U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
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 April 9, 1997.
Convertible Preferred Stock, $1.00 par value per share; authorized 325,000
shares; no shares outstanding as of April 9, 1997.
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
February 28, 1997 (Unaudited) . . . . . . . . . . . 2
Unaudited Statements of Consolidated Operations for
the Three Months Ended February 28, 1997 and
February 29, 1996 . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Consolidated Operations for
the Nine Months Ended February 28, 1997 and
February 29, 1996 . . . . . . . . . . . . . . . . . 4
Unaudited Statements of Consolidated Cash Flows
for the Nine Months Ended February 28, 1997 and
February 29, 1996 . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis . . . . . . . . . . 6
Part II. Other Information
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . 8
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1996 AND FEBRUARY 28, 1997 (UNAUDITED)
FEBRUARY 28, MAY 31,
ASSETS 1997 1996
- --------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 75,804 $ 218,543
Accounts receivable:
Trade 1,601,994 930,598
Unbilled 444,732 622,245
Other 19,399 27,425
Prepaid expenses 113,392 71,432
Inventories 40,465 52,755
Deferred income taxes - current 49,000 49,000
------------- --------------
Total current assets 2,344,786 1,971,998
------------- --------------
LOANS TO OFFICERS 90,000 90,000
------------- --------------
FIXED ASSETS:
Leasehold improvements 605,705 543,735
Furniture, fixtures and equipment 2,941,572 2,647,531
------------- --------------
Total 3,547,277 3,191,266
Less accumulated depreciation
and amortization 2,110,890 1,920,873
------------- --------------
Fixed assets, net 1,436,387 1,270,393
------------- --------------
DEFERRED INCOME TAXES - NONCURRENT 787,100 796,500
OTHER NONCURRENT ASSETS 102,093 102,093
------------- --------------
TOTAL $ 4,760,366 $ 4,230,984
============= ==============
LIABILITIES
CURRENT LIABILITIES:
Borrowings under line of credit $ 690,231
Current maturities of long-term debt 113,918 $ 113,918
Accounts payable 155,319 234,270
Accrued compensation and related costs 206,489 275,794
Accrued income taxes 5,843 3,560
Other accrued liabilities 31,341 11,503
------------- --------------
Total current liabilities 1,203,141 639,045
LONG-TERM DEBT 204,377 288,345
------------- --------------
Total liabilities 1,407,518 927,390
------------- --------------
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 (3,510,834) (3,560,088)
------------- --------------
Total 3,980,205 3,930,951
Less - treasury stock 4,204,208 shares, at cost (627,357) (627,357)
------------- --------------
Total stockholders' equity 3,352,848 3,303,594
------------- --------------
TOTAL $ 4,760,366 $ 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 FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
CONTRACT REVENUES $ 2,264,974 $ 2,196,007
------------ ------------
OPERATING EXPENSES:
Contract 1,849,152 1,776,920
General and administrative 402,017 426,896
------------ ------------
Total 2,251,169 2,203,816
------------ ------------
OPERATING INCOME/(LOSS) 13,805 (7,809)
INTEREST INCOME 1,165 939
INTEREST EXPENSE (10,342) (18,896)
------------ ------------
INCOME/(LOSS) BEFORE INCOME TAX 4,628 (25,766)
PROVISION FOR INCOME TAX 1,500 (10,700)
------------ ------------
NET INCOME/(LOSS) $ 3,128 $ (15,066)
============ ------------
INCOME/(LOSS) PER SHARE $ 0.00 $ (0.00)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
============ ============
See notes to financial statements.
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DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
CONTRACT REVENUES $ 6,789,363 $ 6,563,514
------------ ------------
OPERATING EXPENSES:
Contract 5,389,576 5,179,266
General and administrative 1,289,279 1,283,437
------------ ------------
Total 6,678,855 6,462,703
------------ ------------
OPERATING INCOME 110,508 100,811
INTEREST INCOME 4,757 1,942
INTEREST EXPENSE (33,211) (38,882)
------------ ------------
INCOME BEFORE INCOME TAX 82,054 63,871
PROVISION FOR INCOME TAX 32,800 25,600
------------ ------------
NET INCOME $ 49,254 $ 38,271
============ ------------
INCOME PER SHARE $ 0.01 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
============ ============
See notes to financial statements.
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DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE
NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
Nine Months Ended Nine Months Ended
February 28, 1997 February 29, 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 49,254 $ 38,271
--------------- ---------------
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 190,017 200,553
Deferred income taxes 9,400 10,800
Increase in accounts receivable (485,857) (676,112)
Increase in prepaid expenses (41,960) (50,902)
Decrease (increase) in inventories 12,290 (52,444)
Decrease in other assets 52,903
Decrease in accounts payable and accrued expenses (128,418) (17,828)
Increase (decrease) in income taxes payable 2,283 (302)
--------------- ---------------
Total Adjustments (442,245) (533,332)
--------------- ---------------
NET CASH USED FOR OPERATING ACTIVITIES (392,991) (495,061)
--------------- ---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (356,011) (143,078)
--------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES (356,011) (143,078)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under line-of-credit agreement 690,231 566,566
Principal payments under capital lease obligations (83,968) (81,694)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 606,263 484,872
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (142,739) (153,267)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,543 210,887
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,804 $ 57,620
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 31,199 $ 35,699
=============== ===============
Income taxes $ 15,900 $ 18,460
=============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company issued:
Long-term debt issued in connection with capital
leases $ 289,614
===============
See notes to financial statements.
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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 and nine months 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 third quarter of fiscal year 1997, Diagnon realized a net income of
$3,128 resulting in a net income of $49,254 for the first nine months of fiscal
year 1997.
On February 1, 1997, the Company was awarded and began work on a Small Business
Innovative Research grant to explore the feasibility of establishing a
Comparative Neurobiology of Aging Research Resource that would include a brain
bank for great apes that die in captivity of natural causes. Such a brain bank
will be modeled on human brain banks that are operated to study Alzheimer's and
Parkinson's diseases. Phase I funding from the Government is $93,900.
During this quarter, Diagnon scientists have been successful in experimentally
infecting Erthyrocebus patas monkeys with human Helicobacter pylori. Infection
with H. pylori is associated with most duodenal and gastric ulcers and is a
risk factor in the development of gastric adenocarcinoma. Initial research on
this project has focused on three specific aspects of H. pylori: 1. development
of a nonhuman primate model, 2. identification and characterization of
potential protective antigens for vaccine development, and 3. identification
of novel targets for antibiotic development.
On March 12, 1997, the Company entered into an exclusive agreement with Slusser
Associates, Inc. of New York to develop and implement a plan to attempt to raise
$2,000,000 through a private placement. Neither the structure of the offering
nor whether it will consist of debt, equity, or a combination of the two, have
been determined. The funds raised would be used (i) to supplement Company
funding to expand production and marketing of Lyphomune(TM), its equine product
that treats failure of passive transfer in foals, and to support the development
of additional ancillary products; and (ii) to support continuing research
efforts with Helicobacter pylori. There can be no assurance that any or all of
the proposed funding will be obtained.
Diagnon has not received any communication from the United States Department of
Agriculture regarding the data submitted in the previous quarter relating to the
new intravenous equine IgG product developed by the Company. Though the Company
is optimistic, there is no assurance that the intravenous product will meet all
regulatory requirements for licensing.
Results of Operations
Three Months Comparison
For the three months of operations ended February 28, 1997 (the Company's third
quarter), Contract Revenues increased by 3.1% compared to the prior year. The
increase is primarily due to increased contract activity. Also affecting the
third quarter sales from the prior fiscal year was approximately $34,700 of
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applied indirect costs on four contracts which caused the total incurred costs
of each contract to exceed its funding. These indirect costs were and still are
not available for reimbursement and, therefore, revenue could not be recognized
on these costs. However, according to the Federal Acquisition Regulations, the
Company may be able to recover all or part of these costs after a government
indirect cost audit for fiscal year 1996 has been completed. Contract Operating
Expenses increased 4.1% compared to the prior year primarily due to increased
contract activity and costs incurred related to certain cancer treatments,
immunotherapy, and drug delivery approaches. General and Administrative (G&A)
Expenses decreased 5.8% compared to the prior fiscal year primarily due to
reduced marketing expenses and increased royalties received from Rockville Steel
and Manufacturing Company on nonhuman primate caging sales (royalty income is
accounted for as miscellaneous income and reduces G&A expenses) during this
quarter in the current fiscal year. Total Operating Expenses increased 2.1% due
to the above.
For this quarter , Diagnon had Operating Income of $13,805 compared to an
Operating Loss of ($7,809) in the prior year primarily due to increased contract
activity. During this quarter last fiscal year, the Company's financial results
were adversely affected by the severe snowstorm in the Washington, D.C.
metropolitan area (see February 1996 10-QSB).
For this quarter, Diagnon had interest expense of $10,342 compared to interest
expense of $18,896 in the prior year. The decrease is primarily attributable to
decreased average Borrowings Under Line-of-Credit.
Nine Months Comparison
For the nine months of operations ended February 28, 1997, Contract Revenues
increased by 3.4% compared to the prior year primarily due to increased contract
activity. Contract Operating Expenses increased 4.1% primarily due to increased
contract activity and costs incurred related to certain cancer treatments,
immunotherapy, and drug delivery approaches. General and Administrative Expenses
increased .5% primarily due to costs associated with the clinical trials of the
Equine Intravenous IgG and research and development of other IgG technologies.
Total Operating Expenses increased 3.3%, due to the above.
During this nine months, Operating Income increased 9.6% compared to the prior
year due to increased contract activity. During this period last fiscal year,
the Company's financial results were adversely affected by the severe snowstorm
in the Washington, D.C. metropolitan area (see February 1996 10-QSB).
For the nine months of this fiscal year, Diagnon had interest expense of $33,211
compared to interest expense of $38,882 in the prior year. The decrease is
primarily attributable to decreased average Borrowings Under Line-of-Credit
offset by capitalized leases at higher interest rates.
Liquidity and Capital Resources
Assets
The changes in Cash and Cash Equivalents are detailed in the Statements of
Consolidated Cash Flows on page 5. Accounts Receivable have increased by
$485,857 consisting primarily of 1) an increase of $671,396 to Trade Receivables
reflecting slower than normal collections rate, 2) a decrease of $177,513 to
Unbilled Accounts Receivable reflecting a decrease in reimbursable indirect rate
variances of $112,090 and a decrease of $65,423 in unbilled accrued direct costs
billed in March 1997 compared to unbilled direct costs at the prior year end
billed in June 1996, and 3) a $7,946 decrease to a receivable from Zooquest
Technologies LTD. Prepaid Expenses increased by
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$41,960 primarily due to the prepayment of $15,500 in life insurance premiums,
$3,700 in business insurance premiums, and the prepayment of $21,400 in real
estate and personal property taxes. An increase in Fixed Assets, net of
Accumulated Depreciation and Amortization of $165,994, reflects fixed asset
purchases of $356,011 (mainly nonhuman primate enclosures) offset by
depreciation and amortization of $190,017 during this nine month period.
Deferred Income Taxes decreased by $9,400 primarily as a result of utilizing a
portion of the federal income tax loss carryforward. Inventories decreased
$12,290 as the Company's year to date sales of Equine IgG exceeded its year to
date production.
Liabilities
In the first nine months of operations, Total Liabilities increased $480,128.
This increase is primarily attributable to 1) an increase to Borrowings Under
Line-of-Credit of $690,231 reflecting the increase in Fixed Assets and Trade
Receivable stated above, and 2) an increase in Other Accrued Liabilities of
$19,838.
The above increase is partially offset by 1) a decrease in Accounts Payable of
$78,951 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 $69,305 reflecting a
shorter accrual period this quarter when compared to the prior year end, and 3)
payments totalling $83,968 on capital leases reducing Long-Term Debt.
During the period of March 1 through April 2, 1997, the Company collected
$921,468 of the February 28, 1997 outstanding balance of $1,601,994 in Trade
Receivables and the Company made repayments on the line of credit totalling
$376,474, reducing the February 28, 1997 balance from $690,231 to $313,757. 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 6. EXHIBITS
(10) Investment Banking Services Agreement between Diagnon
Corporation and Slusser Associates, Inc. dated March 12,
1997.
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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 April 11, 1997 /s/ John C. Landon, Ph.D.
-------------------- -------------------------
Chairman of the Board,
President and Chief Executive
Officer
DATE April 11, 1997 /s/ Michael P. O'Flaherty
-------------------- -------------------------
Chief Operating Officer and
Secretary
DATE April 11, 1997 /s/ David A. Newcomer
-------------------- ---------------------
Chief Financial Officer
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EXHIBITS