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 March 31, 1999
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 Issuer's Common Stock, $.01 par value, outstanding on
May 5, 1999 was 6,834,511 shares.
<PAGE>
DIANON SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of 3
March 31, 1999 and December 31, 1998
Income Statements for the 4
three months ended March 31, 1999 and 1998
Statements of Stockholders' Equity for the 5
three months ended March 31, 1999 and 1998
Statements of Cash Flows for the 6
three months ended March 31, 1999 and 1998
Notes to Financial Statements 7-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II OTHER INFORMATION
- --------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
2
<PAGE>
DIANON SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,471,758 $ 12,126,076
Accounts receivable, net of allowances of $960,266 and
$1,033,059, respectively 14,149,880 14,403,878
Prepaid expenses and employee advances 1,025,511 1,007,577
Inventory 877,241 981,647
Deferred income tax asset 1,124,118 1,047,118
--------------- ---------------
Total current assets 31,648,508 29,566,296
--------------- ---------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 10,693,623 10,367,848
Leasehold improvements 3,820,514 3,786,759
Less - accumulated depreciation and amortization (9,264,954) (8,620,122)
--------------- ---------------
5,249,183 5,534,485
--------------- ---------------
INTANGIBLE ASSETS, net of accumulated amortization of
$3,229,337 and $3,181,779 respectively 368,234 377,751
DEFERRED INCOME TAX ASSET 1,124,869 1,005,869
OTHER ASSETS 211,214 218,714
=============== ===============
TOTAL ASSETS $ 38,602,008 $ 36,703,115
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,081,525 $ 1,260,620
Accrued employee compensation 1,394,510 576,335
Accrued employee stock purchase plan 29,115 31,996
Accrued income taxes payable 796,534 309,623
Current portion of capitalized lease obligations 34,661 42,334
Other accrued expenses 3,347,801 3,018,468
--------------- ---------------
Total current liabilities 6,684,146 5,239,376
LONG-TERM PORTION OF CAPITALIZED LEASE OBLIGATIONS 86,063 80,675
--------------- ---------------
TOTAL LIABILITIES 6,770,209 5,320,051
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 6,759,884 and 6,808,729 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively 67,599 68,088
Additional paid-in capital 27,012,489 27,398,120
Retained earnings 6,570,553 5,697,710
Common stock held in treasury, at cost - 225,373 and 222,019
shares at March 31, 1999 and December 31, 1998, respectively (1,818,842) (1,780,854)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 31,831,799 31,383,064
=============== ===============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,602,008 $ 36,703,115
=============== ===============
</TABLE>
The accompanying notes to financial
statements are an integral part of these balance sheets.
3
<PAGE>
DIANON SYSTEMS, INC.
INCOME STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Net revenues $15,856,721 $15,081,473
Cost of sales 9,187,602 8,459,027
----------- -----------
GROSS PROFIT 6,669,119 6,622,446
Selling, general and administrative expenses 5,219,629 5,341,554
Research and development expenses 118,724 165,364
----------- -----------
INCOME FROM OPERATIONS 1,330,766 1,115,528
Interest income, net 161,274 182,260
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,492,040 1,297,788
Provision for income taxes 619,197 558,048
----------- -----------
NET INCOME $ 872,843 $ 739,740
=========== ===========
EARNINGS PER SHARE:
BASIC $ .13 $ .11
DILUTED $ .13 $ .11
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 6,533,757 6,624,120
DILUTED 6,716,461 6,978,126
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
4
<PAGE>
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Common Stock
Common Stock Paid-In Retained Acquired for Treasury
Shares Amount Capital Earnings Shares Amount Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 25,738 257 119,868 -- -- -- 120,125
Employee stock purchase plan -- -- (106,978) -- 28,518 237,429 130,451
Stock grants 16,025 160 156,083 -- -- -- 156,243
Net income -- -- -- 739,740 -- -- 739,740
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1998 6,833,083 $ 68,331 $28,049,196 $ 3,483,120 (169,099) ($1,407,844) $30,192,803
=========== =========== =========== =========== =========== =========== ===========
BALANCE, December 31, 1998 6,808,729 $ 68,088 $27,398,120 $ 5,697,710 (222,019) ($1,780,854) $31,383,064
Employee stock purchase plan -- -- (2,332) -- 646 5,213 2,881
Stock grants 1,155 11 9,951 -- -- -- 9,962
Common stock acquired for treasury -- -- -- -- (54,000) (436,951) (436,951)
Retired shares (50,000) (500) (393,250) -- 50,000 393,750 --
Net income -- -- -- 872,843 -- -- 872,843
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1999 6,759,884 $ 67,599 $27,012,489 $ 6,570,553 (225,373) ($1,818,842) $31,831,799
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
5
<PAGE>
DIANON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 872,843 $ 739,740
Adjustments to reconcile net income to net
cash provided by (used in) operations -
Non-cash charges
Depreciation and amortization 692,390 730,840
Provision for bad debts -- 300,000
Stock compensation expense 9,962 156,243
Changes in other current assets and liabilities
Increase (decrease) in accounts payable and accrued liabilities 1,452,443 (1,824,308)
Decrease (increase) in accounts receivable 253,998 (1,615,863)
Decrease in inventory 104,406 51,832
(Increase) in prepaid expenses and employee advances (17,934) (506,429)
(Increase) in other assets (188,500) 69,711
------------ ------------
Net cash provided by (used in) operating activities 3,179,608 (1,898,234)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (359,530) (420,428)
Intangible asset expenditures (38,041) --
Acquisition of PRL assets, net -- (359,590)
------------ ------------
Net cash (used in) investing activities (397,571) (780,018)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock acquired for treasury (436,951) --
Repayments of note payable and other (2,285) (2,384)
Employee stock purchase plan and stock options exercised 2,881 250,576
------------ ------------
Net cash (used in) provided by financing activities (436,355) 248,192
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,345,682 (2,430,060)
CASH AND CASH EQUIVALENTS, beginning of period 12,126,076 12,401,062
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 14,471,758 $ 9,971,002
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period:
Interest $ 7,735 $ 16,131
Income Taxes $ 311,350 $ 1,056,790
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
6
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION - The consolidated financial statements at and for the
three months ended March 31, 1999 and 1998 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, 1998, 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. The results of operations for the
three months ended March 31, 1999 and 1998 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 net
revenues for the three months ended March 31, 1998, adjusted as if the
acquisition had occurred January 1, 1998 approximate $15.5 million. Pro
forma consolidated net income and earnings per share would not differ
materially from the reported amounts.
3. EARNINGS PER SHARE - Basic earnings per share have been computed based on
the weighted average number of common shares outstanding during each period.
Diluted earnings per share have been computed based on the weighted average
number of common shares and common equivalent shares outstanding during each
period. 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:
<TABLE>
<CAPTION>
First Quarter First Quarter
1999 1998
---------- ----------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted-average number of common shares outstanding 6,533,757 6,624,120
DILUTED EFFECT OF:
Stock options 182,704 354,006
---------- ----------
DILUTED EARNINGS PER SHARE
Weighted-average number of common shares outstanding 6,716,461 6,978,126
---------- ----------
NET INCOME $ 872,843 $ 739,740
---------- ----------
BASIC EARNINGS PER SHARE $ 0.13 $ 0.11
---------- ----------
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.11
---------- ----------
</TABLE>
7
<PAGE>
Options to purchase 297,456 shares of common stock at prices ranging from
$8.125 to $12.25 per share were outstanding as of March 31, 1999 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. SUBSEQUENT EVENT - On April 7, 1999, the Company signed a definitive
agreement to acquire substantially all the assets of Kyto-Meridien
Diagnostics, LLC, an outpatient OB/Gyn laboratory with locations in Woodbury
and New City, New York, scheduled to become effective May 1, 1999. The
Company plans to finance the acquisition through a combination of available
cash and drawdowns of its credit line, as well as issuance of Common Stock,
newly issued or treasury shares.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The descriptive analysis contained herein compares the financial results of the
Company for the three months ended March 31, 1999 ("First Quarter-1999") to the
three months ended March 31, 1998 ("First Quarter-1998").
The Company's results of operations in the First Quarter-1999 reflect higher
revenues on increased volume compared to the First Quarter-1998, along with
continued emphasis on controlling costs in selling, general, administrative and
other operating expenses. In addition, the Company's revenue base continues to
shift toward anatomic pathology from clinical chemistry.
RESULTS OF OPERATIONS
- ---------------------
o NET REVENUES
Net revenues increased 5.1% to $15.9 million in First Quarter-1999 from $15.1
million in First Quarter-1998. This increase is primarily due to the acquisition
of PRL on February 1, 1998 and the related sales for three months in 1999 versus
two months in 1998.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $9.2 million in First
Quarter-1999 from $8.5 million in First Quarter-1998. As a percentage of sales,
cost of sales totaled 57.9% and 56.1%, respectively. The increased percentage of
revenue represented by cost of sales largely reflects 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
$3.3 million in First Quarter-1998 to $3.7 million in First Quarter-1999,
primarily due to an additional month of salaries at PRL. In addition, overhead
expenses (primarily building rent, utilities, and depreciation) increased from
$2.4 million in First Quarter-1998 to $2.8 million in First Quarter-1999.
o GROSS PROFIT
Gross profit was similar in First Quarter-1999 to First Quarter-1998, at $6.7
million and $6.6 million, with gross profit margins of 42.1% and 43.9%
respectively. The decrease in margins is primarily attributable to price
reimbursement denials for certain laboratory services.
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. 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. The President's fiscal
year 2000 budget proposes to reduce this cap even further to 72% of the national
median. In addition, the Balanced Budget Act of 1997 ("BBA") 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
9
<PAGE>
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.
On November 1, 1998, HCFA published its final Medicare physician fee schedule
regulation to be effective January 1, 1999. The regulation decreased the
conversion factor by 5.3% in 1999. It also recalculated 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.
HCFA is required to recalculate the malpractice expense component of the RBRVS
to make it resource-based, effective January 1, 2000. Because malpractice
expenses are the least significant component of the RBRVS formula, the
implementation of resource-based malpractice expense is not expected to make a
significant difference in reimbursement amounts. More information will be
available on HCFA's malpractice proposal when once the proposed Medicare
physician fee schedule is published this May or June.
The 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 material adverse impact on the Company's gross
profits.
The Company's Form 10-K for the year ended December 31, 1998, 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 2.3% from $5.3 million in
First Quarter-1998 to $5.2 million in First Quarter-1999. As a percentage of
sales, selling, general and administrative expenses decreased from 35.4% in
First Quarter-1998 to 32.9% in First Quarter-1999, primarily due to lower
marketing and administrative expenses, largely offset by higher sales commission
and other selling costs. Also, First Quarter-1998 includes severance costs of
$98,000.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 28.2% from $165,000 in First
Quarter-1998 to $119,000 in First Quarter-1999 as a result of the Company's
continuing selectivity in evaluating existing and new technologies.
o INCOME FROM OPERATIONS
Income from operations increased 19.3% from $1.1 million in First Quarter-1998
to $1.3 million in First Quarter-1999, primarily as a result of reduced general,
administrative and research and development costs discussed previously.
10
<PAGE>
o NET INTEREST INCOME
Net interest income declined 11.5% from $182,000 in First Quarter-1998 to
$161,000 in First Quarter-1999, partially due to lower interest earned on
officer loans.
o PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 41.5% and 43.0% effective tax rate in
First Quarter-1999 and First Quarter-1998, respectively, totaling $619,000 and
$558,000 in the corresponding periods. The lower rate in First Quarter-1999
reflects reduced state and miscellaneous taxes.
o NET INCOME
Net income increased 18.0% from $740,000 in First Quarter-1998 to $873,000 in
First Quarter-1999, while basic and diluted earnings per share also increased
18.0%, from $0.11 per share to $0.13 per share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1999, the Company had total cash and cash equivalents of $14.5
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. The $2.3 million increase
in cash from December 31, 1998 is primarily attributable to increased
collections on sales, and timing differences in the payment of salaries and
other liabilities. Working capital was $25.0 million and $24.3 million as of
March 31, 1999 and December 31, 1998, respectively, and the current ratio was
4.7:1 and 5.6:1, respectively.
Accounts receivable (net of allowances) totaled $14.1 million as of March 31,
1999 representing approximately 79 days of sales outstanding ("DSO"), compared
to $14.4 million as of December 31, 1998 or 82 days. DSO as of March 31, 1998
approximated 96 days. The decrease in DSO relates to improved Company billing
and collection processes, resulting largely from enhancements in our billing and
communications systems.
Total capital expenditures during the First Quarter-1999 totaled $360,000.
Expenditures were primarily for ongoing operations.
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 compliance
with financial covenants. As of March 31, 1999, there have been no amouts drawn
down under this line.
As of March 31, 1999, the Company holds 225,373 shares of Common Stock in
treasury at a cost of approximately $1.8 million. In October 1998, the Company's
Board of Directors authorized the repurchase of up to an additional 1.5 million
shares of the Company's Common Stock, on the open market or in a private
transaction, and that the total expenditures for share repurchases be limited to
an additional $10.0 million, for a total authorization of approximately 1.7
million shares and $12.0 million in total expenditures. The remaining authorized
repurchases as of March 31, 1999 are approximately 1.4 million shares and $9.3
million in total expenditures.
On April 7, 1999, the Company signed a definitive agreement to acquire
substantially all the assets of Kyto-Meridien Diagnostics, LLC, an outpatient
OB/Gyn laboratory with locations in Woodbury and New City, New York, scheduled
to become effective May 1, 1999. The Company plans to finance the acquisition
through a combination of available cash and drawdowns of the aforementioned
credit line, as well as issuance of Common Stock, newly issued or treasury
shares.
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.
11
<PAGE>
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 a
date using "00" as the 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.
Currently, 100% of the Company's software has been remediated, unit tested, and
implemented. Substantial progress has been made with respect to personal
computers, mainframes, servers and laboratory instrumentation. The Company
expects all of its computer hardware to be Year 2000 compliant during the second
half of 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 be less than $50,000.
The Company continues 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. As discussed above, the
Company is unaware of any Year 2000 issues related to air transportation.
Accordingly, the Company has not developed a contingency plan in the event its
vendors for air transportation are not Year 2000 compliant. 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
- ----------------------------------------
This document 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
12
<PAGE>
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
anatomic national 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 anatomic national laboratories,
small specialized laboratories and well established local pathologists; and the
uncertainties which would arise if integrated delivery systems closed to outside
providers emerged as the dominant form of health care delivery. These and other
risks are set forth in greater detail in the Company's Annual Report on Form 10K
for the year ended December 31, 1998 on file with the Securities and Exchange
Commission.
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.
13
<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
b Report on Form 8-K.
No reports on Form 8-K were filed during the First Quarter 1999.
14
<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.
May 7, 1999 /s/ KEVIN C. JOHNSON
--------------------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
May 7, 1999 /s/ DAVID R. SCHREIBER
--------------------------------------
By: David R. Schreiber
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
PAGE
----
27.1 Financial Data Schedule (filed herewith)
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000779282
<NAME> DIANON SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 14,472
<SECURITIES> 0
<RECEIVABLES> 15,110
<ALLOWANCES> 960
<INVENTORY> 877
<CURRENT-ASSETS> 31,649
<PP&E> 14,514
<DEPRECIATION> 9,265
<TOTAL-ASSETS> 38,602
<CURRENT-LIABILITIES> 6,684
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 31,764
<TOTAL-LIABILITY-AND-EQUITY> 37,338
<SALES> 15,857
<TOTAL-REVENUES> 15,857
<CGS> 9,188
<TOTAL-COSTS> 9,188
<OTHER-EXPENSES> 5,338
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 1,492
<INCOME-TAX> 619
<INCOME-CONTINUING> 873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 873
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
