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 November 30, 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 January 8, 1997.
Convertible Preferred Stock, $1.00 par value per share; authorized 325,000
shares; no shares outstanding as of January 8, 1997.
Transitional Small Business Disclosure Format (Check one): Yes No X
<PAGE>
DIAGNON CORPORATION
INDEX
Part I. Financial Information Page
Item 1. Financial Statements.
Consolidated Balance Sheets, May 31, 1996 and
November 30, 1996 (Unaudited) . . . . . . . . . . . 2
Unaudited Statements of Consolidated Operations for
the Three Months Ended November 30, 1996 and
November 30, 1995 . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Consolidated Operations for
the Six Months Ended November 30, 1996 and
November 30, 1995 . . . . . . . . . . . . . . . . . 4
Unaudited Statements of Consolidated Cash Flows
for the Six Months Ended November 30, 1996 and
November 30, 1995 . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis . . . . . . . 6
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 8
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1996 AND NOVEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
ASSETS 1996 1996
- ------ --------------- ---------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,069 $ 218,543
Accounts receivable:
Trade 1,013,437 930,598
Unbilled 524,438 622,245
Other 19,467 27,425
Prepaid expenses 129,754 71,432
Inventories 53,149 52,755
Deferred income taxes-current 49,000 49,000
--------------- ---------------
Total current assets 1,868,314 1,971,998
--------------- ---------------
LOANS TO OFFICERS 90,000 90,000
--------------- ---------------
FIXED ASSETS:
Leasehold improvements 547,743 543,735
Furniture, fixtures and equipment 2,794,649 2,647,531
--------------- ---------------
Total 3,342,392 3,191,266
Less accumulated depreciation
and amortization 2,043,798 1,920,873
--------------- ---------------
Fixed assets, net 1,298,594 1,270,393
--------------- ---------------
DEFERRED INCOME TAXES-NONCURRENT 781,500 796,500
OTHER NONCURRENT ASSETS 117,093 102,093
--------------- ---------------
TOTAL $ 4,155,501 $ 4,230,984
=============== ===============
LIABILITIES
CURRENT LIABILITIES:
Borrowings under line of credit $ 74,213
Current maturities of long-term debt 113,918 $ 113,918
Accounts payable 138,773 234,270
Accrued compensation and related costs 219,574 275,794
Accrued income taxes 13,660 3,560
Other accrued liabilities 12,511 11,503
--------------- ---------------
Total current liabilities 572,649 639,045
LONG-TERM DEBT 233,132 288,345
--------------- ---------------
Total liabilities 805,781 927,390
--------------- ---------------
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 (3,513,962) (3,560,088)
--------------- ---------------
Total 3,977,077 3,930,951
Less - treasury stock 4,204,208 shares, at cost (627,357) (627,357)
--------------- ---------------
Total stockholders' equity 3,349,720 3,303,594
--------------- ---------------
TOTAL $ 4,155,501 $ 4,230,984
=============== ===============
</TABLE>
See notes to financial statements.
-2-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARY
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
THREE MONTHS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
NOVEMBER 30, NOVEMBER 30,
1996 1995
----------------- ------------------
CONTRACT REVENUES $ 2,234,002 $ 2,138,159
----------------- ------------------
OPERATING EXPENSES:
Contract 1,730,509 1,681,485
General and administrative 446,699 416,305
----------------- ------------------
Total 2,177,208 2,097,790
----------------- ------------------
OPERATING INCOME 56,794 40,369
INTEREST INCOME 1,791 (3,797)
INTEREST EXPENSE (11,054) (12,341)
----------------- ------------------
INCOME BEFORE INCOME TAX 47,531 24,231
PROVISION FOR INCOME TAX 19,300 9,900
----------------- ------------------
NET INCOME $ 28,231 $ 14,331
================= ==================
INCOME PER SHARE $ 0.01 $ 0.00
================= ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
================= ==================
See notes to financial statements.
-3-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARY
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
SIX MONTHS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
NOVEMBER 30, NOVEMBER 30,
1996 1995
----------------- ------------------
CONTRACT REVENUES $ 4,524,389 $ 4,367,507
----------------- ------------------
OPERATING EXPENSES:
Contract 3,540,424 3,402,346
General and administrative 887,262 856,543
----------------- ------------------
Total 4,427,686 4,258,889
----------------- ------------------
OPERATING INCOME 96,703 108,618
INTEREST INCOME 3,592 1,003
INTEREST EXPENSE (22,869) (19,986)
----------------- ------------------
INCOME BEFORE INCOME TAX 77,426 89,635
PROVISION FOR INCOME TAX 31,300 36,300
----------------- ------------------
NET INCOME $ 46,126 $ 53,335
================= ==================
INCOME PER SHARE $ 0.01 $ 0.01
================= ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244
================= ==================
See notes to financial statements.
-4-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE
SIX MONTHS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
November 30, 1996 November 30, 1995
----------------- -----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 46,126 $ 53,335
----------------- -----------------
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 122,925 128,077
Deferred income taxes 15,000 24,000
Decrease (increase) in accounts receivable 22,926 (224,667)
Increase in prepaid expenses (58,322) (62,080)
Increase in inventories (394) (33,156)
Increase in other assets (15,000) (17,097)
Decrease in accounts payable and accrued expenses (150,709) (53,217)
Increase (decrease) in income taxes payable 10,100 (302)
----------------- -----------------
Total Adjustments (53,474) (238,442)
----------------- -----------------
NET CASH USED FOR OPERATING ACTIVITIES (7,348) (185,107)
----------------- -----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (151,126) (142,268)
----------------- -----------------
NET CASH USED FOR INVESTING ACTIVITIES (151,126) (142,268)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under line-of-credit agreement 74,213 223,793
Principal payments under capital lease obligations (55,213) (50,207)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,000 173,586
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (139,474) (153,789)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,543 210,887
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,069 $ 57,098
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 22,283 $ 19,136
================= =================
Income taxes $ 6,200 $ 13,400
================= =================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company issued:
Long-term debt issued in connection with capital leases $ 128,252
=================
</TABLE>
See notes to financial statements.
-5-
<PAGE>
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 second quarter of fiscal year 1997, Diagnon realized net income of
$28,231 totalling $46,126 for the first six months of fiscal year 1997.
During this quarter, the Company completed its clinical trials for Equine
Intravenous (IV) IgG and subsequently submitted the results to the United States
Department of Agriculture requesting approval to market and sell the veterinary
biologic product commercially. There can be no assurance, however, that the
product will receive the necessary regulatory approval.
At its October 16, 1996, meeting, the Board of Directors voted to extend the due
date of the outstanding loan to the President, Dr. John C. Landon, maintaining
all other terms and conditions, until October 31, 1998, and to continue to offer
Dr. Landon the right to sell shares of stock of Diagnon to the Company at
then-current fair market value to fund the payment of the principal ($90,000)
and accrued interest ($8,955 at November 30, 1996).
Results of Operations
Three Months Comparison
For the three months of operations ended November 30, 1996 (the Company's second
quarter), Contract Revenues increased by 4.5% due to increased contract
activity. Contract Operating Expenses increased 2.9%. General and Administrative
Expenses (G&A) increased 7.3% compared to the prior year primarily due to costs
associated with the clinical trials of the Equine Intravenous IgG and research
and development (R&D) of other IgG technology. Total Operating Expenses
increased 3.8% primarily due to the above.
Operating Income increased 40.7% compared to the prior year primarily due to
increased contract activity offset by the R&D expenses related to certain cancer
treatments and drug delivery approaches and the development of other IgG
technology.
For this quarter, Diagnon had interest expense of $11,054 compared to interest
expense of $12,341 in the prior year. The decrease is primarily attributable to
lower borrowings under the line of credit partially offset by capitalized leases
at higher interest rates.
-6-
<PAGE>
Six Months Comparison
For the six months of operations ended November 30, 1996, Contract Revenues
increased by 3.6% 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 and
drug delivery approaches. General and Administrative Expenses increased 3.6%
primarily due to costs associated with the clinical trials of the Equine
Intravenous IgG and research and development of other IgG technology as
discussed in the Three Months Comparison. Total Operating Expenses increased
4.0%, due to the above.
Operating Income decreased 11.0% compared to the prior year primarily due to
costs associated with the clinical trials of the Equine Intravenous IgG and
research and development of other IgG technology as stated above partially
offset by increased contract activity.
For the six months of this fiscal year, Diagnon had interest expense of $22,869
compared to interest expense of $19,986 in the prior year. The increase is
primarily attributable to 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 decreased by $22,926
primarily consisting of 1) a decrease of $97,807 to Unbilled Accounts Receivable
reflecting a decrease in reimbursable indirect rate variances of $150,045 offset
by an increase of $52,238 in unbilled accrued direct costs billed in December
1996 compared to unbilled direct costs at the prior year end billed in June
1996, 2) an $82,839 increase to Trade Receivables reflecting increased contract
activity and 3) a $7,946 decrease to a receivable from ZooQuest Technologies
LTD.
The decreases above were partially offset by 1) an increase in Prepaid Expenses
of $58,322 primarily due to the prepayment of $20,000 in business insurance
premiums and $38,000 in real estate and personal property taxes. An increase in
Fixed Assets, net of Accumulated Depreciation and Amortization, of $28,201
reflects fixed asset purchases of $151,126 (mainly nonhuman primate housing
units) offset by depreciation and amortization of $122,925 during this six month
period. Other Noncurrent Assets increased by $15,000 reflecting a deposit on the
fabrication of ten nonhuman primate housing units.
Liabilities
In the first six months of operations, Total Liabilities decreased $121,609.
This decrease is primarily attributable to 1) a decrease in Accounts Payable of
$95,497 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 $56,220 reflecting a
shorter accrual period this quarter when compared to the prior year end, and 3)
payments totalling $55,213 on capital leases reducing Long-Term Debt.
-7-
<PAGE>
The decrease above is partially offset by an increase to Borrowings Under
Line-of-Credit of $74,213 reflecting the increase in Fixed Asset purchases
stated above.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 16, 1996
Election of Directors
Four directors were elected:
For Withheld
J. Thomas August, M.D. 4,720,273 12,600
Charles C. Francisco 4,721,573 11,300
Charles F. Gauvin 4,721,573 11,300
John C. Landon, Ph.D. 4,720,573 12,300
There were no other directors whose term of office as a director continued after
the meeting.
Other Matters Voted Upon at the Meeting
Proposal 2 To approve the appointment of Deloitte & Touche LLP as
independent public accountants for the Company.
Affirmative Votes 4,729,573
Negative Votes 2,000
Abstain 1,300
-8-
<PAGE>
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 January 13, 1997 /s/ John C. Landon, Ph.D.
-------------------- -------------------------
Chairman of the Board,
President and Chief Executive
Officer
DATE January 13, 1997 /s/ Michael P. O'Flaherty
-------------------- -------------------------
Chief Operating Officer and
Secretary
DATE January 13, 1997 /s/ David A. Newcomer
-------------------- ---------------------
Chief Financial Officer
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 79,069
<SECURITIES> 0
<RECEIVABLES> 1,557,342
<ALLOWANCES> 0
<INVENTORY> 53,159
<CURRENT-ASSETS> 1,868,314
<PP&E> 3,342,392
<DEPRECIATION> 2,043,798
<TOTAL-ASSETS> 4,155,501
<CURRENT-LIABILITIES> 572,649
<BONDS> 0
0
0
<COMMON> 96,024
<OTHER-SE> 3,253,696
<TOTAL-LIABILITY-AND-EQUITY> 4,155,501
<SALES> 0
<TOTAL-REVENUES> 4,524,389
<CGS> 0
<TOTAL-COSTS> 4,427,686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,869
<INCOME-PRETAX> 77,426
<INCOME-TAX> 31,300
<INCOME-CONTINUING> 46,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,126
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
