-----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, LpaK0vcx68rzrn+C7540fG/gbOvf70nc9qasJk6MVPV7aZBE3S2OU2jAEMn43iDJ muHEvOyNXtptOhKnjTudpg== 0000950148-99-000526.txt : 19990325 0000950148-99-000526.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950148-99-000526 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 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: SEC FILE NUMBER: 001-09957 FILM NUMBER: 99571587 BUSINESS ADDRESS: STREET 1: 5700 W 96TH ST CITY: LOS ANGELES STATE: CA ZIP: 90045 BUSINESS PHONE: 2137760180 10-K405 1 FORM 10-K 405 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, 1998 [ ] 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: (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. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $279,000,000 as of February 26, 1999. The number of shares of Common Stock, no par value, outstanding as of February 26, 1999, was 13,676,129. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the 1999 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 which utilize state-of-the-art technology derived from immunology and molecular biology, and automated laboratory instruments which 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 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 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" which 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, which is used in the DPC IMMULITE system; radioimmunoassay (RIA), which uses double antibody, coated tube and IRMA formats; enzyme immunoassay (EIA), used in microplate and tube formats featuring a proprietary liquid technology for allergy; immunohistochemistry; immunofluorescence; and latex agglutination. Prior to 1992, DPC's core business was based on RIA 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 early 1980's, the RIA market increased significantly, and the Company developed one of the most extensive lines of RIA kits available. In the 1980's, the market began to shift to non-isotopic systems based mainly on fluorescence (FIA) and enzyme (EIA) labels. Non-isotopic technologies have the advantages of longer shelf life, no safety issues associated with the use and disposal of radioactive materials, and ease of automation. Currently, non-isotopic systems account for approximately 90% of the market. DPC's major entry into this market was the IMMULITE system which uses assays based on chemiluminescence technology. As a result of the growth in sales of IMMULITE systems, sales of RIA products as a percentage of total sales have been steadily declining for several years, to 22% of sales in 1998. IMMULITE assays and instruments represented 46%, 54% and 63% of sales in 1996, 1997 and 1998. 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 which 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, 1998, DPC had 85 IMMULITE assays available in the international markets, of which 53 had been cleared for marketing by the FDA in the U.S. In addition, 32 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 menu. 1 3 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 and 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 system has the advantage of having the most extensive and unique thyroid panel consisting of 12 tests. FERTILITY/INFERTILITY - 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 challenging assays. To maintain its traditional advantage in 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 3rd Generation PSA assay, which has an order-of-magnitude greater sensitivity than any other PSA assay currently available. In addition to PSA, DPC offers a total of 11 tumor markers on the IMMULITE, a larger menu than any competitor. 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 12 such assays on the IMMULITE system. ALLERGY - Allergy testing comprises a worldwide market of approximately $250 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 requests from European customers 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, 1998. These include such unique assays as Latex and ECP assay, the latter an important tool for the diagnosis and management of asthma. In 1998, DPC decided to focus on continuing to convert key allergen panels to IMMULITE format and to discontinue work on a separate allergy system. Modifications to the IMMULITE 2000 will allow, for the first time, fully automated testing in walk-away mode. CYTOKINES - 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. AUTOMATED LABORATORY INSTRUMENTATION In addition to an extensive line of diagnostic test kits, DPC designs and manufactures automated laboratory instruments which perform the tests and which provide fast, accurate results, while reducing labor and reagent costs. The IMMULITE system is an automated, random-access, computer-based instrument which performs immunoassays utilizing chemiluminescent technology. The IMMULITE system is totally automated with 2 4 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 which 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 which offers the medium to high-volume laboratory increased efficiency in streamlining its testing workload. The IMMULITE 2000 can run for a full 8-hour shift without the necessity of replenishing the on-board supplies. This increased throughput will allow 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 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 which 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 will complement the existing IMMULITE and extend its life cycle. In response to customers' needs, DPC is developing the IMMUGOLD, a smaller instrument which can provide test results within five minutes for point-of-care applications, such as at the hospital bed site, in intensive care units or in emergency rooms, where rapid results are critical. The IMMUGOLD will utilize innovative, patented proprietary technology which will offer a number of advantages over current immunodiagnostic technologies. The assays used in this system are homogeneous, eliminating the need for a wash step, which is common to other immunoassay systems. The biosensor and all necessary reagents are included in a single, self-contained cartridge. The hands-off nature of the technology makes it possible to design an inexpensive and simple to operate analyzer requiring minimal training. The Company expects to begin limited customer testing of this new system in late 1999. In addition to the IMMULITE family of products, DPC also manufactures and sells the following automated instruments: AlaSTAT Microplate Allergy System - This system consists of a variety of instruments which can be configured to provide the customer with varying degrees of automation and test capacity. A totally automated walk-away system consists of the MARK 5 robotic pipettor with BCR barcode reader, a computer with proprietary WinMAX software and a MAX automated microplate processor. This system can process up to 768 wells in microplate format in an 8-hour shift. The WinMAX software performs data reduction, manages patient data and interfaces with the customer's information system. The AlaSTAT system also offers a manual, low-cost allergy testing system for small volume testing. MARK 5 Robotic Pipettor - The MARK 5 is an open system which accommodates tubes or plates in a limitless range of pipetting applications, such as serial dilutions and multiple test combinations. The instrument uses four probes to process up to 600 samples per hour. 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. 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 and software. The Company also conducts research and development activities at facilities located in the United Kingdom, Germany, Japan (a 50%-owned joint venture), and Italy (through its 45%-owned subsidiary). During the years ended December 31, 1996, 1997 and 1998, the Company spent $17,758,000, $19,710,000 and $22,342,000 on research and development, representing approximately 10%, 11% and 11% of sales. 3 5 MANUFACTURING AND SERVICE The Company's principal test kit manufacturing facility is located in Los Angeles, California. Approximately 25% 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 DPC affiliates in Germany and China. 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 systems are 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. The EURO/DPC Instrumentation Division in the United Kingdom manufactures diagnostic instrumentation and develops associated software used in the allergy product lines. These instruments include the TipTech; 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 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. DPC's Los Angeles and New Jersey facilities are ISO 9001 certified. 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. 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 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 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. The Company's products are sold on a world-wide basis through distributors in over 100 foreign countries. These distributors, including consolidated distributors, also sell other manufacturer's products which 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 total sales in the last three fiscal years. Europe accounted for approximately 51%, 48%and 46% of total sales in 1996, 1997 and 1998 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 which 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 4 6 foreign distributors' 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. PROPRIETARY AND OTHER RIGHTS Substantially all of the Company's products are based on proprietary technologies and know-how. In 1998 the Company received notices that the U.S. Patent office intends to grant patents on the biosensor technology used in the IMMUGOLD instrument and on certain features of the IMMULITE 2000. The Company holds various U.S. and foreign patents including patents on the washing process used in the IMMULITE system which expire in 2009 and for 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 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 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 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 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 which 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. 5 7 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. 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 believes that competition with respect 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, Bayer and Roche Diagnostics. All 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, 1998, the Company (including its consolidated subsidiaries) had 1601 employees, including 668 in manufacturing, 288 in research and development, 381 in marketing and sales and 264 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. 6 8 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, 1998:
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 48,000 sq. ft. Owned Adjacent to Corporate offices, manufacturing and warehousing Gorman, California 80 acres Owned Raw material processing Randolph, New Jersey 38,500 sq. ft. Leased(2) Research, manufacturing and distribution Glyn Rhonwy, Wales, UK 110,000 sq. ft. Owned Research, manufacturing and distribution Bad Nauheim, Germany 56,500 sq. ft. Owned Research and distribution Humbeek-Grimbergen, Belgium 5,000 sq. ft. Owned Distribution Apeldoorn, Netherlands 10,500 sq. ft. Owned Distribution Breda, Netherlands 7,000 sq. ft. Leased Distribution Madrid, Spain 10,161 sq. ft. Leased Distribution Melbourne, Australia 10,400 sq. ft. Owned Distribution
- ---------- (1) Lease payments of $966,000 in 1998. Lease expires at December 31, 2002. See "Item 13. Certain Relationships and Related Transactions". (2) Annual lease payments of $244,000. Lease expires in 2002. In late 1998, the Company acquired land in The Netherlands and commenced construction of a 28,600 square foot building to replace the existing properties. Occupancy is scheduled for April 1, 1999. In 1999 the Company intends to purchase land in New Jersey on which it will build a new 80,000 square foot manufacturing facility for the IMMULITE instrumentation. The construction is expected to be completed by the time the current New Jersey lease expires. 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. 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 1998 and 1997.
1998 -------------------------------------- High Low Dividend --------- ------- -------- First Quarter $30 13/16 $26 1/2 $.12 Second Quarter 32 7/8 26 5/8 .12 Third Quarter 29 3/8 24 3/8 .12 Fourth Quarter 31 1/8 20 3/8 .12 1997 -------------------------------------- High Low Dividend --------- ------- -------- First Quarter $33 1/2 $25 1/2 $.12 Second Quarter 31 5/8 27 7/8 .12 Third Quarter 32 15/16 27 1/4 .12 Fourth Quarter 31 1/4 27 1/8 .12
As of February 26, 1999, the Company had 428 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, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Sales $126,453 $159,649 $176,832 $186,264 $196,643 Net income 16,700 24,169 22,947 18,248 20,213 Earnings per share: Basic 1.28 1.83 1.69 1.34 1.47 Diluted 1.20 1.75 1.65 1.32 1.46 Weighted average shares outstanding: Basic 13,002 13,209 13,554 13,641 13,746 Diluted 13,902 13,847 13,926 13,876 13,881 Dividends per share $ .40 $ .46 $ .48 $ .48 $ .48
BALANCE SHEET DATA
December 31, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Working capital $ 60,704 $ 70,539 $ 81,563 $ 83,031 $ 81,001 Total assets 152,735 189,462 207,002 222,180 246,224 Shareholders' equity 135,100 163,350 182,287 186,295 200,172
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, Year 2000 issues and political and economic instability in certain foreign markets. RESULTS OF OPERATIONS The Company's sales increased 6% in 1998 to $196.6 million compared to sales of $186.3 million in 1997, a 5% increase over 1996 sales. 1998 sales of all IMMULITE products (instruments and reagents) were $123.9 million, a 24% increase over 1997. Sales of IMMULITE products represented 63% of 1998 sales, 54% of 1997 sales and 46% of 1996 sales. 1998 sales of the Company's original IMMULITE instrument, the IMMULITE One, and related reagents were $109.7 million, a 12% increase over 1997. Sales of IMMULITE One reagents were up 20% to $87.7 million, while instrument sales were down 16% to $18.3 million, reflecting the stage of the life cycle of the first generation IMMULITE One instrument which was introduced in 1993. The next generation IMMULITE 2000 instrument, which became commercially available in March 1998, had sales of $14.2 million in 1998. Sales of other DPC products, including allergy reagents, increased 23% to $18.7 million in 1998, compared to $15.2 million in 1997. The Company believes that sales growth in both 1997 and 1998 was restrained due to delays in the release of the IMMULITE 2000 and a longer than originally expected sales process for this instrument. The IMMULITE 2000 has a longer sales process than the IMMULITE One (four to six months compared to an average of 60 days) due to the higher sales price and because prospective customers were waiting to compare the IMMULITE 2000 with competitive systems which had not yet been released. The Company has also experienced a longer time delay between instrument placement and the ramp-up of reagent sales. As of December 31, 1998, 1997 and 1996, the Company had shipped on a cumulative basis approximately 4,000, 3,200 and 2,400 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 13% in 1998, and represented 22% of 1998 sales compared to 26% of 1997 sales and 33% of 1996 sales. This trend is expected to continue. The Company also experienced a significant decrease in sales of non-DPC products through its consolidated international affiliates from $21.7 million in 1997 to $11.4 million in 1998, due to the discontinuation of non-DPC OEM products previously sold by those affiliates. Sales in Brazil accounted for approximately 11% of total sales in 1998, which was an increase of 22% over 1997. As a result of the devaluation of the Brazilian currency in January 1999, the Company's products are currently about 50% more expensive in Brazil than they were prior to the devaluation. As a result, the Company expects the devaluation to slow down the Company's rapid sales expansion in that country and to limit the earnings contribution from Brazil until the economy adjusts to the new currency exchange ratios. Sales to Asia, which represented less than 10% of total sales in 1998, declined approximately 7% compared to 1997, due to the economic instability of that region. Foreign sales as a percentage of total sales were approximately 80% in each of 1998, 1997 and 1996. Europe, the Company's principal foreign market, represented 46%, 48% and 51% of sales in 1998, 1997 9 11 and 1996, respectively. 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 less than 1% negative impact on 1998 sales, compared to a 5% negative impact on 1997 sales and 1% negative impact on 1996 sales. Due to intense competition, the Company's foreign distributors are unable to increase prices to offset the negative effect when the U.S. dollar is strong. Cost of sales have remained stable at approximately 44% of sales in 1998 and 1997, and 43% of sales in 1996. Total operating expenses (selling, R&D, and G&A) as a percentage of sales decreased slightly from 43% in 1997 to 42% in 1998, reflecting the end of pre-launch expenses for the IMMULITE 2000 and modest operating leverage. Such expenses represented 40% of sales in 1996. The increase in 1997 over 1996 related to development and marketing of the IMMULITE line, currency exchange transaction losses in 1997, and start-up costs of the French distributor. Included in general and administrative expenses is the amortization of the excess of cost over net assets acquired and minority interest. Equity in income of affiliates represents the Company's share of earnings of non-consolidated affiliates, principally the 45%-owned Italian distributor. This amount decreased 7% in 1998 and 15% in 1997 primarily due to reduced earnings by the Italian distributor. Net interest income represents the excess of interest income and interest on equipment contracts over interest expense. Net interest income declined 52% in 1998 and 54% in 1997 due to increased borrowings. The Company's effective tax rate (28% in 1998; 29% in 1997 and 28% in 1996) includes Federal, state and foreign taxes. Net income for 1998 (10% of sales) increased 11% over 1997 (10% of sales) due to lower operating expenses as a percentage of sales and less of a negative impact from foreign currency transaction and translation adjustments. Net income for 1997 decreased 20% from 1996 net income (13% of sales) due to the effects of the strong U.S. dollar, costs and expenses related to the launch of the IMMULITE 2000 and start-up costs and operating losses associated with the French distributor. 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 flow from operating activities was $33.2 million in 1998, $28.7 million in 1997 and $18.7 million in 1996. Additions to property, plant and equipment in 1998 were $11.2 million compared to $10.5 million in 1997 and $8 million in 1996. The increase in 1997 was due to the expansion of the German affiliate. Cash used for the placement of IMMULITE systems under sales-type and operating leases (for periods of generally three to five years) increased 44% from $11.6 million in 1997 to $16.7 million in 1998, reflecting increased placements of IMMULITE instruments. In late 1998, the Company acquired land in the The Netherlands and commenced construction of a 28,600 square foot building to replace the existing properties. The total cost of the land and building is estimated to be $2.4 million. Occupancy is scheduled for April 1, 1999. The Company expects to purchase land in New Jersey in 1999 at a cost of approximately $2.8 million. The Company plans to construct an 80,000 square foot manufacturing facility on this property over the next several years at a cost of approximately $5 million. The Company has no other material commitments for capital expenditures in 1999. The Company has a $20 million unsecured line of credit under which there were no borrowings outstanding at December 31, 1998, 1997 and 1996. Standby letters of credit under the line of credit totaled $3,125,000 at December 31, 1997 and $2,045,000 at December 31, 1998. The Company had notes payable (consisting of bank borrowings by the Company's foreign consolidated subsidiaries payable in the local currency which are guaranteed by the U.S. parent company) of $21.2 million at December 31, 1998 compared to $15.5 million at December 31, 1997 and $4 million at December 31, 1996. The terms of the loans are described in Note 6 of the Notes to Consolidated Financial Statements. The Company's foreign operations, particularly, at this time, its operations in Brazil, are subject to risks, such as currency devaluations, associated with political and economic instability. 10 12 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 1 million shares of its common stock from time to time in open market transactions. At December 31, 1998 the Company had repurchased 208,288 shares at a cost of $4,304,000. The Company utilized existing cash to finance the purchases. 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 the local currency. During the transition period, conversion rates will not be computed directly from one local currency to another. Instead, local currencies will be converted first to a euro denomination and then to the second local currency. The Company is in the early stages of assessing the potential impact of the euro conversion on its business and operations. The Company has created a price list of its products in each participating country based on the euro to facilitate purchases in euro or local currency. The Company is also reviewing its information and business systems, and those of its European affiliates, to determine the modifications that will be necessary to process orders in the euro currency. Due to the existence of many unknown variables at this early stage, it is not at this time possible for the Company to predict the precise implications of the euro conversion on its operations. YEAR 2000 The Company has a program to address Year 2000 readiness of its information and business systems. This program is more than half-way completed. The Company has tested all critical systems and has performed routine testing of work stations. Work stations that require corrective software have been identified and the Company's goal, subject to timely software manufacturer support, is to complete the remediation efforts by July 1999. The costs incurred to date and expected to be incurred in the future related to the evaluation and remediation efforts are not material. Independent of the Year 2000 issue, over the last 16 months the Company has been engaged in an ongoing program to upgrade its information systems. The Company has instituted a comprehensive vendor/supplier compliance verification program to assure that the Company will have an uninterrupted supply of goods, services and materials. The Company has requested compliance verification from all vendors/suppliers and will require compliance verification from those deemed critical or significant to its operations. The Company presently believes that, with modifications to existing software, the Year 2000 issue will not pose significant operational problems for the Company or its affiliates. However, if such modifications are not completed timely by the Company or any of its affiliates, or by significant third parties with whom the Company does business, such as communications and power providers, the Year 2000 issue could have a material impact on the operations of the Company. The Company maintains business continuity plans in all major sites to deal with potential business interruptions that could occur as a result of power or communications failures. The Company also has a program to determine whether its instrumentation products are Year 2000 compliant. The Company's website contains a regularly updated product compliance status page which customers can access to obtain information regarding the compliance status of their DPC products. The Company is also providing customer support and customer satisfaction services to all of its customers regarding Year 2000 issues. The IMMULITE 2000 instrument, which the Company began shipping in March 1998, is Year 2000 compliant. The Company has determined that the IMMULITE One instrument is not Year 2000 compliant and has so informed the FDA. The software used in the IMMULITE One has a two-digit year field which must be changed to a four-digit field. As part of its routine, on-going software development, the Company is developing software for the IMMULITE One that will be Year 2000 compliant. The Company's goal is to be able to offer to its customers software and hardware upgrades to make all its products compliant by June 30, 1999. A relatively few older products are not compliant and will not be upgraded due to obsolescence. The costs incurred to date and expected to be incurred to upgrade products are not material. 11 13 While the Company currently expects that it will be able to bring its own systems and products into Year 2000 compliance on a timely basis, if the Company encounters unforeseen problems or delays it could be subject to legal claims (with or without merit), increased warranty costs, or customer dissatisfaction which could result in a material adverse effect on the Company's business, financial condition and results of operations. ITEM 7A. 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, 1998, the Company had $12,500,000 invested in such securities with yielding an average annual return of 5.23%. The average maturity of these investments is less than one month. Additionally, the Company has debt obligations at its foreign subsidiaries that have 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, 1998 (Dollars in Thousands)
Expected Year of Maturity Fair Value ------------------------------------------------------------------------------- December 31, 1999 2000 2001 2002 2003 Thereafter Total 1998 ------ ------ ------ ------ ------ ---------- ------- ------------ Germany - Mark: Variable rate notes payable $2,644 $1,447 $1,397 $1,347 $1,347 $4,145 $12,327 $12,327 Average interest rate 5.0% 5.0% 5.0% 4.9% 4.9% 4.9% France - Franc: Fixed rate notes payable 1,777 963 209 170 113 3,232 3,400 Average interest rate 5.0% 5.0% 7.0% 12.0% 12.0% Netherlands - Guilder: Fixed rate notes payable 45 90 90 90 90 1,576 1,981 1,990 Average interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Spain - Peseta: Fixed rate notes payable 920 189 199 209 219 329 2,065 2,130 Average interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
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 mar- 12 14 ket 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 pound sterling. The distributors in turn have foreign currency risk related to their product purchases. Many of the 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, 1998 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 fair value for its currency contracts outstanding. Foreign Currency Exchange Contracts Outstanding December 31, 1998
(000's) (000's) U.S. Dollar U.S. Dollar Weighted-Average Fair Value at Weighted- Amount Buy Forward Contract December 31, Average Local Currency (Sell) Rate per U.S. Dollar 1998 Maturity Date -------------- ----------- -------------------- ------------- ------------- Contracts for Purchase of U.S. Dollars: Deutsche Mark $12,000 1.62 DEM $11,730 July 29, 1999 Dutch Guilder 5,400 1.86 NLG 5,325 June 30, 1999 Spanish Peseta 1,500 136.6 ESP 1,452 June 30, 1999 French Franc 500 5.49 FRF 493 February 11, 1999
(000's) (000's) U.S. Dollar U.K. Pound Weighted-Average Fair Value at Weighted- Amount Buy Forward Contract December 31, Average Local Currency (Sell) Rate per U.K. Pound 1998 Maturity Date -------------- ----------- -------------------- ------------- ------------- Contracts for Purchase of U.K. Pounds: French Franc L. 349 9.22 FRF 574 May 22, 1999
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" and "Executive Officers" of the Company's Proxy Statement for the 1999 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 Translactions" of the Company's Proxy Statement for the 1999 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 1999 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 1999 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, 1997, and 1998. Consolidated Statements of Income for the three years ended December 31, 1998. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998. Consolidated Statements of Cash Flows for the three years ended December 31, 1998. 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. 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, 1997 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California February 18, 1999 15 17 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
DECEMBER 31, --------------------------- 1997 1998 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,372 $ 18,650 Accounts receivable--net of allowance for doubtful accounts of $131 and $136 45,798 50,440 Inventories 49,038 54,078 Prepaid expenses and other current assets 405 580 Deferred income taxes 3,303 3,305 ---------- ---------- Total current assets 118,916 127,053 PROPERTY, PLANT AND EQUIPMENT: Land and buildings 30,854 35,878 Machinery and equipment 50,005 60,196 Leasehold improvements 7,075 7,135 Construction in progress 736 351 ---------- ---------- Total 88,670 103,560 Less accumulated depreciation and amortization 41,576 49,348 ---------- ---------- Property, plant and equipment -- net 47,094 54,212 SALES-TYPE AND OPERATING LEASES 26,875 33,372 DEFERRED INCOME TAXES 1,442 2,005 INVESTMENTS IN AFFILIATED COMPANIES 13,905 15,509 EXCESS OF COST OVER NET ASSETS ACQUIRED -- Net of amortization of $7,368 and $8,478 13,948 14,073 ---------- ---------- TOTAL ASSETS $ 222,180 $ 246,224 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 15,547 $ 21,178 Accounts payable 14,562 15,306 Accrued liabilities 5,986 6,218 Income taxes payable (210) 3,350 ---------- ---------- Total current liabilities 35,885 46,052 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common Stock-no par value, authorized 30,000,000 shares at December 31, 1997 and 1998; outstanding 13,717,072 shares and 13,661,594 shares 38,527 37,531 Retained earnings 159,278 172,900 Accumulated other comprehensive income (11,510) (10,259) ---------- ---------- Total shareholders' equity 186,295 200,172 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 222,180 $ 246,224 ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 18 CONSOLIDATED STATEMENTS OF INCOME (In Thousands, except per Share Data)
Year Ended December 31, ----------------------------------------- 1996 1997 1998 --------- --------- --------- SALES $ 176,832 $ 186,264 $ 196,643 --------- --------- --------- COSTS AND EXPENSES: Cost of sales 76,698 83,078 87,068 Selling 35,135 37,520 37,757 Research and development 17,758 19,710 22,342 General and administrative 18,605 22,258 22,856 Equity in income of affiliates (1,605) (1,363) (1,262) Interest income-net (1,486) (687) (331) --------- --------- --------- Total costs and expenses 145,105 160,516 168,430 --------- --------- --------- INCOME BEFORE INCOME TAXES 31,727 25,748 28,213 PROVISION FOR INCOME TAXES 8,780 7,500 8,000 --------- --------- --------- NET INCOME $ 22,947 $ 18,248 $ 20,213 ========= ========= ========= EARNINGS PER SHARE: BASIC $ 1.69 $ 1.34 $ 1.47 DILUTED 1.65 1.32 1.46 WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 13,554 13,641 13,746 DILUTED 13,926 13,876 13,881
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 Income Income ---------- ------- -------- -------------------- -------------- Balance, January 1, 1996 13,524,051 $35,179 $131,136 $(2,965) Comprehensive income: Net income 22,947 $22,947 Other comprehensive income Foreign currency translation adjustment 1,089 1,089 ------- Total comprehensive income $24,036 ======= Issuance of shares upon exercise of stock options 73,073 1,405 Cash dividends ($.48 per share) (6,504) ---------- ------ -------- -------- BALANCE, DECEMBER 31, 1996 13,597,124 36,584 147,579 (1,876) Comprehensive income: Net income 18,248 $18,248 Other comprehensive income Foreign currency translation adjustment (9,634) (9,634) ------- Total comprehensive income $ 8,614 ======= Issuance of shares upon exercise of stock options 119,948 1,943 Cash dividends ($.48 per share) (6,549) ---------- ------ -------- -------- BALANCE, DECEMBER 31, 1997 13,717,072 38,527 159,278 (11,510) Comprehensive income: Net income 20,213 $20,213 Other comprehensive income 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) ========== ======= ======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 20 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Year Ended December 31, -------------------------------------- 1996 1997 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,947 $ 18,248 $ 20,213 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 14,440 15,270 19,364 Equity in undistributed income of unconsolidated affiliates (1,906) 1,761 (1,604) Deferred income taxes 216 1,690 (565) Accounts receivable (5,373) (2,543) (3,426) Inventories (6,956) (7,475) (4,165) Prepaid expenses and other current assets (17) (30) (175) Accounts payable (3,490) 3,375 (264) Accrued liabilities 349 (71) 232 Income taxes payable (1,767) (1,725) 3,288 Income tax benefit received upon exercise of certain stock options 294 150 300 -------- -------- -------- Net cash flows from operating activities 18,737 28,650 33,198 CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES: Additions to property, plant and equipment (8,010) (10,542) (11,174) Sales-type and operating leases (11,923) (11,572) (16,687) Investment in affiliated companies (481) (46) (2,612) -------- -------- -------- Net cash from (used for) investing activities (20,414) (22,160) (30,473) CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Borrowing 4,086 9,021 3,685 Repurchase of common stock (4,304) Proceeds from exercise of stock options 1,111 1,793 3,008 Cash dividends paid (6,504) (6,549) (6,591) -------- -------- -------- Net cash from (used for) financing activities (1,307) 4,265 (4,202) EFFECT OF EXCHANGE RATE CHANGES ON CASH 246 (4,164) (245) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,738) 6,591 (1,722) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,519 13,781 20,372 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,781 $ 20,372 $ 18,650 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 9,863 $ 7,202 $ 6,035 Cash paid during the year for interest $ 225 $ 797 $ 1,824 ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 21 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 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 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 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, 1997 and 1998 is $14,500,000 and $12,500,000 of short-term commercial paper. INVENTORIES Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 is recognized when the future 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 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 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 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, 1997 and 1998, the Company had approximately $8,950,000 and $19,900,000 of foreign exchange contracts outstanding, 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. 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 tax consequences on future years of differences between the income tax basis of assets and liabilities and their basis for financial reporting purposes. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the "Board") issued Statement of Financial Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes requirements for recording and reporting derivative financial instruments including hedging transactions and is effective for financial statements issued for periods after June 15, 1999. The Company is in the process of evaluating the impact, if any, that will result from implementing SFAS No. 133. NOTE 2 - BUSINESS ACQUISITIONS As of March 1, 1996, the company acquired a 50% equity interest in D.P. C. - N. Tsakiris S.A., the Company's Greek distributor. As of April 1, 1997, the Company acquired a 100% interest in DPC France, SAS, the Company's French distributor for the IMMULITE product line. 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. NOTE 3 - INVENTORIES Inventories by major categories are summarized as follows: (Dollars in Thousands)
December 31, --------------------- 1997 1998 ------- ------- Raw materials $17,814 $19,235 Work in process 18,073 19,317 Finished goods 13,151 15,526 ------- ------- $49,038 $54,078 ======= =======
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 life, 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, -------------------- 1997 1998 ------- ------- Sales-type leases $ 4,441 $ 3,390 Operating leases 45,477 64,172 Less accumulated amortization 23,043 34,190 ------- ------- Net 22,434 29,982 ------- ------- Total $26,875 $33,372 ======= =======
NOTE 5 - INVESTMENT IN AFFILIATED COMPANIES The Company has equity interests in four 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%; Sweden, 50%; and Greece, 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 its joint venture in Japan, and the results of their operations. (Dollars in Thousands)
December 31, --------------------------------------- 1996 1997 1998 ------- ------- ------- Current assets $45,764 $43,726 $48,609 Property and other assets 40,587 34,498 39,244 ------- ------- ------- Total assets $86,351 $78,224 $87,853 ======= ======= ======= Current liabilities $34,945 $36,754 $43,199 Non-current liabilities 19,998 18,292 24,065 Shareholders' equity 31,408 23,178 20,589 ------- ------- ------- Total liabilities and shareholders' equity $86,351 $78,224 $87,853 ======= ======= ======= Sales $63,340 $60,501 $62,227 ======= ======= ======= Net income $ 2,507 $ 804 $ 470 ======= ======= =======
The Company had sales to non-consolidated affiliates of $21,409,000 in 1996, $21,993,000 in 1997, and $22,318,000 in 1998 including sales to one affiliate (Italy) of $11,251,000 in 1996, $11,352,000 in 1997, and $11,889,000 in 1998. Included in the Company's accounts receivable are trade receivables from non-consolidated affiliates of $7,124,000 at December 31, 1997 and $5,766,000 at December 31, 1998. The Company's cumulative equity in undistributed earnings of non-consolidated affiliated companies at December 31, 1998 is $12,523,000. Additional income taxes payable on earnings of foreign affiliates, if remitted, would be substantially offset by U.S. tax credits for foreign taxes paid. 23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - NOTES PAYABLE Notes payable consist of borrowings by certain of the Company's foreign subsidiaries and are payable in the subsidiaries' local currency. The notes are summarized as follows: (Dollars in Thousands)
December 31, ---------------------- 1997 1998 -------- -------- Notes payable to a bank in Germany, at an average interest rate of approximately 5%, payable through 2006 $ 11,318 $ 12,327 Notes payable to a bank in France, at an interest rate of approximately 7%, payable through 2003 3,290 3,232 Notes payable to a bank in Spain at an interest rate of approximately 5% payable through 2004 2,065 Notes payable to a bank in the Netherlands at an interest rate of approximately 5.7% payable through 2019 1,981 Other 939 1,573 -------- -------- Total $ 15,547 $ 21,178 ======== ========
Aggregate future maturities of long-term debt outstanding at December 31, 1998 are $6,260,000 in 1999, $2,761,000 in 2000, $1,952,000 in 2001, $1,849,000 in 2002, $1,802,000 in 2003, and $6,554,000 thereafter. Interest expense was $225,000 in 1996, $797,000 in 1997 and $ 1,824,000 in 1998. NOTE 7 - PENSION AND PROFIT SHARING 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 $2,202,000 in 1996, $2,365,000 in 1997, and $2,484,000 in 1998. 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. There were no contributions in 1996, 1997 or 1998. 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, -------------------------------- 1996 1997 1998 ------ ------ -------- CURRENT: Federal $6,157 $3,992 $ 5,937 State 730 708 421 Foreign 1,677 1,110 2,207 Deferred federal and state income taxes 216 1,690 (565) ------ ------ -------- Total provision for income taxes $8,780 $7,500 $ 8,000 ====== ====== ========
Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are as follows: (Dollars in Thousands)
December 31, ---------------------- 1997 1998 -------- ------ State income taxes $ 247 $ 147 DPC Cirrus' net operating losses 639 62 Inventory 2,363 2,520 Depreciation 923 990 DPC Cirrus' research and development credit carry forwards 841 1,081 Other (268) 510 -------- ------ Total $ 4,745 $5,310 ======== ======
Included in the net deferred income taxes shown on the consolidated balance sheets for 1998 and 1997 are deferred income tax assets of $5,348,000 and $4,814,000 and deferred income tax liabilities of $38,000 and $69,000. 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, ------------------------------------------------------ 1996 % 1997 % 1998 % -------- ---- ------- ---- ------- --- Provision for income taxes at statutory rate $ 11,104 35 $ 9,012 35 $ 9,875 35 State income taxes, net of federal tax benefit 397 1 456 2 (141) (1) Foreign income subject to tax other than federal statutory rate (487) (2) 40 (35) Non-taxable earnings of FSC (1,073) (3) (952) (4) (943) (3) Research and development tax credit (188) (403) (2) (866) (3) Net foreign tax credit (244) (1) (566) (2) (195) (1) Equity in income of affiliates (562) (2) (477) (2) (442) (2) Other (167) 390 2 747 3 -------- ---- ------- ---- ------- --- Provision for income taxes $ 8,780 28 $ 7,500 29 $ 8,000 28 ======== ==== ======= ==== ======= ===
25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS An income tax benefit during 1998, 1997 and 1996 related to the exercise or early disposition of certain stock options reduced income taxes currently payable by $300,000, $150,000 and $294,000 and was credited directly to shareholders' equity. NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES The Company has 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, 2002. Approximately $879,000 in 1996, $879,000 in 1997, and $966,000 in 1998 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, 2002, with a five-year renewal option. Future minimum lease commitments as of December 31, 1998 for both leases are as follows: (Dollars in Thousands)
1999 2000 2001 2002 Total ------ ------ ------ ------ ------ $1,210 $1,210 $1,210 $1,190 $4,820
Rental expense under operating leases approximated $1,783,000 in 1996, $2,187,000 in 1997, and $2,673,000 in 1998. The Company has a supply contract with a vendor for chemical compounds which 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 Earnings per share ("EPS") is presented in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "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, -------------------------------- 1996 1997 1998 ------ ------ ------ Basic 13,554 13,641 13,746 Assumed exercise of stock options 372 235 135 ------ ------ ------ Diluted 13,926 13,876 13,881 ====== ====== ======
Net income as presented in the consolidated income statement is used as the numerator in the EPScalculation 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 (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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), 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 1.6%, risk-free interest rate of from 4.4% to 5.9% and expected option life of 3 to 10 years. Expected volatility was assumed to be 22.7% in 1996, 38.6% in 1997 and 36.9% in 1998. Forfeiture rate was assumed to be 16.4% in 1996 and 5% in 1997 and 1998.
Weighted Weighted Number Average Average of Exercise Fair Shares Price Value --------- -------- ------- Options outstanding, December 31, 1995 (315,562 exercisable) 959,610 $21.79 Granted 104,500 33.36 10.35 Exercised (53,073) 16.22 Canceled (29,524) 25.47 -------- Options outstanding, December 31, 1996 (379,453 exercisable) 981,513 23.21 Granted 413,500 29.46 13.79 Exercised (119,948) 14.94 Canceled (54,525) 27.91 -------- 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
27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31, 1998:
Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/98 Life Price at 12/31/98 Price ----------- ----------- ---------- ------- ----------- --------- $10.00-19.99 67,400 5.00 years $18.41 29,000 $18.39 20.00-29.99 969,290 6.74 years 25.54 215,873 22.48 30.00-39.99 230,500 4.55 years 34.26 104,700 33.38 40.00-49.99 6,000 4.97 years 41.33 800 41.88
At December 31, 1998 the Company had a non-qualified option outstanding for 50,000 shares under a separate agreement at an exercise price of $30.75 per share. Pursuant to the plans and the separate agreement, 1,722,190 shares of common stock are reserved for issuance upon the exercise of options. As permitted by SFAS 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)
1996 1997 1998 -------- -------- -------- Net income as reported $ 22,947 $ 18,248 $ 20,213 Compensation expense from stock options 89 318 740 -------- -------- -------- Net income adjusted $ 22,858 $ 17,930 $ 19,473 Adjusted earnings per share-diluted $ 1.64 $ 1.29 $ 1.40
This proforma impact only takes into account options granted since 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 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, 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, ---------------------------------------- 1996 1997 1998 -------- -------- -------- Sales: IMMULITE $ 80,490 $100,127 $123,861 Radioimmunoassay ("RIA") 57,673 48,936 42,565 Other 38,669 37,201 30,217 -------- -------- -------- $176,832 $186,264 $196,643 ======== ======== ========
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 131, is prepared on the same basis as the consolidated financial statements and is as follows: (Dollars in Thousands) December 31, 1998 (Dollars in Thousands)
December 31, 1997 -------------------------------------------------------------------------------------------------- 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 7,638 12,907 82,955 Interest income (expense), net 4,508 (800) (970) (1,675) (732) 331 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
29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands)
December 31, 1997 -------------------------------------------------------------------------------------------------- Euro/DPC DPC DPC Limited Biermann Medlab Less: United (United (German (Brazilian Intersegment States Kingdom) Group) Group) Other Elimination Total -------- -------- -------- ---------- -------- ------------- -------- Sales $114,797 $ 24,033 $ 38,789 $ 19,672 $ 32,342 $ (43,369) $186,264 Operating expenses 46,016 4,178 11,787 6,734 10,773 79,488 Interest income (expense), net 4,013 (700) (728) (1,233) (665) 687 Provision (benefit) for income taxes expense 6,390 487 (609) 222 1,010 7,500 Net income (loss) 15,601 1,917 (919) 730 219 700 18,248 Segment assets: Long-lived assets 52,060 15,715 13,421 10,847 14,779 (5,000) 101,822 Total assets 219,081 31,277 24,766 25,690 32,345 (110,979) 222,180 Capital expenditures 6,595 1,339 1,175 4,261 5,041 (2,800) 15,611
(Dollars in Thousands)
December 31, 1997 -------------------------------------------------------------------------------------------------- Euro/DPC DPC DPC Limited Biermann Medlab Less: United (United (German (Brazilian Intersegment States Kingdom) Group) Group) Other Elimination Total -------- -------- -------- ---------- -------- ------------- -------- Sales $110,934 $ 16,828 $ 39,144 $ 15,800 $ 33,688 $ (39,562) $176,832 Operating expenses 39,659 3,995 11,714 5,854 10,276 71,498 Interest income (expense), net 4,070 (692) (475) (1,029) (388) 1,486 Provision (benefit) for income taxes expense 7,103 35 51 1,591 8,780 Net income (loss) 19,140 644 429 653 2,781 (700) 22,947 Segment assets: Long-lived assets 52,094 16,741 14,138 8,849 12,130 (6,000) 97,952 Total assets 216,965 29,133 26,640 13,475 28,729 (107,940) 207,002 Capital expenditures 4,688 5,440 4,898 4,037 4,923 (3,500) 20,486
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 ------- -------- ------- ------- 1996 $5,949 $7,171 $12,929 $26,049 1997 3,466 8,277 14,509 26,252 1998 2,794 8,406 13,701 24,901
SUPPLEMENTARY FINANCIAL DATA Unaudited quarterly financial information for the years December 31, 1997 and 1998 is summarized as follows: (In Thousands, Except per Share Data)
Quarter Ended ----------------------------------------------------------------------------- March 31, June 30, September 30, December 31, Year Ended 1997 1997 1997 1997 1997 --------- -------- ------------- ------------ ---------- Sales $44,400 $46,763 $46,399 $48,702 $186,264 Gross profit 24,718 26,594 25,914 25,960 103,186 Income taxes 1,710 1,790 1,460 2,540 7,500 Net income 4,663 4,892 5,122 3,571 18,248 Earnings per share: Basic .34 .36 .38 .26 1.34 Diluted .34 .35 .37 .26 1.32 Weighted Average Shares Outstanding: Basic 13,605 13,622 13,646 13,690 13,641 Diluted 13,867 13,872 13,901 13,869 13,876
Quarter Ended ----------------------------------------------------------------------------- March 31, June 30, September 30, December 31, Year Ended 1998 1998 1998 1998 1998 --------- -------- ------------- ------------ ---------- Sales $46,104 $49,278 $48,773 $52,488 $196,643 Gross profit 25,709 27,849 27,319 28,698 109,575 Income taxes 1,720 2,190 2,090 2,000 8,000 Net income 4,104 5,194 5,395 5,520 20,213 Earnings per share: Basic .30 .38 .39 .40 1.47 Diluted .30 .37 .39 .40 1.46 Weighted Average Shares Outstanding: Basic 13,746 13,779 13,792 13,669 13,746 Diluted 13,907 13,944 13,923 13,749 13,881
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 By: /s/ Sigi Ziering March 23, 1999 ----------------------------------------- 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 23, 1999 - ------------------------- and Chief Executive Sigi Ziering Officer (Principal Executive Officer) /s/ Michael Ziering Director March 23, 1999 - ------------------------- Michael Ziering /s/ Sidney A. Aroesty Director March 23, 1999 - ------------------------- Sidney A. Aroesty /s/ Maxwell H. Salter Director March 23, 1999 - ------------------------- Maxwell H. Salter /s/ James D. Watson Director March 23, 1999 - ------------------------- James D. Watson /s/ Frederick Frank Director March 23, 1999 - ------------------------- Frederick Frank /s/ Julian R. Bockserman Vice President-- March 23, 1999 - ------------------------- Finance (Principal Julian R. Bockserman 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(5) 10.5 Standard Industrial Lease with 5700 West 96th Street, general partnership, dated February 18, 1991(5) *10.6 1997 Stock Option Plan(7) 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. (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 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. (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 Annual Report on Form 10-K for the year ended December 31, 1996. (File No. 1-9957) 33 EX-21 2 EXHIBIT 21 1 EXHIBIT 21 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% DPC Holding GmbH Germany 100% DPC Biermann GmbH Germany 100% DPC Czech s.r.o. Czech Republic 100% DPC d.o.o. Zagreb Croatia 50% DPC Polska sp.z.o.o. Poland 100% 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. Diagnostic Products Corporation Finland 100% DPC Finland Oy Bio-Mediq DPC Pty. Ltd. Australia 100% DPC Dipesa, S.A. Spain 100% DPC France, SAS France 100% Tianjin De Pu (DPC) China 100% Biotechnological and Medical Products, Inc. Diagnostic Products DPC Norway, AS Norway 100% DPC Medlab Produtos Medico Brazil 56% Hospitalares Ltda. DPC Venezuela C.A. Venezuela 56% DPC Medlab de Uruguay S.A. Uruguay 56% DPC Medlab Centroamerica S. A. Costa Rica 56% Nippon DPC Corporation USA/California 50% DPC Skafte AB Sweden 50% D.P.C.-N. Tsakiris S.A. Greece 50% Medical Systems, S.p.A. Italy 45% Amerlab, Lda. Portugal 40%
EX-23 3 EXHIBIT 23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 2-81631, 33-17575, 33-43043 and 333-34665 on Form S-8 of our report dated February 18, 1999, included in this Annual Report on Form 10-K of Diagnostic Products Corporation for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Los Angeles, California March 22, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 18,650 0 50,440 136 54,078 127,053 103,560 49,348 246,224 46,052 0 0 0 37,531 162,641 246,224 196,643 196,643 87,068 87,068 81,362 0 0 28,213 8,000 20,213 0 0 0 20,213 1.47 1.46
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