SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DIAGNON CORPORATION
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Michael P. O'Flaherty, Diagnon Corporation
9600 Medical Center Drive
Rockville, MD 20850
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
DIAGNON CORPORATION
9600 MEDICAL CENTER DRIVE
ROCKVILLE, MARYLAND 20850
------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 22, 1997
------
The Annual Meeting of Shareholders of Diagnon Corporation (the "Company"), a
Delaware corporation, will be held at the Holiday Inn Gaithersburg, #2
Montgomery Village Avenue, Gaithersburg, Maryland, on October 22, 1997 at 10:00
a.m. for the following purposes:
1. To elect four directors each to hold office until the next
Annual Meeting of shareholders or otherwise as provided in the
By-Laws; and
2. To approve the appointment of Deloitte & Touche LLP as
independent public accountants for the Company; and
3. To amend the Company's 1988 Stock Option Plan; and
4. To adopt a new stock option plan; and
5. To amend the Certificate of Incorporation to authorize,
ratify, and approve the issuance of 17,390 shares of Common
Stock; and
6. To amend and restate the Certificate of Incorporation (i) to
eliminate the authorization to issue 325,000 shares of
Convertible Preferred Stock, all of which was previously
issued and converted to Common Stock, and (ii) to authorize
the issuance of 500,000 shares of new Preferred Stock; and
7. To amend and restate the Certificate of Incorporation (i) to
effect a reverse split of the shares of the Common Stock in
which each six shares of Common Stock shall become one share
of Common Stock, and (ii) to establish the number of
authorized shares of Common Stock at 25,000,000; and
8. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on September 8, 1997, as
the record date for the determination of shareholders entitled to notice of and
vote at the Annual Meeting.
A list of shareholders of the Company entitled to vote at the Annual Meeting
will be available for examination by shareholders of the Company at the offices
of the Company, 9600 Medical Center Drive, Rockville, Maryland, during the ten
days immediately preceding the date of the Annual Meeting.
The Annual Report to Shareholders for the year ended May 31, 1997, accompanies
this notice.
Shareholders who do not expect to attend the meeting in person are urged to fill
out, sign and mail promptly, the enclosed form of proxy.
/s/ Michael P. O'Flaherty
-------------------------
Michael P. O'Flaherty
Secretary
Rockville, Maryland
October 3, 1997
<PAGE>
DIAGNON CORPORATION
9600 MEDICAL CENTER DRIVE
ROCKVILLE, MARYLAND 20850
------
PROXY STATEMENT
------
This proxy statement is furnished in connection with the solicitation by Diagnon
Corporation (the "Company") of proxies to be voted at the Annual Meeting of the
shareholders to be held at the Holiday Inn Gaithersburg, #2 Montgomery Village
Avenue, Gaithersburg, Maryland, on October 22, 1997, at 10:00 a.m., or at any
adjournment thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting. Shares represented by duly executed proxies at the meeting will
be voted at the meeting. Where shareholders specify in the proxy a choice with
respect to any matter to be acted upon, the shares represented by such proxies
will be voted as specified. A shareholder who signs and returns a proxy in the
accompanying form may revoke it at any time before it is voted.
The Company, at the close of business on September 8, 1997, the record date for
determination of shareholders entitled to vote at the meeting (the "Record
Date"), had outstanding 5,398,244 shares of Common Stock, par value one Cent
($0.01) per share, each share being entitled to one vote with respect to each
matter to be voted on at the meeting. Votes submitted prior to the Annual
Meeting by proxy will be counted by the Company's transfer agent, ChaseMellon
Shareholder Service, and the results will be provided to the Company prior to
the Annual Meeting. Shares voted by shareholders present at the meeting will be
manually tabulated by the inspector of elections and added to the totals
provided by ChaseMellon Shareholder Service. Abstentions by proxy or in person
will be counted as present for the purposes of determining whether a quorum is
present. Abstentions will be counted as votes against the matter being voted
upon. Proxies submitted by brokers without indications that do not indicate
whether an item is being voted for will be voted in favor of such item.
The solicitation of proxies is made by and on behalf of the Board of Directors
of the Company. This statement is being mailed to the shareholders on or about
October 3, 1997.
SECURITY OWNERSHIP
To the knowledge of the Company on the Record Date, the only persons known to
hold more than 5 percent of the Common Stock of the Company are:
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS (2)
---------------- ------------- ---------
J. Thomas August........... 1,022,140 18.9
Carole K. Bishop............. 363,040 6.7
100 W. 57th St.
New York, NY 10019
John C. Landon (3)(4).... 1,208,092 21.7
<PAGE>
S. David Leibowitt.......... 598,840 11.1
2295 South Ocean Blvd.
Palm Beach, FL 33480
(1) As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13(d)(3) under the Securities Exchange Act as
consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the
power to dispose or direct the disposition) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise. Unless otherwise indicated, beneficial ownership consists of
sole voting and investment power.
(2) Assumes the exercise by such person or persons of the currently exercisable
options owned by him or them and does not give effect to any shares
issuable upon exercise by any other person or persons of options.
(3) Includes 54,330 shares in the names of members of Dr. Landon's family.
(4) Assumes the exercise of currently exercisable options to purchase
160,000 shares.
The Company has been advised that the shares of Common Stock owned by Dr. August
and Dr. Landon will be voted in favor of the four nominees for director, and in
favor of all propositions above stated.
ITEM 1 - ELECTION OF DIRECTORS
Four persons have been nominated for election as directors to serve until the
next Annual Meeting of shareholders and until their respective successors are
duly elected and qualified. IN THE ABSENCE OF A CONTRARY SPECIFICATION, THE
ENCLOSED PROXY WILL BE VOTED FOR THE ELECTION AS DIRECTORS OF THE PERSONS NAMED
BELOW. If any nominee becomes unavailable as a candidate for election for any
reason, it is intended that votes will be cast for a substitute nominee
designated by the Board of Directors. The Company has no reason to believe that
any nominees named below will be unable to serve if elected.
All four of the nominees currently are directors of the Company. J. Thomas
August has been a director of the Company since 1982, John C. Landon has been a
director since 1986, Charles C. Francisco has been a director since 1991, and
Charles F. Gauvin has been a director since 1992. The terms of all four
directorships will run from October, 1997, to the next Annual Meeting of the
Company's shareholders. Election of the four (4) nominees will require the
affirmative vote of the holders of a plurality of the shares of the Company's
Common Stock present in person or represented by proxy at the Annual Meeting.
The following table sets forth the name and principal occupation of each
nominee, the period without interruption for which he has been a director of the
Company, the names and titles of the Executive Officers of the Company, and the
amount and percent of class of stock of the Company beneficially owned by each
nominee, each Executive Officer, and the Executive Officers and Directors as a
group as of the Record Date. Unless otherwise indicated, beneficial ownership
consists of sole voting and investment power.
<PAGE>
<TABLE>
<CAPTION>
Director of
Company
Principal Occupation Without Nature of Percent
& Business Experience Interruption Beneficial of
Name and Address Age Past Five Years Since Ownership Class Class (1)
- ---------------- --- --------------- ----- --------- ----- ---------
<S> <C>
J. Thomas August 70 Nominee; Prof. & 1982 1,022,140 Common 18.9
School of Medicine Director of the Dept. of (sole)(6)
Johns Hopkins Univ. Pharmacology and
725 N. Wolfe St. Molecular Sciences at
Baltimore, MD 21205 The Johns Hopkins Univ.
School of Medicine,
Baltimore, MD for more
than five years.
John C. Landon 60 Nominee; Chairman of the 1986 1,153,762 Common 21.7
9600 Medical Ctr. Dr. Board (since February, (sole)(2)
Rockville, MD 20850 1987) & CEO & President 54,340
(since 1986) of the (joint)(3)
Company. President of
BIOQUAL, Inc.
("BIOQUAL"), a
subsidiary of the
Company.
Charles C. Francisco 59 Nominee; from 1992 to 1991 20,000 Common 0.3
25 Ridge Creek Trail the present, President, sole(4)
Moreland Hills, OH 44022 CEO & a Director of
Victoreen, Inc., Cleveland, OH, a
manufacturer of radiation measuring
instrumentation; from 1992 to 1995,
Director of Environmental Restoration
Systems, Inc., Middletown, PA,
pollution removal equipment makers;
from 1996 to present, Director of R.E.
Wright Environmental, Inc.,
Middletown, PA, an earth resources
consulting company; from June 1991 to
June 1992, President & Director of AMC
Group, Inc., Rye, NY, a private
investment holding company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Director of
Company
Principal Occupation Without Nature of Percent
& Business Experience Interruption Beneficial of
Name and Address Age Past Five Years Since Ownership Class Class (1)
- ---------------- --- --------------- ----- --------- ----- ---------
<S> <C>
Charles F. Gauvin 41 Nominee; currently 1992 20,000 Common 0.3
Trout Unlimited President and CEO and (sole)(4)
1500 Wilson Blvd. from 1991 to 1994
Arlington, VA 22209 Executive Director of
Trout Unlimited, Arlington, VA, a
nonprofit organization dedicated to
protection and conservation of trout
and salmon and their habitats; from
1986-1991, associated with the law
firm of Beveridge & Diamond, P.C.,
Washington, D.C.
Michael P. O'Flaherty 59 Company Secretary and 109,000 Common 1.98
Diagnon Corporation Corporate Vice President (sole)(5)
9600 Medical Center Dr. since June, 1988, and
Rockville, Maryland 20850 Chief Operating Officer
since June, 1994; Mr.
O'Flaherty's duties for
the Company include most
functions of general
management.
David A. Newcomer 36 Appointed Company Acting 16,000 Common 0.3
Diagnon Corporation Controller in May, 1989, (sole)(6)
9600 Medical Center Dr. Controller in June,
Rockville, MD 20850 1990, and Chief
Financial Officer in
June 1994; Mr.
Newcomer's duties
include the management
of the Company's
financial functions.
Leanne DeNenno 43 Appointed Vice 14,000 Common 0.23
BIOQUAL, Inc. President of Division (sole)(7)
9600 Medical Center Dr. of Animal Sciences in
Rockville, MD 20850 June 1997, Vice
President of the Medical Center Drive
Division of BIOQUAL since 1991, and
Head of Animal Research Programs since
1988; an employee of BIOQUAL since
1982.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Director of
Company
Principal Occupation Without Nature of Percent
& Business Experience Interruption Beneficial of
Name and Address Age Past Five Years Since Ownership Class Class (1)
- ---------------- --- --------------- ----- --------- ----- ---------
<S> <C>
Richard P. Bradbury 62 Appointed as Vice 14,000 Common 0.26
BIOQUAL, Inc. President of the (sole)(7)
2501 Research Blvd. Division of Primate
Rockville, MD 20850 Biology and Medicine in
June 1997, Vice President of the
Company's SEMA subsidiary in November,
1989; concurrent with the merger of
SEMA into BIOQUAL in 1991, was
appointed Vice President of the
Research Blvd. Division of BIOQUAL.
Jerry R. Reel 59 Appointed as Vice 11,000 Common 0.2
BIOQUAL, Inc. President of the (sole)(8)
9600 Medical Center Dr. Division of Reproductive
Rockville, Maryland 20850 Endocrinology and
Toxicology in June 1997, Vice
President, Science, of BIOQUAL since
October, 1991; private consultant from
1989 to 1990.
All Executive Officers and 2,404,232 Common 41.9
Directors as a group (9
Persons)(2)(3)(4)(5)(6)(7)(8)
</TABLE>
(1) Assumes the exercise by such person or persons of the currently
exercisable options owned by him or them and does not give effect to
any shares issuable upon exercise by any other person or persons of
options.
(2) Assumes the exercise of currently exercisable options to purchase
160,000 shares.
(3) Includes 54,330 shares in the names of members of Dr. Landon's
family.
(4) Assumes the exercise of currently exercisable options to purchase
20,000 shares.
(5) Assumes the exercise of currently exercisable options to purchase
105,000 shares.
(6) Assumes the exercise of currently exercisable options to purchase
16,000 shares.
(7) Assumes the exercise of currently exercisable options to purchase
14,000 shares.
(8) Assumes the exercise of currently exercisable options to purchase
11,000 shares.
<PAGE>
THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES OF THE BOARD
The Board of Directors held three meetings in fiscal year 1997. All board
members were present at each meeting.
The Board has established two committees, the Compensation Committee and the
Audit Committee.
The Compensation Committee (currently consisting of Messrs. Francisco and
Gauvin) meets as necessary to determine Dr. Landon's compensation. Dr. Landon
determines the compensation of the Company's other employees. The Compensation
Committee had one formal meeting during fiscal year 1997.
The responsibilities of the Audit Committee (currently consisting of Messrs.
Francisco and Gauvin) include recommending to the full Board the selection of
the Company's independent public accountants, discussing the arrangements for
the proposed scope, and the results of the annual audit with management and the
independent public accountants; reviewing the scope of non-audit professional
services provided by the independent public accountants; obtaining from both
management and the independent public accountants their observations on the
Company's system of internal accounting controls; and reviewing the overall
activities and recommendations of the Company's internal auditors. There was one
formal meeting of the Audit Committee in fiscal year 1997.
Messrs. Francisco, August and Gauvin have agreements with the Company extending
through the term of their election. The agreements for Messrs. Francisco, August
and Gauvin provide for quarterly payments of $1,000 each as directors fees and
payments of $500 for attendance at Board of Directors meetings. The agreement
with Dr. August also provides payments of $2,500 per quarter for services
rendered to the Company as Scientific Adviser. The Company also reimburses
Company related travel expenses incurred by any of the directors.
During fiscal year 1997, the Company paid the following cash compensation to
directors:
<TABLE>
<CAPTION>
DIRECTORS ATTENDANCE OF BOARD MEETINGS TRAVEL TO
FEES MEETINGS AND CONSULTATION BOARD MEETINGS
---- ------------------------- --------------
<S> <C>
Dr. J. Thomas August $4,000 $11,500 $100
Charles C. Francisco 4,000 1,500 627
Charles F. Gauvin 4,000 1,500 0
</TABLE>
7
<PAGE>
REMUNERATION OF EXECUTIVE OFFICERS AND RELATED MATTERS
The following table sets forth information with respect to remuneration
paid during the last three fiscal years to the Chief Executive Officer and
the other Company Officers whose compensation exceeded $ 100,000.
<TABLE>
<CAPTION>
Name and Principal Salary Bonus Other Annual Compensation
Position Year ($) ($) ($)(1,2)
------------------ ---- --- --- -------------------------
<S> <C>
John C. Landon 1997 160,000 101,863 32,723
CEO, President, Chairman 1996 160,000 116,946 32,723
of the Board 1995 160,000 139,963 32,723
Michael P. O'Flaherty 1997 116,690 21,660 10,593
Chief Operating Officer, 1996 120,818 11,944 10,593
Secretary 1995 108,695 17,115
Jerry R. Reel 1997 118,614 9,179
Vice President, BIOQUAL, Inc., 1996 109,481 2,949
Subsidiary 1995 110,636 3,405
Richard P. Bradbury 1997 99,573 4,000
Vice President, BIOQUAL, Inc., 1996 99,205 3,102
Subsidiary 1995 91,504 1,160
</TABLE>
(1) Other annual compensation for the CEO for the years 1997,
1996, and 1995 represents premiums for a $1,000,000 Split
Dollar Life Insurance Policy.
(2) Other annual compensation for the Chief Operating Officer for
the years 1997 and 1996 represents premiums for a $250,00
Split Dollar Life insurance Policy.
Dr. Landon had an employment agreement with the Company, which expired on May
31, 1996; subsequently, the Board of Directors extended Dr. Landon's agreement
until May 31, 1997, on the same terms and conditions. Pursuant to this
agreement, Dr. Landon's base compensation was $160,000 per year. The agreement
provided for various additional incentive compensation dependent upon the
results of the Company's operations each year through the term of employment. On
April 30, 1993, Dr. Landon requested and received Board of Directors concurrence
to reduce his base salary for fiscal year 1994 by 3.5% to assist the Company in
its efforts to contain operating costs. On June 1, 1994, Dr. Landon's base
compensation returned to $160,000 per year. A new employment contract for Dr.
Landon is currently being negotiated by Dr. Landon and the Compensation
Committee of the Board of Directors.
On June 1, 1988 the Company and Dr. Landon agreed to consolidate the previous
loan facilities available to Dr. Landon into a single loan of $100,000. The
consolidated loan had a five year term with repayment of principal deferred for
three years. The loan bore interest at the six month certificate of deposit rate
paid by Signet Bank, Maryland, and the rate was adjusted quarterly. On September
29, 1989, the Company agreed to increase the loan to $125,000. On September 21,
1990, the Company agreed to increase the loan to $150,000. Under Dr. Landon's
employment agreement (as amended), the loan was to be repaid in five
installments of $30,000 plus interest within six weeks after the end of each of
the next five fiscal years beginning with fiscal year 1992.
The largest amount owed by Dr. Landon during the fiscal year ended May 31, 1997,
with respect to his loan facilities was $90,000, excluding interest accrued
amounting to $8,955. There was no addition to the loan during this fiscal year.
On July 1, 1994, Dr. Landon made a payment of $2,745 on accrued interest. On
June 6, 1994, the Company agreed to defer Dr. Landon's third $30,000 repayment
and make the payment due as two $15,000 installments paid with the fourth and
fifth $30,000 repayments respectively. On October 11, 1995, the Company's
shareholders affirmatively voted to approve the purchase of Company's stock from
Dr. Landon at market value to fund repayment by Dr. Landon of the remainder of
the Company loan. As of September 13, 1997, that transaction has not occurred.
In October of 1996, the Board of Directors affirmatively voted to extend the due
date of the loan, maintaining all other terms and conditions, until October 31,
1998.
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of % of Total
Securities Stock Options
Underlying Granted to Exercise
Stock Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
---- ----------- ----------- ------ ----
<S> <C>
John C. Landon 10,000 (1) 10.3% $.378125 7/29/01
CEO, President and
Chairman of the Board
Michael P. O'Flaherty 10,000 (1) 10.3% $.42 5/30/07
Chief Operating Officer
Secretary
Jerry R. Reel 4,000 (1) 4.1% $.42 5/30/07
Vice President, Subsidiary
Richard P. Bradbury 3,000 (1) 3.1% $.42 5/30/07
</TABLE>
- ----------
(1) All options reported in this table are fully exercisable
AGGREGATED STOCK OPTION EXERCISED IN LAST FISCAL, AND FY-END OPTION VALUE
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at FY-End(#) at FY-End($)
on Exercise Realized
Name (#) ($) Exercisable Exercisable
- ---------------------- ----------- -------- ------------ ------------
<S> <C>
John C. Landon 150,000 (1,2) N/A
CEO, President, 10,000 (1) 438
Chairman of the Board
Michael P. O'Flaherty 95,000 (1) 14,114
Chief Operating Officer 10,000 (1,2) N/A
Secretary
Jerry R. Reel 7,000 (1) 373
Vice President, Subsidiary 4,000 (1,2) N/A
Richard P. Bradbury 10,000 (1) 1,959
Vice President, Subsidiary 4,000 (1,2) N/A
</TABLE>
- ----------
(1) All options reported in the table are fully exercisable.
(2) All options are out-of-the-money.
9
<PAGE>
ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors recommends the ratification of the firm of Deloitte &
Touche LLP as independent public accountants for fiscal year 1998. As in prior
years, representatives of Deloitte & Touche LLP will be present at the Annual
Meeting with the opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions raised at the meeting.
Deloitte & Touche LLP has audited the financial statements of Diagnon since
1982. Services provided in connection with the audit function by Deloitte &
Touche LLP for the fiscal year 1997 included primarily the examination of
Diagnon consolidated financial statements, and the review of filings with the
Securities and Exchange Commission.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF DELOITTE & TOUCHE
LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR 1998. PROXIES
SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY
CHOICE ON THE PROXY CARD.
ITEM 3 - TO AMEND THE COMPANY'S 1988 STOCK OPTION PLAN
The Company has an existing Stock Option Plan, initially adopted in 1988, and
subsequently amended (as amended, the "1988 Plan"). The purpose of the 1988 Plan
is to encourage key employees to exert maximum effort for the welfare of the
Company by extending the opportunity to acquire equity interests in the Company
and to participate in its success. The 1988 Plan allows for the issuance of
options in an amount up to 10 percent of the then issued and outstanding Common
Stock of the Company. The Plan is intended to qualify as an incentive stock
option plan under Section 422 of the Internal Revenue Code (the "Code"), and the
options granted that so qualify would be incentive stock options under the Code
("Incentive Stock Options"); however, the 1988 Plan also permits the granting of
options that do not qualify as Incentive Stock Options under the Code
("Non-Qualified Options"). Options granted to consultants and members of the
Board of Directors who are not also salaried officers or key employees of the
Company are not eligible for treatment as Incentive Stock Options and would be
Non-Qualified Options.
As of May 31, 1997, from the 1988 Stock Option Plan, options to purchase an
aggregate of 438,000 (408,000 qualified, 30,000 non-qualified) were outstanding,
all which were fully exercisable. The outstanding options had exercise prices
ranging from $.08 to $. 56.
The 1988 Plan does not include provisions allowing the Company to adjust the
options granted in the event of stock splits (such as the stock split proposed
pursuant to Item 7 of this Proxy Statement), recapitalizations,
reclassifications, combination or exchange of shares, stock dividends, mergers,
consolidations, other reorganizations and similar transactions so as to maintain
the proportionate interest of the holder of each option as before the occurrence
of such event.
The Company desires the ability to adjust the options issued to reflect business
changes without changing the proportionate interest of the holders of options,
and the Board of Directors therefore has proposed an amendment to the 1988 Plan,
subject to approval by the Company's stockholders, to provide for such
adjustments.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF THE COMPANY ENTITLED TO VOTE
AND VOTING IN PERSON OR BY PROXY AT THE ANNUAL MEETING IS REQUIRED FOR THE
PASSAGE OF THE AMENDMENT TO THE 1988 PLAN. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR APPROVAL TO AMEND THE 1988 PLAN. PROXIES SOLICITED BY THE BOARD WILL BE
SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY CHOICE ON THE PROXY CARD.
10
<PAGE>
ITEM 4 - TO ADOPT A NEW STOCK OPTION PLAN
The Board of Directors has approved, subject to approval of the Company's
stockholders, the adoption of a new Stock Option Plan (the "New Plan"), to
replace the 1988 Plan, which expires in July of 1998. The New Plan will be
substantially similar to the 1988 Plan, with the exception of those changes
necessary to conform the New Plan to the Internal Revenue Services requirements
and laws. Like the 1988 Plan, the purpose of the New Plan is to encourage key
employees to exert maximum effort for the welfare of the Company by extending
the opportunity to acquire equity interests in the Company and to participate in
its success. The New Plan would allow for the issuance of options in an amount
up to 10 percent of the then issued and outstanding Common Stock of the Company.
The Plan will have two components: one is intended to qualify as an incentive
stock option plan under Section 422 of the Internal Revenue Code (the "Code"),
and the options granted that so qualify would be incentive stock options under
the Code ("Incentive Stock Options"); the second component of the New Plan would
permit the granting of options that do not qualify as Incentive Stock Options
under the Code ("Non-Qualified Options"). The Company does not yet have any
specific plans to grant options under the New Plan.
The Incentive Stock Option component of the New Plan will be administered by the
Incentive Committee of the Board of Directors (the "Incentive Committee"),
consisting of not fewer that 2 Directors of the Company who shall be
"disinterested" as defined in Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934. Members of the Incentive Committee,
as well as members of the Board of Directors who are not officers or managerial
employees of the Company, would not be eligible to receive Incentive Options
under the New Plan. The Board of Directors may also administer Incentive Stock
Options under the Plan. The Non-Qualified Stock Option component of the New Plan
will be administered by the Compensation Committee of the Board of Directors
(the "Compensation Committee"), consisting of not fewer that 2 Directors of the
Company. The Board of Directors may also administer the Non-Qualified Option
component of the Plan. The New Plan will allow issuance of options in an amount
up to 10 percent of the Company's issued and outstanding shares of Common Stock,
which currently would result in a limit of 539,824 shares being subject to
options (89,970 if the reverse split proposed in Item 7, below, is approved and
effectuated).
Eligible recipients of Incentive Stock Options under the New Plan shall be
salaried officers and employees of the Company and its subsidiaries (being
companies in which the Company owns more than 50 percent of the voting capital
stock), as the Incentive Committee, in its discretion, shall determine.
Currently there are approximately 100 persons in this group of potentially
eligible recipients of Incentive Stock Options. Directors of the Company are
also eligible to receive Incentive Options under the Plan if they are officers
or managerial employees of the Company or a subsidiary and are not members of
the Incentive Committee. Currently there is 1 person in this group of
potentially eligible recipients of Incentive Stock Options. No person may
receive Incentive Stock Options prior to the date on which employment by the
Company actually commences.
Eligible recipients of Non-Qualified Options under the New Plan shall be
Directors, officers, and selected employees and consultants of the Company and
its subsidiaries. Currently there are approximately 125 persons in this group of
potentially eligible recipients of Non-Qualified Options. Recipients will be
selected by the Compensation Committee.
The recipient of an Incentive Stock Option does not recognize income at the time
of the grant or upon the exercise of the option. Rather (subject to certain
holding period requirements), the gain upon sale of the stock received pursuant
to the exercise the Incentive Stock Option is treated as a capital gain. Stock
options that do not qualify as Incentive Stock Options (i.e., Non-Qualified
Options) are treated like any other form of compensation. As such, the recipient
of a Non-Qualified Stock Option generally recognizes the option as ordinary
income at the time the option is granted. If the option does not have a readily
ascertainable value, however, no income recognition occurs until the option is
exercised. When a corporation grants a Non-Qualified Option, it treats the
option as compensation, and can take a corresponding business expense deduction
when the employee recognizes the income. A corporation that grants an Incentive
Stock Option cannot take a business expense deduction with respect to the
option.
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The term of an option granted under the New Plan cannot exceed ten years from
the date it is granted. The Incentive Committee or the Compensation Committee,
as the case may be, determines the number of shares of Common Stock subject to
the grant and the terms of such option at the time of the grant of an option.
For Incentive Stock Options, the exercise price must be at least the fair market
value of the shares on the date of the grant, except that the exercise price of
each option granted to an employee who owns more than 10 percent of the
Company's voting stock must be at least 110 percent of the fair market value of
the shares on the date of the grant. A stock option may not be exercised unless
the recipient has remained an employee or director of, or consultant to, the
Company for six months from the date of the grant. In order to obtain treatment
of an option as an Incentive Stock Option, a recipient may not dispose of shares
acquired through the exercise of an option within two years of the grant of the
option or within one year after the transfer of the shares to the recipient.
Options may not be transferred except by the laws of descent and distribution,
and during the lifetime of the recipient, may only be exercised by the
recipient.
The New Plan provides that no option may be granted if the number of shares
subject to the option, when added to the number of shares subject to options
already issued under the Plan and the 1988 Plan, would exceed 10 percent of the
Company's issued and outstanding shares. The New Plan may be amended by the
Board of Directors, except that any amendment that would increase the number of
shares subject to options under the New Plan or would change the provisions
regarding the persons eligible to receive Incentive Stock Options shall be
subject to the approval of a majority of the shares of the Company entitled to
vote and voting in person or by proxy at a meeting of the Company's
stockholders.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF THE COMPANY ENTITLED TO VOTE
AND VOTING IN PERSON OR BY PROXY AT THE ANNUAL MEETING IS REQUIRED FOR THE
ADOPTION OF THE NEW PLAN. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
ADOPTION OF THE NEW PLAN. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
SHAREHOLDERS SPECIFY A CONTRARY CHOICE ON THE PROXY CARD.
ITEM 5 - TO AMEND THE CERTIFICATE OF INCORPORATION TO AUTHORIZE, RATIFY, AND
APPROVE THE ISSUANCE OF 17,390 SHARES OF COMMON STOCK
The Board of Directors of the Company has declared the advisability of, and has
voted to submit to the shareholders for their consideration, the above amendment
to be included in a restatement of the Certificate of Incorporation of the
Company.
In the 1983 Certificate of Incorporation, the Company authorized, and
subsequently issued, Convertible Preferred Stock which was to be converted to
Common Stock at the option of the holder at any time after May 1, 1986. The
Company's shareholders, in the April 2, 1986 Annual Meeting, changed the
convertibility date to mean November 30, 1985. The shares of Convertible
Preferred Stock were to be converted to Common Stock on a 1 to 1 basis. However,
due to a misunderstanding of whether certain transactions affected the
conversion ratio, beginning in June 1986, certain of the Convertible Preferred
Stock was converted using a ratio of 1 share of Convertible Preferred Stock to
1.1 shares of Common Stock.
The purpose of this proposal is to facilitate the listing of the Company's
capital stock on the Chicago Stock Exchange, by authorizing and ratifying the
issuance of such previously issued Common Stock on the basis of a 1 to 1.1
conversion ratio. Accordingly, subject to shareholder approval, Article Fourth
of the Certificate of Incorporation shall be amended to authorize, ratify, and
approve the issuance of 4,610 shares of Common Stock to Fifty-Third Street
Ventures, Inc., 6,390 shares of Common Stock to Panorama Venture Capital Fund
Limited, and 6,390 shares of Common Stock to Excelsior Fund (for a total of
17,390 shares) in June through August 1987, at a conversion ratio of 1.1 share
of Common Stock to 1.0 share of Convertible Preferred Stock notwithstanding any
other provisions of the Certificate of Incorporation with respect to the
conversion of Convertible Preferred Stock into Common Stock.
The proposal, if adopted, would have the effect of authorizing and ratifying the
issuance of 17,390 shares of Common Stock to the three above entities, who had
possession of the shares in 1986 prior to their resale.
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THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF THE COMPANY ENTITLED TO VOTE
AND VOTING IN PERSON OR BY PROXY AT THE ANNUAL MEETING IS REQUIRED FOR THE
PASSAGE OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
SHAREHOLDERS SPECIFY A CONTRARY CHOICE ON THE PROXY CARD.
ITEM 6 - TO AMEND THE CERTIFICATE OF INCORPORATION (i) TO ELIMINATE THE
AUTHORIZATION TO ISSUE 325,000 SHARES OF CONVERTIBLE PREFERRED STOCK ALL OF
WHICH WAS PREVIOUSLY ISSUED AND CONVERTED TO COMMON STOCK AND (ii) TO AUTHORIZE
THE ISSUANCE OF 500,000 SHARES OF NEW PREFERRED STOCK
The Board of Directors of the Company has declared the advisability of, and has
voted to submit to the stockholders for their consideration, the above amendment
to be included in a restatement of the Certificate of Incorporation of the
Company.
In 1983 the Company issued 325,000 shares of Convertible Preferred Stock to
certain investors. By August 1987, all the Convertible Preferred Stock had been
converted to Common Stock. (See Item 5 above.) The Company is only able to
re-issue these shares of Convertible Preferred Stock under the same terms and
conditions as set forth in the provisions of the Certificate of Incorporation
authorizing the issuance of such Convertible Preferred Stock. Those terms and
conditions no longer meet the business needs of the Company.
In the past 2 fiscal years, the Company has expended significant amounts of its
profits on research and development. In addition, as disclosed in the Company's
April 11, 1997, report of Form 10-QSB for the quarter ended February 28, 1997,
the Company entered into an exclusive agreement with Slusser Associates, Inc.,
of New York on March 12, 1997, to develop and implement a plan to attempt to
raise $2,000,000 through a private placement of the Company's securities.
Neither the structure of the offer nor whether it will consist of debt, equity,
or a combination of the two, has been finally determined. The proceeds of the
private offering tentatively are planned to be used to supplement the Company's
funding to expand production and marketing of its Lyphomune(R) product, to
support the development of ancillary products, and to support continuing
research efforts with Helicobacter pylori. Although there can be no assurance
that any or all of the proposed funding will be obtained, the Company seeks to
authorize the issuance of 500,000 shares of new Preferred Stock in order to
facilitate such private offering, and otherwise to enable the Company to pursue
possible opportunities to obtain additional equity financing for research and
development activities, including further development of veterinary products,
and possibly the diversification of the Company. The Board's resolution was
approved (4-0) and authorized that this proposal be voted on by the shareholders
at the Annual Meeting. Although the Company believes the issuance of additional
equity for the purposes set forth above would be beneficial to the long term
growth of the Company, such issuance could result in a dilution of the interests
of the current stockholders.
The Preferred Stock to be authorized by the proposed amendment would be issued
by the Board of Directors without the requirement of further authorization by
the stockholders. The terms of the Preferred Stock to be authorized, including
but not limited to liquidation preferences, dividend or interest rates,
convertibility, conversion prices, voting rights, redemption prices, and similar
matters will be determined by the Board of Directors upon the issuance of such
Preferred Stock.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF THE COMPANY ENTITLED TO VOTE
AND VOTING IN PERSON OR BY PROXY AT THE ANNUAL MEETING IS REQUIRED FOR THE
PASSAGE OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE AMENDMENT TO THE CERTIFICATE
OF INCORPORATION. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
SHAREHOLDERS SPECIFY A CONTRARY CHOICE ON THE PROXY CARD.
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ITEM 7 - TO AMEND THE CERTIFICATE OF INCORPORATION (i) TO EFFECT A
REVERSE SPLIT OF THE SHARES OF THE COMMON STOCK IN WHICH EACH 6 SHARES OF COMMON
STOCK SHALL BECOME 1 SHARE OF COMMON STOCK; AND (ii) TO ESTABLISH THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK AT 25,000,000.
The Board of Directors of the Company has declared the advisability of, and has
voted to submit to the shareholders for their consideration, the following
amendment to be included in a restatement of the Certificate of Incorporation of
the Company.
The Company proposes to amend the Certificate of Incorporation (i) to effect a
reverse split of the shares of Common Stock in which 6 shares shall become 1
share of Common Stock; and (ii) to establish the number of authorized shares of
Common Stock at 25,000,000.
The purpose of the reverse split is to facilitate the listing of the Company's
Common Stock on the Chicago Stock Exchange. The Chicago Stock Exchange has given
the Company preliminary approval for listing provided the Company effects a
reverse split at no less than 6 to 1 and meets all other requirements of the
Exchange. The listing on an exchange will give the Company better visibility to
attract new investors, shareholders, and joint ventures. The Company will have
an assigned market specialist to conduct a market in the Company's Common Stock.
If approved by the shareholders, each 6 shares of Common Stock par value of one
cent ($0.01) per share) of the Company, issued and outstanding at the close of
business on the date of the taking effect of said amendment, beginning the date
of the filing and recording of said amendment, on or about October 23, 1997, in
the Office of Secretary of State of Delaware, be changed into 1 fully paid and
nonassessable share of Common Stock (par value one cent ($0.01) per share) of
the Company; that all certificates of shares of Common Stock (par value one cent
($0.01) per share) which are then issued and outstanding shall thereupon and
thereafter be deemed to be a certificate for 1/6th the number of shares of
Common Stock respectively (par value one cent ($0.01) per share); and that each
holder of record of said certificates at the close of business on the effective
date of said amendment shall be entitled to receive certificates representing 1
share of Common Stock (par value of one cent ($0.01) per share) for each 6
outstanding shares of Common Stock (par value one cent ($0.01) per share) held
by such holder of record, provided that no fractional shares shall be issued,
and in lieu thereof each record holder of less than 6 shares of Common Stock
(par value one cent ($0.01) per share) shall receive for each such share the
mean between the bid and asked price per share of such Common Stock as reported
by Koonce Securities on the date of the meeting of stockholders at which the
amendment to the Certificate of Incorporation with respect to such reverse split
shall be approved by a majority of the stockholders entitled to vote thereon,
and each holder of record of a number of shares of Common Stock (par value one
cent ($0.01) per share) not divisible by 6 shall receive, for each such share in
excess of highest number of such shares divisible by 6, the mean between the bid
and the asked price per share of such Common Stock as reported by Koonce
Securities on the date of the meeting of stockholders at which the amendment to
the Certificate of Incorporation with respect to such reverse stock split shall
be approved by a majority of the stockholders entitled to vote thereon.
The purpose of the proposed amendment and restatement of the Certificate of
Incorporation establishing the authorized shares of Common Stock at 25,000,000,
which maintains the current number of authorized shares, is to allow the Company
flexibility to issue a significant number of shares should a future offering be
necessary or advisable. The Board of Directors would have full authority to
issue such authorized but unissued shares of Common Stock, subject to the
provisions of the Certificate of Incorporation with respect thereto, without
further shareholder authorization. Although the Company believes the issuance of
additional equity for the purposes set forth above would be beneficial to the
long term growth of the Company, such issuance could result in a dilution of the
interests of the current stockholders.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF THE COMPANY ENTITLED TO VOTE
AND VOTING IN PERSON OR BY PROXY AT THE ANNUAL MEETING IS REQUIRED FOR THE
PASSAGE OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE AMENDMENT TO THE CERTIFICATE
OF INCORPORATION. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
SHAREHOLDERS SPECIFY A CONTRARY CHOICE ON THE PROXY CARD.
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SHAREHOLDERS PROPOSALS
Shareholders who wish to submit proposals at a the next Annual Meeting of
shareholders should submit such proposals to the Company at its headquarters at
9600 Medical Center Drive, Rockville, Maryland 20850. Such proposals must be
received by the Company by June 3, 1998.
The Company will not be required to include in its Proxy Statement or form of
proxy a shareholder proposal which is received after that date or which
otherwise fails to meet requirements for shareholder proposals established by
regulations of the Securities and Exchange Commission.
OTHER MATTERS
The expense of preparing, assembling, printing and mailing the form of proxy
material used for the solicitation of proxies by use of mails will be borne by
the Company. The Company has not retained any firm to solicit proxies on behalf
of the Company. Company directors and officers of the Company may solicit
proxies in person or by telephone and may request brokerage houses and other
custodians, nominees and fiduciaries to forward soliciting material to
beneficial owners of Common Stock. So far as the Board of Directors is aware,
only the aforementioned matters will be acted upon at the meeting. If any other
matters properly come before the meeting, it is intended that the accompanying
proxy may be voted on such matters in accordance with the best judgment of the
person or persons voting said proxy.
THE COMPANY'S REPORT ON FORM 10-KSB FOR ITS FISCAL YEAR ENDED MAY 31, 1997,
ACCOMPANIES THIS PROXY STATEMENT. UPON THE WRITTEN REQUEST OF A SHAREHOLDER OF
THE COMPANY ADDRESSED TO MICHAEL P. O'FLAHERTY, SECRETARY OF THE COMPANY, AT
9600 MEDICAL CENTER DRIVE, ROCKVILLE, MARYLAND 20850, THE COMPANY WILL PROVIDE
WITHOUT CHARGE TO SUCH SHAREHOLDER A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR ITS FISCAL YEAR ENDED MAY 31, 1997, INCLUDING THE FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 13A-A UNDER THE SECURITIES
EXCHANGE ACT OF 1934.
By Order of the Board of Directors
/s/ John C. Landon
----------------------------------
John C. Landon
Chairman of the Board and
Chief Executive Officer
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APPENDIX A
FORM OF PROXY
DIAGNON CORPORATION
-------------------
1998 STOCK OPTION PLAN
----------------------
1. GENERAL
1.1 This 1998 Stock Option Plan ("Plan") is intended to encourage the
ownership of Common Stock of the Diagnon Corporation (the
"Corporation") by eligible key employees of the Corporation and to
provide incentives for them to exert maximum efforts for the welfare of
the Corporation. By extending to key employees the opportunity to
acquire equity interests in the Corporation and to participate in its
success, this Plan is expected to benefit the Corporation and its
stockholders by making it possible for the Corporation to attract and
retain the best available talent and by rewarding key management and
technical personnel for their part in increasing the value of the
Corporation's shares. The Corporation also recognizes that it relies
heavily upon the contributions of independent consultants retained on a
regular basis and on the efforts of members of the Board of Directors
who are not employees. The Corporation also wishes to extend to these
consultants and directors the opportunity to acquire equity interests
in the Corporation and participate in its success. This Plan also is
intended to replace the Corporation's 1988 Stock Option Plan, as
amended (the "1988 Plan").
1.2 This plan shall have two (2) components: one component provides for
Incentive Stock Options ("Incentive Options") as defined in Section 422
of the Internal Revenue Code ("the Code"); and the other component
provides for Non-Qualified Stock Options ("Non-Qualified Options"),
which are not intended to be options as defined in Section 422 of the
Code. The Incentive Options and the Non-Qualified Options are sometimes
referred to together as the "Options." A participant who has been
granted an Incentive or a Non-Qualified Option may be granted an
additional Option or Options under this Plan.
1.3 This Plan was adopted by the Board of Directors of the Corporation
(the "Board") on July 17, 1997, subject to the approval of the
Corporation's shareholders.
2. STOCK SUBJECT TO THIS PLAN
There will be reserved for issue upon the exercise of Options up to 10
percent (539,824 shares) of the Corporation's Common Stock, par value
one cent ($0.01), which may be unissued or reacquired shares. The
Corporation, during the terms of Options granted under this Plan, shall
at all times keep available the number of shares of stock required to
satisfy the Options. If any Option previously granted shall expire or
terminate for any reason without having been fully exercised, the
unpurchased shares shall again become available for the purposes of
this Plan.
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3. INCENTIVE OPTIONS
3.1 All provisions of this Plan relating to Incentive Options shall be
administered by a committee (the "Incentive Committee"), consisting of
not fewer than two (2) Directors of the Corporation who shall be
disinterested within the meaning of Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, and who shall
serve at the pleasure of the Board. The determinations of the Incentive
Committee shall be made in accordance with their judgment as to the
best interests of the Corporation and its stockholders and in
accordance with the purposes of this Plan. No member of the Incentive
Committee shall be liable for any action taken or determination made in
good faith with respect to this Plan or any Incentive Option granted
hereunder. Subject to the provisions of this Plan and the requirements
of the Code with respect to Incentive Options, the Incentive Committee
shall have full authority to interpret this Plan with respect to
Incentive Options, to establish and amend rules and regulations
relating to Incentive Options, to determine the terms and provisions of
Incentive Option agreements (which need not be identical), and to make
all other determinations necessary or advisable for the administration
of Incentive Options granted under this Plan, including but not limited
to determining: (i) which eligible employees, officers, and directors,
of the Corporation shall be granted Incentive Options under this Plan;
(ii) the time or times, during the term of each Incentive Option,
within which all or portions of the Incentive Option may be exercised;
(iii) whether, on the date of exercise of an Incentive Option or
portion thereof, the recipient must pay the entire Incentive Option
price or only some part thereof, the balance to be paid within one year
from the date of exercise of the Incentive Option, provided that
payment tendered on the date of exercise equals or exceeds the
aggregate par value of the shares purchased; (iv) the number of shares
for which an Incentive Option or Incentive Options shall be granted;
and (v) generally all questions of policy and expediency that may
arise, including the correction of any defect or omission in this Plan
and the reconciliation of any inconsistency in this Plan or any
Incentive Option agreement in any manner and to the extent the
Incentive Committee shall deem necessary or expedient to make this Plan
fully effective. The Incentive Committee's interpretation, construction
and adoption of any provisions of this Plan relating to Incentive
Options or any Incentive Option granted hereunder shall be binding and
conclusive, unless otherwise determined by the Board. Any power that
may be exercised or action that may be taken by the Incentive Committee
under this Plan may also be exercised or taken by the Board. The Board
may, at any time by resolution, revoke the delegation of the Incentive
Committee and revest in the Board all or any part of the powers
hereinabove vested in the Incentive Committee.
3.2 Whenever the term "officers" is used in this Plan, such term shall
be deemed to include assistant officers of the Corporation and officers
of subsidiaries of the Corporation. The term "subsidiary" shall mean
any domestic or foreign corporation of which the Corporation owns,
directly or indirectly, at least fifty (50%) percent of the total
combined voting power of all classes of stock of such corporation. In
determining the
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employees to whom Incentive Options shall be granted and the number of
shares to be subject to purchase under such Incentive Options, the
Incentive Committee shall take into account the duties of the
respective employees, their present and potential contributions to the
success of the Corporation, and such other factors as the Incentive
Committee shall deem relevant in connection with accomplishing the
purposes of the Incentive Plan. Membership on the Board of Directors
shall not disqualify a person from receiving an Incentive Option grant
hereunder, although Directors who are members of the Incentive
Committee or who are not officers or managerial employees of the
Corporation or a subsidiary are not eligible to receive Incentive
Options under this Plan.
3.3 The exercise price of any Incentive Option granted to an employee
who at the time such Incentive Option is granted, owns, as defined in
Section 424 of the Code, stock possessing not more than ten (10%)
percent of the total combined voting power of all classes of stock of:
3.3.1 the Corporation; or
3.3.2 if applicable, any subsidiary of the Corporation
qualifying as a "Subsidiary Corporation" as defined in Section
424 of the Code (any such corporation being hereinafter
referred to as a "Subsidiary"); or
3.3.3 If applicable, any parent of the Corporation qualifying
as a "Parent Corporation" as defined in Section 424 of the
Code (any such corporation being hereinafter referred to as
the "Parent"),
shall be at least equal to the fair market value of the Common Stock at
the time of granting of the Incentive Option.
3.4 The exercise price of any Incentive Option granted to an employee
who, at the time such Incentive Option is granted, owns, as defined in
Section 424 of the Code, stock possessing more than (10%) percent of
the total combined voting power of all classes of stock of:
3.4.1 the Corporation; or
3.4.2 if applicable, a Subsidiary; or
3.4.3 if applicable, the Parent,
shall be at least equal to one hundred ten (110%) percent of the fair
market value of the Common Stock at the time of granting of the
Incentive Option.
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3.5 For all purposes of this Plan, the fair market value of the Common
Stock at the time of granting an Option shall be deemed to be the mean
between the high and the low prices of the Common Stock on the national
securities exchange on the day on which the Option is granted, if the
Common Stock is then being traded on a national securities exchange,
and if the Common Stock is then being traded on such an exchange but
there are no sales on such day, the fair market value shall be deemed
to be the mean between the high and low prices of the Common Stock on
the national securities exchange on the day on which the most recent
sales occurred prior to the date of grant, and if the Common Stock is
not then traded on such an exchange, then the fair market value shall
be deemed to be the mean between the high and low bid and asked prices
for the Common Stock on the over-the-counter market on the day on which
the option is granted. If the Common Stock is not publicly traded at
the time of the grant, the fair market value shall be determined in
good faith at the time of the grant of any Incentive Option by decision
of the Incentive Committee.
3.6 The date of grant of an Incentive Option granted hereunder shall be
the date on which the Incentive Committee acts in granting the
Incentive Option.
3.7 Incentive Options granted hereunder shall be exercisable for a term
of not more than ten (10) years from the date of grant thereof, but
shall be subject to Section 3.8 and to earlier termination as
hereinafter provided. Each Incentive Option agreement issued hereunder
shall specify the term of the Incentive Option, which term shall be
determined by the Incentive Committee in accordance with its
discretionary authority hereunder.
3.8 Notwithstanding anything herein to the contrary, in the event an
Incentive Option is granted to an employee who, at the time such option
is granted, owns, as defined in Section 424 of the Code, stock
possessing more than ten (10%) percent of the total combined voting
power of all classes of stock of:
3.8.1 the Corporation; or
3.8.2 if applicable, a Subsidiary; or
3.8.3 if applicable, the Parent,
then such Incentive Option shall not be exercisable more than five (5)
years from the date of grant thereof, but shall be subject to earlier
termination as hereinafter provided.
3.9 No Option will be treated as an Incentive Option to the extent that
the aggregate fair market value (determined at the time the Option is
granted) of the stock with respect to which the Option is exercisable
for the first time by any individual during any calendar year (under
all plans of the Corporation and any subsidiary) exceeds one hundred
thousand ($100,000) dollars.
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3.10 No person may receive Incentive Options prior to the date on which
employment of such person by the Corporation actually commences.
4. NON-QUALIFIED OPTIONS
4.1 All provisions of this Plan relating to Non-Qualified Options shall
be administered by the Compensation Committee (the "Compensation
Committee") appointed by the Board. The Compensation Committee shall
consist of not less than two (2) members of the Board. The
determinations of the Compensation Committee shall be made in
accordance with their judgment as to the best interests of the
Corporation and its stockholders and in accordance with the purposes of
this Plan. No member of the Compensation Committee shall be liable for
any action taken or determination made in good faith with respect to
this Plan or any Non-Qualified Option granted hereunder. Subject to the
provisions of this Plan and the requirements of the Code, the
Compensation Committee shall have full authority to interpret this Plan
with respect to Non-Qualified Options, to establish and amend rules and
regulations relating to Non-Qualified Options, to determine the terms
and provisions of Non-Qualified Option agreements (which need not be
identical), and make all other determinations necessary or advisable
for the administration of Non-Qualified Options granted under this
Plan, including but not limited to determining: (i) which eligible
employees, officers, directors, and consultants of the Corporation
shall be granted Non-Qualified Options under this Plan; (ii) the time
or times, during the term of each Non-Qualified Option, within which
all or portions of the Non-Qualified Option may be exercised; (iii)
whether, on the date of exercise of a Non-Qualified Option or portion
thereof, the recipient must pay the entire Non-Qualified Option price
or only some part thereof, the balance to be paid within one year from
the date of exercise of the Non-Qualified Option, provided that payment
tendered on the date of exercise equals or exceeds the aggregate par
value of the shares purchased; (iv) the number of shares for which a
Non-Qualified Option or Non-Qualified Options shall be granted; and (v)
generally all questions of policy and expediency that may arise,
including the correction of any defect or omission in this Plan and the
reconciliation of any inconsistency in this Plan or any Non-Qualified
Option agreement in any manner and to the extent the Committee shall
deem necessary or expedient to make this Plan fully effective. The
Compensation Committee's interpretation, construction and adoption of
any provisions of this Plan relating to Non-Qualified Options or any
Non-Qualified Option granted hereunder shall be binding and conclusive,
unless otherwise determined by the Board. Any power that may be
exercised or action that may be taken by the Compensation Committee
under this Plan may also be exercised or taken by the Board. The Board
may, at any time by resolution, revoke the delegation of the
Compensation Committee and revest in the Board all or any part of the
powers hereinabove vested in the Compensation Committee.
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<PAGE>
4.2 The Compensation Committee and the Incentive Committee may be
combined into one (1) committee of the Board so long as the membership
requirements set forth herein for both committees are met by the
members of the combined committee.
4.3 Eligible recipients of Non-Qualified Options under this Plan shall
be Directors, officers, and selected employees and consultants of the
Corporation and its Subsidiaries. Recipients will be selected by the
Compensation Committee. The granting of a Non-Qualified Option under
this Plan shall not affect any outstanding stock option previously
granted to an optionee under this Plan or any other plan of the
Corporation.
4.4 On the date a Non-Qualified Option is granted, the exercise price
per share shall be such price that the Committee deems appropriate.
5. TERMS OF OPTION AND OPTION AGREEMENTS
5.1 Each Incentive Option granted to a person eligible to receive such
Incentive Option (a "Qualifying Optionee") shall be evidenced by a
written agreement (an "Incentive Option Agreement") which shall
expressly identify the Incentive Options as "Incentive Stock Options,"
i.e., Options within the meaning of Section 422 of the Code. Each Non-
Qualified Option granted to each other person eligible to receive
Non-Qualified Options hereunder shall be evidenced by a written
agreement (a "Non-Qualified Option Agreement") which shall expressly
identify the Non-Qualified options as other than "Incentive Stock
Options." Unless specifically identified herein as applicable to
Incentive Options, the provisions of' this Plan shall apply to both
Incentive Options and Non-Qualified Options. Each Incentive Option
Agreement and each Non-Qualified Option Agreement shall: (a) be in such
form and contain such provisions as the Board or the Committee shall
from time to time deem appropriate, and (b) include in substance, by
appropriate language, all of the applicable following provisions.
5.2 The Option may be granted at any time within ten (10) years from
the earlier of the date on which this Plan is approved by the
stockholders or was adopted by the Corporation's Board of Directors.
5.3 Incentive Options granted under this Plan to a Qualifying Optionee
are not required to be exercised in the order in which they are
granted.
5.4 An Option may not be exercised, to any extent, either by the person
to whom it was granted or by any person after his death, unless the
person to whom the Option was granted has remained in the continuous
employ of the Corporation, or has been a consultant to or director of
the Corporation, for not less than six months from the date of the
grant.
-6-
<PAGE>
5.5 A Qualifying Optionee may not dispose of shares acquired through
exercise of an Incentive Option (i) within two (2) years from the date
of the granting of the Incentive Option or (ii) within one (1) year
after the transfer of the shares to him by the Corporation and qualify
for the tax treatment provided by Section 421(a) of the Code.
5.6 The Corporation will seek from every regulatory commission or
agency having jurisdiction such authority as may be required to issue
and sell shares of stock to satisfy the Options. The Corporation's
inability to obtain from any such regulatory commission or agency
authority which counsel for the Corporation deems necessary for the
lawful issuance and sale of the Corporation's stock to satisfy the
Options, shall relieve the Corporation from any liability for failure
to issue and sell stock to satisfy otherwise properly exercised Options
until such time as such authority is obtained or is obtainable.
5.7 Neither a person to whom an Option is granted nor his legal
representative, heir, legatee or distributee, shall be deemed to be a
holder of, or to have any of the rights of a holder with respect to,
any shares subject to such Option unless and until he has exercised his
Option in complete accordance with the terms thereof.
5.8 An Option shall not be transferable except by will or by the laws
of descent and distribution. During the lifetime of the person to whom
the Option is granted, he alone may exercise it.
5.9 An Incentive Option granted to a Qualifying Optionee shall
terminate if the person to whom it is granted ceases to be continuously
employed by the Corporation, except (i) if such person's employment is
terminated for a reason other than death, permanent or total disability
(within the meaning of Section 22(e)(3) of the Code) or dismissal for
cause, he may exercise his Incentive Option to the extent that he was
entitled to do so at the date of his termination at any time within
three (3) months following the date of such termination; (ii) if his
continuous employment is terminated for reason of permanent or total
disability (within the meaning of Section 22(e)(3) of the Code), he or
his legal representative, in the event the employee is legally
incapable of doing so, may exercise his Incentive Option to the extent
that he was entitled to do so at the date of his termination at any
time within one (1) year following the date of such termination; or
(iii) if his continuous employment is terminated by death or the
employee's death occurs within three(3) months of his termination of
employment, such termination being for reason other than dismissal for
cause, his Incentive Option may be exercised at any time within one (1)
year following his death by the person or persons to whom his rights
under the Incentive Option shall pass by will or by the laws of descent
or distribution, but only to the extent that such Incentive Option was
exercisable by him on the date of termination of his employment.
Nothing in this paragraph is intended to extend the stated term of the
Incentive Option and in no event may an Option be exercised by anyone
after the expiration of its stated term.
-7-
<PAGE>
5.10 Nothing in this Plan or in any Option granted hereunder shall
confer on any Optionee any right to continue in the employ of the
Corporation or to interfere in any way with the right of the
Corporation to terminate his employment at any time. In the event that
the Corporation has not registered the shares with respect to which
Options are being exercised under the Securities Act of 1933, as
amended, each Optionee electing to purchase shares will be required to
represent that he is acquiring such shares for investment purposes only
and not with a view to the sale or distribution thereof and to make
such other representations as are deemed necessary by counsel to the
Corporation. Stock certificates evidencing such unregistered shares
acquired upon exercise of Options shall bear a restrictive legend
(unless, in the opinion of counsel for the Corporation, such a legend
is not necessary) stating as follows:
The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares have
been acquired for investment and may not be pledged or
hypothecated and may not be sold or transferred in the absence
of an effective registration statement for the shares under
the Securities Act of 1933 or an opinion of counsel
satisfactory to the Corporation that registration is not
required under said Act.
5.11 If the Corporation shall at any time change the number of shares
of its Common Stock without new consideration to the Corporation (such
as by stock dividends or stock splits), the aggregate number of shares
which may be issued pursuant to Options granted under this Plan and the
total number of shares then remaining subject to purchase under an
outstanding Option shall be changed in proportion to such change in
issued shares. The Option price per share also shall be adjusted so
that the total consideration payable to the Corporation upon the
purchase of all shares not theretofore purchased shall not be changed.
5.12 If, during the term of any outstanding Option, the Corporation
shall issue other securities of the Corporation or distribute other
property (other than cash) as a distribution or dividend on or in
exchange for Common Stock of the Corporation, the Corporation shall
take such steps as the Incentive Committee, the Compensation Committee,
and the Board deem appropriate: (a) equitably to adjust the kind and
amount of securities then remaining subject to purchase thereunder and
the exercise price per share; or (b) equitably to adjust the rights of
the optionee thereunder in order to reflect such issuance or
distribution of securities or other property.
5.13 If, during the term of an outstanding Option, the Common Stock of
the Corporation shall be changed into another kind of security of the
Corporation or into cash, securities, or evidences of indebtedness of
another corporation, other property or any combination thereof, as a
result of a reorganization, sale, merger, consolidation, or other
similar transaction, the optionee shall be entitled to receive, at the
election of the optionee (a) upon the due exercise of the Option or (b)
upon the effective date of the
-8-
<PAGE>
reorganization, sale, merger, consolidation or similar transaction, the
cash, securities, evidences of indebtedness, other property or any
combination thereof the optionee would have been entitled to receive
for Common Stock acquired through exercise of the Option (net of the
exercise price) immediately prior to the effective date of such
reorganization, sale, merger, consolidation or other similar
transaction. If appropriate, the exercise price of the shares or
securities remaining subject to purchase following such reorganization,
sale, merger, consolidation or other similar transaction may be
adjusted in each case in such equitable manner as the relevant
Committee and the Board may determine.
6. LIMIT ON STOCK SUBJECT TO OPTIONS
6.1 No Option may be granted under this Plan if the number of shares
that may be issued upon the exercise of that Option, when added to the
number of shares that may be issued (i) upon the exercise of unexpired
options already granted under the 1988 Plan, and (ii) upon the exercise
of unexpired Options already granted under this Plan, would exceed ten
(10%) percent of the then issued and outstanding Common Stock of the
Corporation.
6.2 The aggregate fair market value (determined at the time Options are
granted) of stock with respect to which Incentive Options are
exercisable for the first time by a Qualifying Optionee during any
calendar year shall not exceed one hundred thousand ($100,000) dollars.
7. LISTING REQUIREMENTS
The Corporation shall not be required to issue or deliver any
certificate for shares of its stock purchased upon the exercise of any
Option issued under this Plan prior to the admission of such shares to
listing on any stock exchange on which the stock may at that time be
listed; provided, however, that the Corporation shall take all
necessary steps to secure the admission of such stock to listing on any
such stock exchange and shall secure admission of such shares at the
earliest practicable date.
8. TIME OF GRANTING OPTION
The date on which an Option shall be deemed granted shall be the date
on which a majority of the members of the Board or the Committee shall,
at a meeting, make such determination.
9. AMENDMENT OF THE PLAN
9.1 The Board or the Incentive Committee or the Compensation Committee,
as the case may be, may, at any time, amend this Plan; provided,
however, that no amendment
-9-
<PAGE>
shall be made, except upon approval by a majority of the shares of the
Corporation entitled to vote and voting in person or by proxy at a
meeting of the Corporation's stockholders, which will:
9.1.1 increase the number of shares reserved for Options under
this Plan; or
9.1.2 change in substance the provisions designating the
employees eligible to receive and exercise Incentive Options
under this Plan.
9.2 The rights and obligations created under any Option granted before
amendment of this Plan shall not be altered or impaired by such
amendment without consent of the person to whom the Option was granted
or to whom rights under an Option shall have passed by will or by laws
of descent or distribution.
10. TERMINATION OR SUSPENSION OF THE PLAN
10.1 The Board may at any time suspend or terminate this Plan. This
Plan, unless sooner terminated, shall terminate upon the earlier of ten
(10) years (i) from the date on which this Plan is approved by the
stockholders, or (ii) the date on which this Plan is adopted by the
Corporation's Board of Directors.
10.2 This Plan will also terminate if Incentive Options are exercised
for all the Common Stock reserved for issuance under this Plan. An
Option may not be granted while this Plan is suspended or after it is
terminated.
10.3 The rights and obligations created under any Option granted while
this Plan is in effect shall not be altered or impaired by suspension
or termination of this Plan, except with the consent of the person to
whom the Option was granted. The termination of this Plan shall not
affect any restrictions previously imposed on shares issued pursuant to
this Plan.
11. EFFECTIVE DATE
This Plan shall be deemed adopted upon the earlier of (i) approval by
vote of the holders of the majority of the shares of the Corporation
entitled to vote and voting in person or by proxy on the matter, or
(ii) the date on which this Plan is adopted by the Corporation's Board
of Directors. This Plan shall not be effective (and no Options can be
granted), however, until it is approved by vote of the holders of the
majority of shares of the Corporation entitled to vote and voting in
person or by proxy on the matter.
-10-
<PAGE>
APPENDIX B
COMMON STOCK
PROXY
DIAGNON CORPORATION
ANNUAL MEETING OF STOCKHOLDERS, OCTOBER 22, 1997
The undersigned hereby appoints John C. Landon and Michael P.
O'Flaherty and each of them, with power of substitution in each, as proxies or
proxy to represent the undersigned at the Annual Meeting of the Stockholders of
Diagnon Corporation (the "Company") to be held at the Holiday Inn Gaithersburg,
#2 Montgomery Village Avenue, Gaithersburg, Maryland, on Wednesday, October 22,
1997, at 10:00 a.m., local time, and at any adjournment or adjournments thereof,
and to vote the number of shares of Common Stock which the undersigned would be
entitled to vote if personally present, (a) in the manner designated on the
reverse side hereof with respect to the election of directors and the other
identified proposals and (b) in their discretion on such other matters as may
properly come before the meeting or any adjournments thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
This proxy when properly executed will be voted in the manner directed
herein. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL NOMINEES AND
PROPOSALS LISTED ON THE REVERSE SIDE HEREOF.
DIAGNON CORPORATION ANNUAL MEETING
OF STOCKHOLDERS
WEDNESDAY, OCTOBER 22, 1997
10:00 A.M.
THE HOLIDAY INN GAITHERSBURG
#2 MONTGOMERY VILLAGE AVENUE
GAITHERSBURG, MARYLAND
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING AND DESIRE TO HAVE THEIR
STOCK VOTED AT THE MEETING ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ABOVE
PROXY ON THE REVERSE SIDE AND RETURN THE SAME IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
1. ELECTION OF DIRECTORS: J. Thomas August, M.D., Charles C. Francisco, Charles
F. Gauvin, John C. Landon, Ph.D.
FOR ALL NOMINEES WITHHOLD (To withhold authority to vote for any
listed except as AUTHORITY individual nominees, write the name of
otherwise indicated to vote for such nominee(s) on the following line.)
with respect to all nominees
Individual nominees listed _______________________________________
[ ] [ ]
2. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS:
Ratification of the selection of Deloitte and Touche LLP as the Company's
independent public accountants.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. TO AMEND THE COMPANY's 1988 STOCK OPTION PLAN:
To amend the Company's 1988 Stock Option Plan to provide that options shall
be adjusted in the event of stock splits, recapitalizations,
reclassifications, combinations or exchanges of shares, stock dividends,
mergers, consolidations, other reorganizations and similar transactions so as
to maintain the proportionate interest of the holder of each option as before
the occurrence of such event.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. TO ADOPT A NEW STOCK OPTION PLAN:
To adopt a new Stock Option Plan, to replace the 1988 Stock Option Plan, and
providing for the grant of both Incentive Stock Options as under Section 422
of the Internal Revenue Code and options not so qualified, in the aggregate
not to exceed 10% of the outstanding shares of the Company' capital stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. TO AMEND THE CERTIFICATE OF INCORPORATION TO AUTHORIZE , RATIFY, AND APPROVE
THE ISSUANCE OF 17,390 SHARES OF COMMON STOCK:
To amend the Certificate of Incorporation to authorize, ratify, and approve
the issuance of 4,610 shares of Common Stock to Fifty-Third Street Ventures,
Inc., 6,390 share of Common Stock to Panorama Venture Capital Fund Limited,
and 6,390 shares of Common Stock to Excelsior Fund in June through August
1986, and August, 1987, at a conversation ratio of 1.1 share of Common Stock
to 1.0 share of Convertible Preferred Stock not withstanding any other
provisions of the Certificate of Incorporation with respect to the conversion
of Convertible Preferred Stock into Common Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
6. TO AMEND THE CERTIFICATE OF INCORPORATION TO (i) ELIMINATE THE AUTHORIZATION
TO ISSUE 325,000 SHARES OF CONVERTIBLE PREFERRED STOCK, ALL OF WHICH WAS
PREVIOUSLY ISSUED AND CONVERTED TO COMMON STOCK, AND (ii) TO AUTHORIZE THE
ISSUANCE OF 500,000 SHARES OF NEW PREFERRED STOCK:
To Amend the Certificate of Incorporation to eliminate the 1983 authorization
to issue 325,000 shares of Convertible Preferred Stock all which was issued
and converted to Common Stock, AND to authorize the issuance of 500,000
shares of new Preferred Stock (par value One Dollar ($1.00) per share).
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
7. TO AMEND THE CERTIFICATE OF INCORPORATION (i) TO EFFECT A REVERSE SPLIT OF
THE SHARES OF COMMON STOCK IN WHICH EACH 6 SHARES OF COMMON STOCK SHALL
BECOME 1 SHARE OF COMMON STOCK, AND (ii) TO ESTABLISH THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK AT 25,000,000:
To Amend the Certificate of Incorporation, in order to facilitate the listing
of the Company's Common Stock on the Chicago Stock Exchange, to effect a
reverse split of the shares of the Common Stock in which each 6 shares of
Common Stock shall become 1 share of Common Stock, and to establish the
number of authorized shares of Common Stock at 25,000,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Dated: _________________________________
________________________________________
________________________________________
Signature(s)
Please sign exactly as your name appears
on this proxy. When signing as attorney,
executor, administrator, trustee,
guardian, etc. or as an officer of a
corporation, give full title. For joint
accounts obtain both signatures.
<PAGE>
APPENDIX C
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission file number 0-13281
DIAGNON CORPORATION
----------------------------------------------
(Name of small business issuer 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
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of class which registered
None None
-------------- ------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Shares $.01 Par Value
--------------------------------------------------------------
Title of Class
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
The issuer's revenues for the fiscal year ended May 31, 1997 were $8,939,210.
The aggregate market value of voting stock held by non-affiliates, valued using
the average closing bid-and-ask prices at July 23, 1997 is $1,407,777.
Common Stock, $.01 par value per share; authorized 25,000,000 shares; 5,398,244
shares outstanding as of July 23, 1997.
Convertible Preferred Stock, $1.00 par value per share; authorized 325,000
shares; no shares outstanding as of July 23, 1997.
Documents Incorporated by Reference: Parts III and IV -Exhibits to Registration
Statement dated July 13, 1983 and Form 10-K and 10-KSB for the fiscal years
ended May 31, 1986, 1989, 1990, 1991, 1992, 1994, 1995 and 1996.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Diagnon Corporation (the "Company") was founded in 1981 to develop, produce and
sell diagnostic test kits incorporating monoclonal antibodies to diagnose
certain anemias, infections, and parasitic diseases. In fiscal year 1988, the
Company discontinued the diagnostic test kit segment of its business to
concentrate on and to expand its contract research base with the National
Institutes of Health (NIH).
Beginning with fiscal year 1988, the Company has been profitable each year.
Recently, Company management, recognizing the limited number of new NIH contract
opportunities, has concentrated on maintaining its core base of long-term
contracts, competing on new opportunities when available, and concurrently
pursuing other related business elements.
In the first quarter of fiscal year 1995, the Company entered into agreements
with The Johns Hopkins University to pursue development, testing and possible
commercialization of certain cancer treatment and drug delivery approaches that
had been developed by members of the faculty of The Johns Hopkins' University
(JHU). The transaction was contingent on the obtaining of financing through a
private placement on a best efforts, non-underwritten basis by Slusser
Associates, Inc., a New York investment banking firm. The project was to be
implemented by Enhanced Therapeutics, Inc. (ET), a new company formed by
Diagnon, JHU, certain JHU faculty members, and certain other investors.
During the second quarter of fiscal year 1995, the Company announced the
termination of the agreements between Diagnon and The Johns Hopkins University.
The termination was the result of the inability to obtain financing through a
private placement within the time-frame required by the agreements. On September
5, 1995, ET became a wholly owned subsidiary of Diagnon.
In fiscal year 1996, the Company's research and development activities in cancer
treatment and drug delivery and purified IgG products were assigned to the
Company's Corporate Support Services (now the Division of Bioresearch) business
element and the first IgG product, equine IgG was introduced. Immunoglobulins
used therapeutically provide passive immunity against infectious diseases.
At the end of fiscal year 1997, the Company reorganized into five divisions to
more fully reflect and manage the new business focuses. These are: Division of
Primate Biology and Medicine, Division of Laboratory Animal Sciences, Division
of Reproductive Endocrinology and Toxicology, Division of Bioresearch and the
Division of Neurobiology and Behavior.
CURRENT OPERATIONS
The Company is currently comprised of two subsidiaries, the above mentioned ET
and, BIOQUAL, Inc., which is comprised of three divisions, Primate Biology and
Medicine, Laboratory Animal Sciences, and Reproductive Endocrinology and
Toxicology.
-1-
<PAGE>
In fiscal year 1998, the BIOQUAL subsidiary is expected to generate more than 95
percent of the Company's revenues, with the remaining revenues arising from the
company's Division of Bioresearch business element. As revenues grow from sales
of IgG products and other research and development activities, the Company may
transfer these products and/or contracts to the currently inactive ET
subsidiary.
Administratively, the Company's current business is divided into five elements
corresponding to the business emphases of the divisions.
DIVISION OF LABORATORY ANIMAL SCIENCES - immunological, reproductive and
transgenic studies and services with emphasis on small animal models.
DIVISION OF REPRODUCTIVE ENDOCRINOLOGY AND TOXICOLOGY - Immunoassays,
biochemistry, endocrine bioassays and safety testing as related to reproduction.
DIVISION OF NEUROBIOLOGY AND BEHAVIOR - behavioral and neurological testing and
comparative studies in support of research on neurodegenerative disorders in
humans (e.g. Alzheimer's, Parkinson's, etc.).
DIVISION OF PRIMATE BIOLOGY AND MEDICINE - research and services in human
diseases using nonhuman primate models.
DIVISION OF BIORESEARCH - discovery research in cancer treatment, digestive
diseases and drug delivery systems and developmental and applied research in
veterinary therapeutics.
Financially, the Company combines the first three divisions as they are co-
located in the Medical Center Dr. facility. The Division of Bioresearch is also
located at the Medical Center Dr. facility, however, it is accounted for
separate from the first three divisions. The Division of Primate Biology and
Medicine is located in the Research Blvd. facility.
MEDICAL CENTER DR. FACILITY - DIVISIONS OF LABORATORY ANIMAL SCIENCES,
----------------------------------------------------------------------
REPRODUCTIVE ENDOCRINOLOGY AND TOXICOLOGY AND NEUROBIOLOGY AND BEHAVIOR
-----------------------------------------------------------------------
For the past twenty-two years, BIOQUAL, Inc. (through its Medical Center Dr.
Division from February 25, 1991 until May 31, 1997 and presently as the
Divisions of Laboratory Animal Sciences, Reproductive Endocrinology and
Toxicology and Neurobiology and Behavior) has operated cost-plus-fixed-fee
("CPFF") contracts for the United States Government (the "Government") to
provide research and services in the areas of cancer, immunology, transgenics,
allophenic development, contraception and congenic animal breeding. Currently,
the three divisions operate five contracts which generate more than 85% of the
division's revenue:
1. Maintenance of an Animal Holding Facility and provision of Attendant
Research Services. (ends 10/31/97)
2. Facility for Preparing and Housing Virus Infected Mice, Genetically
Manipulated Mice and Chimeric Mice. (ends 9/30/97)
3. Biological Testing Facility. (Efficacy and Safety of Reproductive
Compounds) (ends 6/30/01)
4. Provide Animal Housing/Maintenance/Bleeds/Immunizations as Specified
Herein. (ends 2/20/02)
-2-
<PAGE>
5. Development of New Methods and Strategies for Diagnosis, Treatment
and Prevention of Invasive Fungal Infection in Patients with Cancer
and HIV Infection. (ends 09/30/99)
The Company has been notified by the National Cancer Institute (NCI) of it's
intent to extend the first two contracts on a sole source basis for up to four
years. Such extensions are subject to negotiations with the NCI.
Contract revenues are charged on the basis of direct labor and supplies provided
by these divisions. Due to the relatively constant required level of effort on
the contracts, revenue is evenly spread over each month of the year. The
Government traditionally pays promptly (barring any unforeseen circumstances
such as a government shut-down). The divisions' revenues totalled $5,035,996 for
the most recent fiscal year.
RESEARCH BLVD. FACILITY - DIVISION OF PRIMATE BIOLOGY AND MEDICINE
------------------------------------------------------------------
For over twenty-four years, BIOQUAL, Inc., and SEMA, Inc., prior to its merger
with BIOQUAL; (through its Research Blvd. Division from February 25, 1991 until
May 31, 1997 and presently the Division of Primate Biology and Medicine), have
operated CPFF and Fixed Price contracts for the Government using nonhuman
primates to provide research and services in the disease areas of cancer, AIDS,
hepatitis, cystic fibrosis and influenza. Currently, this division operates six
contracts:
1. Studies Using Primate Models for AIDS Vaccine Research. (ends
11/27/99)
2. Facility for Animal Models Utilized for Viral Hepatitis Experiments.
(ends 12/27/99)
3. Facility for Nonhuman Primates Utilized in Infectious Disease
Research. (ends 12/30/99)
4. Mechanisms of Chemical Carcinogenesis in Old World Monkeys. (ends
12/18/00)
5. Care and Housing of SIV Infected Research Animals. (ends 01/18/00)
6. MAO/Evaluation of AIDS Vaccines in Non-Human Primates. (ends
11/15/97)
As part of the predecessor contract to the second contract listed above, the
division developed and has a patent on specially designed animal housing units
under the division's animal environmental enrichment program.
Contract revenues are charged on the basis of direct labor and supplies provided
by the division. Due to the relatively constant required level of effort on the
contracts, revenue is evenly spread over each month of the year. The Government
traditionally pays promptly (barring any unforeseen circumstances such as a
government shut-down). Contract revenues totalled $3,883,298 for the most recent
fiscal year.
BIOQUAL plans to bid on renewals for the three divisions' contracts as they come
up for recompetition.
The Government is the major source of funding for all of BIOQUAL's services. All
of BIOQUAL's contracts are subject to renegotiation of profits or termination at
the election of the Government. Termination of a contract or
-3-
<PAGE>
failure to win a renewal competition adversely affects the Company's revenues
and operating capital until the vacated facility space is taken up by another
contract.
DIVISION OF BIORESEARCH (FORMERLY CORPORATE SUPPORT SERVICES)
-------------------------------------------------------------
The Division of Bioresearch has one product in the marketplace, purified equine
IgG which is sold under the brand name Lyphomune(TM). This division is also
responsible for the Company's research and development activities.
EQUINE IGG
----------
In January, 1995, the Company entered into a Licensing and Manufacturing
Agreement with ZooQuest Technologies Ltd. for an exclusive worldwide license to
manufacture and sell Equine Immunoglobulin for oral administration
(Lyphomune(TM) IgG) purified by a patented process assigned to ZooQuest. A sale
agreement was reached in the first quarter of fiscal year 1997 for the Company
to acquire the assets of ZooQuest. On June 11, 1997, the Company was granted
United States Department of Agriculture approval to sell and distribute it's
oral/intravenous equine IgG also being sold under the name Lyphomune(TM).
The highly purified equine IgG is used for treatment for Failure of Passive
Transfer (FPT) of immunity in newborn foals. During the first twenty-four hours
postpartum the foals showing symptoms of FPT can be, under normal circumstances,
administered IgG orally; however, after twenty-four hours postpartum, the foals,
generally, must be treated using intravenous methods.
There are approximately 250,000 foals born in the United States annually. It is
estimated that 20-25% of these (about 55,000) will experience FPT in some form
which can be beneficially treated with Equine IgG therapy. The European Union
produces in the vicinity of 40,000 foals annually, yielding an anticipated 9,000
foals with FPT. Brazil presently has in the vicinity of 6,000,000 horses
yielding in the range of 150,000 foals annually. The remainder of North and
South America have an additional 17,000,000 horses with upwards of 400,000 foals
a year. Australia and New Zealand produce in the range of 13,000 foals a year.
Treatment of a foal requires $60-$240 worth of the IgG product. The potential
United States market is estimated at $6-8,000,000 annually. The Company will
strive to capture as large a portion of the market as possible; however, there
can be no assurance of future sales.
The United States and Europe are the first market areas for Lyphomune(TM). A
distributor is presently serving the market in the U.S. Other distributors are
being contacted to add to U.S. and international coverage.
RESEARCH AND DEVELOPMENT ACTIVITIES
-----------------------------------
CANCER TREATMENT AND DRUG DELIVERY
----------------------------------
During this fiscal year, the Company is continuing the evaluation of a new
approach to cancer treatment which began in fiscal year 1996, and if these
preliminary studies show promise, the Company will seek support for further
development (e.g. SBIR contracts).
-4-
<PAGE>
PURIFIED IgG PRODUCTS
---------------------
Currently the product, Lyphomune(TM), is being distributed as a combined
oral/intravenous dose. The process for producing the product is being reviewed
in an effort to lower unit cost of production.
This division is also working to produce purified IgG from serum from other
species (e.g. dogs). These IgG products will be clinically tested for efficacy
and safety. If these IgG products prove efficacious and safe and capable of
being delivered at an acceptable market price, the Company will move to
production of purified IgG for other species.
IMMUNOTHERAPY
-------------
During this fiscal year, Diagnon scientists successfully experimentally infected
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.
In connection with this research, on May 1, 1997, the Company entered into a two
year Cooperative Research and Development Agreement (CRADA) with the National
Institute of Diabetes and Digestive and Kidney Diseases (NIDDK) for the
"Identification and Characterization of Novel Targets for the Development of
Antibiotic and Protective Vaccines Directed Against Helicobacter pylori", and on
May 15, 1997, the Company entered into a two year Cooperative Research Agreement
with the Uniformed Services University of the Health Sciences (USUHS) for the
"Identification of Helicobacter pylori Antigens for Development of Protective
Vaccines".
The incremental costs of both the USUHS and NIDDK agreements are not material to
Diagnon's financial position.
SMALL BUSINESS INNOVATIVE RESEARCH PROGRAM (SBIR)
-------------------------------------------------
The Government offers to commercial entities "Phase I" SBIR grants which are to
fund feasibility studies costing up to $100,000 and lasting six months. If the
feasibility study shows sufficient promise, then a "Phase II" program providing
grants up to $750,000 may be awarded. "Phase III" of the program consists of
establishing the project on a commercial basis. The Company regularly submits
SBIR proposals and has been awarded and has completed five Phase I grants and
one Phase II grant. On February 1, 1997, BIOQUAL was awarded a Phase I SBIR
grant to explore the feasibility of establishing a "Comparative Neurobiology of
Aging Research Resource". The funding for this grant was $93,900. The study was
completed on July 31, 1997. The Phase II SBIR application for this program was
submitted on August 15, 1997. The Company continues to compete for the
Government's SBIR contract and grant mechanisms to further the Company's
proprietary research. Proprietary positions and/or patents arising from these
programs will be the property of the Company with free licensing available to
the Government. There can be no assurance, however, that additional SBIR grants
will be awarded, or that grants, if awarded, will result in proprietary
positions or patents for the Company.
-5-
<PAGE>
Backlogs
- --------
The divisions of Laboratory Animal Sciences, Reproductive Endocrinology and
Toxicology and Primate Biology and Medicine operate under Government contracts
which typically run three to five years. Therefore, the backlogs of the
divisions are significantly increased in a year in which a long-term contract is
awarded. Most of the contracts included in the following totals are
incrementally funded on an annual basis. Therefore much of the backlog is not
"firm" in that the funds will not be committed until a later date.
<TABLE>
<CAPTION> Backlog
Backlog Backlog Unfilled
FY 97 FY 98 in FY 98
as of 6/1/96 as of 6/1/97 Projected
------------ ------------ ---------
<S><C>
Med. Ctr. Dr. Facility $ 3,089,000 $13,615,000 $ 9,514,000
Res. Blvd. Facility 14,090,000 10,725,000 7,219,000
----------- ----------- -----------
TOTAL $17,179,000 $24,340,000 $16,733,000
</TABLE>
SUPERVISION AND REGULATION
- --------------------------
Animal Model Contracts
----------------------
Over the last few decades, there has been an increasing awareness of the need
for adequate oversight and regulation of the utilization and husbandry of
animals.
BIOQUAL, Inc. utilizes animals and, by contract, is required to observe the
regulations and guidelines of the Institute of Laboratory Animal Resources,
Guide for the Care and Use of Laboratory Animals. Furthermore, BIOQUAL, Inc.
must meet the Public Health Service (PHS) Policy on Humane Care and Use of
Laboratory Animals. This policy mandates that BIOQUAL, Inc. file annually an
assurance as to compliance with the NIH Office for Protection from Research
Risks. BIOQUAL, Inc. also comes under the jurisdiction of the U.S. Department of
Agriculture (USDA), which regularly inspects both of the Company's facilities
for adherence to its rules and regulations regarding care and treatment of
animals. To ensure compliance with the several laws and regulations regarding
animal care, both facilities are accredited as complying laboratories by the
Association for Assessment and Accreditation of Laboratory Animal Care
International (AAALAC).
The supervision and regulation programs described herein are costly in terms of
ongoing operation and maintenance, but are essential because lack of compliance
can lead to cessation of operations and loss of contracts.
Environmental Compliance
------------------------
The Company incurs minimal costs in the disposal of the waste generated by its
operations. These costs are reimbursable under government contracts.
Veterinary Products
-------------------
The USDA is responsible for regulation of veterinary products and the Company's
product testing, approval, production and packaging are governed by Part 9 of
the Code of Federal Regulations (CFR).
-6-
<PAGE>
Cancer Treatment Products
-------------------------
In the upcoming year, work on these products will not involve humans and thus
the Food and Drug Administration (FDA) will not be involved. However, the work
leading up to FDA submission will be performed under Good Laboratory Practices
(GLPs) in order to be acceptable for future presentation. Any work involving
animals will also fall under regulation by the entities described in the prior
"Animal Model Contracts" discussion.
COMPETITION
- ------------
Animal Model Contracts
----------------------
The Company is classified as a "small business" in Government contracting
procedures. So long as the Company continues to qualify as a "small business,"
this classification effectively limits competition for several of the Company's
current research contracts to other "small businesses" in the Washington, D.C.
area. Other barriers to competition include the general requirement of location
in the D.C. area (to serve the NIH scientists) and the high capital costs to
establish animal holding facilities.
The Company's main "small business" competitors are Taconic Farms, BIOCON, ROW
Sciences, Priority One and MA Bioproducts.
The Company also competes on open contracts for animal research work and its
competitors at this level are Covance, ABL, Bionetics, Southern Research
Institute and universities.
Due to the specialized nature of the work and the facilities, relatively few
companies compete for contracts in small animal and nonhuman primate
applications. The Government generally selects winners among the competitors
through evaluation of the merit of the written technical proposals with price
being an important but not an overriding factor.
Veterinary Products
-------------------
Equine IgG, the Company's product which was introduced into the market in fiscal
year 1996, is a purified immunoglobulin sold as a lyophilized (freeze-dried)
product. Competing products currently on the market involve the use of
unpurified equine serum/plasma maintained in a liquid or frozen state (thawed
for use). Principal suppliers of these competing alternative products are
Veterinary Dynamics, Inc. and Sera, Inc.
EMPLOYEES
- ---------
At the end of fiscal year 1997, the Company employed 104 people (98 of which
were full-time) as follows: Diagnon general and administrative, 18 employees;
Research Blvd. Facility, 41 employees; and Medical Center Dr. Facility, 45
employees. The Company expects to encounter competition for the technical
management positions necessary for the Company's business, but there is an ample
labor pool of laboratory technicians, animal caretakers, support/maintenance
personnel and the like.
-7-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's current leases are as follows:
<TABLE>
<CAPTION>
Division/Facility Location Sq. Ft. Exp. Date Options
- ----------------- -------- ------- --------- -------
<S><C>
Diagnon Rockville, MD 6,937 5/31/01
Res. Blvd. Fac. Rockville, MD 30,000 5/31/01 5 years
Med. Ctr. Dr. Fac. Rockville, MD 51,066 3/31/99 5 years
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 16, 1996
Election of Directors
Four directors were elected:
J. Thomas August, M.D.
Charles C. Francisco
Charles F. Gauvin
John C. Landon, Ph.D.
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
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The approximate number of holders of record of the Registrant's Common Stock on
July 23, 1997 was 1,000. The Registrant has paid no dividends with respect to
its Common Stock during the past five years, and does not anticipate doing so in
the near future. The Companys' Line-of-Credit Agreement requires that no
dividends be declared or paid until all obligations have been satisfied.
The Common Stock is traded in the over-the-counter market.
The following table sets forth, for the periods indicated, the high and low per
share closing bid prices for the Common Stock as advised to the Company by the
principal market maker in the Common Stock.
-8-
<PAGE>
<TABLE>
<CAPTION>
Bid or Closing Quotations*
--------------------------
Fiscal Year High Low
----------- ---- ---
<S><C>
1998
1st Quarter
(thru 7/23/97) 7/16 1/3
1997
4th Quarter 11/32 11/32
3rd Quarter 5/16 5/16
2nd Quarter 5/16 1/4
1st Quarter 1/4 1/4
1996
4th Quarter 1/4 1/4
3rd Quarter 9/32 1/4
2nd Quarter 5/16 3/16
1st Quarter 13/32 5/16
</TABLE>
*Prices are interdealer quotations and do not necessarily reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
The Company's Common Stock, $.01 par value per share, carries one vote per
share. There are no outstanding shares of preferred stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Liquidity and Capital Resources
- -------------------------------
The Company currently has a $1,000,000 secured revolving line of credit with
First National Bank of Maryland. This line of credit is annually renewable and
the Company believes, although there is no assurance, that the line of credit
will be renewed in October, 1997. During the renewal process in October 1996,
the interest rate of the line of credit was reduced from the prime rate plus
.75% to the prime rate plus .25%. As of May 31, 1997, there were $536,120 of
borrowings under this line of credit. In the opinion of the Company, total
current assets, the line of credit resources and the capital provided by future
operations will provide adequate liquidity and capital resources to maintain
operations.
The Company leases equipment under various capital leases which expire in fiscal
years 1999, 2000 and 2001. At May 31, 1997, the present value of the minimum
lease payments was $288,345.
The Company's revenues result primarily from Government CPFF and Fixed Price
contracts. Continued success in winning these contracts is essential to
maintaining liquidity and capital resources. Since the 1996 FORM 10-KSB report,
the Company has not been awarded any material new contracts.
During this fiscal year the Company completed an audit with the Financial
Advisory Services Branch of the National Institutes of Health and finalized its
indirect rates for fiscal years 1992 through 1995. The Company invoiced $179,484
of previously unbilled indirect rate variances during this fiscal year (the
invoices were paid on June 2, 1997). The results of the audit did not have a
material impact on the results of operations for this fiscal year.
-9-
<PAGE>
Revenue generated by these costs had been recognized during the fiscal year in
which they were incurred.
Changes in Financial Position - 1997 versus 1996
- ------------------------------------------------
Assets
In the twelve months of operation in this fiscal year, Total Assets increased
$463,537. This amount is primarily attributable to an increase to Accounts
Receivable of $313,945 consisting mainly of 1) an increase of $314,694 to Trade
Accounts Receivable reflecting a slower collection rate compared to the previous
fiscal year end and the billing of $179,484 of previously unbilled indirect rate
variances from prior years, 2) a $23,323 decrease to Unbilled Accounts
Receivable primarily resulting from a $179,484 decrease in reimbursable indirect
rate variances as a result of the billing of previously unbilled variances from
prior fiscal years, a $94,602 increase in reimbursable indirect rate variances
for the current fiscal year and the $61,237 recording of unbilled contract fee
retention to be billed at the completion of the respective contracts, and 3) a
$22,574 increase in Other Accounts Receivable reflecting a $26,212 receivable
with the landlord of the Medical Center Dr. Facility, for reimbursement of a
facility improvement paid for by BIOQUAL. An increase in Fixed Assets, net of
Accumulated Depreciation and Amortization of $203,923, reflecting an increase in
fixed asset purchases of $465,141 (mainly nonhuman primate enclosures) offset by
depreciation and amortization of $261,218 during this fiscal year. Other
Noncurrent Assets increased $102,456 due to deposits for a nonhuman primate
housing unit order ($54,000) and a $48,456 increase in the cash value of
officers split dollar life insurance policies. The balance of the increase is
due to other miscellaneous factors.
The increases above were partially offset by: a $155,905 decrease in Cash and
Cash Equivalents reflecting 1) the increase in Fixed Assets, 2) the increase in
Trade Receivables and 3) the costs associated with the continuing R&D efforts
related to certain cancer treatments, drug delivery approaches and immunotherapy
and clinical and pre-clinical trials of various purified IgG products.
Liabilities
In the twelve months of operation in this fiscal year, Total Liabilities
increased $458,982. This amount is primarily due to 1) a $536,120 increase in
Borrowings Under Line-of-Credit reflecting the increase in Fixed Assets, the
increase in Trade Receivables and the costs associated with the continuing R&D
efforts related to certain cancer treatments, drug delivery approaches and
immunotherapy and clinical and pre-clinical trials of various purified IgG
products, 2) an increase in Accounts Payable of $16,497, and 3) a $17,162
increase in Accrued Compensation and Related Costs. The balance of the increase
is due to other miscellaneous factors.
The increases above are partially offset by a decrease in Long-Term Debt of
$113,918 reflecting payments on capital leases.
On June 2, 1997, the Company received a wire transfer payment totalling $491,231
covering outstanding invoices of several contracts (this includes the $179,484
in prior year indirect rate variances mentioned previously). This payment was
applied to the outstanding balance of the line of credit. As of July 31, 1997,
over 98% of the May 31, 1997 Trade Receivables balance was collected.
-10-
<PAGE>
Changes in Financial Position - 1996 versus 1995
- ------------------------------------------------
Assets
In the twelve months of operation in fiscal year 1996, Total Assets increased
$292,415. This amount was primarily attributable to an increase in Fixed Assets,
net of Accumulated Depreciation and Amortization of $304,360, reflecting an
increase in fixed asset purchases of $574,421 (mainly nonhuman primate
enclosures and an autoclave) offset by depreciation and amortization of $270,061
during fiscal year 1996. Inventories increased $52,755 as the Company continued
to produce equine IgG. The balance of the increase was due to other
miscellaneous factors.
The increases above were partially offset by: a decrease to Accounts Receivable
of $45,196 consisting mainly of 1) a $105,801 decrease to Unbilled Accounts
Receivable resulting from a $232,973 decrease in reimbursable indirect rate
variances as a result of collections of previously unbilled variances from prior
fiscal years and a $127,171 increase in the accrual of unbilled direct costs
that were billed in the subsequent fiscal year, and 2) an increase of $57,240 to
Trade Accounts Receivable. Other Noncurrent Assets decreased $28,677 primarily
due to the net result of the completion of a nonhuman primate housing unit order
($52,553) from the previous fiscal year and a $24,226 increase in the cash
surrender value of a $1,000,000 split dollar life insurance policy held by John
C. Landon, the President, and the Company.
Liabilities
In the twelve months of operation in fiscal year 1996, Total Liabilities
increased $200,217. This amount was primarily due to an increase in Long- Term
Debt of $176,376 related to capital leases of $289,614 for nonhuman primate
enclosures at the Research Boulevard Facility, offset by $113,238 of payments on
capital leases, and an increase in Accounts Payable of $18,926. The balance of
the decrease was due to other miscellaneous factors.
Results of Operations - 1997 versus 1996
- -----------------------------------------
Revenues
Contract revenues increased by 1.2% compared to the prior year primarily due to
increased contract activity. Product sales increased to $19,916 compared to
$7,189 in fiscal year 1996.
Operating Expenses
Contract expenses increased 1.6% compared to the prior year primarily due to an
increase in contract activity. The greater increase in contract expenses over
contract revenues are primarily due to total overhead expenses exceeding
reimbursable overhead expenses during the current fiscal year. Costs of Goods
Sold increased to $18,941 compared to $6,846 in the prior year. Research and
Development (R&D) Costs increased to $349,199 compared to $235,071 in the prior
year. This increase is primarily due to the increased costs incurred associated
with pre-clinical and clinical trials for the Company's various purified IgG
products and increased costs related to certain cancer treatment and drug
delivery approaches and immunotherapy (primarily research of Helicobacter
pylori). General and Administrative Expenses (G&A) decreased 2.0% compared to
the prior fiscal year. The
-11-
<PAGE>
decrease is primarily due to a decrease in administrative salaries as a result
of the elimination of certain administrative positions.
Operating Income
Operating income decreased 52.6% compared to the prior year primarily due to
increased costs incurred associated with R&D expenses relating to certain cancer
treatments and drug delivery approaches and immunotherapy.
Interest Expense
For this fiscal year, Diagnon had interest expense of $49,320 compared to
$49,602 in the prior year.
Provision For Income Tax
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax benefit of $1,900 for the year ended May
31, 1997. The Company provided for state income tax which is estimated at
$32,800. State income tax expense is reimbursable under government contracting
regulations.
Results of Operations - 1996 versus 1995
- -----------------------------------------
Revenues
Contract revenues decreased by 6.8% compared to fiscal year 1995 primarily due
to decreased contract activity (two contracts ended at the end of fiscal year
1995 and the first quarter of this fiscal year respectively representing
approximately 13.4% of the prior fiscal year sales). Also affecting last fiscal
year'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. According to 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 1996 has been completed.
The Company is currently attempting to enter into negotiations with the
government regarding these rate variances as well as rate variances from fiscal
years 1992 through 1995.
Operating Expenses
Contract expenses decreased 7.0% compared to fiscal year 1995 primarily due to a
decrease in contract activity (primarily the two expired contracts mentioned
above). Cost of Goods Sold was $6,846 for fiscal year 1996, the year the Company
began production of it's equine IgG product LyphomuneTM. Research and
Development expenses increased to $235,071 compared to $18,809 in fiscal year
1995. This increase reflects the hire of a molecular biologist (Dr. A. Welch)
and the beginning of the Company's research related to certain cancer treatment
and drug delivery approaches and increased efforts to develop certain other
purified IgG products. General and Administrative Expenses (G&A) decreased 8.2%
compared to fiscal year 1995. The decrease is primarily due to the net result of
fiscal year 1995 $119,000 write-off related to the termination of the agreements
between Diagnon and The Johns Hopkins University and increases in fiscal year
1996 expenses resulting from annual salary increases and the addition of a
full-time legal counsel. Also contributing to the net decrease was a reduction
of the use of outside legal counsel as compared to fiscal year 1995. The
combination of
-12-
<PAGE>
these net decreases resulted in an overall decrease in operating expenses of
4.8%.
Operating Income
Operating income decreased 56.8% compared to fiscal year 1995 due to decreased
contract activity, costs incurred associated with the production of equine IgG,
R&D expenses relating to certain cancer treatment and drug delivery approaches,
and the "Blizzard of '96" as discussed in Form 10-KSB for the year ended May 31,
1996.
Interest Expense
For fiscal year 1996, Diagnon had interest expense of $49,602 compared to
$49,086 in the prior year.
Provision For Income Tax
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax benefit of $2,300 for the year ended May
31, 1996. The Company also provided for state income tax which is estimated at
$27,600. State income tax expense is reimbursable under government contracting
regulations.
Inflation and Price Changes for Fiscal Year
- -------------------------------------------
For fiscal years 1995, 1996, and 1997 neither inflation nor price changes had
any material effect on net sales, revenues, or income from operations.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are listed in the Table of Contents on page 27 as Financial
Statements filed as part of this FORM 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Set forth below is information with respect to the present directors, and
executive officers.
<TABLE>
<CAPTION>
NAME DIRECTOR SINCE AGE POSITIONS
- ---- -------------- --- ---------
<S><C>
John C. Landon, Ph.D. 1986 60 Chairman of the Board; President &
Chief Executive Officer; Director
J. Thomas August, M.D. 1982 70 Director; Consultant; Scientific
Advisor
Charles C. Francisco 1991 59 Director; Member of Compensation
Committee; Member of Audit
Committee
</TABLE>
-13-
<PAGE>
<TABLE>
<S><C>
Charles F. Gauvin 1992 42 Director; Member of Compensation
Committee; Member of Audit
Committee
Michael P. O'Flaherty 59 Secretary; Chief Operating Officer
David A. Newcomer 36 Chief Financial Officer
Leanne DeNenno 43 Vice President, BIOQUAL, Inc.
(Subsidiary)
Richard P. Bradbury, DVM 62 Vice President, BIOQUAL, Inc.
(Subsidiary)
Jerry R. Reel, Ph.D. 59 Vice President, BIOQUAL, Inc.
(Subsidiary)
</TABLE>
Each director is elected to hold office until the next annual meeting of
stockholders and until his successor is elected and qualified. Officers serve
at the discretion of the Board of Directors.
Dr. John C. Landon was elected President and Chief Executive Officer of the
Company in May, 1986 and has been Chairman of the Board since February, 1987.
Dr. Landon has been President of BIOQUAL, Inc. from January 1982 to the present.
Dr. Landon is also the President, Chief Executive Officer, Treasurer and a
Director of the Company's subsidiaries. Dr. Landon's experience includes
positions with the National Cancer Institute and with Litton Industries as
Scientific Director of the Frederick Cancer Research Facility and as President
of EG&G Mason Research Institute.
Dr. J. Thomas August is a consultant to the Company, a principal stockholder and
a founder of the Company, as well as a Director. He is Professor and Director of
the Department of Pharmacology and Molecular Sciences at the Johns Hopkins
University School of Medicine, Baltimore, Maryland and has served in those
positions since 1976. Dr. August's previous experience includes positions as
Director of the Division of Biological Sciences and Chairman of the Department
of Molecular Biology at the Albert Einstein College of Medicine. He has also
held posts as a Research Fellow in Medicine at Harvard Medical School, as an
Instructor and Assistant Professor of Medicine at Stanford University School of
Medicine, and as an Associate Professor in Medicine (assigned to microbiology)
at the New York University School of Medicine.
Mr. Charles C. Francisco is President, CEO and a Director of Victoreen, Inc., a
manufacturer of radiation measuring instrumentation, located in Cleveland, Ohio.
From 1992 to 1995, he was a director of R. E. Wright & Associates, Inc. and
Environmental Restoration Systems, Inc., earth resources consultants and
pollution removal equipment makers, respectively. For part of 1996, he was a
director of R.E. Wright Environmental, Inc., an SAIC company and successor to
R.E. Wright & Associates, Inc.
Mr. Charles F. Gauvin is the President and CEO of Trout Unlimited, a non-profit
organization dedicated to protection and conservation of trout and salmon and
their habitats, located in Arlington, Virginia. From 1986 - 1991, he was
associated with the law firm of Beveridge & Diamond, P.C. in Washington, D.C.,
where his practice included corporate and securities work for the Company.
-14-
<PAGE>
Mr. Michael P. O'Flaherty joined the Company in June 1986, as a Vice President
of BIOQUAL. Mr. O'Flaherty is currently the Chief Operating Officer and the
Secretary of the Company. Mr. O'Flaherty's duties for the Company include most
functions of general management.
Mr. David A. Newcomer joined the Company in May, 1989 as the Acting Controller
of the Company. Mr. Newcomer is currently the Chief Financial Officer of the
Company. Mr. Newcomer's duties include managing the Company's financial
functions.
Ms. Leanne DeNenno has been an employee of Diagnon's subsidiary, BIOQUAL, Inc.,
since its inception in 1982. From that date to the present, she has been a
Project Manager on a major National Cancer Institute contract. In 1988, she was
named head of Animal Research Programs for BIOQUAL, Inc. and in 1991, she was
named Vice President in charge of the Medical Center Dr. Division of BIOQUAL,
Inc. and (in 1997) the Vice President of the Division of Laboratory Animal
Sciences.
Dr. Richard P. Bradbury, D.V.M., an American College of Laboratory Animal
Medicine Diplomate, joined the Company in 1989 as the Vice President of the
Company's subsidiary, SEMA, Inc. Since the 1991 merger of SEMA into BIOQUAL, Dr.
Bradbury has been the Vice President of BIOQUAL in charge of the Research Blvd.
Division and (in 1997) became the Vice President of the Division of Primate
Biology and Medicine.
Dr. Jerry R. Reel, Ph.D., an American Board of Toxicology Diplomate, joined the
Company in 1991 as Vice President, Science and (in 1997) became the Vice
President of the Division of Reproductive Endocrinology and Toxicology for
BIOQUAL. Prior to joining BIOQUAL, Dr. Reel had his own consulting company.
-15-
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to remuneration paid
during the last three fiscal years to the Chief Executive Officer of the Company
and other company officers whose compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Other
Annual
Name and Principal Salary Bonus Compensation
Position Year ($) ($) ($)(1,2)
- ------------------ ---- ------ ----- ------------
<S><C>
John C. Landon 1997 160,000 101,863 32,723
----
CEO, President, Chairman 1996 160,000 116,946 32,723
----
of the Board 1995 160,000 139,963 32,723
----
Michael P. O'Flaherty 1997 116,690 21,660 10,593
----
Chief Operating Officer, 1996 120,818 11,944 10,593
----
Secretary 1995 108,675 17,115 8,827
----
Jerry R. Reel 1997 118,614 9,179
----
Vice President, Bioqual, Inc. 1996 109,481 2,949
----
(Subsidiary) 1995 110,636 3,405
----
Richard P. Bradbury 1997 99,573 4,000
----
Vice President, Bioqual, Inc. 1996 99,205 3,102
----
(Subsidiary) 1995 91,504 1,160
----
</TABLE>
- -------------------
(1) Other Annual Compensation for the CEO for the years 1997, 1996 and 1995
represents premiums for a $1,000,000 Split Dollar Life Insurance Policy.
(2) Other Annual Compensation for the Chief Operating Officer for the years
1997, 1996 and 1995 represents premiums for a $250,000 Split Dollar Life
Insurance Policy.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of % of Total
Securities Stock Options
Underlying Granted to Exercise
Stock Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ------------------------- ------------- ------------ -------- ----------
<S><C>
John C. Landon 10,000 (1) 10.3% $.378125 7/29/01
CEO, President and
Chairman of the Board
Michael P. O'Flaherty 10,000 (1) 10.3% $.42 5/30/07
Chief Operating Officer,
Secretary
Jerry R. Reel 4,000 (1) 4.1% $.42 5/30/07
Vice President, Subsidiary
Richard P. Bradbury 3,000 (1) 3.1% $.42 5/30/07
Vice President, Subsidiary
</TABLE>
- -------------------
(1) All options reported in this table are fully exercisable.
-16-
<PAGE>
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUE
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at FY-End (#) at FY-End ($)
on Exercise Realized
Name (#) ($) Exercisable Exercisable
- -------------------------- ----------- -------- ------------- ------------
<S><C>
John C. Landon 150,000 (1,2) N/A
CEO, President, 10,000 (1) 438
Chairman of the Board
Michael P. O'Flaherty 95,000 (1) 14,114
Chief Operating Officer, 10,000 (1,2) N/A
Secretary
Jerry R. Reel 7,000 (1) 373
Vice President, Subsidiary 4,000 (1,2) N/A
Richard P. Bradbury 10,000 (1) 1,959
Vice President, Subsidiary 4,000 (1,2) N/A
</TABLE>
- -------------------
(1) All options reported in the table are fully exercisable.
(2) All options are out-of-the-money.
- --------------------------------------------------------------------------------
Compensation of Directors
- -------------------------
During fiscal year 1997, the Company paid to Directors:
<TABLE>
<CAPTION>
Attendance of
Board Meetings Travel to
Directors and Consultation Board Meetings
Fees ($) Fees ($) Expenses ($)
--------- ---------------- -------------
<S><C>
J. Thomas August, M.D. 4,000 11,500 100
Charles C. Francisco 4,000 1,500 627
Charles F. Gauvin 4,000 1,500 -0-
</TABLE>
Messrs. Francisco, August and Gauvin have agreements with the Company extending
through the term of their election. The agreements for Messrs. Francisco, August
and Gauvin provide for quarterly payments of $1,000 each as directors fees and
payments of $500 each for attendance at Board of Director meetings. The
agreement for Dr. August also provides payments of $2,500 per quarter for
services rendered to the Company as Scientific Adviser. The Company also
reimburses Company related travel expenses incurred by any of the directors.
-17-
<PAGE>
Employment Contracts
- --------------------
Dr. Landon had an employment agreement with the Company which expired May 31,
1996, subsequently, the Board of Directors extended the agreement until May 31,
1997 at the same terms and conditions. Pursuant to this agreement, Dr. Landon's
base compensation was $160,000 per year. The agreement provided for various
additional incentive compensation dependent upon the results of the Company's
operations each year through the term of employment. Currently, the Compensation
Committee of the Board of Directors is negotiating a new employment agreement
with Dr. Landon.
COMPENSATION PURSUANT TO PLANS
Stock Option Plan - The Company adopted a Stock Option Plan (the "Plan") in
November 1988 which permits the granting of options to all employees to purchase
up to an aggregate of ten percent of the outstanding shares of Common Stock. The
Plan is designed to qualify as an "incentive stock option plan" under Section
422 of the Internal Revenue Code, but also permits the Company to grant
nonqualified options to persons, such as consultants and outside directors.
Under the Plan, options to purchase shares of Common Stock are granted at not
less than 100% of the fair market value of the underlying shares on the date
granted. The Plan is administered by a committee of the Board of Directors,
which has the authority to select optionees, evaluate suggestions presented by
the Company in order to determine the number of options to be granted to the
selected optionees, designate the number of shares to be covered by each option
and, subject to certain restrictions, specify other terms of the options. During
fiscal year 1997, the committee was comprised of Messrs. Gauvin and Francisco.
As of May 31, 1997, the following options to the officers and directors were
outstanding:
<TABLE>
<CAPTION>
Percentage Option Date
Name Service Shares of Total Price Granted
---- ------- ------ ---------- ------ -------
<S><C>
John C. Landon CEO, President, 150,000 34.2% $ .4469 1/19/94
Director, 10,000 2.3% $ .378125 7/29/96
Chairman
Michael P. O'Flaherty Chief Operating 45,000 10.3% $ .3125 12/30/88
Officer, 20,000 4.6% $ .25 10/26/89
Secretary 15,000 3.4% $ .08 2/8/90
5,000 1.1% $ .30 8/14/92
10,000 2.3% $ .5625 6/5/95
10,000 2.3% $ .42 5/30/97
Richard Bradbury Vice President, 5,000 1.1% $ .08 2/8/90
BIOQUAL 2,000 .5% $ .30 8/14/92
4,000 .9% $ .5625 6/5/95
3,000 .7% $ .42 5/30/97
Leanne DeNenno Vice President, 5,000 1.1% $ .08 2/8/90
BIOQUAL 2,000 .5% $ .30 8/14/92
4,000 .9% $ .5625 6/5/95
3,000 .7% $ .42 5/30/97
Jerry Reel Vice President, 3,000 .7% $ .30 8/14/92
BIOQUAL 4,000 .9% $ .5625 6/5/95
4,000 .9% $ .42 5/30/97
David A. Newcomer Chief Financial 4,000 .9% $ .08 2/8/90
Officer 2,000 .5% $ .30 8/14/92
4,000 .9% $ .5625 6/5/95
6,000 1.3% $ .42 5/30/97
Charles C. Francisco Director 10,000 2.3% $ .09 8/14/92
10,000 2.3% $ .34375 7/29/96
Charles F. Gauvin Director 10,000 2.3% $ .30 8/14/92
10,000 2.3% $ .34375 7/29/96
J. Thomas August Director 10,000 2.3% $ .34375 7/29/96
All officers and 370,000 84.5% $ .08 to 12/30/88 to
directors as a group $ .5625 5/30/97
(9 persons)
</TABLE>
-18-
<PAGE>
A total of 438,000 options were granted and outstanding at May 31, 1997. No
options have been exercised to date, however all options are exercisable. Of the
options granted, 408,000 are from the 1988 Stock Option Plan (described herein)
which was established for a ten year period beginning November 17, 1988. Options
to purchase 30,000 shares of common stock were granted outside the plan.
The options granted from the 1988 Plan are effective for a ten year period from
the date of grant, with the exception of John C. Landon whose option for 150,000
shares expires January 19, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners
- -----------------------------------------------
The following table sets forth information as of July 23, 1997, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
<S><C>
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 1,208,092 (2),(3) 21.74
S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL 33480 598,840 (4) 11.09
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 1,022,140 (5) 18.90
Carole Knieter Bishop
100 W. 57th Street
New York, New York 10019 363,040 6.73
</TABLE>
(1) Assumes the exercise by such person or persons of the
currently exercisable options and does not give effect to
any shares issuable upon exercise by any other person or
persons of options.
(2) Includes 54,330 shares in the names of members of Dr.
Landon's family.
(3) Assumes the exercise of currently exercisable options to
purchase 160,000 shares.
(4) Includes 30,000 shares in the name of S. David Leibowitt's
spouse.
(5) Assumes the exercise of currently exercisable options to
purchase 10,000 shares.
Security ownership of management
- --------------------------------
The following table sets forth information as of July 23, 1997, with respect to
the stock ownership of all: directors; executive officers included in the
Summary Compensation Table on page 16; directors and officers as a group, of the
Company's Common Stock.
-19-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
<S><C>
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 1,208,092 (2),(3) 21.74
Charles C. Francisco
25 Ridge Creek Trail
Moreland Hills, OH 44022 20,000 (4) .37
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 1,022,140 (5) 18.90
Charles F. Gauvin
4100 Hamilton Street
Hyattsville, MD 20781 20,000 (6) .37
Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA 22075 109,000 (7) 1.98
Dr. Jerry R. Reel
933 Hillside Lake Terrace
Gaithersburg, MD 20878 11,000 (8) .20
Dr. Richard P. Bradbury
16708 Briardale Road
Rockville, MD 20855 14,000 (9) .26
All executive officers
and directors (7, of
whom all beneficially
own shares) as a group 2,404,232 (10) 41.90
</TABLE>
(1) Assumes the exercise by such person or persons of the
currently exercisable options owned by him or them and does
not give effect to any shares issuable upon exercise by any
other person or persons of options.
(2) Includes 54,330 shares in the names of members of Dr.
Landon's family, as to which he retains beneficial
ownership.
(3) Assumes the exercise of currently exercisable options to
purchase 160,000 shares.
(4) Assumes the exercise of currently exercisable options to
purchase 20,000 shares.
(5) Assumes the exercise of currently exercisable options to
purchase 10,000 shares.
(6) Assumes the exercise of currently exercisable options to
purchase 20,000 shares.
(7) Assumes the exercise of currently exercisable options to
purchase 105,000 shares.
-20-
<PAGE>
(8) Assumes the exercise of currently exercisable options to
purchase 11,000 shares
(9) Assumes the exercise of currently exercisable options to
purchase 14,000 shares.
(10) See Notes (2) through (9) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 1988 the Company and Dr. Landon agreed to consolidate the previous
loan facilities available to Dr. Landon into a single loan of $100,000. The loan
had a five year term with repayment of principal deferred for three years. The
loan bears interest at the six month certificate of deposit rate paid by Signet
Bank, Maryland and the rate is adjusted quarterly. On September 29, 1989 the
Company agreed to increase the loan to $125,000. On September 21, 1990, the
Company agreed to increase the loan to $150,000. Pursuant to Dr. Landon's
current employment agreement, the loan was to be repaid in five installments of
$30,000 plus interest within six weeks after the end of each of the next five
fiscal years beginning with fiscal year 1992.
The largest amount owed by Dr. Landon during the fiscal year ended May 31, 1997
in respect to his loan facilities was $90,000, excluding interest accrued
amounting to $13,005. There was no addition to the loan during this fiscal year.
On July 1, 1994, Dr. Landon made a payment of $2,745 on accrued interest. On
June 6, 1994, the Company agreed to defer Dr. Landon's third $30,000 repayment
and make the payment due as two $15,000 installments paid with the fourth and
fifth $30,000 repayments respectively. On October 11, 1995, the Company's
shareholders affirmatively voted to approve the purchase of Company stock from
Dr. Landon at market value to fund the repayment by Dr. Landon of the remainder
of the Company loan. On October 16, 1996 the Board of Directors affirmatively
voted to extend the due date of the loan, maintaining all other terms and
conditions, until October 31, 1998. As of July 23, 1997, neither the stock
purchase or the loan repayment transaction have occurred.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Table of Contents to Financial Statements, on page
27.
(b) The Registrant filed no reports on FORM 8-K during the
final quarter of its fiscal year ended May 31, 1997.
(c) Exhibits filed (Exhibits incorporated by reference
listed separately.)
(21) List of Subsidiaries
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1997 (filed
with the Company's FORM 10-QSB for the quarter ended
August 31, 1996).
(10) 1. Agreement of Sale by and between ZooQuest
Technologies, LTD. and Diagnon
Corporation.
-21-
<PAGE>
Exhibits incorporated by reference to the Company's
Registration Statement No. 2-83803.
(3) (a) Amended and Restated Certificate of
Incorporation.
(b) By-laws.
(4) Stock certificate representing shares of Common
Stock.
Exhibits incorporated by reference to the Company's FORM
10-K for the fiscal year ended May 31, 1986.
(3) Amendment dated April 15, 1986 to Certificate
of Incorporation.
(10) (a) Agreement of Sale dated February 28, 1986
between Meloy Laboratories, Inc. and SEMA,
Inc.
(b) Stock Purchase Agreement dated May 30,
1986 between BIOQUAL, Inc. and Diagnon
Corporation.
Exhibits incorporated by reference to the Company's FORM
10-K for the fiscal year ended May 31, 1989.
(3) Amendments dated April 7, 1989 to Certificate
of Incorporation.
(10) (a) The Company's 1988 Stock Option Plan, adopted
November 17, 1988.
Exhibits incorporated by reference to the Company's FORM
10-K for the fiscal year ended May 31, 1990.
(10) Government Contracts.
<TABLE>
<S><C>
1. Title: Facility for Animal Models Utilized
for Viral Hepatitis Research
Institute: National Institute of Allergy
and Infectious Diseases
Dates Funded: 12/28/89 - 12/27/94
2. Title: Care and Housing of AIDS Research
Animals
Institute: National Institute of Allergy and
Infectious Diseases
Dates Funded: 1/1/90 - 1/18/95
3. Title: Facility for Nonhuman Primates Utilized
in Infectious Disease Research
Institute: National Institute of Allergy
and Infectious Diseases
Dates Funded: 1/1/90 - 12/30/94
</TABLE>
-22-
<PAGE>
<TABLE>
<S><C>
4. Title: Mouse Breeding Facility
Institute: National Institutes of Allergy
and Infectious Diseases
Dates Funded: 1/1/90 - 5/31/95
Exhibits incorporated by reference to the Company's FORM
10-K for the fiscal year ended May 31, 1991.
(10) Government Contracts.
</TABLE>
<TABLE>
<S><C>
1. Title: SIV Rhesus Macaque Model for Pediatric
AIDS
Institute: National Institute of Mental Health
Dates Funded: 11/7/90 - 6/30/95
2. Title: Transplacental Carcinogenesis and Tumor
Promotion in Old World Monkeys
Institute: National Cancer Institute
Dates Funded: 12/19/90 - 12/18/95
3. Title: Biological Testing Facility
Institute: National Institute of Child Health and
Human Development
Dates Funded: 6/1/91 - 5/31/96
</TABLE>
Exhibits incorporated by reference to the Company's FORM
10-K for the fiscal year ended May 31, 1992.
(10) (a) Leases.
1. Medical Center Drive Facility
2. Research Boulevard Facility
(b) Employment Agreement dated January 23, 1991
between John C. Landon and Diagnon Corporation.
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1994.
(10) Government Contracts.
<TABLE>
<S><C>
1. Title: Facility for Preparing and Housing
Virus Infected Mice, Genetically
Manipulated Mice, and Chimeric Mice.
Institute: National Cancer Institute
Dates Funded: 10/1/93 - 9/30/97
2. Title: Maintenance of an Animal Holding and
Breeding Facility and Provision of
Attendant Research Services.
Institute: National Cancer Institute
Dates Funded: 11/1/93 - 10/31/97
3. Title: Provide Animal Housing/Maintenance/
Bleeds/Immunizations as Specified
Herein.
</TABLE>
-23-
<PAGE>
<TABLE>
<S><C>
Institute: National Institute of Diabetes and
Digestive and Kidney Diseases
Dates Funded: 2/21/92 - 2/20/97
4. Title: Development of Transgenic Mouse Models
for HIV Drug Testing
Institute: National Institute of Dental Research
Dates Funded: 6/28/94 - 6/27/97
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1995 (filed
with the Company's FORM 10-QSB's during the fiscal year
ended May 31, 1995).
(10) (a) Option and Pre-Incorporation Agreement
dated March 25, 1994 between Johns
Hopkins University, Diagnon
Corporation, and Slusser Associates,
Inc.
(b) First Amendment to Option and Pre-
Incorporation Agreement dated June 8,
1994.
(c) Second Amendment to Option and Pre-
Incorporation Agreement dated June 29,
1994.
(d) Service Agreement dated July 1, 1994
between Enhanced Therapeutics, Inc. and
Diagnon Corporation.
(e) Stockholders' Agreement of Enhanced
Therapeutics, Inc. dated July 1, 1994.
(f) Licensing and Manufacturing Agreement
dated January 12, 1995 between ZooQuest
Technologies Ltd., Inc., Equilab
Associates, Inc., and Diagnon
Corporation.
(g) Government Contracts.
1. Title: Care and Housing of Research
Animals for Hepatitis Studies.
Institute: National Institute of Allergy
and Infectious Diseases
Dates Funded: 12/28/94 - 12/27/99
2. Title: Facility for Non-Human Primates
Utilized in Infectious Disease
Research.
Institute: National Institute of Allergy
and Infectious Diseases
Dates Funded: 12/31/94 - 12/30/99
</TABLE>
-24-
<PAGE>
<TABLE>
<S><C>
3. Title: Care and Housing of SIV Infected
Research Animals.
Institute: National Institute of Allergy
and Infectious Diseases
Dates Funded: 1/19/95 - 1/18/00
4. Title: Development of New Methods and
Strategies for Diagnosis,
Treatment, and Prevention of
Invasive Fungal Infection in
Patients with Cancer and HIV
Infection.
Institute: National Cancer Institute
Dates Funded: 10/1/94 - 9/30/99
5. Title: Studies Using Primate Models for
AIDS Vaccine Research.
Institute: National Cancer Institute
Dates Funded: 11/30/94 - 11/29/98
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1996
(10) Government Contracts.
1. Title: Biological Testing
Facility.
Institute: National Institute of Child
Health and Human
Development
Dates Funded: 7/1/96 - 6/30/01
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1996 (filed
with the Company's FORM 10-QSB for the quarter ended
November 30, 1995).
(10) Government Contracts.
1. Title: MAO/Evaluation of AIDS
Vaccines in Non-Human
Primates.
Institute: National Institute of
Allergy and Infectious
Diseases
Dates Funded: 9/30/95 - 11/15/97
2. Title: Mechanisms of Chemical
Carcinogenesis in Old World
Monkeys.
Institute: National Cancer Institute
Dates Funded: 12/19/95 - 12/18/00
</TABLE>
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned thereunto duly authorized on August 28, 1997.
DIAGNON CORPORATION
/s/ John C. Landon
--------------------------
BY: John C. Landon
Chairman of the Board
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chairman of the
Board, President and
Director (Chief Executive
/s/ John C. Landon Officer) 8/28/97
- ---------------------
John C. Landon, Ph.D.
/s/ J. Thomas August Director 8/28/97
- ---------------------
J. Thomas August M.D.
/s/ Charles C. Francisco Director 8/28/97
- ------------------------
Charles C. Francisco
/s/ Charles F. Gauvin Director 8/28/97
- ---------------------
Charles F. Gauvin
/s/ Michael P. O'Flaherty Chief Operating Officer
- ------------------------- and Secretary 8/28/97
Michael P. O'Flaherty
/s/ David A. Newcomer Chief Financial Officer 8/28/97
- ---------------------
David A. Newcomer
-26-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
------------------------------------
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
-----------------------------------------
Independent Auditors' Report..................................... 28
Financial Statements:
Consolidated Balance Sheets, May 31, 1997 and 1996.......... 29
Statements of Consolidated Operations for each of the
years in the three year period ended May 31, 1997........... 30
Statements of Consolidated Cash Flows for each of the years
in the three year period ended May 31, 1997................. 31
Statements of Consolidated Stockholders' Equity for each
of the years in the three year period ended May 31, 1997 ... 32
Notes to Financial Statements............................... 33
Other financial statement schedules are omitted because they are not applicable
or required.
-27-
<PAGE>
DELOITTE & TOUCHE LLP
2 Hopkins Plaza
Baltimore, Maryland 21201-2983
Telephone: (410) 576-6700
Facsimile: (410) 837-0510
ITT Telex: 4995614
INDEPENDENT AUDITORS' REPORT
Diagnon Corporation:
We have audited the accompanying consolidated balance sheets of Diagnon
Corporation and Subsidiaries as of May 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended May 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Diagnon Corporation and
Subsidiaries at May 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
July 30, 1997
-28-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
CONSOLIDATED BALANCE SHEETS, MAY 31, 1997 AND MAY 31, 1996
- ----------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ -------------- --------------
<S><C>
CURRENT ASSETS:
Cash and cash equivalents $ 62,638 $ 218,543
Accounts receivable:
Trade 1,245,292 930,598
Unbilled 598,922 622,245
Other 49,999 27,425
Prepaid expenses 76,444 71,432
Inventories 44,961 52,755
Deferred income taxes - current 50,000 49,000
-------------- --------------
Total current assets 2,128,256 1,971,998
-------------- --------------
LOANS TO OFFICERS 90,000 90,000
-------------- --------------
FIXED ASSETS:
Leasehold improvements 670,899 543,735
Furniture, fixtures and equipment 2,985,508 2,647,531
-------------- --------------
Total 3,656,407 3,191,266
Less accumulated depreciation
and amortization 2,182,091 1,920,873
-------------- --------------
Fixed assets, net 1,474,316 1,270,393
-------------- --------------
DEFERRED INCOME TAXES - NONCURRENT 797,400 796,500
OTHER NONCURRENT ASSETS 204,549 102,093
-------------- --------------
TOTAL $ 4,694,521 $ 4,230,984
============== ==============
LIABILITIES
- -----------
CURRENT LIABILITIES:
Borrowings under line of credit $ 536,120
Current maturities of long-term debt 124,153 $ 113,918
Accounts payable 250,767 234,270
Accrued compensation and related costs 292,956 275,794
Accrued income taxes 5,543 3,560
Other accrued liabilities 12,641 11,503
-------------- --------------
Total current liabilities 1,222,180 639,045
LONG-TERM DEBT 164,192 288,345
-------------- --------------
Total liabilities 1,386,372 927,390
-------------- --------------
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 (3,555,533) (3,560,088)
-------------- --------------
Total 3,935,506 3,930,951
Less - treasury stock 4,204,208 shares, at cost (627,357) (627,357)
-------------- --------------
Total stockholders' equity 3,308,149 3,303,594
-------------- --------------
TOTAL $ 4,694,521 $ 4,230,984
============== ==============
</TABLE>
See notes to financial statements.
-29-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED OPERATIONS FOR EACH OF THE YEARS
- -----------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1997
- -------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S><C>
REVENUES AND SALES:
Contract revenues $8,919,294 $8,812,776 $9,459,667
Product sales 19,916 7,189 1,392
---------- ---------- ----------
Total Revenues and Sales 8,939,210 8,819,965 9,461,059
---------- ---------- ----------
OPERATING EXPENSES:
Contract 6,886,440 6,777,791 7,288,220
Cost of goods sold 18,941 6,846
Research and development 349,199 235,071 18,809
General and administrative 1,610,012 1,642,875 1,789,357
---------- ---------- ----------
Total Operating Expenses 8,864,592 8,662,583 9,096,386
---------- ---------- ----------
OPERATING INCOME 74,618 157,382 364,673
INTEREST INCOME 10,157 9,718 7,743
INTEREST EXPENSE (49,320) (49,602) (49,086)
---------- ---------- ----------
INCOME BEFORE INCOME TAX 35,455 117,498 323,330
PROVISION FOR INCOME TAX (30,900) (25,300) (201,900)
---------- ---------- ----------
NET INCOME $ 4,555 $ 92,198 $ 121,430
========== ========== ==========
INCOME PER SHARE $ 0.00 $ 0.02 $ 0.02
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,398,244 5,398,244 5,398,244
========== ========== ==========
</TABLE>
See notes to financial statements.
-30-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS FOR EACH OF THE YEARS
- -----------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1997
- -------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,555 $ 92,198 $ 121,430
---------- --------- ----------
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization 261,218 271,763 328,254
Deferred income taxes (1,900) (2,300) 181,900
(Increase) decrease in accounts receivable (313,945) 45,196 65,908
Increase in prepaid expenses (5,012) (919) (12,257)
Decrease (increase) in inventories 7,794 (52,755)
(Increase) decrease in other assets (102,456) 28,677 (90,386)
Decrease in accounts payable and accrued expenses 34,797 20,583 3,546
Increase (decrease) in income taxes payable 1,983 3,258 (10,940)
Decrease in deferred income (86,579)
---------- --------- ----------
Total Adjustments (117,521) 313,503 379,446
---------- --------- ----------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (112,966) 405,701 500,876
---------- --------- ----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures (465,141) (284,777) (126,263)
Decrease in loans to officers 10,000
---------- --------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (465,141) (284,777) (116,263)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 536,120 (154,967)
Principal payments under capital lease obligations (113,918) (113,268) (75,715)
Other (350)
---------- --------- ----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 422,202 (113,268) (231,032)
---------- --------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (155,905) 7,656 153,581
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,543 210,887 57,306
---------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,638 $ 218,543 $ 210,887
========== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 46,988 $ 50,496 $ 49,415
========== ========= ==========
Income taxes $ 25,600 $ 24,470 $ 30,954
========== ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company issued:
Long-term debt issued in connection with capital
leases $ 289,644 $ 202,108
</TABLE>
See notes to financial statements.
-31-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY FOR EACH OF THE YEARS
- ---------------------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1997
- -------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------- ------------------------------
ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED NUMBER OF AT
SHARES VALUE CAPITAL DEFICIT SHARES COST
--------- ----- ---------- ----------- --------- ----
<S><C>
BALANCE, JUNE 1, 1994 9,602,452 $ 96,024 $ 7,395,015 $(3,773,716) (4,204,208) $ (627,357)
NET INCOME 121,430
--------- -------- ----------- ----------- ---------- ----------
BALANCE, MAY 31, 1995 9,602,452 96,024 7,395,015 (3,652,286) (4,204,208) (627,357)
NET INCOME 92,198
--------- -------- ----------- ----------- ---------- ----------
BALANCE, MAY 31, 1996 9,602,452 96,024 7,395,015 (3,560,088) (4,204,208) (627,357)
NET INCOME 4,555
--------- -------- ----------- ----------- ---------- ----------
BALANCE, MAY 31, 1997 9,602,452 $ 96,024 $ 7,395,015 $(3,555,533) (4,204,208) $ (627,357)
========= ======== =========== =========== ========== ==========
</TABLE>
See notes to financial statements.
-32-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
Diagnon Corporation (the "Company") its wholly-owned subsidiaries, BIOQUAL, Inc.
and Enhanced Therapeutics, Inc. All significant intercompany transactions and
balances are eliminated in consolidation.
Segment Information
- -------------------
The Company's principal business consists of the government contract research
operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fixed Assets and Depreciation
- -----------------------------
Fixed assets are stated at cost. Depreciation is provided for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets (generally three to ten years). Tax depreciation is provided
on the straight-line method. Leasehold improvements are amortized over the lease
period or the estimated useful life of the improvements, whichever is shorter.
Inventories
- -----------
Inventories are stated at the lower of cost or market.
Research and Development
- ------------------------
All costs incurred in connection with any research and development activities
are expensed as incurred.
Government contracts
- --------------------
Substantially all of the Company's revenue is from U.S. Government contracts.
The indirect rates used in CPFF contracts are subject to final negotiated
settlements at the end of each fiscal year.
Revenue Recognition
- -------------------
Contract research revenue is generally earned based on cost-plus-fixed-fee
("CPFF") arrangements and is recognized as costs are incurred.
-33-
<PAGE>
Earnings Per Share
- ------------------
The Company is required to adopt SFAS No. 128 "Earnings Per Share" effective
June 1, 1998. The standard specifies the computation, presentation and
disclosure requirements for earnings per share. The Company does not believe
this statement will have a material effect on earnings per share.
Earnings per share is computed based on the weighted average number of common
shares outstanding during each period. In 1997, 1996 and 1995, common stock
options were not included in the calculation of earnings per share because they
had an immaterial effect (less than 3%).
Cash and Cash Equivalents
- -------------------------
The Company considers cash equivalents to include short-term investments which
have a maturity of 90 days or less at the date of purchase.
2. CAPITAL STOCK
Stock Options
- -------------
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the 1988 Stock Option Plan, accordingly, no
compensation has been recognized for the plan. Had compensation costs for the
plan been determined based on fair value at the grant date forward under the
plan consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and income
per share would not have been materially affected on a pro forma basis for the
years ended May 31, 1997 and 1996.
The Company has reserved 408,000 shares of its Common Stock to cover the
exercise of options granted under its 1988 stock option plan. With the exception
of the CEO's option which expires January 19, 1999, options expire ten years
from date of grant under the plan, or upon the optionee's separation from the
Company and were granted at the average of the closing bid and ask price of the
Company's Common Stock at the date of grant. The Company has reserved an
additional 30,000 shares of its Common Stock to cover the exercise of options
granted outside its 1988 stock option plan. Option transactions were as follows:
<TABLE>
<CAPTION>
Number of
Shares Option
Under Option Price
------------ ------
<S><C>
Outstanding, June 1, 1994 304,000 $ .08 to .4469
Granted -0-
Cancelled -0-
-------
Outstanding, May 31, 1995 304,000 .08 to .4469
Granted 40,000 .375 to .5625
Cancelled -0-
-------
Outstanding, May 31, 1996 344,000 .08 to .5625
Granted 97,000 .34375 to .42
Cancelled (3,000) .5625
-------
Outstanding, May 31, 1997 438,000 .08 to .5625
=======
</TABLE>
-34-
<PAGE>
The number of options exercisable at May 31 were as follows:
1997 438,000
1996 344,000
1995 304,000
3. LINE OF CREDIT
The Company has a line of credit of $1,000,000 with a bank to meet periodic cash
flow needs. As of May 31, 1997, there were $536,120 of borrowings under this
line of credit, the maximum amount borrowed during the fiscal year was $934,561,
the average balance outstanding was $204,281, and the average interest rate was
8.83% during 1997. The line is guaranteed by the Company's subsidiary, BIOQUAL,
and bears interest at the prime rate plus .25% and is collateralized by trade
accounts receivable. The line is subject to renewal on or before October 29,
1997.
4. LONG-TERM DEBT
1997 1996
---- ----
Capitalized Lease Obligations $288,345 $402,263
Less Current Maturities 124,153 113,918
-------- --------
Long-Term $164,192 $288,345
======== ========
Future annual minimum payments under the capital leases as of May 31, 1997,
were:
1998 $144,543
1999 124,502
2000 41,264
2001 10,591
--------
320,900
Less: Amount representing interest 32,555
--------
Present value of minimum lease payments $288,345
========
The Company leases equipment under various capital leases which expire in fiscal
years 1999, 2000 and 2001. Property held under the capital leases at May 31,
1997 and 1996 consisted of the following:
1997 1996
---- ----
Equipment $479,362 $479,362
Less: Accumulated amortization 96,644 48,708
-------- --------
$382,718 $430,654
======== ========
The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment. Amortization expense amounted to $54,975, $33,516 and
$66,700 in 1997, 1996 and 1995, respectively, and is included with depreciation
expense in the financial statements.
The fair value of long-term debt is estimated to approximate its carrying value
at May 31, 1997 based on borrowing rates currently available with similar terms
and maturity.
-35-
<PAGE>
5. INCOME TAXES
Income taxes are accounted for using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset
and liability approach to financial accounting and reporting for income taxes.
Under SFAS No. 109, deferred tax assets and liabilities are provided for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred tax assets and liabilities are measured using the enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is computed as the tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Current tax expense $ 32,800 $ 27,600 $ 20,000
Deferred tax (benefit) expense (1,900) (2,300) 181,900
-------- -------- --------
$ 30,900 $ 25,300 $201,900
======== ======== ========
A reconciliation of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Federal taxes at statutory
rate $ 12,055 $ 39,949 $111,258
State taxes at statutory rate 32,800 27,600 20,000
Executive life insurance
premiums 2,034 8,997 4,187
Decrease (increase) in
previously recognized tax
loss carryforwards (11,126) (46,000) 69,649
Other, net (4,863) (5,246) (3,194)
-------- -------- --------
$ 30,900 $ 25,300 $201,900
======== ======== ========
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1997 1996 1995
------- ------- -------
<S><C>
Financial statement accruals $ 40,904 $ 39,646 $ 41,056
Different useful lives for
depreciation of fixed assets
for tax purposes (58,300) 10,691 61,358
Tax loss carryforward 1,598,000 1,518,000 1,564,000
Less: valuation allowance (733,204) (722,837) (823,214)
---------- ---------- ----------
Total deferred income taxes $ 847,400 $ 845,500 $ 843,200
========== ========== ==========
</TABLE>
As of May 31, 1997, the Company has cumulative tax operating loss carryforwards
of approximately $4,700,000 available to reduce future federal taxable income.
The operating loss carryforwards expire in fiscal years 2000 to 2003. Management
believes that it is more likely than not that the Company will generate future
taxable income sufficient to realize a portion of the remaining tax loss
carryforward and that the valuation allowance is appropriate given the current
estimates of future taxable income.
-36-
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company is a lessee under various noncancelable operating leases, covering
the facilities in which its operations are conducted and certain equipment and
vehicles. During 1997, 1996 and 1995, the Company subleased a part of its
premises. As of May 31, 1997, there are no material sublease agreements. The
rental income earned has been offset against the Company's rental expense in the
period. The aggregate minimum annual rental commitments under these various
leases are as follows:
Rental
Commitment
----------
1998 1,340,000
1999 1,373,000
2000 1,256,000
2001 1,287,000
2002 64,000
Facilities leases contain options for five-year extensions.
Rental expense was approximately $1,322,000, net of $11,000 of sublease income,
$1,388,000, net of $10,000 of sublease income, and $1,355,000, net of $9,000 of
sublease income, for the years ended May 31, 1997, 1996 and 1995, respectively.
7. RELATED PARTIES
The following schedule presents information regarding loans to officers for the
three year period ended May 31, 1997.
<TABLE>
<CAPTION>
Balance at Balance
Beginning of at End of
Name of Person Period Additions Repayments Period
- -------------- ------------ --------- ---------- ---------
<S><C>
Year Ended May 31, 1997:
President $ 90,000 $ -0- $ -0- $ 90,000
Year Ended May 31, 1996:
President $ 90,000 $ -0- $ -0- $ 90,000
Year Ended May 31, 1995:
President $ 90,000 $ -0- $ -0- $ 90,000
Executive Vice President 10,000 -0- 10,000 -0-
</TABLE>
The loan to the President bears interest at the six month certificate of deposit
rate. On October 11, 1995, the Company's shareholders affirmatively voted to
approve the purchase of common stock of the Company held by Dr. Landon at fair
market value in an amount sufficient to fund the payment of the $45,000
installment payment, plus accrued interest, due after fiscal year 1995 and in a
similar manner to purchase common stock of the Company held by Dr. Landon at
fair market value in an amount sufficient to fund the payment of the final
$45,000 installment payment, plus accrued interest, due after fiscal year 1996.
The 1996 payment would be made within six weeks after the end of fiscal year
1996. On October 16, 1996, the Board of Directors affirmatively voted to extend
-37-
<PAGE>
the due date of the loan, maintaining all other terms and conditions, until
October 31, 1998. As of July 30, 1997, neither the stock purchase or the loan
repayment transaction have occurred.
The President had an employment agreement with the Company which expired May
1996, subsequently the Board of Directors extended the agreement until May 31,
1997 at the same terms and conditions. The agreement continued to provide a base
compensation and additional incentive compensation dependent upon annual
operations. Currently, the Compensation Committee of the Board of Directors is
negotiating a new employment agreement with Dr. Landon.
The loan to the Executive Vice President bore interest at the six month
certificate of deposit rate plus one percent as quoted by Signet Bank/MD. The
loan was paid in full during March 1995.
-38-
<PAGE>
EXHIBITS
-39-
<PAGE>
(21) List of Subsidiaries
1. BIOQUAL, Inc.
9600 Medical Center Dr.
Rockville, Maryland 20850-3336
Incorporated in Delaware
2. Enhanced Therapeutics, Inc.
9600 Medical Center Dr.
Rockville, Maryland 20850-3336
Incorporated in Delaware
-40-
