10-K 1 v70640e10-k.txt FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2000 [ ] 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 1-9957 Diagnostic Products Corporation (Exact name of registrant as specified in its charter) CALIFORNIA 95-2802182 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5700 WEST 96TH STREET LOS ANGELES, CALIFORNIA 90045 (Address of principal executive offices) Registrant's telephone number: (310) 645-8200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, no par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $574,646,356 as of March 9, 2001. The number of shares of Common Stock, no par value, outstanding as of March 9, 2000, was 13,939,574. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the 2001 Annual Shareholders Meeting are incorporated by reference into Part III of this report. ================================================================================ 2 PART I ITEM 1. BUSINESS Diagnostic Products Corporation ("DPC" or the "Company") develops, manufactures, and markets medical immunodiagnostic test kits that utilize state-of-the-art technology derived from immunology and molecular biology and automated laboratory instruments that perform the tests. The Company's products are used by hospital, clinical, veterinary, research and forensic laboratories, and doctors' offices to obtain precise and rapid identification and measurement of hormones, drugs, viruses, bacteria, and other substances present in body fluids and tissues at infinitesimal concentrations. The principal clinical applications of the Company's more than 400 assays (tests) relate to the diagnosis and management of thyroid disorders, anemia, reproductive disorders, diabetes, allergies, bone metabolism, infectious diseases, substance abuse, and certain types of cancer. The Company's kits are used for in vitro testing, meaning the tests are performed outside of the body, typically in a test tube. The Company, with its manufacturing facilities in the United States, the United Kingdom, and China, markets its products through a national sales force and through a worldwide distribution network covering over 100 countries. Unless the context otherwise requires, the terms "DPC" and the "Company" include the Company's consolidated subsidiaries. For information regarding forward-looking statements contained in this report and risks associated with the Company's business, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Statements." IMMUNODIAGNOSTIC TEST KITS DPC manufactures more than 400 immunodiagnostic test kits or "assays" that utilize various technologies to detect and measure substances in a patient's body fluids and tissues. The technologies used in DPC's assays include chemiluminescence-enhanced enzyme immunoassay, that is used in the DPC IMMULITE product line; radioimmunoassay (RIA), that uses double antibody, coated tube, and IRMA formats; enzyme immunoassay (EIA), used in microplate; and tube formats featuring a proprietary liquid technology for allergy, immunofluorescence, and latex agglutination. In fiscal year 2000, RIA tests accounted for 14% of sales and allergy and other tests accounted for 8% of sales. Note 12 of the Notes to Consolidated Financial Statements contains additional information concerning sales by product line over the last three fiscal years. IMMULITE assay instruments and service represented 63%, 70%, and 78% of sales in 1998, 1999, and 2000 respectively. This upward trend is expected to continue. Because IMMULITE is a closed system (it will not perform other manufacturers' tests), one of the most important factors in the successful marketing of the IMMULITE system is the ability to offer a broad menu of assays that can be performed on the system. DPC believes that it has the most extensive menu offering of any automated instrument on the market, especially those tests that when grouped together constitute a decision-making panel for a specific disease state, such as thyroid and fertility. At December 31, 2000, DPC had 98 IMMULITE assays available in the international markets; the FDA in the U.S. had cleared 72 for sale. In addition, 49 out of a total of 63 of the most important assays on the newly developed second generation IMMULITE 2000 have been released for sale in the U.S. The Company's research and development activities continue to be focused on expanding the IMMULITE and IMMULITE 2000 menus. DPC has concentrated on creating the most complete panels of tests for specific disease states. Many of these disease states represent high-volume opportunities in the marketplace or unique, under-served disease categories that allow DPC to fill a market niche. Many of DPC's tests are available in both RIA and non-isotopic formats. Major clinical applications of DPC's test kits include: THYROID - The most frequent utilization of immunoassay techniques is for the determination and monitoring of thyroid function. The IMMULITE systems have the advantage of having the most extensive and unique thyroid panel consisting of 11 tests. The IMMULITE thyroid panels include Third Generation TSH for initial testing and assays for routine follow-up testing such as Free T4, T3, and even Anti-TPO. REPRODUCTIVE HORMONES - DPC has been a longtime market leader in fertility and infertility assays due, in great part, to the high degree of difficulty in developing these assays. To maintain its traditional advantage in 1 3 this field, a total of 10 tests that fall in this category are currently available on the IMMULITE automated instrument. CANCER - Tumor markers are being widely accepted as an important diagnostic tool. The most successful tumor marker is prostate specific antigen (PSA), which is used for the diagnosis of prostate cancer in males. DPC is the only company that offers three PSA markers in fully automated format on the IMMULITE, including the unique Third Generation PSA assay, which has an order-of-magnitude greater sensitivity than any other PSA assay currently available. DPC offers a total of 13 tumor markers on the IMMULITE, a larger menu than any of our competitors. INFECTIOUS DISEASES - A relatively new area for DPC is the development of assays for the detection of infectious diseases, which is one of the fastest growing segments of immunoassays. The Company has developed 15 such assays on the IMMULITE system. ALLERGY - Allergy testing comprises a worldwide market of approximately $200 million with one company, Pharmacia-Upjohn, dominating the field for the last 30 years. DPC, with its unique patented liquid technology, has established itself as the second leading supplier of these test kits. DPC has approximately 300 tests for specific allergens (and panels) available in a semi-automated microplate format. In response to customer demand for complete automation of allergy tests, DPC has added the major large volume allergy screening assays to the IMMULITE menu, bringing full automation to 13 allergy tests and panels as of December 31, 2000. These include such unique assays as Latex and ECP, the latter an important tool for the diagnosis and management of asthma. The Company expects to implement allergy testing on the IMMULITE 2000 during the second half of 2001. INFLAMMATORY MARKERS - A new line of potentially important disease markers currently under intensive investigation by researchers are the cytokines, often referred to as "the hormones of the immune system." DPC is the only company that offers these assays in automated format and currently has five cytokine assays on the IMMULITE system, with others in development. Studies in Europe have indicated that certain cytokines are valuable tools for the management of sepsis, a bacterial infection that often occurs in intensive care units. As a result, these cytokine assays are being used routinely in intensive care units in Germany, and the Company anticipates that interest in these assays will spread to other parts of the world. DPC has obtained exclusive rights from XOMA Corporation to market an automated immunoassay for a marker of inflammation due to infection, termed Lipopolysaccharide Binding Protein (LBP). This marker of systemic exposure to gram negative bacteria is an acute phase protein that is produced by the liver. Elevated blood levels of LBP have been reported in patients with a wide variety of conditions, including abdominal infections, meningococcemia, systemic inflammatory response syndrome, ulcerative colitis, Crohn's disease, hemolytic uremic syndrome, hemorrhage due to trauma, and cardiopulmonary bypass procedures. CARDIAC - Cardiovascular disease is the leading cause of morbidity and mortality in developed nations and represents a $300 million dollar worldwide market. Cardiac biomarkers are quickly assuming a critical role in directing and confirming the physician's diagnostic, prognostic, and therapeutic options required to manage the heart attack patient. DPC has recently introduced the IMMULITE Turbo platform with accelerated test throughput provided by a simple upgrade of the existing IMMULITE software. CK-MB, Myoglobin, and Troponin test results are rapidly delivered in 15 minutes. The proprietary biochemical design of the new reagent system combined with the accelerated throughput of the IMMULITE Turbo facilitates rapid test results for time-dependent therapeutic decision. The growing emphasis on risk assessment for cardiovascular disease has led to the routine measurement of cholesterol levels, for example, but also to a widespread demand for additional tests capable of improving the clinician's ability to assess a patient's prospects in this regard. Homocysteine and High Sensitivity CRP are prominent among the state-of-the-art tests in this field. DPC has implemented both of these as automated, random-access assays, and is actively investigating other tests that may prove clinically useful. DPC has received a license from Axis-Shield of the UK for the method of analysis for the measurement of homocysteine. THERAPEUTIC DRUG MONITORING (TDM) - There is a large market for assays designed for the routine measurement of therapeutic drugs. For many drugs, regular monitoring is essential to ensure that blood levels are maintained within a narrow therapeutic range: high enough to be clinically effective, but not so high as to induce toxic side effects. Among DPC's offerings on the IMMULITE and IMMULITE 2000 are assays for several of the most common anti-epileptic drugs, namely, Phenobarbitol, Phenytoin, Carbamazepine, and Valproic Acid, which are used to control various types of seizure. 2 4 AUTOMATED LABORATORY INSTRUMENTATION In addition to an extensive line of diagnostic test kits, DPC designs and manufactures automated laboratory instruments that perform the tests and that provide fast, accurate results, while reducing labor and reagent costs. The IMMULITE system, first introduced in 1992, is an automated, random-access, computer-driven instrument that performs immunoassays utilizing chemiluminescent technology. The IMMULITE system is totally automated with respect to sample and conjugate handling, incubation, washing, and substrate addition. Printed reports are generated by the system's external computer for each sample. The system has the potential for total random-access immunoassays (meaning that the system can perform any test, or combination of tests, on any patient sample at any time) with capacity for walk-away processing of up to 120 samples per hour. The patented solid-phase wash technology and chemiluminescent detection method employed in the IMMULITE system enables the Company to improve the sensitivity of tests used on the IMMULITE system. An assay's "sensitivity" is the smallest amount of a substance that it can detect. DPC commenced shipments of the next generation IMMULITE 2000 in the first quarter of 1998. The IMMULITE 2000 is a high-speed analyzer with a throughput of up to 200 tests per hour that offers the medium- to high-volume laboratory increased efficiency in streamlining its testing workload. The IMMULITE 2000 can run for a full shift without the necessity of replenishing the on-board supplies. This increased throughput allows DPC to participate in a higher volume segment of the market where the average reagent use per analyzer exceeds that of the original IMMULITE unit. The IMMULITE 2000 includes advanced features such as primary tube sampling and a proprietary auto-dilution capability. The system can also be interfaced with robotic laboratory sample-handling systems and can be connected to the customer's computer for specification of the tests to be run on each sample as well as recording the results. Another innovative feature of the IMMULITE 2000 is a remote diagnostic capability that permits DPC's service facility to access any IMMULITE 2000 worldwide for the purpose of diagnosing system problems. The Company believes that the IMMULITE 2000 complements the existing IMMULITE and has extended its life cycle. RESEARCH AND DEVELOPMENT ACTIVITIES The Company devotes substantial resources to research and development to update and improve its existing products, as well as to develop new products and technologies. In addition to developing and adding allergy testing capabilities to the IMMULITE 2000, the Company's research and development activities include the development of the next generation IMMULITE system and new operating software for both the IMMULITE and the IMMULITE 2000. R&D capabilities in the United States include fully staffed departments in organic synthesis, biochemistry, antisera/ hybridoma, protein chemistry, molecular biology and infectious disease, method development, instrumentation, software, and technology development. During the years ended December 31, 1998, 1999 and 2000, the Company spent $22,342,000, $24,550,000, and $26,464,000 on research and development, representing approximately 11% of sales, respectively. MANUFACTURING AND SERVICE The Company's principal test kit manufacturing facility is located in Los Angeles, California. Approximately 30% of test kit production is conducted at the EURO/DPC facility in the United Kingdom. The Company's European manufacturing facilities enable the Company to maintain its competitiveness in the European Economic Union (EEU) by minimizing import duties and freight charges and by reducing the effects of currency exchange fluctuations. Certain kits are also manufactured by DPC in China. DPC Cirrus, the Company's facility in New Jersey, designs and manufactures IMMULITE instrumentation and engages in software development. Component parts, such as computer hardware, are supplied by original equipment manufacturers. The Company provides a one-year warranty that covers parts and labor. Underwriter's Laboratories Inc. (UL) list the IMMULITE systems. The Company's and its distributors' technical service personnel install new units, train customers in the use of the system, and provide maintenance and service for the instrumentation. The EURO/DPC Instrumentation Division in the United Kingdom manufactures certain components of the IMMULITE and IMMULITE 2000 instruments that are then assembled into the final instrument in New Jersey. DPC's Los Angeles and New Jersey facilities are ISO 9001 registered. Euro/DPC Limited, the Company's wholly owned manufacturing subsidiary in Wales, was the first immunodiagnostics company in the world to be registered under British Standard BS 5750. EURO/DPC is also registered to ISO 9001 and EN 46001 standards. 3 5 DPC provides technical support for all its products, including reagents, instruments and software, via telephone and on-site service. MARKETING AND SALES The Company markets its products to hospital, clinical, forensic, research, reference, and veterinary laboratories, as well as doctors' offices and U.S. government agencies. The Company markets its products in the United States directly to laboratories and hospitals through its own sales force and through a distribution agreement entered into in January 2000 with Dade Behring. Dade Behring has the exclusive right to distribute IMMULITE products to Novation customers. Novation is the supply company for the Veterans Hospital Administration, Inc. and the University HealthSystem Consortium, two national health care alliances, and manages $12 billion in annual supply purchases through 4,200 organizations. In addition, in association with Dade Behring, DPC was added to agreements with Consorta and HPG. The Company sells to the U.S. doctors' office market through a network of independent distributors as well as through its own sales force. Sales personnel and distributors are trained to demonstrate the Company's product line in the customer's laboratory and are supported by the Company's Los Angeles and New Jersey-based technical services departments. In 1999, DPC was selected as an approved vendor for Shared Services Healthcare Inc. of Atlanta, GA, a large group purchasing organization (GPO) that supports approximately 600 hospital members with an equal number of alternate site memberships. The purchasing program provides member facilities with the opportunity to purchase laboratory supplies in volume and capital equipment. The Company's products are sold on a worldwide basis through distributors in over 100 foreign countries. These distributors, including consolidated distributors, also sell other manufacturer's products that are not directly competitive with the Company's products. Foreign sales (including export sales, sales to non-consolidated foreign affiliates, and sales of consolidated subsidiaries) represented approximately 80% of sales in 1998, 79% in 1999, and 76% in 2000. Europe accounted for approximately 46%, 47%, and 44% of total sales in 1998, 1999, and 2000, respectively. See Notes 5 and 12 of Notes to Consolidated Financial Statements for information regarding foreign operations. Sales of test kits to customers and distributors are made against individual purchase orders as well as through volume purchase arrangements. Products are shipped directly from the Company's facilities in Los Angeles and Wales and are generally delivered domestically within 24 hours and overseas within 48 hours of receipt of order. The Company sells, leases, or rents the IMMULITE instrumentation to hospitals and reference laboratories that perform volume testing. The Company's backlog at any date is usually insignificant and not a meaningful indicator of future sales. The Company's foreign operations are subject to various risks, including exposure to currency fluctuations, political and economic instability, and trade restrictions. Because the Company's consolidated foreign distributors' sales are in the respective local currencies, the Company's consolidated financial results are affected by foreign currency translation adjustments (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of Notes to Consolidated Financial Statements). In addition, the price competitiveness of the Company's products abroad is impacted by the relative strength or weakness of the U.S. dollar. PROPRIETARY AND OTHER RIGHTS Substantially all of the Company's products are based on proprietary technologies and know-how. The Company holds various U.S. and foreign patents, including patents on the washing process used in the IMMULITE system that expire in 2009 and patents on its novel liquid-based amplification methodology which forms the basis of the AlaSTAT product lines. The Company also obtains licenses for chemical components and technologies used in certain of its assays. Patents that may be granted to others in the future could inhibit the Company's expansion or entry into certain areas, or require it to pay royalty fees to do so. Because of rapid technological developments in the immunodiagnostic industry with concurrent extensive patent coverage and the rapid rate of issuance of new patents, certain of the Company's products may involve controversy concerning infringement of existing patents or patents that may be issued in the future. The Company purchases certain chemical compounds that are key components in the IMMULITE system pursuant to agreements effective February 9, 1995 with Lumigen, Inc. and Tropix, Inc. The Company has the right for ten years to purchase certain specified chemical compounds from Lumigen or, in certain circumstances, from Tropix, that are the sole suppliers of these chemical compounds. Tropix also agreed to supply the Company with certain other chemical compounds for use in veterinary kits for ten years. Upon 4 6 expiration of the ten year supply agreement, the Company believes that it will either use an alternate technology or that it will enter into a new supply arrangement. GOVERNMENT REGULATION The Company's business is affected by government regulations both in the United States and abroad, in particular Western Europe and Japan, aimed at containing the cost of medical services. These regulations have generally had the effect of inhibiting the growth rate of the immunodiagnostic industry. The Company believes that in vitro diagnostic (IVD) testing is an important tool for reducing health expenditures. By providing early diagnosis and therapy management, IVD tests can reduce the high costs of hospitalization, surgery, and recovery. In response to cost containment measures, hospitals, and laboratories have consolidated and have sought to increase productivity by replacing high cost labor with automated testing systems. The Company's automated systems address these market needs. The Company also seeks to develop more rapid and sensitive tests, such as DPC's Third Generation TSH assay, that can eliminate the need for redundant testing. Manufacturers of immunodiagnostic tests and other clinical products intended for use as human diagnostics are governed by FDA regulations as well as regulations of state agencies and foreign countries. A new in vitro product that is "substantially equivalent" to one already on the market can generally be sold in the United States after it is cleared for marketing by the FDA. Most of the Company's products fall within the "substantially equivalent" category. Certain medically critical in vitro diagnostic products and totally new in vitro diagnostic products, for which there are no equivalents on the market, must be cleared by the FDA after in-depth review that normally takes about two years prior to marketing. The Company's products can be marketed without regulatory clearance in most foreign countries. Japan and France have their own review procedures. The Company's Los Angeles manufacturing facilities are licensed by the California Department of Health Services and must be operated in conformance with the FDA's Good Manufacturing Practices governing medical devices. The Company is regulated by the California Department of Health Services with respect to its possession and use of radioactive substances and by the U.S. Drug Enforcement Agency with respect to the use and storage of controlled drugs and pharmaceuticals. Given the Company's high proportion of sales to the European Union (EU) countries, the Company has undertaken the necessary steps to comply with the EU In-Vitro Diagnostic Directive (IVDD). The Company was fully compliant with all relevant aspects of the EU IVDD on June 7, 2000 and therefore was qualified to apply the "CE Mark" to most of it's IVD kits and instruments as mandated by the EU. COMPETITION The Company's major competitors are broad-based health care companies such as Roche Diagnostics, Abbott Diagnostics (Abbott Laboratories), Bayer, Johnson & Johnson, and Pharmacia/Upjohn (Sweden). The Company competes on a worldwide basis with a number of large corporations that sell diversified lines of products, including immunodiagnostic products, for laboratory, medical, and hospital use. There are currently over 30 domestic suppliers of immunodiagnostic kits. The Company believes that competition in immunoassay testing is based on quality, service, product convenience, and price and that product innovation is an important source for change in market share. The principal competitive factors in automated systems are size of menu (the number of assays that can be performed on the system), ease of use, and price (equipment cost, service, and reagent cost). The Company's IMMULITE system currently offers one of the widest menus of any automated system and the Company is focusing its development efforts on expanding this menu. EMPLOYEES As of December 31, 2000, the Company (including its consolidated subsidiaries) had 1,767 employees, including 724 in manufacturing, 274 in research and development, 512 in marketing and sales, and 257 in administration. None of the Company's employees are represented by a labor union, and the Company considers its employee relations to be good. The Company has experienced no significant problems in recruiting qualified technical and operational personnel. 5 7 ITEM 2. PROPERTIES The following is a list of significant properties owned and leased by the Company and its consolidated subsidiaries as of December 31, 2000:
LOCATION SIZE OWNED/LEASED USES ----------------------------------------------------- ------------------------ ----------------------------------------------------- Los Angeles, California 116,000 sq. ft. Leased(1) Corporate offices, manufacturing, warehousing, distribution, and research and development Los Angeles, California 60,000 sq. ft. Owned Adjacent to Corporate offices, manufacturing, and warehousing Los Angeles, California 9,000 sq. ft. Leased(1) Sales offices Los Angeles, California 16,500 sq. ft. Leased(1) Warehousing Gorman, California 80 acres Owned Raw material processing Randolph, New Jersey 59,000 sq. ft. Leased(2) Research, manufacturing, and distribution Morris Plains, New Jersey 26 acres Owned Land for future manufacturing facility Glyn Rhonwy, Wales, U.K. 110,000 sq. ft. Owned Research, manufacturing, and distribution Paris, France 8,200 sq. ft. Leased Distribution Sao Paulo, Brazil 12,700 sq. ft. Leased Distribution Bad Nauheim, Germany 56,500 sq. ft. Owned Research and distribution Humbeek-Grimbergen, Belgium 5,000 sq. ft. Owned Distribution Breda, Netherlands 27,500 sq. ft. Owned Distribution Madrid, Spain 10,200 sq. ft. Leased Distribution Melbourne, Australia 15,500 sq. ft. Owned Distribution Tianjin, China 21,500 sq. ft. Owned Manufacturing and distribution Oslo, Norway 8,000 sq. ft. Owned Distribution Goteborg, Sweden 9,600 sq. ft. Owned Distribution
---------- (1) Aggregate annual lease payments of $1,274,000. Leases expire in 2002. See "Item 13. Certain Relationships and Related Transactions." (2) Annual lease payments of $485,000. Leases expire in 2001 and 2002. 6 8 During 2000 the Company purchased land in New Jersey to build a new 85,000 square foot manufacturing facility for the IMMULITE instrumentation. The construction is expected to be completed by the time the current New Jersey lease expires at the end of 2002. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." With these additions, the Company believes that its facilities will be adequate to meet its foreseeable needs. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the last fiscal year, no matter was submitted to a vote of the security holders. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is listed on the New York Stock Exchange and is traded under the symbol DP. The following table sets forth the quarterly high and low price of the Company's Common Stock and quarterly dividends per share paid during 2000 and 1999.
2000 -------------------------------------- High Low Dividend --------- --------- --------- First Quarter $24 3/16 $21 13/16 $ .12 Second Quarter 31 7/8 22 7/8 .12 Third Quarter 54 13/16 31 7/8 .12 Fourth Quarter 59 9/16 38 13/16 .12
1999 -------------------------------------- High Low Dividend --------- ---------- --------- First Quarter $ 35 5/16 $ 23 7/8 $ .12 Second Quarter 31 1/2 21 7/8 .12 Third Quarter 29 1/4 24 11/16 .12 Fourth Quarter 28 3/8 22 1/2 .12
As of March 12, 2001, the Company had 308 holders of record of its Common Stock. ITEM 6. SELECTED FINANCIAL DATA (In Thousands, except per Share Data) INCOME STATEMENT DATA
Year Ended December 31, ---------------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- Sales $176,832 $186,264 $196,643 $216,193 $247,867 Net income 22,947 18,248 20,213 20,488 28,250 Earnings per share: Basic 1.69 1.34 1.47 1.50 2.05 Diluted 1.65 1.32 1.46 1.49 2.01 Weighted average shares outstanding: Basic 13,554 13,641 13,746 13,671 13,777 Diluted 13,926 13,876 13,881 13,771 14,074 Dividends per share $ .48 $ .48 $ .48 $ .48 $ .48
BALANCE SHEET DATA
Year Ended December 31, ---------------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- Working capital $ 81,563 $ 83,031 $ 81,001 $ 88,799 $104,812 Total assets 207,002 222,180 246,224 250,494 280,484 Shareholders' equity 182,287 186,295 200,172 206,897 227,024
8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Except for the historical information contained herein, this report and the following discussion in particular contain forward-looking statements (identified by the words "estimate," "project," "anticipate," "plan," "expect," "intend," "believe," "hope," and similar expressions) which are based upon Management's current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties, and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements. These risks and uncertainties include the degree of customer demand for the Company's products, customer acceptance of the IMMULITE 2000 and other new products, the Company's ability to keep abreast of technological innovations, the risks inherent in the development and release of new products (such as delays, unforeseen costs and technical difficulties), competitive pressures, currency risks based on the relative strength or weakness of the U.S. dollar, health care regulation and cost containment measures, and political and economic instability in certain foreign markets. RESULTS OF OPERATIONS The Company's sales increased 15% in 2000 to $247.9 million compared to sales of $216.2 million in 1999, a 10% increase over 1998 sales. 2000 sales of all IMMULITE products (instruments and reagents) were $193.1 million, a 28% increase over 1999. In 1999, sales of all IMMULITE products were $150.7 million, a 22% increase over 1998. Sales of IMMULITE products represented 78% of 2000 sales, 70% of 1999 sales, and 63% of 1998 sales. 2000 sales of the Company's original IMMULITE instrument, the IMMULITE One, related reagents, and service were $123.0 million, an 8% increase over 1999. Sales of IMMULITE One reagents increased 6% to $96.4 million, while instrument sales were up 11% to $19.6 million. The IMMULITE 2000 instrument, which became commercially available in March 1998, had sales including reagents of $70.1 million in 2000, an 88% increase over 1999 sales of $37.3 million. The IMMULITE 2000 has a longer sales process than the IMMULITE One due to the higher sales price. The Company has also experienced a longer time delay between instrument placement and the ramp-up of reagent sales. As of December 31, 2000, 1999, and 1998, the Company had shipped on a cumulative basis approximately 5,900, 4,900, and 4,000 IMMULITE instruments, respectively. This installed base of instruments and an expanding test kit menu are expected to support continued growth in the coming years. Sales of the Company's mature RIA products declined approximately 11% in 2000 and represented 14% of 2000 sales, compared to 17% of 1999 sales and 22% of 1998 sales. This trend is expected to continue. Sales of other DPC products, including allergy reagents, decreased 21% to $13.9 million in 2000, compared to $17.7 million in 1999. The Company also experienced a decrease in sales of non-DPC products through its consolidated international affiliates from $10.0 million in 1999 to $7.1 million in 2000, due to the discontinuation of non-DPC OEM products previously sold by those affiliates. It is anticipated that the sale of non-DPC products will continue to decline. Domestic sales in 2000 increased 27% over 1999, reflecting in part the Company's success with larger customers and purchasing organizations. Sales in Brazil accounted for approximately 11% of total sales in 2000, 1999, and 1998. As a result of the devaluation of the Brazilian currency in January 1999, the Company raised its prices in local currency, making its products more expensive in Brazil than they were prior to the devaluation. However, to-date this has not had a significant impact on unit sales. Sales to foreign customers as a percentage of total sales were approximately 76%, 79%, and 80% in each of 2000, 1999, and 1998. Europe, the Company's principal foreign market, represented 44%, 47%, and 46% of sales in 2000, 1999, and 1998, respectively. Sales in Germany have decreased to $30.1 million in 2000 from $31.5 million in 1999 and $34.4 million in 1998 due in part to a reduction in non-DPC product sales and changes in reimbursement policies of the German government for medical testing. In addition, the Deutsche Mark weakened relative to the U.S. Dollar, which further contributed to the decline. Due to the significance of foreign sales, the Company is subject to currency risks based on the relative strength or weakness of the U.S. dollar. In periods when the U.S. dollar is strengthening, the effect of the translation of the financial statements of consolidated foreign affiliates is that of lower sales and net income. Based on comparative exchange rates in the immediately preceding year, the translation adjustments due to the strong U.S. dollar had a 5% negative impact on 2000 sales. In 1999 there was a 9% negative impact on sales. 9 11 Due to intense competition, the Company's foreign distributors are generally unable to increase prices to offset the negative effect when the U.S. dollar is strong. Cost of sales has remained stable at approximately 45% of sales in 2000, 1999, and 1998. Total operating expenses (Selling, Research and Development, and General and Administration) as a percentage of sales fell to 39% in 2000, from 42% in 1999 and 1998, although all categories increased annually in absolute dollars to support the increased levels of sales. Equity in income of affiliates represents the Company's share of earnings of non-consolidated affiliates, principally the 45%-owned Italian distributor. This amount increased 24% in 2000 relative to 1999 and 13% in 1999 relative to 1998 primarily due to increased earnings of the Italian distributor. Net interest and other income represents the excess of interest income and interest on equipment contracts over interest expense and other amounts of income and expense. Net interest income and other income increased to $666,000 in 2000, from $443,000 in 1999 and $331,000 in 1998. The Company's effective tax rate (30% in 2000 and 1999, and 28% in 1998) includes Federal, State, and foreign taxes. Minority interest represents the 44% interest in the Company's Brazilian distributor held by a third party. Increases in this amount reflect increases in the profitability of the Brazilian distributor. Net income for 2000 increased 38% over 1999 primarily due to increases in sales that were greater than percentage increases in operating expenses. Net income for 1999 increased 1% over 1998 due to increases in operating income being offset by increases in the tax rate and minority interest. LIQUIDITY The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing capital requirements. Net cash flows from operating activities were $39.3 million in 2000, $28.0 million in 1999, and $32.9 million in 1998. Additions to property, plant, and equipment in 2000 were $9.6 million compared to $9.0 million in 1999 and $11.2 million in 1998. Cash used for the placement of IMMULITE systems under sales-type and operating leases (for periods of generally three to five years) decreased from $16.7 million in 1998 to $15.1 million in 1999 reflecting a decrease in this type of IMMULITE placements and an increase to $18.0 million in 2000 reflecting an increase in this type of IMMULITE placements. In late 1998, the Company acquired land in The Netherlands and commenced construction of a 27,500 square foot building to replace the existing properties. The total cost of the land and building was $2.4 million. In 2000, the Company purchased land in New Jersey at a cost of approximately $2.8 million. The Company is constructing an 85,000 square foot manufacturing facility on this property at an estimated cost of approximately $12 million. The Company is replacing its computer system in Los Angeles and certain of its European affiliates at a cost of approximately $3 million in 2000. The Company has no other material commitments for capital expenditures in 2001. The Company has a $20 million unsecured line of credit. Standby letters of credit under the line of credit totaled $386,000 and $2,000,000 at December 31, 2000 and 1998, respectively. There were no standby letters of credit outstanding at December 31, 1999. No other borrowings were outstanding at December 31, 2000, 1999, and 1998 under the line of credit. The Company had notes payable (consisting of bank borrowings by the Company's foreign consolidated subsidiaries payable in the local currency some of which are guaranteed by the U.S. parent company) of $15.6 million at December 31, 2000 compared to $15.8 million at December 31, 1999 and $21.2 million at December 31, 1998. The terms of the loans are described in "ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk." The Company's foreign operations are subject to risks, such as currency devaluations, associated with political and economic instability. The Company has paid a quarterly cash dividend of $.12 per share since 1995. On October 14, 1998 the Company announced a plan under which it could repurchase up to one million shares of its Common Stock from time to time in open market transactions. At December 31, 1999 the Company had repurchased 218,288 shares at a cost of $4,528,000. The Company utilized existing cash to finance the purchases. Additional purchases, if any, will depend on the prevailing market price of the common stock. The Company has not purchased any of its shares in 2000. 10 12 In the first quarter of 2000, the Company sold a building in the U.K. that it had leased to a third party. The sales price was $1.5 million dollars, with a book value at the time of sale of $1.3 million. In the fourth quarter of 2000, the Company sold its Milenia product line in Germany for $1.1 million with a book value of $640,000. Revenues from the Milenia line were approximately $500,000 a quarter. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The Company adopted SFAS 133 on January 1, 2001. The initial adoption of SFAS 133 will not have a material effect on the Company's consolidated financial statements or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"("SAB 101"), as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 did not have a material effect on the Company's consolidated financial statements or revenue recognition policies. EURO CONVERSION The Company has significant sales to European countries (the "participating countries") which began converting to a common legal currency (the "Euro") on January 1, 1999. During the transition period of January 1, 1999 to January 1, 2002, public and private parties may pay for goods and services using either the Euro or local currency. During the transition period, conversion rates are not computed directly from one local currency to another. Instead, local currencies are converted first to a Euro denomination and then to the second local currency. Beginning in January 2002, new Euro-denominated bills and coins become legal currency and all former currencies will, over the ensuing months, be withdrawn from circulation. The ultimate conversion to the Euro will eliminate currency exchange risk among the participating countries. The Company sells its products in the participating countries through affiliated and non-affiliated distributors that determine sales prices in their respective territories. The use of a single currency in the participating countries may affect this variable pricing in the various European markets because of price transparency. Nevertheless, other market factors such as local taxes, customer preferences, and product assortment may reduce the need for price equalization. The Company has significant sales in Europe and is currently evaluating the business implications of the conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions, the competitive implications of cross-border price transparency, the impact on existing marketing programs, and other strategic implications. Due to the existence of many unknown variables, it is not possible for the Company to predict the precise implications of the Euro conversion on its operations. The Company has implemented a plan to convert or upgrade certain of its European subsidiaries to a similar computer software system that will allow them to operate in the European currency environment and to create a central repository for all European information. The Company anticipates the software conversion will be completed in the fourth quarter of 2001, with an expected cost of approximately $1,000,000. 11 13 ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks arising from transactions in the normal course of its business, principally risk associated with interest rate and foreign currency fluctuations. INTEREST RATE RISK The Company periodically invests its excess cash in short-term high-quality commercial paper. At December 31, 2000, the Company had $14,700,000 invested in such securities, which yielded an average annual return of 6.10%. The average maturity of these investments is less than one month. Additionally, the Company has debt obligations at its foreign subsidiaries that have primarily fixed interest rates and mature on various dates. Substantially all of the Company's debt obligations are denominated in European currencies. The table below presents principal cash flows and related interest rates by fiscal year of maturity: NOTES PAYABLE INFORMATION DECEMBER 31, 2000 (U.S. Dollars in Thousands)
Expected Year of Maturity --------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 THEREAFTER TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- GERMANY - MARK: Variable rate notes $ 1,497 $ 1,466 $ 1,466 $ 1,466 $ 1,466 $ 805 $ 8,166 Average interest rate 6.26% 6.18% 6.18% 6.18% 5.90% 5.90% FRANCE - FRANC: Fixed rate notes 895 910 910 730 251 3,696 Average interest rate 5.36% 5.36% 5.39% 5.66% 6.16% SPAIN - PESETA: Fixed rate notes 1,685 166 176 187 81 2,295 Average interest rate 5.75% 5.75% 5.75% 5.75% 5.75% NETHERLANDS - GUILDER: Fixed rate notes 852 852 Average interest rate 5.75% AUSTRALIA - AUST.$: Fixed rate notes 548 548 Average interest rate 6.78% ---------- ---------- ---------- ---------- ---------- ---------- ---------- $ 5,477 $ 2,542 $ 2,552 $ 2,383 $ 1,798 $ 805 $ 15,557 ========== ========== ========== ========== ========== ========== ==========
FOREIGN CURRENCY RISK The Company may periodically enter into foreign currency contracts in order to manage or reduce foreign currency market risk. The Company's policies do not permit active trading of or speculation in derivative financial instruments. The Company's policy is to hedge major foreign currency cash exposures through foreign exchange forward contracts. The Company enters into these contracts with only major financial institutions, which minimizes its risk of credit loss. A discussion of the Company's primary market risk exposures and the management of those exposures is presented below. The Company generates revenues and costs that can fluctuate with changes in foreign currency exchange rates when transactions are denominated in currencies other than the local currency. The Company manufactures its products principally in the United States and the United Kingdom and sells product to distributors, many of which are owned by the Company, throughout the world. Products sold from the United States are denominated in US dollars and products sold from the United Kingdom are denominated in pounds sterling. The distributors in turn have foreign currency risk related to their product purchases. Many of the 12 14 Company's owned distributors purchase forward currency contracts to offset currency exposures related to these purchase commitments. The table below provides information as of December 31, 2000 concerning the Company's forward currency exchange contracts related to certain commitments of its subsidiaries denominated in foreign currencies. The table presents the contractual amount, the weighted-average expiration date, the weighted-average contract exchange rates, and the values for its currency contracts outstanding. FOREIGN CURRENCY EXCHANGE CONTRACTS OUTSTANDING DECEMBER 31, 2000
(000's) Equivalent U.S. Dollar (000's) Weighted-Average Value at U.S. Dollar Forward Contract December 31, 2000 Weighted-Average Local Currency Amount Buy Rate per U.S. Dollar Exchange Rates Maturity Date ----------------- ------------ -------------------- ------------------ -------------------- Contracts for Purchase of U.S. Dollars: Deutsche Mark $1,500 2.16DEM $1,562 February 19, 2001 French Franc $ 460 7.03FRF $ 465 Apri l5, 2001 Australian Dollar $ 150 1.81AUS $ 149 January 25, 2001 Nether. Guilder $1,000 2.38NLG $1,019 February 20, 2001
(000's) Equivalent U.K. Pound (000's) Weighted-Average Value at U.K. Pound Forward Contract December 31, 2000 Weighted-Average Local Currency Amount Buy Rate per U.K. Pound Exchange Rates Maturity Date ----------------- ------------ -------------------- ------------------ -------------------- Contracts for Purchase of U.K. Pounds: French Franc Pound Sterling 60 10.42 FRF Pound Sterling 61 March 5, 2001
(000's) Equivalent EURO (000's) Weighted-Average Value at December EURO Forward Contract 31, 2000 Weighted-Average Local Currency Amount Buy Rate per EURO Exchange Rates Maturity Date ----------------- ------------ -------------------- ------------------ -------------------- Contracts for Purchase of EUROs: British Pound 611 1.64 Euro 640 November 15, 2001
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 for a listing of the consolidated financial statements and supplementary data filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The required information is hereby incorporated herein by reference to the sections entitled "Election of Directors"; "Ownership of Common Stock - Section 16 (a) Beneficial Ownership Reporting Compliance"; and "Executive Officers" of the Company's Proxy Statement for the 2001 Annual Shareholders Meeting. ITEM 11. EXECUTIVE COMPENSATION The required information is hereby incorporated herein by reference to the sections entitled "Election of Directors-Compensation of Directors," "Executive Compensation," and "Compensation and Stock Option Committee Interlocks and Insider Participation and Related Transactions" of the Company's Proxy Statement for the 2001 Annual Shareholders Meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The required information is hereby incorporated herein by reference to the section entitled "Ownership of Common Stock" of the Company's Proxy Statement for the 2001 Annual Shareholders Meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The required information is hereby incorporated herein by reference to the section entitled "Compensation and Stock Option Committee Interlocks and Insider Participation and Related Transactions" of the Company's Proxy Statement for the 2001 Annual Shareholders Meeting. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of Report: 1. Financial Statements: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and 2000. Consolidated Statements of Income for the three years ended December 31, 2000. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000. Consolidated Statements of Cash Flows for the three years ended December 31, 2000. Notes to Consolidated Financial Statements 2. Supplementary Financial Data. 3. Exhibits - See "Exhibit Index" which appears after the signature page of this report. (b) Reports on Form 8-K - none filed in the fourth quarter of 2000. 14 16 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders: We have audited the accompanying consolidated balance sheets of Diagnostic Products Corporation and its subsidiaries (the "Company") as of December 31, 1999 and 2000 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Diagnostic Products Corporation and its subsidiaries as of December 31, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Los Angeles, California February 16, 2001 15 17 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
December 31, ----------------------------- 1999 2000 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,547 $ 26,395 Accounts receivable - net of allowance for doubtful accounts of $504 and $750, respectively 55,018 68,222 Inventories 59,439 60,247 Prepaid expenses and other current assets 548 528 Deferred income taxes 2,844 2,881 ----------- ----------- Total current assets 132,396 158,273 PROPERTY, PLANT AND EQUIPMENT: Land and buildings 34,968 37,394 Machinery and equipment 66,050 66,137 Leasehold improvements 7,222 7,242 Construction in progress 1,064 3,607 ----------- ----------- Total 109,304 114,380 Less accumulated depreciation and amortization 55,886 61,367 ----------- ----------- Property, plant and equipment - net 53,418 53,013 SALES-TYPE AND OPERATING LEASES - net 35,070 40,582 DEFERRED INCOME TAXES 2,685 2,536 INVESTMENTS IN AFFILIATED COMPANIES 13,159 13,465 EXCESS OF COST OVER NET ASSETS ACQUIRED -- Net of accumulated amortization of $9,627 and $10,735 13,766 12,615 ----------- ----------- TOTAL ASSETS $ 250,494 $ 280,484 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 15,756 $ 15,557 Accounts payable 15,790 24,987 Accrued liabilities 8,090 11,409 Income taxes payable 3,961 1,507 ----------- ----------- Total current liabilities 43,597 53,460 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common Stock-no par value, authorized 30,000,000 shares at December 31, 1999 and 2000; outstanding 13,672,754 shares and 13,918,394 shares, respectively 37,816 44,838 Retained earnings 186,826 208,465 Accumulated other comprehensive loss (17,745) (26,279) ----------- ----------- Total shareholders' equity 206,897 227,024 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 250,494 $ 280,484 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 18 CONSOLIDATED STATEMENTS OF INCOME (In Thousands, except per Share Data)
Year Ended December 31, -------------------------------------------- 1998 1999 2000 ---------- ---------- ---------- SALES $ 196,643 $ 216,193 $ 247,867 COST OF SALES 87,068 96,504 110,522 ---------- ---------- ---------- Gross Profit 109,575 119,689 137,345 ---------- ---------- ---------- OPERATING EXPENSES: Selling 37,757 40,949 44,364 Research and Development 22,342 24,550 26,464 General and Administrative 22,486 25,911 26,415 Equity in Income of Affiliates (1,262) (1,421) (1,755) ---------- ---------- ---------- OPERATING EXPENSES -NET 81,323 89,989 95,488 ---------- ---------- ---------- OPERATING INCOME 28,252 29,700 41,857 Interest/Other Income -Net 331 443 666 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 28,583 30,143 42,523 AND MINORITY INTEREST PROVISION FOR INCOME TAXES 8,000 9,073 12,864 MINORITY INTEREST 370 582 1,409 ---------- ---------- ---------- NET INCOME $ 20,213 $ 20,488 $ 28,250 ========== ========== ========== EARNINGS PER SHARE: BASIC $ 1.47 $ 1.50 $ 2.05 DILUTED $ 1.46 $ 1.49 $ 2.01 WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 13,746 13,671 13,777 DILUTED 13,881 13,771 14,074
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands) Common Stock ----------------------- Retained Accumulated Other Comprehensive Shares Amount Earnings Comprehensive Loss Income ---------- -------- ------------ ------------------ ------------- BALANCE, JANUARY 1, 1998 13,717,072 $ 38,527 $ 159,278 $(11,510) Comprehensive income: Net income 20,213 $ 20,213 Foreign currency translation adjustment 1,251 1,251 ----------- Total comprehensive income $ 21,464 =========== Issuance of shares upon exercise of stock options 152,810 3,308 Repurchase and cancellation of shares (208,288) (4,304) Cash dividends ($.48 per share) (6,591) ---------- -------- ------------ -------- BALANCE, DECEMBER 31, 1998 13,661,594 $ 37,531 $ 172,900 $(10,259) Comprehensive income: Net income 20,488 $ 20,488 Foreign currency translation adjustment (7,486) (7,486) ----------- Total comprehensive income $ 13,002 =========== Issuance of shares upon exercise of stock options 21,160 509 Repurchase and cancellation of shares (10,000) (224) Cash dividends ($.48 per share) (6,562) ---------- -------- ------------ -------- BALANCE, DECEMBER 31, 1999 13,672,754 $ 37,816 $ 186,826 $(17,745) Comprehensive income: Net income 28,250 $ 28,250 Foreign currency translation adjustment (8,534) (8,534) ----------- Total comprehensive income $ 19,716 =========== Issuance of shares upon exercise of stock options 245,640 7,022 Cash dividends ($.48 per share) (6,611) ---------- -------- ------------ -------- BALANCE, DECEMBER 31, 2000 13,918,394 $ 44,838 $ 208,465 $(26,279) ========== ======== ============ ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year Ended December 31, -------------------------------------------- 1998 1999 2000 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 20,213 $ 20,488 $ 28,250 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 19,364 16,205 18,792 Equity in income of affiliates (1,604) (1,192) (1,755) Deferred income taxes (565) (219) 112 Income tax benefit received upon exercise of certain stock options 300 87 1,219 Changes in operating assets and liabilities: Accounts receivable (3,426) (7,501) (15,162) Inventories (4,165) (6,088) (2,683) Prepaid expenses and other current assets (175) 32 20 Accounts payable (264) 3,964 11,842 Accrued liabilities 232 1,872 3,319 Income taxes payable 3,299 451 (2,233) ---------- ---------- ---------- Net cash flows from operating activities 33,198 28,099 41,721 ---------- ---------- ---------- CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES: Additions to property, plant and equipment (11,174) (9,037) (9,574) Sales-type and operating leases (16,687) (15,088) (18,004) Investment in affiliated companies (2,612) 1,387) 846 ---------- ---------- ---------- Net cash from (used for) investing activities (30,473) (22,738) (26,732) ---------- ---------- ---------- CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Borrowing (repayment) of notes payable 3,685 (2,828) 921 Repurchase of common stock (4,304) (224) -- Proceeds from exercise of stock options 3,008 422 5,803 Cash dividends paid (6,591) (6,562) (6,611) ---------- ---------- ---------- Net cash from (used for) financing activities (4,202) (9,192) 103 ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (245) (272) (3,254) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,722) (4,103) 11,848 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,372 18,650 14,547 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,650 $ 14,547 $ 26,395 ========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 6,035 $ 8,681 $ 12,257 ========== ========== ========== Cash paid during the year for interest $ 1,824 $ 1,068 $ 1,011 ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPALS OF CONSOLIDATION The consolidated financial statements include the accounts of Diagnostic Products Corporation ("DPC" or the "Company") and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Investments in non-majority-owned companies are accounted for using the equity method. Minority interest represents the 44% of the Company's Brazilian subsidiary not owned. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results are dependent on its ability to research, develop, manufacture, and market innovative products that meet customers' needs. Inherent in this process are a number of risks that the Company must successfully manage in order to achieve favorable operating results. The Company's products which are sold in the United States, whether manufactured in the United States or elsewhere, require product clearance by the United States Food and Drug Administration. The operations of the Company involve the use of substances regulated under various Federal, State, and international laws governing the environment. Environmental costs are presently not material to the Company's operations or financial position. A portion of the Company's research and development activities, its corporate headquarters, and other manufacturing operations are located near major earthquake faults. The ultimate impact on the Company is unknown, but operating results could be materially affected in the event of a major earthquake. The Company is partially insured for such losses and interruptions caused by earthquakes. 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. The Company purchases certain chemical compounds that are key components in the IMMULITE system pursuant to agreements effective February 9, 1995 with Lumigen, Inc. and Tropix, Inc. The Company has the right for ten years to purchase certain specified chemical compounds from Lumigen or, in certain circumstances, from Tropix, that are the sole suppliers of these chemical compounds. Tropix also agreed to supply the Company with certain other chemical compounds for use in veterinary kits for ten years. Upon expiration of the ten year supply agreement, the Company believes that it will either use an alternate technology or that it will enter into a new supply arrangement. Although the Company believes that it has the products and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. Because of the foregoing factors, recent trends may not be reliable indicators of future financial performance. FINANCIAL INSTRUMENTS The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. The Company's cash equivalents are in high quality securities placed with major banks. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across worldwide geographic areas. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The fair value of the Company's financial instruments approximates cost due to their short term nature or, in the case of notes payable, because the notes are at interest rates competitive with those that would be available to the Company in the current market environment. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Included in cash and cash equivalents at December 31, 1999 and 2000 is $7,600,000 and $14,700,000 respectively of short-term commercial paper. 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVENTORIES Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment is stated at cost, less accumulated depreciation and amortization, which is computed using straight-line and declining-balance methods over the estimated useful lives (5 to 50 years) of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. An impairment loss measured by the difference in the estimated fair value and the carrying value of the related asset, is recognized when the future cash flows (based on undiscounted cash flows) is less than the carrying amount of the asset. INVESTMENTS IN AFFILIATED COMPANIES Investments in affiliated companies represent equity investments in foreign distributors in which the Company owns a 50% or less equity interest. The investments are stated at cost plus advances, plus the Company's equity in the undistributed net income since acquisition, less amortization of the excess of cost over the net assets acquired. EXCESS OF COST OVER NET ASSETS ACQUIRED Excess of cost over net assets acquired represents the difference between the cost and underlying fair value of assets purchased and relates to the purchase of certain of the Company's foreign distributors. The excess of cost over net assets acquired is being amortized over 20 years using the straight-line method. The Company periodically reviews excess of cost over net assets acquired to assess recoverability; an impairment would be recognized if a permanent diminution in value were determined to have occurred. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries and affiliates are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and income and expense accounts at the weighted average rate in effect during the year. Foreign exchange translation adjustments are accumulated in a separate component of shareholders' equity. FOREIGN EXCHANGE INSTRUMENTS The Company hedges specific foreign currency exposures by purchasing foreign exchange contracts. Such foreign exchange contracts are generally entered into by the Company's European subsidiaries. The subsidiaries purchase foreign exchange contracts to hedge firm or anticipated commitments, denominated in other than their functional currency, to acquire inventory for resale. The Company does not engage in speculation. The Company's foreign exchange contracts do not subject the Company to exchange rate movement risk as any gains or losses on the transactions being hedged offset losses or gains on these contracts. The foreign exchange contracts have varying maturities that generally do not exceed one year. At December 31, 1999 and 2000, the Company had foreign exchange contracts outstanding to buy the equivalent of approximately $5,000,000 and $3,750,000, the carrying value of which does not differ significantly from their fair value. REVENUE RECOGNITION The Company recognizes sales of its instruments and kits upon shipment to the customer unless its equipment is rented or leased in which case revenue is recognized over the life of the rental or lease agreement. Service contract revenue is recognized over the related contract life. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES Deferred income taxes represent the income tax consequences on future years of differences between the income tax basis of assets and liabilities and their basis for financial reporting purposes multiplied by the applicable statutory tax rate. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The Company adopted SFAS 133 on January 1, 2001. The initial adoption of SFAS 133 will not have a material effect on the Company's consolidated financial statements or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 did not have a material effect on the Company's consolidated financial statements or revenue recognition policies. NOTE 2 - BUSINESS ACQUISITIONS As of January 1, 1998, the Company acquired a 100% interest in Diagnostic Products DPC Norway, AS, the Company's Norwegian distributor. As of July 1, 1998, the Company's Brazilian distributor acquired a majority interest in DPC Medlab Centroamerica S.A., the Company's distributor in Costa Rica, Honduras, El Salvador, Guatemala and Panama. As of January 1, 1999, the Company acquired an additional 50% interest in DPC Skafte AB (Sweden). As of January 1, 1999, the Company owns 100% of DPC Skafte AB. NOTE 3 - INVENTORIES Inventories by major categories are summarized as follows:
(Dollars in Thousands) December 31, -------------------------- 1999 2000 ---------- ---------- Raw materials $ 22,499 $ 23,381 Work in process 19,165 23,862 Finished goods 17,775 13,004 ---------- ---------- $ 59,439 $ 60,247 ========== ==========
NOTE 4 - SALES-TYPE AND OPERATING LEASES In addition to outright sales, the Company places IMMULITE instruments with customers under sales-type and operating leases for periods generally from three to five years. For operating leases, the cost of the equipment is amortized on a straight-line basis over their estimated lives, which range from three to five years. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales-type and operating leases are summarized as follows:
(Dollars in Thousands) December 31, -------------------------- 1999 2000 ---------- ---------- Sales-type leases $ 2,074 $ 1,751 Operating leases 69,606 83,031 Less accumulated amortization 36,610 44,200 ---------- ---------- Net 32,996 38,831 ---------- ---------- Total $ 35,070 $ 40,582 ========== ==========
NOTE 5 - INVESTMENT IN AFFILIATED COMPANIES The Company has equity interests in three non-consolidated foreign affiliates. The affiliates distribute the Company's products in their respective countries. The countries and the Company's ownership interest are as follows: Portugal, 40%; Italy, 45%; and Greece, 50%. The following represents condensed financial information for all of the Company's investments in non-consolidated affiliated companies and its joint venture in Japan, which has been inactive since April 1, 2000, and the results of their operations. The information presented includes the 50% owned DPC Skafte AB "Sweden", for the year ended December 31, 1998. For 1999 and 2000, DPC Skafte AB is 100% owned and consolidated, and therefore is not included with non-consolidated affiliated companies.
(Dollars in Thousands) December 31, ------------------------------------------ 1998 1999 2000 ---------- ---------- ---------- Current assets $ 48,609 $ 37,359 $ 25,610 Property and other assets 39,244 38,120 36,877 ---------- ---------- ---------- Total assets $ 87,853 $ 75,479 $ 62,487 ========== ========== ========== Current liabilities $ 43,199 $ 38,115 $ 25,082 Non-current liabilities 24,065 19,987 18,276 Shareholders' equity 20,589 17,377 19,129 ---------- ---------- ---------- Total liabilities and shareholders' equity $ 87,853 $ 75.479 $ 62,487 ========== ========== ========== Sales $ 62,227 $ 64,491 $ 54,379 ---------- ---------- ---------- Net income $ 470 $ 3,899 $ 4,433 ========== ========== ==========
The Company had sales to non-consolidated affiliates of $22,318,000 in 1998, $27,885,000 in 1999, and $24,864,000 in 2000, including sales to one affiliate (Italy) of $11,889,000 in 1998, and $16,858,000 in 1999, and $18,453,000 in 2000. Included in the Company's accounts receivable are trade receivables from non-consolidated affiliates of $6,032,000 at December 31, 1999 and $2,251,000 at December 31, 2000. 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's cumulative equity in undistributed earnings of non-consolidated affiliated companies at December 31, 2000 is $12,362,000. It is anticipated that additional income taxes payable on earnings of foreign affiliates, if distributed, would be substantially offset by U.S. tax credits for foreign taxes paid. NOTE 6 - NOTES PAYABLE Notes payable consist of borrowings by certain of the Company's foreign subsidiaries (some guaranteed by DPC) that are payable in the subsidiaries' local currency. The notes are summarized as follows:
(Dollars in Thousands) December 31, -------------------------- 1999 2000 ---------- ---------- Notes payable to a bank in Germany, at an average interest rate of approximately 6%, payable through 2006 $ 8,995 $ 8,166 Notes payable to a bank in France, at an interest rate of approximately 6%, payable through 2005 2,809 3,696 Notes payable to a bank in Spain, at an interest rate of approximately 6%, payable through 2005 1,571 2,295 Notes payable to a bank in the Netherlands, at an interest rate of approximately 6%, payable through 2001 1,010 852 Other 1,371 548 ---------- ---------- Total $ 15,756 $ 15,557 ========== ==========
Aggregate future maturities of long-term debt outstanding at December 31, 2000 are $5,477,000 in 2001, $2,542,000 in 2002, $2,552,000 in 2003, $2,383,000 in 2004, $1,798,000 in 2005, and $805,000 thereafter. Interest expense was $1,824,000 in 1998, $1,068,000 in 1999, and $1,011,000 in 2000. The Company also has a line of credit with a bank, under which it may borrow up to $20 million, that matures in May of 2001. Standby letters of credit under the line of credit totaled $386,000 and $2,000,000 at December 31, 2000 and 1998, respectively. There were no standby letters of credit outstanding at December 31, 1999. No other borrowings were outstanding at December 31, 2000, 1999, and 1998 under the line of credit. NOTE 7 - EMPLOYEE BENEFIT PLANS The Company has a defined contribution money purchase pension plan covering substantially all U.S. employees over 21 years of age. Contributions under the pension plan are made annually in an amount equal to 10% of the compensation of all participants for such year. Contributions to the pension plan were $2,484,000 in 1998, $2,989,000 in 1999, and $3,864,000 in 2000. The Company has a defined contribution profit sharing plan covering substantially all U.S. employees over 21 years of age. Contributions under the profit sharing plan for any year are made at the discretion of the Board of Directors of the Company, but not in excess of 15% of the compensation of all participants for such year. The Company contributed $773,000 to the profit sharing plan for 2000; there were no contributions in 1999 or 1998. As of January 1, 2000, the Company merged the assets of its pension plan and its profit sharing plan. The terms and conditions of the merged plan are comparable to the existing plans except that employees may also make contributions to the plan under the provisions of section 401(k) of the Internal Revenue Code. The Company contributed $431,000 in 401(k) employer matches for 2000. 24 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES The provision for income taxes is summarized as follows:
(Dollars in Thousands) Year Ended December 31, -------------------------------------------- 1998 1999 2000 ---------- ---------- ---------- CURRENT: Federal $ 5,937 $ 6,135 $ 8,018 State 421 (71) 258 Foreign 2,207 3,228 4,476 Deferred Federal and State income taxes (565) (219) 112 ---------- ---------- ---------- Total provision for income taxes $ 8,000 $ 9,073 $ 12,864 ========== ========== ==========
Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are as follows:
(Dollars in Thousands) December 31, -------------------------- 1999 2000 ---------- ---------- State net operating losses $ 289 $ 290 Inventory 2,275 2,329 Depreciation 857 1,137 State research and development credit carry forwards 1,668 1,366 Other 440 295 ---------- ---------- Total $ 5,529 $ 5,417 ========== ==========
Reconciliation between the provision for income taxes computed by applying the federal statutory tax rate to income before income taxes and the actual provision for income taxes is as follows:
(Dollars in Thousands) Year Ended December 31, --------------------------------------------------------------------- 1998 % 1999 % 2000 % --------------------- ------------------ ------------------- Provision for income taxes at statutory rate $ 10,004 35 $10,550 35 $14,883 35 State income taxes, net of Federal tax (141) (1) 120 1 13 benefit Foreign income subject to tax other than federal statutory rate (35) 491 2 466 1 Non-taxable earnings of FSC (943) (3) (956) (3) (1,281) (3) Research and development tax credit (866) (3) (738) (2) (575) (1) Equity in income of affiliates (442) (2) (497) (2) (614) (1) Other 423 2 103 (28) --------------- ------------- -------------- Provision for income taxes $ 8,000 28 $ 9,073 31 $12,864 31 =============== ============= ==============
25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS An income tax benefit during 2000, 1999, and 1998 related to the exercise or early disposition of certain stock options reduced income taxes currently payable by $1,219,000, $87,000, and $300,000, respectively, and was credited directly to shareholders' equity. NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES The Company has a non-cancelable operating lease for a portion of its Los Angeles manufacturing facility with a partnership comprised of persons who are executive officers, directors, and/or shareholders of the Company. The agreement extends through December 31, 2002. Approximately $966,000 in 1998, $966,000 in 1999, and $966,000 in 2000 was paid by the Company under the facility lease agreement. DPC Cirrus has entered into a non-cancelable operating lease for its Randolph, New Jersey manufacturing facility. The agreement extends through November 30, 2002, with a five-year renewal option. Future minimum lease commitments as of December 31, 2000 are as follows:
(Dollars in Thousands) 2001 2002 Total ------ ------ ------ $1,808 $1,373 $3,181
Aggregate rental expense under operating leases approximated $2,673,000 in 1998, $3,107,000 in 1999, and $4,429,000 in 2000. The Company has a supply contract with a vendor for chemical compounds that are key components in the IMMULITE system. The Company has agreed to guaranty the vendor's minimum payment obligations to another company in the annual amount of $600,000 through 2004. NOTE 10 - EARNINGS PER SHARE The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted EPS for the income statements presented herein.
(Shares in Thousands) Year Ended December 31, ------------------------------ 1998 1999 2000 ------ ------ ------ Basic 13,746 13,671 13,777 Assumed exercise of stock options 135 100 297 ------ ------ ------ Diluted 13,881 13,771 14,074 ====== ====== ======
Net income as presented in the consolidated income statement is used as the numerator in the EPS calculation for both the basic and diluted computations. 26 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCK OPTION PLANS Under the Company's stock option plans, incentive stock options may be granted and are exercisable at prices not less than 100% of the fair market value on the date of the grant (110% with respect to optionees who are 10% or more shareholders of the Company). Additionally under the plans, non-qualified stock options may be granted and are exercisable at prices not less than 85% of fair market value at the date of grant. Options become exercisable after one year in installments (generally 3 to 9 years) and may be exercised on a cumulative basis at any time before expiration. Options expire no later than ten years from the date of grant. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which was effective as of January 1, 1996, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for proforma footnote purposes with the following assumptions used for grants in all years: dividend yield of 1.0 to 1.7%, risk-free interest rate of from 4.4% to 6.6% and expected option life of 3 to 10 years. Expected volatility was assumed to be 36.9% in 1998, 27.1% in 1999, and 30.1% in 2000. Forfeiture rate was assumed to be 5% in 1998, 1999, and in 2000.
Weighted Number Average Weighted of Exercise Average Shares Price Fair Value ------------ ----------- ---------- Options outstanding, December 31, 1997 (349,656 exercisable) 1,220,540 $25.92 Granted 222,000 26.83 $10.87 Exercised (152,810) 19.69 Canceled (66,540) 30.46 --------- ------ Options outstanding, December 31, 1998 (350,373 exercisable) 1,223,190 26.62 Granted 182,000 26.25 9.76 Exercised (21,160) 19.76 Canceled (32,700) 25.62 --------- ------ Options outstanding, December 31, 1999 (480,870 exercisable) 1,351,330 26.55 Granted 200,000 30.72 14.69 Exercised (245,640) 23.62 Canceled (80,800) 27.15 --------- ------ Options outstanding, December 31, 2000 1,224,890 $27.77 ========= ====== (379,989 exercisable)
27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31, 2000:
Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/00 Life Price at 12/31/00 Price --------------- ------------ ------------ ---------- ----------- ----------- $10.00-19.99 33,750 2.99 years $18.56 13,310 $18.69 20.00-29.99 952,140 6.69 years $25.82 295,379 $25.40 30.00-39.99 186,000 6.07 years $34.38 71,300 $35.58 40.00-49.99 53,000 9.81 years $45.32 -0- -0-
Pursuant to the plans, 1,364,690 shares of common stock are reserved for issuance upon the exercise of options. In addition, a 1,000,000 share increase in the number of shares reserved for issuance under the plans is subject to shareholder approval at the 2001 annual meeting of shareholders. As permitted by SFAS No. 123, the Company has chosen to continue accounting for stock options at their intrinsic value. Accordingly, no compensation expense has been recognized for its stock option compensation plans. Had the fair value method of accounting been applied to the Company's stock option plans, the tax-effected impact would be as follows:
(Dollars in Thousands, except per Share Data) 1998 1999 2000 ---------- ---------- ---------- Net income as reported $ 20,213 $ 20,488 $ 28,250 Compensation expense from stock options 740 1,152 1,373 ---------- ---------- ---------- Net income adjusted $ 19,473 $ 19,336 $ 26,877 ========== ========== ========== Adjusted earnings per share-diluted $ 1.40 $ 1.40 $ 1.91 ========== ========== ==========
This proforma impact only takes into account options granted subsequent to January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. NOTE 12 - SEGMENT AND PRODUCT LINE INFORMATION The Company considers its manufactured instruments and medical immunodiagnostic test kits as one operating segment as defined under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" as the kits are required to run the instruments and utilize similar technology and instrument manufacturing processes. The Company manufacturers its instruments and kits principally from facilities in the United States and the United Kingdom. Kits and instruments are sold to hospitals, medical centers, clinics, physicians, and other clinical laboratories throughout the world through a network of distributors including consolidated distributors located in the United Kingdom, Germany, Czech Republic, Poland, Spain, The Netherlands, Belgium, Luxembourg, Finland, Norway, France, Estonia, Sweden, Australia, China, Brazil, Uruguay, Venezuela, Costa Rica, Honduras, El Salvador, Guatemala, and Panama. 28 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company sells its instruments and immunodiagnostic test kits under several product lines. Product line sales information is as follows:
Year Ended December 31, ------------------------------------ (Dollars in Thousands) 1998 1999 2000 -------- -------- -------- Sales: IMMULITE (includes service) $123,861 $150,714 $193,082 Radioimmunoassay ("RIA") 42,565 37,813 33,706 Other 30,217 27,666 21,079 -------- -------- -------- $196,643 $216,193 $247,867 ======== ======== ========
The Company is organized and managed by geographic area. Transactions between geographic segments are accounted for as normal sales for internal reporting and management purposes with all intercompany amounts eliminated in consolidation. Sales are attributed to geographic area based on the location from which the instrument or kit is shipped to the customer. Information reviewed by the Company's chief operating decision maker on significant geographic segments, as defined under SFAS No. 131, is prepared on the same basis as the consolidated financial statements and is as follows:
(Dollars in Thousands) December 31, 2000 ---------------------------------------------------------------------------------------------------- Euro/DPC DPC DPC Limited Biermann Medlab Less: United (United (German (Brazilian Intersegment States Kingdom) Group) Group) Other Elimination Total ----------- ----------- ----------- ----------- ----------- ------------ ----------- Sales $ 173,194 $ 31,341 $ 30,135 $ 29,541 $ 50,023 $ (66,367) $ 247,867 Operating expenses 60,234 6,983 7,554 8,319 14,153 97,243 Interest income (expense), net 3,863 (776) (1,306) (1,096) 685 Minority interest 1,409 1,409 Provision (benefit) for income taxes expense 8,388 1,752 213 1,728 783 12,864 Net income (loss) 20,986 4,134 125 1,795 1,210 28,250 Segment assets: Long-lived assets 50,584 15,811 20,704 11,016 21,560 119,675 Total assets 287,459 24,381 31,865 21,391 51,299 (135,911) 280,484 Capital expenditures 12,811 3,093 2,123 3,115 6,625 27,767
29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands) December 31, 1999 ---------------------------------------------------------------------------------------------------- Euro/DPC DPC DPC Limited Biermann Medlab Less: United (United (German (Brazilian Intersegment States Kingdom) Group) Group) Other Elimination Total --------- --------- --------- --------- --------- ----------- --------- Sales $ 148,443 $ 29,323 $ 31,471 $ 24,472 $ 47,187 ($ 64,703) $ 216,193 Operating expenses 54,623 6,395 10,017 6,969 13,406 91,410 Interest income (expense), net 3,791 (512) (628) (1,441) (767) 443 Minority interest 582 582 Provision (benefit) for income taxes expense 5,847 1,173 (227) 1,189 1,091 9,073 Net income (loss) 15,086 2,680 (382) 743 2,061 300 20,488 Segment assets: Long-lived assets 50,156 17,916 19,520 10,250 22,871 (5,300) 115,413 Total assets 250,119 38,710 30,119 19,892 46,237 (134,583) 250,494 Capital expenditures 2,816 5,172 8,673 2,086 11,589 (2,940) 27,396
(Dollars in Thousands) December 31, 1998 --------------------------------------------------------------------------------------------------------- Euro/DPC DPC DPC Limited Biermann Medlab Less: United (United (German (Brazilian Intersegment States Kingdom) Group) Group) Other Elimination Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- Sales $ 127,936 $ 27,468 $ 34,425 $ 24,081 $ 38,926 $ (56,193) $ 196,643 Operating expenses 46,875 6,070 9,465 7,268 12,907 82,585 Interest income (expense), net 4,508 (800) (970) (1,675) (732) 331 Minority interest 370 370 Provision (benefit) for income taxes expense 5,793 1,269 (253) 358 833 8,000 Net income (loss) 16,214 2,820 (417) 471 1,325 (200) 20,213 Segment assets: Long-lived assets 52,937 16,869 19,138 12,851 20,871 (5,500) 117,166 Total assets 239,509 36,230 32,753 19,704 41,896 (123,868) 246,224 Capital expenditures 4,293 3,305 9,869 4,594 11,879 (3,500) 30,440
30 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's export sales to unaffiliated customers are summarized as follows:
(Dollars in Thousands) Western South Other Total Europe America Exports Exports --------- --------- --------- --------- 1998 $ 2,794 $ 8,406 $ 13,701 $ 24,901 1999 3,771 6,635 14,691 25,097 2000 3,871 8,035 21,142 33,048
SUPPLEMENTARY FINANCIAL DATA Unaudited quarterly financial information for the years ended December 31, 1999 and 2000 is summarized as follows:
(In Thousands, Except per Share Data) Quarter Ended ----------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, Year Ended 1999 1999 1999 1999 1999 ------------- ------------- ------------- ------------- ------------- Sales $ 50,466 $ 54,593 $ 53,693 $ 57,441 $ 216,193 Gross profit 27,260 30,433 29,048 32,948 119,689 Income taxes 1,790 2,150 1,740 3,393 9,073 Net income 4,100 5,512 4,791 6,085 20,488 Earnings per share: Basic .30 .40 .35 .45 1.50 Diluted .30 .40 .35 .44 1.49 Weighted Average Shares Outstanding: Basic 13,669 13,673 13,671 13,673 13,671 Diluted 13,818 13,739 13,780 13,747 13,771
Quarter Ended ----------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, Year Ended 2000 2000 2000 2000 2000 ------------- ------------- ------------- ------------- ------------- Sales $ 59,184 $ 63,645 $ 60,579 $ 64,459 $ 247,867 Gross profit 32,895 34,780 33,884 35,786 137,345 Income taxes 2,969 3,160 2,875 3,860 12,864 Net income 6,291 7,029 6,397 8,533 28,250 Earnings per share: Basic .46 .51 .46 .61 2.05 Diluted .46 .50 .45 .59 2.01 Weighted Average Shares Outstanding: Basic 13,681 13,726 13,812 13,890 13,777 Diluted 13,735 13,877 14,243 14,441 14,074
31 33 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. DIAGNOSTIC PRODUCTS CORPORATION
/s/ Michael Ziering President and March 29, 2001 ------------------------------------ Chief Executive Officer and Michael Ziering Chairman of the Board (Principal Executive Officer) Director
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.
NAME TITLE DATE ----------------------------------- -------------------------------- -------------------------- /s/ Michael Ziering President and March 29, 2001 ----------------------------------- Chief Executive Officer and Michael Ziering Chairman of the Board (Principal Executive Officer) Director /s/ Sidney A. Aroesty Chief Operating Officer March 29, 2001 ----------------------------------- Director Sidney A. Aroesty /s/ Maxwell H. Salter Director March 29, 2001 ----------------------------------- Maxwell H. Salter /s/ James D. Watson Director March 29, 2001 ----------------------------------- James D. Watson /s/ Frederick Frank Director March 29, 2001 ----------------------------------- Frederick Frank /s/ Ira Ziering Vice President March 29, 2001 ----------------------------------- Director Ira Ziering /s/ James L. Brill Vice President March 29, 2001 ----------------------------------- Finance (Principal James L. Brill Financial and Accounting Officer)
32 34 EXHIBIT INDEX 3.1 Amended and Restated Articles of Incorporation (6) 3.2 Bylaws, as amended (6) 4.1 Stock Certificate (4) *10.1 1981 Employee Stock Option Plan, as amended (2) *10.2 Retirement Benefits Agreement with Sigi Ziering (3) *10.3 Form of Indemnification Agreement with Officers and Directors (1) *10.4 1990 Stock Option Plan as amended (7) 10.5 Standard Industrial Lease with 5700 West 96th Street, general partnership, dated February 18, 1991 (5) *10.6 1997 Stock Option Plan as amended (7) 21 Subsidiaries of Registrant 23 Independent Auditors' Consent ---------------- * Management contracts, compensation plans or arrangements (1) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. (File No. 1-9957) (2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. (File No. 1-9957) (3) Incorporated by reference to Registrant's Registration Statement on Form S-1 (File No. 2-77287) filed on May 3, 1982. (4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (File No. 1-9957) (5) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (File No. 1-9957) (6) Incorporated by reference to Registrant's Quarterly Report on From 10-Q for the quarter ended June 30, 1992. (File No. 1-9957) (7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. (File No. 1-9957) 33