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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2000
Commission file number 0-13527
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BIOQUAL, INC.
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State of Delaware 13-3078199
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 Medical Center Drive, Rockville, Maryland 20850
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code (301) 251-2801
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of class which registered
Common Shares $.01 Par Value Chicago Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
None
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months, and (2)
has been subject to such filing requirement for the past 90 days. Yes X No __
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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. ___
The issuer's revenues for the fiscal year ended May 31, 2000 were $11,663,632
The aggregate market value of voting stock held by non-affiliates, valued using
the average closing bid-and-ask prices at July 27, 2000 is $1,693,179.
Common Stock, $.01 par value per share; authorized 25,000,000 shares; 880,091
shares outstanding as of July 27, 2000.
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, 1989, 1992, 1995, 1996, 1997, 1998 and 1999.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
BIOQUAL, Inc., formerly Diagnon Corporation, (the "Company" or "BIOQUAL"), 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 veterinary 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 December 31, 1999, Diagnon Corporation ("Diagnon") changed its name to
BIOQUAL, Inc. The name change was effected as a result of the merger of Diagnon
and its wholly - owned subsidiary, BIOQUAL, Inc., with Diagnon being the
surviving corporation. In the merger Diagnon adopted the name BIOQUAL, Inc. as
the name of the surviving entity.
CURRENT OPERATIONS
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 reproduction.
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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 government 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 95% of the Company's revenue.
BIOQUAL plans to bid on renewals for its contracts as they come up for
recompetition.
The Company currently has one subsidiary, Enhanced Therapeutics, Inc. (ET) which
is inactive. ET was established to support a joint venture with The Johns
Hopkins University. The venture did not materialize.
Medical Center Dr. Facility - Divisions of Laboratory Animal Sciences and
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Reproductive Endocrinology and Toxicology
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For the past twenty-five years, BIOQUAL, Inc. (through its Medical Center Dr.
Division from February 25, 1991 until May 31, 1997 and presently as the Division
of Laboratory Animal Sciences and the Division of 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 09/30/00)
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
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circumstances such as a government shut-down). The divisions' revenues totaled
$5,911,724 for the most recent fiscal year.
Medical Center Drive Facility - Division of Neurobiology and Behavior
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The Division of Neurobiology and Behavior is implementing a comparative
neurobiology of aging research resource supported by the National Institute on
Aging (NIA). 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 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 2000
the Company requested and received approval for a one year extension for this
grant at no additional cost to the NIA. During fiscal year 1999, the Division
acquired a grant from the National Center for Research Resources (NCRR) to
provide genetic analyses and DNA profiling of chimpanzees. During fiscal year
2000 the Company requested and received approval for a one year extension (at no
additional cost to the NCRR) for this grant which now expires on March 9, 2001
and totals $282,499. On March 2, 2000, the Company was awarded a $99,153 Phase I
grant from the National Institutes of Health as part of its Small Business
Innovation Research (SBIR) program. The six month grant is to identify and
characterize DNA sequence variation in chimpanzees at four genes that contain
mutations implicated in the pathogenesis of Alzheimer's Disease. This division's
revenues totaled $529,504 for the most recent fiscal year.
Research Blvd. Facility - Division of Primate Biology and Medicine
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For over twenty-seven 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 four contracts:
1. Care and Housing of Hepatitis Research Animals. (ends 12/27/06)
2. Facility for Animals Used in Infectious Disease Research. (ends 2/28/07)
3. Mechanisms of Chemical Carcinogenesis in Old World Monkeys. (ends
12/18/00)
4. Care and Housing of AIDS Research Animals. (ends 01/31/07)
The National Cancer Institute (NCI) has advertised a renewal Request for
Proposal (RFP) for the third contract listed above. The Company will submit a
proposal to compete for the renewal of this contract.
As part of a 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
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effort on the contracts, revenue is evenly spread over each month of the year.
The Government traditionally pays promptly (barring any unforeseen circumstances
such as a government shut-down). Contract revenues totalled $5,102,766 for the
most recent fiscal year.
Division of Bioresearch
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The Division of Bioresearch has four products in the marketplace, a purified
equine IgG that is sold under the brand name Lyphomune(R), two equine
nutritional supplements sold under the brand names ImmunoGam and MiniGam and
partially purified equine albumin sold under the brand name Eqstend. This
division is also responsible for the Company's research and development
activities.
Equine IgG
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In January 1995, the Company entered into a Licensing and Manufacturing
Agreement with ZooQuest Technologies Ltd. under which the Company had an
exclusive worldwide license to manufacture and sell Equine Immunoglobulin for
oral administration (Lyphomune(R) IgG) purified by a patented process. A sale
agreement was reached in the first quarter of fiscal year 1997 for the Company
to acquire the assets of ZooQuest. On June 11, 1997, the Company was granted
United States Department of Agriculture approval to sell and distribute its
oral/intravenous equine IgG also being sold under the name Lyphomune(R).
The purified equine IgG is used for treatment for Failure of Passive Transfer
(FPT) of immunity in newborn foals. During the first twenty-four hours
postpartum the foals showing symptoms of FPT can be, under normal circumstances,
administered IgG orally; however, after twenty-four hours postpartum, the foals,
generally, must be treated using intravenous methods.
On October 1, 1998, the Company introduced two nutritional supplements for the
equine industry. The two equine immunoglobulin products are ImmunoGam and
MiniGam. Both products are colostrum supplements that are recommended for use in
newborn foals. MiniGam 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 is recommended for veterinarian use only.
On October 25, 1999, at the Bluegrass Equine Critical Care Symposium in
Lexington, Kentucky, the Company introduced its newest equine product Eqstend
(partially purified equine albumin). Albumin is the main protein, of three blood
plasma proteins, which is important in regulating blood volume and in
transportation of elements within the blood stream. Eqstend is a natural product
for use in horses following blood loss, dehydration, diarrhea, and several other
protein deficit disorders. The primary users of Eqstend will be large animal
surgical hospitals and critical care units.
In addition to direct sales by the Company, the product is being distributed
throughout the United States by several distributors. Repeat sales of the four
products indicates user acceptance. However, product sales have not met
management's expectations. Therefore, during fiscal year 2001 the Company will
pursue a marketing partner and/or the sale of its veterinary products business.
In fiscal year 2001 the Company intends to expend sufficient funds to maintain
operational viability and to produce sufficient quantities of
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product to meet individual product line demand. Product sales for the year ended
May 31, 2000 totaled $119,638.
Research and Development Activities
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Discovery Research Department
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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. The
Company mounted a dual effort directed toward both vaccine and antibiotic
development. This work led to a broader 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
disease causing bacteria and fungi. 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" (expired 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 $23,000 in expenses in support of the NIDDK CRADA during
fiscal year 2000 and anticipates no further expenditures under this agreement.
On September 17, 1999, the Company filed a patent application entitled "High
Throughput Assay Method for Enzymes Which Metabolically Hydrolyze Nucleoside
Triphosphates and an Assay System Therefor". This application specifies broad
coverage of the proprietary assay technology known as HT-SANE (High Throughput
Screening Assay for NTP hydrolyzing Enzymes). The emergence of many strains of
antibiotic resistant bacteria and fungus has intensified the search for new
antibiotics. Most antibiotics and antifungal drugs kill by inhibiting the
activity of enzymes that are essential for growth. One of the limiting steps in
drug discovery is the necessity for a high throughput enzyme assay that can be
used to quickly screen large numbers of potential drugs. HT-SANE technology
introduces the capability to develop high throughput enzyme assays for a large
number of critical enzymes, specifically those that hydrolyze nucleoside
triphosphates (NTPs) in their respective biochemical reactions.
In May 2000, the developer of the assay resigned from the Company. Other
scientific staff (a molecular biologist and chemist), who have been involved
with the development of the assay, are continuing to validate the assay under
the guidance of the Company's Scientific Advisor. The HT-SANE technology will be
presented to potential investors, drug discovery companies and/or pharmaceutical
firms. In the interim, BIOQUAL staff will continue to accumulate data on the
efficacy of the assay.
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Veterinary Therapeutics Department
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The Veterinary Therapeutics Department is developing five additional products
related to equine IgG. These products will serve different therapeutic and
nutritional supplement markets. One is 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 five additional products will not be material to the
Company's financial position. There is no assurance that any of these potential
products will successfully reach the market.
Small Business Innovative Research Program (SBIR)
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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, Medical Center Drive Facility -
Division of Neurobiology and Behavior, on May 15, 1998, BIOQUAL was awarded and
began work on the Phase II SBIR grant titled "Comparative Neurobiology of Aging
Resource" totaling $753,144 for two years. During fiscal year 2000 the Company
was awarded and began work on a six-month Phase I SBIR grant titled "Comparative
DNA Sequence Variation in Alzheimer Genes" totaling $99,153 from the National
Institute on Aging.
On July 26, 2000 the Company was awarded a Phase I SBIR grant from the National
Institute of Dental and Craniofacial Research titled "The Hyrax as a Model for
Facial Biomechanics and Growth". The six-month grant totals $98,711.
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
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The divisions of Laboratory Animal Sciences, Reproductive Endocrinology and
Toxicology and Primate Biology and Medicine operate under Government contracts
which typically run three to seven 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 FY01 Projected.
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Backlog
Backlog Backlog Unfilled
FY 00 FY 01 in FY 01
as of 6/1/99 as of 6/1/00 Projected
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Med. Ctr. Dr. Facility $12,510,000 $ 6,785,000 $ 5,327,000
Res. Blvd. Facility 3,666,000 30,032,000 26,816,000
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TOTAL $16,176,000 $36,817,000 $32,143,000
Supervision and Regulation
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Animal Model Contracts
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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,
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BIOQUAL, Inc. must meet the Public Health Service (PHS) Policy on Humane Care
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and Use of Laboratory Animals. This policy mandates that BIOQUAL, Inc. file
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annually an assurance as to compliance with the NIH Office of Laboratory Animal
Welfare. BIOQUAL, Inc. also comes under the jurisdiction of the U.S. Department
of Agriculture (USDA), which regularly inspects both of the Company's facilities
for adherence to its rules and regulations regarding care and treatment of
animals. To ensure compliance with the several laws and regulations regarding
animal care, both facilities are accredited as complying laboratories by the
Association for Assessment and Accreditation of Laboratory Animal Care
International (AAALAC).
The supervision and regulation programs described herein are costly in terms of
ongoing operation and maintenance, but are essential because lack of compliance
can lead to cessation of operations and loss of contracts.
Environmental Compliance
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The Company incurs minimal costs in the disposal of the waste generated by its
operations. These costs are reimbursable under government contracts.
Veterinary Products
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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
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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 Washington, D.C. area (to serve the NIH scientists) and the high capital
costs to establish animal holding facilities.
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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
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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
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At the end of fiscal year 2000, the Company employed 117 people (110 of whom
were full-time) as follows: general and administrative, 18 employees; Research
Blvd. Facility, 49 employees; and Medical Center Dr. Facility, 50 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.
Forward Looking Information
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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 the Company'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 the Company'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:
Division/Facility Location Sq. Ft. Exp. Date Options
----------------- -------- ------- --------- -------
9600 Med. Ctr. Dr. Fac. Rockville, MD 61,655 5/31/02 5 years
Res. Blvd. Fac. Rockville, MD 30,000 5/31/02 5 years
9610 Med. Ctr. Dr. Fac. Rockville, MD 3,130 6/30/01 none
The Company's laboratory facilities are suitable and adequate for the purposes
for which they are used.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting - October 20, 1999
Election of Directors
Four directors were elected:
FOR Withheld
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J. Thomas August, M.D. 747,029 782
Charles C. Francisco 747,029 782
Charles F. Gauvin 747,029 782
John C. Landon, Ph.D. 747,029 782
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
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public accountants for the Company.
Affirmative Votes 746,914
Negative Votes 83
Abstain 814
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 27, 2000 was 1,000. The Registrant paid a dividend of $.02 per share of
common stock outstanding at September 7, 1999. This was the first dividend paid
by the Company. On July 12, 2000, the Company's Board of Directors declared a
dividend of $0.03 a share for shareholders of record on September 11, 2000,
payable on September 27, 2000. 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, the high and low sale
prices of the Common Stock as advised by the CHX.
Sale Prices
Fiscal Year High Low
----------- ---- ---
2001
1st Quarter
(thru 7/27/00) 4 1/4 3 3/4
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2000
4th Quarter 10 3 3/4
3rd Quarter 3 1/2 2 1/2
2nd Quarter 4 1/2 3 1/16
1st Quarter 3 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)
(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 of 1999 and 1 1/2 and 1 1/8
for the 1st quarter of 1999. There were no sales on the CHX during these
quarters.
(2) Prices are interdealer quotations and do not necessarily reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions. There were no sales on the CHX during these quarters.
The Company's Common Stock, $.01 par value per share, carries one vote per
share. There are no outstanding shares of preferred stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Liquidity and Capital Resources
-------------------------------
The Company currently has a $1,000,000 secured revolving line of credit with
Allfirst Bank. 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 2000. 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, 2000, there were $688,183 of borrowings under this line of credit. In the
opinion of the Company, total current assets, the line of credit resources and
the capital provided by future operations will provide adequate liquidity and
capital resources to maintain operations.
The Company leases equipment under various capital leases which expire in fiscal
years 2001 and 2002. At May 31, 2000 the present value of the annual minimum
capital lease payments was $56,211.
The Company entered into notes payable with a bank to finance the purchase of
equipment. The notes mature in 2003. At May 31, 2000 the principal due on the
notes was $257,047.
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. The Company has and will submit
proposals as described in Item 1., Description of Business, Current Operations,
on renewal competitions during fiscal year 2001. Since the 1999 FORM 10-KSB
report, the following material new contracts have been awarded to the Company:
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1. Title: Care and Housing of Hepatitis Research Animals.
Institute: National Institute of Allergy and Infectious Diseases
Dates Funded: 12/28/99 - 12/27/06
Contract Funding: $13,634,742
2. Title: Facility for Animals Used in Infectious Disease
Research.
Institute: National Institute of Allergy and Infectious Diseases
Dates Funded: 3/1/00 - 2/28/07
Contract Funding: $6,298,647
3. Title: Care and Housing of AIDS Research Animals.
Institute: National Institute of Allergy and Infectious Diseases
Dates Funded: 2/1/00 - 1/31/07
Contract Funding: $10,798,411
Year 2000
---------
The Company 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 continues to monitor its information and non-
information systems for signs of malfunction due to the Year 2000 computer
problem. The Company has not encountered any delays of service or non-service
from its major suppliers of products and services, however there can be no
assurance that the Company will not be affected by another company's Year 2000
non-compliance. The Company spent approximately $20,000 in fiscal year 1999 and
approximately $23,000 in fiscal year 2000 to replace non-compliant computers and
software. Any costs incurred in connection with Year 2000 compliance were
expensed as incurred.
As of July 27, 2000, the Company had not experienced any significant business
disruption as a result of the Year 2000 problem. Although Year 2000 problems may
not become evident until long after January 1, 2000, based on our Year 2000
readiness process and our experience to date, we do not expect significant Year
2000 related business disruptions in the future.
Changes in Financial Position - 2000 versus 1999
------------------------------------------------
Assets
In the twelve months of operations in this fiscal year, total assets increased
$702,340 from $4,623,734 at May 31, 1999 to $5,326,074 at May 31, 2000. This
amount was primarily attributable to an increase in accounts receivable of
$661,403 consisting mainly of 1) an increase of $666,756 in trade accounts
receivable reflecting a slower collection rate compared to the previous fiscal
year end (as of July 27, 2000 approximately 91.5% or $1,494,143 of the May 31,
2000 trade receivables balance had been collected), 2) a $1,697 net increase in
unbilled accounts receivable (current plus noncurrent) primarily resulting from
a $41,329 increase in reimbursable indirect rate variances for the current
fiscal year, a net $65,446 increase in month end accrued sales on accrued direct
labor, the billing and payment of $51,789 previously unbilled contract fee
retention, and a $53,289 decrease for a cost overrun, due to indirect rate
variances from prior years, on a contract that expired on December 27, 1999, and
3) a $7,050 decrease in other accounts receivable. Prepaid expenses increased
$3,547. Fixed assets, net of accumulated depreciation and amortization increased
$133,615 reflecting fixed asset purchases of $484,607 (mainly nonhuman primate
enclosures, lab equipment, and facility improvements), reduced by a $53,351
fully depreciated equipment write off and disposal during fiscal year 2000
offset by
12
<PAGE>
depreciation and amortization of $350,992 reduced by the $53,351 fully
depreciated equipment write off. Cash value of officer's split dollar life
insurance policies increased $38,105. Other noncurrent assets increased $20,000
reflecting a deposit on the fabrication of a new chimpanzee enclosure.
The above increase is partially offset by 1) a decrease in loans to officers of
$32,906 due to payments made during this fiscal year, 2) a deferred income tax
decrease of $63,000 primarily as a result of utilizing a portion of the federal
income tax loss carryforward, and 3) a $61,755 decrease to inventories
reflecting increased sales and reduced production of veterinary products during
fiscal year 2000. The balance of the increase was due to miscellaneous factors.
Liabilities
In the twelve months of operations in fiscal year 2000, total liabilities
increased $630,217 from $1,127,598 at May 31, 1999 to $1,757,815 at May 31,
2000. This increase is primarily attributable to an increase in borrowings under
line-of-credit of $412,901 reflecting the slow collection of trade accounts
receivable, an increase in long-term debt of $190,954 due to entering into notes
payable of $269,661 for nonhuman primate housing units and a back up generator
offset by $78,707 in payments on capital leases and notes payable, and a $70,581
increase to other accrued liabilities primarily due to a receipt of an errant
payment from NIH ($77,243) which the Company will return.
The above increase is partially offset by 1) a decrease in accrued compensation
and related costs of $5,236, 2) a decrease in accrued income taxes of $24,281,
and 3) a decrease in accounts payable of $14,702. The balance of the increase
was due to miscellaneous factors.
Stockholders' Equity
In the twelve months of operation in fiscal year 2000, stockholders' equity
increased $72,123 primarily due to the Company realizing $97,246 of net income
offset by the cash dividend totaling $17,360 to shareholders of record as of
September 7, 1999 paid by the Company during the second quarter of this fiscal
year. The balance of the increase was due to miscellaneous factors.
Changes in Financial Position - 1999 versus 1998
------------------------------------------------
Assets
In the twelve months of operation in fiscal year 1999, total assets increased
$346,864 from $4,276,870 at May 31, 1998 to $4,623,734 at May 31, 1999. 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 fiscal year
1998, 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 fiscal year 1999, offset by $84,755 of prior year
indirect rate variances billed and paid during fiscal year 1999, a $34,762
increase in unbilled direct costs billed in fiscal year 2000 due to a longer
accrual period at the end of fiscal year 1999, 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. Cash value of
officers' split dollar life insurance policies increased $46,423. Inventories
increased $242,489 as the Company continued to produce
13
<PAGE>
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) a
deferred income tax asset decrease of $27,800 primarily as a result of utilizing
a portion of the federal income tax loss carryforward during fiscal year 1999,
3) a loans to officers decrease of $57,094 due to payments during fiscal year
1999 and 4) a $38,148 decrease in other noncurrent assets reflecting the
delivery and payment on a new freeze drying equipment order.
Liabilities
In the twelve months of operation in fiscal year 1999, total liabilities
increased $8,989 from $1,118,609 at May 31, 1998 to $1,127,598 at May 31, 1999.
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 fiscal year 1999 compared to
fiscal year 1998 and a larger management bonus accrual in fiscal year 1999
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.
Results of Operations - 2000 versus 1999
-----------------------------------------
Revenues
Contract revenues increased by 4.8% or $526,013 to $11,543,994 compared to
$11,017,981 for fiscal year 1999. This increase was primarily due to increased
government contract activity including two one-time purchases totaling
approximately $210,000 during the second quarter of fiscal year 2000 and
$103,000 in costs incurred related to two toxicity studies which began during
the third and fourth quarter of fiscal year 2000 offset by a decrease in
commercial contracts. Product sales increased to $119,638 for fiscal year 2000
compared to $66,683 for fiscal year 1999.
Operating Expenses
Contract operating expenses increased 8.4% or $701,335 compared to fiscal year
1999 primarily due to increased government contract activity (including the two
one-time purchases totaling approximately $210,000 and the $103,000 toxicity
studies mentioned above), an increase in overhead expenses supporting the equine
production facility of approximately $109,000 compared to fiscal year 1999,
offset by the decrease in commercial contracts. Cost of goods sold increased to
$99,708 from $55,238 in fiscal year 1999. This increase was primarily due to the
increase in units sold during this fiscal year and the expensing of 23 free
doses of Eqstend. Research and development (R&D) expenses decreased to $166,943
compared to $203,167 in fiscal year 1999. This decrease is primarily due to the
temporary reassignment of R&D staff (during the third and fourth quarter of
fiscal year 2000) to prepare
14
<PAGE>
Small Business Innovative Research (SBIR) grant proposals to possibly provide
additional funding for the research associated with the high throughput assay
system currently being developed by the Company's Department of Discovery
Research. General and administrative expenses increased 8.4% compared to fiscal
year 1999 primarily due to inflationary increases in several items of expense
plus the increased costs associated with the preparation of the SBIR grant
proposals during the third quarter of fiscal year 2000 compared to fiscal year
1999, offset by a decrease in legal expenses during this year compared to fiscal
year 1999. Total operating expenses increased 8.3% due to the above.
Operating Income
Operating income decreased to $235,106 for fiscal year 2000 compared to $529,128
for fiscal year 1999. The decrease is primarily due to several factors: 1) the
increase in contract expenses exceeding the increase in related contract
revenues resulting in a decrease in the gross margin percentage on contracts
this fiscal year, including the increase in overhead expenses supporting the
equine production facility of approximately $109,000 as mentioned above, 2) a
$53,289 indirect cost overrun on a contract that ended on December 27, 1999 and
3) $82,920 increased funding during the fiscal year 1999 to cover an indirect
cost overrun for three expired contracts from 1995 and 1998 without a similar
item in fiscal year 2000.
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 provision of $63,000 for the year ended May 31, 2000 as a result of using
previous net operating loss carryforwards. The Company made a provision for
state income tax which is estimated at $22,000. State income tax expense is
reimbursable under government contracting regulations.
Earnings Per Share (EPS)
Options to purchase 29,502 shares of common stock at prices ranging from $2.8875
per share to $3.375 per share were outstanding at May 31, 2000 but were not
included in the computation of diluted EPS because the option exercise prices
were greater than the market price of the common shares. 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 option exercise prices were greater than
the market price of the common shares.
Results of Operations - 1999 versus 1998
-----------------------------------------
Revenues
Contract revenues increased by 11.9% or $1,169,972 to $11,017,981 at May 31,
1999 compared to $9,848,009 at May 31, 1998 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
during fiscal year 1999). 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 with Lyphomune(R)
which resulted in a net
15
<PAGE>
decrease in sales.
Operating Expenses
Contract expenses increased 8.4% or $644,370 compared to fiscal year 1998
primarily due to an increase in contract and SBIR activity. This increase was
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 was 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 fiscal year 1998. This increase was 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 fiscal year 1998. The increase was primarily
due to inflationary increases in several items of expense in fiscal year 1999.
This increase was 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 fiscal year 1998.
The increase was 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 fiscal year 1998; 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 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 prices
were 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.
16
<PAGE>
Inflation and Price Changes for Fiscal Year
-------------------------------------------
For fiscal years 1998, 1999, and 2000 neither inflation nor price changes had
any material effect on net sales, revenues, or income from operations.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are listed in the Table of Contents on page 30 as Financial
Statements filed as part of this FORM 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is information with respect to the present directors, and
executive officers.
<TABLE>
<CAPTION>
NAME DIRECTOR SINCE AGE POSITIONS
---- -------------- --- ---------
<S> <C> <C> <C>
John C. Landon, Ph.D. 1986 63 Chairman of the Board; President & Chief Executive Officer; Director
J. Thomas August, M.D. 1982 72 Director; Consultant; Scientific Advisor
Charles C. Francisco 1991 62 Director; Member of Compensation Committee; Member of Audit Committee
Charles F. Gauvin 1992 44 Director; Member of Compensation Committee; Member of Audit Committee
Michael P. O'Flaherty 62 Secretary; Chief Operating Officer
David A. Newcomer 39 Chief Financial Officer
Leanne DeNenno 46 Vice President
Richard P. Bradbury, DVM 65 Vice President
Jerry R. Reel, Ph.D. 62 Vice President
</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 is also the President, Chief Executive Officer, Treasurer and a Director
of the Company's subsidiary. 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
17
<PAGE>
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 and former
Director in the Department of Pharmacology and Molecular Sciences at the Johns
Hopkins University School of Medicine, Baltimore, Maryland and has served ion
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, President and a Director 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 (since 1993) 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 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 the Company since its inception. 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.
18
<PAGE>
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.
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 $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Name and Principal Salary Bonus Compensation
Position Year ($) ($) ($) /1,2
-------------------------- ------ ------- ------ ------------
<S> <C> <C> <C> <C>
John C. Landon 2000 275,000 30,000 32,723
----
CEO, President, Chairman 1999 275,000 40,000 32,723
----
of the Board 1998 275,000 32,723
----
Michael P. O'Flaherty 2000 134,593 35,099 10,593
----
Chief Operating Officer, 1999 127,286 44,292 10,593
----
Secretary 1998 122,085 36,444 10,593
----
Jerry R. Reel 2000 121,402 5,550
----
Vice President 1999 120,652 3,789
----
1998 111,282 3,926
----
Richard P. Bradbury 2000 109,676 6,078
----
Vice President 1999 106,426 4,730
----
1998 97,130 8,372
----
David A. Newcomer 2000 91,726 19,378 4,500
----
Chief Financial Officer 1999 88,600 26,292 4,500
----
1998 83,412 19,430 4,500
-----
</TABLE>
1/ Other Annual Compensation for the CEO for the years 2000, 1999 and 1998
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 2000, 1999 and 1998 represents premiums
for a $250,000 Split Dollar Life Insurance Policy.
19
<PAGE>
Aggregated Stock Option Exercised in Last Fiscal Year, and FY-End Option Value
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at FY-End (#) at FY-End ($)/3
on Exercise Realized
Name (#) ($) Exercisable Exercisable
------------------------ ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C>
John C. Landon 1,667 /1 802
CEO, President, 23,500 /1,2 N/A
Chairman of the Board
Michael P. O'Flaherty 5,834 14,583 10,001 /1 10,082
Chief Operating Officer, 1,667 /1,2 N/A
Secretary
Jerry R. Reel 1,167 /1 628
Vice President 667 /1,2 N/A
Richard P. Bradbury 834 2,154 834 /1 432
Vice President 667 /1,2 N/A
David A. Newcomer 667 1,723 1,334 /1 547
Chief Financial Officer 667 /1,2 N/A
</TABLE>
1/ All options reported in the table are fully exercisable.
2/ Options are out-of-the-money.
3/ Represents the difference between the exercise price and the market value.
Compensation of Directors
-------------------------
During fiscal year 2000, the Company paid to Directors:
<TABLE>
<CAPTION>
Attendance of
Board Meetings Travel to
Directors and Consultation Board Meetings
Fees ($) Fees ($) Expenses ($)
--------- --------------- --------------
<S> <C> <C> <C>
J. Thomas August, M.D. 7,000 12,500 163
Charles C. Francisco 7,000 2,500 583
Charles F. Gauvin 7,000 2,500 2,229
</TABLE>
Messrs. Francisco, August and Gauvin have agreements with the Company extending
through the term of their election. For fiscal year 2000,June 1, 1999 through
August 31, 1999, the agreements for Messrs. Francisco, August and Gauvin were
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 received $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 2000, 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 BIOQUAL, Inc. 1988 Stock
Option Plan and the BIOQUAL, Inc. 1998 Stock Option Plan as well as future
options to be offered pursuant to the Plans.
As of May 31, 2000, 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 2.8% $2.26875 7/29/96
Director, 23,500 39.1% $ 2.8875 2/24/99
Chairman
Michael P. O'Flaherty Chief Operating 834 1.4% $ 1.80 8/14/92
Officer, 1,667 2.8% $ 3.375 6/5/95
Secretary 1,667 2.8% $ 2.52 5/30/97
7,500 12.6% $ 1.5625 12/31/98
Richard Bradbury Vice President 334 .5% $ 1.80 8/14/92
667 1.1% $ 3.375 6/5/95
500 .8% $ 2.525 5/30/97
Leanne DeNenno Vice President 334 .5% $ 1.80 8/14/92
667 1.1% $ 3.375 6/5/95
500 .8% $ 2.525 5/30/97
Jerry Reel Vice President 500 .8% $ 1.80 8/14/92
667 1.1% $ 3.375 6/5/95
667 1.1% $ 2.52 5/30/97
David A. Newcomer Chief Financial 334 .5% $ 1.80 8/14/92
Officer 667 1.1% $ 3.375 6/5/95
1,000 1.6% $ 2.52 5/30/97
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Charles C. Francisco Director 1,667 2.8% $ .54 8/14/92
1,667 2.8% $ 2.0625 7/29/96
500 .8% $ 2.625 2/24/99
Charles F. Gauvin Director 1,667 2.8% $ 1.80 8/14/92
1,667 2.8% $ 2.0625 7/29/96
500 .8% $ 2.625 2/24/99
J. Thomas August Director 1,667 2.8% $ 2.0625 7/29/96
All officers and 500 .8% $ 2.8875 2/24/99
directors as a group 53,507 88.9% $ .54 to 8/14/92 to
(9 persons) $ 3.375 2/24/99
</TABLE>
A total of 60,177 options were granted and outstanding at May 31, 2000. During
fiscal year 2000, options for 13,173 shares were exercised by employees of which
8,169 shares were exercised by officers. All options are exercisable. Of the
options granted and outstanding, 25,343 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 28,833 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. 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.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the 1934 Act requires the Company's directors, executive
officers and persons who own more than ten percent of the Common Stock of the
Company to file with the Securities and Exchange Commission ("Commission")
initial reports of beneficial ownership and reports of changes in beneficial
ownership of common shares of the Company. Directors, officers, and greater
than ten percent shareholders are required by the regulations of the Commission
to furnish the Company with copies of all Section 16(a) reports they file. To
the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended May 31, 2000, all Form 3, Form 4, and
Form 5 filing requirements were met, except a Form 4 was filed late for Michael
O'Flaherty for the months of October 1999 and February 2000, and David Newcomer,
Richard Bradbury, and Leanne DeNenno for the month of February, 2000. Each of
the reports were for the exercise, for cash, of options granted under the 1988
stock option plan.
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 27, 2000, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.
22
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (1)
---------------- ---------------- --------------
<S> <C> <C>
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 153,049 (2),(3) 16.91
S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL 33480 88,563 10.06
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 179,006 (4) 20.29
David H. Bishop
100 W. 57th Street
New York, New York 10019 60,509 (5) 6.88
</TABLE>
(1) Assumes the exercise by such person or persons of the currently
exercisable options and does not give effect to any shares issuable
upon exercise by any other person or persons of options.
(2) Includes 3,178 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
2,167 shares.
(5) 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 27, 2000, 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.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (1)
---------------- ------------------- --------------
<S> <C> <C>
Dr. John C. Landon
8213 Raymond Lane
Potomac, MD 20854 153,049 (2),(3) 16.91
Charles C. Francisco
96 Old Littleton Road
Harvard, MA 01451 3,834 (4) .43
Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD 21210 179,006 (5) 20.29
Charles F. Gauvin
97-Cobbs Bridge Road
New Gloucester, ME 04260 3,834 (4) .43
</TABLE>
23
<PAGE>
Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA 22075 18,218 (6) 2.04
Dr. Jerry R. Reel
302 Watkins Pond Blvd.
Rockville, MD 20850 1,884 (7) .21
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
All executive officers
and directors (8, of
whom all beneficially
own shares) as a group 364,928 (10) 39.15
(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 3,178 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
11,668 shares.
(7) Assumes the exercise of currently exercisable options to purchase
1,834 shares
(8) Assumes the exercise of currently exercisable options to purchase
1,501 shares.
(9) Assumes the exercise of currently exercisable options to purchase
2,001 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,
24
<PAGE>
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 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 purchased, on a quarterly basis for four quarters, 9,000
shares and, for one quarter, 2,039 shares, of Company stock from Dr. Landon at
market value. Dr. Landon made a cash payment of $20,000 on accrued interest at
the end of the sixth quarter. Dr. Landon paid the remaining balance of $753 on
accrued interest on June 23, 2000. During fiscal year 1999, Dr. Landon made
repayments totaling $57,094. During fiscal year 2000, Dr. Landon repaid the
balance ($32,906) of the note. The largest amount owed by Dr. Landon during the
fiscal year ended May 31, 2000 in respect to his loan facilities was $32,906,
excluding accrued interest amounting to $753. There was no addition to the loan
during this fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Table of Contents to Financial Statements, on page 30.
(b) The Registrant filed no reports on FORM 8-K during the final
quarter of its fiscal year ended May 31, 2000.
(c) Exhibits filed (Exhibits incorporated by reference listed
---------------------------------------------------------
separately.)
-----------
(21) List of Subsidiaries
Exhibits incorporated by reference to the Company's FORM 10-KSB for
-------------------------------------------------------------------
the fiscal year ended May 31, 2000 (filed with the Company's FORM
-----------------------------------------------------------------
10-QSB for the quarter ended February 29, 2000).
-----------------------------------------------
(10) Government Contracts.
---------------------
1. Title: Care and Housing of Hepatitis Research
Animals.
Institute: National Institute of Allergy and Infectious
Diseases
Dates Funded: 12/28/99 - 12/27/06
2. Title: Care and Housing of AIDS Research Animals.
Institute: National Institute of Allergy and Infectious
Diseases
Dates Funded: 2/1/00 - 1/31/07
25
<PAGE>
3. Title: Facility for Animals Used in Infectious
Disease Research.
Institute: National Institute of Allergy and Infectious
Diseases
Dates Funded: 3/1/00 - 2/28/07
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, 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, 1992.
-------------------------------------------
(10) (a) Leases.
-------
1. Medical Center Drive Facility
2. Research Boulevard Facility
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
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
26
<PAGE>
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, 1996.
--------------------------------------
(10)(a) Leases.
-------
1. Amendment to Lease Agreement - Medical Center Drive
Facility
2. Second Amendment to Lease Agreement - Research
Boulevard Facility
27
<PAGE>
(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.
28
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned thereunto duly authorized on August 25, 2000.
BIOQUAL, INC.
/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) 8/25/00
-------------------------
John C. Landon, Ph.D.
/s/ J. Thomas August Director 8/25/00
-------------------------
J. Thomas August M.D.
/s/ Charles C. Francisco Director 8/25/00
-------------------------
Charles C. Francisco
/s/ Charles F. Gauvin Director 8/25/00
-------------------------
Charles F. Gauvin
/s/ Michael P. O'Flaherty Chief Operating Officer
-------------------------
Michael P. O'Flaherty and Secretary 8/25/00
/s/ David A. Newcomer Chief Financial Officer 8/25/00
-------------------------
David A. Newcomer
29
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
-----------------------------------------
<TABLE>
<S> <C>
Independent Auditors' Report......................................... 31
Financial Statements:
Consolidated Balance Sheets, May 31, 2000 and 1999.............. 32
Consolidated Statements of Operations for each of the
three years in the period ended May 31, 2000................... 33
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended May 31, 2000............ 34
Consolidated Statements of Cash Flows for each of the three
years in the period ended May 31, 2000......................... 35
Notes to Financial Statements................................... 36
</TABLE>
All financial statement schedules are omitted because they are not
applicable or required.
30
<PAGE>
Deloitte & Touche LLP
2 Hopkins Plaza
Baltimore, Maryland 21201-2983
Telephone: (410) 576-6700
Facsimile: (410) 837-0510
ITT Telex: 4995614
INDEPENDENT AUDITORS' REPORT
BIOQUAL, Inc.:
We have audited the accompanying consolidated balance sheets of BIOQUAL, Inc.
and Subsidiary (formerly Diagnon Corporation and Subsidiaries) as of May 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended May 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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 BIOQUAL, Inc. and Subsidiary at May
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended May 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
August 4, 2000
31
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS, MAY 31, 2000 AND 1999
--------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 72,099 $ 68,768
Accounts receivable:
Trade 1,633,110 966,354
Unbilled - current 317,296 262,774
Other 19,817 26,867
Prepaid expenses 95,069 91,522
Inventories 225,841 287,596
Loans to Officers - current 32,906
Deferred income taxes - current 116,800 77,300
----------- -----------
Total current assets 2,480,032 1,814,087
----------- -----------
FIXED ASSETS:
Leasehold improvements 1,007,976 832,264
Furniture, fixtures and equipment 3,545,423 3,289,879
----------- -----------
Total 4,553,399 4,122,143
Less accumulated depreciation and amortization 2,946,699 2,649,058
----------- -----------
Fixed assets, net 1,606,700 1,473,085
----------- -----------
DEFERRED INCOME TAXES - NONCURRENT 497,900 600,400
UNBILLED ACCOUNTS RECEIVABLE - NONCURRENT 440,687 493,512
OTHER NONCURRENT ASSETS 20,000
CASH VALUE OF OFFICERS' LIFE INSURANCE POLICIES 280,755 242,650
----------- -----------
TOTAL $ 5,326,074 $ 4,623,734
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES:
Borrowings under line of credit $ 688,183 $ 275,282
Current maturities of long-term debt 123,114 66,093
Accounts payable 201,254 215,956
Accrued compensation and related costs 469,361 474,597
Accrued income taxes 24,281
Other accrued liabilities 85,759 15,178
----------- -----------
Total current liabilities 1,567,671 1,071,387
LONG-TERM DEBT 190,144 56,211
----------- -----------
Total liabilities 1,757,815 1,127,598
----------- -----------
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 16,004 16,004
shares issued; May 31, 2000, 880,091 shares, May 31, 1999, 872,672 shares outstanding
Additional paid-in capital 7,475,035 7,475,035
Accumulated deficit (3,230,136) (3,310,022)
----------- -----------
Total 4,260,903 4,181,017
Less - treasury stock May 31, 2000, 720,317 shares, May 31, 1999, 727,736 shares, at cost (692,644) (684,881)
----------- -----------
Total stockholders' equity 3,568,259 3,496,136
----------- -----------
TOTAL $ 5,326,074 $ 4,623,734
=========== ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES AND SALES:
Contract revenues $11,543,994 $11,017,981 $9,848,009
Product sales 119,638 66,683 76,377
----------- ----------- ----------
Total Revenues and Sales 11,663,632 11,084,664 9,924,386
----------- ----------- ----------
OPERATING EXPENSES:
Contract 9,055,392 8,354,057 7,709,687
Cost of goods sold 99,708 55,238 108,984
Research and development 166,943 203,167 144,123
General and administrative 2,106,483 1,943,074 1,886,038
----------- ----------- ----------
Total Operating Expenses 11,428,526 10,555,536 9,848,832
----------- ----------- ----------
OPERATING INCOME 235,106 529,128 75,554
INTEREST INCOME 4,253 6,578 9,708
INTEREST EXPENSE (57,113) (53,018) (57,239)
----------- ----------- ----------
INCOME BEFORE INCOME TAX 182,246 482,688 28,023
PROVISION FOR INCOME TAX (85,000) (87,800) (177,400)
----------- ----------- ----------
NET INCOME (LOSS) $ 97,246 $ 394,888 $ (149,377)
=========== =========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 0.11 $ 0.44 $ (0.17)
=========== =========== ==========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.11 $ 0.44 $ (0.17)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
FOR BASIC EARNINGS PER SHARE 872,693 890,626 899,584
EFFECT OF DILUTIVE SECURITIES -
OPTIONS 8,866 8,818
----------- ----------- ----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING FOR DILUTIVE
EARNINGS PER SHARE 881,559 899,444 899,584
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------
<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>
BALANCE, JUNE 1, 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
STOCK RECEIVED FOR
OFFICER LOAN
REPAYMENT (11,039) (32,906) (32,906)
DIVIDEND PAID (17,360) (17,360)
STOCK GIFT TO
EMPLOYEES 4,285 9,391 9,391
STOCK AWARD TO
EMPLOYEE 1,000 2,250 2,250
EXERCISE OF STOCK
OPTIONS 13,173 13,502 13,502
NET INCOME 97,246 97,246
------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 2000 1,600,408 $ 16,004 $7,475,035 $(3,230,136) (720,317) $(692,644) $3,568,259
========== ======== ========== =========== ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 97,246 $ 394,888 $(149,377)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 350,992 321,111 293,728
Deferred income taxes 63,000 27,800 141,900
(Increase) decrease in accounts receivable (661,403) (160,627) 305,333
(Increase) decrease in prepaid expenses (3,547) (36,633) 21,555
Decrease (increase) in inventories 61,755 (242,489) (146)
Increase in other assets (58,105) (8,275) (29,826)
Increase in accounts payable and accrued expenses 50,642 75,125 74,242
Common stock gifted and awarded to employees 11,641
(Decrease) increase in income taxes payable (24,281) 11,372 7,366
--------- --------- ---------
Total Adjustments (209,306) (12,616) 814,152
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (112,060) 382,272 664,775
--------- --------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Net capital expenditures (484,607) (301,807) (201,761)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (484,607) (301,807) (201,761)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line-of-credit agreement 412,901 62,736 (323,574)
Principal payments under long-term debt (78,706) (140,244) (135,837)
Net proceeds from long-term debt 269,661
Net proceeds from exercise of stock options 13,502 81
Dividends paid (17,360)
Net payments for fractional shares as a result of
6 to 1 share reverse stock split (511)
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 599,998 (77,427) (459,922)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,331 3,038 3,092
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 68,768 65,730 62,638
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 72,099 $ 68,768 $ 65,730
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 55,707 $ 52,710 $ 57,134
========= ========= =========
Income taxes $ 58,725 $ 48,936 $ 17,900
========= ========= =========
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 $ 32,906 $ 57,094
========= =========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
BIOQUAL, INC. AND SUBSIDIARY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
-------------
The accompanying consolidated financial statements include the accounts of
BIOQUAL, Inc. ("BIOQUAL") and its wholly - owned subsidiary Enhanced
Therapeutics, Inc. (collectively the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
Merger and Name Change
----------------------
On December 31, 1999, Diagnon Corporation ("Diagnon") changed its name to
BIOQUAL, Inc. The name change was effected as a result of the merger of Diagnon
and its wholly - owned subsidiary, BIOQUAL, Inc., with Diagnon being the
surviving corporation. In the merger Diagnon adopted the name BIOQUAL, Inc. as
the name of the surviving entity.
Segment Information
-------------------
During fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131 Disclosures About Segments of and Enterprise and
Related Information. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about the Company's operating segments. The Company 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. 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.
36
<PAGE>
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.
Revenue Recognition
-------------------
Contract research revenue is generally earned based on CPFF arrangements and is
recognized as costs are incurred. The Company is required to implement Staff
Accounting Bulletin (SAB) No. 101 in the fourth quarter of fiscal year 2001.
This SAB provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. The Company has not completed its assessment of
the impact of SAB No. 101 on its financial statements.
Earnings (Loss) Per Share
-------------------------
The Company uses Statement of Financial Accounting Standard No. 128 ("SFAS 128")
"Earnings Per Share" for the calculation of basic and diluted earnings per
share.
Cash and Cash Equivalents
-------------------------
The Company considers cash equivalents to include short-term investments which
have a maturity of 90 days or less at the date of purchase.
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.
Cash Dividend
-------------
During the second quarter of fiscal year 2000, the Company paid a cash dividend
totaling $17,360 to shareholders of record as of September 7, 1999.
Stock Gifts and Awards to Employees
-----------------------------------
During fiscal year 2000, the Company gifted and awarded a total of 5,285 shares
of the Company's common stock to certain employees. The total cost of those
shares was $11,641.
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 plans. Had compensation
costs for the plans been determined based on fair value at the grant date under
the plans 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, 2000, 1999 and 1998.
37
<PAGE>
The Company has granted 54,176 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 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 2001
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 60,177 in 2000, 73,684 in 1999,
and 72,351 in 1998.
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:
2000 1999
---- ----
Expected volatility 82.85% 36.0%
Risk-free interest rate 6.54%-6.29% 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, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
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 73,684 $ 2.19 72,351 $ 2.17 73,018 $ 2.16
Granted 834 2.38 34,000 2.52
Forfeited (1,168) 1.94 (32,500) 2.50 (667) .81
Exercised (13,173) 1.02 (167) .48 _______
-------- -------
Outstanding at end of year 60,177 $ 2.46 73,684 $ 2.19 72,351 $ 2.17
======= ======= ======
Options exercisable at end of year 60,177 $ 2.46 73,684 $ 2.19 72,351 $ 2.17
======= ======= ======
Weighted average fair value of
options granted during year $ 1.28 $ 0.88
</TABLE>
38
<PAGE>
Outstanding and Exercisable
--------------------------------
Weighted Weighted
Remaining Average
Contractual Exercise
Options Life (years) Price
-------- ------------ --------
Range of exercise price
.54 to 1.80 14,671 5.88 $1.51
2.0625 to 2.625 16,004 5.75 2.37
2.8875 to 3.375 29,502 3.88 2.98
------
60,177 4.87 $2.46
======
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, 2000, there were $688,183 of borrowings under this
line of credit. During fiscal year 2000 the maximum amount borrowed was
$926,520, the average balance outstanding was $521,926, and the average interest
rate was 8.80%. 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, 2000.
4. LONG-TERM DEBT
Notes payable
-------------
In March 2000, the Company entered into a $166,376 (80% of the original purchase
price) term note payable with a bank to finance the purchase of non-human
primate housing units. The term is three years and bears interest at a rate of
9.13% per annum. Maturities under this note are as follows: $51,637 in 2001,
$56,625 in 2002 and $45,500 in 2003.
In May 2000, the Company entered into a $103,285 (80% of the original purchase
price) term note payable with a bank to finance the purchase and installation of
a back-up generator. The term is three years and bears interest at a rate of
9.15% per annum. Maturities under this note are as follows: $31,300 in 2001,
$34,331 in 2002 and $37,654 in 2003.
The term notes above are collateralized by the subject equipment having net book
value of $326,125 at May 31, 2000.
Capital leases
--------------
2000 1999
---- ----
Capitalized Lease Obligations $56,211 $122,304
Less Current Maturities 40,177 66,093
------- --------
Long-Term $16,034 $ 56,211
======= ========
39
<PAGE>
Future annual minimum payments under the capital leases as of May 31, 2000,
were:
2001 $43,101
2002 16,435
-------
59,536
Less: Amount representing interest 3,325
-------
Present value of minimum lease payments $56,211
=======
The Company leases equipment under various capital leases which expire in fiscal
years 2001 and 2002. Property held under the capital leases at May 31, 2000 and
1999 consisted of the following:
2000 1999
---- ----
Equipment $589,402 $589,402
Less accumulated amortization 268,866 209,926
-------- --------
$320,536 $379,476
======== ========
The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment. Amortization expense amounted to $58,940, $58,940 and
$54,347 in 2000, 1999 and 1998, 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, 2000 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 income tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred tax assets and liabilities are measured using the enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is computed as the income tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
The deferred tax expense in 1998 resulted from management's assessment 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:
2000 1999 1998
------- ------- --------
Current tax expense $22,000 $60,000 $ 35,500
Deferred tax expense 63,000 27,800 141,900
------- ------- --------
$85,000 $87,800 $177,400
======= ======= ========
40
<PAGE>
A reconciliation of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:
2000 1999 1998
---- ---- ----
Federal taxes at statutory
rate $ 62,000 $ 164,500 $ 9,500
State taxes at statutory rate 14,500 39,600 23,400
Executive life insurance
premiums 8,500 3,000 3,000
Decrease (increase) in
previously recognized tax
loss carryforwards, net of
other adjustments to deferred
taxes - (113,000) 141,900
Other, net - (6,300) (1,400)
---------- ---------- ----------
$ 85,000 $ 177,400 $ 177,400
========== ========== ==========
The components of deferred income taxes are as follows:
May 31, May 31, May 31,
2000 1999 1998
---------- ---------- ----------
Financial statement accruals $ 46,735 $ 48,735 $ 45,553
Different useful lives for
depreciation of fixed assets
for tax purposes (158,000) (148,000) (46,000)
Research & development costs
deferred for tax purposes 250,000 218,000 164,000
Tax loss carryforward 1,185,000 1,268,000 1,443,000
Less valuation allowance (709,035) (709,035) (901,053)
---------- ---------- ----------
Total deferred income taxes $ 614,700 $ 677,700 $ 705,500
========== ========== ==========
As of May 31, 2000, the Company has cumulative tax operating loss carryforwards
of approximately $3,400,000 available to reduce future federal taxable income
and approximately $7,000,000 available to reduce future state taxable income.
The operating loss carryforwards expire in fiscal years 2001 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 and 1998, the Company subleased a part of its premises. As
of May 31, 2000, 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:
2001 $1,628,000
2002 1,598,000
2003 13,000
2004 1,500
2005 1,500
41
<PAGE>
Facilities leases contain options for five-year extensions.
Rental expense was approximately $1,579,000 net of $-0- sublease income,
$1,449,000, net of $12,000 of sublease income and $1,346,000, net of $11,000 of
sublease income, for the years ended May 31, 2000, 1999 and 1998, respectively.
7. RELATED PARTIES
The following schedule presents information regarding loans to officers for the
three year period ended May 31, 2000.
Balance at Balance
Beginning of at End of
Name of Person Period Additions Repayments Period
-------------- ------------ --------- ---------- ---------
Year Ended May 31, 2000:
President $32,906 $-0- $32,906 $ -0-
Year Ended May 31, 1999:
President 90,000 -0- 57,094 32,906
Year Ended May 31, 1998:
President 90,000 -0- -0- 90,000
The loan to the President bore 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. During the
2000 and 1999 fiscal years, the Company purchased shares valued at $32,906 and
$57,094, respectively, to complete the repayment of the loan in full.
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 12, 2000, the Board of Directors declared a dividend of $0.03 a share
for shareholders of record on September 11, 2000, payable on September 27, 2000.
This is the second dividend declared by the Company.
42
<PAGE>
EXHIBITS
43
