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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13281
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DIAGNON CORPORATION
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(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
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of class which registered
Common Shares $.01 Par Value Chicago Stock Exchange
- ---------------------------- ------------------------
Securities registered under Section 12(g) of the Exchange Act:
None
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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, 1998 were $9,924,386.
The aggregate market value of voting stock held by non-affiliates, valued using
the average closing bid-and-ask prices at July 24, 1998 is $846,071.
Common Stock, $.01 par value per share; authorized 25,000,000 shares; 899,672
shares outstanding as of July 24, 1998.
Convertible Preferred Stock, $1.00 par value per share; authorized 500,000
shares; no shares outstanding as of July 24, 1998.
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, 1996 and 1997.
<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 reported a profit before income
tax each year. Beginning in 1994, 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 Immunoglobulin G (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.
On October 22, 1997, the Company's shareholders voted to effect a one for six
reverse stock split. This was to fulfil a requirement to become listed on the
Chicago Stock Exchange. On October 23, 1997, the Company became listed on the
Chicago Stock Exchange.
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<PAGE>
CURRENT OPERATIONS
The Company is currently comprised of two subsidiaries, the above mentioned
currently inactive ET and, BIOQUAL, Inc.
Administratively, the Company's current business is divided into five elements
corresponding to the business emphases of the following 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 and all division's of BIOQUAL.
The Division of Bioresearch is also located at the Medical Center Dr.
facility, however, it is accounted for separately from the first three
divisions as it is a division of Diagnon. The Division of Primate Biology
and Medicine is located in the Research Blvd. facility.
BIOQUAL plans to bid on renewals for its 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 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.
MEDICAL CENTER DR. FACILITY - DIVISIONS OF LABORATORY ANIMAL SCIENCES AND
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REPRODUCTIVE ENDOCRINOLOGY AND TOXICOLOGY
-----------------------------------------
For the past twenty-three 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 and Reproductive Endocrinology and
Toxicology) 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 10/31/01)
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2. Facility for Preparing and Housing Virus Infected Mice, Genetically
Manipulated Mice and Chimeric Mice. (ends 9/30/01)
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)
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)
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 $5,190,955 for
the most recent fiscal year.
MEDICAL CENTER DRIVE FACILITY - DIVISION OF NEUROBIOLOGY AND BEHAVIOR
---------------------------------------------------------------------
The Division of Neurobiology and Behavior is implementing a comparative
neurobiology of aging research resource supported by the National Institute on
Aging. The Division was awarded a two year Phase II Small Business Innovative
Research (SBIR) grant for the study of the effects of aging on the brain. The
aims are to increase the understanding of normal aging processes and to assist
in developing improved methods of diagnosis, prevention, treatment, and
management of age-related neurodegenerative disorders such as Alzheimer's
disease. The project has yielded exciting new discoveries regarding comparative
neuroanatomy and brain aging which have been presented at recent scientific
conferences. The two year grant is funded at $753,144. This division's revenues
totalled $74,604 for the most recent fiscal year.
RESEARCH BLVD. FACILITY - DIVISION OF PRIMATE BIOLOGY AND MEDICINE
------------------------------------------------------------------
For over twenty-five 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 through its 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
11/29/98)
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)
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6. MAO/Evaluation of AIDS Vaccines in Non-Human Primates. (ends 5/31/99)
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 $4,428,882 for the most recent
fiscal year.
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(R). This division is also
responsible for the Company's research and development activities.
EQUINE IGG
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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(R)
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 its oral/intravenous
equine IgG also being sold under the name Lyphomune(R).
The 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.
In addition to direct sales, the product is being distributed throughout the
United States by five major distributors. The first year of sales of
oral/intravenous Lyphomune(R) was encouraging and met with user acceptance.
Production has been increased to meet immediate demands and can be easily and
rapidly expanded. The product is seasonal, allowing for an inventory buildup
during the slow season. Product sales for the year ended May 31, 1998 totalled
$76,377.
RESEARCH AND DEVELOPMENT ACTIVITIES
-----------------------------------
DISCOVERY RESEARCH DEPARTMENT
-----------------------------
The cancer treatment project reported in last year's 10-KSB was placed on hold,
to allow the Discovery Research Department to focus its efforts on HELICOBACTER
PYLORI, a bacterium associated with duodenal and gastric ulcers and considered a
risk factor in the development of gastric adenocarcinoma. Infection with H.
PYLORI has been associated with morbidity and mortality on all five continents.
With the current large worldwide market for antibiotics to control this
organism, along with the emergence of resistant strains of H. PYLORI, the
Company has mounted a dual effort directed toward both vaccine and antibiotic
development.
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<PAGE>
In May 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 Antibiotics and
Protective Vaccines Directed Against HELICOBACTER PYLORI" and a two year
cooperative agreement with the Uniform Services University of the Health
Sciences (USUHS) for the "Identification of HELICOBACTER PYLORI Antigens for the
Development of Protective Vaccines". The Company incurred approximately $107,000
in expenses in support of these two agreements during fiscal year 1998 and
anticipates comparable expenditures during fiscal year 1999.
During this fiscal year, the Department of Discovery Research was awarded two
Phase I SBIR grants from the National Cancer Institute (NCI) and the NIDDK
respectively. The NCI grant titled "Nonhuman Primate Model for HELICOBACTER
PYLORI Infection" totalled $100,000. The NIDDK grant titled "Identification of
HELICOBACTER PYLORI Protective Antigens" totalled $99,673. The Director of the
Department of Discovery Research was awarded a Young Investigator Award for his
work on the natural resistance to H. PYLORI in the rhesus monkey. An
understanding of this observed natural resistance would potentially contribute
to vaccine development and/or novel therapeutic approaches.
VETERINARY THERAPEUTICS DEPARTMENT
----------------------------------
The Veterinary Therapeutics Department is developing five additional products
related to equine IgG. These products will serve different therapeutic markets.
Three are in clinical trials and one is scheduled for trials in the late fall of
1998. The research direction is to provide a family of therapeutic
immunoglobulin products for the equine industry. The Company believes that the
costs associated with the development of the five additional products will not
be material to Diagnon's financial position.
SMALL BUSINESS INNOVATIVE RESEARCH PROGRAM (SBIR)
-------------------------------------------------
The Government offers to commercial entities "Phase I" SBIR grants which fund
feasibility studies costing up to $100,000 and lasting six months. If the
feasibility study shows sufficient promise, 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 seven and completed six Phase I grants and
has been awarded two and completed one Phase II grants.
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. On May 15, 1998, BIOQUAL was awarded and began work on the Phase
II SBIR grant titled "Comparative Neurobiology of Aging Resource" totalling
$753,144 for two years. Also during this fiscal year BIOQUAL was awarded two
Phase I SBIR grants: 1) Nonhuman Primate Model for HELICOBACTER PYLORI
Infection" totalling $100,000 from the NCI, and 2) "Identification of
HELICOBACTER PYLORI Protective Antigens" totalling $99,673 from the NIDDK. The
first grant expired on June 30, 1998 and the second grant expires on March 31,
1999. 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
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<PAGE>
awarded, or that grants, if awarded, will result in proprietary positions or
patents for the Company.
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.
Backlog
Backlog Backlog Unfilled
FY 98 FY 99 in FY 99
as of 6/1/97 as of 6/1/98 Projected
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Med. Ctr. Dr. Facility $13,615,000 $16,096,000 $11,944,000
Res. Blvd. Facility 10,725,000 7,862,000 4,073,000
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TOTAL $24,340,000 $23,958,000 $16,017,000
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 certain veterinary products and the
Company's product testing, approval, production and packaging are governed by
Part 9 of the Code of Federal Regulations (CFR).
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<PAGE>
Cancer Treatment Products
-------------------------
Since the cancer treatment project is currently on hold there will be no
involvement necessary of the Food and Drug Administration (FDA). However, if the
project resumes, 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 1998, the Company employed 108 people (100 of which
were full-time) as follows: Diagnon general and administrative, 18 employees;
Research Blvd. Facility, 45 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 believes there is
an ample labor pool of laboratory technicians, animal caretakers,
support/maintenance personnel and the like.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's current leases are as follows:
Division/Facility Location Sq. Ft. Exp. Date Options
- ----------------- -------- ------- --------- -------
Diagnon Rockville, MD 9,470 5/31/02 5 years
Res. Blvd. Fac. Rockville, MD 30,000 5/31/02 5 years
Med. Ctr. Dr. Fac. Rockville, MD 52,185 5/31/02 5 years
ITEM 3. LEGAL PROCEEDINGS
On September 3, 1997 Lourdes Weisgerber, a former employee, filed a Complaint in
The United States District Court for the District of Maryland (Southern
Division) Case No. PJM 972970 alleging that BIOQUAL, Inc. violated her
employment rights under the Americans With Disabilities Act. This allegation was
previously reported as an administrative law matter within the Equal Employment
Opportunity Commission (EEOC) and the Montgomery County Human Relations
Commission. The investigation conducted by the Montgomery County Human Relations
Commission found no discrimination. Ms. Weisgerber asked for and received a
Notice of Right to Sue upon the dismissal of the administrative complaint by
Montgomery County and the EEOC. The Plaintiff sued for backpay, emotional
distress, pain and suffering, punitive damages, and attorneys' fees and costs.
On May 20, 1998, the United States District Court for the District of Maryland
(Southern Division) granted BIOQUAL, Inc.'s Motion for Summary Judgement in Case
No. PJM 972970. This ruling for BIOQUAL supported prior administrative findings
that BIOQUAL had not engaged in any discriminatory conduct concerning the
plaintiff. The Plaintiff did not file an appeal from this decision and the case
has been closed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 22, 1997
Election of Directors
Four directors were elected:
For Withheld
--------- --------
J. Thomas August, M.D. 3,484,732 3,815
Charles C. Francisco 3,485,532 3,015
Charles F. Gauvin 3,485,532 3,015
John C. Landon, Ph.D. 3,484,732 3,815
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 3,486,497
Negative Votes 1,200
Abstain 400
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Proposal 3 To amend the Company's 1988 Stock Option Plan.
----------
Affirmative Votes 3,471,542
Negative Votes 16,405
Abstain 600
Proposal 4 To adopt a new stock option plan.
----------
Affirmative Votes 3,337,492
Negative Votes 150,455
Abstain 600
Proposal 5 To amend the Certificate of Incorporation to authorize,
ratify, and approve the issuance of 17,390 shares of Common Stock.
Affirmative Votes 3,466,442
Negative Votes 19,855
Abstain 2,250
Proposal 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.
Affirmative Votes 3,102,402
Negative Votes 383,895
Abstain 2,250
Proposal 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.
Affirmative Votes 3,338,762
Negative Votes 147,735
Abstain 2,050
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 24, 1998 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 to the lender have been
satisfied.
The Common Stock is traded in the over-the-counter market and as of October 23,
1997, the Chicago Stock Exchange.
The following table sets forth, for the periods indicated, prior to the
Company's listing on the Chicago Stock Exchange, 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.
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<PAGE>
Bid or Closing Quotations*
--------------------------
Fiscal Year High Low
----------- ---- ---
1999
1st Quarter
(thru 7/24/98) 1 1/2 1 3/16
1998
4th Quarter 1 9/16 1 1/2
3rd Quarter 1 15/16 1 9/16
2nd Quarter 2 1/4 1 3/4
1st Quarter ** 2 5/8 2 1/16
1997
4th Quarter ** 2 1/16 2 1/16
3rd Quarter ** 1 7/8 1 7/8
2nd Quarter ** 1 7/8 1 1/2
1st Quarter ** 1 1/2 1 1/2
*Prices are interdealer quotations and do not necessarily reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
**Prices for the 1st Quarter 1997 through the 1st Quarter 1998 have been
restated to reflect the six to one reverse stock split effected October 22,
1997.
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, 1998. Currently, the interest rate of the line of
credit is the prime rate plus .25%. As of May 31, 1998, there were $212,546 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, 2001 and 2002. At May 31, 1998, the present value of the
minimum lease payments was $262,548.
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 1997 FORM 10-KSB report,
the Company has been awarded the following material new contracts:
1. Title: Facility for Preparing and Housing
Virus Infected Mice, Genetically
Manipulated Mice, and Chimeric
Mice.
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Institute: National Cancer Institute
Dates Funded: 10/1/97 - 9/30/01
Contract Funding: $3,161,223
2. Title: Maintenance of an Animal Holding
and Breeding Facility and
Provision of Attendant Research
Services.
Institute: National Cancer Institute
Dates Funded: 11/1/97 - 10/31/01
Contract Funding: $4,066,252
Year 2000
- ---------
The Company has performed an internal assessment of the scope of the Year 2000
computer systems and software problems and its potential effect on the operation
of the Company. The Company is contacting its major suppliers of products and
services to determine the status of the suppliers' Year 2000 capability. There
can be no assurance that another company's failure to ensure Year 2000
compliance and capability would not have an adverse effect on the Company. The
Company anticipates incurring approximately $25,000 to $30,000 in each of the
next two fiscal years replacing its Year 2000 non- compliant microcomputers. Any
costs incurred in connection with Year 2000 compliance will be expensed as
incurred. It is the opinion of management that the Year 2000 computer problem
will not have a material effect on the Company's operation. However, the Company
is monitoring the progress of its largest customer, the National Institutes of
Health (NIH), toward Year 2000 compliance. If the NIH is non-compliant on
January 1, 2000, the Company's financial condition may be adversely affected
until such time that the NIH is Year 2000 compliant. Currently, the Company does
not have a contingency plan if it is not Year 2000 compliant by the turn of the
century. Management is in the process of determining whether or not a
contingency plan is necessary.
Changes in Financial Position - 1998 versus 1997
- ------------------------------------------------
Assets
In the twelve months of operation in this fiscal year, Total Assets decreased
$417,651. This amount is primarily attributable to a decrease to Accounts
Receivable of $305,333 consisting mainly of 1) a decrease of $341,949 to Trade
Accounts Receivable reflecting a faster collection rate compared to the previous
fiscal year end, 2) a $56,632 increase to Unbilled Accounts Receivable primarily
resulting from a $162,077 increase in reimbursable indirect rate variances for
the current fiscal year, offset by $50,395 of prior year indirect rate variances
billed and paid during the current year, a $43,672 net decrease to unbilled
contract fee retention, and a $11,378 decrease in accrued unbilled direct costs
to be billed in the subsequent fiscal year, and 3) a $20,016 decrease to Other
Accounts Receivable primarily due to the collection of a prior year receivable
from the Medical Center Drive facility landlord. Deferred Income Tax Asset
decreased by $141,900 primarily as a result of the change in certain estimates
used in the calculation of future utilization of federal income tax loss
carryforward and of utilizing a portion of the federal income tax loss
carryforward during fiscal year 1998. Prepaid Expenses decreased by $21,555.
The decreases above are partially offset by 1) a $29,826 increase to Other
Noncurrent Assets due to a $45,678 increase in the cash value of officers' split
dollar life insurance policies, a $38,148 deposit on new freeze drying
-11-
<PAGE>
equipment, offset by the completion of a nonhuman primate housing order
($54,000) from the previous fiscal year, and 2) an increase in Fixed Assets, net
of Accumulated Depreciation and Amortization, of $18,073 reflecting fixed asset
purchases of $311,801 (mainly nonhuman primate housing units and laboratory and
production equipment), reduced by a $147,872 fully depreciated equipment write
off and disposal during this fiscal year, offset by depreciation and
amortization of $293,728 during this fiscal year reduced by the $147,872 fully
depreciated equipment write off. The balance of the decrease is due to other
miscellaneous factors.
Liabilities
In the twelve months of operation in this fiscal year, Total Liabilities
decreased $267,763. This amount is primarily due to 1) a decrease in Borrowings
Under Line-of-Credit of $323,574 primarily due to more timely payment of Trade
Accounts Receivable, 2) a decrease to long-Term Debt of $25,797 related to
$135,837 in payments on capital leases offset by a capital lease of $110,040 for
nonhuman primate housing units at the Research Boulevard facility, and 3) a
$16,342 decrease to Accounts Payable.
The decreases above were partially offset by a $97,143 increase in Accrued
Compensation and Related Costs reflecting a longer accrual period this fiscal
year compared to fiscal year 1997, a larger management bonus accrual this fiscal
year compared to fiscal year 1997, and the accrual of $24,678 in 401(k)
contributions for May 1998 paid to the insurance carrier for investment during
June 1998. The balance of the decrease is due to other miscellaneous factors.
Stockholders' Equity
On October 22, 1997, the Company's shareholders affirmatively voted to effect a
reverse split of the shares of the Common Stock in which each six shares of
Common Stock became one share of Common Stock. The Company's Common Stock shares
decreased from 9,602,452 shares issued to 1,600,408 shares issued, outstanding
shares decreased from 5,398,244 shares to 899,505 shares, while the Treasury
stock decreased from 4,204,208 shares to 700,903 shares. Fractional shares
(202), as a result of the reverse split, were repurchased by the Company and
recorded as Treasury Stock.
Changes in Financial Position - 1997 versus 1996
- ------------------------------------------------
Assets
In the twelve months of operation in fiscal year 1997, Total Assets increased
$463,537. This amount was 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 fiscal year
1996 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
fiscal year 1997, 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
-12-
<PAGE>
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 fiscal year 1997. 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 was 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 immunotherapy and clinical and pre-clinical trials of various
purified IgG products and the dormant R&D efforts related to certain cancer
treatments, drug delivery approaches.
Liabilities
In the twelve months of operation in fiscal year 1997, Total Liabilities
increased $458,982. This amount was 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, the costs associated with the continuing R&D
efforts related to immunotherapy and clinical and pre-clinical trials of various
purified IgG products, the currently dormant R&D efforts related to certain
cancer treatments and drug delivery approaches, 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 was due to other miscellaneous
factors.
The increases above were partially offset by a decrease in Long-Term Debt of
$113,918 reflecting payments on capital leases.
Results of Operations - 1998 versus 1997
- -----------------------------------------
Revenues
Contract revenues increased by 10.4% compared to the prior year primarily due to
increased contract activity and the award of three SBIR grants during the
current year. Product sales increased to $76,377 compared to $19,916 in fiscal
year 1997.
Operating Expenses
Contract expenses increased 11.9% compared to the prior year primarily due to an
increase in contract activity and the award of three SBIR grants during this
fiscal year. The greater increase in contract expenses over contract revenues
are primarily due to an indirect cost overrun on two expired contracts totalling
$45,590. These indirect costs are currently not available for reimbursement and
therefore revenue cannot be recognized. According to Federal Acquisitions
Regulations, the Company may be able to recover all or part of these costs after
a government indirect cost audit for fiscal year 1998 has been completed. Costs
of Goods Sold increased to $108,984 compared to $18,941 in the prior year. This
increase was primarily due to increased sales of Lyphomune(R) during this fiscal
year compared to fiscal year 1997 and the expensing, from inventory, of 300
units of Lyphomune(R) used in a sales promotion which ended May 31, 1998.
Research and Development (R&D) Costs decreased to $144,123 compared to $349,199
in the prior year. This decrease is primarily due to the completion of the pre-
clinical and clinical trials for the Company's purified IgG product,
-13-
<PAGE>
Lyphomune(R) and the award of two SBIR grants to help support the Company's
ongoing research of HELICOBACTER PYLORI. General and Administrative Expenses
(G&A) increased 17.1% compared to the prior fiscal year. The increase is
primarily due to the legal expenses incurred in defense of a legal proceeding
brought on by a former employee (see Item 3. Legal Proceedings), increased legal
and transfer agent fees related to the reverse stock split, a $25,000
termination fee paid to Slusser Associates related to the tabled private
placement funding effort during the first half of this fiscal year and a $15,000
listing fee from the Chicago Stock Exchange paid during this fiscal year. The
combination of these net increases resulted in an overall increase in operating
expenses of 11.1%.
Operating Income
Operating income increased only 1.3% compared to the prior year primarily due to
increased legal and transfer agent fees related to the reverse stock split, the
$25,000 termination fee paid to Slusser Associates related to a tabled private
placement funding effort, the $15,000 listing fee from the Chicago Stock
Exchange paid during this fiscal year, and an indirect cost overrun on two
expired contracts totalling $45,590.
Interest Expense
For this fiscal year, the Company had interest expense of $57,239 compared to
$49,320 in the prior year. This increase is due to increased average Borrowings
Under the Line-of-Credit during the current fiscal year.
Provision For Income Tax
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax expense of $141,900 for the year ended
May 31, 1998. This expense resulted primarily from a change in the estimates
used in the calculation of future utilization of federal income tax loss
carryforward, and utilizing a portion of the federal income tax loss
carryforward during fiscal year 1998. The Company provided for state income tax
which is estimated at $35,500. State income tax expense is reimbursable under
government contracting regulations.
Earnings Per Share (EPS)
All outstanding options (72,351) to purchase shares of common stock are not
included in the computation of diluted EPS because the options are antidilutive.
Options to purchase 20,934 shares of common stock at prices ranging from $2.46
per share to $3.375 per share were outstanding at May 31, 1997 but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the market price of the common shares.
For comparison purposes, all share and per share data in the financial
statements have been retroactively adjusted to reflect the one-for-six share
reverse stock split effected on October 22, 1997.
-14-
<PAGE>
Results of Operations - 1997 versus 1996
- -----------------------------------------
Revenues
Contract revenues increased in fiscal year 1997 by 1.2% compared to fiscal year
1996 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 in fiscal year 1997 1.6% compared to fiscal year
1996 primarily due to an increase in contract activity. The greater increase in
contract expenses over contract revenues was primarily due to total overhead
expenses exceeding reimbursable overhead expenses during fiscal year 1997. Costs
of Goods Sold increased to $18,941 compared to $6,846 in fiscal year 1996.
Research and Development (R&D) Costs increased to $349,199 compared to $235,071
in fiscal year 1996. This increase was 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 research (primarily
research of HELICOBACTER PYLORI). General and Administrative Expenses (G&A)
decreased 2.0% compared to fiscal year 1996. The decrease was 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 fiscal year 1996 primarily due to
increased costs incurred associated with R&D expenses relating to certain cancer
treatments and drug delivery approaches and immunotherapy research.
Interest Expense
For fiscal year 1997, Diagnon had interest expense of $49,320 compared to
$49,602 in fiscal year 1996.
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 was estimated at
$32,800. State income tax expense is reimbursable under government contracting
regulations.
Earnings Per Share (EPS)
For fiscal year 1997, options to purchase 20,934 shares of common stock at
prices ranging from $2.46 per share to $3.375 per share were outstanding at May
31, 1997 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the market price of the common shares.
Options to purchase 30,502 shares of common stock at prices ranging from $2.68
per share to $3.375 per share were outstanding at May 31, 1996, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the market price of the common shares.
For comparison purposes, all share and per share data in the financial
statements have been retroactively adjusted to reflect the one-for-six share
reverse stock split effected on October 22, 1997.
-15-
<PAGE>
Inflation and Price Changes for Fiscal Year
- -------------------------------------------
For fiscal years 1996, 1997, and 1998 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 30 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 61 Chairman of the Board; President &
Chief Executive Officer; Director
J. Thomas August, M.D. 1982 71 Director; Consultant; Scientific
Advisor
Charles C. Francisco 1991 60 Director; Member of Compensation
Committee; Member of Audit
Committee
Charles F. Gauvin 1992 43 Director; Member of Compensation
Committee; Member of Audit
Committee
Michael P. O'Flaherty 60 Secretary; Chief Operating Officer
David A. Newcomer 37 Chief Financial Officer
Leanne DeNenno 44 Vice President, BIOQUAL, Inc.
(Subsidiary)
Richard P. Bradbury, DVM 63 Vice President, BIOQUAL, Inc.
(Subsidiary)
Jerry R. Reel, Ph.D. 60 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.
-16-
<PAGE>
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 CEO and Managing Member of EdgeOne, LLC, a
manufacturer of acoustic underwater imaging instruments located in Milford,
Massachusetts. From 1993 to March of 1998 he was 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.
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,
-17-
<PAGE>
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.
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 $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual
Name and Principal Salary Bonus Compensation
Position Year ($) ($) ($) (1,2,3)
- ------------------ ---- ------ ----- ------------
John C. Landon 1998 275,000 32,723
CEO, President, Chairman 1997 160,000 101,863 32,723
of the Board 1996 160,000 116,946 32,723
Michael P. O'Flaherty 1998 122,085 36,444 10,593
Chief Operating Officer, 1997 116,690 21,660 10,593
Secretary 1996 120,818 11,944 10,593
Jerry R. Reel 1998 111,282 3,926
Vice President, Bioqual, Inc. 1997 118,614 9,179
(Subsidiary) 1996 109,481 2,949
Richard P. Bradbury 1998 97,130 8,372
Vice President, Bioqual, Inc. 1997 99,573 4,000
(Subsidiary) 1996 99,205 3,102
David A. Newcomer 1998 83,412 19,430 4,500
Chief Financial Officer 1997 78,202 6,592 3,750
1996 78,192
- --------------------
(1) Other Annual Compensation for the CEO for the years 1998, 1997 and 1996
represents premiums for a $1,000,000 Split Dollar Life Insurance Policy.
(2) Other Annual Compensation for the Chief Operating Officer for the years
1998, 1997 and 1996 represents premiums for a $250,000 Split Dollar Life
Insurance Policy.
(3) Other Annual Compensation for the Chief Financial Officer for the years
1998 and 1997 represents premiums for a $250,000 Split Dollar Life
Insurance Policy.
- -------------------------------------------------------------------------------
-18-
<PAGE>
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUE
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at FY-End (#) at FY-End ($)
on Exercise Realized
Name (#) ($) Exercisable Exercisable
- -------------------------- ----------- -------- ------------- ------------
<S><C>
John C. Landon 26,667 (1,2) N/A
CEO, President,
Chairman of the Board
Michael P. O'Flaherty 6,668 (1) 4,384
Chief Operating Officer, 10,834 (1,2) N/A
Secretary
Jerry R. Reel 500 (1) 6
Vice President, Subsidiary 1,334 (1,2) N/A
Richard P. Bradbury 1,168 (1) 1,115
Vice President, Subsidiary 1,167 (1,2) N/A
David A. Newcomer 1,001 (1) 893
Chief Financial Officer 1,667 (1,2) N/A
</TABLE>
- --------------------
(1) All options reported in the table are fully exercisable.
(2) All options are out-of-the-money.
- -------------------------------------------------------------------------------
Compensation of Directors
- -------------------------
During fiscal year 1998, the Company paid to Directors:
Attendance of
Board Meetings Travel to
Directors and Consultation Board Meetings
Fees ($) Fees ($) Expenses ($)
--------- ---------------- -------------
J. Thomas August, M.D. 4,000 11,500 35
Charles C. Francisco 4,000 1,500 561
Charles F. Gauvin 4,000 1,500 143
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.
Employment Contracts
- --------------------
Dr. Landon has an employment agreement with the Company, extending through July
13, 2002. Pursuant to this agreement, Dr. Landon's base compensation is $275,000
per year. The agreement provides for various additional incentive compensation
dependent upon the results of the Company's operations each year through the
term of employment.
-19-
<PAGE>
COMPENSATION PURSUANT TO PLANS
Stock Option Plan - The Company adopted the 1998 Stock Option Plan (the "Plan")
- -----------------
in August 1997 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 1998, the committee was comprised of Messrs. Gauvin and Francisco.
As of May 31, 1998, 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, 25,000 34.6% $2.6814 1/19/94
Director, 1,667 2.3% $2.26875 7/29/96
Chairman
Michael P. O'Flaherty Chief Operating 7,500 10.4% $1.875 12/30/88
Officer, 3,334 4.6% $1.50 10/26/89
Secretary 2,500 3.5% $ .48 2/8/90
834 1.1% $1.80 8/14/92
1,667 2.3% $3.375 6/5/95
1,667 2.3% $2.52 5/30/97
Richard Bradbury Vice President, 834 1.1% $ .48 2/8/90
BIOQUAL 334 .5% $1.80 8/14/92
667 .9% $3.375 6/5/95
500 .7% $2.52 5/30/97
Leanne DeNenno Vice President, 834 1.1% $ .48 2/8/90
BIOQUAL 334 .5% $1.80 8/14/92
667 .9% $3.375 6/5/95
500 .7% $2.52 5/30/97
Jerry Reel Vice President, 500 .7% $1.80 8/14/92
BIOQUAL 667 .9% $3.375 6/5/95
667 .9% $2.52 5/30/97
David A. Newcomer Chief Financial 667 .9% $ .48 2/8/90
Officer 334 .5% $1.80 8/14/92
667 .9% $3.375 6/5/95
1,000 1.4% $2.52 5/30/97
Charles C. Francisco Director 1,667 2.3% $ .54 8/14/92
1,667 2.3% $2.0625 7/29/96
Charles F. Gauvin Director 1,667 2.3% $1.80 8/14/92
1,667 2.3% $2.0625 7/29/96
J. Thomas August Director 1,667 2.3% $2.0625 7/29/96
All officers and 61,676 85.2% $ .48 to 12/30/88 to
directors as a group $3.375 5/30/97
(9 persons)
</TABLE>
A total of 72,351 options were granted and outstanding at May 31, 1998. On July
16, 1998, options for 167 shares were exercised by a former employee. No other
options have been exercised to date, however all options are exercisable. Of the
options granted, 67,350 are from the 1988 Stock Option Plan which was terminated
in accordance with its terms and conditions on June 20, 1998. There are no
options granted under the 1998 stock option plan (described herein) which was
established for a ten year period beginning August 15, 1997. The 1998 stock
option plan is authorized to grant options to purchase up to 10% of the then
outstanding number of shares of common stock (89,950 at May 31, 1998). The
remaining 5,001 options were granted outside the plan.
-20-
<PAGE>
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 25,000
shares expires January 19, 1999 and whose option for 1,667 shares expires July
29, 2001.
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 24, 1998, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 196,298 (2),(3) 21.19
S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL 33480 98,973 (4) 11.00
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 178,506 (5) 19.80
David H. Bishop
100 W. 57th Street
New York, New York 10019 60,510 (6) 6.73
(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 6,888 shares in the names of members of Dr. Landon's
family.
(3) Assumes the exercise of currently exercisable options to purchase
26,667 shares.
(4) Includes 10,833 shares in the name of S. David Leibowitt's spouse.
(5) Assumes the exercise of currently exercisable options to purchase
1,667 shares.
(6) Includes 1,506 shares in the name of David H. Bishop's spouse.
Security ownership of management
- --------------------------------
The following table sets forth information as of July 24, 1998, with respect to
the stock ownership of all: directors; executive officers included in the
Summary Compensation Table on page 18; directors and officers as a group, of the
Company's Common Stock.
-21-
<PAGE>
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 196,298 (2),(3) 21.19
Charles C. Francisco
25 Ridge Creek Trail
Moreland Hills, OH 44022 3,334 (4) .37
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 178,506 (5) 19.80
Charles F. Gauvin
4100 Hamilton Street
Hyattsville, MD 20781 3,334 (4) .37
Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA 22075 18,168 (6) 1.98
Dr. Jerry R. Reel
933 Hillside Lake Terrace
Gaithersburg, MD 20878 1,834 (7) .20
Dr. Richard P. Bradbury
16708 Briardale Road
Rockville, MD 20855 2,335 (8) .26
David A. Newcomer
9 Eternity Court
Germantown, MD 20874 2,668 (9) .30
All executive officers
and directors (8, of
whom all beneficially
own shares) as a group 406,477 (10) 42.38
(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 6,888 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
26,667 shares.
(4) Assumes the exercise of currently exercisable options to purchase
3,334 shares.
(5) Assumes the exercise of currently exercisable options to purchase
1,667 shares.
(6) Assumes the exercise of currently exercisable options to purchase
17,502 shares.
-22-
<PAGE>
(7) Assumes the exercise of currently exercisable options to purchase
1,834 shares
(8) Assumes the exercise of currently exercisable options to purchase
2,335 shares.
(9) Assumes the exercise of currently exercisable options to purchase
2,668 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
previous 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.
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 24, 1998, neither the stock
purchase or the loan repayment transaction have occurred. The largest amount
owed by Dr. Landon during the fiscal year ended May 31, 1998 in respect to his
loan facilities was $90,000, excluding interest accrued amounting to $17,505.
There was no addition to the loan during this fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Table of Contents to Financial Statements, on page 30.
(b) The Registrant filed no reports on FORM 8-K during the final
quarter of its fiscal year ended May 31, 1998.
(c) Exhibits filed (Exhibits incorporated by reference listed
separately.)
(10)(a) Leases.
-------
1. Amendment to Lease Agreement - Medical Center Drive
Facility
2. Second Amendment to Lease Agreement - Research
Boulevard Facility
(b) Employment Agreement dated July 14, 1997 by and between
John C. Landon and Diagnon Corporation.
-23-
<PAGE>
(21) List of Subsidiaries
Exhibits incorporated by reference to the Company's FORM 10-KSB
for the fiscal year ended May 31, 1998 (filed with the Company's
FORM 10-QSB for the quarter ended August 31, 1997.
(10) Government Contracts.
--------------------
1. Title: Facility for Preparing and Housing
Virus Infected Mice, Genetically
Manipulated Mice, and Chimeric Mice.
Institute: National Cancer Institute
Dates Funded: 10/1/97 - 9/30/01
Exhibits incorporated by reference to the Company's FORM 10-KSB
for the fiscal year ended May 31, 1998 (filed with the Company's
FORM 8-A filed on October 22, 1997.
(3) (i) Second Amended and Restated Certificate of
Incorporation dated October 22, 1997.
Exhibits incorporated by reference to the Company's FORM 10-KSB
for the fiscal year ended May 31, 1998 (filed with the Company's
FORM 10-QSB for the quarter ended November 30, 1997.
(10)(a) Government Contracts.
--------------------
1. Title: Maintenance of an Animal Holding and
Breeding Facility and Provision of
Attendant Research Services.
Institute: National Cancer institute
Dates Funded: 11/1/97 - 10/31/01
(b) The Company's 1998 Stock Option Plan, adopted October
22, 1997.
Exhibits incorporated by reference to the Company's Registration
Statement No.2-83803.
(3) 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.
(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.
(10) (a) The Company's 1988 Stock Option Plan, adopted November
17, 1988.
-24-
<PAGE>
Exhibits incorporated by reference to the Company's FORM 10-K for
the fiscal year ended May 31, 1990.
(10) Government Contracts.
--------------------
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
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.
--------------------
l. 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
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.
-25-
<PAGE>
Exhibits incorporated by reference to the Company's FORM 10-KSB
for the fiscal year ended May 31, 1994.
(10) Government Contracts.
--------------------
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.
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 for the quarter ended August 31, 1994).
(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.
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 for the quarter ended February 28, 1995).
(10) (a) Licensing and Manufacturing Agreement dated
January 12, 1995 between ZooQuest Technologies
Ltd., Inc., Equilab Associates, Inc., and Diagnon
Corporation.
-26-
<PAGE>
(b) 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
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.
--------------------
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 during the quarter ended November 30, 1995).
(10) Government Contracts.
--------------------
1. Title: MAO/Evaluation of AIDS Vaccines in
Non-Human Primates.
-27-
<PAGE>
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
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 during the quarter ended August 31, 1996).
(10) Agreement of Sale by and between ZooQuest Technologies,
LTD. and Diagnon Corporation.
-28-
<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 26, 1998.
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) 8/26/98
____________________________
John C. Landon, Ph.D.
/s/ J. Thomas August Director 8/26/98
____________________________
J. Thomas August M.D.
/s/ Charles C. Francisco Director 8/26/98
____________________________
Charles C. Francisco
/s/ Charles F. Gauvin Director 8/26/98
____________________________
Charles F. Gauvin
/s/ Michael P. O'Flaherty Chief Operating Officer
____________________________ and Secretary 8/26/98
Michael P. O'Flaherty
/s/ David A. Newcomer Chief Financial Officer 8/26/98
____________________________
David A. Newcomer
-29-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
------------------------------------
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
-----------------------------------------
Independent Auditors' Report..................................... 31
Financial Statements:
Consolidated Balance Sheets, May 31, 1998 and 1997.......... 32
Statements of Consolidated Operations for each of the
years in the three year period ended May 31, 1998........... 33
Statements of Consolidated Cash Flows for each of the years
in the three year period ended May 31, 1998................. 34
Statements of Consolidated Stockholders' Equity for each
of the years in the three year period ended May 31, 1998 ... 35
Notes to Financial Statements............................... 36
Other financial statement schedules are omitted because they are not applicable
or required.
-30-
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997 and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
______________________________
Deloitte & Touche LLP
July 24, 1998
-31-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
CONSOLIDATED BALANCE SHEETS, MAY 31, 1998 AND MAY 31, 1997
- ----------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ----------- -----------
<S><C>
CURRENT ASSETS:
Cash and cash equivalents $ 65,730 $ 62,638
Accounts receivable:
Trade 903,343 1,245,292
Unbilled 655,554 598,922
Other 29,983 49,999
Prepaid expenses 54,889 76,444
Inventories 45,107 44,961
Deferred income taxes - current 43,700 50,000
----------- -----------
Total current assets 1,798,306 2,128,256
----------- -----------
LOANS TO OFFICERS 90,000 90,000
----------- -----------
FIXED ASSETS:
Leasehold improvements 749,155 670,899
Furniture, fixtures and equipment 3,071,181 2,985,508
----------- -----------
Total 3,820,336 3,656,407
Less accumulated depreciation
and amortization 2,327,947 2,182,091
----------- -----------
Fixed assets, net 1,492,389 1,474,316
----------- -----------
DEFERRED INCOME TAXES - NONCURRENT 661,800 797,400
OTHER NONCURRENT ASSETS 234,375 204,549
----------- -----------
TOTAL $ 4,276,870 $ 4,694,521
=========== ===========
LIABILITIES
- -----------
CURRENT LIABILITIES:
Borrowings under line of credit $ 212,546 $ 536,120
Current maturities of long-term debt 140,245 124,153
Accounts payable 234,425 250,767
Accrued compensation and related costs 390,099 292,956
Accrued income taxes 12,909 5,543
Other accrued liabilities 6,082 12,641
----------- -----------
Total current liabilities 996,306 1,222,180
LONG-TERM DEBT 122,303 164,192
----------- -----------
Total liabilities 1,118,609 1,386,372
----------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Convertible preferred stock - par value of $1.00 per
share: May 31, 1998, 500,000 shares, May 31, 1997
325,000 shares authorized; no shares issued and
outstanding
Common stock - par value of $.01 per share;
25,000,000 shares authorized; 1,600,408 shares
issued; May 31, 1998, 899,505 shares, May 31, 1997,
899,707 shares outstanding 16,004 96,024
Additional paid-in capital 7,475,035 7,395,015
Accumulated deficit (3,704,910) (3,555,533)
----------- -----------
Total 3,786,129 3,935,506
Less - treasury stock May 31, 1998, 700,903 shares,
May 31, 1997, 700,701 shares, at cost (627,868) (627,357)
----------- -----------
Total stockholders' equity 3,158,261 3,308,149
----------- -----------
TOTAL $ 4,276,870 $ 4,694,521
=========== ===========
</TABLE>
See notes to financial statements.
-32-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED OPERATIONS FOR EACH OF THE YEARS
- -----------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1998
- -------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S><C>
REVENUES AND SALES:
Contract revenues $9,848,009 $8,919,294 $8,812,776
Product sales 76,377 19,916 7,189
---------- ---------- ----------
Total Revenues and Sales 9,924,386 8,939,210 8,819,965
---------- ---------- ----------
OPERATING EXPENSES:
Contract 7,709,687 6,886,440 6,777,791
Cost of goods sold 108,984 18,941 6,846
Research and development 144,123 349,199 235,071
General and administrative 1,886,038 1,610,012 1,642,875
---------- ---------- ----------
Total Operating Expenses 9,848,832 8,864,592 8,662,583
---------- ---------- ----------
OPERATING INCOME 75,554 74,618 157,382
INTEREST INCOME 9,708 10,157 9,718
INTEREST EXPENSE (57,239) (49,320) (49,602)
---------- ---------- ----------
INCOME BEFORE INCOME TAX 28,023 35,455 117,498
PROVISION FOR INCOME TAX (177,400) (30,900) (25,300)
---------- ---------- ----------
NET (LOSS)/INCOME $ (149,377) $ 4,555 $ 92,198
========== ========== ==========
BASIC (LOSS)/EARNINGS PER SHARE $ (0.17) $ 0.01 $ 0.10
========== ========== ==========
DILUTED (LOSS)/EARNINGS PER SHARE $ (0.17) $ 0.00 $ 0.10
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR BASIC EPS 899,584 899,707 899,707
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 12,404 12,468
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING + DILUTIVE OPTIONS
FOR DILUTIVE EPS 899,584 912,111 912,175
========== ========== ==========
</TABLE>
See notes to financial statements.
-33-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS FOR EACH OF THE YEARS
- -----------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1998
- -------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $(149,377) $ 4,555 $ 92,198
--------- --------- ---------
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization 293,728 261,218 271,763
Deferred income taxes 141,900 (1,900) (2,300)
Decrease (increase) in accounts receivable 305,333 (313,945) 45,196
Decrease (increase) in prepaid expenses 21,555 (5,012) (919)
(Increase) decrease in inventories (146) 7,794 (52,755)
(Increase) decrease in other assets (29,826) (102,456) 28,677
Decrease in accounts payable and accrued expenses 74,242 34,797 20,583
Increase in income taxes payable 7,366 1,983 3,258
--------- --------- ---------
Total Adjustments 814,152 (117,521) 313,503
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 664,775 (112,966) 405,701
--------- --------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Net capital expenditures (201,761) (465,141) (284,777)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (201,761) (465,141) (284,777)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds under line-of-credit agreement (323,574) 536,120
Principal payments under capital lease obligations (135,837) (113,918) (113,268)
Net payments for fractional shares as a result of
6 to 1 share reverse stock split (511)
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (459,922) 422,202 (113,268)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,092 (155,905) 7,656
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62,638 218,543 210,887
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,730 $ 62,638 $ 218,543
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 57,134 $ 46,988 $ 50,496
========= ========= =========
Income taxes $ 17,900 $ 25,600 $ 24,470
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company issued:
Long-term debt issued in connection with capital
leases $ 110,040 $ 289,644
</TABLE>
See notes to financial statements.
-34-
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
- ------------------------------------
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY FOR EACH OF THE YEARS
- ---------------------------------------------------------------------
IN THE THREE YEAR PERIOD ENDED MAY 31, 1998
- -------------------------------------------
<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, 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)
SIX TO ONE REVERSE
STOCK SPLIT (8,002,044) (80,020) 80,020 3,503,507
REPURCHASE OF
FRACTIONAL SHARES (202) (511)
NET INCOME (149,377)
--------- -------- ---------- ----------- ---------- ---------
BALANCE, MAY 31, 1998 1,600,408 $ 16,004 $7,475,035 $(3,704,910) (700,903) $(627,868)
========= ======== ========== =========== ========== =========
</TABLE>
See notes to financial statements.
-35-
<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 using the average cost
method.
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.
-36-
<PAGE>
Earnings (Loss) Per Share
- -------------------------
The Company has adopted Statement of Financial Accounting Standard No. 128 (SFAS
128) "Earnings Per Share" during the fiscal year ended May 31, 1998 and has
restated, as required, all prior year earnings per share data. SFAS 128
establishes standards for computing and presenting earnings per share.
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.
New Accounting Standards
- ------------------------
In 1997, the Financial Accounting Standards Board issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AND
ENTERPRISE AND RELATED INFORMATION, both of which will be effective for the
Company's fiscal year ending 1999. SFAS No. 130 requires businesses to disclose
comprehensive income and its components in the financial statements. SFAS No.
131 redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about the Company's operating
segments. The Company does not believe that adoption of SFAS No. 130 will have
a material impact on its financial position, and is assessing operating segments
that it may report on upon adoption of SFAS No. 131.
2. CAPITAL STOCK
Reverse Stock Split
- -------------------
On October 22, 1997, the Company's shareholders affirmatively voted to effect a
reverse split of the shares of the Common Stock in which each six shares of
Common Stock became one share of Common Stock. The Company's Common Stock shares
decreased from 9,602,452 shares issued to 1,600,408 shares issued, outstanding
shares decreased from 5,398,244 shares to 899,505 shares, while the Treasury
stock decreased from 4,204,208 shares to 700,903 shares. Fractional shares
(202), as a result of the reverse split, were repurchased by the Company and
recorded as Treasury Stock.
Convertible Preferred Stock and Common Stock
- --------------------------------------------
Also on October 22, 1997, the Company's shareholders voted to eliminate the then
authorized 325,000 shares of convertible preferred stock, and authorized 500,000
shares of new convertible preferred stock, and to establish the number of
authorized shares of common stock at 25,000,000 shares.
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 under the plan
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net loss/income and loss/income per
share would not have been materially affected on a pro forma basis for the years
ended May 31, 1998, 1997 and 1996.
The Company has reserved 67,350 shares of its Common Stock to cover the exercise
of options granted under its 1988 stock option plan. There are no options
granted under the 1998 stock option plan as of May 31, 1998. The 1998 stock
-37-
<PAGE>
option plan is authorized to grant options to purchase up to 10% of the then
outstanding number of shares of common stock (89,950 at May 31, 1998). With the
exception of the CEO's option for 25,000 shares which expires January 19, 1999,
and his option for 1,667 shares which expires July 29, 2001, 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 5,001 shares of its Common Stock to cover the exercise of options
granted outside its 1988 stock option plan. The 1988 plan was terminated in
accordance with its terms and conditions on June 20, 1998. Option transactions
were as follows:
Number of
Shares Option
Under Option Price
------------ ------
Outstanding, June 1, 1995 50,677 $ .48 to 2.6814
Granted 6,669 2.25 to 3.375
Cancelled -0-
------
Outstanding, May 31, 1996 57,346 .48 to 3.375
Granted 16,172 2.0625 to 2.52
Cancelled (500) 3.375
------
Outstanding, May 31, 1997 73,018 .48 to 3.375
Granted -0-
Cancelled (667) .48 to 1.80
------
Outstanding, May 31, 1998 72,351 .48 to 3.375
======
The number of options exercisable at May 31 were as follows:
1998 72,351
1997 73,018
1996 57,346
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, 1998, there were $212,546 of borrowings under this
line of credit, the maximum amount borrowed during the fiscal year was $819,457,
the average balance outstanding was $363,302, and the average interest rate was
8.75% during 1998. 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,
1998.
4. LONG-TERM DEBT
1998 1997
---- ----
Capitalized Lease Obligations $262,548 $288,345
Less Current Maturities 140,245 124,153
-------- --------
Long-Term $122,303 $164,192
======== ========
-38-
<PAGE>
Future annual minimum payments under the capital leases as of May 31, 1998,
were:
1999 $157,010
2000 73,774
2001 43,101
2002 16,435
--------
290,320
Less: Amount representing interest 27,772
--------
Present value of minimum lease payments $262,548
========
The Company leases equipment under various capital leases which expire in fiscal
years 1999, 2000, 2001 and 2002. Property held under the capital leases at May
31, 1998 and 1997 consisted of the following:
1998 1997
---- ----
Equipment $589,402 $479,362
Less: Accumulated amortization 150,986 96,644
-------- --------
$438,416 $382,718
======== ========
The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment. Amortization expense amounted to $81,352, $54,975 and
$33,516 in 1998, 1997 and 1996, 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, 1998 based on borrowing rates currently available with similar terms
and maturity.
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 deferred tax expense in 1998 resulted from management's
assessment that an increase to the valuation allowance was necessary because of
the current estimates of future taxable income during the available tax loss
carryforward period. If the Company is unable to generate sufficient taxable
income in the future through operating results, increases in the valuation
allowance will be required through a charge to income. However, if the Company
achieves sufficient taxable income to utilize a greater portion of the deferred
tax asset, the valuation allowance will be reduced through a credit to income.
The components of income tax expense are as follows:
1998 1997 1996
---- ---- ----
Current tax expense $ 35,500 $32,800 $27,600
Deferred tax expense (benefit) 141,900 (1,900) (2,300)
-------- ------- -------
$177,400 $30,900 $25,300
======== ======= =======
-39-
<PAGE>
A reconciliation of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:
1998 1997 1996
---- ---- ----
Federal taxes at statutory
rate $ 11,209 $ 12,055 $ 39,949
State taxes at statutory rate 35,500 32,800 27,600
Executive life insurance
premiums 3,233 2,034 8,997
Decrease (increase) in
previously recognized tax
loss carryforwards 141,900 (1,900) (2,300)
Other, net (14,442) (14,089) (48,946)
-------- -------- --------
$177,400 $ 30,900 $ 25,300
======== ======== ========
The components of deferred income taxes are as follows:
May 31, May 31, May 31,
1998 1997 1996
---------- ---------- ----------
Financial statement accruals $ 45,553 $ 40,904 $ 39,646
Different useful lives for
depreciation of fixed assets
for tax purposes (46,000) (58,300) 10,691
Research & development costs
deferred for tax purposes 164,000 -0- -0-
Tax loss carryforward 1,443,000 1,598,000 1,518,000
Less: valuation allowance (901,053) (733,204) (722,837)
---------- ---------- ----------
Total deferred income taxes $ 705,500 $ 847,400 $ 845,500
========== ========== ==========
As of May 31, 1998, the Company has cumulative tax operating loss carryforwards
of approximately $4,300,000 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.
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 1998, 1997 and 1996, the Company subleased a part of its
premises. As of May 31, 1998, 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
----------
1999 1,471,000
2000 1,499,000
2001 1,536,000
2002 1,571,000
Facilities leases contain options for five-year extensions.
-40-
<PAGE>
Rental expense was approximately $1,346,000, net of $11,000 of sublease income,
$1,322,000, net of $11,000 of sublease income, and $1,388,000, net of $10,000 of
sublease income, for the years ended May 31, 1998, 1997 and 1996, respectively.
7. RELATED PARTIES
The following schedule presents information regarding loans to officers for the
three year period ended May 31, 1998.
<TABLE>
<CAPTION>
Balance at Balance
Beginning of at End of
Name of Person Period Additions Repayments Period
- -------------- ------------ --------- ---------- ---------
<S><C>
Each of the Years Ended
May 31, 1998, 1997 and 1996:
President $ 90,000 $ -0- $ -0- $ 90,000
</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
the due date of the loan, maintaining all other terms and conditions, until
October 31, 1998. As of July 31, 1998, neither the stock purchase or the loan
repayment transaction have occurred.
On July 14, 1998, the President signed an employment agreement with the Company
retroactive to June 1, 1997. The agreement provides a base compensation and
additional incentive compensation dependent upon annual operations.
-41-
<PAGE>
EXHIBITS
(10) (a) Leases.
1. Amendment to Lease Agreement - Medical Center
Drive Facility
2. Second Amendment to Lease Agreement - Research
Boulevard Facility
<PAGE>
DIAGNON CORPORATION
AMENDMENT TO LEASE AGREEMENT
This amendment to lease agreement ("AGREEMENT") made and entered into this 28th
day of May, 1998 by and between Red Gate III Limited Partnership ("LANDLORD")
and Diagnon Corporation ("TENANT").
WITNESSETH:
Whereas, the LANDLORD and TENANT entered into the following LEASES:
Date Square Footage
---- --------------
April 4, 1990 30,000
May 31, 1991 8,862
September 11, 1991 4,432
December 19, 1991 2,533
March 29, 1994 12,176
located in 9600 Medical Center Drive, Rockville, Maryland 20850 ("BUILDING");
and
Whereas, TENANT desires and LANDLORD agrees to amend these LEASES by:
1. Commencing June 1, 1998, all five LEASES will be combined, plus 3,652
square feet of space located in the basement will be added to TENANT'S
total square footage of space. The new total is 61,655 square feet,
2. Commencing June 1, 1998, the new monthly rate will be $89,630.82,
3. The LEASE termination date will be May 31, 2002,
4. The five (5) year option will commence June 1, 2002 (The monthly
rental rate will be $97,466.28 commencing June 1, 2002, and increase
3% annually),
5. One Hundred and Twenty Five Thousand Dollars ($125,000.00) in
improvements will be allowed under this agreement; and
Whereas, the real estate tax base year is July 1, 1992 through June 30, 1993,
and TENANT'S pro-rata share of the increase in real estate taxes remains at
49.78% of the total above ground square footage of the buildings "B" and "C";
and
Whereas, RENT will increase by 3% annually beginning June 1, 1999.
Ratification of LEASE: Except as expressly modified or amended by this
AGREEMENT, all terms, covenants and conditions of the LEASE shall remain the
same.
<PAGE>
-2-
In witness whereof, LANDLORD and TENANT have caused this AGREEMENT to be
executed as of this 28th day of May, 1998 and do hereby declare this AGREEMENT
to be binding on them, their respective successors and assigns.
WITNESS: LANDLORD:
Red Gate III Limited Partnership
/s/ R. L. Englehart /s/ William M. Rickman
__________________________ ______________________________
By: William M. Rickman
ATTEST: TENANT:
Diagnon Corporation
/s/ Kevin M. O'Neill, Esq. /s/ David A. Newcomer
__________________________ ______________________________
By: David A. Newcomer
Chief Financial Officer
<PAGE>
BIOQUAL, INC.
SECOND AMENDMENT TO LEASE AGREEMENT
This second amendment to lease agreement ("AGREEMENT") made and entered into
this 28th day of May, 1998 by and between W. M. RICKMAN CONSTRUCTION CO.
("LANDLORD") and BIOQUAL, INC. ("TENANT").
WITNESSETH:
Whereas, the LANDLORD and TENANT entered into a certain lease("LEASES") dated
June 1, 1991 covering 30,000 square feet of space ("PREMISES") located in 2501
Research Boulevard, Rockville, Maryland 20850 ("BUILDING"); and
Whereas, the LEASE was amended to extend the LEASE for five (5) additional years
commencing June 1, 1996 and terminating May 31, 2001 with a five (5) year option
commencing June 1, 2001;
Whereas, TENANT desires and LANDLORD agrees to amend this agreement by:
1. The LEASE termination date will be May 31, 2002,
2. The five (5) year option will commence June 1, 2002, not June 1, 2001
(The monthly rental rate will be $31,900.00 commencing June 1, 2002,
and increase 3% annually),
3 Commencing June 1, 1998, the new monthly rate will be $29,800.75,
4. Sixty Thousand Dollars ($60,000.00) in improvements will be allowed
under this agreement; and
Whereas, RENT will increase by 3% annually beginning June 1, 1999.
Ratification of LEASE: Except as expressly modified or amended by this
AGREEMENT, all terms, covenants and conditions of the LEASE shall remain the
same.
<PAGE>
-2-
In witness whereof, LANDLORD and TENANT have caused this AGREEMENT to be
executed as of this 28th day of May, 1998 and do hereby declare this AGREEMENT
to be binding on them, their respective successors and assigns.
WITNESS: LANDLORD:
W. M. Rickman Construction Company
/s/ R. L. Englehart /s/ William M. Rickman
__________________________ _____________________________
By: William M. Rickman
ATTEST: TENANT:
Bioqual, Inc.
/s/ Kevin M. O'Neill, Esq. /s/ David A. Newcomer
__________________________ _____________________________
By: David A. Newcomer
Chief Financial Officer
(10) (b) Employment Agreement dated July 14, 1997 by and
between John C. Landon and Diagnon Corporation.
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of this 14th day of July, 1997, by and between DIAGNON
CORPORATION, a Delaware Corporation, hereinafter referred to as "Diagnon" and
Dr. John Landon, hereinafter referred to as "Dr. Landon".
WHEREAS Dr. Landon is currently serving as President, Chief Executive
Officer, a member of the Executive Committee and as a director of Diagnon and
WHEREAS the Board of Directors of Diagnon recognized that Dr. Landon's
contribution to the growth and success of Diagnon, has been substantial and
WHEREAS Diagnon wishes to assure continued employment of Dr. Landon in
these positions pursuant to the terms and conditions hereinafter set forth,
and
WHEREAS, these terms and conditions are satisfactory to Dr. Landon.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. Diagnon hereby employs Dr. Landon as its President, Chief
Executive Officer, a member of its Executive Committee and as director of
Diagnon upon the terms and conditions herein after set forth. Dr. Landon will
also serve as President and Chief Executive of its subsidiaries Enhanced
Therapeutics, Inc. and BIOQUAL, Inc. As President and Chief Executive Officer,
Dr. Landon shall be subject to the direction and control of the Board of
Directors of Diagnon.
2. Compensation. For this services rendered under this Agreement Dr. Landon
shall receive a base salary of $275,000 per year. The following incentive
compensation is a part of their agreement:
(a) A bonus determined by the Board of Directors based on a variety of
criteria that are unspecified, may be made available after close of each
Fiscal Year. This will be capped at $40,000, unless changed by the
Compensation Committee.
(b) A Split Dollar Whole Life Insurance policy for $1,000,000 will be
carried for Dr. Landon with beneficiary designated by Dr. Landon.
(c) An individual disability insurance policy will be carried for Dr.
Landon, supplementing the group insurance disability.
(d) Additional incentive compensation may be provided at the discretion of
the Board of Directors and/or the Compensation Committee.
3. Conditions of Employment and Fringe Benefits. Dr. Landon shall be entitled to
vacations, sick leave, and fringe benefits consistent with the policies of
Diagnon, in addition to those fringe benefits to which Dr. Landon is entitled as
President and Chief Executive Officer of BIOQUAL, Inc. and Enhanced
Therapeutics, Inc., if any.
4. Terms of Employment. Unless terminated earlier pursuant to the provisions of
the Agreement, the Agreement shall remain in effect for a five (5) year period.
If there is a "change of control of Diagnon", the Agreement shall remain in
effect for the remainder of the five (5) year period or an
<PAGE>
2
additional 2 1/2 years, whichever is greater. For the purpose of this Agreement
a "change in control" shall be considered to occur whenever, as a result of a
change in ownership of Diagnon stock, individuals who are currently members of
the Board of Directors cease for any reason to constitute at least a majority of
the Board of Directors of Diagnon unless the election of individuals who are not
currently directors has been approved in advance by at least two thirds of the
current directors of Diagnon. This Agreement may be terminated prior to the end
of its five year term under the following circumstances:
(a) upon the death of Dr. Landon during the term of this agreement;
(b) in the event that Dr. Landon incurs a disability which is an injury or
a sickness which restricts his ability to perform the material and substantial
duties as President and Chief Executive Officer and prevents him from working on
a full-time basis on behalf of Diagnon for a period in excess of six consecutive
months;
(c) in the event that Diagnon and Dr. Landon mutually agree to the
termination of employment;
(d) in the event that Dr. Landon is discharged for cause. Dr. Landon will
be considered to have been discharged for cause in the event (i) he is convicted
of any offense punishable as a felony, (ii) he admits in writing to the
commission of a crime against Diagnon or (iii) he engages in activities which
compete with the business of Diagnon.
(e) Dr. Landon may terminate his employment hereunder in the event of a
failure by Diagnon to comply with any material provision of the Agreement which
has not been cured within ten (10) days after notice of such noncompliance has
been given by Dr. Landon to Diagnon's Board of Directors.
5. Notice of Termination. Any termination of Dr. Landon's employment by Diagnon
or by Dr. Landon (other than termination due to the death of Dr. Landon) shall
be communicated by written Notice of Termination to the other party hereto. For
purposes o this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in the agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Dr. Landon's employment under the provision
as indicated.
The date of termination shall be determined as follows;
(a) if Dr. Landon's employment is terminated by his death, the date of
this death;
(b) if Dr. Landon's employment is terminated due to disability, the sixth
month anniversary of the date Dr. Landon was first absent from work due to the
disability, provided, that he has not returned to the performance of his duties
on a full-time basis during such time; and
(c) if Dr. landon's employment is terminated for any other reason, the
date specified in the Notice of Termination.
If within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party that a
dispute exist concerning the termination, the date of the termination shall have
been deemed the date on which the dispute is finally resolved, either by mutual
written agreement of the parties, by a binding and final arbitration award, or
by final judgement, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been taken).
<PAGE>
3
6. Compensation Upon Termination
(a) If Dr. Landon's employment is terminated by his death, Diagnon shall
pay to his estate the total compensation which otherwise would have been payable
to Dr. Landon for the twelve month period following the date of his death.
Payments to his estate shall be made bi-weekly.
(b) If Dr. Landon is unable to perform his duties hereunder as a result of
incapacity due to disability, he shall continue to receive his salary until his
employment is terminated pursuant to Paragraph 5(b) above.
(c) If Dr. Landon is terminated for cause, or if Diagnon and Dr. Landon
mutually agree to terminate Dr. Landon's employment, the date stated in the
Notice of Termination shall be the date employment is terminated and thereafter
Diagnon shall have no further obligation to Dr. Landon under this Agreement.
7. Agreement Not To Compete. Dr. Landon agrees that during the term of this
employment by Diagnon and or a period of three (3) years following termination
of employment, so long as Diagnon has not breached this Agreement, he will not,
directly or indirectly, engage in activities competitive with the activities of
Diagnon, either as sole proprietor, partner, stockholder, officer, director,
agent, consultant, independent contractor, or in any other capacity with the
exception of government contract work in the scientific field in which Dr.
Landon has been normally making a livelihood. In the event of breach of this
Agreement Diagnon shall have the right to injunctive relief against such
violation, as well as any other rights and remedies provided by law. In this
connection Dr. Landon acknowledges that his services are unique and that
monetary damages may not adequately compensate Diagnon for its losses resulting
from violation of this agreement not to compete.
8. Confidential Information. Dr. landon shall keep confidential any trade
secrets or other confidential information derived as a result of his services on
behalf of Diagnon and, on termination of his employment, will turn over to
Diagnon all document's relating to his employment by Diagnon and the business
activities of Diagnon except those documents in which Dr. Landon has a
proprietary interest (e.g., copies of professional papers, transcripts of
speeches, etc.).
9. Notices. Any notices required to be given pursuant to this Agreement shall be
in writing and shall be sent by registered or certified mail, return receipt
requested, to the parties at the following addresses:
If to Diagnon delivered or addressed to:
Diagnon Corporation
9600 Medical Center Drive
Rockville, Maryland 20850
With a copy delivered or addressed to:
Mr. Kevin O'Neill
9600 Medical Center Drive
Rockville, Maryland 20850
<PAGE>
4
If to Dr. Landon, addressed to:
Dr. John C. Landon
8213 Raymond Lane
Potomac, Maryland 20854
With a copy to:
Mr. Andrew Mishkin
1350 I Street, N.W., Suite 700
Washington, D.C. 20005
10. Arbitration. Any controversy or claim arising out of or relating to this
contract, or breach thereof, shall be settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and
judgement upon the award rendered by the Arbitration(s) may be entered in any
Court having jurisdiction thereof.
11. Renewal. At the option of Diagnon, the employment of Dr. Landon may be
renewed from year to year under such terms and conditions as are mutually agreed
to by Diagnon and Dr. Landon. Diagnon shall require any successor to all or
substantially all of the business and/or assets of Diagnon expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that Diagnon would be required to perform if not such succession had been taken.
This agreement shall be binding upon the parties hereto and their respective
heirs, successors and permitted assigns.
IN WITNESS WHEREOF the undersigned have executed this Agreement as of this day
14th of July, 1998.
ATTEST DIAGNON CORPORATION
/s/ Michael P. O'Flaherty BY: /s/ Charles F. Gauvin
____________________________ ____________________________
/s/ Michael P. O'Flaherty BY: /s/ Charles C. Francisco
____________________________ ____________________________
/s/ Michael P. O'Flaherty BY: /s/ J. Thomas August
____________________________ ____________________________
BY:
____________________________ ____________________________
WITNESS
/s/ Michael P. O'Flaherty /s/ John C. Landon
____________________________ ____________________________
Dr. John C. Landon
(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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 65,730
<SECURITIES> 0
<RECEIVABLES> 1,588,880
<ALLOWANCES> 0
<INVENTORY> 45,107
<CURRENT-ASSETS> 1,798,306
<PP&E> 3,820,336
<DEPRECIATION> 2,327,947
<TOTAL-ASSETS> 4,276,870
<CURRENT-LIABILITIES> 996,306
<BONDS> 0
0
0
<COMMON> 16,004
<OTHER-SE> 3,142,257
<TOTAL-LIABILITY-AND-EQUITY> 4,276,870
<SALES> 76,377
<TOTAL-REVENUES> 9,848,009
<CGS> 108,984
<TOTAL-COSTS> 9,704,709
<OTHER-EXPENSES> 144,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,239
<INCOME-PRETAX> 28,023
<INCOME-TAX> 177,400
<INCOME-CONTINUING> (149,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,377)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
