U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from TO
Commission file number 0-13281
DIAGNON CORPORATION
(Exact name of small business issuer as specified in its charter)
State of Delaware 13-3078199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Medical Center Drive, Rockville, Maryland 20850
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code (301) 251-2801
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months, and (2)
has been subject to such filing requirement for the past 90 days.
Yes X No
Common Stock, $.01 par value per share; authorized 25,000,000 shares; 5,398,244
shares outstanding as of October 4, 1996.
Convertible Preferred Stock, $1.00 par value per share; authorized 325,000
shares; no shares outstanding as of October 4, 1996.
Transitional Small Business Disclosure Format (Check one): Yes No X
DIAGNON CORPORATION
INDEX
Part I. Financial Information Page
Item 1. Financial Statements.
Consolidated Balance Sheets, May 31, 1996 and
August 31, 1996 (Unaudited) . . . . . . . . . . . . 2
Unaudited Statements of Consolidated Operations for
the Three Months Ended August 31, 1996 and
August 31, 1995 . . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Consolidated Cash Flows
for the Three Months Ended August 31, 1996 and
August 31, 1995 . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis . . . . . . . . . . . 5
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 6
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 6
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1996 AND AUGUST 31, 1996 (UNAUDITED)
AUGUST 31, MAY 31,
ASSETS 1996 1996
- ------ --------------------- ---------------------
CURRENT ASSETS:
Cash and cash equivalents $ 81,579 $ 218,543
Accounts receivable:
Trade 1,327,875 930,598
Unbilled 417,834 622,245
Other 19,479 27,425
Prepaid expenses 96,101 71,432
Inventories 52,135 52,755
Deferred income taxes-current 49,000 49,000
--------------------- ---------------------
Total current assets 2,044,003 1,971,998
--------------------- ---------------------
LOANS TO OFFICERS 90,000 90,000
--------------------- ---------------------
FIXED ASSETS:
Leasehold improvements 545,319 543,735
Furniture, fixtures and equipment 2,764,855 2,647,531
--------------------- ---------------------
Total 3,310,174 3,191,266
Less accumulated depreciation
and amortization 1,983,379 1,920,873
--------------------- ---------------------
Fixed assets, net 1,326,795 1,270,393
--------------------- ---------------------
DEFERRED INCOME TAXES-NONCURRENT 793,500 796,500
--------------------- ---------------------
OTHER NONCURRENT ASSETS 102,093 102,093
--------------------- ---------------------
TOTAL $ 4,356,391 $ 4,230,984
===================== =====================
LIABILITIES
CURRENT LIABILITIES:
Borrowings under line of credit $ 327,931
Current maturities of long-term debt 113,918 $ 113,918
Accounts payable 143,973 234,270
Accrued compensation and related costs 165,011 275,794
Accrued income taxes 11,360 3,560
Other accrued liabilities 11,464 11,503
--------------------- ---------------------
Total current liabilities 773,657 639,045
LONG-TERM DEBT 261,245 288,345
--------------------- ---------------------
Total liabilities 1,034,902 927,390
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Convertible preferred stock - par value of
$1.00 per share, 325,000 shares authorized;
no shares issued and outstanding
Common stock - par value of $.01 per share;
25,000,000 shares authorized; 9,602,452
shares issued; 5,398,244 shares outstanding 96,024 96,024
Additional paid-in capital 7,395,015 7,395,015
Accumulated deficit (3,542,193) (3,560,088)
--------------------- ---------------------
Total 3,948,846 3,930,951
Less - treasury stock 4,204,208 shares, at cost (627,357) (627,357)
--------------------- ---------------------
Total stockholders' equity 3,321,489 3,303,594
--------------------- ---------------------
TOTAL $ 4,356,391 $ 4,230,984
===================== =====================
See notes to financial statements.
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DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
THREE MONTHS ENDED AUGUST 31, 1996 AND AUGUST 31, 1995
AUGUST 31, AUGUST 31,
1996 1995
--------------- ---------------
CONTRACT REVENUES $ 2,290,387 $ 2,229,348
--------------- ---------------
OPERATING EXPENSES:
Contract 1,809,915 1,720,861
General and administrative 440,563 440,238
--------------- ---------------
Total 2,250,478 2,161,099
--------------- ---------------
OPERATING INCOME 39,909 68,249
INTEREST INCOME 1,801 4,800
INTEREST EXPENSE (11,815) (7,645)
--------------- ---------------
INCOME BEFORE INCOME TAX 29,895 65,404
PROVISION FOR INCOME TAX 12,000 26,400
--------------- ---------------
NET INCOME $ 17,895 $ 39,004
=============== ===============
INCOME PER SHARE $ 0.00 $ 0.01
=============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
=============== ===============
See notes to financial statements.
-3-
DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE
THREE MONTHS ENDED AUGUST 31, 1996 AND AUGUST 31, 1995
Three Months Ended Three Months Ended
August 31, 1996 August 31, 1995
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,895 $ 39,004
--------------- --------------
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization 62,506 71,882
Deferred income taxes 3,000 18,600
Increase in accounts receivable (184,920) (481,157)
Increase in prepaid expenses (24,669) (74,064)
Decrease (increase) in inventories 620 (9,524)
Decrease in other assets 27,553
(Decrease) increase in accounts payable and accrued expenses (201,119) 7,601
Increase in income taxes payable 7,800 1,400
--------------- --------------
Total Adjustments (336,782) (437,709)
--------------- --------------
NET CASH USED FOR OPERATING ACTIVITIES (318,887) (398,705)
--------------- --------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (118,908) (154,393)
--------------- --------------
NET CASH USED FOR INVESTING ACTIVITIES (118,908) (154,393)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under line-of-credit agreement 327,931 424,165
Principal payments under capital lease obligations (27,100) (24,984)
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 300,831 399,181
--------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (136,964) (153,917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,543 210,887
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,579 $ 56,970
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 10,385 $ 6,836
=============== ==============
Income taxes $ 1,200 $ 6,400
=============== ==============
See notes to financial statements.
-4-
NOTES TO FINANCIAL STATEMENTS
Interim Financial Statements
In the opinion of management, all adjustments consisting only of normal
recurring accruals necessary for a fair presentation of such amounts have been
included. The results of operations for the quarter are not necessarily
indicative of results for the year.
Inventories
Inventories are stated at the lower of cost or market.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary Analysis
In this first quarter of fiscal year 1997, Diagnon realized net income of
$17,895.
On July 1, 1996, the Company's subsidiary, BIOQUAL, Inc., won a renewal
competition and began work on the National Institute of Child Health and Human
Development contract "Biological Testing Facility". This five year contract
totals $15,015,891.
On July 29, 1996, the Company entered into an Agreement of Sale with ZooQuest
Technologies, LTD. to purchase substantially all of ZooQuest's assets, including
the transfer of the United States Department of Agriculture Licenses (Product
License No. 411 and Facility License No. 411), and the Patent No. 4,911,910
entitled "Purified Equine Immunoglobulins and Method of Use Thereof". The
purchase price of the assets was $5,000 in cash, the forgiveness of
approximately $100,000 in debt (written off as uncollectible in previous fiscal
years) and a royalty of three percent on future sales of Equine Oral and Equine
Intravenous (IV) IgG, and Albumin products (the IV and Albumin products have not
received the necessary regulatory approvals).
This Agreement provides Diagnon with sole control and ownership of the Equine
IgG Lyphomune(TM) and the ability to further develop the technology,
however, there can be no assurance of the development and regulatory approval
of future products.
Results of Operations
For the three months of operations ended August 31, 1996 (the Company's first
quarter), Contract Revenues increased by 2.7%. Contract Operating Expenses
increased 5.2% compared to the prior year primarily due to costs associated with
the production of Equine IgG which the Company began to market and sell during
the last fiscal year and research and development (R&D) expenses related to
certain cancer treatment and drug delivery approaches. General and
Administrative Expenses increased .1%. Total Operating Expenses increased 4.1%
due to the above.
Operating Income decreased 41.5% compared to the prior year as Total Operating
Expenses increased at a greater rate than Contract Revenues. The operating
expense increase was primarily due to increases in costs incurred associated
with the production of Equine IgG and R&D expenses related to certain cancer
treatment and drug delivery approaches as stated above.
-5-
For this quarter, Diagnon had interest expense of $11,815 compared to interest
expense of $7,645 in the prior year. The increase is primarily attributable to
increased capitalized leases at a higher interest rate.
Liquidity and Capital Resources
Assets
The changes in Cash and Cash Equivalents are detailed in the Statements of
Consolidated Cash Flows on page 4. Accounts Receivable has increased by $184,920
consisting mainly of 1) an increase of $397,277 to Trade Receivables reflecting
a slower than normal collections rate and the August invoicing of $59,157 of
previously unbilled indirect rate variances from prior fiscal years, 2) a
$204,411 decrease in Unbilled Accounts Receivable representing decreases in
reimbursable indirect rate variances of $110,784 and prior year unbilled direct
costs of $93,626 that were billed in June 1996, and 3) a $7,946 decrease to a
receivable from ZooQuest Technologies LTD. Prepaid Expenses increased by $24,669
primarily due to the prepayment of $15,000 in life insurance premiums and
$10,000 in business insurance premiums. An increase in Fixed Assets, net of
Accumulated Depreciation and Amortization, of $56,402 reflects an increase in
fixed asset purchases of $118,908 (mainly nonhuman primate housing units) offset
by depreciation and amortization of $62,506 during this quarter.
Liabilities
In the first three months of operations, Total Liabilities increased $107,512.
This increase is primarily attributable to an increase to Borrowings Under
Line-of-Credit of $327,931 reflecting the increases in Trade Receivables and
Fixed Asset purchases stated above.
The increase above is partially offset by 1) a decrease in Accounts Payable of
$90,297 primarily due to the payment of a one-time rent adjustment from Fiscal
Year 1992 ($51,500) that was outstanding at the end of the last fiscal year, 2)
a decrease in Accrued Compensation and Related Costs of $110,783 reflecting a
shorter payroll accrual period this quarter when compared to the prior year end,
and 3) payments totalling $27,100 on capital leases reducing Long-Term Debt.
The Company believes it has sufficient cash and financing sources to provide for
its ongoing operations and the Company continues to believe that the impact of
inflation, or the absence of it, will have no significant effect on its
operations.
PART II. Other Information
Item 1. LEGAL PROCEEDINGS
None.
Item 6. EXHIBITS
(10) Agreement of Sale by and between ZooQuest Technologies,
LTD. and Diagnon Corporation.
-6-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAGNON CORPORATION
DATE October 9, 1996 /s/ John C. Landon, Ph.D.
-------------------- -------------------------
Chairman of the Board,
President and Chief Executive
Officer
DATE October 9, 1996 /s/ Michael P. O'Flaherty
-------------------- -------------------------
Chief Operating Officer and
Secretary
DATE October 9, 1996 /s/ David A. Newcomer
-------------------- ---------------------
Chief Financial Officer
-7-
EXHIBITS