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, 2000
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 1, 2000 was 7,152,030 shares.
<PAGE>
DIANON SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
---------------------------- --------
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 2000
and December 31, 1999. 3
Income Statements for the three month and
six month periods ended June 30, 2000 and 1999. 4
Statements of Stockholders' Equity for the six
months ended June 30, 2000 and 1999. 5
Statements of Cash Flows for the six months
ended June 30, 2000 and 1999. 6
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>
<TABLE>
<CAPTION>
DIANON SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
------------------- ---------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $11,102,430 $ 9,761,047
Accounts receivable, net of allowances of $1,106,596 and
$1,010,266, respectively 20,899,352 19,477,904
Prepaid expenses and employee advances 843,178 1,074,877
Inventory 1,454,150 911,473
Deferred income tax asset 751,352 986,471
------------------- ---------------
Total current assets 35,050,462 32,211,772
------------------- ---------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 13,530,242 12,142,415
Leasehold improvements 4,995,790 4,648,702
Less - accumulated depreciation and amortization (12,975,073) (11,433,539)
-------------------- ---------------
5,550,959 5,357,578
-------------------- ---------------
INTANGIBLE ASSETS, net of accumulated amortization of
$4,252,860 and $3,852,204 respectively 12,453,623 12,854,280
DEFERRED INCOME TAX ASSET 1,571,019 1,422,723
OTHER ASSETS 236,539 242,572
-------------------- ---------------
TOTAL ASSETS $54,862,602 $52,088,925
==================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,971,799 $ 1,642,065
Accrued employee compensation 2,078,074 1,103,903
Accrued income taxes payable 140,813 751,056
Current portion of capitalized lease obligatioins 30,567 31,109
Other accrued expenses 3,343,750 3,434,209
-------------------- ---------------
Total current liabilities 7,565,003 6,962,342
-------------------- ---------------
LONG-TERM LIABILITIES:
Long-term note payable 4,500,000 6,000,000
Long-term deferred tax liability 240,309 313,783
Long-term portion of capitalized lease obligations 31,650 47,23
-------------------- ---------------
Total Liabilities 12,336,962 13,323,363
-------------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 7,190,455 and 7,060,749 shares issued and
outstanding at June 30, 2000 and December 31, 1999, respectively 71,905 70,608
Additional paid-in capital 30,279,125 29,428,647
Retained earnings 12,664,617 9,828,769
Common stock held in treasury, at cost - 51,168 and 58,734
shares at June 30, 2000 and December 31, 1999, respectively (490,007) (562,462)
-------------------- ---------------
Total stockholders' equity 42,525,640 38,765,562
-------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,862,602 $52,088,925
==================== ===============
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
DIANON SYSTEMS, INC.
INCOME STATEMENTS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $24,426,166 $19,053,229 $46,505,079 $34,909,950
Cost of goods 13,832,504 10,896,372 26,579,672 20,083,974
---------------- ---------------- -------------- ----------------
GROSS PROFIT 10,593,662 8,156,857 19,925,407 14,825,976
Selling, general and administrative expenses 7,545,939 6,321,954 14,430,408 11,494,026
Amortization of intangible assets 197,939 171,377 400,655 218,934
Research and development expenses 271,028 109,502 442,838 228,226
---------------- ---------------- -------------- ----------------
INCOME FROM OPERATIONS 2,578,756 1,554,024 4,651,506 2,884,790
Interest income, net 70,398 66,726 114,625 228,000
---------------- ---------------- -------------- ----------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,649,154 1,620,750 4,766,131 3,112,790
Provision for income taxes 1,072,907 672,611 1,930,283 1,291,808
---------------- ---------------- -------------- ----------------
NET INCOME $ 1,576,247 $ 948,139 $ 2,835,848 $ 1,820,982
================ ================ ============== ================
EARNINGS PER SHARE
BASIC $.22 $.14 $.40 $.27
DILUTED $.20 $.14 $.37 $.27
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,083,258 6,703,221 7,070,926 6,618,489
DILUTED 7,701,026 6,960,567 7,660,361 6,838,514
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
4
<PAGE>
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------------------------- ------------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 6,808,729 $ 68,088 $ 27,398,120 $ 5,697,710
Stock options exercised 1,288 13 6,551 --
Issuance of common stock 79,981 800 700,516 --
Employee stock purchase plan -- -- (3,550) --
Stock grants 2,310 23 19,901 --
Common stock acquired for treasury -- -- -- --
Retired shares (50,000) (500) (393,250) --
Net income -- -- -- 1,820,982
------------ ---------- ------------ ------------
BALANCE, June 30, 1999 6,842,308 $ 68,424 $ 27,728,288 $ 7,518,692
============ ========== ============ ============
BALANCE, December 31, 1999 7,060,749 $ 70,608 $ 29,428,647 $ 9,828,769
Stock options exercised 128,481 1,285 866,478 --
Employee stock purchase plan -- -- (35,912) --
Stock grants 1,225 12 19,912 --
Net income -- -- -- 2,835,848
------------ ---------- ------------ ------------
BALANCE, June 30, 2000 7,190,455 $ 71,905 $ 30,279,125 $ 12,664,617
============ ========== ============ ============
DIANON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
continued
Common Stock
Acquired for Treasury
Shares Amount Total
---------------------------------- -----------------
BALANCE, December 31, 1998 (222,019) ($ 1,780,854) $ 31,383,064
Stock options exercised -- -- 6,564
Issuance of common stock 222,019 1,780,854 2,482,170
Employee stock purchase plan 896 7,546 3,996
Stock grants -- -- 19,924
Common stock acquired for treasury (85,500) (724,092) (724,092)
Retired shares 50,000 393,750 --
Net income -- -- 1,820,982
------------ ------------ ------------
BALANCE, June 30, 1999 (34,604) ($ 322,796) $ 34,992,608
============ ============ ============
BALANCE, December 31, 1999 (58,734) ($ 562,462) $ 38,765,562
Stock options exercised -- -- 867,763
Employee stock purchase plan 7,566 72,455 36,543
Stock grants -- -- 19,924
Net income -- -- 2,835,848
------------ ------------ ------------
BALANCE, June 30, 2000 (51,168) ($ 490,007) $ 42,525,640
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
<PAGE>
DIANON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE
2000 1999
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,835,848 $ 1,820,982
Adjustments to reconcile net income to net
cash provided by operations -
Non-cash charges
Depreciation and amortization 1,942,190 1,529,947
Provision for bad debts 200,000 --
Stock compensation expense 19,924 19,924
Changes in other current assets and liabilities
(Increase) in accounts receivable (1,621,448) (1,629,233)
Decrease (increase) in prepaid expenses and employee advances 170,732 (102,495)
(Increase) in inventory (542,677) (43,988)
Decrease (increase) in other assets 153,823 (118,513)
Increase in accounts payable and accrued liabilities 529,729 1,277,479
-------------- -----------
Net cash provided by operating activities 3,688,121 2,754,103
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of KMD assets, net -- (11,274,457)
Capital expenditures (1,734,914) (934,084)
Purchase of other intangibles -- (20,000)
Proceeds from the sale of fixed assets -- 1,316
-------------- -----------
Net cash used in investing activities (1,734,914) (12,227,225)
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings of note payable (1,500,000) 6,000,000
Common stock acquired for treasury -- (724,092)
Issuance of common stock -- 16,545
Employee stock purchase plan 36,543 3,996
Stock options exercised 867,763 6,564
Repayments of capitalized lease obligations (16,130) (11,322)
-------------- -----------
Net cash (used in) provided by financing activities (611,824) 5,291,691
-------------- -----------
Net increase (decrease) in cash and cash equivalents 1,341,383 (4,181,431)
CASH AND CASH EQUIVALENTS, beginning of period 9,761,047 12,126,076
-------------- -----------
CASH AND CASH EQUIVALENTS, end of period $11,102,430 $ 7,944,645
============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 208,495 $ 75,917
Income Taxes 2,522,956 1,766,618
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common Stock of $2,465,625 was issued in connection with the
acquisition of KMD in 1999.
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
6
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company - The consolidated financial statements as of and for the three
months and six months ended June 30, 2000 and 1999 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, 1999, previously filed on Form 10-K with the
Securities and Exchange Commission (the "Annual Report"). Certain amounts in
prior year statements have been reclassified to conform with current year
presentation.
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, 1999.
The results of operations for the three months and six months ended June 30,
2000 and 1999 are not necessarily indicative of the operating results for the
full years.
2. Acquisitions - Effective May 1, 1999, the Company acquired substantially all
the assets of an outpatient OB/GYN laboratory with locations in Woodbury and
New City, New York ("Kyto Meridien Diagnostics, L.L.C." or "KMD"). The
acquisition price was approximately $13.0 million and was financed through a
combination of available cash and drawdowns of the Company's credit line, as
well as through the issuance of Common Stock. The purchase price was
primarily allocated to customer lists ($7.5 million), goodwill ($5.6
million), lab and office equipment ($400,000), and client receivables
($400,000), partially offset by accrued liabilities ($930,000). The
acquisition has been accounted for pursuant to the purchase method of
accounting.
Pro forma net revenue for the three months and six months ended June 30,
1999, adjusted as if the acquisition of KMD had occurred January 1, 1999
approximates $20.0 million and $38.5 million respectively. Pro forma net
income and earnings per share would not differ materially from 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 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 earnings per share computations for the quarterly periods
ended March 31 and June 30 and the six months ended June 30, for both 2000
and 1999.
7
<PAGE>
DIANON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
2000
-------------------------------------
1ST QUARTER 2ND QUARTER SIX MONTHS
BASIC EARNING PER SHARE:
Weighted-average number of common shares 7,040,376 7,083,258 7,070,926
outstanding
DILUTIVE EFFECT OF:
Stock options 556,633 617,768 589,435
------------ ------------ -----------
DILUTED EARNINGS PER SHARE:
Weighted-average number of common shares 7,597,009 7,701,026 7,660,361
outstanding ============ ============ ===========
NET INCOME $1,259,601 $1,576,247 $2,835,848
============ ============ ===========
BASIC EARNINGS PER SHARE $0.18 $0.22 $0.40
============ ============ ===========
DILUTED EARNINGS PER SHARE $0.17 $0.20 $0.37
============ ============ ===========
1999
-------------------------------------
1ST QUARTER 2ND QUARTER SIX MONTHS
BASIC EARNING PER SHARE:
Weighted-average number of common shares 6,533,757 6,703,221 6,618,489
outstanding
DILUTIVE EFFECT OF:
Stock options 182,704 257,346 220,025
----------- ------------ -----------
DILUTED EARNINGS PER SHARE:
Weighted-average number of common shares 6,716,461 6,960,567 6,838,514
outstanding =========== ============ ===========
NET INCOME $872,843 $948,139 $1,820,982
=========== ============ ===========
BASIC EARNINGS PER SHARE $0.13 $0.14 $0.27
=========== ============ ===========
DILUTED EARNINGS PER SHARE $0.13 $0.14 $0.27
============ ============ ===========
Options to purchase 1,200 shares of common stock at $20.75 per share were
outstanding as of June 30, 2000 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.
Options to purchase 50,317 shares of common stock at prices ranging from $9.00
to $12.25 per share were outstanding as of June 30, 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
The descriptive analysis contained herein compares the financial results of the
three months and six months ended June 30, 2000 ("Second Quarter-2000" and "Six
Months-2000" respectively) to the three months and six months ended June 30,
1999 ("Second Quarter-1999" and "Six Months-1999" respectively).
The Company's results of operations in the Second Quarter-2000 and Six
Months-2000 reflect favorable volume and mix increases in certain product lines,
continued reductions in selling, general, administrative and other operating
expenses as a percentage of sales, and the acquisition of Kyto Meridien
Diagnostics, L.L.C. ("KMD") in May 1999.
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased 28% to $24.4 million in the Second Quarter-2000 from
$19.1 million in the Second Quarter- 1999, and 33% to $46.5 million in the Six
Months-2000 from $34.9 million in the Six Months-1999. These increases reflect
the acquisition of KMD in May of 1999, volume increases in certain product
lines, the successful negotiation and introduction in 1999 of several capitated
contracts, and the effects of an increase in Medicare reimbursement for certain
of the Company's tests.
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 the level of reimbursement
for services provided by the Company. 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, the Balanced Budget Act of 1997 ("BBA") freezes fee schedule payments
(i.e., no updates) for the 1998-2002 period.
Beginning in 1998, Medicare began covering screening pap smears for certain
Medicare beneficiaries, and the Balanced Budget Refinement Act of 1999 ("BBRA")
required the Secretary of Health and Human Services ("HHS") to establish a
national minimum payment amount equal to $14.60 for diagnostic or screening pap
smear laboratory tests furnished on or after January 1, 2000. Previously, the
national payment cap for a pap smear was approximately $7.15. The BBRA also
encouraged the Health Care Financing Administration ("HCFA") to institute an
appropriate increase in the payment rate for new cervical cancer screening
technologies that have been approved by the FDA as significantly more effective
than a conventional pap smear, such as the technologies used by the Company. The
addition of Medicare coverage for these tests and higher reimbursement for
certain types of these tests have provided additional revenues for the Company
in 2000.
With respect to the Company's anatomic pathology services, which are not
reimbursed under the Medicare laboratory fee schedules, Medicare reimbursement
amounts 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.
Beginning with the Medicare physician fee schedule regulation that became
effective on January 1, 1999, HCFA recalculated physician practice expenses, a
key component of the RBRVS, to reflect resource consumption rather than
historical charge data. While the actual impact of this change, when fully
implemented, on the pathology revenues of any specific laboratory, including the
Company, will depend on the mix of pathology services furnished, HCFA had
estimated that the new system would decrease the Medicare revenue for
pathologists 13% once it was fully phased in at the end of 2002. However, more
recent changes in the physician fee schedule have had a positive impact on
Medicare payment for pathology services, and HCFA now estimates the impact of
the practice expense recalculation will ultimately result in only a 6% decrease
for pathology services. In addition, other revisions to payment policies under
the physician fee schedule for the year 2000 resulted in increases in the RBRVS
fee schedule payment amounts for the pathology codes for some of the most common
tests historically performed by the Company.
9
<PAGE>
The Clinton Administration's fiscal year 2001 budget initially proposed several
changes that would have had a negative effect on the laboratory industry,
including limiting the Medicare laboratory fee schedule update to the Consumer
Price Index minus 1%; reducing lab payments by 30% for four specific lab tests;
and reinstating a 20% beneficiary co-payment on Medicare lab tests. However, as
part of a recent proposal to restore billions of dollars to healthcare providers
targeted for Medicare payment reductions under the BBA, the President withdrew
these proposed changes affecting laboratories.
The BBA also required the Secretary of the Department of Health and Human
Services to use a negotiated rulemaking process to adopt uniform coverage,
administration and payment policies for lab tests. A proposed rule was published
on March 10, 2000, which would establish national coverage policies for many of
the most commonly ordered lab tests, thereby replacing local Medicare policies,
which sometimes vary. The rule also would establish other uniform requirements
related to submission of claims for lab tests. It is uncertain when a final rule
will be published or how it may differ from the proposed rule, but if adopted as
proposed, the Company believes that the new rule will bring more consistency to
reimbursement among providers of laboratory testing services.
On July 17, 2000, HCFA published its proposed Medicare physician fee schedule
regulation for the year 2001. Comments on the proposed rule will be submitted
over the next 60 days, and a final rule will be published in the Fall of 2000.
HCFA has not proposed any major changes that would affect pathology
reimbursement; however, proposed adjustments in the practice expense component
of the relative value units ("RVUs") used to calculate payment amounts will
result in minor changes in reimbursement for many medical specialties. Revisions
in practice expense RVUs must be budget neutral, meaning that increases for some
services must be offset by decreases for others. HCFA estimates that the
proposed changes would result in a one percent decrease in total allowed charges
for pathology over the period 2001-2002.
HCFA also has announced that effective January 1, 2001, independent labs may no
longer bill Medicare or the patient for the technical component ("TC") of
physician pathology services furnished to Medicare beneficiaries who are
hospital inpatients. Independent labs would still be able to bill and be paid
for the TC of physician pathology services provided to beneficiaries who are in
non-hospital settings, but for the TC of services provided to a hospital
inpatient, the independent lab will have to make arrangements with the hospital
in order to receive payment. Starting August 1, 2000, under new rules for
hospital outpatient reimbursement (see following paragraph), independent labs
also will be limited to billing the hospital for the TC of any pathology
services furnished to hospital outpatients. Since the Company does only minimal
testing for hospital inpatients and outpatients, these charges are not expected
to have a material adverse financial impact to the Company.
The BBA also contained measures to establish market-oriented purchasing for
Medicare, including prospective payment systems ("PPS") for hospital outpatient
services, home health care, and nursing home care. Of these systems, only the
skilled nursing facility ("SNF") PPS has been implemented. The final rule
establishing the home health PPS was published on July 3, 2000 and will be
effective October 1, 2000. Since the Company does only minimal clinical
laboratory testing for home health care patients, these changes are not expected
to materially affect the Company's business. On April 7, 2000, HCFA published a
final rule to implement the hospital outpatient PPS, which, after HCFA postponed
the original July 1 implementation, will go into effect on August 1, 2000.
Clinical laboratory and physician services will be carved out from the hospital
outpatient PPS rates, and will continue to be paid for under their respective
fee schedules, but the technical component of pathology services will be
included in the PPS rate. In other words, that independent laboratories that
perform the technical component of pathology services for hospital outpatient
services may no longer bill Medicare for these services and must, instead, bill
the hospital. As previously mentioned, this change is not expected to have an
adverse material impact to the Company
The Company's Form 10-K for the year ended December 31, 1999, previously filed
with the Securities and Exchange Commission, contains additional information
regarding the complex area of reimbursement.
o COST OF SALES
Cost of sales, which consists primarily of payroll, laboratory supplies, outside
services, logistics and depreciation expense, increased to $13.8 million in the
Second Quarter-2000 from $10.9 million in the Second Quarter-1999, and to $26.6
million for the Six Months-2000 from $20.1 million for the Six Months-1999. As a
percentage of revenues, cost
10
<PAGE>
of sales was 57% for both the Second Quarter-2000 and the Second Quarter-1999
and 57% and 58% for the six month periods 2000 and 1999, respectively.
For the second quarters 2000 and 1999, while percentages were similar, salaries
and wages increased to $5.9 million in 2000 from $4.9 million in 1999. Overhead
expenses (including building rent, utilities, and depreciation) increased to
$4.0 million in 2000 from $2.6 million in 1999. Logistics expenses increased to
$1.7 million from $1.6 million in 2000 and 1999, respectively, and lab supplies
increased to $2.2 million from $1.7 million for the corresponding periods. These
increases primarily reflect the acquisition of KMD in May 1999 as well as
increased volume.
For the six month periods ended June 2000 and 1999, salaries and wages increased
to $11.8 million in 2000 from $8.6 million in 1999. Overhead expenses increased
to $7.1 million in 2000 from $5.4 million in 1999. Logistics expenses increased
to $3.5 million in 2000 from $3.0 million in 1999, while cost of lab supplies
increased to $4.2 million in 2000 from $3.1 million in 1999. These increases
primarily reflect the acquisition of KMD in May 1999 as well as increased
volume.
o GROSS PROFIT
Gross profit totaled $10.6 million in Second Quarter-2000 versus $8.2 million in
Second Quarter-1999, reflecting a gross profit margin of 43% for both periods.
Gross profit for the Six Months-2000 totaled $19.9 million versus $14.8 million
in the prior year, representing margins of 43% for both periods. The increase in
gross profits are a direct result of increased revenues.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the second quarters 2000 and 1999, selling, general and administrative
expenses increased to $7.5 million in 2000 from $6.3 million in 1999. While
absolute expenses increased, they decreased as a percentage of sales to 31% in
the Second Quarter-2000 from 33% in the Second Quarter-1999.
For the six month periods ended June 2000 and 1999, selling, general and
administrative expenses increased to $14.4 million in 2000 from $11.5 million in
1999. Again, although expenses increased, they decreased as a percentage of
sales to 31% in the Six Months-2000 from 33% in the Six Months-1999.
The expense increases were primarily due to higher commissions associated with
obtaining new sales; and from increased risk management, medical and other
insurance costs due to the acquisition of additional facilities and employees.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $198,000 in the Second
Quarter-2000 from $171,000 in the Second Quarter-1999, and to $401,000 in the
Six Months-2000 from $219,000 in the Six Months-1999. These increases were
associated with the acquisition of KMD.
o RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $271,000 in the Second
Quarter-2000 from $110,000 in the Second Quarter-1999, and to $443,000 for the
Six Months-2000 from $228,000 for the Six Months-1999. These increases are
primarily the result of the continued development of the Carepath program, a
disease management information service for patients, physicians and managed care
organizations.
o INCOME FROM OPERATIONS
Income from operations increased to $2.6 million in the Second Quarter-2000 from
$1.6 million in the Second Quarter-1999, and to $4.7 million for the Six
Months-2000 from $2.9 million for the Six Months-1999. These increases in
operating income reflect the increase in sales and the containment of expenses.
11
<PAGE>
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $3.6 million in the Second Quarter-2000 from $2.4 million in the
Second Quarter-1999, and to $6.6 million in the Six Months-2000 from $4.4
million in the Six Months-1999. As a percentage of sales, EBITDA increased to
14.6% in the Second Quarter-2000 from 12.5% in the Second-Quarter-1999, and to
14.2% in the Six Months-2000 from 12.6% in the Six Months-1999.
EBITDA is defined as income before interest expense, income tax expense and
depreciation and amortization. Non-recurring items and gains and losses from
sales of real estate and investments are also excluded from EBITDA as these
items do not impact operating results on a recurring basis. Management considers
EBITDA to be one measure of the cash flows from operations of the Company before
debt service that provides a relevant basis for comparison, and EBITDA is
presented to assist investors in analyzing the performance of the Company. This
information should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted in the
United States, nor should it be considered as an indicator of the overall
financial performance of the Company. The Company's calculation of EBITDA may be
different from the calculation used by other companies and, therefore,
comparability may be limited.
EBITDA for the second quarter and six months ended 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months Ended
-------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA $3,578,094 $2,391,519 $6,593,696 $4,414,678
EBITDA as a percentage of sales 14.6% 12.5% 14.2% 12.6%
</TABLE>
o NET INTEREST INCOME
Net interest income increased to $70,000 in the Second Quarter-2000 from $67,000
in the Second Quarter-1999, and decreased to $115,000 in the Six Months-2000
from $228,000 in the Six Months-1999, due to lower income received on less cash
invested, and the interest expense related to borrowings drawn from the
Company's line of credit which began in April 1999.
o PROVISION FOR INCOME TAXES
The provision for income taxes reflects a 40.5% and 41.5% effective tax rate in
Second Quarter-2000 and Second Quarter-1999, respectively, totaling $1.1 million
and $673,000, respectively. The lower effective tax rate is due primarily to
state rate changes. The provision totaled $1.9 million and $1.3 million for the
Six Months-2000 and Six Months-1999, respectively, also reflecting rates of
40.5% and 41.5%.
o NET INCOME
For the second quarters 2000 and 1999, net income increased 66% to $1.6 million
in 2000 from $948,000 in 1999. Basic earnings per share increased to $0.22 per
share in 2000 from $0.14 per share in 1999, while diluted earnings per share
increased to $0.20 per share in 2000 from $0.14 per share in 1999.
For the six-month periods ended June 2000 and 1999, net income increased 56% to
$2.8 million in 2000 from $1.8 million in 1999. Basic earnings per share
increased to $0.40 per share in 2000 from $0.27 per share in 1999, while diluted
earnings per share increased to $0.37 per share in 2000 from $0.27 per share in
1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had total cash and cash equivalents of $11.1
million, substantially all of which was invested in a fund holding U.S. Treasury
securities with maturities of less than three months. Working capital was $27.5
million and $25.2 million as of June 30, 2000 and December 31, 1999,
respectively, and the current ratios were 4.6:1 for both periods.
Accounts receivable totaled $20.9 million as of June 30, 2000 representing
approximately 78 days of sales outstanding, compared to $19.5 million or 86 days
as of December 31, 1999.
Capital expenditures for the Second Quarter-2000 and Six Months-2000 totaled
$1.3 million and $1.7 million, respectively.
12
<PAGE>
Effective February 17, 1998, the Company entered into a three year $15 million
line of credit agreement with a bank. During the second quarter, the Company and
the bank expressed intention to extend this line of credit agreement to February
17, 2004. The Company expects to finalize this line of credit extension in the
second half of this year. The agreement includes various provisions regarding
borrowings under the facility, including those related to financial covenants.
As of June 30, 2000, $4.5 million had been drawn down against this line for the
acquisition of KMD. This is a reduction of $1.5 million from the original amount
of $6.0 million.
The Company's Board of Directors authorized the repurchase of approximately 1.7
million shares of the Company's Common Stock on the open market or in private
transactions. Total expenditures for share repurchases is limited to $12.0
million. As of June 30, 2000, the Company had repurchased approximately 300,000
shares of the Company's Common Stock and had spent approximately $2.8 million in
so doing.
The Company believes that cash flows from operations and available cash and cash
equivalents are adequate to fund the Company's operations for the foreseeable
future.
RISK FACTORS; FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis 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; the possibility of being deemed to be not in compliance
with Federal or state regulatory requirements; the uncertainties relating to the
ability of the Company to convince physicians and/or managed care organizations
to use the Company as a provider of anatomic pathology testing services; the
ability of the Company to maintain superior quality relative to its competitors;
the ability of the Company to maintain its hospital-based business in light of
the competitive pressures and changes occurring in hospital 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.
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 (filed herewith).
(b) Reports:
No reports on Form 8-K were filed during the second quarter of 2000.
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.
August 7, 2000 /s/ KEVIN C. JOHNSON
----------------------------
By: Kevin C. Johnson
President and
Chief Executive Officer
(Principal Executive Officer)
August 7, 2000 /s/ DAVID R. SCHREIBER
------------------------------
By: David R. Schreiber
Senior Vice President,
Finance and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
