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, 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 registrant's Common Stock, $.01 par value, outstanding
on August 5, 1998 was 6,768,441 shares.
<PAGE>
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
- ---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997. 3
Consolidated Statements of Operations for
the three month and six month periods ended
June 30, 1998 and 1997. 4
Consolidated Statements of Stockholders'
Equity for the twelve months ended
December 31, 1997 and the six months
ended June 30, 1998. 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997. 6
Notes to Consolidated Financial Statements. 7-8
Item 2. 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
2
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $11,765,816 $12,401,062
Accounts receivable, net of allowances of $1,011,323 and
$1,292,095, respectively 14,234,380 14,444,767
Prepaid expenses and employee advances 948,442 529,887
Inventory 724,700 729,658
Deferred income tax asset 967,020 1,016,797
------------------- --------------------
Total current assets 28,640,358 29,122,171
------------------- --------------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 9,419,469 8,489,323
Leasehold improvements 3,706,476 3,676,200
Less - accumulated depreciation and amortization (7,376,646) (6,057,511)
------------------- --------------------
5,749,299 6,108,012
------------------- --------------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,080,676 and $3,207,569, respectively 478,852 388,030
DEFERRED INCOME TAX ASSET 791,160 670,191
OTHER ASSETS 495,017 600,657
------------------- --------------------
TOTAL ASSETS $36,154,686 $36,889,061
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $690,885 $ 1,540,922
Accrued employee bonuses, commissions and payroll 363,649 1,631,180
Accrued employee stock purchase plan 136,329 549,619
Taxes payable 176,872 747,564
Current portion of capitalized lease obligations 63,975 41,470
Other accrued expenses 3,275,640 3,224,613
------------------- --------------------
Total current liabilities 4,707,350 7,735,368
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 97,404 107,449
------------------- --------------------
Total liabilities 4,804,754 7,842,817
------------------- --------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000 shares authorized,
6,845,540 and 6,791,320 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively 68,456 67,914
Additional paid-in capital 27,832,235 27,880,223
Accumulated earnings 4,190,803 2,743,380
Common stock held in treasury, at cost - 89,071 and 197,617
shares at June 30, 1998 and December 31, 1997, respectively (741,562) (1,645,273)
------------------- --------------------
Total stockholders' equity 31,349,932 29,046,244
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,154,686 $36,889,061
=================== ====================
</TABLE>
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 SIX MONTH PERIODS ENDED
JUNE 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
NET REVENUES $15,218,586 $16,056,419 $30,300,059 $31,657,574
COST OF GOODS 8,641,424 7,882,516 17,100,451 15,755,015
--------------- ----------------- -------------- ----------------
GROSS PROFIT 6,577,162 8,173,903 13,199,608 15,902,559
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,321,932 6,380,501 10,663,486 12,597,983
RESEARCH & DEVELOPMENT
EXPENSES 162,659 460,860 328,023 968,565
--------------- ----------------- -------------- ----------------
INCOME FROM OPERATIONS 1,092,571 1,332,542 2,208,099 2,336,011
INTEREST INCOME, NET 148,980 124,219 331,240 205,306
--------------- ----------------- -------------- ----------------
INCOME BEFORE PROVISION FOR 1,241,551 1,456,761 2,539,339 2,541,317
INCOME TAXES
PROVISION FOR INCOME TAXES 533,868 626,407 1,091,916 1,092,766
--------------- ----------------- -------------- ----------------
NET INCOME $707,683 $830,354 $1,447,423 $1,448,551
=============== ================= ============== ================
EARNINGS PER SHARE
BASIC .11 .13 .22 .23
DILUTED .10 .12 .21 .21
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 6,733,507 6,416,376 6,678,814 6,403,735
DILUTED 7,020,617 6,803,442 6,999,372 6,787,739
</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 TWELVE MONTHS ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Retained Common Stock Common Stock
Common Stock Paid-In Earnings Acquired for Acquired for
Capital (Deficit) Treasury, Treasury, at Total
Shares Amount Shares Cost
--------------------- -------------- --------------- --------------- ---------------- ------------
<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 51,764 518 248,498 -- -- -- 249,016
Employee stock purchase plan -- -- (564,822) -- 146,579 1,220,200 655,378
Stock grants 26,782 268 230,987 -- -- -- 231,255
Common stock acquired for
treasury -- -- -- -- (227,000) (1,936,030) (1,936,030
Net Income -- -- -- 3,297,697 -- -- 3,297,697
---------- ---------- -------------- --------------- --------------- ---------------- ------------
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 37,170 371 197,995 -- -- -- 198,366
Employee stock purchase
plan -- -- (412,050) -- 108,546 903,711 491,661
Stock grants 17,050 171 166,067 -- -- -- 166,238
Net Income -- -- -- 1,447,423 -- -- 1,447,423
---------- ---------- -------------- --------------- --------------- ---------------- ------------
BALANCE, June 30, 1998 6,845,540 $68,456 $27,832,235 $4,190,803 (89,071) ($741,562) $31,349,932
========== ========== ============== =============== =============== ================ ============
</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 SIX MONTHS ENDED JUNE 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,447,423 $1,448,551
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 1,442,243 1,338,546
Stock compensation expense 166,238 211,296
Loss on the disposal of fixed assets -- 40,914
Changes in other current assets and liabilities
(Decrease) increase in accounts payable and accrued (3,349,733) 1,582,892
liabilities
Decrease in accounts receivable 506,552 2,697,068
(Increase) in prepaid expenses and employee advances (215,253) (199,614)
Decrease (increase) in inventory 44,905 (123,122)
(Increase) decrease in other assets (184,356) 80,430
--------------- ---------------
Net cash (used in) provided by operating
activities (141,981) 7,076,961
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (836,162) (1,316,271)
Acquisition of PRL assets, net (359,590) --
Proceeds from the sale of stock held for investment -- 9,064
--------------- ---------------
Net cash (used in) investing activities (1,307,207)
(1,195,752)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Employee stock purchase plan 491,661 66,999
Purchase of common stock acquired for treasury -- (1,847,280)
Stock options exercised 198,366 102,741
Repayments of note payable -- (479,491)
Borrowings (repayments) of capitalized lease obligations 12,460 127,819
--------------- ---------------
Net cash provided by (used in) financing
activities 702,487 (2,029,212)
--------------- ---------------
Net (decrease) increase in cash and cash
equivalents (635,246) 3,740,542
CASH AND CASH EQUIVALENTS, beginning of period 12,401,062 7,488,590
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $11,765,816 $11,229,132
=============== ===============
Supplemental cash flow disclosures: Cash paid during the period:
Interest $20,004 $18,999
Income Taxes 1,778,990 1,157,417
</TABLE>
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 six months ended June 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 six months ended
June 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 through 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 six months ended June 30,
1998 and 1997, adjusted as if the acquisition had occurred January 1, 1998
and 1997, approximate $15.2 million and $17.2 million, and $30.7 million and
$34.1 million, respectively. Pro forma consolidated net income and earnings
per share would not differ materially from the reported amounts.
3. Earnings per share - In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per share." 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. Reported earnings per share for all
prior periods have been restated. Below is a reconciliation of the
numerators and denominators of the basic and diluted EPS computations for
the quarterly periods ended March 31 and June 30 and the six months ended
June 30, for both 1998 and 1997:
<TABLE>
<CAPTION>
1998
-------------------------------------------
1st Quarter 2nd Quarter Six Months
<S> <C> <C> <C>
Basic earnings per share
Weighted-average number of
common shares outstanding 6,624,120 6,733,507 6,678,814
Diluted effect of stock options / ESPP 354,006 287,110 320,558
---------- ---------- ----------
Diluted earnings per share
Weighted-average number of
common shares outstanding 6,978,126 7,020,617 6,999,372
---------- ---------- ----------
Net income $739,740 $707,683 $1,447,423
---------- ---------- -----------
Basic earnings per share $0.11 $0.11 $0.22
---------- ---------- -----------
Diluted earnings per share $0.11 $0.10 $0.21
---------- ---------- -----------
7
<PAGE>
<CAPTION>
1997
-------------------------------------------
1st Quarter 2nd Quarter Six Months
<S> <C> <C> <C>
Basic earnings per share
Weighted-average number of
common shares outstanding 6,391,093 6,416,376 6,403,735
Diluted effect of stock options / ESPP 380,943 387,066 384,004
---------- ---------- ----------
Diluted earnings per share
Weighted-average number of
common shares outstanding 6,772,036 6,803,442 6,787,739
---------- ---------- ----------
Net income $618,197 $830,354 $1,448,551
---------- ---------- -----------
Basic earnings per share $0.10 $0.13 $0.23
---------- ---------- ----------
Diluted earnings per share $0.09 $0.12 $0.21
---------- ---------- ----------
</TABLE>
Options to purchase 41,770 shares of common stock at prices ranging from
$9.75 and $12.25 per share were outstanding as of June 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.
3. New accounting pronouncements - The adoption in 1998 of SFAS #130 -
"Reporting Comprehensive Income" had no impact on the Company's financial
statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and six months ended June 30, 1998 ("Second Quarter-1998" and "Six
Months-1998", respectively) to the three months and six months ended June 30,
1997 ("Second Quarter-1997" and "Six Months-1997", respectively).
The Company's results of operations in the Second Quarter- and Six Months-1998
reflect reimbursement decreases which occurred during the Second Quarter-1997,
the profit impact of which was partially offset through cost savings in selling,
general, administrative and other operating expenses. In addition, volume
decreases in certain product lines were partially offset by the acquisition of
PRL.
RESULTS OF OPERATIONS
- ---------------------
o NET REVENUES
Net revenues decreased 5.2% to $15.2 million in the Second Quarter-1998 from
$16.1 million in the Second Quarter-1997, and 4.3% to $30.3 million in the Six
Months-1998 from $31.7 million in the Six Months-1997. These decreases reflects
the impact of volume decreases in certain product lines and price reductions in
the Second Quarter-1997, offset only partially by the acquisition of PRL on
February 1, 1998.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased from $7.9 million in the
Second Quarter-1997 to $8.6 million in the Second Quarter-1998, and from $15.8
million in the Six Months-1997 to $17.1 million in the Six Months-1998. As a
percentage of sales, cost of sales in the Second Quarter totaled 49.1% and 56.8%
in 1997 and 1998, respectively, and 49.8% and 56.4% in the Six Month periods.
The increased percentages of revenue represented by cost of sales largely
reflects the impact of the aforementioned price decreases, volume decreases in
certain product lines, the integration of PRL, and the Company's strategic focus
on anatomic pathology, which requires a larger laboratory work force versus the
clinical chemistry market segment. Salaries and wages increased from $2.7
million in the Second Quarter-1997 to $3.6 million in the Second Quarter-1998,
primarily reflecting the acquisition of PRL, while overhead expenses (primarily
building rent, utilities, and depreciation) decreased from $2.5 million in
Second Quarter-1997 to $2.4 million in Second Quarter-1998. Logistics expenses
and lab supplies for the quarter were $1.4 million and $1.3 million,
respectively, in both 1997 and 1998. Salaries and wages for the Six Month
periods increased from $5.3 million in 1997 to $6.9 million in 1998, again
reflecting the acquisition of PRL, and overhead expenses increased from $4.6
million to $4.8 million. Logistics expenses decreased from $3.1 million in the
Six Months-1997 to $2.9 million in the Six Months-1998, while cost of lab
supplies decreased from $2.8 million to $2.5 million.
o GROSS PROFIT
Gross profit totaled $6.6 million in Second Quarter-1998 versus $8.2 million in
Second Quarter-1997, while gross profit margins were 43.2% and 50.9%
respectively. Gross profit for the Six Months-1998 totaled $13.2 million versus
$15.9 million in the prior year, representing margins of 43.6% and 50.2%,
respectively. The decreases in gross profit and margins reflect the
aforementioned factors, namely volume decreases in certain product lines, price
decreases and the integration of PRL.
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
9
<PAGE>
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. 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.
In June 1998, HCFA published proposed regulations that would recalculate a key
component of the RBRVS to reflect resource consumption rather than historical
charge data. Two alternative approaches to such calculation were proposed and a
final decision is expected in late-1998, with the new fee schedules phased in
over the period 1999 to 2002. The precise impact of this proposal on the
Company's Medicare revenues cannot be determined at this time, and will depend
on the approach selected and the mix of specific pathology services furnished by
the Company.
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 an 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 decreased from $6.4 million in the
Second Quarter-1997 to $5.3 million in the Second Quarter-1998, and from $12.6
million in the Six Months-1997 to $10.7 million in 1998. As a percentage of
sales, selling, general and administrative expenses for the Second Quarter
decreased from 39.7% in 1997 to 35.0% in 1998, and from 39.8% to 35.2% for the
Six Month periods, respectively. These decreases were primarily due to reduced
selling expenses resulting from changes in the sales organization and lower
commission expense. Selling expenses were $2.6 million in the Second
Quarter-1997, or 16.2% of sales, versus $2.3 million in the Second Quarter-1998,
or 14.9% of sales. For the Six Month periods, selling expenses decreased from
$5.3 million in the 1997, or 16.7% of sales, to $4.5 million in 1998, or 14.8%
of sales. During the First Quarter-1998, the Company completed a reorganization
of its sales force begun in the Fourth Quarter of 1997.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased from $461,000 in the Second
Quarter-1997 to $163,000 in the Second Quarter-1998, and from $969,000 for the
Six Months-1997 to $328,000 for the Six Months-1998. This reduction 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 Second Quarter-1997 to
$1.1 million in the Second Quarter-1998, and from $2.3 million to $2.2 million
for the Six Months. The relatively modest drop in operating income, despite the
larger drop in gross profit, reflects cost control initiatives implemented in
anticipation of reimbursement reductions.
10
<PAGE>
o PROVISION FOR INCOME TAXES
The provision for income taxes approximates a 43% effective tax rate in both
periods, totaling $534,000 in Second Quarter-1998 and $626,000 in Second
Quarter-1997, and $1.1 million for both Six Month periods.
o NET INTEREST INCOME
Net interest income grew to $149,000 in the Second Quarter-1998 from $124,000 in
the Second Quarter-1997, and to $331,000 in the Six Months-1998 from $205,000
for the prior year, due to higher average balances and interest earned on
certain loan receivables.
o NET INCOME
Net income decreased 14.8% in the Second Quarter-1998 to $708,000, from $830,000
in the prior year. Year-to-date, net income was flat at $1.4 million for both
Six Month periods. Basic earnings per share decreased from $0.13 per share in
the Second Quarter-1997 to $0.11 per share in the Second 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 Six Months was $0.22 in 1998 versus $0.23
per share in the prior year, while diluted earnings per share was $0.21 in both
1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998, the Company had total cash and cash equivalents of $11.8
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. The $1.8 million increase
in cash during the Second Quarter-1998 is primarily attributable to improved
collections of accounts receivable. Working capital was $23.9 million and $21.4
million as of June 30, 1998 and December 31, 1997, respectively, and the current
ratios were 6.1:1 and 3.8:1, respectively.
Accounts receivable (net of allowances) totaled $14.2 million as of June 30,
1998 representing approximately 85 days of sales outstanding, compared to $16.1
million or 96 days as of March 31, 1998 and $14.4 million or 90 days as of
December 31, 1997. Days sales outstanding as of June 30, 1997 approximated 75
days. The improvement in DSO in the Second Quarter-1998 is due to strong cash
collections, while the higher DSO compared to the prior year is a result of
growth in the anatomic pathology segment and its associated billing complexity.
Capital expenditures during the Second Quarter-1998 and Six Months-1998 totaled
$416,000 and $836,000, 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 June 30, 1998, there were no amounts outstanding under this
line.
As of June 30, 1998, the Company holds 89,071 shares of Common Stock in treasury
as required by its Employee Stock Purchase Plan ("ESPP"). The Company's Board of
Directors has authorized the expenditure of up to $2 million for additional
share repurchases.
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.
The Company believes the Year 2000 IT issues are not material and will require
minimal resources to resolve.
11
<PAGE>
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 June 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.
/s/ KEVIN C. JOHNSON
------------------------------------
August 7, 1998 By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID R. SCHREIBER
------------------------------------
August 7, 1998 By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
/s/ JOHN S. FANUKO
------------------------------------
August 7, 1998 By: John S. Fanuko
Vice President, Finance and
Corporate Controller
(Principal Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
(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).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,766
<SECURITIES> 0
<RECEIVABLES> 15,170
<ALLOWANCES> 936
<INVENTORY> 725
<CURRENT-ASSETS> 28,640
<PP&E> 13,126
<DEPRECIATION> 7,377
<TOTAL-ASSETS> 36,155
<CURRENT-LIABILITIES> 4,707
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 31,282
<TOTAL-LIABILITY-AND-EQUITY> 36,155
<SALES> 15,219
<TOTAL-REVENUES> 15,219
<CGS> 8,641
<TOTAL-COSTS> 8,641
<OTHER-EXPENSES> 5,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 1,242
<INCOME-TAX> 534
<INCOME-CONTINUING> 708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 708
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.10
</TABLE>
