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SECURITIES AND EXCHANGE COMMISSION    FORM 10-Q x
    
    Quarterly report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934For the quarterly period ended June 30, 2004o
    
    Transition report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934For the transition period from __________ to _____________Commission file number 1-9957
 Diagnostic Products Corporation  California
(State or other jurisdiction of
incorporation or organization)
    
    95-2802182
(IRS Employer
Identification No.)
 5700 West 96th Street
Los Angeles, California 90045
(Address of principal executive offices) Registrants telephone number: (310) 645-8200 No change (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES
x NO o 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 o The number of shares of Common Stock, no par value, outstanding as of August 2,
2004, was 29,109,146.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.ITEM 5. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.SIGNATURESEXHIBIT INDEXExhibit 3.1Exhibit 31.1Exhibit 31.2Exhibit 32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS 
 DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Amounts in
Thousands, Except Per Share Data)
    
    2004
    
    2003
    
    2004
    
    2003SALES:Non-Affiliated Customers
    
    $
    102,749
    
    
    $
    88,186
    
    
    $
    199,723
    
    
    $
    168,433Unconsolidated Affiliates
    
    
    7,719
    
    
    
    7,765
    
    
    
    16,828
    
    
    
    14,398Total Sales
    
    
    110,468
    
    
    
    95,951
    
    
    
    216,551
    
    
    
    182,831COST OF SALES
    
    
    44,816
    
    
    
    39,964
    
    
    
    90,838
    
    
    
    76,520Gross Profit
    
    
    65,652
    
    
    
    55,987
    
    
    
    125,713
    
    
    
    106,311OPERATING EXPENSESSelling
    
    
    19,382
    
    
    
    15,622
    
    
    
    38,109
    
    
    
    31,055Research and Development
    
    
    11,025
    
    
    
    10,047
    
    
    
    22,449
    
    
    
    20,050General and Administrative
    
    
    11,058
    
    
    
    8,308
    
    
    
    20,723
    
    
    
    16,908Equity in Income of Affiliates
    
    
    (2,700
    )
    
    
    (1,463
    )
    
    
    (4,830
    )
    
    
    (2,921
    )OPERATING EXPENSES-NET
    
    
    38,765
    
    
    
    32,514
    
    
    
    76,451
    
    
    
    65,092OPERATING INCOME
    
    
    26,887
    
    
    
    23,473
    
    
    
    49,262
    
    
    
    41,219Interest/Other (Expense) Income-Net
    
    
    (184
    )
    
    
    124
    
    
    
    (553
    )
    
    
    153INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST
    
    
    26,703
    
    
    
    23,597
    
    
    
    48,709
    
    
    
    41,372PROVISION FOR INCOME TAXES
    
    
    8,011
    
    
    
    6,843
    
    
    
    14,613
    
    
    
    11,998MINORITY INTEREST
    
    
    73
    
    
    
    132
    
    
    
    20
    
    
    
    45NET INCOME
    
    $
    18,619
    
    
    $
    16,622
    
    
    $
    34,076
    
    
    $
    29,329EARNINGS PER SHARE:BASIC
    
    $
    0.64
    
    
    $
    0.58
    
    
    $
    1.17
    
    
    $
    1.02DILUTED
    
    $
    0.62
    
    
    $
    0.56
    
    
    $
    1.14
    
    
    $
    0.99WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    29,059
    
    
    
    28,690
    
    
    
    29,014
    
    
    
    28,656DILULTED
    
    
    29,866
    
    
    
    29,659
    
    
    
    29,894
    
    
    
    29,576
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2




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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited) June 30,
    
    December 31,(Dollars in
Thousands)
    
    2004
    
    2003AssetsCURRENT ASSETS:Cash and cash equivalents
    
    $
    65,244
    
    
    $
    69,843Accounts receivable (including receivables from unconsolidated
affiliates of $10,704 and $6,701, respectively)  net of allowance
for doubtful accounts of $3,311 and $3,195, respectively
    
    
    95,899
    
    
    
    90,310Inventories
    
    
    92,512
    
    
    
    86,502Prepaid expenses and other current assets
    
    
    6,104
    
    
    
    5,500Deferred income taxes
    
    
    6,070
    
    
    
    5,413Total current assets
    
    
    265,829
    
    
    
    257,568PROPERTY, PLANT, AND EQUIPMENT  net
    
    
    127,044
    
    
    
    104,420INSTRUMENTS  net
    
    
    75,065
    
    
    
    77,230DEFERRED INCOME TAXES
    
    
    
    
    
    
    255INVESTMENTS IN AFFILIATED COMPANIES
    
    
    33,529
    
    
    
    29,822OTHER ASSETS  net
    
    
    12,519
    
    
    
    4,864GOODWILL
    
    
    13,345
    
    
    
    13,423TOTAL ASSETS
    
    $
    527,331
    
    
    $
    487,582Liabilities and Shareholders EquityCURRENT LIABILITIES:Notes payable
    
    $
    9,642
    
    
    $
    12,820Accounts payable
    
    
    22,789
    
    
    
    20,983Accrued liabilities
    
    
    35,441
    
    
    
    31,136Income taxes payable
    
    
    13,748
    
    
    
    9,246Total current liabilities
    
    
    81,620
    
    
    
    74,185LONG-TERM LIABILITIES
    
    
    6,166
    
    
    
    7,549DEFERRED INCOME TAXES
    
    
    133MINORITY INTEREST
    
    
    3,455
    
    
    
    2,848SHAREHOLDERS EQUITY:Common Stockno par value, authorized 60,000,000 shares
at June 30, 2004 and December 31, 2003; outstanding
29,108,546 shares and 28,907,969 shares, respectively
    
    
    70,144
    
    
    
    66,758Retained earnings
    
    
    366,726
    
    
    
    336,129Accumulated other comprehensive (loss) income
    
    
    (913
    )
    
    
    113Total shareholders equity
    
    
    435,957
    
    
    
    403,000TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    527,331
    
    
    $
    487,582
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3




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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Six Months EndedJune 30,(Dollars in
Thousands)
    
    2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    34,076
    
    
    $
    29,329Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    19,274
    
    
    
    16,487Minority interest
    
    
    20
    
    
    
    45Deferred income taxes
    
    
    (849
    )
    
    
    432Equity in undistributed income of unconsolidated affiliates  net
of distributions
    
    
    (3,244
    )
    
    
    (2,474
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (12,279
    )
    
    
    (7,238
    )Inventories
    
    
    (20,554
    )
    
    
    (16,251
    )Prepaid expenses and other assets
    
    
    2,349
    
    
    
    (1,768
    )Accounts payable
    
    
    4,460
    
    
    
    (1,864
    )Accrued liabilities
    
    
    (359
    )
    
    
    (3,008
    )Income taxes payable
    
    
    4,560
    
    
    
    1,522Net cash flows from operating activities
    
    
    27,454
    
    
    
    15,212CASH FLOWS USED FOR INVESTING ACTIVITIES:Investment in affiliated companies
    
    
    (219
    )Additions to property, plant, and equipment
    
    
    (28,265
    )
    
    
    (27,881
    )Net cash flows used for investing activities
    
    
    (28,484
    )
    
    
    (27,881
    )CASH FLOWS USED FOR FINANCING ACTIVITIES(Repayments) borrowings of notes payable-net
    
    
    (3,983
    )
    
    
    1,320Proceeds from exercise of stock options
    
    
    3,386
    
    
    
    1,724Cash dividends paid
    
    
    (3,479
    )
    
    
    (3,439
    )Net cash flows used for financing activities
    
    
    (4,076
    )
    
    
    (395
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    507
    
    
    
    (779
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,599
    )
    
    
    (13,843
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    69,843
    
    
    
    54,284CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    65,244
    
    
    $
    40,441SUPPLEMENTAL CASH FLOW INFORMATION -Non cash transactions  instrument placements transferred from
inventories
    
    $
    14,169
    
    
    $
    11,068
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4




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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) Note 1  Basis of Presentation The information for the three and six-month periods ended June 30, 2004 and
2003 has not been audited by independent public accountants, but includes all
adjustments (consisting of normal recurring accruals) that are, in the opinion
of management, necessary to a fair statement of the results for such periods. Certain information and footnote disclosure normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to the requirements
of the Securities and Exchange Commission, although the Company believes that
the disclosures included in these financial statements are adequate to make the
information not misleading. The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys
2003 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. The results of operations for the three and six-month periods ended June 30,
2004 are not necessarily indicative of the results to be expected for the year
ending December 31, 2004. Basic earnings per share is computed by dividing net
income by the weighted-average number of shares outstanding. Diluted earnings
per share include the dilutive effect of stock options. Certain reclassifications have been made to the 2003 periods to conform to the
2004 presentation. Note 2  Inventories Inventories by major categories are summarized as follows: June 30,
    
    December 31,(Dollars in Thousands)
    
    2004
    
    2003Raw materials
    
    $
    39,891
    
    
    $
    39,145Work in process
    
    
    36,942
    
    
    
    38,761Finished goods
    
    
    15,679
    
    
    
    8,596Total
    
    $
    92,512
    
    
    $
    86,502
 Note 3  Property, Plant & Equipment Property, plant and equipment consist of the following: 5




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June 30,
    
    December 31,(Dollars in Thousands)
    
    2004
    
    2003Land and buildings
    
    $
    58,383
    
    
    $
    58,711Machinery and equipment
    
    
    89,475
    
    
    
    79,638Leasehold improvements
    
    
    9,436
    
    
    
    9,384Construction in progress
    
    
    48,070
    
    
    
    30,111Total
    
    
    205,364
    
    
    
    177,844Accumulated depreciation and amortization
    
    
    (78,320
    )
    
    
    (73,424
    )Property, plant and equipment  net
    
    $
    127,044
    
    
    $
    104,420
 Construction in progress primarily relates to the building out of the Companys
new corporate headquarters building and the construction of a new building in
Wales. Note 4  Goodwill and Other Assets Goodwill results primarily from the Companys purchase of certain of its
foreign distributors. Other assets at June 30, 2004 consist of purchased
technology licenses totaling $7,762,000, which is net of accumulated
amortization of $238,000, and accounts receivable for certain equipment
purchases with a due date of greater than a year totaling $4,757,000. Of the
purchased technology licenses amount, $3.0 million represents licenses
purchased during the first quarter of 2004. The remaining licenses totaling
approximately $4.8 million were purchased during 2003. Amortization expense
for the three and six months ended June 30, 2004 totaled $51,000 and $102,000,
respectively. Amortization expense for each of the next five fiscal years is
estimated to be $464,000, $524,000, $680,000, $766,000, and $854,000,
respectively, and will be amortized in future periods based on the underlying
estimated benefit derived. Note 5  Comprehensive Income Comprehensive income is summarized as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Dollars in Thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    18,619
    
    
    $
    16,622
    
    
    $
    34,076
    
    
    $
    29,329Foreign currency translation adjustment
    
    
    (2,352
    )
    
    
    9,281
    
    
    
    (2,990
    )
    
    
    11,624Unrealized gain on foreign exchange contracts
net of tax impact
    
    
    328
    
    
    
    
    
    
    
    1,964Comprehensive income
    
    $
    16,595
    
    
    $
    25,903
    
    
    $
    33,050
    
    
    $
    40,953
 The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries as these are considered to be
indefinitely invested. Note 6  Segment and Product Line Information The Company considers its manufactured instruments and medical immunodiagnostic
test kits as one operating segment, as the kits are required to run the
instruments and utilize similar technology and instrument
manufacturing processes. The Company manufactures 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,
Luxemborg, Finland, Norway, France, Australia, New Zealand, China, Brazil,
Uruguay, Bolivia, Venezuela, Honduras, Guatemala, Costa Rica, Panama, Sweden,
Latvia, Lithuania, Estonia, and Denmark. 6




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The Company sells its instruments and immunodiagnostic test kits under several
product lines. Product line sales information is as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Dollars in Thousands)
    
    2004
    
    2003
    
    2004
    
    2003Sales:IMMULITE (includes service)
    
    $
    100,814
    
    
    $
    85,173
    
    
    $
    197,080
    
    
    $
    160,827Radioimmunoassay (RIA)
    
    
    6,075
    
    
    
    6,935
    
    
    
    12,480
    
    
    
    13,727Other (Includes DPC and non-DPC
manufactured products)
    
    
    3,579
    
    
    
    3,843
    
    
    
    6,991
    
    
    
    8,277$
    110,468
    
    
    $
    95,951
    
    
    $
    216,551
    
    
    $
    182,831
 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 areas 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 is prepared on the same basis as the consolidated financial
statements and is as follows: Euro/DPC
    
    DPC
    
    DPCLimited
    
    Biermann
    
    Medlab
    
    
    
    
    
    Less:United
    
    (United
    
    (German
    
    (Brazilian
    
    
    
    
    
    Intersegment(Dollars in Thousands)
    
    States
    
    Kingdom)
    
    Group)*
    
    Group)*
    
    Other
    
    Elimination
    
    TotalThree Months Ended June 30, 2004Sales
    
    $
    72,517
    
    
    $
    23,437
    
    
    $
    14,329
    
    
    $
    9,669
    
    
    $
    25,109
    
    
    $
    (34,593
    )
    
    $
    110,468Net income
    
    
    9,418
    
    
    
    5,792
    
    
    
    563
    
    
    
    167
    
    
    
    2,675
    
    
    
    4
    
    
    
    18,619Three Months Ended June 30, 2003Sales
    
    $
    61,455
    
    
    $
    16,804
    
    
    $
    13,012
    
    
    $
    7,742
    
    
    $
    22,025
    
    
    $
    (25,087
    )
    
    $
    95,951Net income
    
    
    9,859
    
    
    
    3,343
    
    
    
    386
    
    
    
    300
    
    
    
    2,815
    
    
    
    (81
    )
    
    
    16,622
 Euro/DPC
    
    DPC
    
    DPCLimited
    
    Biermann
    
    Medlab
    
    
    
    
    
    Less:United
    
    (United
    
    (German
    
    (Brazilian
    
    
    
    
    
    Intersegment(Dollars in Thousands)
    
    States
    
    Kingdom)
    
    Group)*
    
    Group)*
    
    Other
    
    Elimination
    
    TotalSix Months Ended June 30, 2004Sales
    
    $
    137,689
    
    
    $
    44,048
    
    
    $
    28,880
    
    
    $
    17,521
    
    
    $
    50,122
    
    
    $
    (61,709
    )
    
    $
    216,551Net income
    
    
    16,719
    
    
    
    10,540
    
    
    
    1,243
    
    
    
    46
    
    
    
    5,418
    
    
    
    110
    
    
    
    34,076Six Months Ended June 30, 2003Sales
    
    $
    118,133
    
    
    $
    31,877
    
    
    $
    25,687
    
    
    $
    13,944
    
    
    $
    43,169
    
    
    $
    (49,979
    )
    
    $
    182,831Net income
    
    
    16,883
    
    
    
    6,226
    
    
    
    806
    
    
    
    103
    
    
    
    5,242
    
    
    
    69
    
    
    
    29,329
 *DPC Biermann includes the Companys operations in Germany, the Czech Republic,
Slovenia, Croatia, and Poland. DPC Medlab includes the Companys operations in
Brazil, Uruguay, Venezuela, Honduras, Guatemala, Costa Rica, Panama, El
Salvador, and Bolivia. Note 7  Pro Forma Stock-Based Compensation The Company has stock option plans under which options have historically been
granted at exercise prices equal to the market price at the date of grant.
Options granted vest over periods of three to nine years and expire ten years
from the date of grant. 7




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Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company has elected to account
for its employee stock options under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, which recognizes
expense based on the intrinsic value at the date of grant. As stock options
have been issued with exercise prices equal to the respective market prices at
grant date, no compensation expense has resulted. In December 2002, the
Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure, an amendment of FASB
Statement No. 123, which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company elected to maintain the intrinsic method of accounting for stock
options under APB No. 25. Had compensation cost for all options granted been
determined based on the fair value at grant date consistent with SFAS No. 123,
the Companys net income and earnings per share would have been as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Amounts in Thousand, Except Per Share
Data)
    
    2004
    
    2003
    
    2004
    
    2003Net Income:As Reported
    
    $
    18,619
    
    
    $
    16,622
    
    
    $
    34,076
    
    
    $
    29,329Pro Forma expense
    
    
    (680
    )
    
    
    (738
    )
    
    
    (1,353
    )
    
    
    (1,476
    )Pro Forma
    
    $
    17,939
    
    
    $
    15,884
    
    
    $
    32,723
    
    
    $
    27,853Net Earnings Per ShareBasic:As Reported
    
    $
    0.64
    
    
    $
    0.58
    
    
    $
    1.17
    
    
    $
    1.02Pro Forma Adjustment
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.04
    )
    
    
    (0.05
    )Pro Forma
    
    $
    0.62
    
    
    $
    0.55
    
    
    $
    1.13
    
    
    $
    0.97Diluted:As Reported
    
    $
    0.62
    
    
    $
    0.56
    
    
    $
    1.14
    
    
    $
    0.99Pro Forma Adjustment
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.05
    )
    
    
    (0.05
    )Pro Forma
    
    $
    0.60
    
    
    $
    0.54
    
    
    $
    1.09
    
    
    $
    0.94
 Note 8  New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (FIN 46). In December 2003,
FIN 46 was replaced by FASB interpretation No 46R Consolidation of Variable
Interest Entities. FIN 46R clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinate financial support from
other parties. FIN 46R requires an enterprise to consolidate a variable
interest entity if that enterprise will absorb a majority of the entitys
expected losses, is
entitled to receive a majority of the entitys expected residual returns, or
both. FIN 46R was effective for special-purpose entities being evaluated under
FIN 46R for consolidation on December 31, 2003 and was effective for all other
entities being evaluated on March 31, 2004. The adoption of FIN 46R did not
have a material impact on the Companys financial position or results of
operations. Note 9  Commitments and Contingent Liabilities The Company is continuing to cooperate with the SEC and the United States
Justice Department in their review of certain improper payments by the
Companys Chinese subsidiary first discovered internally by the Company in the
fourth quarter of 2002. The Company voluntarily disclosed this to the SEC and
the United States Justice Department in early 2003 and is continuing to
evaluate its internal policies and procedures to promote compliance with
applicable laws. The Companys activities in this regard resulted in the
termination of the general manager of the Chinese subsidiary in the first
quarter of 2004 as a result of his failure to follow payment-related procedures
implemented on the advice of outside counsel. An independent committee of the 8




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##### Table of Contents



Board continues to oversee these issues and is conducting an investigation.
Government and other actions related to this matter may have a material adverse
effect on future operations in China. For the year ended December 31, 2003,
the Chinese subsidiary had sales of $9.8 million. In the second quarter of
2004 the Companys Chinese subsidiary had sales of $2.2 million. In the fourth
quarter of 2002, the Company accrued $1.5 million for actual and estimated
costs to resolve this matter. As of June 30, 2004, $1.4 million remains in the
accrual, although the actual costs, including fines and penalties, to resolve
this matter could significantly exceed the amount accrued. In addition, the
Company recorded a charge of $1.4 million to its 2002 fourth quarter tax
provision related to the possible non-deductibility of the payments in China.
During the third quarter of 2003, the Company recorded an additional charge of
$0.9 million to its income tax provision for this and other Chinese tax-related
matters. Additional legal expenses of approximately $884,000, $700,000 and
$733,000 have been incurred and charged to general and administrative expense
during the year ended December 31, 2003, the three months and the six months
ended June 30, 2004, respectively. It is anticipated that legal fees for
issues related to China will decrease in the remainder of 2004. In February 2004, the Company was informed by the U.S. Food and Drug
Administration (FDA) that based on inspectional findings that included data
integrity and procedural issues, the Company was subject to the FDAs
Application Integrity Policy. The FDA suspended its review of all applications
submitted by the Company and will defer the review of any future applications
until the FDA determines that the Company has resolved these issues. The
resolution process consists of developing and implementing a corrective action
plan that will be audited by a third party and reviewed by the FDA. The
Company has engaged the third party auditor and still believes that 12 months
is a reasonable time for such actions to take place. During this time, the
Company is not restricted by the FDA with regard to introducing new tests
outside of the United States. However, the Companys inability to introduce
new tests in the United States pending resolution of this matter may have a
negative impact on its future sales and profits. 
 ITEM 2. 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 Companys ability to successfully market new and existing
products;
    
    the Companys ability to keep abreast of technological innovations
and successfully incorporate them into new products;
    
    the Companys dependence on sole suppliers for key chemical
components in the IMMULITE assays;
    
    the Companys ability to address and resolve issues relating to the
FDAs Application Integrity Policy;
    
    the Companys ability to have new tests reviewed and approved by
the FDA;
    
    the risks inherent in the development and release of new products,
such as delays, unforeseen costs, technical difficulties, and
regulatory approvals;
    
    competitive pressures, including technological advances and patents obtained by competitors;
    
    environmental risks related to substances regulated by various federal, state, and international laws;
    
    currency risks based on the relative strength or weakness of the U.S. dollar;
    
    domestic and foreign governmental health care regulation and cost containment measures;
    
    political and economic instability in certain foreign markets;
    
    changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange Commission, the
Public Company Accounting Oversight Board, or the American Institute of
Certified Public Accountants; and
    
    the effects of governmental or other actions relating to certain
payments by the Companys Chinese subsidiary. 9




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Overview DPC develops and manufactures automated diagnostic test systems and related
reagent test kits that are used by hospital, reference, and physicians office
laboratories throughout the world. The Companys principal product line,
IMMULITE, is a fully automated, computer-driven modular system that uses
specialized proprietary software to provide rapid, accurate test results that
reduce the customers labor and reagent costs. The Companys immunoassay tests
provide critical information useful to physicians in the diagnosis, monitoring,
management, and prevention of various diseases. DPC manufactures immunodiagnostic test kits (also called reagents or
assays) using several different technologies and assay formats. The IMMULITE
instruments are closed systems, meaning that they will not perform other
manufacturers tests. Accordingly, a major factor in the successful marketing
of these systems is the ability to offer a broad menu of assays. In addition
to about 100 IMMULITE assays, we sell a broad range of tests based on other
technologies that can be performed manually using the customers own laboratory
equipment, such as radioimmunoassay (RIA) and enzyme immunoassay (EIA) tests. In addition to breadth of menu, major competitive factors for the IMMULITE
instruments include time-to-first result (how quickly the instrument performs
the test), ease of use, and overall cost effectiveness. Because of these
competitive factors and the rapid technological developments that characterize
the industry, the Company devotes approximately 10% of its annual revenues to
research and development activities, all of which are expensed as incurred. The Companys products are sold throughout the world directly through
affiliated and independent distributors. Historically, foreign sales
(including U.S. export sales, sales to non-consolidated subsidiaries and
independent distributors, and sales of consolidated subsidiaries) have
accounted for more than 70% of revenues; although, in recent years, domestic
sales growth has outpaced foreign sales growth. The Company derives revenues from two principal sources: reagent (test kit)
sales and IMMULITE instrument placements. The Company recognizes sales of test
kits upon shipment and transfer of title to the customer. IMMULITE instruments are placed with customers under many different types of
arrangements that generally fall into the following categories: sale, lease,
reagent rental, and soft placement. The Company sells instruments directly to
end-users, to third party leasing companies that lease the instruments to
end-users, and to independent distributors that then resell the instruments to
their customers. Instrument sales, which represent the smallest component of
placements, are recognized upon shipment and transfer of title. The Company
also sells instruments under sales-type leases, which are recorded as revenue
upon shipment in an amount equal to the present value of the future minimum
lease payments to be received over the lease term. Many instruments are placed other than by outright sale or capital lease. The
Company enters into various types of operating lease arrangements with
customers that generally provide for terms of three to five years and periodic
rental payments. Revenue on these types of leases is recognized on a pro rata
basis over the term of the lease. When an instrument is placed on a reagent
rental basis, the customer agrees to pay a mark-up on reagents, but is not
charged for the instrument. The Company also places instruments at no charge
to the customer (soft placement) subject to the customers agreement to
purchase a minimum amount of reagents. In reagent rentals and soft placements,
the only revenue recognized is based on reagent shipments. Under operating
lease, rental, and soft placements, DPC continues to own the instrument that is
placed with the
customer. These instruments are generally amortized on a straight-line basis
over five years and maintenance costs are expensed as incurred. The Company
also enters into service contracts with customers and recognizes service
revenue over the related contract life (related costs are expensed as
incurred). Two important indicators used by management to evaluate financial performance
are instrument shipments and reagent utilization. The number of IMMULITE
instruments that the Company reports as being shipped in any period is net of
returned instruments, such as returns at the end of a lease or rental or
trade-ins on the purchase of a new model. The Company refurbishes and seeks to
place returned instruments at reduced prices. Because of the different methods
in which instruments are placed, total instrument sales vary from period to
period based on the relative mix of placement methods, and such sales do not
necessarily have a direct correlation to the number of instruments shipped
during the period. An important measure of the penetration of IMMULITE reagent sales is the
average amount of reagent sales per instrument shipped. It takes a number of
weeks or months after an instrument is shipped for it to become 10




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##### Table of Contents



fully
functional with regard to reagent utilization. The Company calculates average
reagent utilization for a fiscal period by dividing IMMULITE reagent sales for
the period by the total number of instruments shipped as of the end of the
previous fiscal period. Results of Operations SUMMARY FINANCIAL DATA Three Months Ended
    
    Six Months Ended(Dollars in Thousands,Except Per Share
Data)
    
    2004
    
    % change
    
    2003
    
    2004
    
    % change
    
    2003Sales
    
    $
    110,468
    
    
    
    15.1
    %
    
    $
    95,951
    
    
    $
    216,551
    
    
    
    18.4
    %
    
    $
    182,831Gross Profit
    
    
    65,652
    
    
    
    
    
    
    
    55,987
    
    
    
    125,713
    
    
    
    
    
    
    
    106,311% of sales
    
    
    59.4
    %
    
    
    
    
    
    
    58.3
    %
    
    
    58.1
    %
    
    
    
    
    
    
    58.1
    %Operating Expenses:Selling
    
    
    19,382
    
    
    
    
    
    
    
    15,622
    
    
    
    38,109
    
    
    
    
    
    
    
    31,055Research and Development
    
    
    11,025
    
    
    
    
    
    
    
    10,047
    
    
    
    22,449
    
    
    
    
    
    
    
    20,050General and Administrative
    
    
    11,058
    
    
    
    
    
    
    
    8,308
    
    
    
    20,723
    
    
    
    
    
    
    
    16,908Equity in Income of Affiliates
    
    
    (2,700
    )
    
    
    
    
    
    
    (1,463
    )
    
    
    (4,830
    )
    
    
    
    
    
    
    (2,921
    )Total Operating Expenses
    
    
    38,765
    
    
    
    19.2
    %
    
    
    32,514
    
    
    
    76,451
    
    
    
    17.5
    %
    
    
    65,092% of sales
    
    
    35.1
    %
    
    
    
    
    
    
    33.9
    %
    
    
    35.3
    %
    
    
    
    
    
    
    35.6
    %Operating Income
    
    
    26,887
    
    
    
    14.5
    %
    
    
    23,473
    
    
    
    49,262
    
    
    
    19.5
    %
    
    
    41,219% of sales
    
    
    24.3
    %
    
    
    
    
    
    
    24.5
    %
    
    
    22.7
    %
    
    
    
    
    
    
    22.5
    %Interest/Other (Expense) Income net
    
    
    (184
    )
    
    
    
    
    
    
    124
    
    
    
    (553
    )
    
    
    
    
    
    
    153Income Before Income Taxes and
Minority Interest
    
    
    26,703
    
    
    
    
    
    
    
    23,597
    
    
    
    48,709
    
    
    
    
    
    
    
    41,372Provision for Income Taxes
    
    
    8,011
    
    
    
    
    
    
    
    6,843
    
    
    
    14,613
    
    
    
    
    
    
    
    11,998Income Tax Rate
    
    
    30.0
    %
    
    
    
    
    
    
    29.0
    %
    
    
    30.0
    %
    
    
    
    
    
    
    29.0
    %Minority Interest
    
    
    73
    
    
    
    
    
    
    
    132
    
    
    
    20
    
    
    
    
    
    
    
    45Net Income
    
    $
    18,619
    
    
    
    12.0
    %
    
    $
    16,622
    
    
    $
    34,076
    
    
    
    16.2
    %
    
    $
    29,329Earnings per share:Basic
    
    $
    0.64
    
    
    
    
    
    
    $
    0.58
    
    
    $
    1.17
    
    
    
    
    
    
    $
    1.02Diluted
    
    $
    0.62
    
    
    
    
    
    
    $
    0.56
    
    
    $
    1.14
    
    
    
    
    
    
    $
    0.99
 Sales The 15% sales increase in the second quarter of 2004 reflected continued demand
for the IMMULITE product line. Sales of all IMMULITE products, instruments,
service, and reagents in the second quarter of 2004 were
$100.8 million, an 18% increase over 2003. In the second quarter of 2004,
IMMULITE products represented 91% of sales versus 89% in 2003. In the first six
months of 2004, sales of IMMULITE products increased 23% to $197.1 million from
$160.8 million in the fist six months of 2003. In the first six months of 2004,
IMMULITE products represented 91% of sales versus 88% in 2003. Various
categories of IMMULITE product line sales in the second quarter and six months
ended June 30 2004 and 2003 are shown in the following chart: 11




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##### Table of Contents



IMMULITE Product Line Sales Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    % change
    
    2003
    
    2004
    
    % change
    
    2003(Dollars in Thousands)
    
    Sales
    
    from 2003
    
    Sales
    
    Sales
    
    from 2003
    
    SalesIMMULITE 2000 (including IMMULITE 2500)Reagents
    
    $
    59,728
    
    
    
    29.5
    %
    
    $
    46,132
    
    
    $
    114,705
    
    
    
    31.2
    %
    
    $
    87,428Instruments and Service
    
    
    8,848
    
    
    
    12.0
    %
    
    
    7,902
    
    
    
    18,858
    
    
    
    43.5
    %
    
    
    13,144Total
    
    $
    68,576
    
    
    
    26.9
    %
    
    $
    54,034
    
    
    $
    133,563
    
    
    
    32.8
    %
    
    $
    100,572IMMULITE (including IMMULITE 1000)Reagents
    
    $
    27,383
    
    
    
    2.8
    %
    
    $
    26,629
    
    
    $
    54,490
    
    
    
    5.0
    %
    
    $
    51,885Instruments and Service
    
    
    4,855
    
    
    
    7.6
    %
    
    
    4,510
    
    
    
    9,027
    
    
    
    7.8
    %
    
    
    8,370Total
    
    $
    32,238
    
    
    
    3.5
    %
    
    $
    31,139
    
    
    $
    63,517
    
    
    
    5.4
    %
    
    $
    60,255IMMULITE Product Line Sales
    
    $
    100,814
    
    
    
    18.4
    %
    
    $
    85,173
    
    
    $
    197,080
    
    
    
    22.5
    %
    
    $
    160,827
 The Company shipped a total of 246 IMMULITE systems during the second quarter
of 2004, including 185 IMMULITE 2000 and 2500 systems and 61 IMMULITE 1000
systems. The total base of IMMULITE systems shipped grew to 9,488, including
3,287 IMMULITE 2000 and 2500 systems. In the second quarter of 2003 the
Company shipped a total of 201 IMMULITE systems, including 123 IMMULITE 2000
systems. The reduction in the number of IMMULITE 1000s shipped is a result of the time
that the IMMULITE 1000 and its predecessor system, the IMMULITE, have been
available in the market, which is over ten years. The Company also ships
IMMULITE systems that have been returned by customers and refurbished by the
Company. In the fourth quarter of 2003 the Company reduced the price of
the IMMULITE 2000 in anticipation of the release of the IMMULITE 2500 which
occurred in June of 2004. The IMMULITE 2000/2500 has a longer sales process
than the IMMULITE 1000 due to its higher sales price, and the IMMULITE
2000/2500 experiences a longer time delay between instrument placement and the
ramp-up of reagent sales. The 2500, which reduces the time it takes to get a
result for certain tests, most importantly tests for the emergency room to aid
in the diagnosis of cardiac conditions, sells at a higher price than the
IMMULITE 2000, and sales of the 2500 may erode sales of the 2000. The Company
has 78 tests available in the United States on the IMMULITE 2000 and 71 tests
available for introduction in the United States on the IMMULITE 2500. The
Companys ability to add FDA approved tests to the IMMULITE 2500 menu will
depend on the resolution of the FDA inquiry discussed below. The Company is,
however, able to market new tests abroad without FDA approval and expects to
introduce new tests for the IMMULITE 2500, such as Pro-BNP and an ANA screen,
in the fourth quarter of 2004. The increase in IMMULITE and IMMULITE 2000 instrument and service revenue in
the second quarter is primarily due to an increase in revenue from service and
parts. Included in IMMULITE 2000 equipment sales is revenue relating to the
Companys sample management system (SMS), a sample-handling device that can be
attached to the IMMULITE 2000. In the first six months of 2004 the increase in
IMMULITE 2000 instruments and service included a significant increase in
instrument revenue as a result of an increase in the number of instruments
which were sold. For the second quarter of 2004, IMMULITE 2000 reagent utilization per
instrument was $19,255 and IMMULITE reagent utilization per instrument was
$4,460 as compared to the second quarter of 2003, when they were $18,220 and
$4,562, respectively. Increases in utilization on the IMMULITE 2000 are in
part a result of a larger test menu including Hepatitis B tests and the
strength of the euro relative to the dollar. The decrease in average
utilization per instrument on the IMMULITE is expected to continue as high
volume
IMMULITE installations are replaced with IMMULITE 2000s and incremental
IMMULITE placements go into lower volume environments. Sales of the Companys mature RIA product line declined approximately 12% in
the second quarter of 2004, representing 6% of sales, compared to 7% of sales
in the second quarter of 2003. This trend is expected to continue. Sales of
other DPC products declined to $1.7 million in the second quarter of 2004 from
$2.5 million in the second quarter of 2003. The primary reason for this was a
decline in sales of the Companys micro-plate 12




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allergy product line. The
Company ceased manufacturing this product line at the end of 2003 because of
the availability of allergy testing on the IMMULITE 2000. These sales will
continue to decline as inventories are depleted. Sales of non-DPC products,
primarily through its consolidated international affiliates, increased 39% in
the second quarter of 2004 to $1.9 million and increased to 2% of sales from 1%
in the second quarter of 2003. In the second quarter of 2004, sales to domestic customers grew by 17%, and
remained at 29% of total sales. The increase in domestic sales was due to
increased penetration into most customer segments. Foreign sales (including
U.S. export sales, sales to non-consolidated foreign subsidiaries, and sales of
consolidated foreign subsidiaries) as a percentage of total sales were
approximately 71% in the second quarter of 2004 and 2003. Europe, the
Companys principal foreign market, represented 44% of sales in the second
quarter of 2004 and 45% of sales in 2003. Sales in the Companys German
subsidiary, which includes the Czech Republic and Poland, increased 10%
primarily as a result of the strength of the euro. Sales in the Brazil region,
which includes certain other Central and South American countries, accounted
for approximately 9% of total sales in the second quarter of 2004, an increase
of 25% over the second quarter of 2003. Although the Brazilian real relative
to the U.S. dollar weakened slightly in the second quarter and strengthened
slightly in the first six months of 2004, in the past few years the real has
been very volatile relative to the dollar. In the first six months of 2004 sales to domestic customers grew by 19% and
remained at 28% of sales. Europe, the Companys principal foreign market
represented 47% of sales versus 46% in the first six months of 2003. Sales in
the Companys German subsidiary, which includes the Czech Republic and Poland,
increased 12% primarily as a result of the strength of the euro. Sales in the
Brazil region accounted for approximately 8% of sales, an increase of 26%. 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 translation of
financial statements of consolidated affiliates is that of lower sales and net
income. In periods where the dollar is weakening, the impact is the reverse.
Based on comparative exchange rates in the second quarter of 2004 and 2003, the
dollar weakened relative to the euro and strengthened to the Brazilian real. In
the first six months of 2004 the dollar weakened relative to both the euro and
the real. The effect of the changes of exchange rates on sales was a positive
3% in the second quarter and 6% in the first six months of 2004. Due to
intense competition, the Companys foreign distributors are generally unable to
increase prices to offset this negative effect when the U.S. dollar is strong. The Company is continuing to cooperate with the SEC and the United States
Justice Department in their review of certain improper payments by the
Companys Chinese subsidiary first discovered internally by the Company in the
fourth quarter of 2002. The Company voluntarily disclosed this to the SEC and
the United States Justice Department in early 2003 and is continuing to
evaluate its internal policies and procedures to promote compliance with
applicable laws. The Companys activities in this regard resulted in the
termination of the general manager of the Chinese subsidiary in the first
quarter of 2004 as a result of his failure to follow payment-related procedures
implemented on the advice of outside counsel. An independent committee of the
Board continues to oversee these issues and is conducting an investigation.
Government and other actions related to this matter may have a material adverse
effect on future operations in China. For the year ended December 31, 2003,
the Chinese subsidiary had sales of $9.8 million. In the second quarter of
2004 the Companys Chinese subsidiary had sales of $2.2 million. In the fourth
quarter of 2002, the Company accrued $1.5 million for actual and estimated
costs to resolve this matter. As of June 30, 2004, $1.4 million remains in the
accrual, although the actual costs, including fines and penalties, to resolve
this matter could significantly exceed the amount accrued. In addition, the
Company recorded a charge of $1.4 million to its 2002 fourth quarter tax
provision related to the possible non-deductibility of the payments in China.
During the third quarter of 2003, the Company recorded an additional charge of
$0.9 million to its income tax provision for this and other Chinese tax-related
matters. Additional legal expenses of approximately $884,000, $700,000 and
$733,000 have been incurred and charged to general and administrative expense
during the year ended
December 31, 2003, the three months and the six months ended June 30, 2004,
respectively. It is anticipated that legal fees for issues related to China
will decrease in the remainder of 2004. In February 2004, the Company was informed by the U.S. Food and Drug
Administration (FDA) that based on inspectional findings that included data
integrity and procedural issues, the Company was subject to the FDAs
Application Integrity Policy. The FDA suspended its review of all applications
submitted by the Company and 13




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will defer the review of any future applications
until the FDA determines that the Company has resolved these issues. The
resolution process consists of developing and implementing a corrective action
plan that will be audited by a third party and reviewed by the FDA. The
Company has engaged the third party auditor and still believes that 12 months
is a reasonable time for such actions to take place. During this time, the
Company is not restricted by the FDA with regard to introducing new tests
outside of the United States. However, the Companys inability to introduce
new tests in the United States pending resolution of this matter may have a
negative impact on its future sales and profits. Cost of Sales Gross margin increased to 59.4% in the second quarter of 2004 from 58.3% in the
second quarter of 2003. This increase was due in part to a shift in the mix of
revenues toward reagents, particularly IMMULITE 2000 reagents, an increase in
domestic end user sales and the strength of the euro relative to the dollar.
Gross margin for the first six months of 2004 was 58.1% compared to 58.1% in
the same period of 2003. All products manufactured in the United States are
dollar-based. However, a large percentage of these products are sold to
company-owned international distributors, which sell the products in their
local currencies. In periods of a weakening dollar, sales as measured in
dollars increase, resulting in higher gross margins. A strengthening dollar
generally results in lower gross margins at international distributors. Operating Expenses and Other Selling expense in the second quarter of 2004 increased to 17.5% of sales from
16.3% in the second quarter of 2003 in part due to an increase in sales
compensation related to the increase in sales and the increase in the value of
the euro relative to the dollar. General and administrative expense increased to 10.0% of sales in the second
quarter of 2004 from 8.7% in the second quarter of 2003. Included in general
and administrative expense for the second quarter of 2004 is $700,000 in legal
fees related to the Companys internal investigation of its Chinese subsidiary.
The review of this matter is on going, but the related legal expenses are
expected to decrease in the remainder of 2004. See Note 9 of Notes to the
Consolidated Financial Statements. General and administrative expense in the
second half of 2004 will be negatively impacted by legal costs incurred to
respond to the subpoena referred to in Item 5 of this report, legal and other
costs related to the SEC and FDA matters, and expenses relating to the
independent auditors review of the Companys internal controls in connection
with their year end attestation. Equity in income of affiliates represents the Companys share of earnings in
non-consolidated affiliates, principally the 45%-owned Italian distributor.
The amount increased to $2.7 million in the second quarter 2004 from $1.5
million in 2003. Included in the quarter was a one-time benefit from a tax
revaluation in Italy of $260,000. In the first six months ended June 30, 2004 operating expenses increased in
absolute-terms in part due to the increase in sales and the increase in the
value of the euro relative to the dollar. Operating expenses for the first six
months ended June 30, 2004 decreased slightly as a percentage of sales to 35.3%
from 35.6% in 2003. Interest/other (expense) income-net includes interest income, interest expense,
and foreign exchange transaction losses and gains. The net amount was expense
of $184,000 in the second quarter of 2004 versus income of $124,000 in 2003.
This difference was driven in part by a $957,000 swing from a $611,000 foreign
currency translation gain in 2003 to a net loss of $346,000 in 2004, net of a
reduction in interest expense and other expense of $649,000, which was in part
due to the capitalization of interest related to the Companys construction
projects and a reduction of other taxes in Brazil. For the first six months of
2004 interest/other expense was an expense of $553,000 versus income of
$153,000 in 2003. This difference was due in part to a $1.7 million swing from
a $1.1 million foreign currency gain in 2003 to a $552,000 foreign currency
loss in 2004. This was partially offset by a $948,000 increase in net interest
income, primarily the result of the capitalization of interest related to the
Companys construction projects, which are essentially complete. Income Taxes and Minority Interest The Companys effective tax rate includes federal, state, and foreign taxes.
The Companys tax rate increased to 30.0% in the second quarter and first six
months of 2004 from 29.0% in the first quarter and first six months of 2003. 14




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Contractual Obligations and Commitments The Companys contractual obligations and commitments have not changed
significantly from those discussed in Item 7 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. These estimates and assumptions
include, but are not limited to, allowance for bad debts, allowance for slow
moving and obsolete inventories, useful lives selected for depreciating
property, plant, and equipment, valuation allowances for deferred income taxes,
estimates used in the recoverability of long-lived assets, and contingency
reserves established with respect to the Companys Chinese subsidiary.
Management bases its estimates and assumptions on historical experience and on
various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Management does not believe that any of its estimates involve assumptions about
matters that are highly uncertain or that different reasonable estimates, or
changes in accounting estimates that are reasonably likely to occur, would have
a material impact on the financial statements. To the extent there are
material differences between managements estimates and actual results, future
results of operations will be affected. However, managements experience has
been that the differences between estimates and actual results have been
immaterial, and appropriate adjustments to the consolidated financial
statements are made as soon as the differences become known. Liquidity and Capital Resources The Company has adequate working capital and sources of capital to carry on its
current business and to meet its existing capital requirements. At June 30,
2004 and December 31, 2003, the Company had cash and cash equivalents of $65.2
million and $69.8 million, respectively. Net cash flow from operating
activities was $27.5 million in the first six months of 2004 and $15.2 million
in the first six months of 2003. The increase was primarily a result of an
increase in net income, depreciation and amortization, accounts payable,
accrued liabilities and income taxes payable net of increases in accounts
receivable, and inventories. Additions to property, plant, and equipment in
the first six months of 2004 were $28.3 million, compared to $27.9 million in
the first six months of 2003. The increases in plant, property, and equipment
related to the purchase of a new corporate headquarters building. In 2004 the
increase in plant, property, and equipment was in great part related to the
fitting out of the Companys new corporate headquarters building and the
construction of a new building in Wales. The Companys new headquarters will
be occupied in the third quarter of 2004. The Companys new 30,000 square foot
building in Wales was completed in the second quarter of 2004 at a total cost
of approximately $9 million. The Company decreased borrowings by $4.0 million
in the first six months of 2004 and increased borrowings by $1.3 million in the
first six months of 2003. The Companys foreign operations are subject to
risks, such as currency devaluations, associated with political and economic
instability. See discussion above under Results of Operations. The Company
placed $14.2 million in instruments in the first six months of 2004, including
operating and sales-type leases, as compared to $11.1 million in the first six
months of 2003. The Company has a $20 million domestic unsecured line of credit under which
there were no borrowings outstanding at June 30, 2004 or December 31, 2003.
The Company had other notes payable (consisting of bank borrowings by the
Companys foreign consolidated subsidiaries payable in their local currency,
some of which are guaranteed by the Company) of $14.8 million at June 30, 2004
compared to $19.4 million at December 31,
2003. The Company received $3.4 million from the exercise of stock options in
the first six months of 2004 versus $1.7 million in the first six months of
2003. The Company has paid a quarterly cash dividend of $.06 per share, on a
split-adjusted basis, since 1995. New Accounting Pronouncements 15




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In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (FIN 46). In December 2003,
FIN 46 was replaced by FIN 46R Consolidation of Variable Interest Entities.
FIN 46R clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinate financial support from other parties.
FIN 46R requires an enterprise to consolidate a variable interest entity if
that enterprise will absorb a majority of the entitys expected losses, is
entitled to receive a majority of the entitys expected residual returns, or
both. FIN 46R was effective for special-purpose entities being evaluated under
FIN 46R for consolidation on December 31, 2003 and was effective for all other
entities being evaluated on March 31, 2004. The adoption of FIN 46R did not
have a material impact on the Companys financial position or results of
operations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change during the quarter ended June 30, 2004 from
the disclosures about market risk provided in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. 
 ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation of the Companys disclosure controls and procedures
as of June 30, 2004, the Chief Executive Officer and Chief Financial Officer of
the Company have concluded that such disclosure controls and procedures were
adequate and effective and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them by others within those entities. There has been no change in the
Companys internal control over financial reporting identified in connection
with such evaluation that occurred during the Companys last fiscal quarter
that has materially affected or is reasonably likely to materially affect the
Companys internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following persons were elected Directors at the Annual Meeting of
Shareholders held May 4, 2004. Votes CastFor
    
    WithheldSidney A. Aroesty
    
    
    25,860,249
    
    
    
    604,530Frederick Frank
    
    
    25,811,848
    
    
    
    652,931Kenneth A. Merchant
    
    
    25,533,398
    
    
    
    931,381Maxwell H. Salter
    
    
    25,537,861
    
    
    
    926,918James D. Watson
    
    
    26,189,866
    
    
    
    274,913Ira Ziering
    
    
    26,132,728
    
    
    
    332,051Michael Ziering
    
    
    25,599,958
    
    
    
    864,821
 The Bylaws of the Company were amended to increase the number of directors. Votes CastBrokerFor
    
    Against
    
    Abstain
    
    Non-Votes23,983,340
    
    
    485,190
    
    
    
    40,419
    
    
    
    0
 
 ITEM 5. OTHER INFORMATION In late July 2004, the Company was served with a subpoena requiring it to
produce to the Federal grand jury for the Central District of California
documents relating to trading in the Companys securities and the exercise of
options by officers, directors and employees of the Company between December
30, 2003 and April 1, 2004. The subpoena also seeks all documents relating to
the FDAs review of the Companys diagnostic test to detect Chagas and any
audits or reviews by the FDA between 2000 and the present relating to the
Companys 16




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products. Finally, the subpoena seeks the personnel file of a former
Company employee. The Company is cooperating with the SEC and the U.S.
Attorneys Office regarding these matters. An independent committee of the
Board of Directors has conducted an investigation of the trading issues and
expects to present its findings and conclusions to the SEC in the near future. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    
    Exhibits  3.1
    
    Amended and Restated Bylaws31.1
    
    Certificate of Chief Executive Officer31.2
    
    Certificate of Chief Financial Officer32.1
    
    Section 906 Officers Certification  (b)
    
    Reports on Form 8-K. None 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DIAGNOSTIC PRODUCTS CORPORATION(Registrant)/s/ Michael Ziering
    
    President andChief Executive Officer and
    
    August 9, 2004Michael Ziering
    
    Chairman of the Board(Principal Executive Officer)Director/s/ James L. Brill
    
    Vice President-Finance(Principal Financial and
    
    August 9, 2004James L. Brill
    
    Accounting Officer)
 
 EXHIBIT INDEX 3.1
    
    Amended and Restated Bylaws31.1
    
    Certificate of Chief Executive Officer31.2
    
    Certificate of Chief Financial Officer32.1
    
    Section 906 Officers Certification
 17