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, 1998
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
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(Exact name of small business issuer as specified in its charter)
State of Delaware 13-3078199
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(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
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(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
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Common Stock, $.01 par value per share; authorized 25,000,000 shares; 899,672
shares outstanding as of October 9, 1998.
Convertible Preferred Stock, $1.00 par value per share; authorized 500,000
shares; no shares outstanding as of October 9, 1998.
Transitional Small Business Disclosure Format (Check one): Yes No X
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<PAGE>
DIAGNON CORPORATION
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INDEX
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Part I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements.
Consolidated Balance Sheets, May 31, 1998 and
August 31, 1998 (Unaudited) . . . . . . . . . . . . . . 2
Unaudited Statements of Consolidated Operations for
the Three Months Ended August 31, 1998 and
August 31, 1997 . . . . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Consolidated Cash Flows
for the Three Months Ended August 31, 1998 and
August 31, 1997 . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis . . . . . . . . . 5
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
CONSOLIDATED BALANCE SHEETS, MAY 31, 1998 AND AUGUST 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
ASSETS 1998 1998
- ------ ---------- -------
<S><C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,529 $ 65,730
Accounts receivable:
Trade 942,687 903,343
Unbilled 545,929 655,554
Other 26,727 29,983
Prepaid expenses 74,103 54,889
Inventories 98,984 45,107
Deferred income taxes - current 14,700 43,700
------------- --------------
Total current assets 1,769,659 1,798,306
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LOANS TO OFFICERS 90,000 90,000
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FIXED ASSETS:
Leasehold improvements 766,997 749,155
Furniture, fixtures and equipment 3,131,542 3,071,181
------------- --------------
Total 3,898,539 3,820,336
Less accumulated depreciation
and amortization 2,405,671 2,327,947
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Fixed assets, net 1,492,868 1,492,389
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DEFERRED INCOME TAXES - NONCURRENT 661,800 661,800
OTHER NONCURRENT ASSETS 216,227 234,375
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TOTAL $ 4,230,554 $ 4,276,870
============= ==============
LIABILITIES
- -----------
CURRENT LIABILITIES:
Borrowings under line of credit $ 308,910 $ 212,546
Current maturities of long-term debt 140,245 140,245
Accounts payable 244,647 234,425
Accrued compensation and related costs 223,540 390,099
Accrued income taxes 3,909 12,909
Other accrued liabilities 3,775 6,082
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Total current liabilities 925,026 996,306
LONG-TERM DEBT 83,482 122,303
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Total liabilities 1,008,508 1,118,609
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STOCKHOLDERS' EQUITY
- --------------------
Convertible preferred stock - par value of $1.00
per share, 500,000 shares authorized; no shares
issued and outstanding
Common stock - par value of $.01 per share;
25,000,000 shares authorized; 1,600,408 shares
issued; August 31, 1998, 899,672 shares, May 31,
1998, 899,505 shares outstanding 16,004 16,004
Additional paid-in capital 7,475,035 7,475,035
Accumulated deficit (3,641,206) (3,704,910)
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Total 3,849,833 3,786,129
Less - treasury stock August 31, 1998, 700,736
shares, May 31, 1998, 700,903 shares, at cost (627,787) (627,868)
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Total stockholders' equity 3,222,046 3,158,261
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TOTAL $ 4,230,554 $ 4,276,870
============= ==============
</TABLE>
See notes to financial statements.
2
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
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UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE
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THREE MONTHS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
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<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1998 1997
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<S><C>
REVENUES AND SALES:
Contract revenues $ 2,711,176 $ 2,336,141
Product sales 4,118 1,073
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Total Revenues and Sales 2,715,294 2,337,214
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OPERATING EXPENSES:
Contract 2,095,359 1,764,299
Cost of goods sold 5,073 16,478
Research and development 41,272 117,850
General and administrative 454,791 426,168
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Total 2,596,495 2,324,795
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OPERATING INCOME 118,799 12,419
INTEREST INCOME 948 1,338
INTEREST EXPENSE (13,543) (12,121)
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INCOME BEFORE INCOME TAX 106,204 1,636
PROVISION FOR INCOME TAX 42,500 650
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NET INCOME $ 63,704 $ 986
============ ============
BASIC EARNINGS PER SHARE $ 0.07 $ 0.00
============ ============
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.00
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR BASIC EPS 899,590 899,707
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 6,262 14,974
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING + DILUTIVE OPTIONS FOR
DILUTIVE EPS 905,852 914,681
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
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UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE
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THREE MONTHS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
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<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
August 31, 1998 August 31, 1997
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<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 63,704 $ 986
--------------- ---------------
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 77,724 70,377
Deferred income taxes 29,000 550
Decrease in accounts receivable 73,537 66,237
(Increase) in prepaid expenses (19,214) (70,703)
(Increase) decrease in inventories (53,877) 1,000
Decrease in other assets 18,148 54,000
Decrease in accounts payable and accrued expenses (158,644) (162,554)
Decrease in income taxes payable (9,000) (2,300)
--------------- ---------------
Total Adjustments (42,326) (43,393)
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 21,378 (42,407)
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CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (78,203) (181,266)
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NET CASH USED FOR INVESTING ACTIVITIES (78,203) (181,266)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under line-of-credit agreement 96,364 256,449
Net proceeds from exercise of stock options 81
Principal payments under capital lease obligations (38,821) (30,005)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 57,624 226,444
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NET INCREASE IN CASH AND CASH EQUIVALENTS 799 2,771
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 65,730 62,638
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66,529 $ 65,409
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 12,487 $ 11,538
=============== ===============
Income taxes $ 18,500 $ 2,400
=============== ===============
</TABLE>
See notes to financial statements.
4
<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 using the average cost
method.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary Analysis
- ----------------
In this first quarter of fiscal year 1999, Diagnon realized net income of
$63,704.
During this quarter, the Company was notified by the National Cancer Institute
(NCI) that the contract "Studies Using Primate Models for AIDS Vaccine
Research", which expires on November 29, 1998, would not be renewed with the
Company or with any other contractor. This contract accounts for approximately
1.7% of the Company's projected revenues for fiscal year 1999. The expiration of
this contract will have a minimal effect on the Company's revenues and operating
capital.
On October 1, 1998, the Company introduced two nutritional supplements for the
equine industry. The two equine immunoglobulin products are Immugam and Minigam.
Both products are colostrum supplements that are recommended for use in newborn
foals. Minigam is for use in miniature horses and Immugam is intended for use in
all other breeds. These products provide an inexpensive oral colostrum
supplement which can be used by lay horse owners and breeders, whereas Diagnon's
pre-existing product, Lyphomune(R), is recommended for veterinarian use only.
Year 2000
- ---------
The Company has performed an internal assessment of the scope of the Year 2000
computer systems and software problems and its potential effect on the operation
of the Company. The Company is currently assessing its non-information systems
for Year 2000 compliance. The Company is contacting its major suppliers of
products and services to determine the status of the suppliers' Year 2000
capability. There can be no assurance that another company's failure to ensure
Year 2000 compliance and capability would not have an adverse effect on the
Company. The Company anticipates incurring approximately $25,000 to $30,000 in
each of the next two fiscal years replacing its Year 2000 non-compliant
microcomputers. To date the Company has spent approximately $5,000 to replace
non-compliant microcomputers. The replacement computers have pre-installed Year
2000 compliant software. Any costs incurred in connection with Year 2000
compliance will be expensed as incurred. It is the opinion of management that
the Year 2000 computer problem will not have a material effect on the Company's
operation. However, the Company is monitoring the progress of its largest
customer, the National Institutes of Health (NIH), toward Year
5
<PAGE>
2000 compliance. If the NIH is non-compliant on January 1, 2000, the Company's
financial condition may be adversely affected until such time that the NIH's
non-compliance contingency plan is initiated.
Currently, the Company does not have a Year 2000 non-compliance contingency
plan. Management is continuing to gather information to determine whether or not
a contingency plan is necessary.
Results of Operations
- ---------------------
For the three months of operations ended August 31, 1998 (the Company's first
quarter), Contract Revenues increased by 16.1% compared to the first quarter of
fiscal year 1998 reflecting increased contract activity, an increase in sales
related to Small Business Innovative Research (SBIR) grants, and the funding of
a $34,976 indirect rate variance cost overrun of a contract that expired in
fiscal year 1995 (the contract was administratively closed out on September 30,
1998). Product Sales increased to $4,118 compared to $1,073 in fiscal year 1998.
Contract Operating Expenses increased 18.8% compared to the first quarter of
fiscal year 1998 primarily due to increased contract activity and increased SBIR
activity. Cost of Goods Sold decreased to $5,073 from $16,478 in the first
quarter of fiscal year 1998. This decrease was primarily due to the expensing,
from inventory, of 147 units of Lyphomune(R) used in a sales promotion in fiscal
year 1998 compared to 19 complimentary units in this quarter. Research and
Development (R&D) expenses decreased to $41,272 compared to $117,850 in the
first quarter of fiscal year 1998. This decrease is primarily due to the
completion of the pre-clinical and clinical trials for the Company's purified
IgG product, Lyphomune(R) and the award of two SBIR grants to help support the
Company's ongoing research of Helicobacter pylori (both grants were awarded in
the second quarter of fiscal year 1998). General and Administrative Expenses
increased 6.7% compared to the first quarter of fiscal year 1998 primarily due
to inflationary increases in several expenses. Total Operating Expenses
increased 11.7% due to the above.
Operating Income increased to $118,799 compared to $12,419 in the prior year.
The increase is primarily due to the increase in Contract Revenues, the
decreases in Cost of Goods Sold and R&D expenses and the $34,976 increased
funding to cover an indirect cost overrun for an expired contract as mentioned
above.
For this quarter, Diagnon had Interest Expense of $13,543 compared to Interest
Expense of $12,121 in the prior year.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax expense of $29,000 for the three months
ended August 31, 1998. The Company provided for state income tax which is
estimated at $13,500. State income tax expense is reimbursable under government
contracting regulations.
Earnings Per Share (EPS) - For the three month comparison, options to purchase
63,179 shares of common stock at prices ranging from $1.50 per share to $3.375
per share were outstanding at August 31, 1998 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the market price of the common shares. Options to purchase 30,502 shares of
common stock at prices ranging from $2.6814 per share to $3.375 per share were
outstanding at August 31, 1997 but were not included in the computation of
diluted EPS because the
6
<PAGE>
options' exercise price was greater than the market price of the common shares.
For comparison purposes, all share and per share data in the financial
statements have been retroactively adjusted to reflect the one-for-six share
reverse stock split effected on October 22, 1997.
Liquidity and Capital Resources
- -------------------------------
Assets
The changes in Cash and Cash Equivalents are detailed in the Statements of
Consolidated Cash Flows on page 4. Total Assets decreased $46,316. Accounts
Receivable have decreased by $73,537 consisting mainly of 1) a decrease of
$109,625 to Unbilled Accounts Receivable primarily due to a $140,580 decrease in
prior year unbilled direct costs that were billed in June 1998 offset by a
$41,677 accrual of current period unbilled direct costs to be billed during the
second quarter of fiscal year 1999, a $5,804 accrual of contract fee retention
to be billed at the completion of the respective contracts, a decrease of
$51,502 in reimbursable indirect rate variances for the first three months of
fiscal year 1999, and the $34,976 increased funding to pay for the indirect cost
overrun of the expired contract mentioned above, 2) a $3,256 decrease to Other
Accounts Receivable, and 3) an increase of $39,344 to Trade Receivables.
Deferred Income Taxes decreased by $29,000 primarily as a result of utilizing a
portion of the federal income tax loss carryforward. Other Noncurrent Assets
decreased $18,148 due to the completion of a new freeze drying equipment order
($38,148) from the previous fiscal year end offset by a $20,000 deposit on a
nonhuman primate housing unit order placed during this quarter.
The decrease above is partially offset by 1) an increase in Inventories of
$53,877 as the Company continues to produce Lyphomune(R) for the next foaling
season (Spring 1999), and 2) an increase of $19,214 in Prepaid Expenses
primarily due to the prepayment of life insurance premiums. The balance of the
decrease was due to other miscellaneous factors.
Liabilities
In the first three months of operations, Total Liabilities decreased $110,101 as
compared to May 31, 1998. This decrease is primarily attributable to 1) a
decrease in Accrued Compensation and Related Costs of $166,559 reflecting a
shorter accrual period this quarter when compared to the prior year end and the
payment of accrued bonuses from fiscal year 1998 during this quarter, and 2)
payments totalling $38,821 on capital leases reducing Long-Term Debt.
The above decrease is partially offset by an increase to Borrowings Under
Line-of-Credit of $96,364 reflecting the increase in Inventories and the payment
of the accrued bonuses. The balance of the decrease was due to other
miscellaneous factors.
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.
7
<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 October 14, 1998 /s/ John C. Landon, Ph.D.
________________ _________________________
Chairman of the Board,
President and Chief Executive
Officer
DATE October 14, 1998 /s/ Michael P. O'Flaherty
________________ _________________________
Chief Operating Officer and
Secretary
DATE October 14, 1998 /s/ David A. Newcomer
________________ _____________________
Chief Financial Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<CASH> 66,529
<SECURITIES> 0
<RECEIVABLES> 1,515,343
<ALLOWANCES> 0
<INVENTORY> 98,984
<CURRENT-ASSETS> 1,769,659
<PP&E> 3,898,539
<DEPRECIATION> 2,405,671
<TOTAL-ASSETS> 4,230,554
<CURRENT-LIABILITIES> 925,026
<BONDS> 0
0
0
<COMMON> 16,004
<OTHER-SE> 3,206,042
<TOTAL-LIABILITY-AND-EQUITY> 4,230,554
<SALES> 4,118
<TOTAL-REVENUES> 2,711,176
<CGS> 5,073
<TOTAL-COSTS> 2,555,223
<OTHER-EXPENSES> 41,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,543
<INCOME-PRETAX> 106,204
<INCOME-TAX> 42,500
<INCOME-CONTINUING> 63,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,704
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
