SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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 06615
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 381-4000
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on November 6, 1998 was 6,782,516 shares.
<PAGE>
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for
the three-month and nine-month periods ended
September 30, 1998 and 1997 4
Consolidated Statements of Stockholders'
Equity for the nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-8
Item 2. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 8
Item 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12
Part II OTHER INFORMATION
- --------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
2
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,385,004 $ 12,401,062
Accounts receivable, net of allowances of
$1,013,637 and $1,292,095, respectively 13,872,975 14,444,767
Prepaid expenses and employee advances 596,688 529,887
Inventory 1,005,177 729,658
Deferred income tax asset 725,094 1,016,797
---------------------------
Total current assets 29,584,938 29,122,171
---------------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 9,996,411 8,489,323
Leasehold improvements 3,786,714 3,676,200
Less - accumulated depreciation
and amortization (7,986,894) (6,057,511)
---------------------------
5,796,231 6,108,012
---------------------------
INTANGIBLE ASSETS, net of accumulated amortization
of $3,131,229 and $3,207,569, respectively 428,301 388,030
DEFERRED INCOME TAX ASSET 1,033,086 670,191
OTHER ASSETS 495,367 600,657
---------------------------
TOTAL ASSETS $ 37,337,923 $ 36,889,061
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 846,403 $ 1,540,922
Accrued employee compensation 912,343 1,631,180
Accrued employee stock purchase plan 31,993 549,619
Current portion of capitalized lease obligations 63,122 41,470
Accrued income taxes payable 167,733 747,564
Other accrued expenses 3,076,620 3,224,613
---------------------------
Total current liabilities 5,098,214 7,735,368
---------------------------
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 87,862 107,449
---------------------------
Total liabilities 5,186,076 7,842,817
---------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share,
20,000,000 shares authorized, 6,846,970
and 6,791,320 shares issued and outstanding
at September 30, 1998 and December 31, 1997,
respectively 68,470 67,914
Additional paid-in capital 27,756,526 27,880,223
Retained earnings 4,877,324 2,743,380
Common stock held in treasury, at cost - 66,119
and 197,617 shares at September 30, 1998 and
December 31, 1997, respectively (550,473) (1,645,273)
---------------------------
Total stockholders' equity 32,151,847 29,046,244
===========================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,337,923 $ 36,889,061
===========================
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
3
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUES $15,750,655 $14,512,373 $46,050,714 $46,169,947
COST OF GOODS 9,275,302 7,621,207 26,375,753 23,376,222
-----------------------------------------------------
Gross Profit 6,475,353 6,891,166 19,674,961 22,793,725
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,293,541 5,224,120 15,957,027 17,822,103
RESEARCH & DEVELOPMENT
EXPENSES 146,313 381,681 474,336 1,350,246
-----------------------------------------------------
Income from Operations 1,035,499 1,285,365 3,243,598 3,621,376
INTEREST INCOME, NET 184,852 153,430 516,092 358,736
-----------------------------------------------------
Income Before Provision for
Income Taxes 1,220,351 1,438,795 3,759,690 3,980,112
PROVISION FOR INCOME TAXES 533,830 618,682 1,625,746 1,711,448
-----------------------------------------------------
Net Income $ 686,521 $ 820,113 $ 2,133,944 $ 2,268,664
=====================================================
EARNINGS PER SHARE
BASIC .10 .13 .32 .35
DILUTED .10 .12 .31 .33
WEIGHTED AVERAGE SHARES
OUTSTANDING
BASIC 6,774,514 6,435,277 6,710,714 6,414,249
DILUTED 6,914,163 6,783,266 6,970,969 6,786,248
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Retained Common Stock Common Stock
Common Stock Paid-In Earnings Acquired for Acquired for
Shares Amount Capital (Deficit) Treasury, Shares Treasury, at Cost Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 6,712,774 $ 67,128 $ 27,965,560 ($ 554,317) (117,196) ($ 929,443) $ 26,548,928
Stock options exercised 44,503 445 212,011 -- -- -- 212,456
Employee stock purchase plan -- -- (127,753) -- 33,382 277,772 150,019
Stock grants 25,617 256 221,023 -- -- -- 221,279
Common stock acquired for
treasury -- -- -- -- (227,000) (1,936,030) (1,936,030)
Net Income -- -- -- 2,268,664 -- -- 2,268,664
---------------------------------------------------------------------------------------------------
BALANCE, September 30, 1997 6,782,894 $ 67,829 $ 28,270,841 $ 1,714,347 (310,814) ($ 2,587,701) $ 27,465,316
===================================================================================================
BALANCE, December 31, 1997 6,791,320 $ 67,914 $ 27,880,223 $ 2,743,380 (197,617) ($ 1,645,273) $ 29,046,244
Stock options exercised 37,490 374 199,451 -- -- -- 199,825
Employee stock purchase plan -- -- (499,193) -- 131,498 1,094,800 595,607
Stock grants 18,160 182 176,045 -- -- -- 176,227
Net Income -- -- -- 2,133,944 -- -- 2,133,944
---------------------------------------------------------------------------------------------------
BALANCE, September 30, 1998 6,846,970 $ 68,470 $ 27,756,526 $ 4,877,324 (66,119) ($ 550,473) $ 32,151,847
===================================================================================================
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
5
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
SEPTEMBER 30,
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
---------------------------
Net income $ 2,133,944 $ 2,268,664
---------------------------
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 2,103,042 2,216,659
Stock compensation expense 176,227 221,279
Loss on the disposal of fixed assets -- 40,914
Changes in other current assets and liabilities
Decrease in accounts receivable 867,956 920,073
(Increase) decrease in prepaid expenses and
employee advances (40,158) 299,020
(Increase) in inventory (235,572) (102,977)
Decrease in other assets 175,803 112,361
(Decrease) increase in accounts payable
and accrued liabilities (3,141,866) 1,433,843
---------------------------
Net cash provided by
operating activities 2,039,376 7,409,836
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,493,341) (1,650,368)
Acquisition of PRL, net (359,590) --
Proceeds from the sale of stock held for
investment -- 9,064
---------------------------
Net cash (used in) investing activities (1,852,931) (1,641,304)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Employee stock purchase plan 595,607 150,019
Stock options exercised 199,825 212,456
Borrowings (repayments) of capitalized
lease obligations, net 2,065 117,189
Repayments of note payable -- (650,154)
Purchase of common stock acquired for
treasury -- (1,936,030)
---------------------------
Net cash provided by (used in)
financing activities 797,497 (2,106,520)
---------------------------
Net increase in cash and cash equivalents 983,942 3,662,012
CASH AND CASH EQUIVALENTS, beginning of period 12,401,062 7,488,590
---------------------------
CASH AND CASH EQUIVALENTS, end of period $13,385,004 $11,150,602
===========================
Supplemental cash flow disclosures:
Cash paid during the period:
Interest $ 22,997 $ 24,795
Income Taxes 2,164,552 1,475,089
The accompanying notes to consolidated financial
statements are an integral part of these statements.
6
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company - The consolidated financial statements as of and for the three
months and nine months ended September 30, 1998 and 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 for such periods have been
made, and the interim accounting policies followed are in conformity with
generally accepted accounting principles and are consistent with those
applied for annual periods as described in the Company's annual report for
the year ended December 31, 1997, previously filed on Form 10-K with the
Securities and Exchange Commission (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,
1997. The results of operations for the three months and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the operating
results for the full years.
2. Acquisition - Effective February 1, 1998, the Company acquired certain
assets of a pathology laboratory in Tampa, Florida ("Pathologists Reference
Laboratory" or "PRL"). The acquisition price was approximately $558,000
(including acquisition costs), of which $359,590 was paid in cash prior to
March 31, 1998 and the balance was satisfied through the assumption of
certain liabilities. The purchase price was primarily allocated to trade
receivables ($265,000) and customer lists ($164,000), and the acquisition
has been accounted for pursuant to the purchase method of accounting. Pro
forma consolidated net revenues for the three months and nine months ended
September 30, 1998 and 1997, adjusted as if the acquisition had occurred
January 1, 1998 and 1997, approximate $15.8 million and $16.0 million, and
$46.5 million and $50.2 million, respectively. Pro forma consolidated net
income and earnings per share would not differ materially from the reported
amounts.
3. Earnings per share - The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per share" as of December 31, 1977. Reported
earnings per share for all prior periods have been restated. Basic earnings
per share have been computed based on the weighted average number of common
shares outstanding during each year. Diluted earnings per share have been
computed based on the weighted average number of common shares and common
equivalent shares outstanding during each year. Common equivalent shares
outstanding include the common equivalent shares calculated for warrants
and stock options under the treasury stock method. Below is a
reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the quarterly periods ended March 31, June 30 and
September 30 and the nine months ended September 30, for both 1998 and
1997:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter Nine Months
<S> <C> <C> <C> <C>
Basic earnings per share
Weighted-average number of
common shares outstanding 6,624,120 6,733,507 6,774,514 6,710,714
Diluted effect of stock options / ESPP 354,006 287,110 139,649 260,255
--------- --------- --------- ---------
Diluted earnings per share
Weighted-average number of
common shares outstanding 6,978,126 7,020,617 6,914,163 6,970,969
Net income $ 739,740 $ 707,683 $ 686,521 $2,133,944
Basic earnings per share $ 0.11 $ 0.11 $ 0.10 $ 0.32
Diluted earnings per share $ 0.11 $ 0.10 $ 0.10 $ 0.31
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter Nine Months
<S> <C> <C> <C> <C>
Basic earnings per share
Weighted-average number of
common shares outstanding 6,391,093 6,416,376 6,435,277 6,414,249
Diluted effect of stock options / ESPP 380,943 387,066 347,989 371,999
------- ------- ------- -------
Diluted earnings per share
Weighted-average number of
common shares outstanding 6,772,036 6,803,442 6,783,266 6,786,248
Net income $ 618,197 $ 830,354 $ 820,113 $2,268,664
Basic earnings per share $ 0.10 $ 0.13 $ 0.13 $ 0.35
Diluted earnings per share $ 0.09 $ 0.12 $ 0.12 $ 0.33
</TABLE>
Options to purchase 475,856 shares of common stock at prices ranging from
$7.88 to $12.25 per share were outstanding as of September 30, 1998 but
were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of
common shares.
4. New accounting pronouncements - The adoption in 1998 of SFAS #130--
"Reporting Comprehensive Income" had no impact on the Company's financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to market risk with respect to its cash and cash
equivalents since substantially all amounts are invested in a fund holding U.S.
Treasury securities with maturities of less than three months.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and nine months ended September 30, 1998 ("Third Quarter-1998" and
"Nine Months-1998", respectively) to the three months and nine months ended
September 30, 1997 ("Third Quarter-1997" and "Nine Months-1997", respectively).
The Company's results of operations in the Third Quarter-1998 and Nine
Months-1998 reflect volume mix shifts toward lower margin services, as well as
reimbursement decreases which occurred throughout 1997. The acquisition of PRL
offset substantially all of the revenue declines caused by the aforementioned
factors. The profit impact of these revenue factors was partially offset through
cost savings in selling, general, administrative and other operating expenses in
the early part of the year, while the Third Quarter reflected the impact of
incremental costs related to anticipated managed care contracts which have been
delayed.
Results of Operations
o Net Revenues
Net revenues increased 8.5% to $15.8 million in the Third Quarter-1998 from
$14.5 million in the Third Quarter-1997, and were essentially flat for the Nine
Months-1998 at $46.1 million compared with $46.2 million for the Nine
Months-1997. Sales of PRL (acquired February 1998) offset the impact of volume
decreases in certain product lines and price reductions for the Nine Months, and
largely accounted for the revenue increase in the Third Quarter.
o Cost of Sales
Cost of sales, which consists primarily of laboratory payroll and supplies,
logistics and facility costs, increased from $7.6 million in the Third
Quarter-1997 to $9.3 million in the Third Quarter-1998, and from $23.4 million
in the Nine Months-1997 to $26.4 million in the Nine Months-1998. As a
percentage of sales, cost of sales in the Third Quarter totaled 52.5% and 58.9%
in 1997 and 1998, respectively, and 50.6% and 57.3% in the Nine Month periods.
The increased percentages of revenue represented by cost of sales largely
reflects the impact of a partial mix shift toward certain lower margin services,
the aforementioned price decreases, and the integration of PRL. In addition, the
Company incurred incremental operating costs in the Third Quarter-1998 in
anticipation of new managed care contracts which have been delayed.
o Gross Profit
Gross profit totaled $6.5 million in Third Quarter-1998 versus $6.9 million in
Third Quarter-1997, while gross profit margins were 41.1% and 47.5%
respectively. Gross profit for the Nine Months-1998 totaled $19.7 million versus
$22.8 million in the prior year, representing margins of 42.7% and 49.4%,
respectively. The decreases in gross profit and margins reflect the factors
discussed above under cost of sales.
The clinical laboratory industry, which includes both clinical chemistry and
anatomic pathology, has seen steady and continuing downward pressure on prices
exerted by both government and private third party payers. Payment for services
such as those provided by the Company is and will likely continue to be affected
by periodic reevaluations made by payers concerning which services to reimburse
or cease reimbursing, and over time Congress has reduced the national cap on
Medicare laboratory fee schedules (under which the Company's clinical chemistry
services are reimbursed) to 74% of the national median. In addition, legislation
freezes fee schedule payments for the 1998-2002 period.
With respect to the Company's anatomic pathology services, which are not
reimbursed under the Medicare laboratory fee schedules, the Medicare fees 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.
9
<PAGE>
In 1997, there was an overall decrease of 5.7% in payments for pathology
services due to a five-year review of the work value component and a decrease in
the 1997 conversion factor applicable to pathology services, plus an additional
decrease in Connecticut, where the Company's primary operations are located,
because of the Health Care Financing Administration's ("HCFA") reduction in the
number of different payment localities recognized for RBRVS purposes. Although
the conversion factor (which is a component of the reimbursement calculation)
increased by 8.4% in 1998, the overall impact on the Company's revenues will be
only modestly positive due to, among other factors, other changes in the RBRVS
formula in 1998.
On November 1, 1998, HCFA published its final Medicare physician fee schedule
regulation to be effective January 1, 1999. The regulation provides that the
conversion factor will decrease by 5.3% in 1999. It also recalculates physician
practice expenses, a key component of the RBRVS, to reflect resource consumption
rather than historical charge data. The resulting new practice expense values
will be phased in over the period 1999 to 2002. While the actual impact on the
Company's Medicare pathology revenues will depend on the mix of pathology
services furnished, HCFA estimates that the new system will decrease the
Medicare revenue for pathologists 13% once it is fully phased-in at the end of
the four-year period. Overall, these fee schedule changes likely will continue
to have a negative effect on the Company's average unit price. The Company
estimates that the adverse impact on revenues in 1999 will not be material.
The Balanced Budget Act of 1997 ("BBA") directs the Secretary of the Department
of Health and Human Services to implement a prospective payment system ("PPS")
for hospital outpatient services by January 1, 1999. Because of Year 2000
computer problems, however, HCFA has asserted that it cannot implement the
outpatient PPS until after January 1, 2000. On September 8, 1998, HCFA published
a proposed outpatient PPS rule that would carve out clinical laboratory services
from the outpatient PPS rates, but would include the technical component of
surgical pathology services. The outpatient PPS could affect the Company's
revenues for these surgical pathology services depending on the precise details
of how and when the PPS is implemented.
Other potential changes in government and third-party payer reimbursement,
resulting from federal, state or local legislation, the impact of managed care,
or other market pressures, are also likely to continue the downward pressure on
prices and make the market for clinical laboratory services more competitive,
which could in turn have a mateiral adverse impact on the Company's gross
profits.
The Company's Form 10-K for the year ended December 31, 1997, previously filed
with the Securities and Exchange Commission, contains additional information
regarding the complex area of reimbursement.
o Selling, general and administrative expenses
Selling, general and administrative expenses increased slightly from $5.2
million in the Third Quarter-1997 to $5.3 million in the Third Quarter-1998, and
decreased from $17.8 million in the Nine Months-1997 to $16.0 million in 1998.
As a percentage of sales, selling, general and administrative expenses for the
Third Quarter and Nine Month periods decreased from 36.0% to 33.6%, and from
38.6% to 34.7%, respectively. The results reflect the operating leverage
resulting from the PRL acquisition, reduced marketing expenses in both the Third
Quarter and Nine Month periods, and lower selling expenses in the early part of
1998 due to changes in the sales force. These were offset somewhat by increased
spending corresponding to improvements in the billing organization.
o Research and development expenses
Research and development expenses decreased from $382,000 in the Third
Quarter-1997 to $146,000 in the Third Quarter-1998, and from $1,350,000 for the
Nine Months-1997 to $474,000 for the Nine Months-1998. This reduction partially
reflects the evolution of certain developmental test costs from R&D into cost of
sales as those tests have been brought to market and reimbursement rates are
currently being established.
o Income from Operations
Income from operations decreased from $1.3 million in the Third Quarter-1997 to
$1.0 million in the Third Quarter-1998, and from $3.6 million to $3.2 million
for the Nine Months. The relatively modest drop in year-to-date operating
10
<PAGE>
income, despite the larger drop in gross profit, reflects cost control
initiatives implemented in anticipation of reimbursement reductions offset
somewhat in the Third Quarter by the incremental costs incurred in anticipation
of new managed care contracts which have been delayed, as described above.
o Provision for Income Taxes
The provision for income taxes approximates a 43% effective tax rate in both
periods, totaling $534,000 in Third Quarter-1998 and $619,000 in Third
Quarter-1997, and $1.6 million and $1.7 million, respectively, for the
corresponding Nine Month periods.
o Net Interest Income
Net interest income grew to $185,000 in the Third Quarter-1998 from $153,000 in
the Third Quarter-1997, and to $516,000 in the Nine Months-1998 from $359,000
for the prior year, primarily due to higher average balances.
o Net Income
Net income decreased 16.3% in the Third Quarter-1998 to $687,000, from $820,000
in the prior year. Year-to-date net income decreased to $2.1 million in 1998
from $2.3 million in 1997. Basic earnings per share decreased from $0.13 per
share in the Third Quarter-1997 to $0.10 per share in the Third Quarter-1998,
while diluted earnings per share was $0.12 per share in 1997 and $0.10 per share
in 1998. Basic earnings per share for the Nine Months was $0.32 in 1998 versus
$0.35 per share in the prior year, while diluted earnings per share was $0.31 in
the Nine Months-1998 and $0.33 in the Nine Months-1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had total cash and cash equivalents of $13.4
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. This represents an
increase of $1.6 million during the quarter. Working capital was $24.5 million
and $21.4 million as of September 30, 1998 and December 31, 1997, respectively,
and the current ratios were 5.8:1 and 3.8:1, respectively.
Accounts receivable (net of allowances) totaled $13.9 million as of September
30, 1998 representing approximately 81 days of sales outstanding, compared to
$14.4 million or 90 days as of December 31, 1997. Days sales outstanding as of
September 30, 1997 approximated 92 days. The favorable progression in DSO is due
to strong cash collections, partly resulting from improvements in billing
procedures and follow-up initiatives.
Capital expenditures during the Third Quarter-1998 and Nine Months-1998 totaled
$657,000 and $1,493,000, respectively, while the acquisition of the PRL assets
represented a cash outlay of $360,000 in the First Quarter-1998.
Effective February 17, 1998, the Company entered into a three-year, $15 million
line of credit agreement with a bank. The agreement includes various provisions
regarding borrowings under the facility, including those related to financial
covenants. As of September 30, 1998, there were no amounts outstanding under
this line.
As of September 30, 1998, the Company holds 66,119 shares of Common Stock in
treasury. In November 1998, the Company's Board of Directors authorized
additional expenditures for share repurchases. The Company is currently
authorized to repurchase up to approximately 1.7 million shares at an aggregate
cost not to exceed approximately $11.8 million.
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.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, any of the
Company's computer programs that have time-sensitive software may recognize
11
<PAGE>
a date using "00" as their year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
issue bills, or engage in similar normal business activities.
While the Company believes the remedial measures necessary to address its
internal Year 2000 issues are not material and will require minimal resources to
resolve, it has determined that certain actions are necessary. It has developed
a plan to mitigate its Year 2000 issues, which involves four phases: assessment,
remediation, testing, and implementation. To date, the Company has fully
completed its assessment of all material systems that could be affected by the
Year 2000 Issue, and has identified specific systems requiring further action.
All remediated systems are expected to be fully implemented by early 1999.
The Company will utilize internal resources to reprogram, or replace, test, and
implement the software for Year 2000 modifications. Management anticipates that
its total year 2000 project costs will not be material.
The Company has begun to query its important customers, suppliers and vendors to
assess their Year 2000 readiness. As to customers, the most significant exposure
is that associated with the federal government's Medicare and Medicaid programs
and with major insurance companies. These customers in aggregate represent a
material portion of the Company's revenues and corresponding cash flow. As to
suppliers and vendors, the most significant exposure is that associated with air
transportation (substantially all specimens are flown in overnight and the
resulting reports overnighted back to the customer) and laboratory supplies. To
date, the Company is not aware of any problems that would materially impact
results of operations, liquidity, or capital resources. However, the Company has
no means of ensuring that these customers, suppliers and vendors will be Year
2000 compliant. The inability of those parties to complete their Year 2000
resolution process could materially impact the Company. The Company will strive
to maintain liquidity, through its credit line and cash position, to mitigate
any cash flow risks associated with the aforementioned Year 2000 exposures.
The Company's plans to complete Year 2000 modification are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. Estimates regarding the status of remediation and the expected
completion dates are based on hours expended to date compared to total expected
hours. However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel training in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
If the Company's modifications and replacements are not made on a complete or
timely basis, the Year 2000 Issue could have a material impact on the operations
of the Company.
Risk Factors; Forward Looking Statements
The Management's Discussion and Analysis contains 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; 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 healthcare delivery;
the uncertainties relating to states erecting barriers to the performance of
national anatomic national laboratories, together with the competitive pressures
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.
12
<PAGE>
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a Exhibits
(11.1) Statement regarding computation of per share earnings is not required
because the relevant computation can be determined from the material
contained in the Financial Statements included herein.
(27.1) Financial Data Schedule (filed herewith).
b Report on Form 8-K. No reports on Form 8-K were filed during the quarter
ended September 30, 1998 .
13
<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.
November 13, 1998 /s/ KEVIN C. JOHNSON
-----------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
November 13, 1998 /s/ DAVID R. SCHREIBER
-----------------------------------
By: David R. Schreiber
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
November 13, 1998 /s/ JOHN S. FANUKO
-----------------------------------
By: John S. Fanuko
Vice President, Finance and
Corporate Controller
(Principal Accounting Officer)
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