-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qh8okgd7ZiaFTz0SPe//Z9cDiVXUNEBGIOSq4dcP6LCMTOHlJNcuvnsZTYLVietT T4iDksz3sDrLu0u0Sr9j7A== 0000351506-96-000006.txt : 19960924 0000351506-96-000006.hdr.sgml : 19960924 ACCESSION NUMBER: 0000351506-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMAKINETICS LABORATORIES INC CENTRAL INDEX KEY: 0000351506 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 521067519 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11580 FILM NUMBER: 96633193 BUSINESS ADDRESS: STREET 1: 302 W FAYETTE ST CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4103854500 MAIL ADDRESS: STREET 1: 302 W FAYETTE STREET CITY: BALTIMORE STATE: MD ZIP: 21201 10-K 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended JUNE 30, 1996 Commission file number 0-11580 ------------- ------- PHARMAKINETICS LABORATORIES, INC. --------------------------------- (Exact Name of Registrant as Specified in its Charter) MARYLAND 52-1067519 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 302 WEST FAYETTE STREET BALTIMORE, MARYLAND 21201 ------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code (410) 385-4500 ------------- Securities registered pursuant to Section 12(b) of the Act: NONE (Title of each class) Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K [ ]. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. Yes _X_ No ___ As of August 23, 1996, 12,195,891 shares of Common Stock of PharmaKinetics Laboratories, Inc. were outstanding and the aggregate market value of Common Stock (based upon the average bid and asked prices as reported on the OTC Bulletin Board on that date) held by non- affiliates was $6,850,599. Portions of the registrant's proxy statement for its 1996 annual meeting of stockholders are incorporated into Part III of this report. 2 PART I ITEM 1. BUSINESS PharmaKinetics Laboratories, Inc. (the "Company") is a contract research organization ("CRO") serving the pharmaceutical industry. The Company performs biopharmaceutic services including clinical evaluation and analytical chemistry services with respect to prescription and non- prescription products. Its principal markets are in the United States and Canada. New pharmaceutical products must undergo extensive testing and regulatory review to determine their relative safety and effectiveness. Companies seeking approval for these products are responsible for performing and analyzing the results of clinical and analytical tests (also referred to as studies or trials). As a result of the Company's history of serving the generic drug industry, a significant portion of its testing has involved bioavailability and bioequivalency studies of pharmaceutical products. In recent years, pharmaceutical companies have begun to outsource clinical and analytical research to CROs. The Company believes world- wide research being outsourced annually to CROs is approximately $2 to 3 billion. The Company believes that certain industry trends have led pharmaceutical companies to increase outsourcing of research for prescription and non-prescription products. These trends include the increased emphasis on finding new proprietary products, getting these products to market as expeditiously as possible, and the desire to contain costs. On May 23, 1996, the United States Bankruptcy Court in the District of Maryland approved the Company's Application for Final Decree, thus closing the bankruptcy case that commenced in 1990. BIOPHARMACEUTICS Clinical Evaluation Services The Company offers complete services for the design, management, and performance of clinical evaluation studies - human trials on a limited scale to assess safety and to test the efficacy of pharmaceutical products. A major portion of the Company's clinical operations involve the testing of generic pharmaceutical products to determine bioavailability and bioequivalency. Bioavailability testing determines the rate and extent to which an active drug ingredient is absorbed from a drug product and becomes available at the site of drug action in the human body. Typically, the determination of bioavailability is performed through the collection and laboratory analysis of blood, urine or other specimens. However, for certain drug products which are not absorbed or are minimally absorbed, for example ointments and creams, the determination of bioavailability must be performed using special procedures and equipment. Drug manufacturers are required to include information obtained from human testing in detailed laboratory and clinical studies as part of applications for approval to market certain new drug products, submitted -1- 3 to regulatory authorities, such as the United States Food and Drug Administration ("FDA"). Bioavailability data is also used to evaluate the adequacy of proposed labeling recommendations regarding dosage and administration of a drug product, to define its profile in order to evaluate product reformulations or changes in recommended dosage strength or dosage regimens, and to evaluate and substantiate controlled release claims. Bioequivalency testing compares the bioavailability of similar generic and brand name drugs. The FDA has established bioequivalency requirements for certain drug products or classes of drug products which are intended to be interchangeable. As a result, bioequivalency data is required in the case of new formulations of certain drug products developed by generic pharmaceutical manufacturers for marketing upon expiration of patents on brand name drugs previously found to be safe and effective. Bioequivalency testing is also required for certain drug products in the case of new formulations or new dosage forms intended to be used by the manufacturer which obtained the original approval. The clinical portions of bioavailability and bioequivalency studies are conducted pursuant to testing plans, called protocols, which are designed to reflect the specific characteristics of the active drug ingredients being tested. The Company employs experts in medicine, pharmacology, analytical chemistry, statistical analysis and data processing to design, evaluate and execute protocols according to current scientific standards and governmental regulatory requirements. Protocols for the Company's clinical studies are either written by the Company's staff or provided by the client. Once developed, a protocol is submitted for approval to the Company's Institutional Review Board, which independently evaluates and, if necessary, requests revisions of the protocol in order to safeguard the rights and welfare of the human subjects. The current Institutional Review Board consists of one affiliated (non-voting) individual and ten non-affiliated (voting) individuals, four of whom are medical doctors (one of these serving as chairman), one pharmacologist, one clergy, and four representatives of the community. For each clinical study the Company uses volunteer study participants. The availability of sufficient numbers of qualified and willing study participants has at times been, and could in the future be, a limitation on the Company's business. Each prospective participant is screened at a Company facility and examined by a physician or physician's assistant employed by the Company. Prior to the commencement of a study, the Company's Medical Director or another qualified individual meets with the study participants to explain the purpose of the study and the fact that research is involved, the procedures to be followed and the expected duration of the testing, and to provide them with other information, including a description of any foreseeable risks or discomforts deemed relevant, to enable them to make an informed decision as to whether or not they want to participate in the study. A written consent form -2- 4 approved by the Company's Institutional Review Board for each study, acknowledging such disclosures, is signed by each participant prior to initiation of the study. Study participants usually arrive at the Company's controlled environment facility the night before testing is to begin. To maximize reliability of the test data, all study participants are immediately placed on a strictly supervised schedule in which all of their activities, including eating, drinking, sleeping, recreation and type of clothing, are tightly regulated. Testing, which can last for as long as four weeks, includes physical observation by medical personnel and a strict schedule of collecting blood, urine and other specimens which are subjected to drug analysis in the Company's analytical chemistry laboratory or by other arrangements of the client. ANALYTICAL CHEMISTRY SERVICES Laboratory analysis determines the amount of drug present in each of the hundreds of biological specimens generated by a given study. Chemists extract the drug and metabolites (compounds into which a drug is broken down inside the body) from a specimen using a mixture of solvents or a specific extraction column. Extracted samples are then processed by the Company's analytical instrumentation, including high performance liquid chromatography, and gas chromatography interfaced with various methods of detection, including mass spectrometry. These instruments separate the drug and metabolites from any other remaining substances and have the ability to detect and quantify as little as billionths of a gram of material. This process of extraction and detection is called an assay method. Each drug requires the development of a unique assay method, the accuracy and precision of which must be documented according to current scientific standards to meet FDA requirements. The Company's research and development group develops and validates these unique assay methods. The results of these assays are entered into computers maintained by the Company to show the concentration of drug in the blood over time and to determine statistically whether the product being evaluated is equivalent to the already marketed product or other reference material. A detailed report on the results of the analysis is prepared by Company scientists and submitted to the client requesting the test. Following the system used by the FDA for granting approval to market new drug products, the pharmaceutical manufacturer may use the report to support either a New Drug Application ("NDA") or, in the case of generic drugs, an Abbreviated New Drug Application ("ANDA"). In the event that the study shows any inequivalencies, it may provide the basis for additional development work and further bioequivalence studies or the manufacturer may discontinue its NDA or ANDA application. Through July 31, 1995, the Company also offered a complete range of stability services for finished dosage form pharmaceuticals. The services were discontinued because they did not fit strategically with the Company's base business. -3- 5 LIABILITY EXPOSURE The Company itself does not maintain professional malpractice insurance related to its testing procedures as its medical personnel are required to carry such insurance, and the Company is not a provider of medical care and related services. The Company maintains a general liability policy which provides coverage with a limit of $1,000,000 for each occurrence, an umbrella liability policy which has a limit of $5,000,000 for each occurrence, and a workmen's compensation liability policy which provides coverage of $1,000,000. The Company's contractual agreements for biopharmaceutic testing require the manufacturer of the drug being tested to assume liability for product claims resulting from the testing performed by the Company unless the injuries or damages are a result of the Company's negligence, or the tests are not performed in accordance with the agreed procedures. A judgment against the Company for which a pharmaceutical manufacturer is not required to indemnify the Company and which is in excess of any applicable workmen's compensation, umbrella or general liability insurance coverage and/or any applicable malpractice insurance covering an independently contracted physician could have a material adverse effect on the Company's business. The Company believes that such exposure is made less likely by the fact that safety and toxicity studies have generally been performed by itself or others before the Company commences clinical testing. GOVERNMENT REGULATION The Company's services are conducted for pharmaceutical companies to support their applications for approval to market new "branded" or bioequivalent generic drug products. These companies, and therefore the Company, are subject to extensive regulation by government authorities. Regulatory proceedings which adversely affect the Company's clients have affected and could continue to adversely affect the Company's business. The repeal or significant alteration of some or all of the laws or regulations requiring testing of the type performed by the Company could have a material adverse effect on the Company's business. However, regulatory changes which require additional or more complex testing to be performed in support of the drug approval process could significantly enhance the Company's business. Management believes that legislation and regulation, on balance, have a favorable impact on the demand for its services by providing sponsors and manufacturers of new drugs with additional requirements which increase the need for outsourcing. The Company is subject to regulation and inspection by the Baltimore City Health Department (for the Maryland State Department of Health and Mental Hygiene), the Center for Disease Control of the United States Department of Health and Human Services and other state and local agencies where the Company's facility is located. The Company has not experienced any significant problems to date in complying with the applicable requirements of such agencies and does not believe that any existing or proposed regulations will require material capital -4- 6 expenditures or changes in its method of operation. Management believes that the Company is acting in accordance with all applicable federal, state and local laws. COMPETITION The Company competes primarily against other CROs and pharmaceutical companies' own in-house research departments. The CRO industry is highly fragmented, with approximately twenty "full service" CROs and many small specialty providers. In recent years, several large full service CROs have emerged some of which have substantially greater capital and other resources, are better known and have more experienced personnel than the Company. The recent trend towards industry consolidation is likely to result in heightened competition among the larger CROs. The Company competes in a specialty niche segment of the overall market where total size and "full service" are less important competitive factors than in the overall CRO industry. Clients choose to use the Company, or a direct competitor, on the basis of reputation for quality of the service provided, the ability to schedule the specific study in a time frame which meets the client's needs, scientific and technical capability and the price of the services performed. The Company believes it competes favorably in these areas. CUSTOMERS For the year ended June 30, 1996, one customer contributed in excess of 10% of contract revenue, accounting for 27% of contract revenue. For the year ended June 30, 1995, one customer contributed in excess of 10% of contract revenue, accounting for 11% of contract revenue. For the year ended June 30, 1994, two customers each contributed in excess of 10% of contract revenue, which in aggregate accounted for 41% of contract revenue. The nature of the Company's services and recurring business with major clients contributes to having several clients whose business accounts for ten percent or more in a fiscal year. From year to year, the specific clients may change. While an individual client may represent a significant percent of revenues, these revenues are the result of the sum of a number of different contracts during the year. While the complete loss of a significant client could have a material adverse effect on the Company, the termination or loss of any one contract would typically not have a material adverse effect. EXPORT SALES The Company conducts studies for a number of companies outside of the United States, primarily in Canada and Europe, in addition to many domestic companies. This work is billed and paid in U.S. dollars, so there is no currency exchange risk to the Company. The Company has recognized revenue of $3,301,000, $2,208,000 and $2,327,000, for the -5- 7 periods ended June 30, 1996, 1995 and 1994, respectively, from its clients outside of the United States. BACKLOG The Company maintains a backlog of its business, representing studies underway in-house, for which revenue has not yet been recognized, and studies that have been awarded to the Company by its various clients but have yet to begin. At June 30, 1996, the backlog was approximately $4.0 million. At June 30, 1995, the Company's backlog was approximately $4.6 million. The Company expects to recognize revenue from studies represented in the June 30, 1996 backlog during fiscal 1997. EMPLOYEES At July 31, 1996, the Company had 105 full-time employees and 61 part-time employees, including 5 physicians and 12 scientists with advanced degrees. The Company does not have collective bargaining agreements with any of its employees and considers its employee relations to be satisfactory. EXECUTIVE OFFICERS Position with the Company Employed Officer Name Age and principal occupation Since Since - ---- --- ------------------------ ----- ----- Christopher H. Hendy, Ph.D. 36 Vice President Clinical 1993 1993 Evaluation Services since (5) December 1993; Director of Clinical Research of ICON Clinical Research from February 1993 to December 1993; Managing Director of Harris Labs Ltd from April 1991 to February 1993; and Manager of European Project Management of Otsuka Pharmaceutical Co., Ltd from April 1988 to April 1991. V. Brewster Jones 51 President and Chief Executive 1990 1990 Officer from October 1990 to (1) July 1995; Chief Operating Officer of PharmaKinetics' United States businesses from June 1990 to October 1990; Founder/Director, President and Chief Operating Officer of The Compucare Company, Reston, Virginia, a computer technology services company in the -6- 8 Position with the Company Employed Officer Name Age and principal occupation Since Since - ---- --- ------------------------ ----- ----- V. Brewster Jones healthcare industry; and (continued) Division President of Baxter Healthcare Corporation from June 1985 to December 1987. Taryn L. Kunkel 35 Vice President, Chief 1990 1991 Financial Officer and Treasurer since February 1991; Controller from November 1990 to February 1991; and Director of Financial Analysis from July 1990 to November 1990. Elizabeth A. Lane, Ph.D. 51 Vice President 1988 1992 Biopharmaceutics and Regulatory Affairs since May 1992; Director of Pharmacokinetics and Regulatory Affairs from September 1988 to May 1992. James K. Leslie 51 President and Chief Executive 1995 1995 Officer since July 1995; (1) Executive Vice President and Chief Operating Officer since June 1995; President and Chief Executive Officer of BioFin, a start up biotechnology company from July 1993 to June 1995; President and Chief Executive Officer of SICPA Industries of America from 1991 to 1992; and President and Chief Operating Officer of Ecogen, Inc. from 1988 - 1990. Roger H. Meacham, Jr. Ph.D. 54 Vice President Analytical 1995 1995 Laboratory Services since (2) July 1995; Director of the Pharmaceutical Chemistry Division of Hazleton Laboratories, a CRO specializing in drug development, from 1992 to 1995; and Director of Drug Disposition at Rhone-Poulenc Rorer from 1985 to 1992. -7- 9 Position with the Company Employed Officer Name Age and principal occupation Since Since - ---- --- ------------------------ ----- ----- Leon Shargel, Ph.D. 54 Vice President since March 1995 1995 1995; Director of (3) Biochemistry and Pharmacokinetics at Forest Laboratories, a pharmaceutical manufacturer, from 1993 to 1994; and Director of Pharmacokinetics at Chelsea Laboratories from 1991 to 1993. James M. Wilkinson II, Ph.D. 44 Vice President Analytical 1996 1996 Laboratory Services since (4) July 1996; Associate Director, Pharmaco International, Inc. Analytical Laboratory Division from December 1992 to June 1996. (1) Mr. Jones resigned from the Company effective July 1995. Mr. Leslie was promoted to the position of President and Chief Executive Officer as of that date. (2) Dr. Meacham joined the Company in July 1995. His employment with the Company ended in December 1995. (3) Dr. Shargel's employment with the Company ended in October 1995. (4) Dr. Wilkinson joined the Company on July 1, 1996. (5) Dr. Hendy resigned his position with the Company effective September 27, 1996. ITEM 2. PROPERTIES The Company is headquartered in a seven-story building located in Baltimore, Maryland. The building has a consolidated analytical chemistry laboratory, a controlled live-in clinical facility with a 120-bed capacity, and corporate-wide information and data management systems. The facility is comprised of approximately 142,000 gross square feet. The Company has available 25,000 gross square feet of unfinished space within the facility to meet its potential expansion needs. Substantially all of the Company's assets, including its facility, collateralize the Company's borrowing agreements with NationsBank, N.A. (see Note E to the Financial Statements). See Note C to the Financial Statements for additional information regarding the Company's property, plant and equipment. -8- 10 ITEM 3. LEGAL PROCEEDINGS (a) Reorganization Proceedings under Chapter 11 of the Bankruptcy Code On November 19, 1990, PharmaKinetics Laboratories, Inc. filed a voluntary petition (Case No. 90-5-5020-JS) in the United States Bankruptcy Court in the District of Maryland seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The Company confirmed its Amended Plan of Reorganization (the "Plan") on April 1, 1993. The Plan became effective May 10, 1993. The Company received an order approving its Application for Final Decree on May 23, 1996. Therefore, the bankruptcy case is closed. (b) Other Legal Proceedings On October 12, 1992, the Company was notified that it had been named as a contributor of hazardous waste at the Aqua-Tech Environmental, Inc. site, located in Greer, South Carolina, by the United States Environmental Protection Agency (the "EPA"). In September 1995, the Company entered into a final Removal Action Allocation and a DeMinimus Settlement and Indemnification Agreement. The Agreement enabled each identified generator to end its liability for all transaction costs and clean-up costs, including Removal Action Costs, the cost of the remedial investigation/feasibility study, and the cost of the final remedy at the Site. The Agreement also covers claims for costs by governmental agencies, including EPA and South Carolina Department of Health and Environmental Control. On September 12, 1995, the Company remitted the requested $3,000 to satisfy the final buy-out option for clean-up costs at this site. In June 1996, the Company paid the final installment of a fine imposed under a plea agreement with the United States Attorney's Office of the District Court of Maryland and the Office of Consumer Litigation of the Department of Justice, resulting from a 1990 federal grand jury investigation of the generic drug industry, in which the Company and its Chief Scientific Officer were named as targets (see Note E to the Financial Statements). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is currently traded in the over-the-counter market and is quoted on the OTC Bulletin Board (OTCBB: PKLB). -9- 11 The following table sets forth the high and low bid prices of the Common Stock for the fiscal periods indicated and as reported through the OTC Bulletin Board. Year Ended Year Ended June 30, 1996 June 30, 1995 ------------- ------------- Quarter High Low High Low - ------- ---- --- ---- --- First $ 9/16 $ 11/32 $ 3/4 $ 5/16 Second 15/32 1/4 11/16 7/32 Third 7/16 11/32 9/16 1/4 Fourth 1/2 11/32 7/16 1/8 Such quotations reflect inter-dealer prices, without retail mark- up, mark-down or commission and may not represent actual transactions. The approximate number of shareholders of record at August 23, 1996, was 1,160. The Company has not declared a dividend on its Common Stock since its inception and has no intention of doing so in the foreseeable future. Notwithstanding the Company's dividend policy, the Company's borrowing agreement with its primary lender restricts the Company from declaring or paying a dividend if such dividend would cause the Company to default under any of the covenants contained in the borrowing agreement. ITEM 6: SELECTED FINANCIAL DATA
Years ended June 30, ----------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Revenues $10,962,160 $ 9,893,762 $ 8,847,674 $ 8,718,246 $12,811,911 Earnings (loss): Before extraordinary item $778,895 $127,827 $204,851 $(197,947)$ 3,543,745 Extraordinary item - - - $ 107,016 - Net earnings (loss) $778,895 $127,827 $204,851 $ (90,931)$ 3,543,745 Earnings (loss) per share: Before extraordinary item $ 0.06 $ 0.01 $ 0.02 $(0.02) $ 0.32 Extraordinary item - - - 0.01 - Net earnings (loss) per share $ 0.06 $ 0.01 $ 0.02 $(0.01) $ 0.32 Weighted average shares outstanding 12,319,646 12,598,102 12,780,687 10,719,615 10,984,253 Total assets $ 6,622,959 $ 6,553,348 $ 6,163,128 $ 6,198,151 $ 9,580,388 Working capital (deficiency)$ 411,498 $ (63,474)$ 262,632 $ 831,114 $ 3,235,788 Long-term liabilities $ 1,784,876 $ 2,074,109 $ 2,437,373 $ 2,866,072 $ 7,296,205 Stockholders' equity (deficiency in assets) $ 2,547,754 $ 1,768,859 $ 1,540,669 $ 1,364,898 $ (198,858) -10- 12 - ------------------------------------------------------------------------- Notes to Selected Financial Data: The Company has not declared a dividend on common stock since inception. During the fiscal year ended June 30, 1992, the Company adjusted certain of its accruals for professional fees related to the bankruptcy proceedings, interest recorded for amounts due Maryland National Bank, which was later acquired by NationsBank, N.A. and certain other accrued expenses aggregating $1,181,931. In addition, the Company recorded additional expenses of $376,200 associated with the rejection of various leased equipment. Fiscal year 1992 included contract revenue for the Company's German subsidiary, which was sold effective March 31, 1992. During the fiscal year ended June 30, 1993, the Company recorded $68,000 for expenses associated with the reorganization of the Company under the Bankruptcy Code and debt forgiveness of $107,016, which was recorded as an extraordinary item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PharmaKinetics Laboratories, Inc. ("the Company") is a leading contract research organization ("CRO") providing drug development services to pharmaceutical firms. As of June 30, 1996, the operations of the Company consisted of biopharmaceutic services, including design, development and implementation of the clinical protocol, management and analysis of laboratory and statistical data, compilation of reports and consultation on regulatory affairs. The nature of the Company's services and recurring business with major clients contributes to having several clients whose business accounts for 10% or more in a fiscal year. From year to year, the specific clients may change. Since the Company's inception in 1976, the Company has assisted pharmaceutical clients with over 1,000 submissions for approval to the United States Food and Drug Administration ("FDA"), as well as submissions to the Canadian Health Protection Branch ("HPB"). RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, items in the Statements of Operations as percentages of total revenues and the increase (decrease) by each item as a percentage of the amount for the previous period: -11- 13 Percentage of Period to Period Total Revenues Change -------------- ------------------- 1996 1995 1994 Years ended June 30, Compared to 1996 1995 1994 1995 1994 1993 ------ ------ ------ ------ ------ ------ Contract revenue 95.5% 93.5% 89.9% 13.2% 16.3% (0.3)% License fee 4.5 6.5 10.1 (23.8) (27.7) 21.0 ----- ----- ----- ----- ----- ----- Total 100.0 100.0 100.0 10.8 11.8 1.5 Cost of contracts 66.5 68.9 67.9 7.0 13.4 (0.5) ----- ----- ----- ----- ----- ----- Gross margin 33.5 31.1 32.1 19.2 8.4 5.9 Research and development 3.6 4.2 2.5 (5.5) 92.8 175.5 General and administrative 20.9 22.2 25.0 4.3 (0.7) 9.2 ----- ----- ----- ----- ----- ----- Operating income 9.0 4.7 4.6 112.7 12.6 (28.9) Interest expense (2.0) (2.6) (3.0) (13.2) (3.2) 5.7 Interest income 0.4 0.4 0.6 (3.5) (23.3) 188.3 Loss on disposal of equipment (0.2) - - - - - Loss on sale of investments - (1.0) - (100.0) 100.0 - Write-down of investments - (0.5) - (100.0) 100.0 (100.0) ----- ----- ----- ----- ----- ----- Earnings before income taxes 7.1 1.0 2.2 690.9 (50.4) 187.2 Reorganization item - - - - - (100.0) ----- ----- ----- ----- ----- ----- Earnings before taxes 7.1 1.0 2.2 690.9 (50.4) 195.1 Income taxes - (0.3) (0.1) 115.4 (475.6) 58.8 Extraordinary item - - - - - (100.0) ----- ----- ----- ----- ----- ----- Net earnings 7.1% 1.3% 2.3% 509.3% (37.6)%325.3% ===== ===== ===== ===== ===== =====
1996 COMPARED TO 1995 Total revenue increased 10.8% from $9.9 million in fiscal 1995 to $11.0 million in fiscal 1996. The increase was primarily attributable to the Company's increased marketing efforts and timely completion of several studies in the fourth quarter of fiscal 1996. During fiscal 1996, the Company continued to expand its client list, diversify its services and perform multiple studies for several of its clients. Contract revenue increased 13.2% for fiscal 1996, compared to fiscal -12- 14 1995. Revenue growth in the current fiscal year demonstrates continued growth in volume, despite the Company's decision in July 1995 to discontinue its offering of Stability and Dissolution services. License fee income of $493,000 was recorded in fiscal 1996, compared to $647,000 in fiscal 1995. License fee income, based on clients' sales of approved drugs, will continue through the expiration of the two current license fee agreements, the first of which will expire during fiscal 1998 and the second of which will expire in fiscal 2000. In addition, the Company has a license fee agreement with another of its clients which recently received approval from the FDA to manufacture and market Sucralfate Tablets. The client expects to commence shipments after the completion of validation studies. Once marketing is begun, the Company expects to receive payments for a minimum of eight years from the date of approval. No assurance can be given of the time when such payments will begin or the amount of such payments. The Company's gross margin increased 19.2% from $3.1 million in fiscal 1995 to $3.7 million in fiscal 1996. As a percentage of revenue, the Company's gross margin increased from 31.1% in fiscal 1995 to 33.5% in fiscal 1996, on a 10.8% increase in total revenue. The increase in gross margin, despite a significant reduction in license fee income, is attributed to increased productivity, timely completion of studies and increased study shipments, particularly in the fourth quarter. Fiscal 1995 also reflected a reversal of $232,719 in accrued expenses for unemployment insurance assessments on study participant compensation. Absent this reversal in fiscal 1995, gross profit as a percentage of revenue would have been 28.8%. General and administrative expenses totalled $2.3 million for fiscal 1996, compared to $2.2 million in fiscal 1995, representing a 4.3% increase. As a percentage of revenue, general and administrative expenses were 20.9% in fiscal 1996 and 22.2% in fiscal 1995. General and administrative expenses increased due to the increased compensation and related expenses associated with the growth of the Company's administrative staff and certain non-recurring business development costs. Research and development expenses decreased 5.5% from $420,000 in fiscal 1995 to $397,000 in fiscal 1996. The Company has continued to invest in its research and development effort in 1996 in an effort to bring new analytical methods on-line to meet client demands. The Company re-directed certain personnel to revenue generating activities throughout the year in an effort to meet client demands. Interest expense decreased 13.2% from $257,000 in fiscal 1995 to $223,000 in fiscal 1996. The decrease is primarily attributable to decreases in the Company's interest bearing obligations. In addition, the rate of interest on the Company's long-term debt has been favorably impacted by reductions in the prime rate of interest of NationsBank, N.A., 8.25% at June 30, 1996, compared to 9.00% at June 30, 1995. The Company has also made and expects to continue to make accelerated principal payments relative to its term note payable to the Bank. -13- 15 During fiscal year 1996, the Company sold idle equipment from its Stability and Dissolution services group. The sale of the equipment generated proceeds of $71,400 and a net loss of $17,172. Income tax expense of $4,400 was recorded in fiscal 1996. The tax arises from the impact of the Alternative Minimum Tax. At June 30, 1996, the Company had tax loss carryforwards of approximately $3,885,000, expiring in 2006 through 2009, and general business credits of approximately $1,432,500, expiring during the period 1999 through 2009. 1995 COMPARED TO 1994 Total revenue increased 11.8% from $8.8 million in fiscal 1994 to $9.9 million in fiscal 1995. The increase was primarily attributable to the Company's increased marketing efforts, which produced an increase in the overall volume of business for the fiscal year. During fiscal 1995, the Company diversified its services, added new clients and successfully penetrated new markets for its services. Contract revenue increased 16.3% for fiscal 1995, compared to fiscal 1994. License fee income of $647,000 was recorded in fiscal 1995, compared to $896,000 in fiscal 1994. The Company continued to receive income pursuant to license fee agreements that it has with two of its clients based on sales of their drug products. The Company's gross margin increased 8.4% from $2.8 million in fiscal 1994 to $3.1 million in fiscal 1995. As a percentage of revenue, the Company's gross margin decreased from 32.1% in fiscal 1994 to 31.1% in fiscal 1995, on an 11.8% increase in overall revenue. The decrease in gross margin primarily resulted from fourth quarter production inefficiencies, particularly in the laboratory, causing increases in costs and delays in shipments. In addition, an inability to resolve a major technical problem in the laboratory resulted in a failure to complete two studies and resulted in non-recovery of substantial investments in research and development. The increase in expense associated with these difficulties was partially offset by the Company's December reversal of $232,719 in accrued expenses for unemployment insurance assessments on study participant compensation during the period January 1, 1991 through September 30, 1994. In December 1994, the Company received a favorable ruling from Maryland's Board of Appeals that study participants utilized by the Company are not subject to unemployment insurance. The on-going impact of this ruling has been and will continue to be reduced unemployment costs for the Company. Absent this reversal in fiscal 1995, gross profit as a percentage of revenue would have been 28.8%. General and administrative expenses totalled $2.2 million for fiscal 1994 and fiscal 1995. As a percentage of revenue, general and administrative expenses were 22.2% in fiscal 1995 compared to 25.0% in fiscal 1994. The Company increased its research and development spending by 92.8% from $218,000 in fiscal 1994 to $420,000 in fiscal 1995. Of the amount -14- 16 invested in the Company's research and development efforts for fiscal 1995, approximately $145,000 was expended in an unsuccessful effort to develop a new assay for one of the Company's major clients. The Company implemented procedures to minimize the likelihood that a similar assay development problem will recur. Interest expense decreased 3.2% from $266,000 in fiscal 1994 to $257,000 in fiscal 1995. The decrease is primarily attributable to decreases in the Company's interest bearing obligations. In addition, the Company negotiated improved terms with NationsBank, N.A. in May 1995, reducing the rate of interest on its term note payable to the Bank from the Bank's prime rate plus 2% to the Bank's prime rate plus 1/2%. The benefit from income taxes of $29,000 was recorded in fiscal 1995 to reflect a reduction in the Company's tax liability. At June 30, 1995, the Company had tax loss carryforwards of approximately $4,511,000, expiring in 2006 through 2009, and general business credits of approximately $1,404,000, expiring during the period 1999 through 2009. LIQUIDITY AND CAPITAL RESOURCES On June 30, 1996, the Company had cash and equivalents of $990,000 compared to $1,084,000 at June 30, 1995. The decrease in cash is the result of contractual and discretionary payments on long-term debt and capital lease obligations and the purchase of equipment for utilization in the Company's operating units, offset by cash generated by operating activities. The Company invested $512,000 in capital equipment purchases, $165,000 of which was paid in cash with the remaining $347,000 financed through capital leases. The capital leases have terms expiring through fiscal 1999. The Company made payments of $304,000 on its long- term debt obligations during fiscal 1996. On a discretionary basis, the Company has made and expects to continue to make escalated principal payments relative to its term note payable to NationsBank, N.A. The Company's primary source of funds is cash flow from operations. The Company also has available a $500,000 line of credit from NationsBank, N.A. which has not been drawn upon. As of June 30, 1996, the Company's stockholders' equity totalled $2,548,000 compared to $1,769,000 at June 30, 1995. The Company had working capital of $411,000 at June 30, 1996, compared to a deficiency in working capital of $63,000 at June 30, 1995. The increase in working capital reflects the increase in accounts receivable generated by accelerated study completion in the quarter ended June 30, 1996. The Company is currently seeking financing for a state-of-the-art laboratory instrument to be delivered to the Company in the first quarter of fiscal 1997. The amount to be financed totals $410,000. -15- 17 REPORT OF INDEPENDENT ACCOUNTANTS ----- To the Directors and Stockholders of PharmaKinetics Laboratories, Inc. We have audited the financial statements and financial statement schedule of PharmaKinetics Laboratories, Inc. listed in the index on page 28 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PharmaKinetics Laboratories, Inc. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS AND LYBRAND L.L.P. Baltimore, Maryland August 14, 1996 -16- 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF OPERATIONS Years ended June 30, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Revenues $10,962,160 $ 9,893,762 $ 8,847,674 Cost of contracts 7,289,138 6,813,576 6,006,185 ----------- ----------- ----------- Gross profit 3,673,022 3,080,186 2,841,489 General and administrative expenses 2,293,504 2,198,050 2,213,188 Research and development expenses 396,741 420,049 217,861 ----------- ----------- ----------- Earnings from operations 982,777 462,087 410,440 Interest expense (223,028) (257,018) (265,591) Interest income 40,748 42,207 55,002 Loss on sale of equipment (17,172) - - Loss on sale of investments - (101,479) - Write-down of investments - (46,750) - ----------- ----------- ----------- Earnings before income taxes 783,325 99,047 199,851 Provision for (benefit of) income taxes 4,430 (28,780) (5,000) ----------- ----------- ----------- Net earnings $ 778,895 $ 127,827 $ 204,851 =========== =========== =========== Net earnings per share $ 0.06 $ 0.01 $ 0.02 =========== =========== =========== Weighted average shares outstanding 12,319,646 12,598,102 12,780,687 =========== =========== =========== - ------------------------------------------------------------------------ See notes to financial statements.
-17- 19 PHARMAKINETICS LABORATORIES, INC. BALANCE SHEETS June 30, ------------------------- 1996 1995 ----------- ----------- ASSETS Current Assets: Cash and equivalents $ 955,526 $ 1,044,782 Restricted cash and equivalents 34,875 39,036 Accounts receivable 1,248,293 774,684 Refundable income taxes - 29,364 Contracts in process 336,930 695,359 Prepaid expenses 126,203 63,681 ----------- ----------- Total Current Assets 2,701,827 2,646,906 Property, plant and equipment, net 3,862,710 3,848,020 Other assets 58,422 58,422 ----------- ----------- Total Assets $ 6,622,959 $ 6,553,348 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 1,213,403 $ 1,378,495 Deposits on contracts in process 933,310 1,133,547 Current portion of long-term debt 143,616 198,338 ----------- ----------- Total Current Liabilities 2,290,329 2,710,380 Other liabilities 76,459 116,150 Long-term debt 1,708,417 1,957,959 ----------- ----------- Total Liabilities 4,075,205 4,784,489 ----------- ----------- Commitments and Contingent Liabilities Stockholders' Equity: Preferred stock, no par value; 1,500,000 shares authorized and unissued - - Common stock, $.001 par value; authorized 25,000,000 shares; issued and outstanding, 12,195,891 shares 12,196 12,196 Additional paid-in capital 12,013,701 12,013,701 Accumulated deficit (9,478,143) (10,257,038) ----------- ----------- Total Stockholders' Equity 2,547,754 1,768,859 ----------- ----------- Total Liabilities and Stockholders' Equity $ 6,622,959 $ 6,553,348 =========== =========== - ----------------------------------------------------------------------- See notes to financial statements.
-18- 20 PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years ended June 30, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- COMMON STOCK Balance, beginning of year $ 12,196 $ 12,396 $ 12,316 Stock cancelled - (200) - Exercise of stock options - - 80 ----------- ----------- ----------- Balance, end of year 12,196 12,196 12,396 ----------- ----------- ----------- (Shares outstanding: 12,195,891, 12,195,891 and 12,395,891, at June 30, 1996, 1995 and 1994, respectively). ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 12,013,701 12,113,501 12,043,581 Stock subscription cancelled - (99,800) - Exercise of stock options - - 69,920 ----------- ----------- ----------- Balance, end of year 12,013,701 12,013,701 12,113,501 ----------- ----------- ----------- ACCUMULATED DEFICIT Balance, beginning of year (10,257,038) (10,384,865) (10,589,716) Net earnings 778,895 127,827 204,851 ----------- ----------- ----------- Balance, end of year (9,478,143) (10,257,038) (10,384,865) ----------- ----------- ----------- NOTE RECEIVABLE ON COMMON STOCK SUBSCRIBED Balance, beginning of year - (101,283) (101,283) Note cancelled - 100,000 - Interest accrued - (6,000) (6,000) Interest paid - 6,000 6,000 Interest received - 1,283 - ----------- ----------- ----------- Balance, end of year - - (101,283) ----------- ----------- ----------- INVESTMENT VALUATION ALLOWANCE - - (99,080) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY $ 2,547,754 $ 1,768,859 $ 1,540,669 =========== =========== =========== - ------------------------------------------------------------------------ See notes to financial statements.
-19- 21 PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF CASH FLOWS Years ended June 30, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- Cash flows from operating activities: Net Earnings $ 778,895 $ 127,827 $ 204,851 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 405,703 312,875 188,437 Recovery of doubtful accounts - (9,450) (27,262) (Gain)loss on sale of equipment 17,172 (1,315) - Loss on disposal of equipment 2,676 - - Loss on sale of investments - 101,479 - Write-down of investments - 46,750 - Changes in operating assets and liabilities: Accounts receivable (473,609) 40,628 (105,939) Contracts in process 358,429 (176,390) (7,652) Prepaid expenses (62,522) (14,093) 32,887 Refundable income taxes 29,364 (29,364) - Other assets - - (3,650) Accounts payable and accrued expenses (327,781) 61,935 (109,097) Deposits on contracts in process (200,237) 378,372 372,640 Other liabilities - (204,729) (229,061) ---------- ---------- ---------- Net cash provided by operating activities 528,090 634,525 316,154 ---------- ---------- ---------- Cash flows from investing activities: Payment for purchases of property and equipment (164,474) (410,885) (599,421) Proceeds from sale of equipment 71,400 4,300 - Proceeds from sale of investments - 69,747 - ---------- ---------- ---------- Net cash used by investing activities (93,074) (336,838) (599,421) ---------- ---------- ---------- Cash flows from financing activities: Payment on long-term debt (304,264) (273,153) (245,276) Payment for capital lease obligations (224,169) (15,298) - Proceeds from exercise of stock options - - 70,000 ---------- ---------- ---------- Net cash used by financing activities (528,433) (288,451) (175,276) ---------- ---------- ---------- Increase(decrease)in cash and equivalents (93,417) 9,236 (458,543) Cash and equivalents, beginning of year 1,083,818 1,074,582 1,533,125 ---------- ---------- ---------- Cash and equivalents, end of year $ 990,401 $1,083,818 $1,074,582 ========== ========== ========== Supplemental Schedule of Non-Cash Transactions Fixed assets acquired through capital leases $ 347,167 $ 214,903 - Investment valuation allowance - - $ 99,080 - -------------------------------------------------------------------------- See notes to financial statements.
-20- 22 PHARMAKINETICS LABORATORIES, INC. NOTES TO FINANCIAL STATEMENTS A. ORGANIZATION AND BASIS OF PRESENTATION PharmaKinetics Laboratories, Inc. (the "Company") is a contract research organization serving the pharmaceutical industry. The Company performs biopharmaceutic services including clinical evaluation and analytical chemistry services with respect to prescription and non- prescription products. Its principal markets are in the United States and Canada. The Company operates principally in one industry segment, the testing and related research of pharmaceutical products. Revenues include contract revenue and revenue from licensing technologies under special agreements whereby the Company receives license fees based upon the clients' actual product sales. At June 30, 1996, the Company has two license fee agreements from which the Company is receiving license fee income. Based upon actual client sales, license fee income of $493,076, $647,308, and $895,656 was recorded during fiscal years ended June 30, 1996, 1995, and 1994, respectively. License fee income, based on clients' sales of approved drugs, will continue through the expiration of the license fee agreements, the first of which will expire during fiscal 1998. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenues associated with testing services, which are short-term in duration, are earned and recognized upon completion of all required clinical and laboratory analysis. Projected losses on contracts are provided for in their entirety when known. Operating revenue attributable to the performance of long-term testing is recorded by contract by determining the status of work performed to date in relation to total services to be provided. Revenues under fixed-rate contracts include a proration of the earnings expected to be realized on the contract based upon the ratio of costs incurred to estimated total costs. For the year ended June 30, 1996, one customer contributed in excess of 10% of contract revenue, accounting for 27% of contract revenue. For the year ended June 30, 1995, one customer contributed in excess of 10% of contract revenue, accounting for 11% of contract revenue. For the year ended June 30, 1994, two customers each contributed in excess of 10% of contract revenue, which in aggregate accounted for 41% of contract revenue. As of June 30, 1996, three customers accounted for approximately 53% of accounts receivable. CONTRACTS IN PROCESS AND DEPOSITS ON CONTRACTS Contracts in process include direct and indirect costs related to contract performance. Deposits on contracts represent interim payments. -21- 23 Upon completion of contracts, the customer is billed for the total contract amount less any deposits or interim payments. EARNINGS PER SHARE Earnings per share is determined by dividing net earnings by the weighted average number of common stock and common stock equivalent shares outstanding. Outstanding stock options granted under the Company's stock option plans and other grants outside of the Company's plans are considered common stock equivalents for the purpose of earnings per share data. CASH AND EQUIVALENTS Cash equivalents consist of highly liquid investments with an original maturity of ninety days or less. Restricted cash at June 30, 1996, and 1995, of $34,875 and $39,036, respectively, represents amounts held in escrow for payment of post-confirmation administrative claims. CONCENTRATION OF CREDIT RISK The Company is subject to credit risk related to cash balances with financial institutions in excess of insured amounts. The risk is mitigated by the fact that, at the close of each business day, excess funds in the Company's operating accounts are placed in an overnight investment account which is collateralized by government securities held by the financial institution. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost or net realizable value. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying currently enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. ACCOUNTING 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", establishes accounting and reporting standards for stock based employee compensation plans. As permitted by the -22- 24 standard, the Company expects to continue to account for such arrangements under APB Opinion No. 25. Accordingly, adoption of the standard in fiscal 1997 will not affect the Company's results of operations or financial position. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and Assets to be Disposed of", which is to be adopted by the Company for its fiscal year beginning July 1, 1996, requires that long lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this standard is not expected to have a material impact on the Company's financial statements. C. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at June 30, is summarized as follows: 1996 1995 ----------- ----------- Land $ 200,000 $ 200,000 Building and improvements 2,876,430 2,850,402 Furniture and equipment 2,215,566 2,640,434 ----------- ----------- 5,291,996 5,690,836 Less: accumulated depreciation (1,429,286) (1,842,816) ----------- ----------- $ 3,862,710 $ 3,848,020 =========== =========== Assets held under capital lease at June 30, 1996 and 1995, were $562,070 and $214,903, respectively. Accumulated amortization of assets held under capital lease at June 30, 1996 and 1995, was $94,230 and $19,758, respectively. During fiscal year 1996, the Company wrote-off certain fully depreciated assets with an historical cost basis of $748,538. In addition, idle equipment from the Company's discontinued stability and dissolution operation were sold, generating cash proceeds of $71,400 and a loss of $17,172. These assets had an historical cost basis of $156,359. D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES At June 30, accounts payable and accrued expenses consisted of the following: 1996 1995 ----------- ----------- Trade accounts payable $ 293,001 $ 812,075 Accrued payroll and related expenses 341,768 105,800 Other accrued expenses 578,634 460,620 ----------- ----------- $ 1,213,403 $ 1,378,495 =========== =========== -23- 25 E. DEBT At June 30, long-term debt consists of the following: 1996 1995 ----------- ----------- Note payable to bank $ 1,852,033 $ 2,066,297 Other - 90,000 ----------- ----------- 1,852,033 2,156,297 Less: current portion (143,616) (198,338) ----------- ----------- $ 1,708,417 $ 1,957,959 =========== =========== The Company has a note payable to NationsBank, N.A. and a $500,000 working capital borrowing facility. Terms of the note and credit facility provide for interest at the Bank's prime rate (8.25% at June 30, 1996) plus an additional 1/2% on the note payable only. The note has a five year amortization schedule with equal monthly payments of $25,000 for principal and interest. In May 1998, the Company will have the option to pay the remaining principal balance over a three year period or to refinance the note. The borrowing agreements are collateralized by substantially all of the Company's assets, place restrictions on borrowings and investments, and require maintenance of specified amounts of working capital, net worth and cash flow ratios. The Company previously reached an agreement with the City of Baltimore to finance past due real property taxes related to 1990 and 1991. The final payment of $50,000 was made in June 1996. In June 1996, the Company made its final payment of $40,000, plus accrued interest, related to a 1991 fine by the Food and Drug Administration. Cash payments for interest were $362,946, $248,148, and $241,096, in fiscal 1996, 1995, and 1994, respectively. The long-term debt matures as follows: Year ending June 30, 1997 $ 143,616 1998 206,922 1999 488,127 2000 532,593 2001 480,775 ---------- $1,852,033 ========== On a discretionary basis, the Company has made and expects to continue to make escalated principal payments relative to its term note payable to the bank. -24- 26 F. INCOME TAXES The Company's expenses for and benefit from income taxes results from the impact of alternative minimum tax charges and credits. Deferred tax balances are comprised of the following: Year ended June 30, ------------------------- 1996 1995 ----------- ----------- Deferred tax assets: Property, plant and equipment $ 508,225 $ 656,461 Accrued liabilities 73,973 44,216 Net operating loss carryforwards 1,515,251 1,759,123 Alternative minimum tax credits 4,095 3,506 General business credits 1,432,538 1,403,536 ----------- ----------- Total deferred tax assets 3,534,082 3,866,842 Less: valuation allowance (3,534,082) (3,866,842) ----------- ----------- Deferred income taxes per balance sheet$ - $ - =========== =========== Based on the weight of evidence available at June 30, 1996, in management's opinion, a full valuation allowance is required to be recorded against the Company's deferred income tax assets. At June 30, 1996, the Company had tax loss carryforwards of approximately $3,885,000, expiring in 2006 through 2009, and general business credits of approximately $1,432,500, expiring during the period 1999 through 2009. The principal differences between the actual effective tax rate and the statutory federal tax rates are as follows: Year ended June 30, ------------------------ 1996 1995 1994 ------ ------ ------ Statutory rate 34.0 % 34.0 % 34.0 % State income taxes - net of federal benefit 4.9 4.9 4.9 Alternative minimum tax .8 - - Alternative minimum tax credits (.2) (29.0) (2.5) Loss carryforwards (38.9) (38.9) (38.9) ------ ------ ------ Effective rate .6 % (29.0)% (2.5)% ====== ====== ====== G. COMMITMENTS AND CONTINGENT LIABILITIES Leases Lease expense for all operating leases, including leases with terms -25- 27 of less than one year, amounted to $50,700, $106,000, and $261,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The Company has entered into capital lease arrangements for the purchase of furniture and equipment in the amount of $562,070. The current and long-term portions of the capital lease obligations are in accounts payable and accrued expenses and other liabilities, respectively. The future expected payout of these capital leases is as follows: Year ended June 30, ------------------ 1997 $ 264,073 1998 73,309 1999 7,985 less: interest portion (22,766) ---------- $ 322,601 ========== Subsequent to June 30, 1996, the Company expects to enter into a financing arrangement for laboratory equipment in the amount of $410,000 to be paid over a period not to exceed sixty months. H. EMPLOYEE STOCK OWNERSHIP AND STOCK OPTION PLANS The Company has an Incentive Stock Option Plan for key employees which provides for issuance of up to 1,700,000 shares of common stock to employees. The Company also has a Non-qualified Stock Option Plan for key employees and has reserved 568,000 shares of Common Stock under the plan. In addition, the Company grants options to its outside directors. Options are granted at fair market value on the date of grant and vest over periods of up to five years. A summary of option activity follows: Shares Under Option ---------------------------- 1996 1995 1994 --------- --------- --------- Balance, beginning of year ($0.28 - $5.25 per share) 1,081,067 988,467 1,038,433 Exercised ($0.875) - - (80,000) Granted ($0.4375 - $1.0625) 281,700 155,900 89,500 Cancelled ($0.4375 - $2.69) (172,700) (63,300) (59,466) --------- --------- --------- Balance, end of year ($0.28 - $5.25 per share) 1,190,067 1,081,067 988,467 ========= ========= ========= Options exercisable at June 30, 1996, were 863,434. Options exercised to date total 710,012. Of the options exercised to date, 200,000 shares -26- 28 were returned to the Company and cancelled when a note receivable for common stock subscribed was cancelled effective June 30, 1995. As of June 30, 1996, the Company has reserved 2,339,255 shares of Common Stock for future issuance under authorized options and grants. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item with respect to directors is contained in the Company's Proxy Statement for its 1996 annual meeting and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996. ITEM 11. EXECUTIVE COMPENSATION Pursuant to General Instruction G(3) to Form 10-K, the information required with respect to this Item is contained in the Company's Proxy Statement for its 1996 annual meeting, and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3) to Form 10-K, the information required with respect to this Item is contained in the Company's Proxy Statement for its 1996 annual meeting, and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3) to Form 10-K, the information required with respect to this Item is contained in the Company's Proxy Statement for its 1996 annual meeting, and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996. -27- 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page(s) (a) 1. FINANCIAL STATEMENTS Report of Independent Accountants 16 Statements of operations for each of the three years in the period ended June 30, 1996 17 Balance sheets at June 30, 1996 and 1995 18 Statements of stockholders' equity for each of the three years in the period ended June 30, 1996 19 Statements of cash flows for each of the three years in the period ended June 30, 1996 20 Notes to financial statements 21 2. FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts 30 3. EXHIBITS See Exhibit Index. (b) REPORTS ON FORM 8-K No reports of Form 8-K were filed during the quarter ended June 30, 1996. -28- 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHARMAKINETICS LABORATORIES, INC. Date: September 18, 1996 By:/s/James K. Leslie ------------------ ------------------------ James K. Leslie, Chief Executive Officer and President 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 and in the capacities and on the dates indicated: Date: September 18, 1996 /s/James K. Leslie ------------------ --------------------------- James K. Leslie, Chief Executive Officer, President and Director (Principal Executive Officer) Date: September 18, 1996 /s/Taryn L. Kunkel ------------------ --------------------------- Taryn L. Kunkel, Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: September 18, 1996 /s/Michael D. Dunn ------------------ --------------------------- Michael D. Dunn, Director Date: September 18, 1996 /s/Thomas F. Kearns ------------------ --------------------------- Thomas F. Kearns, Director Date: September 18, 1996 /s/Richard P. Sullivan ------------------ --------------------------- Richard P. Sullivan, Director Date: September 18, 1996 /s/Roger C. Thies ------------------ --------------------------- Roger C. Thies, Director -29- 31 PHARMAKINETICS LABORATORIES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 Column A Column B Column C Column D Column E - ----------- --------- --------------------- -------- -------- Balance at Charged to Charged to Balance at Beginning Costs and Other end Description of Period Expense Accounts Deductions of Period - ----------- --------- ---------- ---------- ---------- ---------- (a) Valuation Allowance Deferred tax assets 1996 $3,866,842 - $ (332,760) - $3,534,082 1995 $4,341,980 - $ (475,138) - $3,866,842 1994 $4,402,884 - $ ( 60,904) - $4,341,980 Notes: - ----- (a) Represents charges to deferred tax asset account. See Note F to the Financial Statements.
-30- 32 EXHIBIT INDEX Exhibit No. 2. Disclosure Statement (incorporated by reference to Exhibit 2 of the Company's 8-K filing on April 6, 1993). 3. (a) Articles of Incorporation as amended (incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993). (b) Bylaws, as amended (incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10. Material Contracts (a) PharmaKinetics Laboratories, Inc. Incentive Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, Nos. 33-51840 and 33-57616). (b) PharmaKinetics Laboratories, Inc. Nonqualified Employee Stock Option Plan (incorporated by reference to registration Statement on Form S-8, No. 33-51838). (c) Employment Agreement between the Company and V. Brewster Jones (incorporated by reference to Exhibit 10 (c) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991). (d) Loan documents dated May 13, 1993, between Maryland National Bank (now, NationsBank, N.A.) and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993). (i) Amended and Restated Insurance Agreement (ii) Partnership/Joint Venture Borrowing Authority (iii) Unconditional Guaranty of Payment (iv) Security Agreement (v) Commercial Promissory Note (vi) Collateral Pledge Agreement (vii) Note (viii) Indemnity Deed of Trust (ix) Indemnity Deed of Trust (x) Financing Statement (xi) Loan Agreement (e) First Amendment to Loan Agreement, dated May 11, 1995, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995). (f) First Commercial Promissory Note Modification Agreement dated May 11, 1995, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995). -31- 33 (g) First Note Modification Agreement dated May 11, 1995, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995). (h) Second Amendment to Loan Agreement, dated May 11, 1995, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (filed herewith). 11. Computations of net earnings per common share (reference Item 6 filed herewith). 21. List of subsidiaries of registrant (incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995). 99. (a) Court Order approving Debtor's Amended Plan of reorganization (incorporated by reference to the Company's 8-K filing on April 6, 1993). (b) Court Order approving Application for Final Decree (filed herewith). -32- EX-10 2 1 EXHIBIT 10 (h) SECOND AMENDMENT TO LOAN AGREEMENT This SECOND AMENDMENT TO LOAN AGREEMENT (this "Agreement") is made as of the 20th day of June, 1996, by PHARMAKINETICS LABORATORIES, INC., a corporation organized and existing under the laws of the State of Maryland (the "Obligor") and NATIONSBANK, N.A., a national banking association (formerly known as "NationsBank of Virginia, N.A." and successor by merger to NationsBank, N.A. which was formerly known as NationsBank of Maryland, N.A.) and successor by merger to Maryland National Bank (the "Bank"). RECITALS -------- A. The Obligor and the Bank entered into a Loan Agreement dated May 13, 1993 (the "Loan Agreement"), which was amended by a First Amendment to Loan Agreement dated May 11, 1995 (the "First Amendment"). B. The Obligor has requested that the Bank amend the financial reporting requirements established in the Loan Agreement. C. The Bank is willing to agree to the Obligor's request on the condition, among others, that this Agreement be executed. AGREED PROVISIONS ----------------- NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledge, the Obligor and the Bank agree as follows: 1. The Obligor and the Bank agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Loan Agreement shall have the same meaning under this Agreement. 2. The Obligor and the Bank agree that on the date hereof the aggregate outstanding principal balance under the Revolving Credit Note (subject to change for return items and other adjustments made in the ordinary course of business) is $0 and under the Term Note is $1,852,033. 3. The Loan Agreement is hereby amended as follows: (a) On Page 5 of the First Amendment, the section "Financial -1- 2 Statements", which substitutes for the section "Financial Statements" on Page 7 of the Loan Agreement, item number 3, setting forth a requirement that the Obligor provide monthly operating statements, is hereby deleted in its entirety. 4. The Obligor hereby issues, ratifies and confirms the representations, warranties and covenants contained in the Loan Agreement, as amended hereby. The Obligor agrees that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations, and that, except as amended by the First Amendment and this Second Amendment to Loan Agreement, all terms and provision, representations, warranties and covenants of the original Loan Agreement shall continue in full force and effect. 5. The Obligor hereby acknowledges and warrants that the Bank has acted in good faith and has conducted in a commercially reasonable manner its relationships with the Obligor in connection with this Agreement and generally in connection with the Loan Agreement and the Obligations, the Obligor hereby waiving and releasing any claims to the contrary. 6. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. The Obligor agrees that the Bank may rely on the telecopy of any signature of any Obligor. The Bank agrees that the Obligor may rely on a telecopy of this Agreement executed by the Bank. IN WITNESS WHEREOF, the Obligor and the Bank have executed this Agreement under seal as of the date and year first written above. ATTEST: PHARMAKINETICS LABORATORIES, INC. /s/ Taryn L. Kunkel By: /s/ James K. Leslie (SEAL) - ------------------- ----------------------- James K. Leslie, President and Chief Executive Officer ATTEST: NATIONSBANK, N.A. /s/Glenda Garcia By: /s/ James W. Kirschner (SEAL) - ------------- -------------------------- James W. Kirschner Vice President -2- 3 AGREEMENT OF GUARANTOR ---------------------- The undersigned is the "Guarantor" under a Guaranty of Payment Agreement;, dated May 13, 1993 (as amended, modified, substituted, extended and renewed from time to time, the "Guaranty"), in favor of the foregoing Bank. In order to induce the Bank to enter into the foregoing Agreement, the undersigned (a) consents to the transactions contemplated by, and agreements made by the Obligor under the foregoing Agreement, and (b) ratifies, confirms and reissues the terms, conditions, promises, representations, warranties and provisions contained in the Guaranty. Without limiting the foregoing, the undersigned acknowledges and agrees that the Obligations (defined in the Loan Agreement as amended, modified, substituted, extended and renewed from time to time, include without limitation the amendments described in the foregoing Agreement) are covered by the Guaranty. WITNESS signature and seal of the undersigned as of the date of the Agreement. ATTEST: PKLB LIMITED PARTNERSHIP By: PharmaKinetics Laboratories, Inc., General Partner /s/ Taryn L. Kunkel By: /s/ James K. Leslie (SEAL) - ------------------- ------------------------- James K. Leslie President and Chief Executive Officer -3- EX-11 3 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (1)
For the Twelve Months Ended June 30, ---------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding: Common stock 12,195,891 12,195,891 12,395,891 12,395,891 12,350,959 12,350,959 Shares available under options 123,755 147,626 202,211 202,211 429,728 429,728 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding 12,319,646 12,343,517 12,598,102 12,598,102 12,780,687 12,780,687 ========== ========== ========== ========== ========== ========== Net income $ 778,895 $ 778,895 $ 127,827 $ 127,827 $ 204,851 $ 204,851 ========== ========== ========== ========== ========== ========== Earnings per share $ 0.06 $ 0.06 $ 0.01 $ 0.01 $ 0.02 $ 0.02 ========== ========== ========== ========== ========== ========== (1) Fully diluted earnings per share are not presented on the Company's Statement of Operations due to fully diluted earnings per share not having a difference from primary earnings per share of greater than 3% for the years ended June 30, 1996, 1995 and 1994.
EX-27 4
5 This schedule contains summary financial information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1996 JUN-30-1996 990,401 0 1,248,293 0 336,930 2,701,827 5,291,996 1,429,286 6,622,959 2,290,329 0 12,196 0 0 2,535,558 6,622,959 10,962,160 11,002,908 7,289,138 9,979,383 17,172 0 223,028 783,325 4,430 778,895 0 0 0 778,895 .06 .06
EX-99 5 EXHIBIT 99 (b) IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND NORTHERN DIVISION In re: PHARMAKINETICS LABORATORIES, INC. Case No: 90-5-5020-JS (Chapter 11) Debtor ORDER APPROVING APPLICATION FOR FINAL DECREE -------------------------------------------- Upon the foregoing Application for Final Decree and good cause having been shown, it is therefore this 23rd day of May, 1996 by the United States Bankruptcy Court for the District of Maryland, ORDERED, that pursuant to Local Bankruptcy Rule 23, the within bankruptcy case is closed. /s/ James F. Schneider ---------------------- Judge, United States Bankruptcy Court for the District of Maryland cc: Joel I. Sher, Esquire Shapiro and Olander 20th Floor 36 South Charles Street Baltimore, Maryland 21201 Kenneth Oestreicher, Esquire Whiteford, Taylor & Preston Suite 1400 7 St. Paul Street Baltimore, Maryland 21202-1626 Karen H. Moore, Esquire Assistant U.S. Trustee 300 West Pratt Street, Suite 350 Baltimore, Maryland 21201 -----END PRIVACY-ENHANCED MESSAGE-----