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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to
Commission file number 0-13281
DIAGNON CORPORATION
(Name of small business issuer in its charter)
State of Delaware 13-3078199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Medical Center Drive, Rockville, Maryland 20850
- ---------------------------------------------- -------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code (301) 251-2801
--------------
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of class which registered
Common Shares $.01 Par Value Chicago Stock Exchange
- ---------------------------- -------------------------
Securities registered under Section 12(g) of the Exchange Act:
None
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, 1999 were $11,084,664
The aggregate market value of voting stock held by non-affiliates, valued using
the average closing bid-and-ask prices at July 30, 1999 is $1,208,673.
Common Stock, $.01 par value per share; authorized 25,000,000 shares; 876,957
shares outstanding as of July 30, 1999.
Convertible Preferred Stock, $1.00 par value per share; authorized 500,000
shares; no shares outstanding as of July 30, 1999.
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, 1997 and 1998.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Diagnon Corporation (the "Company"), a Delaware corporation, 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 fiscal year 1996, the Company's Division of Bioresearch business element was
given responsibility for the Company's research and development activities in
cancer treatment and drug delivery and purified Immunoglobulin G (IgG) products,
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, in order to accumulate information related to
its government research contracts, the Company reorganized into five divisions
reflecting the various research 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 fulfill a requirement to become listed on the
Chicago Stock Exchange. On October 23, 1997, the Company became listed on the
Chicago Stock Exchange.
On July 14, 1999, the Board of Directors unanimously approved that Diagnon merge
into itself its wholly owned subsidiary, BIOQUAL, Inc. and assume all of
BIOQUAL's assets, liabilities and obligations. In connection with the merger the
Company will change its name to BIOQUAL, Inc. The expected date of the merger
and name change is the close of business on December 31, 1999.
CURRENT OPERATIONS
The Company is currently comprised of two subsidiaries, Enhanced Therapeutics,
Inc. (ET), and BIOQUAL, Inc (BIOQUAL). ET was established to support a joint
venture with The Johns Hopkins University. The venture did not materialize and
ET is currently inactive.
The various areas of research are comprised 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
2
<PAGE>
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 digestive diseases and drug
delivery systems and developmental and applied research in veterinary
therapeutics and nutritional supplements.
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 United States Government (the "Government"). Termination of
a contract or failure to win a renewal competition would adversely affect the
Company's revenues and operating capital until the vacated facility space was
taken up by another contract, of which there is no assurance. Government
contracts generate more than 85% of the Company's revenue.
BIOQUAL plans to bid on renewals for its contracts as they come up for
recompetition.
Medical Center Dr. Facility - Divisions of Laboratory Animal Sciences and
Reproductive Endocrinology and Toxicology
For the past twenty-four 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
Government to provide research and services in the areas of cancer, immunology,
transgenics, allophenic development, contraception and congenic animal breeding.
Currently, the two divisions operate five contracts:
1. Maintenance of an Animal Holding Facility and provision of Attendant
Research Services. (ends 10/31/01)
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) (The National Cancer Institute
(NCI) issued a sole source request for extension of this contract to
9/30/00. The Company's budgetary proposal was submitted to the NCI on
August 18, 1999.)
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
3
<PAGE>
circumstances such as a government shut-down). The divisions' revenues totaled
$5,803,863 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. In May 1998 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 that have been presented at scientific conferences.
The two year grant is funded at $753,144. During fiscal year 1999, the Division
acquired a grant from the National Center for Research Resources to provide
genetic analyses and DNA profiling of chimpanzees. This grant expires on March
9, 2000 and totals $282,499. This division's revenues totaled $410,705 for the
most recent fiscal year.
Research Blvd. Facility - Division of Primate Biology and Medicine
For over twenty-six 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 five contracts:
1. Facility for Animal Models Utilized for Viral Hepatitis Experiments.
(ends 12/27/99)
2. Facility for Nonhuman Primates Utilized in Infectious Disease
Research. (ends 12/30/99)
3. Mechanisms of Chemical Carcinogenesis in Old World Monkeys. (ends
12/18/00)
4. Care and Housing of SIV Infected Research Animals. (ends 01/18/00)
5. MAO/Evaluation of AIDS Vaccines in Non-Human Primates. (ends 12/31/99)
The National Institute of Allergy and Infectious Diseases (NIAID) has advertised
the renewal Request for Proposal (RFP) for the first and second contracts listed
above and issued the RFP for the fourth listed contract. The Company will submit
a proposal to compete for the renewal of each of these contracts. The contract
listed fifth may not be renewed at its completion. That contract contributes
approximately 1% of the Company's revenues.
As part of the predecessor contract to the first contract listed above, the
division developed and has two patents 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
4
<PAGE>
year. The Government traditionally pays promptly (barring any unforeseen
circumstances such as a government shut-down). Contract revenues totalled
$4,753,108 for the most recent fiscal year.
Division of Bioresearch
- -----------------------
The Division of Bioresearch has three products in the marketplace, a purified
equine IgG that is sold under the brand name Lyphomune(R), and two equine
nutritional supplements sold under the brand names ImmunoGam and MiniGam(TM).
This division is also responsible for the Company's research and development
activities.
Equine IgG
----------
In January 1995, the Company entered into a Licensing and Manufacturing
Agreement with ZooQuest Technologies Ltd. under which the Company has an
exclusive worldwide license to manufacture and sell Equine Immunoglobulin for
oral administration (Lyphomune(R) IgG) purified by a patented process. 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.
On October 1, 1998, the Company introduced two nutritional supplements for the
equine industry. The two equine immunoglobulin products are ImmunoGam and
MiniGam(TM). Both products are colostrum supplements that are recommended for
use in newborn foals. MiniGam(TM) is for use in miniature horses and ImmunoGam
is intended for use in all other horse breeds. These products provide an
inexpensive oral colostrum supplement that can be used by horse owners and
breeders, whereas Lyphomune(R) is recommended for veterinarian use only.
In addition to direct sales by the Company, the product is being distributed
throughout the United States by a number of distributors. Repeat sales of the
three products indicates user acceptance. Production has been increased to meet
immediate demands and can be readily and rapidly expanded. The products are
seasonal, allowing for an inventory buildup during the slow season.
Product sales for the year ended May 31, 1999 totaled $66,383.
Research and Development Activities
-----------------------------------
Discovery Research Department
-----------------------------
Initially this Department directed its discovery research toward the development
of new antibiotics and protective vaccines for the treatment and prevention of
Helicobacter pylori infection which is of significant interest to the medical
community. H. pylori is 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 mounted a dual effort directed toward both vaccine and
antibiotic development. This work led to a broader
5
<PAGE>
research base in targeting specific enzymes of a variety of pathogenic
organisms.
The Company succeeded in the development of an assay designed to identify and
validate antibiotics that specifically target critical enzymes related to
pathogen maintenance. This success has prompted the Company to focus on this
technology. The expansion of the Department into a program to support the
discovery of new antibiotics and antifungals coupled with continued progress may
lead the Company to seek capital and/or partnerships to fulfill its overall
goals.
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" (extended through May
2000) 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" (expired May 1999). The
Company incurred approximately $107,000 in expenses in support of these two
agreements during fiscal year 1999 and anticipates reduced expenditures during
fiscal year 2000 due to the expiration of one of the agreements.
During fiscal year 1999, the Department of Discovery Research continued work on
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" totaled $100,000. The NIDDK grant titled "Identification of
Helicobacter pylori Protective Antigens" totaled $99,673. Both grants have been
fully utilized in fiscal year 1999. Recently, the Director of the Department of
Discovery Research was awarded a second Young Investigator Award for his work on
the natural resistance to H. pylori in the rhesus monkey. An understanding of
this observed natural resistance could potentially contribute to vaccine
development and/or novel therapeutic approaches.
Veterinary Therapeutics Department
----------------------------------
The Veterinary Therapeutics Department is developing six additional products
related to equine IgG. These products will serve different therapeutic markets.
Two are currently in clinical trials. 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 six
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 and completed seven Phase I grants and has
been awarded two and completed one Phase II grants.
As described in Item 1. Description of Business, Research and Development
Activities, and Discovery Research Department, on May 15, 1998, BIOQUAL was
awarded and began work on the Phase II SBIR grant titled "Comparative
6
<PAGE>
Neurobiology of Aging Resource" totaling $753,144 for two years. Also during
fiscal year 1998 BIOQUAL was awarded two Phase I SBIR grants: 1) Nonhuman
Primate Model for Helicobacter pylori Infection" totaling $100,000 from the NCI,
and 2) "Identification of Helicobacter pylori Protective Antigens" totaling
$99,673 from the NIDDK. The first grant expired on June 30, 1998 and the second
grant expired 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 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 as described
in the third column titled Backlog Unfilled in FY00 Projected.
<TABLE>
<CAPTION>
Backlog
Backlog Backlog Unfilled
FY 99 FY 00 in FY 00
as of 6/1/98 as of 6/1/99 Projected
------------ ------------ ---------
<S> <C> <C> <C>
Med. Ctr. Dr. Facility $16,096,000 $12,510,000 $ 9,662,000
Res. Blvd. Facility 7,862,000 3,666,000 983,000
----------- ----------- -----------
TOTAL $23,958,000 $16,176,000 $10,645,000
</TABLE>
Supervision and Regulation
- --------------------------
Animal Model Contracts
----------------------
Over the last few decades, there has been an increasing awareness of the need
for adequate oversight and regulation of the utilization and husbandry of
animals.
BIOQUAL, Inc. utilizes animals and, under its government contracts, 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).
7
<PAGE>
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).
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 and
Priority One.
The Company also competes on open contracts for animal research work and its
competitors at this level are Covance, ABL, Bionetics, Southern Research
Institute, BioReliance 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
-------------------
The Company's Equine IgG products, which began to be introduced into the market
in fiscal year 1996, are purified and unpurified immunoglobulin sold as
lyophilized (freeze-dried) products. 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 1999, the Company employed 109 people (102 of whom
were full-time) as follows: Diagnon general and administrative, 17 employees;
Research Blvd. Facility, 47 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.
8
<PAGE>
Forward Looking Information
- ---------------------------
Statements herein that are not descriptions of historical facts are
forward-looking and subject to risk and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors
including those set forth in Diagnon's Securities and Exchange Commission
filings under "Risk Factors", including risks relating to the early stage of
products under development; uncertainties relating to clinical trials;
dependence on third parties' future capital needs; and risks relating to the
commercialization, if any, of Diagnon's proposed products (such as marketing,
safety, regulatory, patent, product liability, supply, competition and other
risks).
ITEM 2. DESCRIPTION OF PROPERTY
The Company's current leases are as follows:
<TABLE>
<CAPTION>
Division/Facility Location Sq. Ft. Exp. Date Options
- ----------------- -------- ------- --------- -------
<S> <C> <C> <C> <C>
Diagnon Rockville, MD 10,070 5/31/02 5 years
Res. Blvd. Fac. Rockville, MD 30,000 5/31/02 5 years
Med. Ctr. Dr. Fac. Rockville, MD 51,585 5/31/02 5 years
</TABLE>
The Company's laboratory facilities are suitable and adequate for the purposes
for which they are used.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 28, 1998
Election of Directors
Four directors were elected:
For Withheld
--- --------
J. Thomas August, M.D. 769,168 5,339
Charles C. Francisco 769,168 5,339
Charles F. Gauvin 769,119 5,388
John C. Landon, Ph.D. 768,736 5,771
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 770,284
Negative Votes 3,481
Abstain 742
9
<PAGE>
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 30, 1999 was 1,000. The Registrant has paid no dividends with respect to
its Common Stock during the past five years. On July 20, 1999, Diagnon's Board
of Directors declared a dividend of $0.02 a share for shareholders of record on
September 7, 1999, payable on September 22, 1999. The Company's Line-of-Credit
Agreement requires that no dividends be declared or paid until all obligations
to the lender have been satisfied. The Company's lender (Allfirst Bank) has
agreed to waive this requirement for this dividend.
The Common Stock is traded in the over-the-counter (O-T-C) market and the
Chicago Stock Exchange.
The following table sets forth, for the periods indicated, prior to the
Company's listing on the Chicago Stock Exchange (CHX) on October 23, 1997, 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, and for the period
beginning when the Company was listed on the CHX, the high and low sale prices
of the Common Stock as advised by the CHX.
Sale Prices
Fiscal Year High Low
2000
1st Quarter
(thru 7/30/99) 2 5/8 2 5/8
1999
4th Quarter 2 7/16 2 1/8
3rd Quarter(1)(2)
2nd Quarter 1 1/2 1 1/2
1st Quarter(1)(2)
1998
4th Quarter 1 7/8 1 7/8
3rd Quarter 1 7/8 1 3/4
2nd Quarter 2 1/2 2 3/8
Bid or Closing Quotations(2)
High Low
1st Quarter(3) 2 5/8 2 1/16
(1) During these quarters, the high and low bid or closing quotations from the
O-T-C were 2 3/8 and 1 1/4 for the 3rd quarter and 1 1/2 and 1 1/8 for the 1st
quarter.
(2) Prices are interdealer quotations and do not necessarily reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
(3) Prices for 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.
10
<PAGE>
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
Allfirst Bank (formerly, 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 1999. The line of credit is
callable on demand. Currently, the interest rate of the line of credit is the
prime rate plus .25%. As of May 31, 1999, there were $275,282 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 has received approval from Allfirst Bank to proceed with the merger of
Diagnon and BIOQUAL.
The Company leases equipment under various capital leases which expire in fiscal
years 2000, 2001 and 2002. At May 31, 1999 the present value of the annual
minimum lease payments was $122,304.
The Company's revenues result primarily from Government CPFF and Fixed Price
contracts. Continued success in winning these contracts and the continuation of
the Government's solicitation of contracts in these areas are essential to
maintaining liquidity and capital resources. Since the 1998 FORM 10-KSB report,
the Company has not been awarded any material new contracts. The Company has and
will submit proposals as described in Item 1. Description of Business, Current
Operations, on renewal competitions during fiscal year 2000.
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 continuing the assessment of its non-information
systems for Year 2000 compliance. The Company has contacted its major suppliers
of products and services to determine the status of the suppliers' Year 2000
capability. The Company has received assurances from a majority of providers of
critical systems that those systems are or will be Year 2000 compliant before
December 31, 1999. There can be no assurance that another company's failure to
ensure Year 2000 compliance and capability will not have an adverse effect on
the Company. The Company spent approximately $20,000 in fiscal year 1999 and
anticipates spending approximately $30,000 in fiscal year 2000 replacing its
Year 2000 non-compliant computers. To date, the Company has spent approximately
$35,000 to replace non-compliant computers and software. Any costs incurred in
connection with Year 2000 compliance will be expensed as incurred. It is the
opinion of management that the Year 2000 computer problem will not have a
material effect on the Company's operation. However, the Company is monitoring
the progress of its largest customer, the National Institutes of Health (NIH),
toward Year 2000 compliance. If the NIH is non-compliant on January 1, 2000, the
Company's financial condition may be adversely affected until such time that the
NIH's non-compliant contingency plan is initiated.
Not all instances of date failure can be anticipated or controlled. In planning
for the most reasonably likely worst case scenario, (e.g. NIH systems being
non-compliant on January 1, 2000), or in cases in which, despite our efforts,
failures occur, we have developed a contingency plan such that our vendors can
support us and enable our critical operations to
11
<PAGE>
continue to the maximum extent possible.
Changes in Financial Position - 1999 versus 1998
- ------------------------------------------------
Assets
In the twelve months of operation in this fiscal year, total assets increased
$346,864. This amount was primarily attributable to an increase to accounts
receivable of $160,627 consisting mainly of 1) an increase of $63,011 in trade
accounts receivable reflecting a slightly slower collection rate compared to the
previous fiscal year end, 2) a $100,732 increase in unbilled accounts receivable
(current plus noncurrent) primarily resulting from a $124,796 increase in
reimbursable indirect rate variances for the current fiscal year, offset by
$84,755 of prior year indirect rate variances billed and paid during the current
year, a $34,762 increase in unbilled direct costs to be billed in the subsequent
fiscal year due to a longer accrual period at the end of this fiscal year, and
the recording of $25,929 unbilled contract fee retention to be billed at the
completion of the respective contracts, and 3) a $3,116 decrease in other
accounts receivable. Other noncurrent assets increased $8,275 due to a $46,423
increase in the cash value of officers' split dollar life insurance policies
offset by $38,148 due to the delivery and payment on a new freeze drying
equipment order. Inventories increased $242,489 as the Company continues to
produce Lyphomune(R), ImmunoGam, and MiniGam(TM) for future sales. Prepaid
expenses increased $36,633 primarily due to the prepayment of health insurance
premiums.
The increases above were partially offset by 1) a decrease in fixed assets, net
of accumulated depreciation and amortization of $19,304 reflecting depreciation
and amortization of $321,111 offset by fixed asset purchases of $301,807 (mainly
nonhuman primate housing units, lab equipment and facility improvements), 2)
deferred income tax asset decreased by $27,800 primarily as a result of
utilizing a portion of the federal income tax loss carryforward during fiscal
year 1999, and 3) loans to officers decreased $57,094 due to payments during the
current fiscal year.
Liabilities
In the twelve months of operation in this fiscal year, total liabilities
increased $8,989. This amount was primarily due to 1) a $62,736 increase in
borrowings under line-of-credit reflecting the increase in inventories, 2) an
increase in accrued income taxes of $11,372, 3) an $84,498 increase in accrued
compensation and related costs reflecting a longer accrual period this fiscal
year compared to fiscal year 1998 and a larger management bonus accrual this
year compared to fiscal year 1998, and 4) a $9,096 increase in other accrued
liabilities.
The increases above were largely offset by a decrease in long-term debt of
$140,244 reflecting payments on capital leases and an $18,469 decrease in
accounts payable.
Changes in Financial Position - 1998 versus 1997
- ------------------------------------------------
Assets
In the twelve months of operation in fiscal year 1998, total assets decreased
$417,651. This amount was primarily attributable to a decrease in accounts
receivable of $305,333 consisting mainly of 1) a decrease of $341,949 in trade
accounts receivable reflecting a faster collection rate compared to
12
<PAGE>
fiscal year 1997, 2) a $56,632 increase to unbilled accounts receivable (current
plus noncurrent) primarily resulting from a $162,077 increase in reimbursable
indirect rate variances for fiscal year 1998, offset by $50,395 of prior year
indirect rate variances billed and paid during current year 1998, a $43,672 net
decrease in unbilled contract fee retention, and a $11,378 decrease in accrued
unbilled direct costs to be billed in fiscal year 1999, and 3) a $20,016
decrease in other accounts receivable primarily due to the collection of fiscal
year 1997 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 were partially offset by 1) a $29,826 increase in other
noncurrent assets due to a $45,678 increase in the cash value of officer's split
dollar life insurance policies, a $38,148 deposit on new freeze drying
equipment, offset by the completion of a nonhuman primate housing order
($54,000) from fiscal year 1997, 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 fiscal year 1998, offset by depreciation and
amortization of $293,728 during fiscal year 1998 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 fiscal year 1998, total liabilities
decreased $267,763. This amount was 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 in 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 for fiscal
year 1998 compared to fiscal year 1997, a larger management bonus accrual for
fiscal year 1998 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.
Results of Operations - 1999 versus 1998
- -----------------------------------------
Revenues
Contract revenues increased by 11.9% compared to the prior year primarily due to
increased contract activity, an increase in sales related to SBIR grants, and
the funding of $82,920 of indirect rate variance cost overruns of three
contracts that expired in fiscal years 1995 and 1998 (the contracts were
administratively closed out on September 30, 1998, January 29, 1999 and May 13,
1999 respectively). Product sales decreased to $66,683 compared to $76,377 in
fiscal year 1998. Product unit sales for fiscal year 1999 were relatively the
same as fiscal year 1998, however, in fiscal year 1999 the Company was selling
the lower priced ImmunoGam and MiniGam(TM) products along
13
<PAGE>
with Lyphomune(R) which resulted in a net decrease in sales.
Operating Expenses
Contract expenses increased 8.4% compared to the prior year primarily due to an
increase in contract and SBIR activity. This increase is not as large as would
be anticipated because of a $45,590 cost overrun on two contracts that expired
during fiscal year 1998. The greater increase in contract revenues over contract
expenses is primarily due to the fiscal year 1999 funding of indirect cost
overruns on three expired contracts from prior years totaling $82,920 (two of
the three contracts created the $45,590 overrun from fiscal year 1998). Costs of
goods sold decreased to $55,238 compared to $108,984 in the prior year. This
decrease was primarily due to the expensing, of 300 units of Lyphomune(R)
inventory, used in a sales promotion in fiscal year 1998 compared to only 71
complimentary units being used in sales promotions during fiscal year 1999.
Research and development (R&D) Costs increased to $203,167 compared to $144,123
in the prior year. This increase is primarily due to costs associated with the
development of a proprietary assay design for high throughput screening for new
antibiotics. General and administrative expenses (G&A) increased 3.0% compared
to the prior fiscal year. The increase is primarily due to inflationary
increases in several items of expense in this fiscal year. This increase is not
as large as would be anticipated because of expenses incurred in fiscal year
1998 related to the $25,000 termination fee for terminating the private
placement funding effort with Slusser Associates (SA) and the $15,000 fee for
listing on the Chicago Stock Exchange (CHX). The combination of these net
increases resulted in an overall increase in operating expenses of 7.2%.
Operating Income
Operating income increased to $529,128 compared to $75,554 in the prior year.
The increase is primarily due to the increase in contract revenues without a
comparative increase in related contract expenses resulting in an increase in
the gross margin percentage on contracts from the prior fiscal year; this
increase in contract gross profit dollars was offset to some extent by net
increases in R&D and G&A expenses.
Provision For Income Tax
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," the Company reported a deferred federal income
tax expense of $27,800 for the year ended May 31, 1999. This expense resulted
primarily from a change in the estimate used in the calculation of future
utilization of federal income tax loss carryforward, offset by another deferred
income tax adjustment. The Company provided for state income tax estimated at
$60,000. State income tax expense is reimbursable under government contracting
regulations.
Earnings Per Share (EPS)
Options to purchase 51,845 shares of common stock at prices ranging from $1.80
per share to $3.375 per share were outstanding at May 31, 1999 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 the year ended May
31, 1998, 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.
14
<PAGE>
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 totaling
$45,590. These indirect costs were currently not available for reimbursement and
therefore revenue could not 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 was primarily due to the completion of the
pre-clinical and clinical trials for the Company's purified IgG product,
Lyphomune(R), and the award of two SBIR grants to help support the Company's
ongoing research of Helicobacter pylori. General and administrative expenses
(G&A) increased 17.1% compared to the prior fiscal year. The increase was
primarily due to the legal expenses incurred in defense of a legal proceeding
brought on by a former employee, 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 fiscal year 1998
and a $15,000 listing fee from the Chicago Stock Exchange paid during fiscal
year 1998. The combination of these net increases resulted in an overall
increase in operating expenses of 11.1%.
Operating Income
Operating income increased 1.3% compared to the prior year primarily due to
increased contract revenues offset by 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 totaling $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 was 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
15
<PAGE>
carryforwards, 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 were not
included in the computation of diluted EPS because the options were
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.
Inflation and Price Changes for Fiscal Year
- -------------------------------------------
For fiscal years 1997, 1998, and 1999 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 31 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> <C>
John C. Landon, Ph.D. 1986 62 Chairman of the Board; President & Chief Executive
Officer; Director
J. Thomas August, M.D. 1982 72 Director; Consultant; Scientific Advisor
Charles C. Francisco 1991 61 Director; Member of Compensation Committee; Member of
Audit Committee
Charles F. Gauvin 1992 44 Director; Member of Compensation Committee; Member of
Audit Committee
16
<PAGE>
Michael P. O'Flaherty 61 Secretary; Chief Operating Officer
David A. Newcomer 38 Chief Financial Officer
Leanne DeNenno 45 Vice President, BIOQUAL, Inc. (Subsidiary)
Richard P. Bradbury, DVM 64 Vice President, BIOQUAL, Inc. (Subsidiary)
Jerry R. Reel, Ph.D. 61 Vice President, BIOQUAL, Inc. (Subsidiary)
</TABLE>
Each director is elected to hold office until the next annual meeting of
stockholders and until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors.
Dr. John C. Landon was elected President and Chief Executive Officer of the
Company in May 1986 and has been Chairman of the Board since February, 1987. Dr.
Landon has been President of BIOQUAL, Inc. from January 1982 to the present. Dr.
Landon is also the President, Chief Executive Officer, Treasurer and a Director
of the Company's subsidiaries. Dr. Landon's experience includes positions with
the National Cancer Institute and with Litton Industries as Scientific Director
of the Frederick Cancer Research Facility and as President of EG&G Mason
Research Institute.
Dr. J. Thomas August is a consultant to the Company, a principal stockholder and
a founder of the Company, as well as a Director. He is a Professor in 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 EdgeTech, Inc., a
manufacturer of acoustic underwater imaging instruments located in Milford,
Massachusetts. Mr. Francisco is also CEO of C&W Fabricators, Inc., a
manufacturer of inlet and exhaust systems for gas turbine electric generators
located in Gardner, 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, located in
Arlington, Virginia, a non-profit organization dedicated to protection and
conservation of trout and salmon and their habitats. 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
17
<PAGE>
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 and its successor
contracts. In 1988, Ms. DeNenno was named head of Animal Research Programs for
BIOQUAL, Inc., in 1991 she was named the Vice President in charge of the Medical
Center Dr. Division of BIOQUAL, Inc. and (in 1997) the Vice President of the
Division of Laboratory Animal Sciences.
Dr. Richard P. Bradbury, D.V.M., an American College of Laboratory Animal
Medicine Diplomate, joined the Company in 1989 as the Vice President of the
Company's subsidiary, SEMA, Inc. Since the 1991 merger of SEMA into BIOQUAL, Dr.
Bradbury has been the Vice President of BIOQUAL in charge of the Research Blvd.
Division and (in 1997) became the Vice President of the Division of Primate
Biology and Medicine.
Dr. Jerry R. Reel, Ph.D., an American Board of Toxicology Diplomate, joined the
Company in 1991 as Vice President, Science and (in 1997) became the Vice
President of the Division of Reproductive Endocrinology and Toxicology for
BIOQUAL. Prior to joining BIOQUAL, Dr. Reel had his own consulting company.
18
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to remuneration paid
during the last three fiscal years to the Chief Executive Officer of the Company
and other company officers whose compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Other
Name and Principal Salary Bonus Compensation
Position Year ($) ($) ($) /1,2
- ------------------ ---- ------- ------- ------------
<S> <C> <C> <C> <C>
John C. Landon 1999 275,000 40,000 32,723
----
CEO, President, Chairman 1998 275,000 32,723
----
of the Board 1997 160,000 101,863 32,723
----
Michael P. O'Flaherty 1999 127,286 44,292 10,593
----
Chief Operating Officer, 1998 122,085 36,444 10,593
----
Secretary 1997 116,690 21,660 10,593
----
Jerry R. Reel 1999 120,652 3,789
----
Vice President, Bioqual, Inc. 1998 111,282 3,926
----
(Subsidiary) 1997 118,614 9,179
----
Richard P. Bradbury 1999 106,426 4,730
----
Vice President, Bioqual, Inc. 1998 97,130 8,372
----
(Subsidiary) 1997 99,573 4,000
----
David A. Newcomer 1999 88,600 26,292 4,500
----
Chief Financial Officer 1998 83,412 19,430 4,500
----
1997 78,202 6,592 3,750
----
</TABLE>
1/ Other Annual Compensation for the CEO for the years 1999, 1998 and 1997
represents premiums for a $1,000,000 Split Dollar Life Insurance Policy.
2/ Other Annual Compensation for the Chief Operating Officer and Chief
Financial Officer for the years 1999, 1998 and 1997 represents premiums for
a $250,000 Split Dollar Life Insurance Policy.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total
Securities Stock Options
Underlying Granted to
Stock Options Employees in Exercise Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
---- ----------- ----------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
John C. Landon 23,500 1/ 69.0% $2.8875 2/24/04
CEO, President,
Chairman of the Board
Michael P. O'Flaherty 7,500 1/ 22.0% $1.5625 12/31/08
Chief Operating Officer
1/ All options reported in this table are fully exercisable.
19
<PAGE>
Aggregated Stock Option Exercised in Last Fiscal Year, and FY-End Option Value
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at FY-End (#) at FY-End ($)
on Exercise Realized
Name (#) ($) Exercisable Exercisable
- -------------------------- ----------- -------- ------------- -------------
John C. Landon 1,667 /1 177
CEO, President, 23,500 /1,2 N/A
Chairman of the Board
Michael P. O'Flaherty 14,168 /1 14,228
Chief Operating Officer, 3,334 /1,2 N/A
Secretary
Jerry R. Reel 500 /1 288
Vice President, Subsidiary 1,334 /1,2 N/A
Richard P. Bradbury 1,168 /1 1,772
Vice President, Subsidiary 1,167 /1,2 N/A
David A. Newcomer 1,001 /1 1,456
Chief Financial Officer 1,667 /1,2 N/A
</TABLE>
1/ All options reported in the table are fully exercisable.
2/ Options are out-of-the-money.
Compensation of Directors
- -------------------------
During fiscal year 1999, the Company paid to Directors:
<TABLE>
<CAPTION>
Attendance of
Board Meetings Travel to
Directors and Consultation Board Meetings
Fees ($) Fees ($) Expenses ($)
--------- ---------------- --------------
<S> <C> <C> <C>
J. Thomas August, M.D. 4,000 11,500
Charles C. Francisco 4,000 1,500 755
Charles F. Gauvin 4,000 1,500 100
</TABLE>
Messrs. Francisco, August and Gauvin have agreements with the Company extending
through the term of their election. For fiscal year 1999, the agreements for
Messrs. Francisco, August and Gauvin provided quarterly payments of $1,000 each
as Directors fees and payments of $500 each for attendance at Board of Director
meetings. Beginning September 1, 1999, Messrs. Francisco, August and Gauvin will
receive $2,000 each per quarter as Directors fees and $1,000 each for each Board
meeting attended. 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.
20
<PAGE>
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.
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 1999, the committee was comprised of Messrs. Gauvin and Francisco.
On February 25, 1999, the Company filed a Form S-8 with the Securities and
Exchange Commission to register 100,000 shares of common stock, par value $.01,
to cover previously issued options granted under the Diagnon Corporation 1988
Stock Option Plan and the Diagnon Corporation 1998 Stock Option Plan as well as
future options to be offered pursuant to the Plans.
As of May 31, 1999, the following options to the officers and directors were
outstanding:
<TABLE>
<CAPTION>
Percentage Option Date
Name Service Shares of Total Price Granted
---- ------- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C>
John C. Landon CEO, President, 1,667 2.3% $2.26875 7/29/96
Director, 23,500 31.8% $2.8875 2/24/99
Chairman
Michael P. O'Flaherty Chief Operating 3,334 4.5% $1.50 10/26/89
Officer, 2,500 3.4% $ .48 2/8/90
Secretary 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
7,500 10.1% $1.5625 12/31/98
Richard Bradbury Vice President, 834 1.1% $ .48 2/8/90
BIOQUAL 334 .4% $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 .4% $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
21
<PAGE>
David A. Newcomer Chief Financial 667 .9% $ .48 2/8/90
Officer 334 .4% $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
500 .7% $2.625 2/24/99
Charles F. Gauvin Director 1,667 2.3% $1.80 8/14/92
1,667 2.3% $2.0625 7/29/96
500 .7% $2.625 2/24/99
J. Thomas August Director 1,667 2.3% $2.0625 7/29/96
500 .7% $2.8875 2/24/99
All officers and 61,676 83.7% $ .48 to 10/26/89 to
directors as a group $3.375 2/24/99
(9 persons)
</TABLE>
A total of 73,684 options were granted and outstanding at May 31, 1999. 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 and outstanding, 34,683 are from the 1988 Stock Option Plan
which was terminated in accordance with its terms and conditions on June 20,
1998 but allows the exercise of outstanding options in accordance with their
terms. There are 33,000 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 83,333 shares of common stock (89,950 at May 31, 1998). The remaining
6,001 options were granted outside the plan.
The options granted from the 1988 Plan are effective for a ten year period from
the date of grant, with the exception of the options for 23,500 shares that
expires February 24, 2004, and 1,667 shares that expires July 29, 2001 granted
to John C. Landon, and the options for 500 shares that expires February 24,
2004, and 1,667 shares that expires July 29, 2001 granted to J. Thomas August.
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 30, 1999, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
<S> <C> <C>
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 167,798 (2),(3) 18.69
S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL 33480 98,973 (4) 11.34
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 179,006 (5) 20.46
David H. Bishop
100 W. 57th Street
New York, New York 10019 60,509 (6) 6.93
</TABLE>
(1) Assumes the exercise by such person or persons of the
currently
22
<PAGE>
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 25,167 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 2,167 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 30, 1999, with respect to
the ownership of the Company's Common Stock of all: directors, executive
officers included in the Summary Compensation Table on page 19, and directors
and officers as a group.
Name and Address Number of Shares Percentage (1)
- ---------------- ---------------- --------------
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 167,798 (2),(3) 18.69
Charles C. Francisco
96 Old Littleton Road
Harvard, MA 01451 3,834 (4) .44
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 179,006 (5) 20.46
Charles F. Gauvin
97-Cobbs Bridge Road
New Gloucester, ME
04260 3,834 (4) .44
Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA 22075 18,218 (6) 2.05
Dr. Jerry R. Reel
302 Watkins Pond Blvd.
Rockville, MD 20850 1,884 (7) .22
Dr. Richard P. Bradbury
16708 Briardale Road
Rockville, MD 20855 2,385 (8) .27
David A. Newcomer
9 Eternity Court
Germantown, MD 20874 2,718 (9) .31
23
<PAGE>
All executive officers
and directors (8, of
whom all beneficially
own shares) as a group 379,677 (10) 40.74
(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.
(3) Assumes the exercise of currently exercisable options to purchase
25,167 shares.
(4) Assumes the exercise of currently exercisable options to purchase
3,834 shares.
(5) Assumes the exercise of currently exercisable options to purchase
2,167 shares.
(6) Assumes the exercise of currently exercisable options to purchase
17,502 shares.
(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 bore interest at the six month certificate of deposit rate paid by Signet
Bank, Maryland and the rate was adjusted quarterly. On September 29, 1989 the
Company agreed to increase the loan to $125,000. On September 21, 1990, the
Company agreed to increase the loan to $150,000. 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.
On October 28, 1998, the Compensation Committee of the Board of Directors
24
<PAGE>
agreed to extend the repayment period of the Company loan to Dr. Landon from
October 31, 1998 to April 30, 2000. In accordance with the shareholders' prior
approval of the Company's plan to purchase shares of stock from Dr. Landon at
market value, the Company is purchasing, on a quarterly basis for six quarters,
9,000 shares of Company stock from Dr. Landon at market value. Any unpaid
principal balance and accrued interest will be paid in cash at the end of the
sixth quarter. As of July 23, 1999, Dr. Landon has made three repayments
totaling $57,094. The largest amount owed by Dr. Landon during the fiscal year
ended May 31, 1999 in respect to his loan facilities was $90,000, excluding
accrued interest amounting to $20,453. 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 31.
(b) The Registrant filed no reports on FORM 8-K during the final quarter
of its fiscal year ended May 31, 1999.
(c) Exhibits filed (Exhibits incorporated by reference listed
separately.)
(21) List of Subsidiaries
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.
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
25
<PAGE>
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.
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
26
<PAGE>
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.
(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
27
<PAGE>
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.
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,
28
<PAGE>
LTD. and Diagnon Corporation.
Exhibits incorporated by reference to the Company's FORM
10-KSB for the fiscal year ended May 31, 1996.
(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.
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
Registration Statement No. 1-13527 (filed on October 22,
1997.
(3) (1) Second Amended and Restated Certificate of
Incorporation dated October 22, 1997.
(2) By-laws.
(3) Form of Common Stock Certificate.
(4) Restated 1988 Stock Option Plan.
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.
29
<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 25, 1999.
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) 8/25/99
- --------------------------
John C. Landon, Ph.D.
/s/ J. Thomas August Director 8/25/99
- --------------------------
J. Thomas August M.D.
/s/ Charles C. Francisco Director 8/25/99
- --------------------------
Charles C. Francisco
/s/ Charles F. Gauvin Director 8/25/99
- --------------------------
Charles F. Gauvin
/s/ Michael P. O'Flaherty Chief Operating Officer
- -------------------------- and Secretary 8/25/99
Michael P. O'Flaherty
/s/ David A. Newcomer Chief Financial Officer 8/25/99
- --------------------------
David A. Newcomer
30
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
------------------------------------
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
-----------------------------------------
Independent Auditors' Report..................................... 32
Financial Statements:
Consolidated Balance Sheets, May 31, 1999 and 1998.......... 33
Consolidated Statements of Operations for each of the
years in the three year period ended May 31, 1999........... 34
Consolidated Statements of Stockholders' Equity for each
of the years in the three year period ended May 31, 1999 ... 35
Consolidated Statements of Cash Flows for each of the years
in the three year period ended May 31, 1999................. 36
Notes to Financial Statements............................... 37
All financial statement schedules are omitted because they are not applicable or
required.
31
<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, 1999 and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
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, 1999 and 1998 and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
July 22, 1999
32
<PAGE>
<TABLE>
<CAPTION>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1999 AND 1998
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 68,768 $ 65,730
Accounts receivable:
Trade 966,354 903,343
Unbilled - current 262,774 301,843
Other 26,867 29,983
Prepaid expenses 91,522 54,889
Inventories 287,596 45,107
Loans to Officers - current 32,906
Deferred income taxes - current 77,300 43,700
-------------- --------------
Total current assets 1,814,087 1,444,595
-------------- --------------
LOANS TO OFFICERS - NONCURRENT 90,000
-------------- --------------
FIXED ASSETS:
Leasehold improvements 832,264 749,155
Furniture, fixtures and equipment 3,289,879 3,071,181
-------------- --------------
Total 4,122,143 3,820,336
Less accumulated depreciation and amortization 2,649,058 2,327,947
-------------- --------------
Fixed assets, net 1,473,085 1,492,389
-------------- --------------
DEFERRED INCOME TAXES - NONCURRENT 600,400 661,800
UNBILLED ACCOUNTS RECEIVABLE - NONCURRENT 493,512 353,711
OTHER NONCURRENT ASSETS 242,650 234,375
-------------- --------------
TOTAL $ 4,623,734 $ 4,276,870
============== ==============
LIABILITIES
CURRENT LIABILITIES:
Borrowings under line of credit $ 275,282 $ 212,546
Current maturities of long-term debt 66,093 140,245
Accounts payable 215,956 234,425
Accrued compensation and related costs 474,597 390,099
Accrued income taxes 24,281 12,909
Other accrued liabilities 15,178 6,082
-------------- --------------
Total current liabilities 1,071,387 996,306
LONG-TERM DEBT 56,211 122,303
-------------- --------------
Total liabilities 1,127,598 1,118,609
-------------- --------------
STOCKHOLDERS' EQUITY
Convertible preferred stock - par value of
$1.00 per share: 500,000 shares
authorized; no shares issued and outstanding
Common stock - par value of $.01 per share;
25,000,000 shares authorized; 1,600,408
shares issued; May 31, 1999, 872,672
shares, May 31, 1998, 899,505 16,004 16,004
shares outstanding
Additional paid-in capital 7,475,035 7,475,035
Accumulated deficit (3,310,022) (3,704,910)
-------------- --------------
Total 4,181,017 3,786,129
Less - treasury stock May 31, 1999, 727,736
shares, May 31, 1998, 700,903 shares, at
cost (684,881) (627,868)
-------------- --------------
Total stockholders' equity 3,496,136 3,158,261
-------------- --------------
TOTAL $ 4,623,734 $ 4,276,870
============== ==============
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF
THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES AND SALES:
Contract revenues $11,017,981 $9,848,009 $8,919,294
Product sales 66,683 76,377 19,916
----------- ---------- ----------
Total Revenues and Sales 11,084,664 9,924,386 8,939,210
----------- ---------- ----------
OPERATING EXPENSES:
Contract 8,354,057 7,709,687 6,886,440
Cost of goods sold 55,238 108,984 18,941
Research and development 203,167 144,123 349,199
General and administrative 1,943,074 1,886,038 1,610,012
----------- ---------- ----------
Total Operating Expenses 10,555,536 9,848,832 8,864,592
----------- ---------- ----------
OPERATING INCOME 529,128 75,554 74,618
INTEREST INCOME 6,578 9,708 10,157
INTEREST EXPENSE (53,018) (57,239) (49,320)
----------- ---------- ----------
INCOME BEFORE INCOME TAX 482,688 28,023 35,455
PROVISION FOR INCOME TAX (87,800) (177,400) (30,900)
----------- ---------- ----------
NET INCOME (LOSS) $ 394,888 $ (149,377) $ 4,555
=========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 0.44 $ (0.17) $ 0.01
=========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.44 $ (0.17) $ 0.00
=========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 890,626 899,584 899,707
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 8,818 12,404
----------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING FOR DILUTIVE
EARNINGS PER SHARE 899,444 899,584 912,111
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------ ---------------
NUMBER ADDITIONAL
OF PAR PAID-IN ACCUMULATED NUMBER OF AT
SHARES VALUE CAPITAL DEFICIT SHARES COST TOTAL
------ ----- ------- ------- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 1, 1996 9,602,452 $ 96,024 $7,395,015 $(3,560,088) (4,204,208) $(627,357) $3,303,594
NET INCOME 4,555 4,555
------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1997 9,602,452 96,024 7,395,015 (3,555,533) (4,204,208) (627,357) $3,308,149
SIX TO ONE REVERSE
STOCK SPLIT (8,002,044) (80,020) 80,020 3,503,507
REPURCHASE OF
FRACTIONAL SHARES (202) (511) (511)
NET LOSS (149,377) (149,377)
------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1998 1,600,408 16,004 7,475,035 (3,704,910) (700,903) (627,868) $3,158,261
STOCK RECEIVED FOR
OFFICER LOAN
REPAYMENT (27,000) (57,094) (57,094)
EXERCISE OF STOCK
OPTIONS 167 81 81
NET INCOME 394,888 394,888
------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1999 1,600,408 $ 16,004 $7,475,035 $(3,310,022) (727,736) $(684,881) $3,496,136
========== ======== ========== =========== ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF
THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 394,888 $(149,377) $ 4,555
---------- --------- ----------
<S> <C> <C> <C>
Adjustments to reconcile net income (loss) to net
cash provided by (used for)operating activities:
Depreciation and amortization 321,111 293,728 261,218
Deferred income taxes 27,800 141,900 (1,900)
(Increase) decrease in accounts receivable (160,627) 305,333 (313,945)
(Increase) decrease in prepaid expenses (36,633) 21,555 (5,012)
(Increase) decrease in inventories (242,489) (146) 7,794
Increase in other assets (8,275) (29,826) (102,456)
Increase in accounts payable and accrued expenses 75,125 74,242 34,797
Increase in income taxes payable 11,372 7,366 1,983
---------- --------- ----------
Total Adjustments (12,616) 814,152 (117,521)
---------- --------- ----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 382,272 664,775 (112,966)
---------- --------- ----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Net capital expenditures (301,807) (201,761) (465,141)
---------- --------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (301,807) (201,761) (465,141)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 62,736 (323,574) 536,120
Principal payments under capital lease obligations (140,244) (135,837) (113,918)
Net proceeds from exercise of stock options 81
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 (77,427) (459,922) 422,202
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,038 3,092 (155,905)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 65,730 62,638 218,543
---------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 68,768 $ 65,730 $ 62,638
========== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 52,710 $ 57,134 $ 46,988
========= ========= ==========
Income taxes $ 48,936 $ 17,900 $ 25,600
========= ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Long-term debt issued in connection with capital
Leases $ 110,040
=========
Treasury stock received for payment
of loans to officer $ 57,094
=========
</TABLE>
See notes to consolidated financial statements.
36
<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 ("Diagnon") its wholly owned subsidiaries, BIOQUAL, Inc.
("BIOQUAL") and Enhanced Therapeutics, Inc. (collectively the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Reclassifications
- -----------------
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
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 cost-plus-fixed-fee ("CPFF") contracts are subject to
final negotiated settlements for each fiscal year.
37
<PAGE>
Revenue Recognition
- -------------------
Contract research revenue is generally earned based on CPFF arrangements and is
recognized as costs are incurred.
Earnings (Loss) Per Share
- -------------------------
The Company adopted Statement of Financial Accounting Standard No. 128 ("SFAS
128") "Earnings Per Share" during the fiscal year ended May 31, 1998 and
restated, as required, all prior year earnings per share data.
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
- -------------------------
The Company adopted 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, during this fiscal year.
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. SFAS No. 130 had
no impact on its financial position. The Company has determined that it only has
one material operating segment and, in accordance with SFAS No. 131, has
described and reported the Company as such.
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.
Stock Options
- -------------
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the 1988 and 1998 Stock Option Plans,
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 income/loss and
income/loss per share would not have been materially affected on a pro forma
basis for the years ended May 31, 1999, 1998 and 1997.
The Company has granted 67,683 shares of its Common Stock under its 1988 and
1998 stock option plans. The 1998 stock option plan is authorized to grant
options to purchase up to 83,333 shares of common stock. Except for certain
options granted to an officer and a director, options expire ten years from
38
<PAGE>
date of grant under the plan, or upon the optionee's separation from the Company
and are granted at the average of the closing bid and ask price of the Company's
Common Stock at the date of grant. Options for 24,000 and 3,334 common shares
granted to an officer and a director for a period of five years expire in 2000
and 2004, respectively. The Company has reserved an additional 6,001 shares of
its Common Stock to cover the exercise of options granted outside its 1988 and
1998 stock option plans. The 1988 plan was terminated in accordance with its
terms and conditions on June 20, 1998.
The number of options exercisable at May 31 were 73,684 in 1999, 72,351 in 1998,
and 73,018 in 1997.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1997
---- ----
Expected volatility 36.0% 59.0%
Risk-free interest rate 5.5%-6.15% 5.5%-6.15%
Expected term of options 5-10 years 5-10 years
Expected dividend yield -0- -0-
Information regarding the Company's stock option plans for the years ended May
31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 72,351 $2.17 73,018 $2.16 57,346 $2.11
Granted 34,000 2.52 16,172 2.34
Forfeited (32,500) 2.50 (667) .81 (500) 3.375
Exercise (167) .48 _______ _______
-------
Outstanding at end of year 73,684 $2.19 72,351 $2.17 73,018 $2.16
======= ======= =======
Options exercisable at end of year 73,684 $2.19 72,351 $2.17 73,018 $2.16
======= ======= =======
Weighted average fair value of
options granted during year $ 0.88 $ 1.19
</TABLE>
Outstanding and Exercisable
----------------------------------------
Weighted Weighted
Remaining Average
Contractual Exercise
Options Life (years) Price
------- ----------- -----
Range of exercise price
.48 to 1.80 26,343 4.27 $1.19
1.81 to 2.625 17,839 5.99 2.37
2.626 to 3.375 29,502 4.97 2.98
------
73,684 4.97 $2.19
======
39
<PAGE>
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, 1999, there were $275,282 of borrowings under this
line of credit. During fiscal year 1999 the maximum amount borrowed was
$892,003, the average balance outstanding was $430,728, and the average interest
rate was 8.38%. The line is guaranteed by BIOQUAL, Inc., 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, 1999.
4. LONG-TERM DEBT
1999 1998
Capitalized Lease Obligations $122,304 $262,548
Less Current Maturities 66,093 140,244
-------- --------
Long-Term $ 56,211 $122,304
======== ========
Future annual minimum payments under the capital leases as of May 31, 1999,
were:
2000 $ 73,774
2001 43,101
2002 16,435
--------
133,310
Less: Amount representing interest 11,006
--------
Present value of minimum lease payments $122,304
========
The Company leases equipment under various capital leases which expire in fiscal
years 2000, 2001 and 2002. Property held under the capital leases at May 31,
1999 and 1998 consisted of the following:
1999 1998
---- ----
Equipment $589,402 $589,402
Less accumulated amortization 209,926 150,986
-------- --------
$379,476 $438,416
======== ========
The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment. Amortization expense amounted to $94,828, $81,352 and
$54,975 in 1999, 1998 and 1997, 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, 1999 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
40
<PAGE>
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 income tax expense for 1999 is lower
than the statutory rate as a result of management's assessment in the fourth
quarter that a decrease in the valuation allowance offset by other income tax
adjustments was necessary because of the current estimates of future taxable
income during the available tax loss carryforward period.
The deferred tax expense in 1998 resulted from management's assessment in the
fourth quarter 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:
1999 1998 1997
---- ---- ----
Current tax expense $ 60,000 $ 35,500 $ 32,800
Deferred tax expense (benefit) 27,800 141,900 (1,900)
-------- -------- --------
$ 87,800 $177,400 $ 30,900
======== ======== ========
A reconciliation of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:
1999 1998 1997
---- ---- ----
Federal taxes at statutory
rate $164,500 $ 9,500 $ 12,100
State taxes at statutory rate 39,600 23,400 21,600
Executive life insurance
Premiums 3,000 3,000 2,000
Decrease (increase) in
previously recognized tax
loss carryforwards, net of
other adjustments to deferred
taxes (113,000) 141,900 (1,900)
Other, net (6,300) (1,400) (2,900)
-------- -------- --------
$ 87,800 $177,400 $ 30,900
======== ======== ========
The components of deferred income taxes are as follows:
May 31, May 31, May 31,
1999 1998 1997
---- ---- ----
Financial statement accruals $ 48,735 $ 45,553 $ 40,904
Different useful lives for
depreciation of fixed assets
for tax purposes (148,000) (46,000) (58,300)
Research & development costs
deferred for tax purposes 218,000 164,000 -0-
Tax loss carryforward 1,268,000 1,443,000 1,598,000
Less valuation allowance (709,035) (901,053) (733,204)
--------- --------- ---------
Total deferred income taxes $ 677,700 $ 705,500 $ 847,400
========= ========= =========
41
<PAGE>
As of May 31, 1999, the Company has cumulative tax operating loss carryforwards
of approximately $3,700,000 available to reduce future federal taxable income.
The operating loss carryforwards expire in fiscal years 2000 to 2003. Management
believes that it is more likely than not that the Company will generate future
taxable income sufficient to realize a portion of the remaining tax loss
carryforward and that the valuation allowance is appropriate given the current
estimates of future taxable income.
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 1999, 1998 and 1997, the Company subleased a part of its
premises. As of May 31, 1999, 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:
2000 1,578,000
2001 1,622,000
2002 1,596,000
2003 11,000
Facilities leases contain options for five-year extensions.
Rental expense was approximately $1,449,000, net of $12,000 of sublease income,
$1,346,000, net of $11,000 of sublease income, and $1,322,000, net of $11,000 of
sublease income, for the years ended May 31, 1999, 1998 and 1997, respectively.
7. RELATED PARTIES
The following schedule presents information regarding loans to officers for the
three year period ended May 31, 1999.
Balance at Balance
Beginning of at End of
Name of Person Period Additions Repayments Period
- -------------- ------- --------- ---------- ------
Year Ended May 31, 1999:
President $ 90,000 $ -0- $ 57,074 $ 32,906
Each of the Years Ended
May 31, 1998 and 1997:
President 90,000 -0- -0- 90,000
The loan to the President bears interest at the six month certificate of deposit
rate. The Company's shareholders affirmatively voted to approve the purchase of
common stock of the Company held by the President at fair market value in an
amount sufficient to fund the loan payments, plus accrued interest. 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.
42
<PAGE>
On October 28, 1998, the Compensation Committee of the Board of Directors agreed
to extend the repayment period of the Company loan to the President from October
31, 1998 to April 30, 2000. In accordance with the shareholder's prior approval
of the Company's plan to purchase shares of stock from the President at market
value, the Company plans to purchase, on a quarterly basis for six quarters,
9,000 shares of Company stock from the President at market value. Any unpaid
principal balance and accrued interest will be paid in cash at the end of the
sixth quarter. During the 1999 fiscal year, the Company purchased shares valued
at $57,094.
The President has an employment agreement with the Company which provides a base
compensation and additional incentive compensation dependent upon annual
operations. This agreement expires on July 13, 2002.
8. SUBSEQUENT EVENTS
On July 14, 1999, the Board of Directors unanimously approved that Diagnon merge
into itself it's wholly owned subsidiary, BIOQUAL, Inc., and assume all of the
subsidiary's assets, liabilities and obligations. Further, in connection with
the merger, the name of Diagnon will change its name to BIOQUAL. The expected
date for the merger and name change is the close of business on December 31,
1999.
Also on July 14, 1999, the Board of Directors declared a dividend of $0.02 a
share for shareholders of record on September 7, 1999, payable on September 22,
1999. This is the first dividend declared by Diagnon.
On July 9, 1999, the Company, acknowledging the contribution of its employees,
distributed fifty shares of common stock to all current employees who have been
with the company for at least one year as of May 31, 1999.
43
<PAGE>
EXHIBITS
44
(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
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE YEAR ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 68,768
<SECURITIES> 0
<RECEIVABLES> 1,749,507
<ALLOWANCES> 0
<INVENTORY> 287,596
<CURRENT-ASSETS> 1,814,087
<PP&E> 4,122,143
<DEPRECIATION> 2,649,058
<TOTAL-ASSETS> 4,623,734
<CURRENT-LIABILITIES> 1,071,387
<BONDS> 0
0
0
<COMMON> 16,004
<OTHER-SE> 3,480,132
<TOTAL-LIABILITY-AND-EQUITY> 4,623,734
<SALES> 66,683
<TOTAL-REVENUES> 11,017,981
<CGS> 55,238
<TOTAL-COSTS> 10,352,369
<OTHER-EXPENSES> 203,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,018
<INCOME-PRETAX> 482,688
<INCOME-TAX> 87,800
<INCOME-CONTINUING> 394,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,888
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
