UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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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
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DIANON Systems, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1128081
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
200 Watson Boulevard, Stratford, Connecticut 06615
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 381-4000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 9, 2000, the aggregate market value of the voting Common Stock held
by non-affiliates of the registrant was $87,933,937.
Number of shares of Common Stock outstanding as of March 9, 2000: 7,052,203
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated October 21, 1999
<PAGE>
PART I
ITEM 1. BUSINESS
DIANON Systems, Inc. ("DIANON" or the "Company"), incorporated in 1984,
provides a full line of anatomic pathology testing services and a number of
genetic and clinical chemistry testing services to patients, physicians and
managed care organizations throughout the United States.
The Company has traditionally been a specialized laboratory with a limited
line of clinical chemistry and anatomic pathology testing services based
principally on new technology purchased or licensed from test developers. This
technology has been marketed directly to medical oncologists and urologists as
testing and information services rather than as products or test kits.
As a result of the Company's success in providing pathology services, the
Company expanded its mission to include a full line of anatomic pathology
services and related information products to physicians, patients and managed
care organizations throughout the United States. The Company's principal
physician audience for these services includes approximately 50,000 clinicians
engaged in the fields of medical oncology, urology, dermatology, gynecology and
gastroenterology. The Company is one of the leading specialized providers of
anatomic pathology testing services in the United States.
While the Company continues in its traditional role of assisting
developers of new technology and the physicians evaluating such technology, it
is expected that this service and the Company's clinical chemistry business will
represent a decreasing proportion of total revenue in future years as anatomic
pathology revenues grow.
The business of the Company is subject to a number of risks and
uncertainties that could adversely affect the Company's ability to achieve its
objectives. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Risk Factors: Forward Looking Statements" for a
description of various factors that could have an adverse effect on the
performance of the Company.
MEDICAL TESTING MARKETS
The Company operates in one reportable segment, the medical laboratory
industry. Medical laboratories offer a broad range of testing services to the
medical profession. The Company's testing services are categorized based upon
the nature of the test: Anatomic Pathology testing and Clinical Chemistry
testing. These testing services are used by physicians in the diagnosis,
prognosis, monitoring and general management of diseases and other clinical
conditions. The tests included in such services generally detect
medically-significant abnormalities and visual patterns in blood, tissue samples
and other specimens.
Below are some of the major differences between the two testing services
offered by the Company:
Anatomic Pathology Clinical Chemistry
Testing Testing
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Type of Specimen Tissue or cells - Blood or urine - usually
usually obtained by a collected by a nurse
physician from a biopsy, (blood) or by the
pap smear, urine patient (urine)
specimen or surgery
Technology Employed Physician interpretation Highly automated blood
of tissue slides chemistries and
supplemented by special immunoassays
antibody stains, DNA
probes, genetic tests
1999 DIANON Net Revenues $60 million $16 million
<PAGE>
The Company offers a complete line of anatomic pathology testing services
as well as selected clinical chemistry tests for cancer and gynecological
conditions. The Company performs all testing at either its main facility in
Stratford, Connecticut or at its other facilities located in Tampa, Florida; New
City, New York or Woodbury, New York (the latter two acquired in May 1999). The
Company provides most test results to physicians within forty-eight hours. In
1996, the Company opened a specimen processing facility at the hub of its
airfreight provider in Ohio in order to prepare certain specimens for more rapid
processing when they arrive in Stratford and to improve overall turnaround time
to the physicians.
INFORMATION SERVICES
The Company's information services are used principally to assist the
physician in the analysis of test results and to help managed care organizations
better manage patient treatment. These services complement the Company's current
service offerings and are not a separate product category. Patient specific
reports aid the physician in analyzing multiple prognostic tests and/or
correlative trends in a patient's test results, treatment and clinical
condition. Summary reports on all patients in a physician's practice allow the
physician to compare test results on patients with similar conditions, review
multiple patient histories and compare his or her experience with that of
physicians across the country. Similar reports help managed care organizations
capture and compare utilization and diagnostic trends within their own
organization, with other managed care organizations and with the Company's
national database. The Company's current information services are an important
part of the Company's marketing program and they provide important value-added
services which help the Company differentiate itself from competitors.
QUALITY ASSURANCE
The Company utilizes a unique quality control program for anatomic
pathology which provides a reduced number of equivocal results reported to
clinicians. This program is applied to all anatomic pathology specimens. By
diminishing the number of indeterminate diagnoses and providing the unequivocal
diagnosis as soon as possible, the Company enables clinicians to treat patients
sooner and more effectively while reducing overall health care costs.
The Company's quality assurance program includes adherence by employees to
the Standard Operating Procedures, continuing education and technical training
of technologists, statistical quality control of all analytical processes,
instrument maintenance, and regular inspection by governmental agencies and the
College of American Pathologists.
EUROPEAN OPERATIONS
During 1998, the Company completed the liquidation of its European
operations, which were discontinued in 1995.
REIMBURSEMENT
In 1999, 1998 and 1997 approximately 31%, 33%, and 37%, respectively, of
the Company's net revenues were derived from testing performed for beneficiaries
under the Medicare and Medicaid programs. This includes the 20% copayment and
deductible normally billed to the patient when anatomic pathology services are
involved. At least 90% of this total was derived from the Medicare program.
Revenues from testing performed for other patients are derived principally from
other third-party payors, including commercial insurers, Blue Cross Blue Shield
plans, health maintenance and preferred provider organizations, patients,
physicians, hospitals and other laboratories (who in turn usually bill
non-governmental third-party payors or patients). For many of the tests
performed for Medicare or Medicaid beneficiaries (except clinical diagnostic
laboratory tests for those beneficiaries being treated by a hospital or, in some
instances, by a skilled nursing facility ("SNF")), laboratories are required to
bill Medicare or Medicaid directly for covered services and to accept Medicare
or Medicaid reimbursement as payment in full for such services. Management has
elected, to date, to accept reimbursement rates set by other third-party payors
as payment in full as well (apart from any copayment or deductible which the
payor has established).
Reimbursement rates for some services of the type, or similar to the type,
performed by the Company have been established by Medicare, Medicaid and other
third-party payors, but have not been established for all services or by all
carriers with respect to any particular service. While most carriers, including
Medicare, do not cover services they determine to be investigational, or
otherwise not reasonable and necessary for diagnosis or treatment, a formal
coverage determination is made with respect to relatively few new procedures.
When such determinations do occur for Medicare purposes, they most commonly are
made by the local Medicare carrier which processes claims for reimbursement
within the carrier's geographic jurisdiction. The Company receives Medicare
reimbursement primarily through its Medicare carriers in Connecticut, New York
and Florida. A positive coverage determination, or reimbursement without such
determination by one or more third-party payors, or clearance for marketing by
the Food and Drug Administration ("FDA"), does not assure reimbursement by other
third-party payors. A few third-party payors have denied payment for services
for which the Company receives reimbursement from other payors. On occasion,
Medicare or other third-payors have decided to cease payment for one or more of
the Company's services that historically have been reimbursed by them because
such services are performed using test kits or other products which have not
received FDA pre-market clearance or because such services may otherwise be
deemed investigational or for other reasons. Furthermore, Medicare and other
third-party payors have, on occasion, ceased reimbursement when certain tests
are ordered for patients with certain diagnoses while maintaining reimbursement
when tests are ordered for other diagnoses deemed appropriate by the carrier.
This practice recently has become more prevalent with respect to Medicare.
The Balanced Budget Act of 1997 ("BBA") required the Secretary of the
Department of Health and Human Services ("the Secretary") to divide the country
into no more than five regions no later than January 1, 1999, and to designate a
single Medicare carrier for each region to process laboratory claims (except
those performed by independent physicians' offices) by such date, and to adopt
uniform coverage, administration and payment policies for lab tests using a
negotiated rule-making process by July 1, 1998. The Health Care Financing
Administration ("HCFA") has not yet redesignated Medicare carrier regions for
lab claims. The clinical lab negotiated rulemaking committee met periodically
during 1998 and 1999, and a proposed rule reflecting the consensus of the
committee members was published on March 10, 2000. This rule would establish
national coverage policies for many of the most commonly ordered laboratory
tests, thereby replacing local Medicare policies which sometimes vary, and such
rule would establish other uniform requirements related to submission of claims
for lab tests. It is uncertain how the final rules will differ from the proposed
rule, or when such final rules will be published, but the changes arising from
the rule will not be effective until 12 months after publication of the final
rule. If adopted as proposed, the Company believes that the new rule will bring
more consistency to reimbursement amongst providers of laboratory testing
services.
In general, reimbursement disapprovals by the various carriers, reductions
or delays in the establishment of reimbursement rates, and carrier limitations
on the insurance coverage of the Company's services or the use of the Company as
a service provider could have a material adverse effect on the Company's future
revenues.
Medicare Fee Schedule Payment for Clinical Chemistry Laboratory Services.
Medicare reimbursement for clinical chemistry laboratory services constituted
approximately 24%, 23%, and 25% of the Company's clinical chemistry revenues in
1999, 1998 and 1997, respectively. In 1984, Congress adopted legislation
establishing a locality-specific fee schedule reimbursement methodology with
Consumer Price Index ("CPI") related updates for clinical diagnostic laboratory
testing for non-hospital patients and hospital outpatients under Medicare.
(Payment for clinical chemistry laboratory services performed for Medicare
hospital and SNF inpatients is included within the prospectively determined
Diagnosis Related Group rate paid to the hospital and Resource Utilization Group
rate paid to the SNF.) In addition, state Medicaid programs are prohibited from
paying more than the Medicare laboratory fee schedule amount.
Beginning with the Consolidated Omnibus Budget Reconciliation Act of 1985
("OBRA `85"), Congress instituted a national cap on Medicare clinical chemistry
laboratory fee schedules. This national cap has been lowered each year and now
is 74% of the national median. Moreover, the Omnibus Budget Reconciliation Act
of 1987 ("OBRA `87") eliminated the CPI update for 1988, and in succeeding years
Congress has often either limited or eliminated annual updates of Medicare
clinical chemistry laboratory fee schedules. After providing updates of 3.2% in
1996 and approximately 2.7% in 1997, the BBA froze fee schedule payments for the
1998-2002 period. The update limitations and changes in the national cap made to
date have not had, and are not expected by the Company to have, a material
adverse effect on the Company's results of operations. Any further significant
decrease in such fee schedules, however, could have a material adverse effect on
the Company's future revenues.
The BBA added coverage for a screening pap smear for Medicare
beneficiaries, including payment for physician interpretation of the results,
effective January 1, 1998. Screening pap smears are covered annually for women
at high risk of developing cervical or vaginal cancer and for beneficiaries of
childbearing age who have not had a negative test in each of the preceding three
years. The BBA also added coverage for annual prostate cancer screening,
including a prostate-specific antigen blood test, for beneficiaries over age 50,
effective January 1, 2000. Effective January 1, 1999, Medicare also authorizes a
separate payment for physician interpretation of an abnormal pap smear in any
setting. Prior to 1999, Medicare only covered these services in an inpatient
setting. In addition, the Medicare 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 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. Although most women of
childbearing age and men under age 65 are not Medicare beneficiaries, the
addition of Medicare coverage for these tests and higher reimbursement for
certain types of these tests could provide additional revenues for the Company.
Other changes in government and other third-party payor reimbursement
which may result from the enactment of health care reform legislation likely
will continue the downward pressure on prices and make the market for clinical
laboratory services more competitive. For example, the BBA revised the Medicare
program substantially to permit beneficiaries to choose between traditional
fee-for-service Medicare and several non-traditional Medicare options, including
managed care plans and provider-sponsored organization plans. These
non-traditional Medicare plans have considerable discretion in determining
whether and how to cover and reimburse clinical laboratory services and to limit
the number of labs with which they deal. The BBA also included provisions to
implement competitive bidding for certain Medicare items and services, including
laboratory services, on a three-site demonstration project basis. This provision
has not yet been implemented, but these changes likely would have an adverse
impact on the Company's revenues if adopted on a widespread basis.
Finally, the BBA contained measures to establish market-oriented
purchasing for Medicare, including prospective payment systems ("PPS") for
outpatient hospital services, home health care, and nursing home care. Of these
systems, only the SNF PPS has been implemented. Since the Company does only
minimal clinical laboratory testing for SNF patients, this change is not
expected to materially affect the Company's business. The BBA directed the
Secretary to implement the PPS for hospital outpatient services by January 1,
1999, but, because of potential Year 2000 computer problems, publication of the
final rule implementing PPS was delayed. 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. The final rule is expected to be
published in Spring 2000, and HCFA has said that the effective date will be July
1, 2000.
Because of the uncertainties about how the Medicare changes such as those
described above will be implemented, the Company currently is unable to predict
their ultimate impact on the clinical laboratory industry in general or on the
Company in particular. Even apart from federal legislative action, reforms may
occur at the state level and changes are occurring in the marketplace as a
result of market pressures, including the increasing number of patients covered
by some form of managed care. In general, these changes are likely to put a
downward pressure on price and also may act to limit access by some laboratories
to some managed care patient groups. Because of the uncertainties about the
exact nature, extent and timing of any such changes, however, the Company
currently is unable to predict their ultimate impact on the clinical laboratory
industry in general or on the Company in particular.
Medicare Payment for Anatomic Pathology Services. In addition to
furnishing clinical chemistry laboratory testing services, the Company furnishes
a number of services which are characterized for the purposes of the Medicare
program as anatomic pathology services. Medicare reimbursement for these
services constituted approximately 33%, 35%, and 40% of the Company's net
anatomic pathology revenues in 1999, 1998 and 1997, respectively. Such revenues
include the 20% copayment and deductible normally billed to the patient when
anatomic pathology services are involved. As of January 1, 1992, all physician
services, including anatomic pathology services, have been reimbursed by
Medicare based on a methodology known as the resource-based relative value scale
("RBRVS"), which was fully phased in by the end of 1996. Overall, anatomic
pathology reimbursement rates declined during the fee schedule phase-in period,
despite an increase in payment rates for certain pathology services performed by
the Company.
The Medicare RBRVS payment for each service is calculated by multiplying
the total relative value units ("RVUs") established for the service by a
conversion factor that is set by statute. Although originally there were three
conversion factors, the BBA merged them into one factor effective January 1,
1998. The 2000 conversion factor is $36.6137, an increase of approximately 5.5%
from the 1999 conversion factor. The number of RVUs assigned to each service is
in turn calculated by adding three separate components: physician work, practice
expense and malpractice expense. 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 HCFA's reduction of the number of
different payment localities recognized for RBRVS purposes.
On November 1, 1998, HCFA published its final Medicare physician fee
schedule regulation that recalculated the physician practice expense component
to reflect resource consumption rather than historical charge data. The
resulting new practice expense values are being phased in over the period 1999
to 2002. While the total impact on the Company's Medicare pathology revenues
will depend on the mix of pathology services furnished, HCFA estimated that the
new system would decrease the Medicare revenue for pathologists 13% once it was
fully phased in at the end of the four-year period. However, on November 2,
1999, in its physician fee schedule regulation for the year 2000, HCFA made
several changes in the payment methodology for physician services, including a
modification specific to pathology, that had a positive impact. In 1998, HCFA
had created a separate practice expense pool for services with zero physician
work RVUs, and this had a negative effect on reimbursement for pathology
services. HCFA received comments requesting that these services be taken out of
the special pool and treated like most other codes and HCFA agreed to make this
change. Removing pathology services from the zero work pool mitigates HCFA's
earlier estimate that pathology services would decrease 13% as a result of the
fully implemented practice expense RVUs, and HCFA now estimates the impact will
be only a 6% decrease for pathology services. In addition, other revisions to
payment policies under the physician fee schedule published November 2, 1999
resulted in increases in the RBRVS fee schedule payment amounts for the most
common pathology codes the Company historically has performed.
HCFA also announced in the November 2, 1999 physician fee schedule that,
effective January 1, 2001, independent labs may no longer bill for the technical
component ("TC") of physician pathology services furnished to Medicare
beneficiaries who are hospital inpatients. Independent labs would still be
permitted to bill and be paid for the TC of physician pathology services
provided to beneficiaries who are hospital outpatients or are in other settings,
but for the TC of services provided to inpatients, the independent laboratories
will have to make arrangements with the hospital in order to receive payment. In
addition, as noted above, the proposed hospital outpatient PPS rule would
include the TC of surgical pathology services in the prospective payment rate,
though clinical laboratory and other pathology services would be carved out and
would continue to be paid separately.
In the past, the Company has been able to offset a substantial portion of
the impact of reduced Medicare reimbursement rates for anatomic pathology
services through the achievement of economies of scale and the introduction of
alternative technologies that do not depend on reimbursement through the RBRVS
system. In addition, the Company believes that the recent modifications to the
physician fee schedule, as described above, will serve to mitigate the decreases
in Medicare reimbursement that had been expected. While other potential
legislative and market changes may have a negative effect on the Company's
average unit price, the Company is not able to predict the exact nature or
effect of any other potential changes affecting its reimbursement for anatomic
pathology services at this time.
Other Developments Affecting Reimbursement. In 1999, approximately 28% of
the Company's net revenues were in the State of New York. In September 1996, New
York passed the New York Health Care Reform Act of 1996 ("NYHCRA"). The NYHCRA
requires payors to pay an 8.18% surcharge on the services provided by a variety
of providers, including independent laboratories for services rendered to
residents of the State of New York. If the payor neglects to pay the 8.18%
surcharge directly, providers are required to collect the surcharge plus an
additional assessment of 24% of the surcharge for a total surcharge of 32.18%.
Under the NYHCRA, it is possible that independent labs, such as the Company,
will be placed at a competitive disadvantage with physician office labs and
other labs whose services are not subject to the surcharge. In addition,
independent labs probably will be liable for the surcharge even if the payor
fails to pay the laboratory. Moreover, payors may reduce the fees they pay for
laboratory services in order to offset the surcharge. However, the New York
State Clinical Laboratory Association brought suit against the New York State
Department of Health, alleging that these provisions of NYHCRA are
unconstitutional under the United States and New York Constitutions, and the
provisions have been repealed effective October 1, 2000.
COMPETITION
The Company provides services in a segment of the healthcare industry that
is intensely competitive, both with respect to clinical chemistry as well as
anatomic pathology. The Company estimates that there are over 11,500
laboratories in the United States which might be deemed actual or potential
competitors for the testing business of cancer-treating or cancer-diagnosing
physicians.
The anatomic pathology segment is highly fragmented and has not yet
experienced industry consolidation to any significant degree. Competitors
include physician-owned laboratories, specialized commercial laboratories and
hospital laboratories. None of these competitors have a material share of the
anatomic pathology market.
In contrast, the clinical chemistry segment, has been consolidated to an
extent, and the two largest national clinical laboratories in the U.S., Quest
Diagnostics and Laboratory Corporation of America, have a significant market
share in outpatient testing. In 1999, Quest Diagnostics acquired the clinical
laboratory operations of SmithKline Beecham Clinical Laboratories. The clinical
laboratories' product offerings are broader and the two companies have more
substantial financial and operational resources than the Company. Other
competitors in this segment include special-purpose clinical laboratories and
manufacturers of test kits and other diagnostic tools.
In addition to the competition for customers, there is increasing
competition for qualified personnel, particularly in the laboratory. To date,
such competition has not had an adverse impact on the Company's operations.
Significant factors that enhance the Company's ability to compete
effectively include the Company's highly-trained and knowledgeable sales force,
high quality laboratory operations, accurate and consistent test results,
quality of service to physicians, price and speed of turnaround for test
results.
PATENTS AND PROPRIETARY TECHNOLOGY
To date, the Company has not relied heavily on patents or licensed
technology in its business. Some of the tests or related diagnostic products
purchased and used by the Company may be patented. There can be no assurance
that such tests or related products do not infringe patent rights of others. Any
such infringement could give rise to claims against the Company. Typically, the
Company has no contractual right to be indemnified against such risks. There can
be no assurance that any issued patent upon which the Company relies directly or
indirectly will afford protection to the Company in the face of challenges to
the patent's validity.
Other private and public entities, including universities, have filed
applications for (or have been issued) patents in the Company's field and may
obtain additional patents and other proprietary rights to technology that may be
the same as or similar to that utilized by the Company. The scope and validity
of such patents, the extent to which the Company may wish or need to acquire
such rights, and the cost or availability of such rights are presently unknown.
There can be no assurance that others may not obtain access to the Company's
technology or independently develop the same or similar technology to that
utilized by the Company.
EMPLOYEES
As of December 31, 1999, the Company had 681 full-time equivalent
employees.
REGULATORY MATTERS
The Company's business is subject to government regulation at the federal,
state and local levels, some of which regulations are described under
"Laboratory," "Anti-Fraud and Abuse," "Confidentiality of Health Information,"
"Food and Drug Administration" and "Other" below.
LABORATORY
The Company's laboratories are located in Connecticut, New York and
Florida. Each laboratory is certified or licensed under the federal Medicare
program, the Clinical Laboratories Improvement Act of 1967, as amended by the
Clinical Laboratory Improvement Amendments of 1988 (collectively "CLIA `88") and
the respective clinical laboratory licensure laws of the state in which they are
located. The Connecticut laboratory also is certified to bill the Connecticut
and various other state Medicaid programs. The Company believes it has obtained
all material laboratory licenses required for its operations. In addition, the
laboratory is licensed by the federal Nuclear Regulatory Commission and is
accredited by the College of American Pathology.
The federal and state certification and licensure programs establish
standards for the operation of medical laboratories, including, but not limited
to, personnel and quality control. Compliance with such standards is verified by
periodic inspections by inspectors employed by federal or state regulatory
agencies. In addition, federal regulatory authorities require participation in a
proficiency testing program approved by HHS for many of the specialties and
subspecialties for which a laboratory seeks approval from Medicare or Medicaid
and certification under CLIA `88. Proficiency testing programs involve actual
testing of specimens that have been prepared by an entity running an approved
program for testing by the laboratory.
A final rule implementing CLIA `88, published by HHS on February 28, 1992,
became effective September 1, 1992. This rule has been revised on several
occasions and further revision is expected. The CLIA `88 rule applies to
virtually all laboratories in the United States, including the Company's
laboratory. The Company has reviewed its operations as they relate to CLIA,
including, among other things, the CLIA rule's requirements regarding laboratory
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and personnel for the types of testing
undertaken by the Company, and believes it is in compliance with these
requirements. However, no assurances can be given that the Company's laboratory
will pass future inspections conducted to ensure compliance with CLIA `88 or
with any other applicable licensure or certification laws. The sanctions for
failure to comply with CLIA or state licensure requirements may be suspension,
revocation or limitation of the lab's CLIA certificate or state license, as well
as civil and/or criminal penalties.
ANTI-FRAUD AND ABUSE LAWS
Existing federal laws governing Medicare and Medicaid, as well as some
state laws, also regulate certain aspects of the relationship between healthcare
providers, including clinical laboratories, and their referral sources,
including physicians, hospitals and other laboratories. One provision of these
laws, known as the "anti-kickback law," contains extremely broad proscriptions.
Violation of this provision may result in criminal penalties, exclusion from
Medicare and Medicaid, and significant civil monetary penalties.
Following a study of pricing practices in the clinical laboratory
industry, the Office of the Inspector General ("OIG") of HHS conducted a study
of such practices and, in January 1990, issued a final report. This report
addresses how these pricing practices relate to Medicare and Medicaid. The OIG
reviewed the industry's use of one fee schedule for physicians and other
professional accounts and another fee schedule for patients/third- party payors,
including Medicare, in billing for testing services, and focused specifically on
the pricing differential when profiles (or established groups of tests) are
ordered.
Existing federal law authorizes the Secretary of HHS to exclude providers
from participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual
charges." On September 2, 1998, the OIG issued a final rule in which it
indicated that this provision has limited applicability to services for which
Medicare pays under a PPS or a fee schedule, such as clinical laboratory
services and anatomic pathology services. More recently, the OIG has provided
additional guidance regarding arrangements that may violate the anti-kickback
laws. The OIG concluded in a 1999 Advisory Opinion that an arrangement under
which a laboratory offered substantial discounts to physicians for laboratory
tests billed directly to the physicians might violate the anti-kickback law,
because the discounts could be viewed as being provided to the physician in
exchange for the physician's referral to the laboratory of non-discounted
Medicare business, unless the discounts could otherwise be justified. The
Medicaid laws in some states also have prohibitions related to discriminatory
pricing.
The Company sometimes enters into discounting arrangements in billing for
its services. Depending upon the nature of any regulatory or enforcement action
taken or the content of legislation, if any, which might be initiated to address
this issue, the Company could experience a significant decrease in revenue which
could have a material adverse effect on the Company. The law provides for civil
or criminal penalties or exclusion from participation in Medicare and Medicaid.
The Company is unable to predict at this time whether any further regulatory,
enforcement, or legislative action will be taken.
Under another federal law, known as the "Stark" law or "self-referral
prohibition," physicians who have an investment or compensation relationship
with an entity furnishing clinical laboratory services (including clinical
chemistry and anatomic pathology services) may not, subject to certain
exceptions, refer clinical laboratory testing for Medicare patients to that
entity. Similarly, laboratories may not bill Medicare or Medicaid or any other
party for services furnished pursuant to a prohibited referral. Violation of
these provisions may result in disallowance of Medicare and Medicaid claims for
the affected testing services, as well as the imposition of civil monetary
penalties. Some states also have laws similar to the Stark law.
The Company seeks to structure its arrangements with physicians and other
customers to be in compliance with the anti-kickback, Stark and state laws, and
to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. The Company also has a
compliance committee which meets on a regular basis to review various operations
and relationships as well as adopt policies. However, the Company is unable to
predict how these laws will be applied in the future, and no assurances can be
given that its arrangements will not become subject to scrutiny under them.
In February 1997, the OIG released a model compliance plan for
laboratories that is based largely on corporate integrity agreements negotiated
with laboratories that had settled enforcement actions brought by the federal
government related to allegations of submitting false claims. The Company has
adopted aspects of the model plan that it deems appropriate to the conduct of
its business. One key aspect of the corporate integrity agreements and the model
compliance plan is an emphasis on the responsibilities of laboratories to notify
physicians that Medicare covers only medically necessary services. These
requirements, and their likely effect on physician test ordering habits, focus
on chemistry tests, especially routine tests, rather than on anatomic pathology
services or the non-automated tests which make up the majority of the Company's
business measured in terms of net revenues. Nevertheless, they potentially could
affect physicians' test ordering habits more broadly. The Company is unable to
predict whether, or to what extent, these developments may have an impact or the
utilization of the Company's services.
Prior to 1998, the Medical Director of the Connecticut Medicare carrier to
whom the Company submits its Medicare claims orally expressed the view that some
amount of money which the carrier has paid to the Company for certain pathology
services involving DNA measurements in prostate tumor cells (morphometric
analysis of tumor) potentially is recoverable by the carrier. (The Company is
not presently submitting claims for this service.) The carrier's Medical
Director has never reduced his view to writing or otherwise asserted a claim.
Accordingly, at this time, the Company cannot evaluate any such possible claim,
or the probability of assertion of any such claim.
During 1997, the Company was made aware that an agent based in the
Hartford Connecticut branch of the U.S. Department of Health and Human Services
Office of the Inspector General ("OIG") was investigating the Company's practice
of supplying pathology specimen collection devices without charge to physician
customers as well as unspecified billing issues that had been raised by the
local Medicare carrier. The Company believes that its practices with respect to
specimen collection devices were proper, and a letter describing the Company's
actions and its views regarding applicable regulations was sent by the Company
to the OIG. That letter also requested information about any billing issues of
concern to the OIG so that the Company could address them. As of the date of
this report, the Company had not received a response from or otherwise been
contacted by the OIG regarding these matters, and has not received any formal
notification regarding the matter.
Although the Company seeks to structure its practices to comply with all
applicable laws, and management believes such practices are in compliance,
uncertainty nevertheless exists as to how these matters may develop, and the
Company currently is unable to predict their impact, if any, on the Company.
While management does not believe that this matter will have a material adverse
effect on the Company's financial condition, if the carrier and/or OIG agent
were to pursue and prevail on these matters, any significant recoupment of funds
could have a material adverse effect on the Company's business and its results
of operations.
Any exclusion or suspension from participation in the Medicare and
Medicaid programs, any loss of licensure or accreditation, or any inability to
obtain any required license or permit, whether arising from any action by HHS,
any state, or any other regulatory authority, would have a material adverse
effect on the Company's business. Any significant civil or criminal penalty
resulting from such proceedings could have a material adverse effect on the
Company's business.
CONFIDENTIALITY OF HEALTH INFORMATION
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions that affect the handling of claims and other patient
information that is, or has been, transmitted electronically. These provisions,
which address security and confidentiality of patient information as well as the
administrative aspects of claims handling, have very broad applicability, and
they specifically apply to health care providers, which includes physicians and
clinical laboratories. Proposed rules implementing various aspects of HIPAA have
been published but are not expected to be finalized until at least the summer of
2000, and they do not become effective until 2 years after the date of
publication of final rules. Failure to comply with the rules mentioned above
could result in significant civil and/or criminal penalties. Complying with
these rules will require significant effort and expense for virtually all
entities that handle patient health information, but the Company is unable to
estimate the total cost or impact until after final regulations are published.
In addition to the HIPAA rules described above, which have not yet been
implemented, the Company is subject to state laws regarding the handling and
disclosure of patient records and patient health information. These laws vary
widely, and many states are passing new laws in this area. Penalties for
violation include sanctions against a lab's licensure as well as civil or
criminal penalties. The Company believes it is in compliance with applicable
state law regarding the confidentiality of health information.
FOOD AND DRUG ADMINISTRATION
The FDA does not currently regulate laboratory testing services, which is
the Company's principal business. However, the Company performs some testing
services using test kits purchased from manufacturers for which FDA premarket
clearance or approval for commercial distribution in the United States has not
been obtained by the manufacturers ("investigational test kits"). Under current
FDA regulations and policies, such investigational test kits may be sold by
manufacturers for investigational use only if certain requirements are met to
prevent commercial distribution. The manufacturers of these investigational test
kits are responsible for marketing them under conditions meeting applicable FDA
requirements. In January 1998, the FDA issued a revised draft Compliance Policy
Guide ("CPG") that sets forth FDA's intent to undertake a heightened enforcement
effort with respect to investigational test kits improperly commercialized prior
to receipt of FDA premarket clearance or approval. That draft CPG is not
presently in effect but, if implemented as written, would place greater
restrictions on the distribution of investigational test kits. If the Company
were to be substantially limited in or prevented from purchasing investigational
test kits by reason of the FDA finalizing the new draft CPG, there could be
adverse effects on the Company's ability to access new technology, which could
have a material adverse effect on the Company's business.
The Company also performs some testing services using reagents, known as
analyte specific reagents ("ASRs"), purchased from companies in bulk rather than
as part of a test kit. In November 1997, the FDA issued a new regulation placing
restrictions on the sale, distribution, labeling and use of ASRs, such as those
used by the Company. Most ASRs will be treated by the FDA as low risk devices,
requiring the manufacturer to register with the agency, list its ASRs (and any
other devices), conform to good manufacturing practice requirements and comply
with medical device reporting of adverse events. A smaller group of ASRs,
primarily those used in blood banking and/or screening for fatal contagious
diseases (e.g., HIV/AIDS), will be treated as higher risk devices requiring
premarket clearance or approval from the FDA before commercial distribution is
permitted. The imposition of this new regulatory framework on ASR sellers may
reduce the availability or raise the price of ASRs purchased by the Company. In
addition, when the Company performs a test developed in-house using reagents
rather than a test kit cleared or approved by the FDA, it will be required to
disclose [that it used an in-house test utilizing reagents] in the test report.
However, by clearly declining to impose any requirement for FDA premarket
approval or clearance for most ASRs, the new rule removes one barrier to
reimbursement for tests performed using these ASRs. In light of all the
foregoing factors, it is impossible to predict exactly how the new regulation
will affect the Company's business, and thus there can be no assurance that the
new ASR regulation will not have a material adverse effect on the Company's
business.
OTHER
Certain federal and state laws govern the handling and disposal of medical
specimens, infectious and hazardous wastes and radioactive materials. Failure to
comply with such laws could subject an entity covered by these laws to fines,
criminal penalties and/or other enforcement actions.
Pursuant to the Occupational Safety and Health Act, laboratories have a
general duty to provide a work place to their employees that is safe from
hazard. Over the past few years, the Occupational Safety and Health
Administration ("OSHA") has issued rules relevant to certain hazards that are
found in the laboratory. In addition, OSHA recently has promulgated final
regulations containing requirements healthcare providers must follow to protect
workers from bloodborne pathogens. Failure to comply with these regulations,
other applicable OSHA rules or with the general duty to provide a safe work
place could subject employers, including a laboratory employer such as the
Company, to substantial fines and penalties.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 143,663 square feet of office and
laboratory space in Stratford, Connecticut; Wilmington, Ohio; Tampa, Florida;
New City, New York and Woodbury, New York. The leases on the Stratford
facilities, representing 63,280 square feet, expire May 31, 2003, and contain
options to renew for up to three years. The Company also leases a record storage
facility in Stratford, Connecticut, representing 15,105 square feet, which
expires May 31, 2004, with no renewal option. The lease for the Wilmington
facility, representing 19,200 square feet, expires March 31, 2001, and contains
renewal options for five additional terms of three years each. The lease on the
Tampa office and laboratory facility, representing 18,382 square feet, expires
January 31, 2003, with an option to renew for an additional five-year period.
The lease in New City, representing 19,273 square feet, expires April 30, 2002
and contains an option to renew for one year. The lease in Woodbury,
representing 8,423 square feet, expires March 31, 2003 with no renewal option.
The Company also leases a small office in Stamford, Connecticut, which expires
November 30, 2000 with an option to renew for up to three years.
The Company also leases three regional sales offices located in North
Carolina, Texas and Illinois, which expire within one year plus renewal options,
and four branch offices in Florida with remaining terms of up to two years.
(See Note 5 to the Company's consolidated financial statements included
herewith).
ITEM 3. LEGAL PROCEEDINGS
There are no known material legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
DIANON's Common Stock trades on The Nasdaq Stock Market under the symbol
"DIAN." The following table shows the high and low sales prices of the Company's
Common Stock quoted on The Nasdaq Stock Market, for the periods indicated below:
High Low
---- ---
1998:
First Quarter $11-1/4 $8-1/4
Second Quarter 10-7/8 8-1/8
Third Quarter 9-5/8 6
Fourth Quarter 9 5-1/4
1999:
First Quarter $9-1/8 $7
Second Quarter 11 8
Third Quarter 11 8-5/8
Fourth Quarter 13-7/8 9
As of March 9, 2000, the Company had approximately 1,499 shareholders of
record. No dividends have been paid by DIANON and it is not anticipated that any
will be paid in the foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
-------------------------------------
Net revenues $76,097 $62,182 $60,887 $56,000 $45,700
Gross profit 32,213 26,511 29,766 29,101 25,310
Expenses:
Selling, general and
administrative
expenses (1) 24,846 21,465 22,912 22,443 19,620
Research and development 572 528 1,666 3,157 5,255
---------------------------------------------------
Income from operations 6,795 4,518 5,188 3,500 435
Net interest income 267 682 522 307 181
Provision for income taxes 2,931 2,246 2,412 1,637 509
---------------------------------------------------
Net income $ 4,131 $ 2,954 $ 3,298 $ 2,170 $ 107
===================================================
EPS:
Basic $ .61 $ .44 $ .51 $ .35 $ .02
Diluted $ .59 $ .43 $ .48 $ .35 $ .02
Weighted average shares
outstanding:
Basic 6,763 6,678 6,430 6,151 5,542
Diluted 7,053 6,902 6,808 6,287 5,549
BALANCE SHEET DATA:
Working capital $25,249 $24,327 $21,387 $18,058 $16,974
Total assets 52,089 36,703 36,889 34,536 30,455
Long-term obligations 6,361 81 107 272 750
Stockholders' equity (2) 38,766 31,383 29,046 26,549 23,452
(1) During 1998, 1997, 1996 and 1995, non-recurring charges relating to
severance costs as a result of streamlining its operations and of the
resignation of certain officers, restructuring, accelerated amortization
and other one-time costs of $212,000, $324,000, $609,000 and $2,668,000,
respectively, were incurred. There were no similar charges recorded in
1999. (See Note 12 to the Company's consolidated financial statements
included herewith.)
(2) No dividends were paid by the Company during the periods presented above.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The Company's results of operations over the three-year period ended
December 31, 1999 reflect its continued shift toward non OB/GYN anatomic
pathology testing. The acquisitions of Kyto Meridien Diagnostics, L.L.C. ("KMD")
in May 1999 and of Pathology Reference Laboratory ("PRL") in February 1998
partially offset the impact of this shift during 1999 since these operations
traditionally focused on OB/GYN anatomic pathology, which has lower margins. The
reduced gross profit impact of these revenue factors was partially offset
through cost savings in selling, general, administrative and other operating
expenses.
RESULTS OF OPERATIONS
o NET REVENUES
Net revenues increased to $76.1 million in 1999 from $62.2 million in 1998
and $60.9 million in 1997, representing annual increases of 22.4% and 2.1%,
respectively.
Anatomic pathology net revenues increased to $60.5 million in 1999 from
$48.2 million in 1998 and $43.9 million in 1997, increases of 25.7% and 9.6%,
respectively. The revenue growth reflects increased market penetration in the
anatomic pathology area, including the impact of the KMD and PRL acquisitions in
May 1999 and February 1998, respectively, offset by reimbursement reductions.
Clinical chemistry net revenues increased to $15.6 million in 1999 from
$14.0 million in 1998. This increase is primarily a result of the KMD
acquisition. Clinical chemistry net revenues decreased $2.9 million or 17.3%
from 1997 to 1998. This decrease reflected the Company's shift in emphasis
toward anatomic pathology, and is a result of both volume and reimbursement
reductions including Medicare reimbursement pressures.
o COST OF SALES
Cost of sales, which consists primarily of laboratory payroll and
supplies, logistics and facility costs, increased to $43.9 million in 1999 from
$35.7 million in 1998 and $31.1 million in 1997. As a percentage of sales, cost
of sales totaled 57.7%, 57.4% and 51.1% in 1999, 1998 and 1997, respectively.
The increased percentages of revenue represented by cost of sales largely
reflects the impact of the aforementioned reimbursement decreases and the
integration of KMD and PRL, which have lower margins than the traditional
business.
o GROSS PROFIT
Gross profit totaled $32.2 million in 1999 versus $26.5 million in 1998
and $29.8 million in 1997, while gross profit margins were 42.3%, 42.6% and
48.9%, respectively. The decreases in gross profit and margins reflect the
factors discussed above under cost of sales.
The clinical laboratory industry, which includes both clinical chemistry
and anatomic pathology, has seen steady and continuing downward pressure on
prices exerted by both government and private third party payers. Payment for
services such as those provided by the Company is and will likely continue to be
affected by periodic reevaluations made by payors 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. 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.
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 on the Company's
Medicare pathology revenues 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, in the physician fee schedule regulation published on November 2, 1999,
and effective January 1, 2000, HCFA increased the conversion factor
approximately 5.5% and made several changes in the payment methodology for
physician services, including a modification specific to pathology that had a
positive impact. As a result of these changes, HCFA now estimates the impact of
the practice expense recalculation will be 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 most common pathology codes the Company historically has
performed.
HCFA also announced in the November 2, 1999 physician fee schedule final
rule that, effective January 1, 2001, independent labs may no longer bill for
the technical component ("TC") of physician pathology services furnished to
Medicare beneficiaries who are hospital inpatients. Independent labs would still
be permitted to bill and be paid for the TC of physician pathology services
provided to beneficiaries who are hospital outpatients or are in other settings,
but for the TC of services provided to inpatients, the independent laboratories
will have to make arrangements with the hospital in order to receive payment.
The Balanced Budget Act of 1997 ("BBA") contains measures to establish
market-oriented purchasing for Medicare, including prospective payment systems
("PPS") for outpatient hospital services, home health care and nursing home
care. Of these systems, only the skilled nursing facility ("SNF") PPS has been
implemented, and since the Company does only minimal clinical laboratory testing
for SNF patients, this change is not expected to materially affect the Company's
business. On September 8, 1998, HCFA published a proposed rule implementing the
outpatient PPS that would carve out clinical laboratory services from the
outpatient hospital PPS rates, but would include the technical component of
surgical pathology services in the rate. HCFA has said the final rule is
expected to be published in the spring of 2000, and will be effective July 1,
2000. The outpatient PPS could affect the Company's revenues for these surgical
pathology services depending on the precise details of how 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,
competitive bidding, or other market pressures, may continue to exert 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.
o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $24.2 million in
1999 from $21.2 million in 1998, after decreasing slightly from the $22.7
million incurred in 1997. The increase of approximately $3.0 million from 1998
to 1999 is primarily a result of increased commission expense, which is a result
of increased revenues. As a percentage of sales, selling, general and
administrative expenses decreased significantly over the three-year period from
37.3% in 1997 to 31.8% in 1999, reflecting the operating leverage inherent in
the business and from the KMD and PRL acquisitions and general revenue growth.
o AMORTIZATION OF INTANGIBLE ASSETS
Amortization expense increased to $670,000 in 1999 from $224,000 in 1998
as a result of the KMD acquisition. Amortization expense remained flat between
1997 and 1998 at $236,000 and $224,000, respectively.
o RESEARCH AND DEVELOPMENT
Research and development expenses remained flat between 1999 and 1998 at
$0.6 million and $0.5 million, respectively, and decreased $1.1 million between
1998 and 1997. The reduction in 1998 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 were established.
o INCOME FROM OPERATIONS
Income from operations increased to $6.8 million in 1999 from $4.5 million
in 1998, due primarily to increased sales and cost control initiatives. The
relatively modest $0.7 million decrease in operating income between 1998 and
1997, despite the $3.3 million drop in gross profit, partially reflects cost
control initiatives implemented in anticipation of reimbursement reductions.
o NET INTEREST INCOME
Net interest income decreased to $267,000 in 1999 from $682,000 in 1998
primarily due to the funding of the acquisition of KMD in May 1999. Net interest
income increased in 1998 by $160,000 from $522,000 in 1997. This reflects the
increased cash and cash equivalent position of the Company over the period,
resulting from cash generated by operations.
o PROVISION FOR INCOME TAXES
The provision for income taxes increased to $2.9 million in 1999, from
$2.2 million in 1998 and $2.4 million in 1997, while the effective tax rate was
41.5%, 43.2% and 42.2%, respectively. The changes were due primarily to state
rate changes.
o NET INCOME
Net income increased 39.8% to $4.1 million, from $3.0 million in 1998 and
$3.3 million in 1997. Basic earnings per share increased to $0.61 per share in
1999, from $0.44 per share in 1998 and $0.51 per share in 1997. Diluted earnings
per share increased to $0.59 per share in 1999, from $0.43 per share in 1998 and
$0.48 per share in 1997.
o LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had total cash and cash equivalents of
$9.8 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 $25.2 million and $24.3 million, as of December 31, 1999 and 1998,
respectively, and the current ratios were 4.6:1 and 5.6:1, respectively.
Accounts receivable totaled $19.5 million and $14.4 million, as of
December 31, 1999 and 1998, respectively, representing approximately 86 days and
82 days of average sales, respectively. The increase in days sales outstanding
is due primarily to a shift in the payor mix as a result of the KMD acquisition.
Capital expenditures for 1999 and 1998 were $2.2 million and $1.9 million,
respectively. Expenditures were primarily related to building expansion and
information system enhancements. In addition, $13.0 million and $360,000 was
expended in 1999 and 1998 for the acquisitions of KMD and PRL, respectively.
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 financial
covenants. As of December 31, 1999, $6.0 million had been drawn down against
this line.
The Company's Board of Directors authorized to repurchase approximately
1.7 million shares of the Company's Common Stock, on the open market or in
private transaction. Total expenditures for share repurchases is limited to
$12.0 million. The remaining authorized repurchases as of December 31, 1999 is
approximately 1.4 million shares and $9.2 million in total expenditures.
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
consisted primarily of trade receivables for ($265,000) and customer lists for
($164,000), and the acquisition has been accounted for pursuant to the purchase
method of accounting.
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 revenues for the twelve months ended December 31, 1999 and
1998, adjusted as if the acquisitions for KMD and PRL had occurred January 1,
1999 and 1998, respectively, approximate $79.7 million and $73.6 million
respectively. Pro forma consolidated net income and earnings per share would not
differ materially from the reported amounts.
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 and the information provided
elsewhere in this Annual Report on form 10K (including, without limitation, in
the third and fourth paragraphs of "Item 1. Business" and under "Gross Profit"
and "Liquidity and Capital Resources" above) contain forward looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others, the uncertainties in reimbursement rates and
reimbursement coverage of various tests sold by the Company to beneficiaries of
the Medicare program (see e.g. Item 1 - Business - "Reimbursement"); being
deemed to be not in compliance with Federal or state regulatory requirements
(see e.g. Item 1 - Business - "Regulatory"); 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 pathology testing by out-of-state laboratories; the ability of the
Company to find, attract and retain qualified management and technical
personnel; the uncertainties associated with competitive pressures from the
large 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and schedules and the
reports of independent public accountants thereon appear beginning on page F-2.
See index to such consolidated financial statements and schedules and reports on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each director and
executive officer during the last five years has been furnished to the Company
by such director or executive officer. Except as indicated, each of the
directors and executive officers has had the same principal occupation for the
last five years.
INFORMATION REGARDING DIRECTORS
Set forth below is certain information concerning each director of DIANON
Systems, Inc.
Kevin C. Johnson, age 45, a Director since May 1996, is President and
Chief Executive Officer of the Company. Mr. Johnson joined Dianon as President
in May 1996, and was appointed to the additional position of Chief Executive
Officer in February 1997. Formerly, Mr. Johnson was with Corning Inc., a
manufacturer of specialty materials and a provider of laboratory services, for
eighteen years, serving most recently as Vice President and General Manager of
Corning Clinical Laboratories' Eastern region in Teterboro, New Jersey. Mr.
Johnson also serves on the Board of Medical Logistics, Inc.
John P. Davis, age 58, a Director since 1984, has served as a consultant
to the Company since October 1998. Mr. Davis was President and Chief Executive
Officer of Infant Advantage, Inc., a child development company, from December
1997 through June 1998. From May 1995 through December 1997, Mr. Davis was
President and Chief Executive Officer of Calypte Biomedical Corp., a diagnostic
products company. From 1984 to January 1995, Mr. Davis was an officer of the
Company. Mr. Davis joined the Company in January 1984 as President and Chief
Operating Officer, and subsequently became co-Chief Executive Officer in 1992
and Chief Executive Officer in 1994. In January 1995, Mr. Davis resigned as
Chief Executive Officer of the Company and became Vice Chairman of the Board. In
February 1997, Mr. Davis was elected non-executive Chairman of the Board. Mr.
Davis also serves as Chairman of the Board of CytoLogix, Inc. and Synergy
Medical Informatics, Inc.
Bruce K. Crowther, age 48, a Director since December 1997, is President
and Chief Executive Officer of Northwest Community Healthcare, Northwest
Community Hospital, in Arlington Heights, Illinois and certain of its
affiliates. Mr. Crowther is a Fellow of the American College of Healthcare
Executives, Chairman of the Board of the Illinois Hospital and HealthSystems
Association and serves on the Board of both Chicago Hospital Risk Pooling
Program and Barrington Bank and Trust. Mr. Crowther received an MBA from
Virginia Commonwealth University Medical College in Richmond, VA.
E. Timothy Geary, age 48, a Director since May 1997, had been Chairman,
President and Chief Executive Officer of National Surgery Centers, Inc. of
Chicago, Illinois, the leading independent owner and operator of ambulatory
surgery centers in the country, until its acquisition by HealthSouth
Corporation on July 22, 1998. Mr. Geary is currently a consultant to
HealthSouth Corporation. Prior to founding National Surgery Centers in 1987,
Mr. Geary served as a Vice President with Medical Care International. Mr.
Geary holds an MBA and AB from the University of Chicago.
G. S. Beckwith Gilbert, age 58, a Director since October 1995, is
President, Chief Executive Officer and a Director of Field Point Capital
Management Company in Greenwich, Connecticut, a merchant banking firm. Mr.
Gilbert is also a partner of Wolsey & Co., a merchant banking firm. In addition,
Mr. Gilbert is Chairman and Chief Executive Officer of Megadata Corporation as
well as a Director of Davidson Hubeny Brands, Inc. Mr. Gilbert is a graduate of
Princeton University and holds an MBA from New York University. In February
1997, the Board elected Mr. Gilbert Chairman of the Executive Committee.
Jeffrey L. Sklar, age 52, a Director since 1994, is Professor of
Pathology, Harvard Medical School, and Director, Divisions of Diagnostic
Molecular Biology and of Molecular Oncology, Department of Pathology, Brigham
and Women's Hospital. Dr. Sklar has served on numerous editorial boards and has
consulted widely to the biotechnology industry. In addition, Dr. Sklar serves on
the Scientific Advisory Committee for Clinical Science, The Fred Hutchinson
Cancer Center, Seattle, Washington; the Scientific Advisory Committee, New
England Primate Research Center, Harvard University; the External Review
Committee, Dana-Farber Cancer Institute, Boston, and the Pathology B Study
Section, National Institutes of Health. Dr. Sklar also serves as a Director of
Transgenomic, Inc. and holds an MD and Ph.D. from Yale University and an MA
(honorary) from Harvard University.
David R. Schreiber, age 40, a Director since October 1999, has served as
Senior Vice President, Finance, Chief Financial Officer and Corporate Secretary
since November 1996 when he joined the Company. Formerly, Mr. Schreiber was with
Corning Clinical Laboratories, a provider of laboratory services, for 10 years,
serving most recently as Vice President and General Manager of the laboratory's
Midwest region. Mr. Schreiber holds an MBA from Northern Illinois University.
INFORMATION REGARDING EXECUTIVE OFFICERS
James B. Amberson, age 48, is Senior Vice President and Chief Medical
Officer of the Company. Dr. Amberson joined Dianon in 1989 as Director,
Cytometry Business Unit, and has served as Vice President of Pathology Services,
Vice President of Medical Affairs and Senior Vice President and General Manager
of the Anatomic Pathology Unit before his present position. Prior to joining the
Company, Dr. Amberson was Assistant Professor of Pathology, Cornell University
Medical College for six years. Dr. Amberson holds an MD from Johns Hopkins
University and an MBA from Columbia University School of Business.
Steven T. Clayton, age 33, is Vice President, Information Services and
Chief Information Officer. Mr. Clayton joined Dianon in December 1996 as Vice
President, Information Services, and was appointed to the additional position of
Chief Information Officer in January 2000. Prior to joining the Company, Mr.
Clayton was with Corning Clinical Laboratories for nine years serving most
recently as the Midwest Regional Director of Information Systems. Mr. Clayton
holds an ASM from Thomas Edison State College.
Martin J. Stefanelli, age 38, has served as Senior Vice President, Sales,
Marketing and Business Development since December 1999. He previously served as
Senior Vice President, Operations and Vice President, Laboratory Operations. Mr.
Stefanelli joined the Company in January 1990 as a Sales Representative and
subsequently served as Logistics Manager, Marketing Manager and Director of
Operations, Anatomic Pathology. Before joining the Company, Mr. Stefanelli was a
captain in the U.S. Army. Mr. Stefanelli holds a BS from the United States
Military Academy.
Valerie B. Palmieri, age 38, has served as Vice President, Operations
since December 1999. She previously served as Vice President, Service Operations
since November 1998. Ms. Palmieri joined the Company in December 1987 as a
Medical Technologist and subsequently served as Laboratory Supervisor,
Operations Laboratory Manager, Director of Operations - Clinical Pathology, and
Director of Service Operations. Prior to joining the Company, Ms. Palmieri was
with Park City and Bridgeport Hospital as a Medical Technologist. Ms. Palmieri
holds a BS from Western Connecticut State University.
Steven L. Gersen, age 46, has served as Vice President, Genetics Services
since January 2000. Dr. Gersen joined the Company in December 1993 as Director,
Genetics Services. Prior to joining the Company, Dr. Gersen was with Integrated
Genetics for 3 years serving most recently as the Associate Director,
Cytogenetics Laboratory. Dr. Gersen holds a Ph.D. in Genetics from Rutgers
University / University of Medicine and Dentistry of NJ.
For information with respect to Messrs. Johnson and Schreiber, who are
also directors, see ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - Information Regarding Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required during the fiscal year ended December 31, 1999, all Section 16(a)
reporting requirements applicable to its officers, directors and greater than
ten percent beneficial shareholders were complied with.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the following
named executive officers: (i) the person who served as Chief Executive Officer
("CEO") during 1999 and (ii) the four most highly compensated executive officers
other than the CEO serving at December 31, 1999 whose total salary and bonus for
1999 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
------------------- Compensation
Other ------------
Name and Annual Securities All Other
Principal Position Year Salary Bonus Compensation Underlying Options Compensation
------------------ ---- ------ ----- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James B. Amberson, M.D. 1999 $239,200 $ 9,062 $ -- -- $10,083 (1)
Senior Vice President, 1998 239,200 -- -- 12,000 10,568
Chief Medical Officer 1997 238,790 35,451 -- 20,000 2,630
Steven T. Clayton 1999 128,544 -- -- -- 2,031 (2)
Vice President, Information Services 1998 127,211 -- -- 5,000 43,613
and Chief Information Officer 1997 120,000 35,568 -- 15,000 73,073
Kevin C. Johnson 1999 300,479 -- -- -- 39,678 (3)
President, Chief Executive 1998 295,773 -- -- 40,000 184,599
Officer and Director 1997 281,939 82,378 -- -- 158,360
David R. Schreiber 1999 204,516 -- -- -- 9,678 (4)
Senior Vice President Finance, 1998 195,582 -- -- 20,000 6,124
Chief Financial Officer and 1997 191,170 65,702 -- 20,000 149,167
Corporate Secretary and Director
Martin J. Stefanelli 1999 150,768 -- -- -- 9,571 (5)
Sr. Vice President, Sales, Marketing 1998 125,394 -- -- 20,000 1,223
and Business Development 1997 103,091 31,350 -- 20,000 260
</TABLE>
(1) The $10,083 indicated for Dr. Amberson represents an auto allowance of
$8,028, contributions of $1,600 paid by the Company pursuant to the
Company's 401(K) Retirement Plan, and term life insurance premiums of $455
paid by the Company.
(2) The $2,031 indicated for Mr. Clayton represents an auto allowance of
$2,000 and term life insurance premiums of $31 paid by the Company.
(3) The $39,678 indicated for Mr. Johnson represents: (i) a loan forgiveness
aggregating $30,000 pursuant to Mr. Johnson's employment agreement; (ii)
an auto allowance of $8,028; (iii) contributions of $1,600 paid by the
Company pursuant to the Company's 401(K) Retirement Plan; and (iv) term
life insurance premiums of $50 paid by the Company.
(4) The $9,678 indicated for Mr. Schreiber represents an auto allowance of
$8,028, contributions of $1,600 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $50
paid by the Company.
(5) The $9,571 indicated for Mr. Stefanelli represents an auto allowance of
$8,196, contributions of $1,330 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $45
paid by the Company.
<PAGE>
DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid $1,500 for each
meeting of the Board of Directors attended in person and $500 for each meeting
attended by telephone, and committee members are paid $500 for each committee
meeting attended which does not occur on the same day as a Board meeting.
Directors are also reimbursed for expenses to attend meetings of the Board and
its committees. In addition, the Company has made payments to Brigham & Women's
Hospital, Inc., for which Dr. Sklar is a director, Division of Diagnostic
Molecular Biology, Department of Pathology. See "Compensation Committee
Interlocks and Insider Participation."
Commencing January 1, 1998, Mr. Davis and Mr. Gilbert, in connection with
their capacities as non-Executive Chairman of the Board and Chairman of the
Executive Committee, respectively, also receive $50,000 annually (payable
monthly at $4,166) and an annual grant of 3,000 stock options, at a price equal
to the market value on the date of grant, pursuant to the Company's 1996 and
1999 Stock Incentive Plans. They each also received a one-time grant of 13,000
stock options in December 1997 pursuant to the Company's 1996 Stock Incentive
Plan, in connection with their services in the aforementioned positions during
1997. In addition, the Company extended the expiration date by five years for
116,084 non-qualified stock options granted to Mr. Davis. These options, which
were originally due to expire on January 20, 2000, will now expire on January
20, 2005 unless said non-qualified stock option is earlier terminated in
accordance with its terms.
In addition to his aforementioned duties, commencing October 1, 1998 Mr.
Davis began serving as a consultant to the Company, providing approximately two
days per week of consulting services and maintaining an office at the Company.
He works closely with the sales and marketing functions of the Company, and is
involved in the planning and development of sales training programs, recruiting,
compensation planning, market segmentation, pricing, and national and managed
care marketing programs. As compensation for these services, Mr. Davis receives
$50,000 annually (payable monthly at $4,166), in addition to his director
compensation and in addition to the $50,000 he receives in his capacity as
non-Executive Chairman of the Board. In connection with his consulting
arrangement, Mr. Davis was also paid a relocation reimbursement of $123,667 in
February 1999, and will receive in 2000 a reimbursement for the tax effect of
the relocation payment.
Pursuant to the Company's 1996 and 1999 Stock Incentive Plans, Directors
who are not employees of the Company receive (i) automatic initial and quarterly
grants of stock options with tandem limited stock appreciation rights beginning
July 1995, (ii) automatic quarterly grants of shares of Common Stock beginning
January 1997 and (iii) additional stock options or other awards to the extent
granted by the Board of Directors in its discretion.
Each initial and quarterly stock option which is automatically granted
under such plan is exercisable for that number of shares obtained by dividing
$5,000 by the closing price of the Common Stock on the date of grant and is
exercisable at that price. Each such option has a 10-year term and vests with
respect to 10% of the underlying shares on the date which is three months after
the date of grant, and an additional 10% at the end of each three-month period
thereafter. Each such option can be exercised for five years following a
director's termination of service to the extent it had vested prior to
termination. Each automatic quarterly stock grant is for the number of shares
obtained by dividing $2,000 by the closing price of the Common Stock on the date
of grant, and is fully vested at grant.
In November 1996, pursuant to authorization by the Board of Directors, the
Company granted to Dr. Sklar an option to purchase 10,000 shares of Common Stock
at an exercise price of $6.375 to compensate him for his services as a Director.
Such option vested 40% on grant, and an additional 20% on each of August 4,
1997, August 4, 1998 and August 4, 1999. Such grant was a replacement of an
option to purchase 10,000 shares of Common Stock authorized by the Board in
1994, but not accepted by Dr. Sklar at that time due to the conditions of his
employment by Brigham & Women's Hospital, Inc. In October 1996, pursuant to
authorization by the Board of Directors, the Company granted an option to
purchase 10,000 shares of Common Stock at an exercise price of $7.125 per share
to a director in replacement of options issued in June 1993 which had the same
exercise price, were due to expire in June 2000 and were 80% vested as of June
4, 1997 and 20% vested on June 4, 1998. These replacement options vested 100% in
October 1996 and expire ten years from the date of grant.
Messrs. Johnson and Schreiber, who are employees of the Company, receive
no additional compensation for their services as Directors of the Company.
STOCK OPTIONS
There were no option grants for executive officers of the Company in the
last fiscal year. The Company, as of December 31, 1999, has not granted any
Stock Appreciation Rights to officers.
The following table shows aggregate option exercises in the last fiscal
year and fiscal year-end option values for the named executive officers. The
Company, as of December 31, 1999, has not granted any Stock Appreciation Rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Value
Realized
(Market Value of Unexercised
Price at Number of Securities In-the-Money Options at FY-End
Exercise Underlying Unexercised Options (based on FY-End Price of
Shares less at FY-end(#) $13.75/share) ($) (1)
Acquired on Exercise -------------------------------
Name Exercise(#) Price)($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James B. Amberson, M.D. -- $ -- 67,000 36,500 $554,798 $240,313
Steven T. Clayton 15,000 72,975 -- 20,000 -- 114,625
Kevin C. Johnson -- -- 120,000 120,000 967,500 920,000
David R. Schreiber 15,000 96,975 23,000 52,000 146,875 340,000
Martin J. Stefanelli 12,320 76,060 4,000 39,000 20,000 250,250
</TABLE>
(1) Computed based upon difference between aggregate fair market value and
aggregate exercise price.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company entered into an employment agreement with Mr. Johnson on May
2, 1996. The agreement provides for Mr. Johnson to serve as President of the
Company at an initial base salary of $275,000 per annum, the grant of options to
purchase 200,000 shares of Common Stock with a 10-year term and an exercise
price of $5.69, stock grants of 15,000 shares of Common Stock on January 2, 1997
and 15,000 additional shares on January 2, 1998, a signing bonus of $50,000 and
a loan of $150,000. The loan carries an interest rate of 5.9%, payable annually,
and is repayable upon termination of Mr. Johnson's employment with the Company.
If Mr. Johnson continues to be employed with the Company, the loan principal
will be forgiven at the rate of $2,500 per completed month of employment from
January 31, 1998 through December 31, 2002. This agreement provides that in the
event of a termination of Mr. Johnson's employment other than for "Cause," as
defined in the agreement, he is entitled to receive one year's salary and other
benefits. Subject to the foregoing, this agreement is subject to termination at
will by either party.
The Company entered into an employment agreement with David R. Schreiber
on September 30, 1996 as the Chief Financial Officer and Senior Vice President,
Finance. The agreement provides for an initial base salary of $190,000 per
annum, the grant of options to purchase 50,000 shares of Common Stock with a
10-year term and an exercise price of $6.625, a signing bonus of $80,000 and a
stock grant of 7,500 shares of Common Stock on April 1, 1997. This agreement
provides that in the event of a termination of Mr. Schreiber's employment other
than for "Cause," as defined in the agreement, he is entitled to receive one
year's salary (and certain other benefits) if such termination occurs within the
first year of employment or six months after the Company is acquired by another
business entity, or six month's salary (and certain other benefits) if such
termination occurs after such period. Subject to the foregoing, this agreement
is subject to termination at will by either party.
The Company entered into an agreement with James B. Amberson, M.D. on
September 1, 1996, which provides that following a "Change in Control" of the
Company, as defined in the agreement, if Dr. Amberson's employment is terminated
other than for "Cause," as defined in the agreement, he is entitled to receive
one year's salary and bonus and all his stock options will vest completely. Dr.
Amberson's agreement expires in September 2001 and is subject to successive
automatic one-year renewals thereafter (unless certain notice is given).
The Company also entered into an employment agreement with James B.
Amberson, M.D. on September 1, 1996. Pursuant to such agreement, Dr. Amberson is
entitled to a salary as determined by the Company and other employee benefits
made available by the Company to its employees. This agreement provides that in
the event of a termination of Dr. Amberson's employment for other than "Stated
Cause" (as defined in the agreement), he is entitled to receive six month's
salary and other benefits. Subject to the foregoing, this agreement is subject
to termination at will by either party.
The Company entered into an employment agreement with Steven T. Clayton
on November 18, 1996 as Vice President, Information Services of the Company. The
agreement provides for an initial base salary of $120,000 per annum, a signing
bonus of $14,000 and the grant of options to purchase 15,000 shares of Common
Stock with a 10-year term and an exercise price of $7.875.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF VOTING STOCK BY CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the only
persons who, to the best knowledge of the Company, beneficially owned more than
five percent of the Common Stock of the Company as of March 9, 2000. Unless
otherwise indicated below, each person included in the table has sole voting and
investment power with respect to all shares included therein.
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class(1)
- -------------- ---------------- --------- -----------
Common Stock G. S. Beckwith Gilbert et al 1,818,884 (2)(3) 25.7% (3)
47 Arch Street
Greenwich, CT 06830
Common Stock Oracle Management Partners, Inc. 750,400 10.6%
and Affiliates
712 E 5th Avenue - 45th Floor
New York, NY 10019
Common Stock Westfield Capital Management 467,900 6.6%
One Financial Center
Boston, MA 02111
Common Stock John M. Bryan et al 356,412 5.1%
Bryan and Edwards
600 Montgomery Street - 35th Floor
San Francisco, CA 94111
(1) For the purposes of this table, "Percent of Class" held by each person has
been calculated based on a total class equal to the sum of (i) 7,052,203
shares of Common Stock issued and outstanding on March 9, 2000 plus (ii)
for such person the number of shares of Common Stock subject to stock
options or warrants presently exercisable, or exercisable within 60 days
after March 9, 2000, held by that person, and which percent is rounded to
the nearest whole number.
(2) Mr. Gilbert has shared voting and investment power with respect to 121,951
shares included in the table above.
(3) As of March 9, 2000, Mr. Gilbert cannot vote, without restriction, any
Common Stock or other voting securities of the Company beneficially owned
by him representing greater than 20% of the total voting power of the
Company's voting securities outstanding from time to time, or 1,410,441
votes as of March 9, 2000. Excess votes above this amount are required to
be voted in proportion to the votes cast by all other shareholders of the
Company.
<PAGE>
OWNERSHIP OF VOTING STOCK BY MANAGEMENT
The following table gives information concerning the beneficial ownership
of the Company's Common Stock as of March 9, 2000 by each director and each of
the executive officers named in the summary compensation table and all current
directors and executive officers (as of March 9, 2000) as a group.
<TABLE>
<CAPTION>
Total Shares
Beneficially Direct Right to Percent of
Beneficial Owners Owned(1)(2) Ownership Acquire(3) Class(4)
- ----------------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C>
James B. Amberson, M.D. 82,307 23,580 43,420 1.2%
Steven T. Clayton -- -- -- -- (5)
Bruce K. Crowther 5,038 1,959 3,079 -- (5)
John P. Davis 252,107 119,088 133,019 3.5%
E. Timothy Geary 6,618 2,405 4,213 -- (5)
G. S. Beckwith Gilbert 1,818,884 1,802,868 16,016 25.7% (6)
Kevin C. Johnson 205,841 30,534 160,000 2.9%
David R. Schreiber 46,210 7,903 23,000 -- (5)
Martin J. Stefanelli 4,000 -- 4,000 -- (5)
Jeffrey L. Sklar, M.D., Ph.D. 23,403 2,868 20,535 -- (5)
All current directors and executive officers
as a group (12 persons) 2,427,046 1,991,257 420,482 32.5%
</TABLE>
(1) The information as to beneficial ownership is based on statements furnished
to the Company by its executive officers and directors. Each executive
officer and director has sole voting and sole investment power with respect
to his respective shares listed above, except that the shares reported for
Mr. Gilbert include 121,951 shares which are held by a trust of which Mr.
Gilbert is a trustee, as to which Mr. Gilbert shares voting and investment
powers. Amounts shown for each of Messrs. Johnson and Schreiber and Dr.
Amberson include 15,307 shares held in the Company's 401(K) Retirement
Plan, as to which such officers share voting power as trustees of such plan
and each individual plan participant has investment power, subject to the
terms of such plan, of the shares in his account; such amount includes 534
and 403 shares in Messrs. Johnson and Schreiber, respectively.
(2) Includes shares listed under the captions "Direct Ownership" and "Right to
Acquire," as well as shares held in the Company's 401(K) Retirement Plan
which are beneficially owned by the named individuals as trustees of such
plan but as to which such trustees have no economic interest.
(3) Individuals have the right to acquire these shares within 60 days of March
9, 2000 by the exercise of stock options or through purchases under the
Company's Employee Stock Purchase Plan.
(4) For the purposes of this table, "Percent of Class" held by each individual
has been calculated based on a total class equal to the sum of (i)
7,052,203 shares of Common Stock issued and outstanding on March 9, 2000
plus (ii) for such individual the number of shares of Common Stock subject
to stock options presently exercisable, or exercisable within 60 days after
March 9, 2000, held by that individual, and which percent is rounded to the
nearest whole number.
(5) Owns less than 1% of the outstanding Common Stock.
(6) As of March 9, 2000, Mr. Gilbert cannot vote, without restriction, any
Common Stock or other voting securities of the Company beneficially owned
by him representing greater than 20% of the total voting power of the
Company's voting securities outstanding from time to time, or 1,410,441
votes as of March 9, 2000. Excess votes above this amount are required to
be voted in proportion to the votes cast by all other shareholders of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 8 to the Company's consolidated financial statements included
herewith.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules Filed.
1) Financial Statements - See accompanying Consolidated Financial
Statements and Schedules, Pages F-1 through F-18.
2) Financial Statement Schedules - See accompanying Consolidated
Financial Statements and Schedules, Pages F-1 through F-18.
3) Exhibits - Refer to 14(c) below.
(b) Reports:
The Company filed no reports on Form 8-K in the fourth quarter of 1999
with the Securities and Exchange Commission.
(c) Exhibit Index
3.1 Restated Certificate of Incorporation of the Company, as amended through
June 12, 1991 (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement No. 33-41226).
3.2 Restated By-Laws of the Company, as amended through October 24, 1996
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement No. 333-18817).
3.3 Restated By-Laws of the Company, as amended through February 2, 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement No. 333-18817).
10.1 Consulting Agreement, dated August 4, 1989, between DIANON Systems, Inc.
and Nonda Katopodis, Ph.D. (incorporated by reference to Exhibit 10.7 of
the Registrant's Registration Statement No. 33-41226).**
10.2 Executive Vesting Agreement, dated as of June 11, 1991, between DIANON
Systems, Inc. and James B. Amberson, M.D. (incorporated by reference to
Exhibit 10.13 of the Registrant's Registration Statement No. 33-41226).**
10.3 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 of
the Registrant's Registration Statement No. 33-41226).**
10.4 Management Incentive Plan (incorporated by reference to Exhibit 10.18 of
the Registrant's Registration Statement No. 33-41226).**
10.5 Stock Option Grant to Walter O. Fredericks, dated April 27, 1990
(incorporated by reference to Exhibit 10.23 of the Registrant's
Registration Statement No. 33-41226).**
10.6 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991
(incorporated by reference to Exhibit 10.24 of the Registrant's
Registration Statement No. 33-41226).**
10.7 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991
(incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement No. 33-41226).**
10.8 Lease Agreement, made as of February 14, 1989, between Watson Boulevard
Development Limited Partnership, as lessor, and DIANON Systems, Inc., as
lessee, for premises located at 200 Watson Boulevard (incorporated by
reference to Exhibit 10.29 of the Registrant's Registration Statement No.
33-41226).
10.9 License Agreement, dated June 9, 1983, between Sloan-Kettering Institute
for Cancer Research and N-K Laboratories Limited Partnership
(incorporated by reference to Exhibit 10.30 of the Registrant's
Registration Statement No. 33-41226).
10.10 License Agreement, dated July 29, 1987, between University of
Rochester and DIANON Systems, Inc. (incorporated by reference to
Exhibit 10.32 of the Registrant's Registration Statement No. 33-41226).
10.11 Development Agreement, effective September 25, 1987, between Connecticut
Product Development Corporation and DIANON Systems, Inc. (incorporated by
reference to Exhibit 10.33 of the Registrant's Registration Statement No.
33-41226).
<PAGE>
Exhibit Index (continued)
10.12 Stock Option Grant to James B. Amberson, M.D., dated April 23, 1991
(incorporated by reference to Exhibit 28.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991).**
10.13 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991, as
amended (incorporated by reference to Exhibit 10.37 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991).**
10.14 Asset Purchase Agreement, dated April 30, 1993, by and among the
Registrant and Molecular Oncology, Inc., and Oncologix, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form 8-K
dated April 30, 1993, filed with the Securities and Exchange Commission
on May 14, 1993).
10.15 Asset Purchase Agreement, dated June 29, 1993, by and among the
Registrant and Collaborative Research, Inc. (incorporated by reference to
Exhibit 1.2 to the Registrant's Form 8-K dated June 29, 1993, filed with
the Securities and Exchange Commission on July 13, 1993).
10.16 Term Loan Agreement, dated July 14, 1993, by and among the Registrant and
the Union Trust Company (incorporated by reference to Exhibit 10.34 to
the Registrant's Annual Report on Form 10-K/A Amendment 1 for the year
ended December 31, 1993, filed with the Securities and Exchange
Commission on April 28, 1994).
10.17 Rights Agreement, dated April 29, 1994, by and among the Registrant and
American Stock and Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K dated April 29, 1994,
filed with the Securities and Exchange Commission on May 9, 1994).
10.18 Severance Agreement, dated January 20, 1995, by and among the Registrant
and John P. Davis (incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on March 29,
1996).**
10.19 Employment Agreement, dated May 3, 1996, by the Registrant and Kevin C.
Johnson (incorporated by reference to Exhibit 10.37 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).**
10.20 Executive Employment Agreement, dated September 1, 1996, by the
Registrant and Richard A. Sandberg (incorporated by reference to Exhibit
10.38 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).**
10.21 Employment Agreement, dated September 1, 1996, by the Registrant and
James B. Amberson, M.D. (incorporated by reference to Exhibit 10.39 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.22 Executive Employment Agreement, dated September 1, 1996, by the
Registrant and James B. Amberson, M.D. (incorporated by reference to
Exhibit 10.40 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).**
10.23 Severance Agreement, dated September 27, 1996, by the Registrant and Carl
R. Iberger (incorporated by reference to Exhibit 10.41 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.24 Employment Agreement, dated September 30,1996, by the Registrant and
David R. Schreiber (incorporated by reference to Exhibit 10.42 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.25 Employment Agreement, dated November 18, 1996, by the registrant and
Steven T. Clayton.**
10.26 Severance Agreement dated November 18, 1996, by the registrant and Daniel
J. Cronin, III.**
10.27 Amendment dated as of October 4, 1995 to Rights Agreement dated as of
April 29, 1994 between the Registrant and American Stock Transfer and
Trust Company, as Rights Agent (incorporated by reference to Exhibit No.
1 to the Registrant's Form 8-K dated October 30, 1996 filed with the
Securities and Exchange Commission on November 8, 1995).
10.28 1996 Stock Incentive Plan (incorporated by reference to Appendix A to the
Registrant's Statement on Schedule 14A filed with the Securities and
Exchange Commission on September 23, 1996).**
10.29 Stock and Warrant Purchase Agreement, dated as of October 4, 1995, among
the Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.30 Registration Rights Agreement, dated as of October 4, 1995, among the
Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.31 Warrant No. 1, dated as of October 4, 1995, by the Registrant in favor of
G. S. Beckwith.
10.32 Promissory Note, dated October 4, 1995, by G. S. Beckwith Gilbert in
favor of the Registrant.
10.33 Stock Option Grant dated October 24, 1996 by the Registrant to Andre de
Bruin.**
10.34 Stock Option Grant dated November 4, 1996 by the Registrant to Jeffrey M.
Sklar, M.D., Ph.D.**
10.35 Loan Agreement dated December 3, 1996 by the Registrant to Kevin C.
Johnson).**
10.36 Form of standard Stock Option Grant for outside directors.**
<PAGE>
Exhibit Index (continued)
10.37 Amendment to Warrant Certificate No. W-1 dated as of October 2, 1996
between the Registrant and G. S. Beckwith Gilbert.
10.38 Severance Agreement dated February 27, 1997 by the Registrant and
Richard A. Sandberg.**
10.39 Amendment dated April 30, 1997 by the Registrant and Richard A.
Sandberg.**
10.40 Security Agreement dated April 30, 1997 by the Registrant and Richard
A. Sandberg.**
10.41 Secured Promissory Note dated April 30, 1997 by the Registrant and
Richard A. Sandberg.**
10.42 Non-Compete Agreement dated September 3, 1997 by the Registrant and
Vernon L. Wells.**
10.43 Severance Agreement dated September 15, 1997 by the Registrant and
Robert C. Verfurth.**
10.44 Consulting and Proprietary Information and Inventions Agreement dated
October 1, 1997 by the Registrant and Jeffrey L. Sklar, M.D., Ph.D.
10.45 Severance Agreement dated January 27, 1998 by the Registrant and
Vernon L. Wells.**
10.46 Asset Purchase Agreement dated as of April 7, 1999 among DIANON Systems,
Inc., Kyto Meridien Diagnostics, L.L.C., Kyto Diagnostics, L.P., Meridian
Diagnostics Labs, Inc., A. Bruce Shapiro and Ralph M. Richart, M.D.
(incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
10.47 Registration Rights Agreement dated as of May 1, 1999 between DIANON
Systems Inc. and Kyto Meridien Diagnostics, L.L.C. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated May 1, 1999,
filed with the Securities and Exchange Commission on May 5, 1999).
10.48 Consulting Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and A. Bruce Shapiro (incorporated by reference to Exhibit 10.3 to
the Registrant's Form 8-K dated May 1, 1999, filed with the Securities
and Exchange Commission on May 5, 1999).
10.49 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Ralph Mr. Richart, M.D. (incorporated by reference to Exhibit
10.4 to the Registrant's Form 8-K dated May 1, 1999, filed with the
Securities and Exchange Commission on May 5, 1999).
10.50 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Beth Phillips (incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.51 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Dana Shapiro (incorporated by reference to Exhibit 10.6 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.52 Amendment Agreement date December 23, 1999 by and among DIANON Systems,
Inc. and A. Bruce Shapiro, Ralph M. Richart, Dana Shapiro, Kyto Meridien
Diagnostics, L.L.C., Kyto Diagnostics L.P. and Meridien Diagnostics Labs,
Inc. (filed herewith).
11.1 Statement re: computation of per share earnings. *
21.1 List of Subsidiaries of the Company (incorporated by reference to Exhibit
22.1 of the Registrant's Registration Statement No. 33-41226).
23.1 Consent of Arthur Andersen LLP (filed herewith).
27.1 Financial Data Schedule. (filed herewith)
99.1 Press Release (incorporated by reference to Exhibit 99.1 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
99.2 KMD financial statements for the year ending December 31, 1998
(incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
- --------------
* Not applicable or contained elsewhere herein.
** A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: March 28, 2000
DIANON SYSTEMS, INC.
By: /s/ KEVIN C. JOHNSON
-------------------------------------
Kevin C. Johnson,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ KEVIN C. JOHNSON President and March 28, 2000
- --------------------------------- Chief Executive Officer and a
Kevin C. Johnson Director
(Principal Executive Officer)
/s/ DAVID R. SCHREIBER Senior Vice President, Finance and March 28, 2000
- --------------------------------- Chief Financial Officer and a Director
David R. Schreiber (Principal Financial and
Accounting Officer)
/s/ JOHN P. DAVIS Chairman of the Board March 28, 2000
- ---------------------------------
John P. Davis
/s/ G. S. BECKWITH GILBERT Director and March 28, 2000
- --------------------------------- Chairman of the
G. S. Beckwith Gilbert Executive Committee
/s/ BRUCE K. CROWTHER Director March 28, 2000
- ---------------------------------
Bruce K. Crowther
/s/ E. TIMOTHY GEARY Director March 28, 2000
- ---------------------------------
E. Timothy Geary
/s/ JEFFREY L. SKLAR, M.D., Ph.D. Director March 28, 2000
- ---------------------------------
Jeffrey L. Sklar, M.D., Ph.D.
</TABLE>
<PAGE>
DIANON SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998
F-3 & F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-7 & F-8
Notes to Consolidated Financial Statements F-9 to F-17
Schedules:
Report of Independent Public Accountants F-18
Schedule II - Valuation and Qualifying Accounts F-19
All other schedules required by Regulation S-X have been omitted because
they are not applicable or because the required information is included in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIANON Systems, Inc.:
We have audited the accompanying consolidated balance sheets of DIANON
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIANON Systems, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 3 to the financial statements, effective January 1,
1998, the Company changed its method of accounting for internally developed
software costs to conform with Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use."
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
February 22, 2000
F-2
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,761,047 $12,126,076
Accounts receivable, net of allowance for bad debts of $1,010,266
and $1,033,059 at December 31, 1999 and 1998, respectively 19,477,904 14,403,878
Prepaid expenses and employee advances 1,074,877 1,007,577
Inventory 911,473 981,647
Deferred income taxes 986,471 1,047,118
---------------- ---------------
Total current assets 32,211,772 29,566,296
---------------- ---------------
PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 12,142,415 10,367,848
Leasehold improvements 4,648,703 3,786,759
Less - accumulated depreciation and amortization (11,433,539) (8,620,122)
---------------- ---------------
5,357,578 5,534,485
---------------- ---------------
INTANGIBLE ASSETS, net of accumulated amortization of $3,852,204 and
$3,181,779 at December 31, 1999 and 1998, respectively 12,854,280 377,751
DEFERRED INCOME TAXES 1,422,723 1,005,869
OTHER ASSETS 242,572 218,714
---------------- ---------------
TOTAL ASSETS $52,088,925 $36,703,115
================ ===============
</TABLE>
F-3
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1999 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,642,065 $ 1,260,620
Accrued employee compensation 1,103,903 576,335
Accrued employee stock purchase plan 10,212 31,996
Accrued income taxes payable 751,056 309,623
Current portion of capitalized lease obligations 31,109 42,334
Other accrued expenses 3,423,997 3,018,468
---------------- ---------------
Total current liabilities 6,962,342 5,239,376
---------------- ---------------
LONG-TERM PORTION LIABILITIES:
Long-term note payable 6,000,000 --
Long-term deferred tax liability 313,783 --
Long-term portion of capitalized lease obligations 47,238 80,675
---------------- ---------------
Total liabilities 13,323,363 5,320,051
---------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 7,060,749 and 6,808,729 shares issued and
outstanding at December 31, 1999 and 1998, respectively 70,608 68,088
Additional paid-in capital 29,428,647 27,398,120
Retained earnings 9,828,769 5,697,710
Common stock held in treasury, at cost - 58,734 and 222,019
shares at December 31, 1999 and 1998, respectively (562,462) (1,780,854)
---------------- ---------------
Total stockholders' equity 38,765,562 31,383,064
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,088,925 $36,703,115
================ ===============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
F-4
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net revenues $76,097,031 $62,181,503 $60,887,193
Cost of sales 43,883,592 35,670,153 31,121,507
--------------- ---------------- ---------------
GROSS PROFIT 32,213,439 26,511,350 29,765,686
Selling, general and administrative expenses 24,176,265 21,240,527 22,695,863
Amortization of intangible assets 670,425 224,210 236,176
Research and development expenses 571,797 528,478 1,645,843
--------------- ---------------- ---------------
INCOME FROM OPERATIONS 6,794,952 4,518,135 5,187,804
Interest income, net 266,688 682,138 522,427
--------------- ---------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,061,640 5,200,273 5,710,231
Provision for income taxes 2,930,581 2,245,943 2,412,534
--------------- ---------------- ---------------
NET INCOME $ 4,131,059 $ 2,954,330 $ 3,297,697
=============== ================ ===============
EARNINGS PER SHARE:
BASIC $ .61 $ .44 $ .51
DILUTED $ .59 $ .43 $ .48
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 6,763,120 6,677,524 6,430,060
DILUTED 7,053,161 6,902,080 6,808,250
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Additional Retained Common Stock
Common Stock Paid-In Earnings Acquired for Treasury
Shares Amount Capital (Deficit) Shares Amount Total
------------ ----------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 6,712,774 $67,128 $27,965,560 ($ 554,317) (117,196) ($929,443) $26,548,928
Stock options exercised 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 53,584 535 288,012 -- -- -- 288,547
Employee stock purchase plan -- -- (499,193) -- 131,498 1,094,800 595,607
Stock grants 19,825 199 186,018 -- -- -- 186,217
Common stock acquired for treasury -- -- -- -- (211,900) (1,687,881) (1,687,881)
Retired shares (56,000) (560) (456,940) -- 56,000 457,500 --
Net income -- -- -- 2,954,330 -- -- 2,954,330
------------ ----------- ------------ ------------- ----------- ------------ -------------
BALANCE, December 31, 1998 6,808,729 68,088 27,398,120 5,697,710 (222,019) (1,780,854) 31,383,064
Stock options exercised 217,814 2,178 1,705,564 -- -- -- 1,707,742
Issuance of common stock 79,981 800 700,516 -- 222,019 1,780,854 2,482,170
Employee stock purchase plan -- -- (22,136) -- 4,766 43,920 21,784
Stock grants 4,225 42 39,833 -- -- -- 39,875
Common stock acquired for treasury -- -- -- -- (113,500) (1,000,132) (1,000,132)
Retired shares (50,000) (500) (393,250) -- 50,000 393,750 --
Net income -- -- -- 4,131,059 -- -- 4,131,059
------------ ----------- ------------ ------------- ----------- ------------ -------------
BALANCE, December 31, 1999 7,060,749 $70,608 $29,428,647 $9,828,769 (58,734) ($562,462) $38,765,562
============ =========== ============ ============= =========== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,131,059 $2,954,330 $3,297,697
Adjustments to reconcile net income to net cash provided
by (used in) operations -
Non-cash charges
Depreciation and amortization 3,489,544 2,786,821 3,109,515
Stock compensation expense 39,875 186,217 231,255
Loss on disposal of fixed assets -- -- 55,241
Deferred tax provision (470,063) (365,999) (753,197)
Changes in other current assets and liabilities
(Increase) decrease in accounts receivable (4,724,164) 337,054 981,454
(Increase) decrease in prepaid expenses and
employee advances (264,986) (183,473) 988,623
Decrease (increase) in inventory 79,924 (212,042) (67,091)
Decrease (increase) in other assets 296,603 256,073 (160,853)
Increase (decrease) in accounts payable and other
accrued liabilities 1,118,114 (2,979,916) 646,762
--------------- ---------------- --------------
Net cash provided by operating activities 3,695,906 2,779,065 8,329,406
--------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of assets, net of debt assumed (10,500,000) (359,590) --
Capital expenditures (2,263,528) (1,864,824) (1,860,646)
Other 1,316 -- 16,124
--------------- ---------------- --------------
Net cash (used in) investing activities (12,762,212) (2,224,414) (1,844,522)
--------------- ---------------- --------------
</TABLE>
F-7
<PAGE>
DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of note payable $ 6,000,000 $ -- $ --
Issuance of common stock 16,545 -- --
Purchase of common stock acquired for treasury (1,000,132) (1,687,881) (1,936,030)
Exercise of stock options 1,707,742 288,547 249,016
Employee stock purchase plan 21,784 595,607 655,378
Net borrowings (repayments) of capitalized lease
obligations (44,662) (25,910) 109,378
Repayments of note payable -- -- (650,154)
--------------- ---------------- ---------------
Net cash provided by (used in) financing activities 6,701,277 (829,637) (1,572,412)
--------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents (2,365,029) (274,986) 4,912,472
CASH AND CASH EQUIVALENTS,
beginning of year 12,126,076 12,401,062 7,488,590
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS,
end of year $ 9,761,047 $12,126,076 $12,401,062
=============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year
Interest $ 281,318 $ 20,275 $ 27,416
Income taxes 2,659,753 2,883,890 2,171,422
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common Stock of $2,462,625 was issued in connection with the acquisition
of KMD.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
DIANON Systems, Inc. (the "Company") provides a full line of anatomic
pathology testing services, as well as a number of genetic and clinical
chemistry testing services to patients, physicians and managed care
organizations throughout the United States. A significant portion of the
services provided by the Company are paid for by either the patients' Medicare
or private medical insurance carriers. The remaining services are generally paid
for by patients, physicians or hospitals directly.
The Company operates in one reportable segment, the medical laboratory
industry. Its testing services are separated based upon the nature of the test:
anatomic pathology testing and clinical chemistry testing. Anatomic pathology
testing is characterized by tissue or cell specimens that are interpreted by
physicians. Clinical chemistry testing is characterized by blood or urine
specimens that are interpreted through highly automated processes. Net revenues
by type of test for fiscal year 1999, 1998 and 1997 are presented below:
Year Ended December 31
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Anatomic pathology testing $60,523,215 $48,151,160 $43,923,487
Clinical chemistry testing 15,573,816 14,030,343 16,963,706
--------------- --------------- ---------------
Consolidated net revenues $76,097,031 $62,181,503 $60,887,193
=============== =============== ===============
The Company's operations are conducted entirely in the United States since
the discontinuation of its international operations, the liquidation of which
was completed in 1998. No customer accounted for more than 10% of the Company's
revenues; however, in 1999, 1998 and 1997, respectively, approximately 31%, 33%
and 37% of the Company's net revenues were derived from testing performed for
beneficiaries under the Medicare and Medicaid programs. These figures include
the 20% co-payment portion normally billed to patients.
(2) ACQUISITIONS
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
consisted primarily of trade receivables for ($265,000) and customer lists for
($164,000), and the acquisition has been accounted for pursuant to the purchase
method of accounting.
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 revenues for the twelve months ended December 31, 1999 and
1998, adjusted as if the acquisitions for KMD and PRL had occurred January 1,
1999 and 1998, respectively, approximate $79.7 million and $73.6 million
respectively. Pro forma consolidated net income and earnings per share would not
differ materially from the reported amounts.
F-9
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1999 and 1998, the Company had approximately $9.8 million and $12.1 million,
respectively, invested in short-term U.S. treasury funds with maturities of less
than three months. The carrying amount of the cash equivalents approximates its
fair value due to the relatively short period to maturity of these instruments.
Interest income per the consolidated statements of operations is presented net
of interest expense of $281,318, $32,529 and $26,869 for 1999, 1998 and 1997,
respectively.
Inventory -
Inventory consists primarily of bulk reagents, specimen collection kits
and devices. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and Equipment -
Property and equipment are stated at cost. Major improvements which add to
productive capacity or extend the life of an asset are capitalized while repairs
and maintenance are charged to expense as incurred.
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 98-1 "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use." In accordance with SOP 98-1, the Company has capitalized
approximately $70,000 and $443,000 in internally developed software costs in
1999 and 1998, respectively. These costs relate to the purchase of external
materials and direct payroll costs associated with software development. The
Company is amortizing these costs on a straight-line basis over three years.
Intangible Assets -
Intangible assets are amortized on a straight-line basis over the
respective economic life as follows:
Years
-----
Goodwill 30
Acquired Workforce 15
Customer lists 7 - 15
Non-compete agreements 4
The Company periodically reviews the anticipated revenues related to
intangible assets to determine whether any adjustments to their carrying values
are necessary. Based on the guidelines of SFAS No. 121, the Company believes
that no material impairment exists for any of the intangible assets as of
December 31, 1999. Impairments are recognized in operating results when a
permanent diminution in carrying value occurs.
F-10
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition -
Revenues are recognized in the period in which services are provided.
Revenues subject to Medicare and Medicaid, direct physician and hospital billing
are based on fixed reimbursement fee schedules. All remaining revenues subject
to third-party reimbursement are recorded at the expected net realizable value.
Such estimates are revised periodically based upon the Company's actual
reimbursement experience.
Depreciation and Amortization -
Laboratory and office equipment is depreciated using the straight-line
method over a useful life of two to seven years. Leasehold improvements are
amortized over the shorter of their economic useful life or the remaining life
of the lease.
Research and Development -
Research and development costs are charged to expense as incurred.
Income Taxes -
The Company utilizes the liability method of accounting for income taxes
as set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred income taxes are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates and regulations.
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 EPS computations:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
BASIC EARNING PER SHARE:
Weighted-average number of common shares outstanding 6,763,120 6,677,524 6,430,060
DILUTIVE EFFECT OF:
Stock options 290,041 224,556 378,190
-------------- -------------- --------------
DILUTED EARNINGS PER SHARE:
Weighted-average number of common shares outstanding 7,053,161 6,902,080 6,808,250
============== ============== ==============
NET INCOME $4,131,059 $2,954,330 $3,297,697
============== ============== ==============
BASIC EARNINGS PER SHARE $0.61 $0.44 $0.51
============== ============== ==============
DILUTED EARNINGS PER SHARE $0.59 $0.43 $0.48
============== ============== ==============
</TABLE>
F-11
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase 55,925 shares of common stock at prices ranging from
$9.75 and $12.25 per share were outstanding as of December 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.
Reclassifications -
Certain reclassifications have been made to prior year amounts to conform
to the classifications used in the current year presentation.
(4) INCOME TAXES
The income tax provisions for the years ended December 31, 1999, 1998 and
1997 consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 1998 1997
---------------- -------------- ---------------
<S> <C> <C> <C>
Current
Federal $2,707,951 $2,071,854 $2,444,187
State 692,693 540,088 721,544
---------------- -------------- ---------------
Total current 3,400,644 2,611,942 3,165,731
---------------- -------------- ---------------
Deferred
Federal (405,959) (280,806) (598,785)
State (64,104) (85,193) (154,412)
---------------- -------------- ---------------
Total deferred (470,063) (365,999) (753,197)
---------------- -------------- ---------------
Total provision for income taxes $2,930,581 $2,245,943 $2,412,534
================ ============== ===============
</TABLE>
The reasons for the differences between the statutory and effective rates
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 1998 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 5.4 5.8 6.6
Non-deductible expenses 1.6 1.7 1.3
Other 0.5 1.7 0.3
---------------- ------------- -------------
41.5% 43.2% 42.2%
================ ============= =============
</TABLE>
The net deferred tax asset is a result of the following temporary
differences:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Allowance for bad debts $446,829 $407,533 $520,986
Accrued expenses 372,737 555,085 329,765
Depreciation 1,381,722 823,822 416,824
Compensation not currently recognized for tax reporting 117,428 131,347 215,103
International restructuring reserve -- -- 72,835
Amortization (268,671) 42,441 43,783
Inventory obsolescence reserve 49,475 84,500 87,692
Other (4,109) 8,259 --
-------------- ------------- --------------
$2,095,411 $2,052,987 $1,686,988
============== ============= ==============
</TABLE>
F-12
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LEASE OBLIGATIONS
Included in property and equipment at December 31, 1999 and 1998 is
laboratory and office equipment held under capitalized leases as follows:
1999 1998
---- ----
Property and equipment $303,325 $303,325
Less - accumulated depreciation (223,867) (184,156)
------------- -------------
$ 79,458 $119,169
============= =============
The future minimum lease payments under non-cancelable operating leases
and the present value of future minimum capital lease payments at December 31,
1999 are:
Capital Operating
Leases Leases
------ ------
2000 $36,206 $1,809,450
2001 34,440 1,740,017
2002 15,755 1,494,236
2003 -- 574,465
2004 -- 48,902
----------- -----------
Minimum lease payments 86,401 5,092,997
Less - amount representing interest 8,054 --
----------- -----------
Present value of total minimum lease payments $78,347 $5,092,997
=========== ===========
Total rental expense relating to operating leases for the years ended
December 31, 1999, 1998, and 1997 was $1,560,754, $1,117,967 and $997,869,
respectively.
The Company leases office and laboratory space at two facilities in
Stratford, Connecticut. The leases expire in May 2003 and contain options to
renew for up to three years. The annual rent on these leases will be increased
by a pro rata portion of the increase in real estate taxes and the increase in
common area maintenance. The Company also leases an office in Stamford,
Connecticut and a record storage facility in Stratford, Connecticut. The
Stamford lease expires in November 2000 with an option to renew for up to three
years. The record storage facility lease expires in May 2004 with no renewal
option.
The Company also leases three regional sales offices located in North
Carolina, Texas and Illinois. The terms of the leases expire in 2000 with
options to renew for up to one year.
The Company executed a lease for a laboratory facility in Wilmington, Ohio
with a five-year term commencing April 1, 1996 and a renewal option for five
additional terms of three years each.
In connection with the acquisition of PRL (see Note 2), the Company
entered into a lease for an office and laboratory facility in Tampa, Florida for
a five-year term commencing January 31, 1998 with an option to renew for an
additional five-year period. In addition, the Company assumed leases for four
branch offices in Florida with remaining terms of up to two years and renewal
options for up to three years.
In connection with the acquisition of Kyto Meridian Diagnostics (see Note
2), the Company entered into leases for office and laboratory facilities in New
City, New York and Woodbury, New York. The leases expire in April 2002 and March
2003, respectively. The New City facility contains an option to renew the lease
for one year. The Woodbury facility contains no renewal options.
F-13
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LONG-TERM NOTE PAYABLE
In April 1999, the Company borrowed $6 million under its $15 million line
of credit. The loan bears interest at a rate per annum equal to LIBOR plus 0.75%
- - 1.50%. The interest rate as of December 31, 1999 was 6.88%. Interest is
payable monthly and the principal is due and payable in full by January 15,
2001. The loan agreement contains various provisions including those related to
financial covenants relating to current ratio, net worth, EBITDA ratio, funded
debt, EBITDA, interest coverage ratio, debt service coverage ratio, fixed
assets, limitation on debt and limits on loans and advances. As of December 31,
1999, the Company is in compliance with all of its financial covenants relating
to this note.
(7) STOCK-BASED COMPENSATION PLANS
In June 1991, the Company adopted the 1991 Stock Incentive Plan which
provides for up to 400,000 shares of the Company's Common Stock, par value $.01
per share ("Common Stock"), to be reserved for potential future issuance of
stock options or awards. This plan is the successor to the Company's previous
plan which expired. As of December 31, 1999, 18,593 shares of Common Stock are
available under the 1991 Stock Incentive Plan for future issuance. The majority
of the options vest 40% in the second year after grant and 20% each year
thereafter and expire ten years from the original grant date.
In October 1996, the Company's shareholders approved the Company's
adoption of the 1996 Stock Incentive Plan, which provides for up to 700,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 1991 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 1999, 49,419 shares of Common Stock are available
under the 1996 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 40% in the second year after
grant and 20% per year thereafter or 40% in the third year after grant and 20%
per year thereafter and expire ten years from the original date of grant. The
majority of options issued to directors vest at a rate of 10% per quarter and
expire ten years from the original date of grant.
In October 1999, the Company's shareholders approved the Company's
adoption of the 1999 Stock Incentive Plan, which provides for up to 300,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 1996 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 1999, 282,000 shares of Common Stock are available
under the 1999 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 40% in the second year after
grant and 20% per year thereafter and expire ten years from the original date of
grant. The majority of options issued to directors vest at a rate of 10% per
quarter and expire ten years from the original date of grant.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with the Statement
of Financial Accounting Standards No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:
1999 1998 1997
---- ---- ----
Net Income: As Reported $4,131,000 $2,954,000 $3,298,000
Pro Forma $3,467,000 $2,300,000 $2,704,000
Basic earnings per share: As Reported $.61 $.44 $.51
Pro Forma $.51 $.34 $.42
Diluted earnings per share: As Reported $.59 $.43 $.48
Pro Forma $.49 $.33 $.40
F-14
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of the pro forma information above, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1999, 1998 and 1997, repectively: risk-free interest rates of 5.88%, 5.38% and
6.52%, respectively; expected volatility of 67%, 71% and 74%, respectively; and
expected lives of 4.3 years for 1999 and 8.6 years for 1998 and 1997. A summary
of the status of the Company's three fixed stock option plans as of December 31,
1999, 1998 and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
1999 Exercise 1998 Exercise 1997 Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 884,454 $7.28 781,458 $7.24 597,676 $6.00
Granted 90,085 8.98 265,060 7.13 338,351 8.61
Exercised (93,014) 7.63 (43,584) 4.99 (51,764) 4.81
Forfeited / canceled (100,000) 7.46 (118,480) 7.53 (102,805) 5.65
------------ ----------- ------------
Outstanding at end of year 781,525 7.37 884,454 7.28 781,458 7.24
------------ ----------- ------------
Options exercisable at year-end 284,718 6.94 203,993 6.67 152,218 6.24
Weighted-average fair value of
options granted $5.17 $5.43 $6.82
</TABLE>
The table below contains information with respect to the 781,525 options
outstanding for the Company's 1991, 1996 and 1999 Stock Incentive Plan as of
December 31, 1999:
<TABLE>
<CAPTION>
Exercise Price Exercisable Options
-------------------------------------- --------------------------------------
Options Weighted Remaining Weighted Average
Outstanding Range Average Contractual Life Options Exercise Price
----------- ----- ------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C>
119,860 $4.13 - $6.00 $4.97 4.9 99,360 $4.88
604,088 $6.01 - $9.00 $7.58 8.0 168,362 $7.82
57,577 $9.01 - $10.88 $10.14 7.5 16,996 $10.28
</TABLE>
In addition to the disclosures above related to options granted under the
Company's 1991, 1996 and 1999 Stock Incentive Plans, the disclosure that follows
relates to options granted pursuant to employment agreements or otherwise not
under such plans.
In August 1999, the Company adopted a new Employee Stock Purchase Plan
(the "ESPP" or "Plan") as described in Section 423 of the Internal Revenue Code.
The Company has reserved a maximum of 300,000 shares of Common Stock to be sold
to employees under the Employee Stock Purchase Plan. No more than 100,000 shares
of Common Stock will be available for purchase under the Plan in any calendar
year and no participating employee may purchase more than 500 shares of Common
Stock in any calendar quarter, which is referred to in the Plan as an "Offering
Period". The first Offering Period will commence on January 1, 2000. The
purchase price for these shares will be 85% of the fair market value of a share
of Common Stock on the last day of each Offering Period, which is referred to in
the Plan as the "Exercise Date".
F-15
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RELATED PARTIES
The Company pays a stockholder, who is also Chairman Emeritus, and who was
a director until January 1995, a royalty of 6% of revenue on sales of certain
technology covered by a license agreement. In addition, the Company provides
this stockholder with certain insurance benefits, the use of an automobile and
the reimbursement of expenses incident to his performance as a consultant to the
Company. The Company paid licensing and royalty fees to this stockholder of
approximately $30,000, $27,000 and $42,000 during the years ended December 31,
1999, 1998 and 1997, respectively.
In 1995, the Company entered into a three-year research and development
agreement with Brigham & Women's Hospital, Inc. The agreement required the
Company to make quarterly payments of $30,000 in exchange for an option to
obtain rights in certain existing inventions as well as inventions developed
during the course of the research in the areas of cancer detection and
diagnosis. The research was to be conducted by a director of the Company. The
Company paid $8,000 and $60,000 under this agreement in 1998 and 1997,
respectively. The Company terminated this agreement effective as of June 30,
1997 and has made all required payments.
Pursuant to his employment agreement, the President of the Company
received a loan in 1996 totaling $150,000 which bears interest at 5.9%, payable
annually, and is repayable upon termination of his employment with the Company.
In addition, pursuant to the terms of such agreement the loan principal is being
forgiven at a rate of $2,500 per month over the period January 1998 through
December 2002 if the President continues to be employed by the Company. Pursuant
to the terms of such agreement, the current outstanding balance on the loan was
$90,000 on December 31, 1999.
In the fourth quarter 1997, the Company entered into a one-year consulting
and proprietary information and inventions agreement with Jeffrey L. Sklar,
M.D., Ph.D., a director of the Company. The agreement requires the Company to
make quarterly payments at the beginning of each quarter for $5,000 in exchange
for delivery of services for molecular diagnosis. The Company paid $15,000 under
this agreement in 1998 and $5,000 in 1997.
The President of the Company is a co-founder and board member of Medical
Logistics Inc., a company that provides logistics for a variety of healthcare
providers. The Company began using Medical Logistics Inc. in the fourth quarter
of 1999 for a limited number of logistic routes in Massachusetts. The Company
paid approximately $11,000 in 1999 to Medical Logistics Inc.
In December 1999, the Company modified an existing loan agreement with an
officer of the Company for approximately $55,000, bearing interest at 8.25% per
annum through December 31, 1999. The loan is payable at a rate of $1,000 per
month, commencing January 1, 2000, with the remaining outstanding balance due in
full no later than December 31, 2002 or upon termination of employment with the
Company.
(9) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain legal matters which periodically arise
in the normal course of business. Management believes that the outcome of these
legal matters will not have a material adverse effect on the financial position
and results of operations of the Company.
The Company operates in the medical laboratory industry, which is subject
to numerous federal and state laws and regulations. In addition, a significant
portion of the Company's net revenue is from payments by the
government-sponsored Medicare and Medicaid programs. These programs have
extensive compliance requirements, and the payments made thereunder are subject
to audit and adjustment by applicable regulatory agencies. Failure to comply
with these laws and regulations, or the results of regulatory audits and payment
adjustments, could have a material adverse effect on the Company's financial
position and results of operations.
Prior to 1998, the Medical Director of the Connecticut Medicare carrier to
whom the Company submits its Medicare claims orally expressed the view that some
amount of money which the carrier has paid to the Company for certain pathology
services involving DNA measurements in prostate tumor cells (morphometric
analysis of tumor) potentially is recoverable by the carrier. (The Company is
not presently submitting claims for this service.) The carrier Medical Director
has never reduced his view to writing or otherwise asserted a claim.
Accordingly, at this time, the Company cannot evaluate any such possible claim,
or the probability of assertion of any such claim.
F-16
<PAGE>
DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the Company was made aware that an agent based in the
Hartford Connecticut branch of the U.S. Department of Health and Human Services
Office of the Inspector General ("OIG") was investigating the Company's practice
of supplying pathology specimen collection devices without charge to physician
customers as well as unspecified billing issues that had been raised by the
local Medicare carrier. The Company believes that its practices with respect to
specimen collection devices were proper, and a letter describing the Company's
actions and its views regarding applicable regulations was sent by the Company
to the OIG. That letter also requested information about any billing issues of
concern to the OIG so that the Company could address them. As of the date of
this report, the Company had not received a response from or otherwise been
contacted by the OIG regarding these matters, and has not received any formal
notification regarding the matter.
Although the Company seeks to structure its practices to comply with all
applicable laws, and management believes such practices are in compliance,
uncertainty nevertheless exists as to how these matters may develop, and the
Company currently is unable to predict their impact, if any, on the Company.
While management does not believe that this matter will have a material adverse
effect on the Company's financial condition, if the carrier and/or OIG agent
were to pursue and prevail on these matters, any significant recoupment of funds
or civil or criminal penalty potentially resulting from such proceedings could
have a material adverse effect on the Company's business and its results of
operations.
(10) EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) employee benefit plan pursuant to
which participants receive certain benefits upon retirement, death or
termination of employment. The Company approved a new 401(k) plan, effective
February 1, 2000, which increases the Company match from 20% of the
contributions made by employees up to 1% of their total annual salary (subject
to tax code limits) to 50% of the contributions made by employees up to 3% of
their total annual salary (subject to tax code limits). The Company contributed
approximately $200,000, $132,000 and $105,000 to the plan during 1999, 1998 and
1997, respectively. The Company offers no other post-retirement benefits or
post-employment benefits to its employees.
(11) RIGHTS AGREEMENT
On April 29, 1994, the Company's Board of Directors declared a dividend
distribution of one right for each outstanding share of Common Stock, par value
$.01 per share, of the Company to stockholders of record on May 10, 1994. Each
right entitles the registered holder to purchase from the Company a unit
("Unit") consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company, at a
price of $20 per Unit, subject to adjustment, upon change of control in the
Company, as defined in the rights agreement.
(12) SEVERANCE COSTS
The Company recorded charges of approximately $212,000 and $324,000 during
1998 and 1997, respectively, for severance costs as a result of streamlining its
operations and of the resignation of certain officers of the Company. There were
no similar charges incurred or recorded in 1999.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIANON Systems, Inc.:
We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of DIANON Systems,
Inc. and subsidiary companies included in this Form 10-K and have issued our
report thereon dated February 22, 2000. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in the index to consolidated financial statements is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 22, 2000
F-18
<PAGE>
DIANON SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
Beginning of Provision for Charges to Balance at End
Year Allowance Allowance of Year
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for bad debts $1,056,920 $300,294 $ 65,119 $1,292,095
International restructuring reserve 155,475 -- 135,404 20,071
For the year ended December 31, 1998:
Allowance for bad debts (a) 1,292,095 75,000 334,036 1,033,059
International restructuring reserve 20,071 -- 20,071 --
For the year ended December 31, 1999:
Allowance for bad debts (b) 1,033,059 50,000 72,793 1,010,266
</TABLE>
(a) The bad debt provision of $75,000 for the year ended December 31, 1998
represents a purchase accounting adjustment related to the acquisition of
PRL, rather than a charge to expense.
(b) The bad debt provision of $50,000 for the year ended December 31, 1999
represents a purchase accounting adjustment related to the acquisition of
KMD, rather than a charge to expense.
F-19
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit
Document
No. Reference
--- ---------
3.1 Restated Certificate of Incorporation of the Company, as amended
through June 12, 1991 (incorporated by reference to Exhibit 3.1 of
the Registrant's Registration Statement No. 33-41226).
3.2 Restated By-Laws of the Company, as amended through October 24, 1996
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement No. 333-18817).
3.3 Restated By-Laws of the Company, as amended through February 2, 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's
Registration Statement No. 333-18817).
10.1 Consulting Agreement, dated August 4, 1989, between DIANON Systems,
Inc. and Nonda Katopodis, Ph.D. (incorporated by reference to Exhibit
10.7 of the Registrant's Registration Statement No. 33-41226).**
10.2 Executive Vesting Agreement, dated as of June 11, 1991, between
DIANON Systems, Inc. and James B. Amberson, M.D. (incorporated by
reference to Exhibit 10.13 of the Registrant's Registration Statement
No. 33-41226).**
10.3 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.17
of the Registrant's Registration Statement No. 33-41226).**
10.4 Management Incentive Plan (incorporated by reference to Exhibit 10.18
of the Registrant's Registration Statement No. 33-41226).**
10.5 Stock Option Grant to Walter O. Fredericks, dated April 27, 1990
(incorporated by reference to Exhibit 10.23 of the Registrant's
Registration Statement No. 33-41226).**
10.6 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991
(incorporated by reference to Exhibit 10.24 of the Registrant's
Registration Statement No. 33-41226).**
10.7 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991
(incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement No. 33-41226).**
10.8 Lease Agreement, made as of February 14, 1989, between Watson
Boulevard Development Limited Partnership, as lessor, and DIANON
Systems, Inc., as lessee, for premises located at 200 Watson
Boulevard (incorporated by reference to Exhibit 10.29 of the
Registrant's Registration Statement No. 33-41226).
10.9 License Agreement, dated June 9, 1983, between Sloan-Kettering
Institute for Cancer Research and N-K Laboratories Limited
Partnership (incorporated by reference to Exhibit 10.30 of the
Registrant's Registration Statement No. 33-41226).
10.10 License Agreement, dated July 29, 1987, between University of
Rochester and DIANON Systems, Inc. (incorporated by reference to
Exhibit 10.32 of the Registrant's Registration Statement No.
33-41226).
10.11 Development Agreement, effective September 25, 1987, between
Connecticut Product Development Corporation and DIANON Systems, Inc.
(incorporated by reference to Exhibit 10.33 of the Registrant's
Registration Statement No. 33-41226).
10.12 Stock Option Grant to James B. Amberson, M.D., dated April 23, 1991
(incorporated by reference to Exhibit 28.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1991).**
10.13 Stock Option Grant to Richard A. Sandberg, dated June 12, 1991, as
amended (incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1991).**
10.14 Asset Purchase Agreement, dated April 30, 1993, by and among the
Registrant and Molecular Oncology, Inc., and Oncologix, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form
8-K dated April 30, 1993, filed with the Securities and Exchange
Commission on May 14, 1993).
10.15 Asset Purchase Agreement, dated June 29, 1993, by and among the
Registrant and Collaborative Research, Inc. (incorporated by
reference to Exhibit 1.2 to the Registrant's Form 8-K dated June 29,
1993, filed with the Securities and Exchange Commission on July 13,
1993).
<PAGE>
Exhibit
Document
No. Reference
--- ---------
10.16 Term Loan Agreement, dated July 14, 1993, by and among the Registrant
and the Union Trust Company (incorporated by reference to Exhibit
10.34 to the Registrant's Annual Report on Form 10-K/A Amendment 1
for the year ended December 31, 1993, filed with the Securities and
Exchange Commission on April 28, 1994).
10.17 Rights Agreement, dated April 29, 1994, by and among the Registrant
and American Stock and Trust Company, as Rights Agent (incorporated
by reference to Exhibit 1 to the Registrant's Form 8-K dated April
29, 1994, filed with the Securities and Exchange Commission on May 9,
1994).
10.18 Severance Agreement, dated January 20, 1995, by and among the
Registrant and John P. Davis (incorporated by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities and Exchange
Commission on March 29, 1996).**
10.19 Employment Agreement, dated May 3, 1996, by the Registrant and Kevin
C. Johnson (incorporated by reference to Exhibit 10.37 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996).**
10.20 Executive Employment Agreement, dated September 1, 1996, by the
Registrant and Richard A. Sandberg (incorporated by reference to
Exhibit 10.38 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996).**
10.21 Employment Agreement, dated September 1, 1996, by the Registrant and
James B. Amberson, M.D. (incorporated by reference to Exhibit 10.39
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).**
10.22 Executive Employment Agreement, dated September 1, 1996, by the
Registrant and James B. Amberson, M.D. (incorporated by reference to
Exhibit 10.40 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996).**
10.23 Severance Agreement, dated September 27, 1996, by the Registrant and
Carl R. Iberger (incorporated by reference to Exhibit 10.41 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.24 Employment Agreement, dated September 30,1996, by the Registrant and
David R. Schreiber (incorporated by reference to Exhibit 10.42 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.25 Employment Agreement, dated November 18, 1996, by the registrant and
Steven T. Clayton.**
10.26 Severance Agreement dated November 18, 1996, by the registrant and
Daniel J. Cronin, III.**
10.27 Amendment dated as of October 4, 1995 to Rights Agreement dated as of
April 29, 1994 between the Registrant and American Stock Transfer and
Trust Company, as Rights Agent (incorporated by reference to Exhibit
No. 1 to the Registrant's Form 8-K dated October 30, 1996 filed with
the Securities and Exchange Commission on November 8, 1995).
10.28 1996 Stock Incentive Plan (incorporated by reference to Appendix A to
the Registrant's Statement on Schedule 14A filed with the Securities
and Exchange Commission on September 23, 1996).**
10.29 Stock and Warrant Purchase Agreement, dated as of October 4, 1995,
among the Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A.
Contributory Account, G. S. Beckwith Gilbert and the Registrant.
10.30 Registration Rights Agreement, dated as of October 4, 1995, among the
Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.31 Warrant No. 1, dated as of October 4, 1995, by the Registrant in
favor of G. S. Beckwith.
10.32 Promissory Note, dated October 4, 1995, by G. S. Beckwith Gilbert in
favor of the Registrant.
10.33 Stock Option Grant dated October 24, 1996 by the Registrant to Andre
de Bruin.**
10.34 Stock Option Grant dated November 4, 1996 by the Registrant to
Jeffrey M. Sklar, M.D., Ph.D.**
10.35 Loan Agreement dated December 3, 1996 by the Registrant to Kevin C.
Johnson).**
10.36 Form of standard Stock Option Grant for outside directors.**
10.37 Amendment to Warrant Certificate No. W-1 dated as of October 2, 1996
between the Registrant and G. S. Beckwith Gilbert.
10.38 Severance Agreement dated February 27, 1997 by the Registrant and
Richard A. Sandberg.**
10.39 Amendment dated April 30, 1997 by the Registrant and Richard A.
Sandberg.**
<PAGE>
Exhibit
Document
No. Reference
--- ---------
10.40 Security Agreement dated April 30, 1997 by the Registrant and Richard
A. Sandberg.**
10.41 Secured Promissory Note dated April 30, 1997 by the Registrant and
Richard A. Sandberg.**
10.42 Non-Compete Agreement dated September 3, 1997 by the Registrant and
Vernon L. Wells.**
10.43 Severance Agreement dated September 15, 1997 by the Registrant and
Robert C. Verfurth.**
10.44 Consulting and Proprietary Information and Inventions Agreement
dated October 1, 1997 by the Registrant and Jeffrey L. Sklar, M.D.,
Ph.D.
10.45 Severance Agreement dated January 27, 1998 by the Registrant and
Vernon L. Wells.**
10.46 Asset Purchase Agreement dated as of April 7, 1999 among DIANON
Systems, Inc., Kyto Meridien Diagnostics, L.L.C., Kyto Diagnostics,
L.P., Meridian Diagnostics Labs, Inc., A. Bruce Shapiro and Ralph M.
Richart, M.D. (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities
and Exchange Commission on May 5, 1999).
10.47 Registration Rights Agreement dated as of May 1, 1999 between DIANON
Systems Inc. and Kyto Meridien Diagnostics, L.L.C. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated May 1,
1999, filed with the Securities and Exchange Commission on May 5,
1999).
10.48 Consulting Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and A. Bruce Shapiro (incorporated by reference to Exhibit 10.3
to the Registrant's Form 8-K dated May 1, 1999, filed with the
Securities and Exchange Commission on May 5, 1999).
10.49 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Ralph Mr. Richart, M.D. (incorporated by reference to
Exhibit 10.4 to the Registrant's Form 8-K dated May 1, 1999, filed
with the Securities and Exchange Commission on May 5, 1999).
10.50 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Beth Phillips (incorporated by reference to Exhibit 10.5 to
the Registrant's Form 8-K dated May 1, 1999, filed with the
Securities and Exchange Commission on May 5, 1999).
10.51 Employment Agreement dated May 1, 1999 by and between DIANON Systems,
Inc. and Dana Shapiro (incorporated by reference to Exhibit 10.6 to
the Registrant's Form 8-K dated May 1, 1999, filed with the
Securities and Exchange Commission on May 5, 1999).
10.52 Amendment Agreement date December 23, 1999 by and among DIANON E-1-E10
Systems, Inc. and A. Bruce Shapiro, Ralph M. Richart, Dana
Shapiro, Kyto Meridien Diagnostics, L.L.C., Kyto Diagnostics
L.P. and Meridien Diagnostics Labs, Inc. (filed herewith).
11.1 Statement re: computation of per share earnings. *
21.1 List of Subsidiaries of the Company (incorporated by reference to
Exhibit 22.1 of the Registrant's Registration Statement No.
33-41226).
23.1 Consent of Arthur Andersen LLP (filed herewith). E-11
27.1 Financial Data Schedule. (filed herewith) E-12
99.1 Press Release (incorporated by reference to Exhibit 99.1 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities
and Exchange Commission on May 5, 1999).
99.2 KMD financial statements for the year ending December 31, 1998
(incorporated by reference to Exhibit 99.2 to the Registrant's Form
8-K dated May 1, 1999, filed with the Securities and Exchange
Commission on May 5, 1999).
- --------------
* Not applicable or contained elsewhere herein.
** A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.
EXHIBIT 10.52
AMENDMENT AGREEMENT
This is an Agreement dated as of December 23, 1999 (the "Agreement") by
and among DIANON SYSTEMS, INC. ("DIANON"), on the one hand, and A. Bruce Shapiro
("A. Shapiro"), Ralph M. Richart, M.D. ("Richart"), Dana Shapiro ("D. Shapiro"),
Kyto Meridien Diagnostics, L.L.C. ("KMD"), Kyto Diagnostics L.P. ("Kyto") and
Meridien Diagnostics Labs, Inc. ("Meridien"), on the other hand.
WITNESSETH:
WHEREAS, KMD, Kyto, Meridien, A. Shapiro and Richart (collectively the
"Sellers") entered into an Asset Purchase Agreement dated as of April 7, 1999
(the "Asset Agreement") with DIANON for the purchase of substantially all of the
assets of KMD; and
WHEREAS, pursuant to the Asset Agreement, A. Shapiro entered into a
Consulting Agreement with DIANON dated as of May 1, 1999 (the "Consulting
Agreement"); and
WHEREAS, pursuant to the Asset Agreement, Richart entered into an
Employment Agreement with DIANON dated as of May 1, 1999 (the "Employment
Agreement"); and
WHEREAS, pursuant to the Asset Agreement, D. Shapiro entered into an
Employment Agreement with DIANON dated as of May 1, 1999; and
WHEREAS, Section 3(a) of the Asset Purchase Agreement requires DIANON to
make certain payments to KMD for Purchased Receivables; and
WHEREAS, certain disputes have arisen concerning the Employment and
Consulting Agreements.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. OFFSETTING PAYMENTS.
(A) In full and complete satisfaction of its obligation to pay for the
Purchased Receivables under Section 3(a) of the Asset Agreement, DIANON shall
pay to KMD three hundred ninety-nine thousand eight hundred and sixty-two
($399,862) dollars in the manner described in paragraph (C) below.
(B) In the manner described in paragraph (C) below, A. Shapiro, Richart
and D. Shapiro shall refund the amounts indicated below that were paid to them
under their respective Consulting and Employment Agreements through December 31,
1999:
A. Shapiro: One hundred fifty-four thousand five hundred fifty-two
($154,552) dollars;
Richart: One hundred thirty-five thousand three hundred twenty-one
($135,321) dollars;
D. Shapiro: Forty-three thousand five hundred fifty-seven ($43,557)
dollars
(C) The payments under paragraph (A) and (B) above shall be made by
offsetting the amounts to be paid by A. Shapiro, Richart and D. Shapiro against
the payments to be made by DIANON. The payments required by each of A. Shapiro,
Richart, D. Shapiro and DIANON shall be recognized to
E-1
<PAGE>
have been paid in full upon the payment by DIANON to KMD of the net balance
resulting from the offsetting payments, which net balance is sixty-six thousand
four hundred thirty-two ($66,432) dollars.
2. AMENDMENT TO AGREEMENTS.
(A) The term specified in Section 3 of the Consulting Agreement is hereby
amended to end on the second anniversary of the Closing Date of the Asset
Agreement.
(B) The term specified in Section 3 of the Employment Agreement is hereby
amended to end on the second anniversary of the Closing Date of the Asset
Agreement.
(C) Except as amended herein, the Consulting Agreement and Employment
Agreement shall remain in full force and effect in accordance with their terms
and may not be further amended except in a writing signed by the parties
thereto. In particular, the term and requirements of the restrictive covenants
set forth in Section 5 of the Consulting Agreement and Section 5 of the
Employment Agreement shall remain as set forth in those agreements and are not
altered or diminished in any respect as a consequence of these amendments.
3. CROSS-RELEASES.
Simultaneously with the execution of this Agreement, DIANON shall execute
a release in the form of Exhibit A annexed hereto and Sellers shall execute a
release in the form of Exhibit B annexed hereto.
4. NON ADMISSION.
Nothing in this Agreement shall be construed as, and none of the Parties
hereto has made, an admission of liability or wrongdoing.
5. COUNTERPARTS.
This Agreement and the Releases may be signed in counterparts, each of
which when so executed and delivered shall be deemed an original.
E-2
<PAGE>
6. NON-DEFAMATION
No person within the senior management of DIANON shall make any defamatory
or misleading statement that is calculated to have the effect or purpose of
maligning the integrity, management, products or services of the Sellers or
their officers, directors, shareholders or principals, including D. Shapiro,
whether in connection with the Asset Purchase, Employment or Consulting
Agreements or otherwise.
7. REPRESENTATION AND WARRANTY
DIANON represents and warrants to the Sellers that, as of the date of this
Agreement, other than issues raised in discussions or correspondence between
DIANON and any of the Sellers or D. Shapiro, including without limitation issues
relating to the Oxford contract, potential professional liability claims, which
matters are released pursuant to this Agreement, and matters disclosed by
Sellers pursuant to the Asset Agreement, DIANON, other than members of DIANON to
whom this representation is being made, has no knowledge of any facts or any
threatened or pending claims by any third party that would form the basis of any
additional claim, cause of action or judgment against the Sellers or D. Shapiro.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
DIANON SYSTEMS, INC.
/s/ A. Bruce Shapiro
---------------------------------
A. Bruce Shapiro
/s/ KCJ
- -----------------------------------------
By: Kevin Johnson /s/ Ralph Richart
---------------------------------
Ralph M. Richart, M.D.
KYTO MERIDIEN DIAGNOSTICS, L.L.C. /s/ Dana Shapiro
---------------------------------
Dana Shapiro
/s/ Ralph Richart
- -----------------------------------------
By: Bruce Shapiro or Ralph Richart, M.D.
MERIDIEN DIAGNOSTICS LABS, INC. KYTO DIAGNOSTICS
/s/ Bruce Shapiro /s/ Ralph Richart
- ----------------------------------------- ---------------------------------
By: Bruce Shapiro By: Ralph Richart, M.D.
E-3
<PAGE>
EXHIBIT A TO AMENDMENT AGREEMENT
RELEASE
TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT
Dianon Systems, Inc. a corporation organized and existing under the laws of the
State of Delaware, (the "RELEASOR"), in consideration of the sum of $1.00 and
other good and valuable consideration, receipt of which is hereby acknowledged,
except as limited herein, releases, discharges and acquits forever Kyto Meridien
Diagnostics, L.L.C., a New York limited liability company, Meridien Diagnostics
Labs, Inc., a New York corporation, Kyto Diagnostics, L.P. a New York limited
partnership, A. Bruce Shapiro, Ralph M. Richart, M.D., and Dana Shapiro (the
"RELEASEES"), RELEASEES' heirs, executors, administrators, members, partners,
officers, employees, agents, successors and assigns, from all actions, causes of
action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever in law, admiralty or equity, which the RELEASOR and the
RELEASOR's heirs, executors, administrators, partners, officers, directors,
shareholders, employees, agents, successors and assigns ever had, now have or
hereafter can, shall or may have, for, upon or by reason of any breach of
representation and warranty by RELEASEES concerning revenues derived from a
contract to service Oxford Health Plans and any financial consequences to the
business of RELEASOR from the beginning of the world to the date of this Release
arising from any matter, cause or thing known by DIANON, other than employees
and consultants of DIANON who are subject to this Release.
1. Nothing in this Release is intended to, nor shall, release or waive any right
or obligation of the parties hereto arising under a certain Amendment Agreement
dated as of December 23, 1999 and executed by the parties in connection with
this Release, or the Employment and Consulting Agreements referred to therein.
2. Nothing in this Release is intended to, nor shall, release or waive any
action, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bills, specialties, covenants, contracts, controversies, agreements,
promises, damages, judgments, claims or demands whatsoever, in law or in equity,
which RELEASOR had, now has or hereafter can, shall or may have against
RELEASEES, or any RELEASEE, or any of RELEASEES' heirs, executors,
administrators, members, partners, officers, employees, agents, successors or
assigns, with respect to any governmental or third party claim, proceeding,
investigation, suit, controversy, judgment or action, whether s based on known
facts or facts unknown as of the date of this Release.
E-4
<PAGE>
3. The signatory to this Release hereby warrants and represents that he is duly
authorized to enter into this Release on behalf of the persons and entities on
whose behalf he purports to act.
4. This Release shall in all respects be interpreted, enforced and governed
under the laws of the State of New York without regard to New York's conflicts
of laws principles.
5. Whenever text hereof requires, the use of the singular number shall include
the appropriate plural number.
6. This Release may not be changed orally.
IN WITNESS WHEREOF, this Release has been executed by a duly
authorized representative as of the date set forth below.
DIANON SYSTEMS, INC.
By: /s/ KCJ
---------------------------------
Title: President and CEO
---------------------------------
Date: 1/26/00
---------------------------------
ACKNOWLEDGMENT
STATE OF CONNECTICUT )
) SS.:
COUNTY OF FAIRFIELD )
On the 26th day of January, 2000, before me personally came Kevin C.
Johnson, to me known, who by me duly sworn, did depose and say that deponent
resides at Keelers Ridge, Wilton, Ct, that deponent is a duly authorized officer
of Dianon Systems, Inc. the corporation described herein as Releasor and which
executed the foregoing Release, and that deponent signed deponent's name thereto
by authority of the board of directors of said corporation.
Merrilee B. Tooker
------------------
Notary Public
E-5
<PAGE>
EXHIBIT B TO AMENDMENT AGREEMENT
RELEASE
TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT
A. Bruce Shapiro, Ralph M. Richart, M.D., Dana Shapiro, Kyto Meridien
Diagnostics, L.L.C., Kyto Diagnostics, L.P. and Meridien Diagnostics Labs, Inc.
(the "RELEASORS"), in consideration of the sum of $1.00 and other good and
valuable consideration, receipt of which is hereby acknowledged, release,
discharge and acquit forever Dianon Systems, Inc., a Delaware Corporation (the
"RELEASEE"), RELEASEE's heirs, executors, administrators, members, partners,
officers, employees, agents, successors and assigns, from all known actions,
causes of action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents, executions, claims
and demands whatsoever, in law, admiralty or equity, which the RELEASORS and the
RELEASORS's heirs, executors, administrators, partners, officers, directors,
shareholders, employees, agents, successors and assigns ever had, now have or
hereafter can, shall or may have, for, upon or by reason of RELEASEE's payment
obligations for Purchased Receivables under Section 3 (A) of the Asset Purchase
Agreement by and among Dianon Systems, Inc., Kyto Meridien Diagnostics, L.L.C.
et alia dated April 7, 1999.
1. Nothing in this Release is intended to, nor shall, release or
waive any right or obligation of the parties hereto arising under a certain
Amendment Agreement dated as of December 23, 1999 and executed by the parties in
connection with this Release, or the Employment and Consulting Agreements
referred to therein.
2. The signatories to this Release hereby warrant and represent that
he or she is duly authorized to enter into this Release on behalf of the persons
and entities on whose behalf he or she purports to act.
3. This Release shall in all respects be interpreted, enforced and
governed under the laws of the State of New York without regard to New York's
conflicts of laws principles.
4. Whenever text hereof requires, the use of the singular number
shall include the appropriate plural number.
5. This Release may not be changed orally.
E-6
<PAGE>
IN WITNESS WHEREOF, this Release has been executed by a duly
authorized representative as of the date set forth below.
/s/ A. Bruce Shapiro
---------------------------------
KYTO MERIDIEN DIAGNOSTICS, L.L.C. A. Bruce Shapiro
/s/ Ralph Richart /s/ Ralph Richart
---------------------------------
- -----------------------------------------
By: Bruce Shapiro or Ralph Richart, Ralph M. Richart, M.D.
M.D.
/s/ Dana Shapiro
---------------------------------
Dana Shapiro
MERIDIEN DIAGNOSTICS LABS, INC.
KYTO DIAGNOSTICS, L.P.
/s/ A. Bruce Shapiro
- -----------------------------------------
By: Bruce Shapiro /s/ Ralph Richart
---------------------------------
By: Ralph Richart, M.D.
E-7
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 27th day of January, 2000, before me personally came Ralph
Richart to me known, who by me duly sworn, did depose and say that deponent
resides at Oakdale, NY, that deponent is a duly authorized officer of Kyto
Meridien Diagnostics, L.L.C.. the corporation described herein as Releasor and
which executed the foregoing Release, and that deponent signed deponent's name
thereto by authority of the board of directors of said corporation.
Catherine McGrath
-----------------
Notary Public
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 27th day of January, 2000, before me personally came Bruce
Shapiro, to me known, who by me duly sworn, did depose and say that deponent
resides at Woodbury, NY, that deponent is a duly authorized officer of Meridien
Diagnositcs Labs, Inc.. the corporation described herein as Releasor and which
executed the foregoing Release, and that deponent signed deponent's name thereto
by authority of the board of directors of said corporation.
Lindsay Mara Schoen
-------------------
Notary Public
E-8
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NASSAU )
On the 26th day of January, 2000, before me personally came Dana
Shapiro, to me known, who by me duly sworn, did depose and say that deponent
resides at Woodbury, NY, that deponent described herein as Releasor and which
executed the foregoing Release.
Kathleen Andres
---------------
Notary Public
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NASSAU )
On the 26th day of January, 2000, before me personally came A. Bruce
Shapiro, to me known, who by me duly sworn, did depose and say that deponent
resides at Woodbury, NY, that deponent is the person described herein as
Releasor and who executed the foregoing Release.
Kathleen Andres
---------------
Notary Public
E-9
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 27th day of January, 2000, before me personally came Ralph M.
Richart, M.D., to me known, who by me duly sworn, did depose and say that
deponent resides at Oakdale, NY, that deponent is the person described herein as
Releasor and who executed the foregoing Release.
Catherine McGrath
-----------------
Notary Public
E-10
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 22, 2000, incorporated by reference in
DIANON Systems, Inc.'s Form 10-K for the year ended December 31, 1999, into the
previously file Registration Statements Nos. 33-41226, 33-94176, 33-94178,
33-43673 and 333-18817.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000779282
<NAME> DIANON SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 9,761
<SECURITIES> 0
<RECEIVABLES> 20,488
<ALLOWANCES> 1,010
<INVENTORY> 911
<CURRENT-ASSETS> 32,212
<PP&E> 16,791
<DEPRECIATION> 11,434
<TOTAL-ASSETS> 52,089
<CURRENT-LIABILITIES> 6,962
<BONDS> 0
0
0
<COMMON> 71
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<TOTAL-LIABILITY-AND-EQUITY> 52,089
<SALES> 76,097
<TOTAL-REVENUES> 76,097
<CGS> 43,884
<TOTAL-COSTS> 43,884
<OTHER-EXPENSES> 25,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281
<INCOME-PRETAX> 7,062
<INCOME-TAX> 2,931
<INCOME-CONTINUING> 4,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,131
<EPS-BASIC> 0.61
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