<PAGE> 1
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 February 29, 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
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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
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(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 8, 1996.
Convertible Preferred Stock, $1.00 par value per share; authorized 325,000
shares; no shares outstanding as of April 8, 1996.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE> 2
DIAGNON CORPORATION
INDEX
Part I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements.
Consolidated Balance Sheets, May 31, 1995 and
February 29, 1996 (Unaudited) . . . . . . . . . . . 2
Unaudited Statements of Consolidated Operations for
the Three Months Ended February 29, 1996 and
February 28, 1995 . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Consolidated Operations for
the Nine Months Ended February 29, 1996 and
February 28, 1995 . . . . . . . . . . . . . . . . . 4
Unaudited Statements of Consolidated Cash Flows
for the Nine Months Ended February 29, 1996 and
February 28, 1995 . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis . . . . . . . . . 6
<PAGE> 3
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1995 AND FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 29, MAY 31,
ASSETS 1996 1995
- ------ -------------------- --------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 57,620 $ 210,887
Accounts receivable:
Trade 1,540,394 873,358
Unbilled 731,235 728,046
Other 29,947 24,060
Prepaid expenses 104,415 70,513
Inventories 52,444
Deferred income taxes-current 43,800 43,800
-------------------- --------------------
Total current assets 2,559,855 1,950,664
-------------------- --------------------
LOANS TO OFFICERS 90,000 90,000
-------------------- --------------------
FIXED ASSETS:
Leasehold improvements 532,379 532,379
Furniture, fixtures and equipment 2,517,158 2,084,466
-------------------- --------------------
Total 3,049,537 2,616,845
Less accumulated depreciation
and amortization 1,849,663 1,650,812
-------------------- --------------------
Fixed assets, net 1,199,874 966,033
-------------------- --------------------
DEFERRED INCOME TAXES-NONCURRENT 788,600 799,400
-------------------- --------------------
OTHER NONCURRENT ASSETS 94,867 130,770
-------------------- --------------------
GOODWILL, NET OF ACCUMULATED
AMORTIZATION 1,702
-------------------- --------------------
TOTAL $ 4,733,196 $ 3,938,569
==================== ====================
LIABILITIES
- -----------
CURRENT LIABILITIES:
Borrowings under line of credit $ 566,566
Current maturities of long-term debt 71,426 $ 83,075
Accounts payable 177,042 215,344
Accrued compensation and related costs 281,042 276,247
Accrued income taxes 302
Other accrued liabilities 25,072 9,393
-------------------- --------------------
Total current liabilities 1,121,148 584,361
LONG-TERM DEBT 362,381 142,812
-------------------- --------------------
Total liabilities 1,483,529 727,173
-------------------- --------------------
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 (3,614,015) (3,652,286)
-------------------- --------------------
Total 3,877,024 3,838,753
Less - treasury stock 4,204,208 shares, at cost (627,357) (627,357)
-------------------- --------------------
Total stockholders' equity 3,249,667 3,211,396
-------------------- --------------------
TOTAL $ 4,733,196 $ 3,938,569
==================== ====================
</TABLE>
See notes to financial statements.
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<PAGE> 4
DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
THREE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------------------ ---------------------------
<S> <C> <C>
CONTRACT REVENUES $ 2,196,007 $ 2,318,046
------------------------ ---------------------------
OPERATING EXPENSES:
Contract 1,776,920 1,780,682
General and administrative 426,896 451,335
------------------------ ---------------------------
Total 2,203,816 2,232,017
------------------------ ---------------------------
OPERATING (LOSS) INCOME (7,809) 86,029
INTEREST INCOME 939 727
INTEREST EXPENSE (18,896) (15,865)
------------------------ ---------------------------
(LOSS) INCOME BEFORE INCOME TAX (25,766) 70,891
PROVISION FOR INCOME TAX (10,700) 28,400
------------------------ ---------------------------
NET (LOSS) INCOME $ (15,066) $ 42,491
======================== ===========================
INCOME PER SHARE $ 0.00 $ 0.01
======================== ===========================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
======================== ===========================
</TABLE>
See notes to financial statements.
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<PAGE> 5
DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
----------------------- -------------------
<S> <C> <C>
CONTRACT REVENUES $ 6,563,514 $ 7,188,768
----------------------- -------------------
OPERATING EXPENSES:
Contract 5,179,266 5,564,793
General and administrative 1,283,437 1,360,489
----------------------- -------------------
Total 6,462,703 6,925,282
----------------------- -------------------
OPERATING INCOME 100,811 263,486
INTEREST INCOME 1,942 2,405
INTEREST EXPENSE (38,882) (29,947)
----------------------- -------------------
INCOME BEFORE INCOME TAX 63,871 235,944
PROVISION FOR INCOME TAX 25,600 94,400
----------------------- -------------------
NET INCOME $ 38,271 $ 141,544
======================= ===================
INCOME PER SHARE $ 0.01 $ 0.03
======================= ===================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
======================= ===================
</TABLE>
See notes to financial statements.
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<PAGE> 6
DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE
NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
February 29, 1996 February 28, 1995
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 38,271 $ 141,544
----------------- ---------------
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 200,553 258,600
Deferred income taxes 10,800 77,900
Increase in accounts receivable (676,112) (221,965)
Increase in prepaid expenses (50,902) (62,471)
Increase in inventories (52,444)
Decrease in other assets 52,903
(Increase) decrease in accounts payable and accrued expenses (17,828) 16,513
Decrease in income taxes payable (302) (11,242)
Decrease in deferred income (86,579)
----------------- ---------------
Total Adjustments (533,332) (29,244)
----------------- ---------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (495,061) 112,300
----------------- ---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (143,078) (206,713)
Decrease in loans to officers 8,000
----------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES (143,078) (198,713)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under line-of-credit agreement 566,566 140,425
Principal payments under capital lease obligations (81,694) (54,355)
Other (350)
----------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 484,872 85,720
----------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (153,267) (693)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 210,887 57,306
----------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,620 $ 56,613
================= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 35,699 $ 38,163
================= ===============
Income taxes $ 18,460 $ 30,954
================= ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company issued:
Long-term debt issued in connection with capital leases $ 289,614 $ 111,822
================= ===============
</TABLE>
See notes to financial statements.
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<PAGE> 7
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.
Reclassifications
Certain prior year statements of consolidated cash flow amounts have been
reclassified to conform with current year classifications.
Inventories
Inventories are stated at the lower of cost or market. Inventories at February
29, 1996 are comprised of the following:
<TABLE>
<S> <C>
Raw materials $ 8,835
Finished goods 43,609
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$52,444
=======
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary Analysis
In this third quarter of fiscal year 1996, Diagnon realized a net loss of
$15,066 resulting in a net income of $38,271 for the first nine months of
fiscal year 1996.
During this quarter, there were two external factors which significantly
affected the financial results of the Company: 1) the shut-down of the Federal
Government and 2) a severe snowstorm in the Washington, D.C. metropolitan area
("Blizzard of '96"). The government shut-down created operational delays
within existing contracts held by the Company's subsidiary, BIOQUAL, Inc., as
well as delayed potential contract negotiations. The shut-down also had a
negative impact on the Company's ability to make timely collections of accounts
receivable on its federal contracts. The result of the poor collections rate
was increased borrowings on the Company's line of credit and increased interest
expense for the quarter.
The "Blizzard of '96" caused a decrease in the Company's direct labor base, and
consequently sales, this quarter as many of the Company's employees were unable
to report to work during the storm. The Company's sales are generated mainly
from cost reimbursable contracts with direct labor being the primary producer
of sales.
In addition to the two external factors above, the expiration of two major
contracts on May 31, 1995 and June 30, 1995 has had a significant impact on the
Company this fiscal year. The Company is continuing its efforts to replace the
expired contracts.
During this quarter, BIOQUAL won a renewal competition and began work on the
National Cancer Institute contract "Mechanisms of Chemical Carcinogenesis in
Old World Monkeys". This five year contract totals $3,266,150. BIOQUAL also
began work on a two year contract with the National Institute of Allergy and
Infectious Disease. The contract titled "MAO/Evaluation of AIDS Vaccines in
Non-Human Primates" totals $367,489.
At the end of January 1996, the Company completed negotiations with the
Financial Advisory Services Branch of the National Institutes of Health on new
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<PAGE> 8
provisional indirect cost billing rates for fiscal years 1995 and 1996. The
newly approved indirect cost rates allowed BIOQUAL to invoice the government
approximately $500,000 in previously unbilled reimbursable indirect rate
variances from fiscal years 1995 and 1996. The invoicing of these rate
variances has no impact on the results of operations of the Company during this
fiscal year. Revenue generated by these costs had been recognized during the
prior fiscal year or previously this fiscal year.
Results of Operations
Three Months Comparison
For the three months of operations ended February 29, 1996 (the Company's third
quarter), Contract Revenues decreased by 5.3% compared to the prior year. The
decrease is primarily due to decreased contract activity (two major contracts
ended at the end of last fiscal year and the first quarter of this year
respectively). Also affecting this quarter's sales is approximately $34,700 of
applied indirect costs on four contracts which caused the total incurred costs
of each contract to exceed its funding. These indirect costs are currently not
available for reimbursement and, therefore, revenue cannot be recognized on
these costs. 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 this fiscal year has been completed. Contract Operating Expenses
decreased .2% compared to the prior year primarily due to a decrease in
contract activity offset by costs incurred associated with the production of
Equine IgG (a new product this fiscal year) which the Company intends to market
and sell the first half of this calendar year. General and Administrative
Expenses (G&A) decreased 5.4% compared to the prior fiscal year. During the
same quarter last year, the Company wrote off an additional $15,000 related to
the termination of the agreements between Diagnon and The Johns Hopkins
University (see February 1995 10-QSB). The decrease in G&A is the net result
of the prior year write off and the increase in current year expenses resulting
from annual salary increases and the addition of a full-time legal counsel.
Also contributing to the decrease is a reduction of the use of outside legal
counsel as compared to the prior year.
Operating Income decreased 109.1% to become an Operating Loss, and compared to
the prior year, decreased due to decreased contract activity, costs incurred
associated with the production of Equine IgG, and the "Blizzard of '96" as
previously discussed.
For this quarter, Diagnon had interest expense of $18,896 compared to interest
expense of $15,865 in the prior year. The increase is primarily attributable
to increased Borrowings Under Line-of-Credit (see Summary Analysis) and
capitalized leases at a higher interest rate.
Nine Months Comparison
For the nine months of operations ended February 29, 1996, Contract Revenues
decreased by 8.7% compared to the prior year primarily due to decreased
contract activity. Contract Operating Expenses decreased 6.9% primarily due to
decreased contract activity offset by costs incurred associated with the
production of Equine IgG (a new product this fiscal year) which the Company
intends to market and sell the first half of this calendar year. General and
Administrative Expenses decreased 5.7% primarily due to the net result of the
$119,000 prior year write off and the salary increases and additional staff as
discussed in the Three Months Comparison and Summary Analysis. Total Operating
Expenses decreased 6.7%, due to the above.
During this nine months, Operating Income decreased 61.7% compared to the prior
year due to decreased contract activity, costs incurred associated with the
production of Equine IgG, and the "Blizzard of '96" as previously discussed in
the Three Months Comparison.
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<PAGE> 9
For the nine months of this fiscal year, Diagnon had interest expense of
$38,882 compared to interest expense of $29,947 in the prior year. The
increase is primarily attributable to increased Borrowings Under Line-of-Credit
(see Summary Analysis) and 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 5. Accounts Receivable has increased by
$676,112 consisting primarily of an increase of $667,036 to Trade Receivables
reflecting slower than normal collections rate (due to the government
shut-down) and the January billing of approximately $590,000 in previously
unbilled indirect rate variances from the current fiscal year and prior fiscal
years and the settlement of costs incurred on certain other expired Federal
contracts. Prepaid Expenses increased by $33,902 primarily due to the
prepayment of $13,679 in life insurance premiums, $3,400 in business insurance
premiums, and the prepayment of $14,500 in real estate taxes. The increase in
Fixed Assets, net of Accumulated Depreciation and Amortization of $233,841,
reflects an increase in fixed asset purchases of $432,692 (mainly nonhuman
primate enclosures and an autoclave) offset by depreciation and amortization of
$198,851 during this nine month period. Inventories increased $52,444 as the
Company continues to produce Equine IgG.
Deferred Income Taxes decreased by $10,800 primarily as a result of utilizing a
portion of the federal income tax loss carryforward. Other Noncurrent Assets
decreased $35,903 as the net result of the completion of a nonhuman primate
housing unit order from the previous fiscal year and a $17,000 deposit on a new
order of housing units during this quarter.
Liabilities
In the first nine months of operations, Total Liabilities increased $756,356.
This increase is primarily attributable to 1) an increase to Borrowings Under
Line-of-Credit of $566,566 reflecting the increase in Fixed Assets and Trade
Receivable stated above, 2) an increase in Long-Term Debt of $207,920 related
to capital leases of $289,614 for nonhuman primate enclosures at the Research
Boulevard Facility, offset by $81,694 of payments on capital leases, and 3) an
increase in Other Accrued Liabilities of $15,679.
The above increase is partially offset by a decrease in Accounts Payable of
$38,302.
During the period of March 1 through April 9, 1996, the Company collected
$1,171,036 of the February 29, 1996 outstanding balance of $1,540,394 in Trade
Receivables and the Company made repayments on the line of credit totalling
$447,282, reducing the February 29, 1996 balance from $566,566 to $119,284.
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.
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<PAGE> 10
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 12, 1996 /s/ John C. Landon, Ph.D.
-------------------- --------------------------------
Chairman of the Board,
President and Chief Executive
Officer
DATE April 12, 1996 /s/ Michael P. O'Flaherty
-------------------- --------------------------------
Chief Operating Officer and
Secretary
DATE April 12, 1996 /s/ David A. Newcomer
-------------------- --------------------------------
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 57,620
<SECURITIES> 0
<RECEIVABLES> 2,301,576
<ALLOWANCES> 0
<INVENTORY> 52,444
<CURRENT-ASSETS> 2,559,855
<PP&E> 3,049,537
<DEPRECIATION> 1,849,663
<TOTAL-ASSETS> 4,733,196
<CURRENT-LIABILITIES> 1,121,148
<BONDS> 0
0
0
<COMMON> 96,024
<OTHER-SE> 3,153,643
<TOTAL-LIABILITY-AND-EQUITY> 4,733,196
<SALES> 0
<TOTAL-REVENUES> 6,563,514
<CGS> 0
<TOTAL-COSTS> 6,462,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,882
<INCOME-PRETAX> 63,871
<INCOME-TAX> 25,600
<INCOME-CONTINUING> 38,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,271
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
