (i) to exercise any or all of the Options from time
to time subject to the Secured Party's continuing first priority security
interest in the shares of Common Stock issuable upon the exercise of the Option
and (ii) to sell any or all of the Pledged Stock, provided that (A) 60% of the
gain realized by Pledgor upon any such sale shall be payable to the Secured
Party in satisfaction of Pledgor's obligations under the Secured Promissory Note
pursuant to arrangements satisfactory to the Secured Party and (B) if at such
time Pledgor has any indebtedness outstanding to the Company other than the
Obligations, any remaining balance of the proceeds after application of clause
(A) shall be applied to repay such indebtedness.
6. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Pledgor hereby makes
the following representations, covenants and warranties, which shall be deemed
to be repeated and confirmed upon the creation or acquisition by the Pledgor of
each item of Collateral and upon the creation of any Obligation:
(a) This Security Agreement has been duly executed and delivered
by the Pledgor and is his legal, valid and binding obligation, enforceable
against him in accordance with its terms, subject only to bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to or affecting the enforceability of rights of creditors
generally and to general equitable principles that may limit the right to obtain
equitable remedies. By virtue of the execution and delivery by the Pledgor of
this Security Agreement, when the Pledged Securities, certificates, instruments
or other documents representing or evidencing the Collateral are delivered to
the Secured Party in accordance with this Security Agreement, the Secured Party
will obtain a valid and perfected first lien on and security interest in such
Collateral, enforceable against the Pledgor and all third parties and superior
in right to all other security interests, liens, encumbrances or charges,
existing or future.
(b) On the date hereof and at any time during the term of this
Security Agreement during which a security interest in the Secured Party's favor
in the Collateral exists, the Pledgor will be the direct owner, beneficially and
of record, of the Collateral and will have good right to grant the Secured Party
a security interest therein; the Pledgor will perform all acts and deeds
possible to assure that all documents and agreements held by the Pledgor with
respect to the Collateral will be true and correct and in all respects what they
purport to be; subject to Section 8, the Pledgor will cause any and all
Collateral, whether for value paid by the Pledgor or otherwise, to be forthwith
deposited with the Secured Party and pledged or assigned hereunder; all
signatures and endorsements that appear thereon will be genuine and such
signatories and endorsers will have the full capacity to contract; none of the
transactions underlying or giving rise to the Collateral nor any operation or
use of any of the Collateral will violate any applicable state or federal law or
regulation; and all documents relating to the Collateral will be legally
sufficient under such laws and regulations and will be legally enforceable in
accordance with their terms. The Pledgor will defend the Collateral against all
claims and demands of all other parties claiming the same or an interest
therein, and none of the Collateral will be: (i) sold, assigned or transferred
to any person or entity other than the Secured Party or (ii) in any way pledged,
mortgaged or otherwise encumbered except to the Secured Party or as permitted in
<PAGE>
accordance with Section 5 hereof. All of the Milkhaus Shares have been duly
authorized and validly issued and are fully paid and non-assessable.
(c) There is no litigation pending or threatened in any court or
jurisdiction, the outcome of which would affect the Pledgor's interest in the
Collateral in a materially adverse manner.
(d) There are no setoffs, counterclaims or defenses with respect
to the Collateral or the right of the Pledgor to receive the Collateral and no
agreement has been made with any other person or party under which any deduction
or discount may be claimed with respect to the Collateral and the Pledgor knows
of no fact which would prohibit or prevent the Pledgor from receiving all of the
Collateral.
(e) The Pledgor will, promptly upon learning thereof, report to
the Secured Party: (i) any material, adverse change in the information contained
herein relating to the Pledgor or the Collateral; (ii) the details of any
material adverse claim or litigation affecting the Pledgor or the Collateral;
and (iii) any material loss of or damage to the Collateral or any other matters
affecting the value, enforceability or collectibility of any of the Collateral.
(f) The Pledgor will take any and all steps and will observe such
formalities as the Secured Party may request, all in order to create and
maintain the Secured Party's valid security interest in any and all of the
Collateral. The Pledgor agrees to execute such financing statements, security
agreements or other instruments with respect to any of the Collateral as the
Secured Party may request and authorize the Secured Party to execute and file at
any time such financing statements without the Pledgor's signature and, if upon
request the Pledgor fails to do so, to execute such security agreements or other
instruments on its behalf. The Secured Party may file a photocopy or other
reproduction of this Security Agreement as a financing statement.
(g) The Pledgor will pay all costs necessary to preserve the
Collateral, including (but not limited to) all taxes, rates, levies, assessments
and other charges of every nature that may be lawfully levied, assessed or
imposed against or in respect of the Pledgor or the Collateral as and when they
become due and payable.
(h) The Pledgor will give the Secured Party immediate notice of
(i) any default under this Security Agreement or the Secured Promissory Note, or
(ii) any action or proceeding to which the Pledgor is a party or affecting the
Pledgor an adverse determination of which would affect the Pledgor or the
Collateral in a materially adverse manner.
(i) Neither the making of the loan pursuant to the Secured
Promissory Note nor the use of the proceeds thereof will violate or be
inconsistent with the provisions of Regulation G or X of the Board of Governors
of the Federal Reserve System and no part of the proceeds of such loan will be
used to purchase or carry any "margin stock" within the meaning of such
Regulation G or to extend credit for the purpose of purchasing or carrying any
such margin stock.
<PAGE>
7. REGISTRATION IN NOMINEE NAME. The Secured Party shall have the
right (in its sole and absolute discretion) to hold the Pledged Securities in
its own name as pledgee, the name of its nominee (as pledgee or as sub-agent) or
the name of the Pledgor, endorsed or assigned in blank or in favor of the
Secured Party. The Pledgor will promptly give to the Secured Party copies of any
notices or other communications received by it with respect to Pledged
Securities registered in the name of the Pledgor. The Secured Party shall at all
times have the right to exchange the certificates representing Pledged
Securities for certificates of smaller or larger denominations for any purpose
consistent with this Security Agreement.
8. VOTING RIGHTS AND DIVIDENDS, ETC. (a) Unless and until a default
shall have occurred:
(i) The Pledgor shall be entitled to exercise any and all voting
and/or other consensual rights and powers inuring to an owner of any of the
Pledged Securities or any part thereof for any purpose consistent with the terms
of this Security Agreement and the Secured Promissory Note; PROVIDED, HOWEVER,
that the Pledgor will not be entitled to exercise any such right if the result
thereof could materially and adversely affect the rights inuring to a holder of
the Pledged Securities or the rights and remedies of the Secured Party under
this Security Agreement or the Secured Promissory Note or the ability of the
Secured Party to exercise the same.
(ii) The Pledgor shall be entitled to receive and retain any and
all cash dividends, interest and principal paid on the Pledged Securities to the
extent and only to the extent that such cash dividends, interest and principal
are permitted by, and otherwise paid in accordance with, applicable laws. Other
than pursuant to the first sentence of this subparagraph, all noncash dividends,
interest and principal, and all dividends, interest and principal paid or
payable in cash or otherwise in connection with a partial or total liquidation
or dissolution, return of capital, capital surplus or paid-in surplus, and all
other distributions made on or in respect of the Pledged Securities, whether
paid or payable in cash or otherwise, whether resulting from a subdivision,
combination or reclassification of the outstanding capital stock of the issuer
of any Pledged Securities or received in exchange for Pledged Securities or any
part thereof, or in redemption thereof, or as a result of any merger,
consolidation, acquisition or other exchange of assets to which such issuer may
be a party or otherwise, shall be and become part of the Collateral, and, if
received by the Pledgor, shall not be commingled by the Pledgor with any of its
other funds or property but shall be held separate and apart therefrom, shall be
held in trust for the benefit of the Secured Party and shall be forthwith
delivered to the Secured Party in the same form as so received (with any
necessary endorsement).
(b) Upon the occurrence of a default, all rights of the Pledgor
to dividends, interest and principal that the Pledgor is authorized to receive
pursuant to paragraph (a)(ii) above shall cease, and all such rights shall
thereupon become vested in the Secured Party, which shall have the sole and
exclusive right and authority to receive and retain such dividend, interest and
principal payments. All dividends, interest and principal received by the
Pledgor contrary to the provisions of this Section 8 shall be held in trust for
the benefit of the Secured Party, shall be segregated from other property or
funds of the Pledgor and shall be forthwith delivered to the Secured Party in
the same form as so received (with any necessary endorsement). Any and all money
<PAGE>
and other property paid over to or received by the Secured Party pursuant to the
provisions of this paragraph (b) shall be applied in accordance with the
provisions of Section 12.
(c) Upon the occurrence of a default, all rights of the Pledgor
to exercise the voting and consensual rights and powers that the Pledgor is
entitled to exercise pursuant to paragraph (a)(i) of this Section 8 shall cease,
and all such rights shall thereupon become vested in the Secured Party, which
shall have the sole and exclusive right and authority to exercise such voting
and consensual rights and powers.
9. DEFAULT. If any default in the payment or performance of any of the
Obligations occurs and is continuing, if any representation or warranty made in
this Security Agreement proves to have been false or misleading in any material
respect when made or deemed made, if the Pledgor defaults in the due observance
or performance of any other covenant, condition or agreement to be observed or
performed pursuant to the terms of this Security Agreement or the Secured
Promissory Note or if the Pledgor becomes involved as the debtor in any
bankruptcy or insolvency proceedings, then the Pledgor will be in default under
this Security Agreement.
10. RIGHTS AND REMEDIES UPON DEFAULT. (a) Upon the Pledgor's default
under this Security Agreement, and at any time thereafter, the Secured Party
may, without presentment, demand, protest or notice of any kind, all of which
are hereby expressly waived, declare any or all of the Obligations to be
immediately due and payable.
(b) The Pledgor hereby authorizes and empowers the Secured Party
as the attorney-in-fact of the Pledgor, at any time after default, with or
without notice to the Pledgor, for the use and benefit of the Secured Party to
take all steps which the Secured Party shall in its sole discretion deem
necessary to enforce the rights of the Pledgor in and to the Collateral,
including, but not limited to, the commencement and prosecution of any action or
proceeding which the Secured Party in its sole discretion deems necessary or
desirable to protect or realize upon the Collateral. In addition, the Pledgor
hereby authorizes and empowers the Secured Party as the attorney-in-fact of the
Pledgor, at any time after a default, to endorse in the name of the Pledgor any
checks, drafts or other orders payable to the Pledgor with respect to the
Collateral for application against the Obligations. The power-of-attorney
granted to the Secured Party pursuant hereto shall be deemed to be coupled with
an interest and shall be irrevocable until the Secured Party shall have been
fully and indefeasibly paid.
(c) In addition to any rights and remedies contained in this
Security Agreement or now or hereafter granted under applicable law and not by
way of limitation of any such rights and remedies, the Secured Party shall have
all the rights and remedies of a secured party under the Uniform Commercial Code
as enacted in any applicable jurisdiction. The Secured Party may take legal
proceedings for the appointment of a receiver or receivers (to which the Secured
Party shall be entitled as a matter of right) to take possession of the
Collateral pending the sale thereof pursuant either to the power of sale granted
by this Security Agreement or to a judgment, order or decree made in any
<PAGE>
judicial proceeding for the foreclosure or involving the enforcement of this
Security Agreement.
(d) The Pledgor agrees that all of the foregoing rights and
actions specified in paragraphs (a), (b) and (c) of this Section 10 may be
executed or effected without demand, advertisement or notice (except as required
by law), all of which (to the extent permitted by law) are hereby expressly
waived. The Secured Party shall not be obligated to do any of the acts
authorized in this Security Agreement, but if the Secured Party elects to do any
such act, the Secured Party will not be responsible to the Pledgor except for
the Secured Party's own gross negligence or willful misconduct.
(e) The Secured Party shall have the right in its sole discretion
to determine which rights, security, liens, guarantees, security interests or
remedies the Secured Party will retain, pursue, release, subordinate, modify or
take any other action with respect to, without in any way modifying or affecting
any other of them or any of its rights under this Security Agreement. Any of the
Pledgor's moneys, deposits, balances or other property that may come into the
Secured Party's possession at any time or in any manner may in its sole
discretion be retained by the Secured Party and applied to any of the
Obligations. Notwithstanding any other rights the Secured Party may have under
applicable law and under this Security Agreement, the Pledgor agrees that,
should it at any time be in default under this Security Agreement, the Secured
Party shall have the right to apply (including, but not limited to, by way of
setoff) any of the Pledgor's property held by the Secured Party to a reduction
of the Obligations. The Secured Party shall be deemed to have exercised such
right of setoff immediately at the time of making its decision to do so even
though any charge for such setoff is made or entered on the Secured Party's
records subsequent to such time.
11. SALE OF COLLATERAL. Upon the occurrence of a default, the Secured
Party may sell the Collateral, or any part thereof, at public or private sale or
at any broker's board or on any securities exchange, for cash, upon credit or
for future delivery as the Secured Party shall deem appropriate. Upon any sale
of any of the Collateral, whether made under the power of sale given by this
Security Agreement or under judgment, order or decree in any judicial proceeding
for foreclosure or involving the enforcement of this Security Agreement: (a) the
Secured Party shall be authorized at any such sale (if it deems it advisable to
do so) to restrict the prospective bidders or purchasers to persons who will
represent and agree that they are purchasing the Collateral for their own
account for investment and not with a view to the distribution or sale thereof,
and upon consummation of any such sale the Secured Party shall have the right to
assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold and may bid for the property being sold and, upon compliance
with the terms of sale, may hold, retain and possess and dispose of such
property in its own absolute right without further accountability and may, in
paying the purchase price for such property, deliver any notes evidencing the
Obligations or claims for interest thereon in lieu of cash in payment of the
amount equal to the unpaid amount of such notes or claims; (b) the Secured Party
may make and deliver to the purchaser or purchasers a good and sufficient deed,
bill of sale and instrument of assignment and transfer of the property sold; (c)
the Secured Party is irrevocably appointed the Pledgor's true and lawful
<PAGE>
attorney-in-fact in the Pledgor's name and stead to make all necessary deeds,
bills of sale and instruments of assignment and transfer of the property thus
sold and for such other purposes as are necessary or desirable to effectuate the
provisions of this Security Agreement, and for that purpose the Secured Party
may execute and deliver all necessary deeds, bills of sale and instruments of
assignment and transfer, and may substitute one or more persons or entities with
like power, and the Pledgor ratifies and confirms all that the Pledgor's said
attorney, or such substitute or substitutes, shall lawfully do by virtue of this
appointment, but if so requested by the Secured Party or by any purchaser the
Pledgor will ratify and confirm any such sale or transfer by executing and
delivering to the Secured Party or to such purchaser all such deeds, bills of
sale, instruments of assignment and transfer and releases as may be designated
in any such request; (d) all of the Pledgor's right, title, interest, claim and
demand whatsoever, either at law or in equity or otherwise, in and to the
property so sold shall be divested, such sale shall be a perpetual bar both at
law and in equity against the Pledgor, its successors and assigns and against
any and all persons or entities claiming or who may claim the property sold or
any part thereof from, through or under the Pledgor or its successors or
assigns; (e) the Pledgor will terminate and cease forthwith all use of the
property so sold; (f) the Secured Party's receipt or a receipt of the officer
making such sale shall be a sufficient discharge to the purchaser or purchasers
at such sale for the purchase money, and such purchaser or purchasers, and such
purchaser's or purchasers' assigns or personal representatives, shall not, after
paying such purchase money and receiving such receipt, be obligated to see to
the application of such purchase money or be in any way answerable for any loss,
misapplication or non-application thereof; and (g) to the extent that the
Pledgor may lawfully do so, the Pledgor agrees that it will not at any time
insist upon or plead, or in any manner whatsoever claim or take the benefit or
advantage of, any appraisement, valuation, stay, extension or redemption law or
any law permitting it to direct the order in which the Collateral or any part
thereof shall be sold, now or at any time hereafter in force, that may delay,
prevent or otherwise affect the performance or enforcement of this Security
Agreement or the Obligations, and the Pledgor expressly waives all benefit or
advantage of any such law and agrees that the Pledgor will not hinder, delay or
impede the execution of any power granted or delegated to the Secured Party in
this Security Agreement, but will suffer and permit the execution of every such
power as though no such law were in force. In the event of any sale of
Collateral, the Secured Party shall, at least ten days before such sale, give
the Pledgor written notice of the Secured Party's intention to sell. Such
notice, in the case of a public sale, shall state the time and place for such
sale and, in the case of a sale at a broker's board or on a securities exchange,
shall state the board or exchange at which such sale is to be made and the day
on which the Collateral, or portion thereof, will first be offered for sale at
such board or exchange. Any such public sale shall be held at such time or times
within ordinary business hours and at such place or places as the Secured Party
may fix and state in the notice of such sale. At any such sale, the Collateral,
or portion thereof, to be sold may be sold in one lot as an entirety or in
separate parcels, as the Secured Party may (in its sole and absolute discretion)
determine. The Secured Party shall not be obligated to make any sale of any
Collateral if it shall determine not to do so, regardless of the fact that
notice of sale of such Collateral shall have been given. The Secured Party may,
without notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and place
fixed for sale, and such sale may, without further notice, be made at the time
and place to which the same was so adjourned.
<PAGE>
12. APPLICATION OF MONEYS. Except as otherwise provided in this
Security Agreement, all moneys the Secured Party receives in accordance with the
provisions of this Security Agreement shall be applied in the following manner:
First, to the payment of all costs and expenses incurred in connection with the
administration and enforcement of, or the preservation of any rights under, this
Security Agreement and the realization on the Collateral (including, but not
limited to, the reasonable fees and disbursements of the Secured Party's counsel
and agents); and SECOND, to the payment of all other Obligations in such order
as the Secured Party may choose. Any surplus shall be promptly remitted to
Pledgor except as otherwise required by law.
13. WAIVERS, AMENDMENTS, REQUIRED NOTICES. The Pledgor waives notice
of acceptance of this Security Agreement, notice of nonpayment, demand,
presentment, protest and notice thereof with respect to any and all instruments,
notice of Collateral received or delivered or any other action taken in reliance
on this Security Agreement and all other demands and notices of any description,
except such as are expressly provided for in this Security Agreement or which by
applicable law may not be waived on the date of this Security Agreement. No
failure on the Secured Party's part to exercise, and no delay in exercising, any
right, power or remedy under this Security Agreement shall operate as a waiver
thereof or of any default by us under this Security Agreement, nor shall any
single or partial exercise by the Secured Party of any right, power or remedy
under this Security Agreement preclude any other or future exercise thereof or
the exercise of any other right, power or remedy. No amendment or modification
of this Security Agreement nor any waiver of any provision of this Security
Agreement or consent to any departure by us therefrom shall be effective unless
it is in writing and signed by the Secured Party and then any such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on the Pledgor shall, of itself, entitle the
Pledgor to any other or further notice or demand in similar or other
circumstances. Except as otherwise provided in this Security Agreement, if
notice, whether before or after any default by the Pledgor under this Security
Agreement has occurred, is required by law to be given by the Secured Party to
the Pledgor, the Pledgor agrees that five days' notice given in the manner
provided in Section 17 will be reasonable notice.
14. SECURITIES ACT, ETC. A question may arise under the Securities Act
of 1933, as now or hereafter in effect, or any similar statute hereafter enacted
analogous in purpose or effect (such Act and any such similar statute as from
time to time in effect being called the "Federal Securities Laws") with respect
to any disposition of the Pledged Securities permitted hereunder. The Pledgor
understands that compliance with the Federal Securities Laws might very strictly
limit the course of conduct of the Secured Party if the Secured Party were to
attempt to dispose of all or any part of the Pledged Securities, and might also
limit the extent to which or the manner in which any subsequent transferee of
any Pledged Securities could dispose of the same. Similarly, there may be other
legal restrictions or limitations affecting the Secured Party in any attempt to
dispose of all or part of the Pledged Securities under applicable Blue Sky or
other state securities laws or similar laws analogous in purpose or effect. The
Pledgor recognizes that in light of such restrictions and limitations the
Secured Party may, with respect to any sale of the Pledged Securities, limit the
purchasers to those who will agree, among other things, to acquire such Pledged
Securities for their own account, for investment, and not with a view to the
distribution or resale thereof. The Pledgor acknowledges and agrees that in
<PAGE>
light of such restrictions and limitations, the Secured Party, in its sole and
absolute discretion, (a) may proceed to make such a sale whether or not a
registration statement for the purpose of registering such Pledged Securities or
part thereof shall have been filed under the Federal Securities Laws and (b) may
approach and negotiate with a single potential purchaser to effect such sale.
The Pledgor acknowledges and agrees that any such sale might result in prices
and other terms less favorable to the seller than if such sale were a public
sale without such restrictions. In the event of any such sale, the Secured Party
shall incur no responsibility or liability for selling all or any part of the
Pledged Securities at a price that the Secured Party, in its sole and absolute
discretion, may in good faith deem reasonable under the circumstances,
notwithstanding the possibility that a substantially higher price might have
been realized if the sale were deferred until after registration as aforesaid or
if more, than a single purchaser were approached. The provisions of this Section
14 will apply notwithstanding the existence of a public or private market upon
which the quotations or sales prices may exceed substantially the price at which
the Secured Party sells.
15. REGISTRATION, ETC. The Pledgor agrees that, upon the occurrence of
a default hereunder, if for any reason the Secured Party desires to sell any of
the Milkhaus Shares at a public sale, he will, at any time and from time to
time, upon the written request of the Secured Party, use his best efforts to
cause Milkhaus to take such action and prepare, distribute and/or file such
documents, as are required or advisable in the reasonable opinion of counsel for
the Secured Party to permit the public sale of such Milkhaus Shares; provided
that Pledgor shall not be required to take any action that would be inconsistent
with his position or duties as a director of Milkhaus. The Pledgor further
agrees to indemnify, defend and hold harmless the Secured Party, any underwriter
and their respective officers, directors, affiliates and controlling persons
from and against all loss, liability, expenses, costs of counsel (including,
without limitation, reasonable fees and expenses to the Secured Party of legal
counsel), and claims (including the costs of investigation) that they may incur
insofar as such loss, liability, expense or claim arises out of or is based upon
any alleged untrue statement of a material fact contained in any prospectus (or
any amendment or supplement thereto) or in any notification or offering
circular, or arises out of or is based upon any alleged omission to state a
material fact required to be stated therein or necessary to make the statements
in any thereof not misleading, except insofar as the same may have been caused
by any untrue statement or omission based upon information furnished in writing
to the Pledgor or the issuer of such Milkhaus Shares by the Secured Party
expressly for use therein. The Pledgor further agrees, upon such written request
referred to above, to use his best efforts to cause Milkhaus to qualify, file or
register, any of the Milkhaus Shares under the Blue Sky or other securities laws
of such states as may be requested by the Secured Party and keep effective all
such qualifications, filings or registrations; provided that Pledgor shall not
be required to take any action that would be inconsistent with his position or
duties as a director of Milkhaus. The Pledgor will bear all costs and expenses
of carrying out its obligations under this Section 15. The Pledgor acknowledges
that there is no adequate remedy at law for failure by him to comply with the
provisions of this Section 15 and that such failure would not be adequately
compensable in damages, and therefore agrees that his agreements contained in
this Section 15 may be specifically enforced.
<PAGE>
16. CUMULATIVE RIGHTS AND REMEDIES. This Security Agreement and the
security interest granted by this Security Agreement are in addition to and not
in substitution for any other security interest now or hereafter held by the
Secured Party, and this Security Agreement is, and is intended to be, a
continuing agreement and shall not operate as a merger of any contract debt or
suspend the fulfillment of or affect the Secured Party's rights, remedies or
powers in respect of any obligation or other security held by the Secured Party
for the fulfillment thereof. The remedies provided in this Security Agreement
are cumulative and are not exclusive of any remedy provided by law.
17. NOTICES. Any notice given under this Security Agreement shall be
given in writing (including teletransmissions) and mailed, teletransmitted or
delivered by the party giving such notice to the other party at the address, if
to the Secured Party, indicated beneath its signature line of this Security
Agreement or, if to the Pledgor, indicated beneath its signature line of this
Security Agreement or, as to each such party, at such other address as may be
designated by such party by notice complying with the terms of this Section 17.
All notices under this Security Agreement shall be deemed given when deposited
in the mails or delivered or teletransmitted, addressed as provided in this
Section 17.
18. COSTS AND EXPENSES. The Pledgor agrees to pay, promptly after
demand, whether or not any default by us under this Security Agreement has
occurred and whether or not any proceeding to enforce this Security Agreement or
the Obligations has been commenced, all of the Secured Party's reasonable costs
and expenses, including (but not limited to) all reasonable fees and
disbursements of the Secured Party's legal counsel, incurred in connection with
the enforcement of this Security Agreement, the security interest granted by
this Security Agreement, the receipt of proceeds of Collateral under this
Security Agreement, the care and preservation of the Collateral or the
preparation of any requested amendments to this Security Agreement,
modifications of this Security Agreement or waivers or consents in connection
with this Security Agreement. Any such expenses so incurred by the Secured Party
shall be specified to the Pledgor, shall be part of the Obligations and shall be
secured by the Collateral.
If any tax, assessment, charge or claim is claimed or made with
respect to the Collateral that in the Secured Party's opinion may possibly
create a valid obligation having priority over the security interest granted to
the Secured Party by this Security Agreement, the Secured Party may, in its sole
discretion and without notice, pay such taxes, assessments, charges or claims,
and the amount thereof shall be specified to the Pledgor, shall be part of the
Obligations and shall be secured by the Collateral.
Upon the Pledgor's failure to perform any of the its duties under this
Security Agreement, the Secured Party may, but shall not be obligated to,
perform any or all of such duties, and the Pledgor will pay to the Secured Party
on written demand an amount equal to the cash or out-of-pocket expense incurred
by the Secured Party in so doing plus interest thereon from the date such
expense is incurred until it is paid at a rate per annum equal to the highest
rate of interest payable by the Pledgor from time to time on the Obligations.
<PAGE>
19. SUCCESSORS AND ASSIGNS, GOVERNING LAW, SURVIVAL AND SEVERABILITY.
This Security Agreement, which shall inure to the benefit of and shall be
binding upon each of the parties and respective heirs, executors,
administrators, successors and assigns, shall be governed by and construed in
accordance with the laws of the State of Connecticut. All covenants, agreements,
representations and warranties made by the Pledgor in this Security Agreement
shall survive the execution and delivery of this Security Agreement and shall
continue in full force and effect so long as any Obligation remains unpaid or
unperformed. If any part of this Security Agreement is contrary to, prohibited
by or deemed invalid under applicable law or regulations, such provision shall
be inapplicable and deemed omitted to the extent so contrary, prohibited or
invalid, but the remainder of this Security Agreement shall not be invalidated
and shall be given full force and effect so far as possible, and any such
prohibition or invalidity in any jurisdiction shall not invalidate such
provision or render it unenforceable in any other jurisdiction.
20. NO ASSUMPTIONS OF DUTIES; LIMITATION ON LIABILITIES. (a) Nothing
in this Security Agreement shall be construed to constitute the Secured Party as
the Pledgor's agent for any purpose whatsoever. The Secured Party does not, by
this Security Agreement or any assignment or otherwise, assume any of the
Pledgor's obligations under any Collateral or any contract or agreement relating
to any Collateral, and the Secured Party shall not be responsible in any way for
performance of any of the terms and conditions thereof.
(b) Neither the Secured Party nor any of its directors, officers,
agents or employees shall be liable to any person or entity for any action taken
or omitted by it or any of its directors, officers, agents or employees under
this Security Agreement or with respect to any transaction contemplated by this
Security Agreement, except for the Secured Party's or such director's,
officer's, agent's or employee's own gross negligence or willful misconduct.
Without limiting the generality of the foregoing, the Secured Party shall not be
responsible or liable for any damage, loss or destruction of any part of the
Collateral, wherever it may be located and regardless of the cause thereof,
unless due to its own gross negligence or willful misconduct. The Secured Party
shall not, under any circumstances or in any event whatsoever, have any
liability for any error or omission or delay of any kind occurring in the
settlement, collection or payment of any Collateral or any instrument received
in payment thereof or for any damage resulting therefrom. The Pledgor assumes
all responsibility and liability arising from the use of the Collateral and will
pay, and indemnify and holds the Secured Party harmless from and against, any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to its right, title and interest in, to and under the
Collateral.
21. AMENDMENTS, MODIFICATIONS AND WAIVERS WITH RESPECT TO OBLIGATIONS.
The Pledgor hereby consents that, without the necessity of any reservation of
rights against it and without notice to or further assent by it, the liability
of any other person or entity on or for any part of the Obligations, or any
collateral security or guaranty therefor or right of offset with respect
thereto, may from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released and
any other collateral security document or guaranty or document delivered in
connection therewith to which the Pledgor is not a party may be amended,
modified, supplemented, restated or terminated, in whole or in part, as the
<PAGE>
Secured Party may deem advisable from time to time, and any collateral security
or guaranty or right of offset at any time held for payment of the Obligations
may be sold, waived, surrendered or released, all without the necessity of any
reservation of rights against the Pledgor and without notice to or further
assent by the Pledgor, and the Pledgor will remain bound hereunder
notwithstanding any such renewal, extension, modification, acceleration,
compromise, amendment, supplement, restatement, termination, sale, exchange,
waiver, surrender or release. The Pledgor waives any and all notice of or proof
of reliance by the Secured Party on this Security Agreement, and the
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred in reliance upon this Security Agreement, and all
dealings between the parties shall likewise be conclusively presumed to have
been had or consummated in reliance on this Security Agreement. The Pledgor
waives (to the fullest extent permitted by applicable law) diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
with respect to the Obligations.
22. NO SUBROGATION. Notwithstanding any payment or payments made by
the Pledgor hereunder, the receipt of any amounts by the Secured Party with
respect to the Collateral or any setoff or application of the Pledgor's funds by
the Secured Party, the Pledgor shall not be entitled to be subrogated to any of
the Secured Party's rights against any collateral security or guaranty or right
of offset held by the Secured Party for the payment of the Obligations.
23. HEADINGS; CONSTRUCTION. The headings used in this Security
Agreement are for convenience only and are not to be considered a part of this
Security Agreement and do not in any way limit or amplify the terms and
provisions of this Security Agreement. When the context so requires, the
singular number shall be read as if the plural were expressed and the provisions
of this Security Agreement shall be read with all grammatical changes necessary
dependent upon the person or entity referred to being a male, female, firm or
corporation.
24. SUBMISSION TO JURISDICTION. The Pledgor expressly submits to the
jurisdiction of all federal and state courts located in the State of
Connecticut, and consents that any order, process or other paper may be served
upon it within or without such court's jurisdiction by registered mail or by
personal service at the address specified pursuant to Section 17 hereof,
PROVIDED a reasonable time for appearance is allowed. The Pledgor irrevocably
waives any objection it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Security Agreement
brought in any such court and further irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. Nothing contained in this Security Agreement shall affect
the Secured Party's right to serve legal process in any other manner permitted
by law or to bring any action or proceeding against the Pledgor or its property
in the courts of other jurisdictions.
25. DEFEASANCE. Upon indefeasible satisfaction in full of the
Obligations, this Security Agreement shall terminate and be of no further force
and effect. Notwithstanding the preceding sentence, the indemnity agreement
contained in Section 20(b) of this Security Agreement shall survive the
termination of this Security Agreement.
<PAGE>
26. PRIOR UNDERSTANDINGS. This Security Agreement supersedes all prior
understandings and agreements, whether written or oral, between the parties
relating to the transactions provided for herein; provided, however, that
notwithstanding any provision of this Security Agreement, the provisions of the
agreements setting forth the terms of the Options shall remain in full force and
effect and shall be fully enforceable by Pledgor and the Company in accordance
with their terms.
27. COUNTERPARTS. This Security Agreement may be executed in any
number of counterparts and by the parties hereto on separate counterparts, each
of which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.
28. WAIVER OF JURY TRIAL. THE PLEDGOR AND, BY ITS ACCEPTANCE OF THIS
SECURITY AGREEMENT, THE SECURED PARTY HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT THE PLEDGOR OR THE SECURED PARTY MAY HAVE TO A
TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS SECURITY
AGREEMENT OR THE SECURED PROMISSORY NOTE AND AGREE THAT ANY SUCH DISPUTE SHALL
BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
/S/ RICHARD A. SANDBERG
------------------------
Richard A. Sandberg
Address for notices:
233 Brushy Ridge
New Canaan, Connecticut 06840
ACCEPTED:
DIANON SYSTEMS, INC.
By /S/ KEVIN JOHNSON
-------------------
Kevin Johnson
Address for notices:
200 Watson Boulevard
Stratford, Connecticut 06497
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
COMMON STOCK
------------
Stock Certificate
NAME OF ISSUER CLASS OF STOCK NUMBER(S) NUMBER OF SHARES
- -------------- -------------- --------- ----------------
<S> <C> <C> <C>
Milkhaus Laboratory, Inc. Common 72 32,750
</TABLE>
<TABLE>
<CAPTION>
OPTIONS
-------
Class of
NAME OF ISSUER UNDERLYING SHARES NUMBER OF SHARES EXERCISE PRICE
- -------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
DIANON Systems, Inc. Common 124,800 $8.00
DIANON Systems, Inc. Common 31,200 $10.75
DIANON Systems, Inc. Common 20,000 $4.56
</TABLE>
EXHIBIT 10.41
-------------
SECURED PROMISSORY NOTE
$300,000 April 30, 1997
FOR VALUE RECEIVED, Richard A. Sandberg and his heirs, executors and
administrators ("Borrower") hereby promises to pay to DIANON Systems, Inc.
("Lender") the principal sum of Three Hundred Thousand Dollars ($300,000) on
April 30, 1999, and to pay interest on the unpaid principal balance from the
date hereof until paid in full at the rate of 9.5% per annum on April 30, 1998
and April 30, 1999.
Payments of principal and interest shall be made in lawful currency of the
United States at the offices of Lender at 200 Watson Boulevard, Stratford,
Connecticut or such other place as Lender may designate.
This Note may be prepaid by Borrower prior to its stated maturity in whole
or in part at any time or from time to time, without penalty or premium
(together with interest accrued to the date of prepayment on the amount of
principal being prepaid).
The obligations of Borrower under this Note are secured by a first priority
pledge of and security interest in (i) Borrower's rights under his options to
purchase Common Stock of Lender, (ii) any shares of stock of Lender issuable
upon exercise of such options and (iii) 30,000 shares of stock of Milkhaus
Laboratory, Inc. owned by Borrower, pursuant to a Security Agreement dated the
date hereof (the "Security Agreement"). Borrower agrees that the Security
Agreement shall be binding upon the Borrower and that the grant of the security
interest in the Collateral (as defined in the Security Agreement) shall be
irrevocable and unconditional, irrespective of the validity, legality or
enforceability of the obligations of Borrower hereunder and the other
Obligations (as defined in the Security Agreement), the absence of any action to
enforce the same, any waiver or consent by the Secured Party with respect to any
provisions thereof, or any action to enforce the same or any other similar
circumstances.
In the event that (A) Borrower, pursuant to or within the meaning of Title
11, U.S. Code or any similar foreign, United States federal or state law for the
relief of debtors ("Bankruptcy Law"), (i) commences a voluntary case or
proceeding, (ii) consents to the entry of an order for relief against Borrower
in an involuntary case or proceeding, (iii) consents to the appointment for
Borrower of a receiver, trustee, assignee, liquidator, sequestrator or similar
official under any Bankruptcy Law (a "Custodian"), or (iv) makes a general
assignment for the benefit of Borrower's creditors or (B) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for
relief against Borrower in an involuntary case or proceeding, (ii) appoints a
Custodian for all or substantially all of Borrower's properties, or (iii) orders
the liquidation of all or substantially all of the assets of Borrower, or (C)
Borrower is in default under the Security Agreement or (D) Borrower fails to pay
<PAGE>
interest when due, then in any such case all unpaid principal of and interest on
this Note shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of Lender.
Borrower shall pay all of the costs and expenses of Lender in connection
with any action taken by it to collect or enforce this Note, to exercise its
rights under the Security Agreement referred to above or to protect its rights
with respect thereto including reasonable attorney's fees, whether or not suit
be instituted, and Lender may, without limitation, take judgment for all such
amounts.
Borrower hereby submits to the jurisdiction of the courts of the State of
Connecticut and the Federal courts of the United States of America for
Connecticut in respect of any legal action or proceeding relating to this Note
or the enforcement of any judgment in respect of this Note. Borrower hereby
waives, and agrees not to assert as a defense in any action, suit or proceeding
for the interpretation and/or enforcement of this Note that Borrower is not
subject thereto, that such action, suit or proceeding may not be brought or is
not maintainable in said courts, that this Note may not be enforced in or by
said courts, that Borrower's property is exempt or immune from execution, that
the suit, action or proceeding is brought in an inconvenient forum or that that
venue of the suit, action or proceeding is improper. Borrower agrees that
service of process in any such action, suit or proceeding shall be deemed in
every respect effective service of process upon him if mailed or delivered to
Richard A. Sandberg, 233 Brushy Ridge, New Canaan, Connecticut 06840.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut applicable to instruments made and to be performed in
Connecticut and cannot be changed orally.
/S/ RICHARD A. SANDBERG
------------------------
Richard A. Sandberg
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 11,229
<SECURITIES> 0
<RECEIVABLES> 12,729
<ALLOWANCES> 1,028
<INVENTORY> 786
<CURRENT-ASSETS> 27,139
<PP&E> 16,743
<DEPRECIATION> 9,541
<TOTAL-ASSETS> 35,655
<CURRENT-LIABILITIES> 8,796
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 26,463
<TOTAL-LIABILITY-AND-EQUITY> 35,655
<SALES> 31,658
<TOTAL-REVENUES> 31,658
<CGS> 15,755
<TOTAL-COSTS> 15,755
<OTHER-EXPENSES> 13,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 2,541
<INCOME-TAX> 1,093
<INCOME-CONTINUING> 1,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,449
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
