-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GJplxk3M9q1SxX0E9Cr/591nWZhxunKGHgf6ZcoB373eDv0Hjm/Zi5YTZS2q2LBW KBZbICcv5gi0w6siUzHkEw== 0000950148-96-000420.txt : 19960326 0000950148-96-000420.hdr.sgml : 19960326 ACCESSION NUMBER: 0000950148-96-000420 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC PRODUCTS CORP CENTRAL INDEX KEY: 0000702259 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 952802182 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09957 FILM NUMBER: 96537952 BUSINESS ADDRESS: STREET 1: 5700 W 96TH ST CITY: LOS ANGELES STATE: CA ZIP: 90045 BUSINESS PHONE: 2137760180 10-K405 1 FORM 10-K405 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, 1995 / / 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 (I.R.S. Employer incorporation or organization) Identification No.) 5700 WEST 96TH STREET LOS ANGELES, CALIFORNIA 90045 (Address of principal executive offices) Registrant's telephone number: (213) 776-0180 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. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $386,000,000 as of March 15, 1996. The number of shares of Common Stock, no par value, outstanding as of March 15, 1996, was 13,533,156. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the 1996 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 and related instrumentation which utilize state-of-the-art technology derived from immunology and molecular biology. The Company's products are used by hospitals, 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 300 assays (tests) relate to diagnosis of thyroid conditions and anemia; testing for pregnancy, fertility and fetal well-being; management of diabetes and certain types of cancer; drugs of abuse testing; rapid diagnosis of infectious diseases, including sexually transmitted diseases; allergy testing; and diagnosis of a variety of disorders due to hormone and steroid imbalances. The Company believes that it is the market leader in fertility testing, with the most comprehensive line of kits currently available. 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 affiliated research and development and manufacturing facilities in the United Kingdom, Japan, Germany, China and Italy, markets its products through a national sales force and through a worldwide distribution network covering 100 countries. Unless the context otherwise requires, the terms "DPC" and the "Company" include the Company's consolidated subsidiaries. THE MATURE RIA MARKET Since its inception in 1971, DPC's core business has been based on RIA (radioimmunoassay) technology, which utilizes radioisotopes to achieve high levels of test specificity and sensitivity. RIA tests are labor intensive and must be performed by skilled technicians. During the 1970's and 1980's, the RIA market increased significantly and the Company developed one of the most extensive lines of RIA kits available. In the early 1980's, the market began to shift to nonisotopic systems based mainly on florescence (FIA) and enzyme (EIA) labels. Currently, nonisotopic systems account for approximately 90% of the market. Although nonisotopic techniques, such as the IMMULITE products, account for a growing percentage of the Company's total sales, RIA test kits continue to generate the majority of the Company's sales. While the immunoassay market is increasing worldwide, the RIA segment of this market has been decreasing. This decline reflects concerns regarding the disposal of radioactive materials used in RIA tests and demands for labor-saving, automated immunodiagnostic systems which utilize nonisotopic tests. Even though the worldwide market for RIA is contracting, DPC has continued to achieve good sales levels in this segment and expects RIA to continue to be an important market for the Company. The Company's strategy for the RIA market includes the following: - Exploit markets which have been abandoned by competitors; - Exploit niche markets by developing products aimed at readily identified market needs; and - Exploit certain foreign markets, such as South America and certain less industrialized countries, where demand for RIA tests is still growing due to the lower labor and reagent costs and the availability of the gamma counting equipment necessary to perform the tests. The Company continues to expand its RIA product line. During 1995, the Company obtained FDA approval for 5 RIA test kits, including a test for measuring PSA (prostate specific antigen). The total worldwide market for PSA, which is the most useful available tumor marker for prostate cancer, is estimated to be approximately $200 million per year. IMMULITE -- TRANSITION TO A FULLY INTEGRATED SYSTEMS COMPANY With the acquisition of Cirrus Diagnostics Inc. in May 1992, the Company was able to enter the marketplace for fully automated, nonisotopic diagnostic instrumentation systems, the most rapidly growing segment of the immunoassay market. The IMMULITE system, which was developed by Cirrus, is an auto- 1 3 mated, random-access, computer-based instrument which 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. Whereas DPC's RIA tests can be performed on equipment manufactured by many different companies, IMMULITE is a closed system; that is, it can only accommodate IMMULITE assays. Accordingly, one of the most important factors in the successful marketing of the IMMULITE system is the ability to offer a broad menu of assays which can be performed on the system. During 1995, the Company developed 19 assays for the IMMULITE system, bringing the total number of IMMULITE assays to 56, 28 of which have been approved by the FDA for marketing in the United States. DPC currently offers the most complete panel of assays available in the key areas of thyroid, fertility and cancer testing. Included in the fertility panel are tests for estradiol and progesterone, both important assays which are not yet available on many other automated systems. IMMULITE products also include allergy panels and an initial group of assays for infectious diseases was introduced in 1995. 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 which it can detect. DPC's Third Generation TSH assay is the only fully automated assay for TSH offering the level of sensitivity required for TSH to serve as a first-line screen for thyroid disorders, thus replacing the multiple tests previously required with a single test. Because this assay provides physicians with a more cost effective, accurate and useful diagnostic tool, approximately 90 percent of all IMMULITE customers in the United States have adopted this assay for routine thyroid testing. In 1995 the Company also developed a Third Generation PSA, one of the most sensitive tests available for prostate specific antigen. This test is not yet approved for sale in the United States, but is being sold in foreign markets. In 1995, DPC continued the development of its next generation IMMULITE instrumentation. The IMMULITE 2000 will have almost double the throughput of the current model and will incorporate new features such as primary tube sampling. This feature, by which the instrument takes the test sample directly from the patient's blood collection tube, will increase laboratory safety and productivity. The IMMULITE 2000 will provide the Company with access to the market represented by higher volume hospitals and laboratories. The IMMULITE 2000 will be introduced at the July 1996 Annual Meeting of the American Association for Clinical Chemistry in Chicago and is expected to be available for delivery to customers in early 1997. ALLERGY TESTING An important market segment to which the Company has devoted significant development and marketing resources is the area of allergy testing. While this market is dominated by Pharmacia of Sweden, the Company believes that its technology is competitive in this large and growing market. DPC offers three distinct methodologies for its AlaSTAT allergy product line based on a patented liquid-handling technology: (i) the traditional RIA format, (ii) a tube methodology for smaller laboratories preferring nonisotopic methodologies, and (iii) a microplate-based system for larger laboratories desiring full automation. In addition, the IMMULITE system offers a fully automated test for total IgE as well as a pivotal screening test (AlaTOP), the most widely used first line test for allergies. The number of specific allergens which the DPC methodologies can handle is rapidly expanding. During 1995, DPC obtained FDA approval to market 57 new tests for specific allergens in microplate format. In addition, DPC obtained FDA approval to market the first commercial test for determining sensitivity to latex products in patients and health care professionals exposed to latex products. 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. Because of the importance of being able to offer an 2 4 extensive menu of assays on the IMMULITE system, approximately 80% of research and development activities in 1995 related to the development of IMMULITE assays. The Company expects similar levels in the coming year. The Company conducts research and development activities at facilities located in Los Angeles, Randolph, New Jersey, the United Kingdom, Germany, Japan (a 50%-owned joint venture), and Italy (through its 45%-owned subsidiary). During the years ended December 31, 1993, 1994 and 1995, the Company spent $12,768,000, $13,404,000 and $16,135,000 on research and development, representing approximately 12%, 11% and 10% of sales. MANUFACTURING AND SERVICE The Company's principal test kit manufacturing facility is located in Los Angeles, California. Approximately 10% 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 EEC by minimizing import duties and freight charges and by reducing the effects of currency exchange fluctuations. Certain kits are also manufactured in Japan by the Company's 50%-owned joint venture, and by the DPC Biermann GmbH facility in Germany. The IMMULITE system instrumentation is assembled at the Company's facility in New Jersey. Component parts, such as computer hardware, are supplied by original equipment manufacturers. The Company provides a one year warranty which covers parts and labor. The IMMULITE system is certified by Underwriter's Laboratories Inc. (UL). 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. During 1995 the Company released the IMMULITE On-Line Reference Guide and Tutorial software which provides customers with information on theory, operation and trouble-shooting for the entire system, including instrument hardware, software and chemistry. The EURO/DPC Instrumentation Division manufactures diagnostic instrumentation and develops associated software used in the allergy product lines. These instruments include the MARK 5, an automated pipettor; the MicroLite 3 pipetting aid; and the MARK 5 BCR barcode reader. Certain components of the IMMULITE instrument are also manufactured in Wales. Certain of the Company's proprietary instruments and software are manufactured by OEMs, including AlaSTAT Microplate instrumentation, gamma counters used with RIA tests, and spectrophotometers used with certain EIA tests. The Company is not dependent on any outside supplier and believes that alternate sources are readily available. In 1995, DPC Cirrus received ISO 9001 certification, an internationally recognized manufacturing standard. In December 1990, Euro/DPC, the Company's wholly owned manufacturing subsidiary in Wales, was the first immunodiagnostics company in the world to be certified under British Standard BS 5750 (also known as International Standard ISO 9002 and European Standard EN 29002), a rigorous British quality assurance program which is the forerunner of a uniform manufacturing code for the European Economic Community. MARKETING AND SALES The Company markets its diagnostic kits to hospital, clinical, forensic, research, reference and veterinary laboratories, to doctors' offices, and to U.S. government agencies. The Company markets its products in the United States directly to laboratories and hospitals through its own sales force. The Company sells to the 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. Foreign sales are handled by the Company's distributors including consolidated distributors. The Company's products are sold on a world-wide basis through distributors in 100 foreign countries. The Company's distributors, including consolidated distributors, also sell other manufacturer's products which are not directly competitive with the Company's products. Foreign sales (including sales of consolidated subsidiaries) represented approximately 75% of sales in 1993, 76% in 1994, and 79% in 1995, with 3 5 sales in Europe accounting for approximately 53%, 54% and 55% of total sales respectively. See Notes 5 and 10 of Notes to Consolidated Financial Statements for information regarding foreign operations. The Company owns equity interests in the following foreign distributors:
Distributor Location % Ownership - ---------------------------------------------- ---------------- ----------- Diagnostic Products Corporation Nederland B.V. Netherlands 100% Diagnostic Products Corporation Belgium 100% Belgium b.v.b.A./s.p.r.l. DPC Biermann GmbH Germany 100% Bio-Mediq DPC Pty. Ltd. Australia 100% DPL, a division of EURO/DPC Limited United Kingdom 100% DPC Dipesa, S.A. Spain 100% Tianjin De Pu (DPC) Biotechnological and China 90% Medical Products, Inc. DPC Medlab Produtos Brazil 56% Medico Hospitalares, Ltda. Nippon DPC Corporation Japan 50% DPC Skafte AB Sweden 50% Medical Systems, S.p.A. Italy 45% Amerlab, Lda. Portugal 40%
The consolidated financial statements include the accounts of those distributors in which the Company has a greater than 50% ownership interest. The Company had sales to nonconsolidated affiliated distributors of $11,460,000 in 1993, $12,119,000 in 1994 and $18,504,000 in 1995, including sales to Medical Systems S.p.A. of $6,207,000 in 1993, $6,005,000 in 1994 and $10,034,000 in 1995. Sales of test kits to customers and distributors are made against individual purchase orders rather than through volume purchase arrangements. Because of the typically short shelf life of diagnostic kits, the Company's customers and distributors tend to order frequently, based on their short-term needs. 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 the IMMULITE instrumentation to hospitals and reference laboratories which perform volume testing. Most of the instruments are placed under a sales-type or operating lease basis. The Company's backlog at any date is usually insignificant and not a meaningful indicator of future sales. Foreign sales are subject to inherent risks including exposure to currency fluctuations, political and economic instability and trade restrictions. Because the Company's consolidated foreign distributor's sales are in the local currency, 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. The 1984 GATT agreement on tariffs specifically targets medical diagnostic devices for a five year elimination of all duties. This took effect on January 1, 1995 in the major countries in Europe and Japan. The Company believes that the elimination of duties will have a positive impact on foreign sales. PROPRIETARY AND OTHER RIGHTS Substantially all of the Company's products are based on proprietary technologies and know-how. The Company holds patents on the washing process used in the IMMULITE system which expire in 2009. In 4 6 1988, the Company was issued a U.S. patent for its novel liquid-based amplification methodology which forms the basis of the AlaSTAT product lines. The Company also holds a patent for its neonatal test kit procedure which expires in 1998. The Company also obtains licenses for chemical components and technologies used in certain of its assays. Patents which 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 which may be issued in the future. The Company purchases certain chemical compounds which 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, which 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 it will either use an alternate technology or 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, aimed at containing the cost of medical services. For example, the profitability of the Company's Italian distributor (in which the Company has a 45% interest) has been adversely affected by government reductions in health care cost reimbursements. Similar reductions could affect other major European markets. 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 IMMULITEsystem addresses these market needs. The Company also seeks to develop more rapid and sensitive tests which can eliminate the need for redundant testing, such as DPC's Third Generation TSH assay. 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 the FDA's Center for Devices and Radiological Health approval. Most of the Company's products fall within the "substantially equivalent" category. Certain medically critical in vitro diagnostic products, such as the Company's kits for cancer therapy management, and totally new in vitro diagnostic products for which there are no equivalents on the market, must be approved by the FDA after in-depth review which normally takes about two years prior to marketing. The Company's products can be marketed without regulatory approval in most foreign countries. Japan and France have their own approval 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. COMPETITION The Company competes on a worldwide basis with a number of large corporations which sell diversified lines of products, including immunodiagnostic products, for laboratory, medical and hospital use, and which have substantially greater resources than the Company. There are currently over 30 domestic suppliers of immunodiagnostic kits. Most of the leading suppliers are broad-based health care companies such as Abbott Diagnostics (Abbott Laboratories), Chiron and Johnson & Johnson. The Company's major competitors in Europe include Serono Laboratories, Inc. (Italy), Pharmacia/Upjohn (Sweden), Hoffman-La Roche (Switzerland) and Boehringer Mannheim (Germany). The Company believes that competition with respect 5 7 to immunoassay tests is based on quality, service, product convenience and price, and that product innovation is an important source for change in market share. Many companies worldwide manufacture and sell automated immunodiagnostic systems. The Company's principal competitors are Abbott Diagnostics, Chiron, Sanofi, and Tosoh Medics. Abbott Diagnostics is the market leader in nonisotopic assays and semiautomated instruments. Most of these companies are substantially larger and have greater resources than the Company. The principal competitive factors in automated systems are size of menu (the number of assays which 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, 1995, the Company (including its consolidated subsidiaries) had 1182 employees, including 508 in manufacturing, 225 in research and development, 272 in marketing and sales and 177 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. 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, 1995:
Location Size Owned/Leased Uses - ---------------------------- --------------- ------------ ---------------------------------------------- Los Angeles, California 116,000 sq. ft. Leased * Corporate offices, manufacturing, warehousing, distribution, and research and development Los Angeles, California 48,000 sq. ft. Owned Adjacent to Corporate Offices, manufacturing and warehousing Gorman, California 40 acres Owned Raw material processing Randolph, New Jersey 27,500 sq. ft. Leased Research, manufacturing and distribution Glyn Rhonwy, Wales, UK 110,000 sq. ft. Owned Research, manufacturing and distribution Bad Nauheim, Germany 28,675 sq. ft. Owned Research and distribution Humbeek-Grimbergen, Belgium 5,000 sq. ft. Owned Distribution Apeldoorn, Netherlands 5,100 sq. ft. Owned Distribution Madrid, Spain 10,161 sq. ft. Leased Distribution Melbourne, Australia 7,600 sq. ft. Owned Distribution
- -------------------- *Lease payments of $849,000 in 1995. Lease expires in 1997, with a five-year renewal option. See "Item 13. Certain Relationships and Related Transactions". The Company believes that its facilities are adequate to meet its foreseeable needs. 6 8 ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. ITEM 4. 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 1995 and 1994.
1995 ---------------------------------------------- High Low Dividend -------- -------- -------- First Quarter $ 34 3/4 $ 24 1/4 $ .10 Second Quarter 40 3/8 34 .12 Third Quarter 44 7/8 35 3/4 .12 Fourth Quarter 39 1/4 33 1/2 .12
1994 ---------------------------------------------- High Low Dividend -------- -------- -------- First Quarter $ 20 7/8 $ 17 3/4 $ .10 Second Quarter 22 1/4 17 3/4 .10 Third Quarter 24 1/2 21 .10 Fourth Quarter 26 5/8 20 3/8 .10
As of March 15, 1996, the Company had 641 holders of record of its Common Stock. ITEM 6. SELECTED FINANCIAL DATA (Dollars in Thousands, except per Share Data) INCOME STATEMENT DATA
Year Ended December 31, ------------------------------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- -------- Sales $ 90,065 $103,489 $106,791 $126,453 $159,649 Net income 16,260 17,289 14,166 16,700 24,169 Net income per share 1.20 1.26 1.04 1.24 1.75 Average shares outstanding 13,502 13,706 13,627 13, 508 13,847 Dividends per share $ .32 $ .32 $ .40 $ .40 $ .46
BALANCE SHEET DATA
December 31, ------------------------------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- ------- Working capital $ 53,024 $ 55,534 $ 54,260 $ 60,704 $70,539 Total assets 135,006 134,323 137,149 152,735 189,462 Shareholders' equity 110,849 119,544 123,273 135,100 163,350
8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's sales increased 26% in 1995 to $160 million, following an 18% increase in 1994 to $126 million. Notwithstanding the severe restrictions placed worldwide on health care expenditures, the Company reported double-digit 1995 and 1994 sales increases principally as a result of the increased worldwide acceptance of the fully automated, random access IMMULITE system. The Company doubled the number of IMMULITE systems placed in 1995 compared to the total placed in the prior two years and shipments of IMMULITE reagents more than doubled in 1995 compared to 1994. The IMMULITE system is expected to continue to account for the greatest amount of growth of all the Company's product lines for the foreseeable future. Although RIA kits continue to generate profitable sales, this product line has matured and on a worldwide basis is experiencing a slow decline. Sales growth from IMMULITE products in 1994 and 1995 were, and in the future are expected to be, partially offset by declines in RIA sales. In 1995, approximately 79% of the Company's sales were non-US (compared to 76% in 1994 and 75% in 1993), with Europe being the Company's principal foreign market, accounting for 55% of total sales (compared to 54% in 1994 and 53% in 1993). In periods when the US dollar is weakening, the effect of the translation of the financial statements of the consolidated foreign affiliates is that of higher sales, costs and net income. The weaker US dollar in 1995 (when compared to 1994) has resulted in higher reported sales of approximately 5% and higher reported net income of 3%. The weaker US dollar in 1994 when compared to 1993 resulted in less than 1% translation effect on sales and net income. In 1995 and 1994, cost of sales as a percentage of sales was 44% compared to 40% in 1993. In 1995 and 1994, the cost of sales percentages were higher due to the higher cost of sales for IMMULITE instruments compared to reagents. Because instrument sales as a percentage of total sales will continue to increase, it is unlikely that the gross margin will ever fully return to the historical levels achieved when the Company was primarily a reagent manufacturer. Selling expense as a percentage of sales was 18% in 1995 and 19% in 1994 and 1993. The dollar amount continues to increase primarily as a result of the continual expansion of the marketing and sales effort, especially for the IMMULITE system. Research and development expenditures as a percentage of sales were 10% in 1995, 11% in 1994 and 12% in 1993. The dollar amount of these expenditures have increased to support the IMMULITE system. General and administrative expenses as a percentage of sales were 9% in 1995, 11% in 1994 and 12% in 1993. Included in general and administrative expenses is the amortization of the excess of cost over net assets acquired. Equity in income of affiliates represents the Company's share of earnings of nonconsolidated affiliates, principally the 45%-owned Italian affiliate whose 1995 net income was substantially lower than in 1994 and previous years. Profitability in Italy was adversely influenced by a combination of (1) reduced sales caused by current serious economic problems and reductions in health care cost reimbursements and (2) the impact of a substantial weakening of the Italian currency in relation to the US dollar in 1993. Investment income consists of interest income on the Company's cash and cash equivalents. The Company's effective tax rate includes Federal, state and foreign taxes. The 1995 rate of 26% compares to 26% in 1994 and 29% in 1993. The lower rate in 1995 and 1994 is the result of higher income levels generated in lower tax rate jurisdictions and the increased utilization of foreign tax credits. Additionally, in 1995, the Company determined it would realize the benefit of available state net operating loss carryforwards, resulting in the reversal of a previously established valuation allowance. The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing capital requirements. Cash flow from operating activities was $18.5 million in 1995, $18.5 million in 1994 and $10 million in 1993. Cash flow used for plant and equipment additions and renovations was $8.1 million in 1995, $4.5 million in 1994 and $7.6 million in 1993. Cash flow used for sales-type and operating leases was $6.4 million in 1995, $4 million in 1994 and $3.7 million in 1993. 9 11 During 1994 and the first quarter of 1995, the Company paid a cash dividend of $.10 per share. Commencing with the second quarter of 1995, the quarterly dividend was increased to $.12 per share. During 1994, the Company repurchased 190,800 shares of its Common Stock in the open market at a cost of $3,728,000. During 1993, the Company repurchased 93,000 shares of its common stock in the open market at a cost of $1,689,000. The Company will be required to adopt new accounting standards in the future. In 1996, the Company will be required to adopt Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company anticipates that SFAS No. 121 will not have a material impact on the Company's financial statements. In addition, in 1996 the Company will be required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation." The primary impact of this standard will relate to certain disclosure about the Company's stock option plan. The Company will continue to account for employee stock options under Accounting Principles Board Opinion No. 25. 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. 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" and "Executive Officers" of the Company's Proxy Statement for the 1996 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" of the Company's Proxy Statement for the 1996 Annual Shareholders Meeting. 10 12 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 1996 Annual Shareholders Meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The required information is hereby incorporated herein by reference to the second paragraph of the section entitled "Compensation and Stock Option Committee Interlocks and Insider Participation" of the Company's Proxy Statement for the 1996 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, 1994, and 1995. Consolidated Statements of Income for the three years ended December 31, 1995. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1995. Consolidated Statements of Cash Flows for the three years ended December 31, 1995. 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. 11 13 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders: We have audited the accompanying consolidated balance sheets of Diagnostic Products Corporation and its subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 generally accepted auditing standards. 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 at December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California February 20, 1996 12 14 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
December 31, -------------------------- ASSETS 1994 1995 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 14,833 $ 16,519 Accounts receivable -- net of allowance for doubtful accounts of $76 and $77 32,076 40,802 Inventories 28,324 35,521 Prepaid expenses and other current assets 983 358 Deferred income taxes 2,123 3,451 --------- --------- Total current assets 78,339 96,651 PROPERTY, PLANT AND EQUIPMENT: Land and buildings 26,224 27,553 Machinery and equipment 31,040 38,607 Leasehold improvements 6,175 6,635 Construction in progress 162 836 --------- --------- Total 63,601 73,631 Less accumulated depreciation and amortization 26,337 31,707 --------- --------- Property, plant and equipment -- net 37,264 41,924 SALES-TYPE AND OPERATING LEASES 8,005 18,128 DEFERRED INCOME TAXES 2,537 3,200 INVESTMENTS IN AFFILIATED COMPANIES 12,775 13,279 EXCESS OF COST OVER NET ASSETS ACQUIRED -- Net of amortization of $4,453 and $5,373 13,815 16,280 --------- --------- TOTAL ASSETS $ 152,735 $ 189,462 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 11,667 $ 16,969 Accrued liabilities 5,124 5,708 Income taxes payable 844 3,435 --------- --------- Total current liabilities 17,635 26,112 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common Stock - no par value, authorized 30,000,000 shares at December 31, 1994 and 1995; outstanding 12,952,880 shares and 13,524,051 shares 27,334 35,179 Retained earnings 113,041 131,136 Foreign currency translation adjustments (5,275) (2,965) --------- --------- Total shareholders' equity 135,100 163,350 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 152,735 $ 189,462 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 13 15 CONSOLIDATED STATEMENTS OF INCOME (In Thousands, except per Share Data)
Year Ended December 31, ----------------------- 1993 1994 1995 --------- --------- --------- SALES $ 106,791 $ 126,453 $ 159,649 --------- --------- --------- COSTS AND EXPENSES: Cost of sales 43,175 55,836 70,528 Selling 20,163 23,481 29,188 Research and development 12,768 13,404 16,135 General and administrative 12,632 13,303 14,454 Equity in income of affiliates (1,346) (1,592) (1,407) Investment income (547) (619) (1,828) --------- --------- --------- Total costs and expenses 86,845 103,813 127,070 --------- --------- --------- INCOME BEFORE INCOME TAXES 19,946 22,640 32,579 PROVISION FOR INCOME TAXES 5,780 5,940 8,410 --------- --------- --------- NET INCOME $ 14,166 $ 16,700 $ 24,169 ========= ========= ========= NET INCOME PER SHARE $ 1.04 $ 1.24 $ 1.75 WEIGHTED AVERAGE SHARES AND EQUIVALENTS OUTSTANDING 13,627 13,508 13,847
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands)
Common Stock Retained ------------------------------ Shares Amount Earnings ----------- ----------- ----------- BALANCE, JANUARY 1, 1993 13,127,295 $ 31,870 $ 92,645 Issuance of shares upon exercise of stock options 50,585 442 Repurchase and retirement of shares (93,900) (1,689) Cash dividends ($.40 per share) (5,265) Net income 14,166 ----------- ----------- ----------- BALANCE, DECEMBER 31, 1993 13,083,980 30,623 101,546 Issuance of shares upon exercise of stock options 59,700 439 Repurchase and retirement of shares (190,800) (3,728) Cash dividends ($.40 per share) (5,205) Net income 16,700 ----------- ----------- ----------- BALANCE, DECEMBER 31, 1994 12,952,880 27,334 113,041 Issuance of shares upon exercise of stock options 571,171 7,845 Cash dividends ($.46 per share) (6,074) Net income 24,169 ----------- ----------- ----------- BALANCE, DECEMBER 31, 1995 13,524,051 $ 35,179 $ 131,136 =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 15 17 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year Ended December 31, ---------------------------------------- 1993 1994 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,166 $ 16,700 $ 24,169 Adjustments to reconcile net income to net cash flows from operating activities (net of effect from 1995 purchase of Brazilian distributor): Depreciation and amortization 4,228 5,904 6,085 Equity in undistributed income of unconsolidated affiliates 839 (1,524) (504) Accounts receivable (3,620) (5,423) (6,343) Inventories (4,121) (655) (6,715) Prepaid expenses and other current assets (955) 228 625 Deferred income taxes (218) 441 (1,991) Accounts payable (315) 940 (5,545) Accrued liabilities 396 1,448 584 Income taxes payable (377) 404 2,564 Income tax benefit received upon exercise of certain stock options 5,604 -------- -------- -------- Net cash flows from operating activities 10,023 18,463 18,533 CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES: Marketable securities 11,000 Additions to property, plant and equipment (7,627) (4,528) (8,060) Sales-type and operating leases (3,718) (3,998) (6,440) Purchase of Brazilian distributor (1) -------- -------- -------- Net cash from (used for) investing activities (345) (8,526) (14,501) CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Proceeds from exercise of stock options 442 439 2,241 Cash dividends paid (5,265) (5,205) (6,074) Repurchase of common stock (1,689) (3,728) -------- -------- -------- Net cash from (used for) financing activities (6,512) (8,494) (3,833) EFFECT OF EXCHANGE RATE -------- -------- -------- CHANGES ON CASH (1,991) 506 1,487 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,175 1,949 1,686 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,709 12,884 14,833 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,884 $ 14,833 $ 16,519 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 6,217 $ 4,754 $ 3,098 ======== ======== ======== BUSINESSACQUISITION: Fair value of assets acquired $ 10,741 Liabilities assumed (10,740) Cash paid $ 1 ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Diagnostic Products Corporation 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. 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 approval 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 in 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. 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 should not be considered reliable indicators of future financial performance. CONCENTRATIONS OF CREDIT RISK 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. NET INCOME PER SHARE Net income per share has been computed using the weighted-average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effect of outstanding stock options. 17 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1994 and 1995 is $9,300,000 and $12,600,000 of short-term commercial paper. The carrying value of the cash and cash equivalents approximates fair value. 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. 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 arose as a result of 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 cost over net assets acquired to assess recoverability; impairments would be recognized in operating results if a permanent diminution in value were to occur. 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 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 forward dollar contracts to hedge firm commitments 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 these contracts are offset by gains or losses on the transactions being hedged. The foreign exchange contracts have varying maturities which generally do not exceed one year. At December 31, 1994 and 1995, the Company had approximately $10,000,000 and $15,000,000 of foreign exchange contracts outstanding, the carrying value of which does not differ significantly from their fair value. 18 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. INCOME TAXES Deferred income taxes represent the tax consequences on future years of differences between the income tax basis of assets and liabilities and their basis for financial reporting purposes. NOTE 2 - BUSINESS ACQUISTION As of September 1, 1995, the Company acquired a 56% equity interest in DPC Medlab Produtos Medico Hospitalares Ltda., the Company's Brazilian distributor. NOTE 3 - INVENTORIES Inventories by major categories are summarized as follows:
(Dollars in Thousands) December 31, ---------------------------- 1994 1995 ------- ------- Raw materials $ 9,259 $11,414 Work in process 11,233 14,567 Finished goods 7,832 9,540 ------- ------- $28,324 $35,521 ======= =======
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 three to five years. Sales-type and operating leases are summarized as follows:
(Dollars in Thousands) December 31, ---------------------------- 1994 1995 ------- ------- Sales-type leases $3,057 $ 5,472 Operating leases 7,919 25,397 Less accumulated amortization 2,971 12,741 ------- ------- Net 4,948 12,656 ------- ------- Total $8,005 $18,128 ======= =======
19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 countries. The countries and the Company's ownership interest are as follows: Portugal, 40%; Italy, 45%; and Sweden, 50%. The Company has a joint venture formed for the purpose of marketing and manufacturing the Company's immunodiagnostic test kits in Japan. The joint venture (Nippon DPC Corporation), owned equally by the Company and Dainippon Ink and Chemicals, Incorporated is being funded with capital contributed and debt guaranteed by Dainippon Ink and Chemicals, Incorporated and technology by the Company. The following represents condensed financial information for all of the Company's investments in non-consolidated affiliated companies, and the results of their operations.
(Dollars in Thousands) December 31, ------------------------------------------------ 1993 1994 1995 -------- -------- -------- Current assets $ 42,821 $ 41,595 $ 45,577 Property and other assets 24,097 26,653 33,377 -------- -------- -------- Total assets $ 66,918 $ 68,248 $ 78,954 ======== ======== ======== Current liabilities $ 38,126 $ 31,084 $ 37,019 Non-current liabilities 11,540 14,626 14,771 Shareholders' equity 17,252 22,538 27,164 -------- -------- -------- Total liabilities and shareholders' equity $ 66,918 $ 68,248 $ 78,954 ======== ======== ======== Sales $ 58,104 $ 58,471 $ 61,218 Net income 3,893 3,971 3,619 ======== ======== ========
The Company had sales to non-consolidated affiliates of $11,460,000 in 1993, $12,119,000 in 1994 and $18,504,000 in 1995, including sales to one affiliate (Italy) of $6,207,000 in 1993, $6,005,000 in 1994 and $10,034,000 in 1995. Included in the Company's accounts receivable are trade receivables from non-consolidated affiliates of $3,376,000 at December 31, 1994 and $6,016,000 at December 31, 1995. The Company received dividends in 1993 and 1994 of $1,916,000 and $872,000 from its Italian affiliate. The Company's cumulative equity in undistributed earnings of non-consolidated affiliated companies at December 31, 1995 is $11,628,000. Deferred taxes are not provided for undistributed earnings as these amounts are intended to be reinvested. NOTE 6 - PENSION AND PROFIT SHARING PLANS The Company has a 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 $1,341,000 in 1993, $1,469,000 in 1994 and $1,883,000 in 1995. The Company has a 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. There was no contribution in 1993. The contribution to the profit sharing plan was $479,000 in 1994 and $391,000 in 1995. 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES The provision for income taxes is summarized as follows:
(Dollars in Thousands) Year Ended December 31, ---------------------------------------------- 1993 1994 1995 ------- ------- ------- CURRENTLY PAYABLE: Federal $ 2,555 $ 3,194 $ 7,076 State 1,153 737 220 Foreign 2,290 1,568 3,105 Deferred federal and state income taxes (218) 441 (1,991) ------- ------- ------- Total provision for income taxes $ 5,780 $ 5,940 $ 8,410 ======= ======= =======
Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are as follows:
(Dollars in Thousands) December 31, --------------------------- 1994 1995 ------- ------- State income taxes $ 163 $ 19 Cirrus' net operating losses 3,211 2,501 Inventory 1,367 2,650 Depreciation 345 612 Other 631 869 Total 5,717 6,651 Valuation allowance (1,057) ------- ------- Total $ 4,660 $ 6,651 ======= =======
Included in the net deferred income taxes shown on the consolidated balance sheets for 1994 and 1995 are deferred tax assets of $4,723,000 and $6,832,000 and deferred tax liabilities of $63,000 and $181,000. At December 31, 1995, DPC Cirrushad net operating loss carryforwards for Federal and state income tax purposes of approximately $5,018,000 and $9,463,000 expiring at varying dates through 2001. Utilization of the Federal net operating losses are subject to annual limitations of approximately $2,000,000. The Federal and state income tax asset related to DPC Cirrus' net operating losses has been recorded in the accompanying consolidated financial statements. This reflects the Company's belief, on the basis of available evidence, that the DPC Cirrus net operating loss carry forwards will be realized. 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A 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, ---------------------------------------------- 1993 % 1994 % 1995 % ------------- ------------- ------------ Provision for income taxes at statutory rate $ 6,911 35 $ 7,924 35 $11,403 35 State income taxes, net of federal tax benefit 855 4 479 2 (1,440) (4) Foreign income subject to tax other than federal statutory rate 525 3 577 2 23 Non-taxable earnings of FSC (521) (3) (904) (4) (1,013) (3) Research and development tax credit (225) (1) (175) (1) (247) (1) Net foreign tax credit (1,625) (8) (1,768) (8) (111) Equity in income of affiliates (466) (2) (557) (2) (492) (2) Tax benefit from sale of French distributor Other 326 1 364 2 287 1 ------------- ------------- ------------ Provision for income taxes $ 5,780 29 $ 5,940 26 $ 8,410 26 ============= ============= ============
An income tax benefit during 1995 related to the exercise or early disposition of certain stock options reduced income taxes currently payable by $5,604,000 and was credited directly to shareholders' equity. NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES The Company has entered into a noncancelable operating lease for a portion of its Los Angeles manufacturing facility with a partnership comprised of two officers/shareholders of the Company and their four children, who are also shareholders and one of whom is an officer and a director. The agreement extends through December 31, 1997, with a five-year renewal option. Approximately $818,000 in 1993 and 1994 and $849,000 in 1995 was paid under the facility lease agreement. DPC Cirrus has entered into a noncancelable operating lease for its Randolph, New Jersey manufacturing facility. The agreement extends through November 30, 2000, with a five-year renewal option, at a current average annual rental of approximately $172,000. Future minimum lease commitments as of December 31, 1995 for both leases are as follows:
(Dollars in Thousands) 1996 1997 1998 1999 2000 Total ------- ------- ----- ----- ----- ------- $ 1,045 $ 1,051 $ 172 $ 172 $ 158 $ 2,598
Rental expense under operating leases approximated $1,379,000 in 1993, $1,340,000 in 1994 and $1,527,000 in 1995. The Company has a supply contract with a vendor for chemical compounds, which are key components in the IMMULITE system. For several years the vendor had been involved in multiple legal proceedings both domestically and internationally with another company, which had challenged the vendor's patent and other rights to these compounds and other technology. Pursuant to a settlement agreement, the Company will have the right for ten years to purchase the chemical compounds currently in use. As part of the agreement, the Company will guaranty the vendor's minimum payment obligations to the other company in the amount of $1,000,000 in each of 1995 and 1996 and $600,000 in each of the next eight years. There were no amounts disbursed in 1995 under the guaranty. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - 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). 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 in installments 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 (five years with respect to optionees who are 10% or more shareholders). The following table summarizes option activity for the plans:
Option prices Shares --------------- --------- OPTIONS OUTSTANDING, JANUARY 1, 1993 $ 3.16 - 42.625 1,146,202 Options granted 17.625 - 25.375 602,350 Options exercised 3.16 - 19.00 (48,585) Options canceled 15.375 - 42.625 (678,996) --------------- --------- OPTIONS OUTSTANDING, DECEMBER 31, 1993 3.16 - 39.125 1,020,971 Options granted 18.50 - 23.50 107,500 Options exercised 4.375 - 19.00 (59,700) Options canceled 7.625 - 28.50 (73,450) --------------- --------- OPTIONS OUTSTANDING, DECEMBER 31, 1994 3.16 - 39.125 995,321 Options granted 25.25 - 40.00 152,000 Options exercised 3.16 - 28.375 (158,491) Options canceled 16.25 - 28.375 (29,220) --------------- --------- OPTIONS OUTSTANDING, DECEMBER 31, 1995 $10.375 - 40.00 959,610 =============== =========
In November 1993, the Board of Directors approved an offer to all optionees to cancel certain options with exercise prices which ranged from $24.50 to $40.00 per share and to replace such options with options to purchase common stock with an exercise price of $20.00 per share, a price which was not less than the fair market value of the Company's common stock at the date of grant. Pursuant to this offer 626,600 shares of common stock were cancelled and replaced with options to purchase 463,350 shares of common stock. In November 1985, the Company granted to its Chief Executive Officer, a non-qualified, 10-year stock option for 500,000 shares at $7.50 per share (fair market value at date of grant). The option was exercised during 1995. During 1995, 103,320 shares of outstanding Common Stock were received by the Company as consideration for the exercise of options for 509,800 shares. At December 31, 1995 the Company had non-qualified options outstanding for 70,000 shares under separate agreements at exercise prices of $12.50 and $30.75 per share. Pursuant to the plans and the separate agreements, 1,144,327 shares of common stock are reserved for issuance upon the exercise of options and options for 385,562 shares were exercisable at December 31, 1995. 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - SEGMENT INFORMATION The Company manufactures and sells medical diagnostic kits and related instrumentation. The kits and instruments are sold to hospitals, medical centers, clinics, physicians, and other clinical laboratories. The Company's operating locations include the United States, Europe (United Kingdom, Germany, Spain, Netherlands, Belgium, Luxembourg), and Rest of World (Australia, China and Brazil from September 1, 1995). The Company's operations and identifiable assets by geographical area are as follows:
(Dollars in Thousands) December 31, 1993 -------------------------------------------------------------------------- Rest United States Europe of World Eliminations Consolidated ------------- --------- --------- ------------ ------------ Sales $ 54,676 $ 46,141 $ 5,974 -- $ 106,791 Transfer between geographical areas 15,375 1,040 (16,415) --------- --------- --------- --------- --------- Net sales $ 70,051 $ 47,181 $ 5,974 $ (16,415) $ 106,791 ========= ========= ========= ========= ========= Operating income (loss), before equity in income of affiliates $ 15,403 $ 3,459 $ (262) $ 18,600 ========= ========= ========= ========= ========= Identifiable assets $ 62,922 $ 59,052 $ 9,336 $ (5,412) $ 125,898 ========= ========= ========= ========= Investment in affiliates 11,251 --------- $ 137,149 =========
(Dollars in Thousands) December 31, 1994 -------------------------------------------------------------------------- Rest United States Europe of World Eliminations Consolidated ------------- --------- --------- ------------ ------------ Sales $ 67,716 $ 52,933 $ 5,804 $ 126,453 Transfer between geographical areas 18,620 2,040 (20,660) --------- --------- --------- --------- --------- Net sales $ 86,336 54,973 $ 5,804 $ (20,660) $ 126,453 ========= ========= ========= ========= ========= Operating income, before equity in income of affiliates $ 19,837 $ 691 $ 520 $ 21,048 ========= ========= ========= ========= ========= Identifiable assets $ 73,604 $ 65,370 $ 9,889 $ (8,903) $ 139,960 ========= ========= ========= ========= Investment in affiliates 12,775 --------- $ 152,735 =========
(Dollars in Thousands) December 31, 1995 -------------------------------------------------------------------------- Rest United States Europe of World Eliminations Consolidated ------------- --------- --------- ------------ ------------ Sales $ 78,293 $ 70,081 $ 11,275 -- $ 159,649 Transfer between geographical areas 25,165 3,930 -- (29,095) -- --------- --------- --------- --------- --------- Net sales $ 103,458 $ 74,011 $ 11,275 $ (29,095) $ 159,649 ========= ========= ========= ========= ========= Operating income, before equity in income of affiliates $ 24,041 $ 6,117 $ 1,014 -- $ 31,172 ========= ========= ========= ========= ========= Identifiable assets $ 93,423 $ 75,750 $ 22,246 $ (15,236) $ 176,183 ========= ========= ========= ========= ========= Investment in affiliates 13,279 --------- $ 189,462 =========
24 26 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 -------- -------- ------- ------- 1993 $ 4,797 $ 5,286 $ 6,238 $16,321 1994 7,964 8,968 8,128 25,060 1995 7,381 6,907 13,047 27,335
25 27 SUPPLEMENTARY FINANCIAL DATA Unaudited quarterly financial information for the years December 31, 1994 and 1995 is summarized as follows: (Dollars in Thousands, Except per Share Data)
Quarter Ended ------------------------------------------------------------------------ March 31 June 30 September 30 December 31 1995 1995 1995 1995 Year -------- -------- ------------ ----------- -------- Sales $ 39,201 $ 38,534 $ 40,530 $ 41,384 $159,649 Gross profit 21,939 21,563 21,464 24,155 89,121 Income taxes 2,150 2,060 2,050 2,150 8,410 Net income 5,805 6,105 5,891 6,368 24,169 Net income per share .42 .44 .43 .46 1.75 Average shares outstanding 13,683 13,986 13,846 13,874 13,847
Quarter Ended ----------------------------------------------------------------------- March 31 June 30 September 30 December 31 1994 1994 1994 1994 Year -------- -------- ------------ ----------- -------- Sales $ 27,773 $ 30,132 $ 30,643 $ 37,905 $126,453 Gross profit 15,956 16,866 17,368 20,427 70,617 Income taxes 1,220 1,400 1,430 1,890 5,940 Net income 3,468 3,900 4,318 5,014 16,700 Net income per share .26 .29 .32 .37 1.24 Average shares outstanding 13,529 13,403 13,592 13,527 13,508
26 28 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 By: /s/ Sigi Ziering March 25, 1996 ----------------------------------------------- Sigi Ziering, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - ---------------------------- --------------------- -------------- /s/ Sigi Ziering Chairman of the Board March 25, 1996 - ---------------------------- Sigi Ziering and Chief Executive Officer (Principal Executive Officer) /s/ Michael Ziering Director March 25, 1996 - ---------------------------- Michael Ziering /s/ Marilyn Ziering Director March 25, 1996 - ---------------------------- Marilyn Ziering /s/ Sidney A. Aroesty Director March 25, 1996 - ---------------------------- Sidney A. Aroesty /s/ Maxwell H. Salter Director March 25, 1996 - ---------------------------- Maxwell H. Salter /s/ James D. Watson Director March 25, 1996 - ---------------------------- James D. Watson /s/ Frederick Frank Director March 25, 1996 - ---------------------------- Frederick Frank /s/ Julian R. Bockserman Vice President -- March 25, 1996 - ---------------------------- Julian R. Bockserman Finance (Principal Financial and Accounting Officer)
27 29 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 (5) 10.5 Standard Industrial Lease with 5700 West 96th Street, general partnership, dated February 18, 1991 (5) *10.6 Consulting Agreement with Sidney Aroesty dated December 14, 1994 (7) *10.7 Description of Consulting Arrangement with Dr. James D. Watson (7) 10.8 Description of Consulting Arrangement with Frederick Frank 11 Computation of Net Income per share 21 Subsidiaries of Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule (For EDGAR filing only) - --------------------------------- * 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. (2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. (3) Incorporated by reference to Registrant's Registration Statement on Form S1 (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. (5) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to Registrant's Quarterly Report on From 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 28 EX-10.8 2 CONSULTING ARRAGEMENT WITH FREDERICK FRANK 1 DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES EXHIBIT 10.8 DESCRIPTION OF CONSULTING ARRANGEMENT WITH FREDERICK FRANK Frederick Frank, a director of the Company, provides consulting services with respect to technology, product development and corporate matters. He is paid $1,000 per month for such services. There is no written agreement and this arrangement may be terminated at any time by either party. EXHIBIT 10.8 EX-11 3 COMPUTATION OF NET INCOME PER SHARE 1 DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE
Year Ended December 31, ---------------------------------------------------------- 1993 1994 1995 ---- ---- ---- Primary earnings per share: Average common stock outstanding 13,149,609 13,002,218 13,208,942 Average dilutive common stock options outstanding 1,145,645 1,176,009 1,274,127 Shares assumed to be repurchased under treasury stock method at an average market price of: 22.03 (667,926) 20.91 (670,258) 35.93 (635,816) ------------ ------------ ----------- TOTAL 13,627,328 13,507,969 13,847,253 ============ ============ =========== NET INCOME $ 14,166,000 $ 16,700,000 $24,169,000 ============ ============ =========== PER COMMON SHARE AMOUNT $ 1.04 $ 1.24 $1.75 ============ ============ ===========
EXHIBIT 11 EX-21 4 SUBSIDIARIES OF REGISTRANT 1 DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES
Name Place of Incorporation % Ownership - ------------------------------ --------------------------- --------------- DPC Cirrus Inc. USA/Delaware 100% EURO/DPC Limited United Kingdom 100% Diagnostic Products International, Inc. Barbados 100% DPCHolding GmbH Germany 100% DPC Biermann GmbH Germany 100% Genoclin Diagnostica GmbH Germany 80% Diagnostic Products Corporation Netherlands 100% Benelux B.V. Diagnostic Products Corporation Netherlands 100% Nederland B.V. Diagnostic Products Corporation Belgium 100% Belgium b.v.b.A./s.p.r.l. Bio-Mediq DPC Pty. Ltd. Australia 100% DPC Dipesa, S.A. Spain 100% Tianjin De Pu (DPC) China 90% Biotechnological and Medical Products, Inc. DPC Medlab Produtos Medico Brazil 56% Hospitalares Ltda. Nippon DPC Corporation USA/California 50% DPC Skafte AB Sweden 50% Medical Systems, S.p.A. Italy 45% Amerlab, Lda. Portugal 40%
EXHIBIT 21 EX-23 5 INDEPENDENT AUDITORS' CONSENT 1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 2-81631, 33-17575 and 33-43043 on Form S-8 of our report dated February 20, 1996, included in this Annual Report on Form 10-K of Diagnostic Products Corporation for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Los Angeles, California March 25, 1996 EXHIBIT 23 EX-27 6 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 16,519 0 40,802 77 35,521 96,651 73,631 31,707 189,462 26,112 0 0 0 35,179 128,171 189,462 159,649 159,649 70,528 70,528 56,542 0 0 32,579 8,410 24,169 0 0 0 24,169 1.75 0
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