-----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, CqaHP0fjnVrrZ3Lv48N5zpoeOIFN7buBXlMTN8nlcrjrb7Og5eW2g9baxzhd5fx+ DDec8Ip9+o9u28TgkXesYA== 0000351506-97-000010.txt : 19971001 0000351506-97-000010.hdr.sgml : 19971001 ACCESSION NUMBER: 0000351506-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970930 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: SEC FILE NUMBER: 000-11580 FILM NUMBER: 97688564 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, 1997 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 September 2, 1997, 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 $4,095,916. List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: none. 2 PART I ITEM 1. BUSINESS PharmaKinetics Laboratories, Inc. (the "Company") is a contract research organization ("CRO") providing a range of clinical research and development services to the worldwide pharmaceutical industry and to the biotechnology industry in the development of prescription and non- rescription drug products. The Company also provides bioanalytical laboratory services and management and monitoring of clinical trials conducted at remote sites, including ancillary services such as protocol and case report form design, data management and biostatistics and regulatory consulting. The Company has historically focused its business development efforts on generic pharmaceutical companies in the United States ("U.S.") and Canada, and has more recently expanded its clients to include several of the innovator pharmaceutical and biotechnology companies in the U.S. and Europe. In connection with the implementation of a new strategic plan, the Company is pursuing business opportunities in four segments of the CRO industry: (1) providing services to generic drug companies - primarily in the area of bioequivalence/bioavailability studies which include both clinical and laboratory services; (2) providing Phase I clinical trials - primarily safety studies on new drugs - to the innovator pharmaceutical industry and to biotechnology firms; (3) providing bioanalytical laboratory services primarily to the innovator drug companies - this involves the analysis of biological samples, typically blood samples, which are the result of trials conducted at sites around the country and sent to the Company's laboratory for analysis; and (4) providing project management and monitoring services to both generic and innovator pharmaceutical firms - overseeing the conduct of trials conducted at remote sites, typically on patients. The Company's project management expertise lies in management of smaller trials conducted at fifteen or fewer sites with 200 - 400 patients rather than the very large trials more typically conducted by the large global CROs. SERVICES CLINICAL EVALUATION SERVICES The Company offers complete services for 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 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 -2- 3 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 Company also conducts Phase I clinical trials - primarily safety studies on new drugs - for the innovator pharmaceutical industry and for biotechnology firms. The clinical portions of 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. In 1997 the Company opened a new screening site in suburban Baltimore. The site is close to two colleges and is expected to expand the Company's access to healthy volunteers. 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 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. -3- 4 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. BIOANALYTICAL LABORATORY 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, HPLC, HPLC/MS/MS, GC and GC/MS, 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 results show the product is not bioequivalent, they may provide the basis for additional development work and further bioequivalence studies or the manufacturer may discontinue its NDA or ANDA application. The Company also provides bioanalytical laboratory services to innovator drug companies conducting clinical trials around the country. Samples from these trials are sent to the Company's laboratory for analysis. 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. CLINICAL TRIAL MANAGEMENT AND MONITORING The Company provides project management and monitoring of Phase II, III -4- 5 and IV clinical trials conducted at remote sites. In the course of such projects the Company's personnel are involved in site and investigator recruitment, patient enrollment, and study monitoring and data collection. In studies where the Company is providing Project Management and/or Monitoring services the drug is administered to patients by physicians, referred to as investigators, at hospitals, clinics, or other locations, referred to as sites. Potential investigators may be identified by the drug sponsor or by the Company. The Company generally solicits investigators' participation in the study. The trial's success depends on the successful identification and recruitment of investigators with an adequate base of patients who satisfy the requirements of the study protocol. The investigators find and enroll patients suitable for the study. The speed with which trials can be completed is significantly affected by the rate at which patients are enrolled. The Company's personnel closely track the rate of patient enrollment and provide input necessary to ensure that the planned schedule of enrollment is maintained. Prospective patients are required to review information about the drug and its possible side effects, and sign an Informed Consent form to record their knowledge and acceptance of potential side effects. Patients also undergo a medical examination to determine whether they meet the requirements of the study protocol. Patients then receive the drug and are examined by the investigator as specified by the study protocol. As patients are examined and tests are conducted in accordance with the study protocol, data are recorded on Case Report Forms (CRFs) and laboratory reports. The data are collected from study sites by specially trained persons known as monitors. The Company's monitors visit sites regularly to ensure study protocol adherence, that the CRFs are completed correctly, and that all data specified in the protocol are collected. The monitors take completed CRFs to be reviewed for consistency and accuracy before their data is entered into an electronic database. REGULATORY AFFAIRS SERVICES The Company provides comprehensive regulatory services to pharmaceutical and biotechnology companies including: representation with state formularies, pre-audit facility inspections, NDA and ANDA report writing, data assessment, report and literature review, protocol design and development, full statistical data analysis, and liaison with the FDA. LIABILITY EXPOSURE The Company's clinical research services center on the testing of new and generic (already marketed) drugs on human volunteers pursuant to a study protocol. Clinical research involves a risk of liability for personal injury or death to participants due, among other reasons, to possible unforeseen adverse side effects or improper administration of the drug. The Company believes that the risk of liability to participants in clinical research is mitigated by various regulatory requirements, including the role of IRBs and the need to obtain each participant's informed consent. The FDA requires that each human clinical trial be reviewed and approved by the IRB at each study site. The Company has its own independent IRB. This -5- 6 is an independent committee that includes both medical and non-medical personnel whose major purpose is to protect the interests and well being of individuals enrolled in the trial. After the trial begins, the IRB monitors compliance with the protocol and measures designed to protect participants, such as the requirement to obtain the informed consent. To reduce its potential liability, the Company seeks to obtain indemnity provisions in its contracts with clients and with investigators hired by the Company on behalf of its clients. These indemnities generally do not, however, protect the Company against certain of its own actions such as those involving negligence. Moreover, these indemnities are contractual arrangements that are subject to negotiation with individual clients and the terms and scope of such indemnities can vary from client to client and from study to study. Finally, the financial performance of these indemnities is not secured so that the Company bears the risk that an indemnifying party may not have the financial ability to fulfill its indemnification obligations. The Company could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of indemnity or where the indemnity, although applicable, is not performed in accordance with its terms. 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 in excess of primary, and a workmen's compensation liability policy which provides coverage of $1,000,000. There can be no assurance that this insurance coverage will be adequate, or that insurance coverage will continue to be available on terms acceptable to the Company. GOVERNMENT REGULATION The Company's services are conducted for pharmaceutical and biotechnology 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 services provided by the Company and the activities of its clients are ultimately subject to FDA regulation in the U.S. and comparable agencies in other countries. The Company is obligated to comply with FDA requirements governing activities such as obtaining informed consents, verifying qualifications of investigators, complying with Standard Operating -6- 7 Procedures (SOPs), reporting adverse reactions to drugs, and maintaining thorough and accurate records. The Company must maintain source documents for each study for specified periods. Such documents are frequently reviewed by the study sponsor during visits to the Company's facility and may be reviewed by the FDA during audits. Non-compliance with FDA regulations can result in the disqualification of data collected during a study. 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 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 prior experience with the Company, its 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. CLIENTS The Company has served most of the leading U.S. and Canadian generic drug firms and several of the leading U.S. and European pharmaceutical companies. The Company's clients also include companies which utilize biotechnology and other emerging technologies to develop new drugs. The Company has in the past derived, and may in the future derive, a significant portion of its revenue from a relatively limited number of major clients. Concentrations of business in the CRO industry are not uncommon and the Company is likely to experience such concentration in future years. For the years ended June 30, 1997, 1996 and 1995, one customer contributed in excess of 10% of contract revenue, accounting for 29%, 27% and 11%, respectively, of contract revenue. While an individual client may represent a significant percent of revenues, these revenues are the result of the sum of a number of different -7- 8 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 on the Company's results of operations. EXPORT SALES The Company conducts studies for a number of companies outside of the U.S., 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 $3,221,000, $3,301,000, and $2,208,000, for the years ended June 30, 1997, 1996 and 1995, 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, 1997, the backlog was approximately $6.0 million. At June 30, 1996, the Company's backlog was approximately $4.0 million. The Company expects to recognize revenue from studies included in the June 30, 1997, backlog during fiscal 1998 and future fiscal years. EMPLOYEES At July 31, 1997, the Company had 151 employees (58 of whom were part- time employees), of which 9 hold Ph.D. or M.D. degrees and 11 others hold masters degrees. The Company does not have collective bargaining agreements with any of its employees and considers its employee relations to be satisfactory. BUSINESS CONSIDERATIONS Certain statements contained in this Annual Report on Form 10-K are forward looking statements that have been made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are numerous risks and uncertainties which may cause the Company's actual results in future periods or plans for future periods to differ materially from the forward-looking statements contained herein. Those risks include, among others, (1) general economic conditions, (2) conditions affecting the pharmaceutical industry and the generic drug industry in particular, and (3) consolidation resulting in increased competition within the Company's market, as well as certain other risks described herein. ITEM 2. PROPERTIES The Company's principal executive offices are located in Baltimore, Maryland, where it owns a building containing approximately 142,000 square feet of space of which approximately 117,000 square feet are utilized in the Company's operations. The remaining space, consisting of two unfinished floors in the seven story 302 W. Fayette Street building, could be made available for expansion of the Company's operations when necessary. The -8- 9 building contains a consolidated analytical chemistry laboratory, a controlled live-in clinical facility with a 120 bed capacity, and corporate- wide information and data management systems. Substantially all of the Company's assets, including the building, collateralize the Company's borrowing agreements with NationsBank, N.A. (see Notes C and E to the Financial Statements). The Company also leases 1,000 square feet of office space in a Baltimore suburb for utilization as a screening location to provide more convenient access for students attending two nearby colleges, as well as for local residents and those for whom a suburban location is more convenient. 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 Material Legal Proceedings On January 24, 1997, the Company was notified that it may have incurred liability or may incur liability under Section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended (CERCLA), 42 U.S.C. Section 9607(a), in connection with the RAMP industries Site in Denver, Colorado. The Environmental Protection Agency (the "EPA") has identified approximately 800 entities that shipped wastes to the site and is conducting an investigation of the source, extent and nature of the release or threatened release of hazardous substances, pollutants or contaminants, or hazardous wastes, on or about the RAMP Industries Site. It is believed that the Company may have disposed of 15 cubic feet, or two drums, of waste at this site. Management is unable to estimate at this time the Company's portion of such costs, but based on information available to date, management does not believe that the resolution of this matter will be material to the Company's financial position, results of operations, or cash flows. 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). The trading -9- 10 market for the Company's stock is limited and sporadic. 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, 1997 June 30, 1996 -------------- -------------- Quarter High Low High Low ------- ------- ------ ------ ------- First $ 21/32 $ 5/16 $ 9/16 $ 11/32 Second 5/8 13/32 15/32 1/4 Third 7/16 3/8 7/16 11/32 Fourth 3/8 .245 1/2 11/32 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 September 2, 1997, was 1,107. 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, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ----------- ---------- ---------- ---------- Revenues $9,597,536 $10,962,160 $9,893,762 $8,847,674 $8,718,246 Earnings (loss): Before extraordinary item ($109,513) $778,895 $127,827 $204,851 ($197,947) Extraordinary item - - - - $107,016 Net earnings (loss) ($109,513) $778,895 $127,827 $204,851 ($90,931) Earnings (loss) per share: Before extraordinary item ($0.01) $0.06 $0.01 $0.02 ($0.02) Extraordinary item - - - - 0.01 Net earnings (loss) per share ($0.01) $0.06 $0.01 $0.02 ($0.01) Weighted average shares outstanding 12,195,891 12,319,646 12,598,102 12,780,687 10,719,615 -10- 11 Total Assets $5,958,732 $6,622,959 $6,553,348 $6,163,128 $6,198,151 Working capital (deficiency) $282,538 $411,498 ($63,474) $262,632 $831,114 Long-term liabilities $1,538,945 $1,784,876 $2,074,109 $2,437,373 $2,866,072 Stockholders' equity $2,438,241 $2,547,754 $1,768,859 $1,540,669 $1,364,898 - --------------------------------------------------------------------------- Notes to Selected Financial Data: The Company has not declared a dividend on common stock since inception. 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 contract research organization ("CRO") providing a range of clinical research and development services to the worldwide pharmaceutical industry and to the biotechnology industry in the development of prescription and non- prescription drug products. The Company also provides bioanalytical laboratory services and management and monitoring of clinical trials conducted at remote sites, including ancillary services such as protocol and case report form design, data management and biostatistics and regulatory consulting. The nature of the Company's services and recurring business with major clients results in the Company having clients whose business could account 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 900 Abbreviated New Drug ("ANDA") and New Drug ("NDA") Approvals which were received as a result of the conduct of over 2,000 studies. The Company's services are provided in accordance with regulations, promulgated by the United States Food and Drug Administration ("FDA"), as well as submissions to the Canadian Health Protection Branch ("HPB"), which govern clinical trials and the drug approval process. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, items in the Statements of Operations as percentages of total revenue and the increase (decrease) by each item as a percentage of the amount for the previous period: -11- 12 Percentage of Period to Period Total Revenues Change --------------------- ------------------- 1997 1996 Years ended June 30, Compared to 1997 1996 1995 1996 1995 ----- ----- ----- ----- ----- Contract revenue 91.3% 95.5% 93.5% (16.3)% 13.2% License fees 8.7 4.5 6.5 69.1 (23.8) ----- ----- ----- ----- ----- Total 100.0 100.0 100.0 (12.4) 10.8 Cost of contracts 73.5 66.5 68.9 (3.2) 7.0 ----- ----- ----- ----- ----- Gross margin 26.5 33.5 31.1 (30.7) 19.2 Research and development 4.7 3.6 4.2 12.6 (5.5) Selling, general and administrative 21.4 20.9 22.2 (10.2) 4.3 ----- ----- ----- ----- ----- Operating income 0.4 9.0 4.7 (95.9) 112.7 Interest expense (1.9) (2.0) (2.6) (16.7) (13.2) Interest income 0.4 0.4 0.4 (11.1) (3.5) Loss on disposal of equipment - (0.2) - (100.0) - Loss on sale of investments - - (1.0) - (100.0) Write-down of investments - - (0.5) - (100.0) ----- ----- ----- ----- ----- Earnings (loss) before taxes (1.1) 7.1 1.0 (114.0) 690.9 Income taxes - - (0.3) (100.0) 115.4 ----- ----- ----- ----- ----- Net earnings (loss) (1.1)% 7.1% 1.3 % (114.1)% 509.3% ===== ===== ===== ===== ===== 1997 COMPARED TO 1996 Total revenue decreased 12.4% from $11.0 million in fiscal 1996 to $9.6 million in fiscal 1997. The decrease was primarily attributable to weakness in the generic drug market early in the year, caused by an industry-wide downturn and continued consolidation of generic drug industry clients, and failure to meet certain internal time lines resulting in delayed revenue recognition for projects not completed by June 30, 1997. The Company has made progress in accomplishing its goals to increase the amount of clinical revenue generated from major pharmaceutical and biotechnology firms; initiate new clinical trial management contracts; and acquire its second LC/MS/MS instrument for utilization in its laboratory. The Company's contract revenue decreased 16.3% for fiscal 1997, compared to fiscal 1996. License fee income of $834,000 was recorded in fiscal 1997, compared to $493,000 in fiscal 1996. The Company will continue to receive license fee income, based on clients' sales of their approved drug products, through the -12- 13 expiration of the license fee agreements, the first of which will expire early in fiscal 1998 and the second of which will expire in fiscal 2000. In addition, the Company began receiving license fees under its third agreement with another of its clients which received approval from the FDA to manufacture and market Sucralfate Tablets. The client received approval to market its drug in April 1996 and commenced sales in November 1996. The Company expects to receive payments for a minimum of eight years from the date of approval. License fee income from sales of this third product accounted for the increase in license fee income, notwithstanding a decline in license fee income from the other two license fee arrangements. The Company believes it is unlikely that its clients will wish to utilize license fee arrangements in the future as compensation for work performed. As a result of this trend, contract revenues, rather than licensing income, will continue to be the primary source of revenues. The Company's gross margin decreased 30.7% from $3.7 million in fiscal 1996 to $2.5 million in fiscal 1997. As a percentage of revenue, the Company's gross margin decreased from 33.5% in fiscal 1996 to 26.5% in fiscal 1997, on a 12.4% decrease in total revenue. The decrease in gross margin is indicative of the fact that fixed costs, relative to employee salaries and other operating expenses, remained at similar levels as revenues decreased. Measures to bring costs and staffing levels in line with current levels of business were implemented in January 1997. Selling, general and administrative expenses totaled $2.1 million for fiscal 1997, compared to $2.3 million in fiscal 1996, representing a 10.2% decrease. As a percentage of revenue, selling, general and administrative expenses were 20.9% in fiscal 1996 and 21.4% in fiscal 1997. The Company effected certain staff reductions for administrative personnel in September 1995. The fact that these positions have not been filled has contributed to the decrease in expenses for fiscal year 1997, offset by increased compensation and increased operating costs. Research and development expenses increased 12.6% from $397,000 in fiscal 1996 to $447,000 in fiscal 1997. The Company has continued to invest in its research and development effort in 1997 in an effort to bring new analytical methods on-line to meet client demands. In addition, in August 1996, the Company acquired its first LC/MS/MS instrument for its laboratory and has invested in research and development to bring the instrument on-line and to develop methods for utilization in future studies. The Company believes that these investments will result in the generation of new business and an improvement in its competitive position. Interest expense decreased 16.7% from $223,000 in fiscal 1996 to $186,000 in fiscal 1997. The decrease is primarily attributable to decreases in the Company's interest bearing obligations. No provision for income taxes has been recorded in fiscal 1997, compared to minimal amounts for Alternative Minimum Tax obligations in fiscal 1996. The Company has available tax loss carryforwards of approximately $5,319,000, expiring in 2006 through 2010, and general business credits of approximately $1,433,000, expiring during the period 1999 to 2009. -13- 14 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 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 license fee agreements, the first of which will expire during fiscal 1998 and the second of which will expire in fiscal 2000. 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%. Selling, general and administrative expenses totaled $2.3 million for fiscal 1996, compared to $2.2 million in fiscal 1995, representing a 4.2% increase. As a percentage of revenue, selling, general and administrative expenses were 20.9% in fiscal 1996 and 22.2% in fiscal 1995. Selling, 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. Also, on a discretionary basis, the Company has made and expects to continue to make accelerated principal payments relative to its term note payable to the Bank. -14- 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 carry forwards 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. LIQUIDITY AND CAPITAL RESOURCES On June 30, 1997, the Company had cash and equivalents of $556,000 compared to $990,000 at June 30, 1996. 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. The Company invested $249,000 in capital equipment purchases, $195,000 of which was paid in cash with the remaining $54,000 financed through capital leases. The capital leases have terms expiring through fiscal 2000. The Company made principal payments of $145,000 on its long-term debt obligations during fiscal 1997. On a discretionary basis, the Company has made and expects to continue to make accelerated principal payments relative to its term note payable to NationsBank, N.A. At June 30, 1997, the Company was not in compliance with its cash flow ratio as required by the terms of the note. The Bank has granted a waiver for the Company's lack of compliance on this covenant. At the time the waiver was granted, the Company's term note payable to the Bank was amended. The note, which had previously borne interest at the rate of the Bank's prime rate plus one-half percent, now bears interest at the rate of the Bank's prime rate plus three-quarters percent. This change was effective August 1997. The Company's primary source of funds is cash flow from operations, which decreased by $554,000 in fiscal 1997 from fiscal 1996, principally as a result of the Company's 1997 results of operations as compared to 1996. The Company also has available a $500,000 line of credit from NationsBank, N.A. which has not been drawn upon. Terms of the Company's line of credit include advances against eligible receivables, interest at the Bank's prime rate of interest and cash pledges equal to amounts advanced. As of June 30, 1997, the Company's stockholders' equity totaled $2,438,000 compared to $2,548,000 at June 30, 1996. The Company had working capital of $283,000 at June 30, 1997, compared to working capital of $411,000 at June 30, 1996. The decrease in working capital reflects the decrease in cash balances caused by the Company's poor performance during fiscal 1997. The Company's performance in fiscal 1997 can be attributed to weakness in the generic drug market and failure to meet certain internal time lines resulting in delayed revenue recognition for projects not completed by June 30, 1997. The Company is currently negotiating to lease its second state-of-the- art laboratory instrument, a LC/MS/MS, delivered to the Company in the first -15- 16 quarter of fiscal 1998. The cost of the instrument approximates $360,000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable to this registrant in 1997 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 29 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 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 & LYBRAND, L.L.P. Baltimore, Maryland August 14, 1997 -16- 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF OPERATIONS
Years ended June 30, ----------------------------------- 1997 1996 1995 ---------- ----------- ---------- Revenues $9,597,536 $10,962,160 $9,893,762 Cost of contracts 7,053,560 7,289,138 6,813,576 ---------- ---------- ---------- Gross profit 2,543,976 3,673,022 3,080,186 Selling, general and administrative expenses 2,057,212 2,290,828 2,199,365 Research and development expenses 446,677 396,741 420,049 ---------- ---------- ---------- Earnings from operations 40,087 985,453 460,772 Interest expense (185,817) (223,028) (257,018) Interest income 36,217 40,748 42,207 Gain (loss) on disposal of equipment - (19,848) 1,315 Loss on sale of investments - - (101,479) Write-down of investments - - (46,750) ---------- ---------- ---------- Earnings (loss) before income taxes (109,513) 783,325 99,047 Provision for (benefit of) income taxes - 4,430 (28,780) ---------- ---------- ---------- Net earnings (loss) ($109,513) $778,895 $127,827 ========== ========== ========== Net earnings (loss) per share ($0.01) $0.06 $0.01 ========== ========== ========== Weighted average shares outstanding 12,195,891 12,319,646 12,598,102 ========== ========== ==========
-17- 18 PHARMAKINETICS LABORATORIES, INC. BALANCE SHEETS
June 30, ------------------------- 1997 1996 ---------- ---------- ASSETS Current Assets: Cash and equivalents $556,040 $955,526 Restricted cash and equivalents - 34,875 Accounts receivable 1,014,538 1,248,293 Contracts in process 503,163 336,930 Prepaid expenses 190,343 126,203 ---------- ---------- Total Current Assets 2,264,084 2,701,827 Property, plant and equipment, net 3,654,132 3,862,710 Other assets 40,516 58,422 ---------- ---------- Total Assets $5,958,732 $6,622,959 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $206,588 $143,616 Accounts payable and accrued expenses 912,686 1,213,403 Deposits on contracts in process 862,272 933,310 ---------- ---------- Total Current Liabilities 1,981,546 2,290,329 Long-term debt 1,500,231 1,708,417 Other liabilities 38,714 76,459 ---------- ---------- Total Liabilities 3,520,491 4,075,205 ---------- ---------- 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 (9,587,656) (9,478,143) ---------- ---------- Total Stockholders' Equity 2,438,241 2,547,754 ---------- ---------- Total Liabilities and Stockholders' Equity $5,958,732 $6,622,959 ========== ========== - ---------------------------------------------------------------------------- See notes to financial statements.
-18- 19 PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- COMMON STOCK Balance, beginning of year $12,196 $12,196 $12,396 Stock canceled - - (200) ---------- ---------- ---------- Balance, end of year 12,196 12,196 12,196 ---------- ---------- ---------- (Shares outstanding: 12,195,891 at June 30, 1997, 1996 and 1995.) ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 12,013,701 12,013,701 12,113,501 Stock subscription canceled - - (99,800) ---------- ---------- ---------- Balance, end of year 12,013,701 12,013,701 12,013,701 ---------- ---------- ---------- ACCUMULATED DEFICIT Balance, beginning of year (9,478,143) (10,257,038) (10,384,865) Net earnings (loss) (109,513) 778,895 127,827 ---------- ---------- ---------- Balance, end of year (9,587,656) (9,478,143) (10,257,038) ---------- ---------- ---------- NOTE RECEIVABLE ON COMMON STOCK SUBSCRIBED Balance, beginning of year - - (101,283) Note canceled - - 100,000 Interest accrued - - (6,000) Interest received - - 7,283 ---------- ---------- ---------- Balance, end of year - - - ---------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $2,438,241 $2,547,754 $1,768,859 ========== ========== ========== - ---------------------------------------------------------------------------- See notes to financial statements.
-19- 20 PHARMAKINETICS LABORATORIES, INC. STATEMENTS OF CASH FLOWS
Years ended June 30, -------------------------------- 1997 1996 1995 --------- --------- ---------- Cash flows from operating activities: Net earnings (loss) ($109,513) $778,895 $127,827 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 457,785 405,703 312,875 Recovery of doubtful accounts - - (9,450) (Gain) loss in disposal of equipment - 19,848 (1,315) Loss on sale of investments - - 101,479 Write-down of investments - - 46,750 Changes in operating assets and liabilities: Accounts receivable 233,755 (473,609) 40,628 Contracts in process (166,233) 358,429 (176,390) Prepaid expenses (64,140) (62,522) (14,093) Refundable income taxes - 29,364 (29,364) Accounts payable and accrued expenses (306,386) (327,781) 61,935 Deposits on contracts in process (71,038) (200,237) 378,372 Other liabilities - - (204,729) --------- --------- ---------- Net cash provided (used) by operating activities (25,770) 528,090 634,525 --------- --------- ---------- Cash flows from investing activities: Payments for purchases of property and equipment (195,367) (164,474) (410,885) Proceeds from sale of equipment - 71,400 4,300 Proceeds from sale of investments - - 69,747 --------- --------- ---------- Net cash used by investing activities (195,367) (93,074) (336,838) --------- --------- ---------- Cash flows from financing activities: Payments on long-term debt (145,214) (304,264) (273,153) Payments for capital lease obligations (85,916) (224,169) (15,298) Other assets 17,906 - - --------- --------- ---------- Net cash used by financing activities (213,224) (528,433) (288,451) --------- --------- ---------- Increase (decrease) in cash and equivalents (434,361) (93,417) 9,236 Cash and equivalents, beginning of year 990,401 1,083,818 1,074,582 --------- --------- ---------- Cash and equivalents, end of year $556,040 $990,401 $1,083,818 ========= ========= ========== Supplemental Schedule of Non-Cash Transactions Fixed assets acquired through capital leases $53,840 $347,167 $214,903 - ---------------------------------------------------------------------------- See notes to financial statements.
-20- 21 PHARMAKINETICS LABORATORIES, INC. NOTES TO FINANCIAL STATEMENTS A. ORGANIZATION AND BASIS OF PRESENTATION PharmaKinetics Laboratories, Inc. (the "Company") is a contract research organization ("CRO") providing a range of clinical research and development services to the worldwide pharmaceutical industry and to the biotechnology industry in the development of prescription and non- prescription drug products. The Company also provides bioanalytical laboratory services and management and monitoring of clinical trials conducted at remote sites, including ancillary services such as protocol and case report form design, data management and biostatistics and regulatory consulting. The Company has historically focused its business development efforts on generic pharmaceutical companies in the United States ("U.S.") and Canada, and has more recently expanded its clients to include several of the innovator pharmaceutical and biotechnology companies in the U.S. and Europe. 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, 1997, the Company had three license fee agreements from which it received license fee income. The Company began receiving license fees under its third license fee arrangement in November 1996. Based upon actual client sales, license fee income of $833,701, $493,076, and $647,308 was recorded during fiscal years ended June 30, 1997, 1996, and 1995, 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 early in 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. 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. Projected losses on contracts are provided for in their entirety when known. For the years ended June 30, 1997, 1996, and 1995 one client contributed in excess of 10% of contract revenue, accounting for 29%, 27% and 11% of contract revenue, respectively. The Company conducts studies for a number of companies outside of the U.S., 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 -21- 22 of $3,221,000, $3,301,000, and $2,208,000, for the years ended June 30, 1997, 1996 and 1995, respectively, from its clients outside of the United States. Contracts in Process and Deposits on Contracts Contracts in process includes direct and indirect costs related to contract performance. Deposits on contracts represent interim payments. Upon completion of contracts, the customer is billed for the total contract amount less any deposits or interim payments. Earnings (Loss) per Share Earnings (loss) per share is determined by dividing net earnings by the weighted average number of common stock and dilutive 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 (loss) per share data; however, they are excluded from fiscal 1997 calculations because the effect of their inclusion would be anti-dilutive. 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, of $34,875 represented an amount held in escrow for payment of post-confirmation administrative claims. The amount was returned to the Company's general funds in September 1996. 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. Five of the Company's customers account for 63.6% of the outstanding accounts receivable balance at June 30, 1997. In addition, 34.5% of the outstanding accounts receivable balance at June 30, 1997 was from clients outside of the U.S. Property, Plant and Equipment Property, plant and equipment are stated at the lower of cost or net realizable value. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives of the Company's furniture and equipment approximate five years, and its building and improvements range from fifteen to thirty-six years. -22- 23 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. Valuation allowances are established when the deferred tax assets are not currently assured of realization. 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. During fiscal 1995, the Company reversed a previous accrual for unemployment insurance assessments on study participant compensation as a result of a favorable ruling from Maryland's Board of Appeals, which had the effect of increasing income before taxes by $232,719. New Accounting Standards Adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", establishes accounting and reporting standards for stock based employee compensation plans. Accordingly, no compensation cost has been recognized for the stock option plans consistent with previous accounting under APB No. 25. Effective July 1, 1996, the Company adopted the disclosure only provisions of this Statement. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and Assets to be Disposed of", adopted by the Company for its current fiscal year, 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 had no impact on the Company's financial statements. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued the following Statements of Financial Accounting Standards: No. 128 regarding Earnings per Share and No. 129 regarding Capital Structure. These require the Company to present basic and diluted earnings per share in the financial statements and make certain disclosures about the Company's capital structure. The Company must adopt the requirements of these Standards in the financial statements for periods ending after December 15, 1997. Adoption of these Standards is not expected to have a material impact on the Company's financial presentation and disclosure. -23- 24 Also during 1997, the Financial Accounting Standards Board issued the following Statements of Financial Accounting Standards that will impact the Company's financial statement presentation and disclosure: No. 130 regarding Reporting Comprehensive Income and No. 131 regarding Segment Reporting. The Company will adopt these Standards as prescribed in fiscal 1999. C. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at June 30, is summarized as follows: 1997 1996 ---------- ---------- Land $200,000 $200,000 Building and improvements 2,880,085 2,876,430 Furniture and equipment 2,461,118 2,215,566 ---------- ---------- 5,541,203 5,291,996 Less: accumulated depreciation (1,887,071) (1,429,286) ---------- ---------- $3,654,132 $3,862,710 ========== ========== Assets held under capital lease at June 30, 1997 and 1996, were $289,990 and $535,400, respectively. Accumulated amortization of assets held under capital lease at June 30, 1997 and 1996, was $119,267, and $94,230, 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 was 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: 1997 1996 ---------- ---------- Trade accounts payable $488,522 $293,001 Accrued payroll and related expenses 94,647 341,768 Other accrued expenses 329,517 578,634 ---------- ---------- $912,686 $1,213,403 ========== ========== E. DEBT At June 30, long-term debt consisted of the following: 1997 1996 ---------- ---------- Note payable $1,706,819 $1,852,033 Less: current portion (206,588) (143,616) ---------- ---------- $1,500,231 $1,708,417 ========== ========== -24- 25 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 (8.50% at June 30, 1997) plus an additional one-half percent on the note payable only. Terms of the Company's line of credit include advances against eligible receivables and cash pledges equal to amounts advanced. 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 carrying value of the note approximates its current value at June 30, 1997. At June 30, 1997, the Company was not in compliance with its cash flow ratio as required by the terms of the note. The Bank has granted a waiver for the Company's lack of compliance on this covenant. At the time the waiver was granted, the Company's term note payable to the Bank was amended. The note, which had previously borne interest at the rate of the Bank's prime rate plus one-half percent, now bears interest at the rate of the Bank's prime rate plus three-quarters percent. This change was effective August 1997. Cash payments for interest were $181,722, $362,946, and $248,148, in fiscal 1997, 1996, and 1995, respectively. The long-term debt matures as follows: Year ending June 30, ------------------- 1998 206,588 1999 487,680 2000 532,105 2001 480,446 ---------- $1,706,819 ---------- On a discretionary basis, the Company has made and expects to continue to make accelerated principal payments relative to its term note payable to the bank. 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: -25- 26 Year ended June 30, ------------------------ 1997 1996 ---------- ---------- Deferred tax assets: Property, plant and equipment $388,964 $508,225 Accrued liabilities 20,644 73,973 Net operating loss carryforwards 2,074,466 1,515,251 Alternative minimum tax credits 4,095 4,095 General business credits 1,432,538 1,432,538 ---------- ---------- Total deferred tax assets 3,920,707 3,534,082 Less: valuation allowance (3,920,707) (3,534,082) ---------- ---------- Deferred income taxes per balance sheet $ - $ - ========== ========== Based on the weight of evidence available at June 30, 1997, in management's opinion, a full valuation allowance is required to be recorded against the Company's deferred income tax assets. At June 30, 1997, the Company had tax loss carryforwards of approximately $5,319,000, expiring in 2006 through 2010, and general business credits of approximately $1,433,000, expiring during the period 1999 through 2009. The principal differences between the actual effective tax rate and the statutory federal tax rate are as follows: Year ended June 30, ------------------------- 1997 1996 1995 ----- ----- ----- 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) Loss carryforwards (38.9) (38.9) (38.9) ----- ----- ----- Effective rate -% .6% (29.0)% ===== ===== ===== The Company made cash payments for income taxes in fiscal years ended June 30, 1997, and 1995, in the amounts of $5,800 and $5,000, respectively. The Company received a refund for income taxes of $29,000 in the fiscal year ended June 30, 1996. G. COMMITMENTS AND CONTINGENT LIABILITIES Leases On October 1, 1996, the Company commenced an operating lease for a LC/MS/MS for utilization in its analytical laboratory. The terms of the lease include an original instrument cost of $358,000, 36 monthly payments of approximately $10,200 and an end-of-lease-term option to retain or return the instrument. Lease expense for all operating leases, including leases with -26- 27 terms of less than one year, amounted to $168,000, $50,700 and $106,000 for the years ended June 30, 1997, 1996 and 1995, respectively. The future expected payout of leases with terms in excess of one year is as follows: Year ending June 30, ------------------- 1998 $175,678 1999 166,352 2000 54,078 2001 7,925 2002 2,054 -------- $406,087 ======== The Company has entered into capital lease arrangements for the purchase of furniture and equipment in the amount of $289,990. 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 ending June 30, ------------------- 1998 $95,019 1999 29,695 2000 12,664 less: interest portion (13,388) -------- $123,990 ======== Legal Proceedings On January 24, 1997, the Company was notified that it may have incurred liability or may incur liability under Section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended (CERCLA), 42 U.S.C. Section 9607(a), in connection with the RAMP industries Site in Denver, Colorado. The Environmental Protection Agency (the "EPA") has identified approximately 800 entities that shipped wastes to the site and is conducting an investigation of the source, extent and nature of the release or threatened release of hazardous substances, pollutants or contaminants, or hazardous wastes, on or about the RAMP Industries Site. It is believed that the Company may have disposed of 15 cubic feet, or two drums, of waste at this site. Management is unable to estimate at this time the Company's portion of such costs, but based on information available to date, management does not believe that the resolution of this matter will be material to the Company's financial position, results of operations, or cash flows. H. CAPITAL STOCK AND STOCK PLANS Preferred Stock The Board of Directors is authorized to issue up to 1,500,000 shares of -27- 28 preferred stock at such time or times, in such series, with such designations, preferences, or other special rights, as it may determine. Stock Option Plans The Company has stock option plans under which incentive and non-qualified stock options may be granted to key employees. As of June 30, 1997, the plans provide for the delivery of up to 2,569,900 shares of common stock upon exercise of options granted at no less than the fair market value of the shares on the date of grant. The options may be granted for terms up to but not exceeding ten years and are generally fully vested after five years from the date granted. In November 1996, the Board of Directors elected to discontinue cash compensation for its non-employee directors and to adopt a Non-Employee Directors Stock Option Plan effective November 25, 1996. Each non-employee director shall be granted options to purchase 120,000 shares of the Company's Common Stock, at the fair market value of the stock on the effective date of the grant, which shall vest in four equal installments of one-quarter over four years. The first year's grant will be pro-rated for directors joining the Board after the effective date. The first installment shall vest on the effective date of the grant. Thereafter, on the date of each of the next three annual meetings of stockholders at which elections to the Board are conducted, an installment of 30,000 shares shall vest in each serving director who is reelected to the Board. The Plan shall be administered by the Board or the Compensation Committee established by the Board and provides that the number of shares of Stock that may be issued pursuant to options granted under the Plan shall not exceed in the aggregate 600,000 shares. As of June 30, 1997, there were 352,500 options outstanding under this Plan. The Plan will be submitted to stockholders for ratification at the next Annual Meeting of Stockholders. In addition to the options described above, the Company has granted Non- qualified options to purchase 284,600 shares of the Company's Common Stock to non-employees. The options were granted at fair market value of the stock on the effective date of the grant and were considered vested on the effective date of the grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" and has continued to account for its stock based compensation in accordance with the provisions of APB No. 25. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company' stock option plans been determined based on the fair value at the date of grant for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below: 1997 1996 --------- --------- Net earnings (loss) - as reported ($109,513) $778,895 Net earnings (loss) - pro forma ($151,314) $768,078 Earnings (loss) per share - as reported ($0.01) $0.06 Earnings (loss) per share - pro forma ($0.01) $0.06 -28- 29 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions for options granted in 1997 and 1996: 1997 1996 --------- --------- Expected option life 5 years 5 years Expected annual volatility 59.7% 78.6% Risk-free interest rate 6.48% 6.12% Dividend yield .00% .00% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, therefore, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The status of stock options is summarized as follows: Weighted Average Option Number Price Options Price of Shares per Share Exercisable -------------------------- --------- --------- ----------- Balance June 30, 1994 ($0.28 - $5.25 per share) 988,467 $0.61 539,884 Granted ($0.44 - $0.7813 per share) 155,900 $0.51 Exercised - - Forfeited ($0.625 - $1.0625 per share) (63,300) $0.70 --------- Balance June 30, 1995 ($0.28 - $5.25 per share) 1,081,067 $0.59 792,660 Granted ($0.4375 - $0.50 per share) 281,700 $0.48 Exercised - - Forfeited ($0.4375 - $1.50 per share) (172,700) $0.64 --------- Balance June 30, 1996 ($0.28 - $5.25 per share) 1,190,067 $0.56 863,434 Granted ($0.36 - $0.5469 per share) 725,600 $0.47 Exercised - - Forfeited ($0.315 - $2.00 per share) (311,992) $0.59 --------- Balance June 30, 1997 ($0.28 - $5.25 per share) 1,603,675 $0.51 788,975 ========= The following table summarizes information about stock options outstanding at June 30, 1997: -29- 30 Options outstanding Options exercisable ----------------------------------- ----------------------- Range Number Weighted Weighted Number Weighted of outstanding average average exercisable average exercise at remaining exercise at exercise prices June 30, contractual price June 30, price 1997 life 1997 - ---------------------------------------------------- ----------------------- $ years $ $ 0.28 - 1.00 1,527,775 6.9 0.47 715,325 0.47 1.01 - 5.25 75,900 4.9 1.44 73,650 1.45 - ---------------------------------------------------- ----------------------- 0.28 - 5.25 1,603,675 6.8 0.51 788,975 0.56 Options exercised to date total 710,012. Of the options exercised to date, 200,000 shares were returned to the Company and canceled when a note receivable for common stock subscribed was canceled effective June 30, 1995. As of June 30, 1997, the Company has reserved 1,603,675 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 The directors and executive officers of the Company and their ages, positions and years of service are as follows: DIRECTORS Name, Age, and Year in which first Elected a Director Business Experience - --------------------- -------------------------------------------------------- Thomas F. Kearns, Jr. Retired from Bear Stearns, Inc. in 1987; Director of 60 (1995) Biomet, Inc., Fibrogen, Inc. and OnGard Systems, Inc.; Trustee of the University of North Carolina Foundation and Endowment Fund. James K. Leslie President and Chief Executive Officer of PharmaKinetics 52 (1995) Laboratories, Inc., since July 1995; Executive Vice President and Chief Operating Officer from June 1995 to July 1995; President and Chief Executive Officer of BioFin, Inc., 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. Education - M.B.A. (with distinction), Harvard Business School, Boston, Massachusetts, 1969; B.SC., Chemical Engineering (First Class Honors), University of Edinburgh, Edinburgh, Scotland, 1967. -30- 31 Roger C. Thies Director of Hyman, Phelps and McNamara, P.C. 53 (1991) representing a broad range of clients on legal issues concerning food, drug, medical devices, and cosmetic law and legislation since 1988; Vice President and General Counsel of G.D. Searle managing all of the company's legal matters from 1986 to 1988. Grover C. Wrenn Chairman and CEO of Better Health Network, Inc., 54 (1997) a provider of consumer health information to physician waiting rooms in more than 30 media markets since 1996. Previously, President and CEO of Ensys Environmental Products, Inc. from 1995 to 1996 and prior to that President and CEO of Applied Bioscience International from 1990 to 1995. Director of Strategic Diagnostics, Inc. and Laidlaw Environmental Services. The Board of Directors has an Audit Committee and a Compensation Committee, each consisting of all directors who are not employees of the Company. The Board of Directors does not have a Nominating Committee. EXECUTIVE OFFICERS Position with the Company Employed Officer Name Age and principal occupation Since Since - -------------------------- --- -------------------------- -------- ------- Christopher H. Hendy, Ph.D. 37 Vice President Clinical 1993 1993 Evaluation Services since (1) 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. Education - Ph.D., Neurophysiology, Imperial College, University of London, 1987; B.SC.., Zoology, Imperial College, University of London, 1982. Taryn L. Kunkel 36 Vice President, Chief Financial 1990 1991 Officer and Treasurer since February 1991; Controller from November 1990 to February 1991; and Director of Financial Analysis from July 1990 to November 1990. Education - M.A.S., Management, Johns Hopkins University, Baltimore, Maryland 1989; B.S., Accounting (Magna Cum Laude), Loyola College, Baltimore, Maryland 1983. C.P.A. -31- 32 Elizabeth A. Lane, Ph.D. 52 Vice President Biopharmaceutics 1988 1992 and Regulatory Affairs since May 1992; Director of Pharmacokinetics and Regulatory Affairs from September 1988 to May 1992. Education - Ph.D., Pharmaceutical Sciences, University of Washington, Seattle, Washington, 1981; B.S. Pharmacy, University of Washington, Seattle, Washington, 1973; B.Pharm., University of Sydney, Australia, 1965. James K. Leslie 52 President and Chief Executive 1995 1995 Officer since July 1995; Executive Vice President and Chief Operating Officer from June 1995 to July 1995; President and Chief Executive Officer of BioFin, Inc., 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. Education - M.B.A. (with distinction), Harvard Business School, Boston, Massachusetts, 1969; B.SC., Chemical Engineering (First Class Honors), University of Edinburgh, Edinburgh, Scotland, 1967. Vernon D. Parker, Ph.D. 49 Vice President Clinical Services 1997 1997 since January 1997; Director, (2) Clinical Pharmacology from 1995 to 1997 of Wyeth-Ayerst Research; Associate Director, Clinical Pharmacology from 1990 to 1995, and Assistant Director, Clinical Pharmacology from 1988 to 1990 also at Wyeth-Ayerst Research. Education - Ph.D., Clinical Pharmacy with a minor in pharmacology, Purdue University School of Pharmacy, West Lafayette, Indiana, 1983; M.S., Pharmacology and Physiology, Tuskegee University School of Veterinary Medicine, Tuskegee, Alabama, 1976; B.S. Pharm., Pharmacy with a minor in chemistry, Florida A&M University School of Pharmacy, Tallahassee, Florida, 1970. -32- 33 James M. Wilkinson II, Ph.D. 45 Vice President Analytical 1996 1996 Laboratory Services since July 1996; Associate Director, Pharmaco International, Inc. Analytical Laboratory Division from December 1992 to June 1996. Education - Postdoctoral Associate, University of Washington, Seattle, Washington, 1979; Ph.D., Organic Chemistry, Duke University, Durham, North Carolina, 1978; B.S., Chemistry, Virginia Military Institute, Lexington, Virginia, 1974. (1) Dr. Hendy resigned his position with the Company effective September 24, 1996. (2) Dr. Parker joined the Company on January 3, 1997. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based on the Company's review of copies of reporting forms received by it, the Company believes that during the fiscal year ended June 30, 1997, all applicable filing requirements were complied with, except that one report, a Form 4, was filed late by Mrs. Kunkel. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE OFFICERS The following table sets forth, for the Company's last three fiscal years, the cash compensation paid or accrued by the Company, as well as certain other compensation paid or accrued for those years, to its Chief Executive Officer and other executive officers whose remuneration exceeded $100,000 for the fiscal year ended June 30, 1997. -33- 34 SUMMARY COMPENSATION TABLE Annual Compensation -------------------------- Long-term All Compensation Other ------------ ----- Other Securities All Annual Underlying Other Name and Fiscal Salary Bonus Comp. Options Comp. Principal Position Year ($) ($) ($)(1) (#) ($)(2) - ----------------------------- ------ ------- ------- ------- ------- ----- James K. Leslie (3) 1997 150,000 - 6,000 100,000 - President, CEO 1996 124,000 87,043 6,000 100,000 - and Director 1995 4,700 - 230 120,000 - Christopher H. Hendy, Ph.D.(4) 1997 28,700 - 1,500 - - Vice President 1996 102,000 32,226 6,000 - - Clinical Evaluation Services 1995 102,000 - 6,000 10,000 - Elizabeth A. Lane, Ph.D. 1997 100,000 - - - - Vice President 1996 88,000 10,742 - - - Biopharmaceutics and 1995 85,000 - 3,000 - - Regulatory Affairs Vernon D. Parker, Ph.D. (5) 1997 51,000 - 2,500 60,000 3,600 Vice President 1996 - - - - - Clinical Evaluation Services 1995 - - - - - James M. Wilkinson II, Ph.D. 1997 106,000 - 6,000 70,000 7,000 Vice President 1996 - - - - - Analytical Laboratory Services 1995 - - - - - (1) Other Annual Compensation includes personal benefits provided by the Company. (2) Other compensation includes amounts paid for relocation and related expenses. (3) Mr. Leslie joined the Company in June 1995. (4) Dr. Hendy resigned from the Company effective September 24, 1996. (5) Dr. Parker joined the Company on January 3, 1997. Dr. Parker's annual salary for fiscal 1997 was $105,000, plus other compensation of $5,000. SEVERANCE AGREEMENTS The Company has severance agreements with Mr. Leslie and Mrs. Kunkel, Vice President and Chief Financial Officer, respectively. The Agreements, which are identical, provide for continuance of their respective annual base salaries for a period of twelve (12) months from the date of termination if such termination occurs at any time during a two (2) year period after a "Significant Transaction" or a "Change of Board Composition", and is for reasons other than "Just Cause", such terms being defined in the Agreements. Upon termination, the Agreements also provide for accelerated vesting of all stock options and the option to extend the exercise period of such options. The Agreements were effective April 22, 1997. As of June 30, 1997, benefits payable would be approximately $156,000 for Mr. Leslie and approximately $90,500 for Mrs. Kunkel. -34- 35 STOCK OPTIONS The following table sets forth information concerning the grant of stock options under the Company's 1996 Incentive Stock Option Plan during fiscal 1997 to the executive officers named in the Summary Compensation Table. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS % of Total Options Options Granted to Exercise or Granted Employees in Base Price Expiration Name (#)(1) Fiscal Year ($/share) Date - ------------------------------------------------------------------------------ James K. Leslie 100,000 13.8% $0.469 7/01/06 Vernon D. Parker, Ph.D. 60,000 8.3% $0.4531 1/13/07 James M. Wilkinson II, Ph.D. 70,000 9.6% $0.469 7/01/06 (1) All options were granted under the 1996 Incentive Stock Option Plan. All options vest over a four year period from the date of grant and all options expire ten years from the date of grant, if not exercised earlier. The following table sets forth information related to the number and value of options held by four of the Company's executive officers. No options were exercised during the fiscal year ended June 30, 1997. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Value of Number of Unexercised Shares Unexercised In-the-Money Acquired ($) Options at Options at in Value FY-End (#) FY-End ($)(1) Name Exercise Realized Exer. Unexer. Exer. Unexer. - ------------------------------------------------------------------------------- Elizabeth A. Lane, Ph.D. - - 75,000 - - - James K. Leslie - - 85,000 235,000 - - Vernon D. Parker, Ph.D. - - - 60,000 - - James M. Wilkinson II, Ph.D. - - - 70,000 - - (1) The exercise price of all options exceeded market value at June 30, 1997. DIRECTOR COMPENSATION Each member of the Board of Directors who is not an employee of the Company, except one, received a monthly retainer of $1,366.66 and reimbursement of expenses for attendance at meetings during the period July 1, 1996 through November 30, 1996. One director opted to forego his monthly retainer for personal reasons. Two of the directors serving the Company during this time period did not stand for reelection to the Board of Directors at the Company's Annual Meeting of Stockholders on November 25, 1996. -35- 36 Subsequent to the Annual Meeting of Stockholders on November 25, 1996 the Company instituted a stock option plan covering non-employee directors pursuant to which each director shall be granted options to purchase 120,000 shares at the fair market value of the Stock on the effective date of the grant, which shall vest in four equal installments of 30,000 shares over four years. The first year's installment shall vest on the effective date of the grant and shall be prorated for directors joining the Board after the effective date of November 25, 1996, but shall in no event be less than 15,000 shares. Thereafter, on the date of each of the next three annual meetings of stockholders at which elections to the Board are conducted, an installment of 30,000 shares shall vest in each serving director who is reelected to the Board. The Plan shall be administered by the Board and provides that the number of shares of Stock that may be issued pursuant to Options granted under the Plan shall not exceed 600,000 shares. Currently there are options covering 352,500 shares outstanding under this Plan. Although the Plan, by its terms, became effective on November 25, 1996, no options granted under this Plan may be exercised unless and until the Plan has been approved by the vote of the holders of a majority of the shares of Common Stock of the Company represented in person or by proxy at the Company's next annual meeting of shareholders. Each member of the Board of Directors who is not an employee of the Company continues to receive reimbursement of expenses for attendance at meetings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of September 2, 1997, regarding stock ownership of management and owners of 5% or more of the Company's Common Stock: Beneficial Ownership ------------------------------------ Number of Percent of Name & Address Shares Owned Shares Owned - -------------- ------------ ------------ R.A. Mackie and Co., L.P. 173,593 1.4% 18 North Astor Street Irvington, NY 10533 Robert A. Mackie, Jr. 898,383 7.4% 18 North Astor Street Irvington, NY 10533 Allen and Company, Incorporated 843,155 6.9% Allen Holding Inc. 711 Fifth Avenue New York, NY 10022 Thomas F. Kearns 69,078 (1) (3) Elizabeth A. Lane, Ph.D. 75,000 (1) (3) James K. Leslie 245,000 (1)(2) 2.0% Roger C. Thies 44,600 (1) (3) James M. Wilkinson II, Ph.D. 17,500 (1) (3) Grover C. Wrenn 22,500 (1) (3) All directors and officers as a group 563,678 (1) 4.5% -36- 37 (1) Includes shares of stock which directors and officers have exercisable rights to acquire as of or within 60 days of June 30, 1997, through the exercise of options, in the amount of 30,000 shares for Mr. Kearns; 75,000 shares for Dr. Lane; 135,000 shares for Mr. Leslie; 44,600 shares for Mr. Thies; 17,500 shares for Dr. Wilkinson; 22,500 shares for Mr. Wrenn; and 414,600 shares for all directors and officers as a group. (2) Of the total shares, 10,000 shares are held in the estate of Mary Hogan Leslie for which Mr. Leslie is a beneficiary. Mr. Leslie serves as executor of the estate. (3) Less than 1%. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 20, 1996, Dr. Wilkinson executed a non-interest bearing Promissory Note in favor of the Company in the amount of $20,000. Dr. Wilkinson may earn the forgiveness of the principal balance of the note upon successful completion of specific goals and objectives over a five year period. None of the principal was forgiven for the fiscal year ended June 30, 1997. This financial accommodation was made to Dr. Wilkinson in connection with recruitment for his position. 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 17 in the period ended June 30, 1997 Balance sheets at June 30, 1997 and 1996 18 Statements of stockholders' equity for each of the three 19 years in the period ended June 30, 1997 Statements of cash flows for each of the three years 20 in the period ended June 30, 1997 Notes to financial statements 21 2. FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts 39 3. EXHIBITS See Exhibit Index 40 (b) REPORTS ON FORM 8-K No reports of Form 8-K were filed during the quarter ended June 30, 1997. -37- 38 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 29, 1997 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 29, 1997 /s/James K. Leslie - ------------------------ ------------------ James K. Leslie, Chief Executive Officer, President and Director (Principal Executive Officer) Date: September 29, 1997 /s/Taryn L. Kunkel - ------------------------ ------------------ Taryn L. Kunkel, Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: September 29, 1997 /s/Thomas F. Kearns - ------------------------ ------------------- Thomas F. Kearns, Director Date: September 29, 1997 /s/Roger C. Thies - ------------------------ ----------------- Roger C. Thies, Director Date: September 29, 1997 /s/Grover C. Wrenn - ------------------------ ------------------ Grover C. Wrenn, Director -38- 39 PHARMAKINETICS LABORATORIES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 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 - --------------- ---------- ---------- ----------- ----------- ---------- Valuation Allowance Deferred Tax Assets 1997 $3,534,082 - $386,625 - $3,920,707 1996 $3,866,842 - ($332,760) - $3,534,082 1995 $4,341,980 - ($475,138) - $3,866,842 Notes: (a) Represents charges to deferred tax asset account. See Note F to Financial Statements. -39- 40 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, No. 33-51840). (b) PharmaKinetics Laboratories, Inc. 1996 Incentive Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, No. 333-19865). (c) PharmaKinetics Laboratories, Inc. Non-qualified Employee Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, No. 33-51838). (d) PharmaKinetics Laboratories, Inc. 1996 Non-Employee Director's Stock Option Plan (filed herewith). (e) Severance Agreement, dated April 15, 1997, between the Company and James K. Leslie (filed herewith). (f) Severance Agreement, dated April 15, 1997, between the Company and Taryn L. Kunkel (filed herewith). (g) Promissory Note, dated September 20, 1996, from James M. Wilkinson II, Ph.D. in favor of the Company (filed herewith). (h) 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 (i) 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). (j) 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). -40- 41 (k) 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). (l) Second Amendment to Loan Agreement, dated June 20, 1996, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996). (m) Second Commercial Promissory Note Modification Agreement, dated November 30, 1996, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (filed herewith). (n) Third Amendment to Loan Agreement, dated November 30, 1996, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (filed herewith). (o) Second Note Modification Agreement dated August 1, 1997, between NationsBank N.A. and PharmaKinetics Laboratories, Inc. (filed herewith). (p) Fourth Amendment to Loan Agreement, dated August 1, 1997, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (filed herewith). 11. Computations of net earnings per common share (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). 23. Consent of Independent Accountants (filed herewith). 27. Financial Data Schedule (filed herewith). 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 (incorporated by reference to Exhibit 99 (b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996). -41- EX-10 2 1 EXHIBIT 10(d) MATERIAL CONTRACTS PHARMAKINETICS LABORATORIES, INC. 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN PHARMAKINETICS LABORATORIES, INC. (the "Corporation") sets forth herein the terms of this 1996 Non-Employee Directors Stock Option Plan (the "Plan") as follows: 1. Purpose. The Board of Directors (the "Board") believes that the success of the Corporation depends in part on its ability to attract and retain directors with relevant beneficial experience who are motivated to exert their best efforts on behalf of the Corporation. The Board believes that a program that permits the grant of stock options to Non-Employee Directors, as defined below in this Section, promotes the long-term financial success of the Corporation by further aligning the interests of the Non- Employee Directors with the interests of the Corporation and its stockholders. The Plan is intended to promote the interests of the Corporation by providing Non-Employee Directors with a program to acquire or increase a proprietary interest in the Corporation. Each stock option granted under the Plan (an "Option") is intended to be granted to directors of the Corporation who are not officers or other salaried employees of the Corporation or any "subsidiary corporation" (a "Subsidiary") thereof within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code") (the "Non-Employee Directors" or "Optionees"). 2. Administration. (a) Administration. The Plan shall be administered by the Board or the Compensation Committee established by the Board (the "Committee"), if the Board duly resolves to delegate administration to the Committee which shall have full power and authority to take all actions, and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 7 below) entered into hereunder and all such actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board or Committee to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. The interpretation and construction by the Board or Committee of any provision of the -1- 2 Plan or of any Option granted or Option Agreement entered into hereunder shall be final and conclusive. The Board or Committee shall cause a copy of this Plan to be delivered to each participant in the Plan. (b) No Liability. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. (c) Delegation to the Committee. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in Section 2(a) above. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. 3. Stock The stock that may be issued pursuant to Options granted under the Plan shall be shares of Common Stock, par value $.001 per share, of the Corporation (the "Stock"), which shares may be authorized but unissued shares or shares that may be purchased by the Corporation in the open market or in private transactions. The number of shares of Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 600,000 shares, which number of shares is subject to adjustment as hereinafter provided in Section 16 below. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise in full, the shares of Stock that were subject to the unexercised portion of such Option shall be available for future Options granted under the Plan. 4. Eligibility. Only those directors of the Company who are Non-Employee Directors of the Corporation and who are not holders, directly or indirectly, of ten percent (10%) or more of the combined voting power of the Corporation are eligible to participate in the Plan. 5. Effective Date and Term of the Plan. (a) Effective Date. The Plan shall be effective as of November 25, 1996 (the "Effective Date"), the date of the adoption by the Board. -2- 3 (b) Term. The Plan shall terminate on the 10th anniversary of the Effective Date. 6. Grant of Options. (a) Non-Employee Directors Serving on the Effective Date. Each Non-Employee Director who is serving on the Board on the Effective Date ("Serving Director"), shall be granted on the Effective Date options to purchase One Hundred and Twenty Thousand (120,000) shares of the Stock (the "Grant") which shall vest in four equal installments of one-quarter (1/4) over four (4) years. The first installment shall vest on the Effective Date of the Grant. Thereafter, on the date of each of the next three (3) annual meetings of stockholders at which elections to the Board are conducted (each, an "Annual Meeting"), an installment of one-quarter (1/4) of the Grant shall vest in each Serving Director who is re-elected to the Board. (b) Non-Employee Directors Elected or Appointed After the Effective Date. Each Non-Employee Director who is elected or appointed to the Board after the Effective Date ("Subsequent Director") shall be granted on the date of his or her election or appointment an option to purchase One Hundred and Twenty Thousand (120,000) shares of the Stock (adjusted, if applicable, as provided in subparagraph (ii) below) which shall vest in four installments as follows: (i) if the Subsequent Director is elected on the date of an Annual Meeting, one-quarter (1/4) of the Grant shall vest on the date of the Subsequent Director's election to the Board. Thereafter, on the date of each of the next three (3) Annual Meetings at which elections to the Board are conducted, an installment of one-quarter (1/4) of the Grant shall vest in each Subsequent Director who is reelected to the Board; and (ii) if the Subsequent Director is appointed on a date other than the date of an Annual Meeting, then the first installment of the Grant shall be prorated to equal an amount equal to the product of 30,000 times a fraction, the numerator of which shall be the number of calendar months during which the Subsequent Director will serve on the Board prior to the next succeeding Annual Meeting and the denominator of which shall be the number twelve (12). Notwithstanding this formula, in no case shall the first installment be less than fifteen thousand (15,000) shares and the amount of such installment shall be rounded to the nearest whole share. Thereafter, on the date of each of the next three (3) Annual Meetings an installment of one-quarter (1/4) of the Grant shall vest in each Subsequent Director who is reelected to the Board. -3- 4 7. Option Agreements All Options granted pursuant to the Plan shall be evidenced by written agreements ("Option Agreements"), to be executed by the Corporation and by the Optionee, in such form or forms as the Board or Committee shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply will all terms of the Plan. 8. Option Price. The purchase price of each share of the Stock subject to an Option (the "Option Price") shall be fixed by the Board or Committee and stated in each Option Agreement, and shall be equal to 100% of the fair market value of the Stock which is deemed to be the mean of the bid and asked prices as determined by over- he-counter trading on the date the Option is granted pursuant to the terms and conditions of Section 6 herein, or, if no sale of the Stock has been made on such day, on the next preceding day on which any such sale has been made. 9. Term and Exercise Options. (a) Term. Each Option granted under the Plan shall terminate, and all rights to purchase shares thereunder shall cease, upon the expiration of ten (10) years from the date such Option is granted, unless otherwise provided in this Plan. (b) Option Period and Limitations on Exercise. Except as otherwise provided in an Option Agreement, each Option granted be exercised in whole or in part any time after the date of vesting provided, however, that a period of six months must elapse between the date of grant of an Option and the date of disposition of the Stock purchased upon the exercise of such Option. Notwithstanding the foregoing, the Board or Committee, subject to the terms and conditions of the Plan, may in is sole discretion provide other time periods during which an Option may be exercised in whole or in part while such Option is outstanding. Any limitation on the exercise of an Option may be rescinded, modified or waived by the Board or Committee, in its sole discretion, at any time and from time to time after the date of grant of such Option, so as to accelerate the time at which the Option my be exercised. (c) Method of Exercise. An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at its principal office, address to the attention -4- 5 of the Board, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 100 shares or the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) through the tender to the Corporation of shares of Stock, which shares be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value (determined in the manner described in Section 8 above) on the date of exercise; (iii) through the tender to the Corporation of Options, to the extent of the difference between the Option Price and the fair market value of the shares of Stock subject to such Option (determined in the manner described in Section 8 above) on the exercise date; or (iv) by combination of the methods described in (i), (ii) and (iii) above. Payment in full of the Option Price need not accompany the written notice of exercise provided the notice of exercise directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker applicable to the Corporation as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price for the shares of Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal and/or the taxes which the Corporation may, in its judgement, be required to withhold with respect to the exercise of the Option. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a stock certificate or certificates evidencing his ownership of such shares; provided however, that the Corporation shall have the right to withhold and deduct from the number of shares of Stock deliverable upon exercise of an Option, a number of shares having an aggregate fair market value (determined in the manner described in Section 8 above) equal to the amount of any taxes and other charges the Corporation or any Subsidiary is obligated to withhold or deduct from amounts payable to such individual. An individual holding or exercising an Option shall have none of the rights of a shareholder until the shares of Stock covered thereby are fully paid and issued to him and, except as provided in Section 16 below, no adjustment shall be made for dividends or -5- 6 other rights, if any, for which the record date is prior to the date of such issuance. 10. Transferability of Options. During the lifetime of an Optionee to whom an Option is granted, only such Optionee (or, in the event of legal incapacity or incompetency, the Optionee's guardian or legal representative) may exercise the Option. No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or the laws of the descent and distribution. 11. Termination of Service or Employment. Any Option granted to a Non-Employee Director shall terminate upon the expiration of ninety (90) days following the date on which the Non-Employee Director ceases to be a member of the Board other than because of death or "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee. All Options that have not vested on the date the Non-Employee Director ceases to be a member of the Board other than by death or permanent and total disability shall expire immediately upon said date. 12. Rights in the Event of Death or Disability. Any Option granted to a Non-Employee Director shall terminate upon the expiration of one year following the date on which a Non-Employee Director ceases to be a member of the Board by reason of death or "permanent and total disability" as defined above or, if earlier, upon the expiration of ten years following grant of the Option. 13. Use of Proceeds. The proceeds received by the Corporation from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of the Corporation. 14. Requirements of Law. (a) Violations of Law. The Corporation shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or the Corporation of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with Securities Act of 1933 (as now in effect with respect to the shares of any -6- 7 Option, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Option), the Corporation shall not be required to sell or issue such shares unless the Corporation has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under such Act, and the shares of Stock to be issued upon the exercise of all or any potion of any Option granted under the Plan shall be issued on the exercise of all or any portion of any Option granted under the Plan shall be issued on the condition that the Optionee represents that the purchase of Stock upon such exercise shall be for investment purposes and not with a view to resale, distribution, offering, transferring, mortgaging, pledging, hypothecating or otherwise disposing of any such Stock under the circumstances which would constitute a public offering or distribution under the Securities Act of 1993 or the securities of any state. No shares of Stock shall be issued upon the exercise of any Option unless the Corporation shall have received from the Optionee a written statement satisfactory to legal counsel for the Corporation containing the above representations, stating that certificates representing such shares may bear a legend restricting their transfer and stating that the Corporation's transfer agent or agents may be given instructions to stop transfer of any certificate bearing such legend. Such representation and restrictions provided for herein shall not be required if (i) an effective registration statement for such shares under the Securities Act of 1933 and any applicable state laws has been filed with the Securities and Exchange Commission and with the appropriate agency or commission of any state whose laws apply to the transaction, or (ii) an opinion of counsel satisfactory to the Corporation has been delivered to the Corporation to the effect that registration is not required under the Securities Act of 1933 or under the applicable securities laws of any state. Any determination by the Board or Committee regarding the foregoing shall be final, binding, and conclusive. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation or any governmental authority. (b) Restriction on Transfer of Stock. The certificate or certificates for Stock issued upon the exercise of an Option shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED PURSUANT TO AN INVESTMENT REPRESENTATION ON THE PART OF THE HOLDER THEREOF AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR -7- 8 CONSIDERATION EXCEPT UPON THE ISSUANCE TO THE ISSUER OF A FAVORABLE OPINION OF ITS COUNSEL AND/OR THE SATISFACTORY TO COUNSEL TO THE ISSUER, TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS. 15. Amendment and Termination of the Plan. The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Options have not been granted. Except as permitted under Section 16 hereof, no amendment, suspension or termination of the Plan shall, without the consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 16. Effect of Changes in Capitalization. (a) Changes in Stock. If the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind or shares or other securities of the Corporation by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock divided or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation, occurring after the effective date of the Plan, the number and kinds of shares for the purchase of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Corporation. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the unexercised portion in the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. (b) Reorganization in which the Corporation is the Surviving Corporation. Subject to Subsection (d) hereof, if the Corporation shall be surviving corporation in any reorganization, merger, share exchange or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that -8- 9 the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) Reorganization in which the Corporation is not the Surviving Corporation or Sale of Assets or Stock. In the event of the commencement of a tender offer (other than by the Corporation) for any shares of the Corporation or a sale or transfer, in one or a series of transactions, of assets having a fair marker value of 50% or more of the fair market value of all assets of the Corporation, or a merger, consolidation or share exchange pursuant to which shares of the Corporation may be exchanged for or converted into cash, property or securities of another issuer, or the liquidation of the Corporation (an "Extraordinary Event"), then regardless of whether or not any Option granted pursuant to the Plan shall have vested or become fully exercisable, all Options granted pursuant to the Plan shall immediately vest and become fully exercisable for the full number of shares subject to any such Option on and at all times after the "Event Date" of the Extraordinary Event. (i) The "Event Date" is the date of the commencement of the tender offer, if the Extraordinary Event is a tender offer, and in the case of any other Extraordinary Event, the day preceding the date as of which shareholders of record become entitled to the consideration payable in respect or such Extraordinary Event. (ii) In the case of an Extraordinary Event other then a tender offer, the exercise of an Option pursuant to this Section prior to the Event Date shall be effective on and as of the Event Date. Upon the exercise of an Option upon the occurrence of an Extraordinary Event, the Corporation shall issue, on and as of the effective date of such exercise, all shares with respect to which Option shall have been exercised. (iii) In the event of the exercise pursuant to this Section of any Option the Option Price for which shall not have been fixed as of the Event Date, the Option Price in respect of such Option shall be equal to the average fair market value (determined in the manner described in Section 8 above) for the 30 days preceding the announcement or other publication of the Extraordinary Event. (iv) In the event that an Optionee fails to exercise his or her Option, in whole or in part, pursuant to this Section upon an Extraordinary Event, the Corporation shall take such action as -9- 10 may be necessary to enable each Optionee to receive upon any subsequent exercise of his or her Option, in whole or in part, in lieu of shares of the Corporation, securities or other assets as were issuable or payable upon such Extraordinary Event in respect of, or in exchange for, such shares. (d) Adjustments. Adjustments under this Section 16 related to stock or securities of the Corporation shall be made by the Board or Committee, whose determination in that respect shall be final, binding, and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) No Limitations on Corporation. The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassification, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or sell or transfer all or any part of its business or assets. 17. Disclaimer of Rights No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the service of the Corporation or any Subsidiary, or to interfere in any way with the right and authority of the Corporation or any Subsidiary either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any Subsidiary. 18. Non-Exclusivity of the Plan. The adoption of the Plan shall not be construed as creating any limitation upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 19. Governing Law. This Plan shall be construed and governed under the laws of the State of Maryland. -10- EX-11 3 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (1)
For the Twelve Months Ended June 30, ----------------------------------------------------------------- 1997 1996 1995 --------------------- --------------------- --------------------- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding: Common stock 12,195,891 12,195,891 12,195,891 12,195,891 12,395,891 12,395,891 Shares available under options - - 123,755 147,626 202,211 202,211 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding12,195,891 12,195,891 12,319,646 12,343,517 12,598,102 12,598,102 ========== ========== ========== ========== ========== ========== Net earnings (loss) ($109,513) ($109,513) $778,895 $778,895 $127,827 $127,827 ========== ========== ========== ========== ========== ========== Net earnings (loss) per share ($0.01) ($0.01) $0.06 $0.06 $0.01 $0.01 ========== ========== ========== ========== ========== ========== (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, 1997, 1996 and 1995.
EX-27 4
5 This schedule contains summary financial information extracted from SEC Form 10K and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1997 JUN-30-1997 556,040 0 1,014,538 0 503,163 2,264,084 5,541,203 1,887,071 5,958,732 1,981,546 0 12,196 0 0 2,426,045 5,958,732 9,597,536 9,633,753 7,053,560 9,557,449 0 0 185,817 (109,513) 0 (109,513) 0 0 0 (109,513) (.01) (.01)
EX-10 5 1 EXHIBIT 10 (e) MATERIAL CONTRACTS SEVERANCE AGREEMENT BETWEEN THE COMPANY AND JAMES K. LESLIE April 15, 1997 Mr. James K. Leslie 112 Grafton Street Chevy Chase, MD 20815 Dear Jim: PharmaKinetics Laboratories, Inc. (the Company) is pleased to provide to you this severance agreement in consideration of the services you render to the Company from and after the date of this Agreement, which the Board of Directors believes are important to the future growth and prosperity of the Company. The terms of the agreement follow: If you are terminated other than for "Just Cause" - hereinafter defined - at any time during a two (2) year period after a "Significant Transaction" or a "Change of Board Composition" - each, hereinafter defined - you will be entitled to a continuance of your annual base salary for twelve (12) months from the date of termination. You will also be granted immediate and accelerated vesting of all stock options (ISOs, NQSOs, and performance shares). In the event you wish to defer the exercise of these options beyond the statutory three (3) month period you will have the ability at your sole discretion to extend the exercise period for no more than thirty-six (36) months from the date of termination. It is mutually agreed and understood that the consequences of an extension beyond the three (3) month period carries ramifications regarding the tax treatment of the option and the status of the stock provided to you upon exercise (i.e. if the exercise takes place beyond the three (3) month period the options are no longer ISOs, the stock may be unregistered and its sale may be subject to restrictions). Nothing in this Agreement shall be deemed to alter the "at will" nature of your employment by the Company. "Just Cause" to be defined as a good faith determination by the Company's Board of personal dishonesty, breach of fiduciary duty involving personal profit, willful failure to perform stated duties, willful violation of any law rule or regulation (other than traffic violation or similar offenses). -1- 2 A "Significant Transaction" is defined as any of: (a) the sale of a block of stock representing greater than 50% or more of the combined voting power of the Company's then outstanding securities; (b) upon the first purchase of the Company's common stock pursuant to a tender or exchange offer; and (c) upon the approval by the Company's shareholders of (i) a merger with or into another corporation, (ii) a sale or disposition of all or substantially all of the Company's assets or (iii) a plan of liquidation or dissolution of the Company. "Change of Board Composition" means any change in the composition of the Board of Directors of the Company in connection with any transaction in which stock of the Company is sold by the Company, such that a majority of the non-employee directors of the Company at the time of the stock sale transaction no longer constitute a majority. I am pleased we have been able to work this out to everyone's satisfaction. If the foregoing is acceptable to you, please sign below and return this agreement to me. Sincerely, /s/ Roger C. Thies - ------------------ Roger C. Thies Chairman Compensation Committee cc: Thomas F. Kearns Grover C. Wrenn Accepted and agreed this 22nd day of April 1997. /s/James K. Leslie - ------------------ James K. Leslie -2- EX-10 6 1 EXHIBIT 10 (f) MATERIAL CONTRACTS SEVERANCE AGREEMENT BETWEEN THE COMPANY AND TARYN L. KUNKEL April 15, 1997 Mrs. Taryn L. Kunkel 109 West Lake Avenue Baltimore, Maryland 21210 Dear Taryn: PharmaKinetics Laboratories, Inc. is pleased to provide to you this severance agreement in consideration of the services you render to the Company from and after the date of this Agreement, which the Board of Directors believes are important to the future growth and prosperity of the Company. The terms of the agreement follow: If you are terminated other than for "Just Cause" - hereinafter defined - at any time during a two (2) year period after a "Significant Transaction" or a "Change of Board Composition" - each, hereinafter defined - you will be entitled to a continuance of your annual base salary for twelve (12) months from the date of termination. You will also be granted immediate and accelerated vesting of all stock options (ISOs, NQSOs, and performance shares). In the event you wish to defer the exercise of these options beyond the statutory three (3) month period you will have the ability at your sole discretion to extend the exercise period for no more than thirty-six (36) months from the date of termination. It is mutually agreed and understood that the consequences of an extension beyond the three (3) month period carries ramifications regarding the tax treatment of the option and the status of the stock provided to you upon exercise (i.e. if the exercise takes place beyond the three (3) month period the options are no longer ISOs, the stock may be unregistered and its sale may be subject to restrictions). Nothing in this agreement shall be deemed to alter the "at will" nature of your employment by the Company. "Just Cause" to be defined as a good faith determination by the Company's Board of personal dishonesty, breach of fiduciary duty involving personal profit, willful failure to perform stated duties, willful violation of any law rule or regulation (other than traffic violation or similar offenses). -1- 2 "Significant Transaction" is defined as any of: (a) the sale of a block of stock representing greater than 50% or more of the combined voting power of the Company's then outstanding securities; (b) upon the first purchase of the Company's common stock pursuant to a tender or exchange offer; and (c) upon the approval by the Company's shareholders of (i) a merger with or into another corporation, (ii) a sale or disposition of all or substantially all of the Company's assets or (iii) a plan of liquidation or dissolution of the Company. "Change of Board Composition" means any change in the composition of the Board of Directors of the Company in connection with any transaction in which stock of the Company is sold by the Company, such that a majority of the non-employee directors of the Company at the time of the stock sale transaction no longer constitute a majority. I am pleased we have been able to work this out to everyone's satisfaction. If the foregoing is acceptable to you, please sign below and return this agreement to me. Sincerely, /s/ Roger C. Thies - ------------------ Roger C. Thies Chairman Compensation Committee cc: Thomas F. Kearns Grover C. Wrenn Accepted and agreed this 22nd day of April 1997. /s/ Taryn L. Kunkel - ------------------- Taryn L. Kunkel -2- EX-10 7 1 EXHIBIT 10(g) MATERIAL CONTRACTS PROMISSORY NOTE FROM JAMES M. WILKINSON, II Promissory Note Twenty Thousand and 0/00 dollars Dated: September 20, 1996 FOR VALUE RECEIVED, the undersigned, James M. Wilkinson, II, Ph.D. (the "Maker") promises to pay to the order of PHARMAKINETICS LABORATORIES, INC., a Maryland corporation ("PK"), in lawful money of the United States of America, the principal sum of TWENTY THOUSAND AND 0/00 ($20,000.00) DOLLARS according to the payment schedule set forth below. The aggregate principal amount of this Note outstanding shall be non-interest bearing. The principal amount of this note may be forgiven over a period of five years, in equal annual amounts of $4,000, upon successful completion of specific goals and objectives identified by the Chief Executive Officer and communicated to and agreed upon by the Maker at the outset of each of the five consecutive fiscal years beginning July 1, 1996. Amounts forgiven by PK for the benefit of Maker will become taxable income to Maker on the date of forgiveness. In the event that Maker voluntarily ceases to be employed by PK prior to June 30, 2001, Maker agrees to pay any and all outstanding amounts within (30) days of the last day of employment with PK. In the event that Maker is involuntarily terminated, for reasons other than misconduct in the performance of Maker's duties as an Officer of PK, all remaining principal amounts will be forgiven and will become taxable income to Maker on such date. In the event of a change in controlling ownership of PK all remaining principal amounts will be forgiven and will then become taxable income to Maker on such date. Maker waives presentment for payment, demand, notice of non- payment, notice of protest, and protest of this Note, and all other notices in connection with delivery, acceptance, performance, default, dishonor, or enforcement of the payment of this Note. Maker shall pay all costs of collection of this Note, including reasonable attorneys' fees. All rights and remedies given by this Note, are cumulative and not exclusive of any thereof or of any other rights or remedies available to PK, and no course of dealing between Maker and PK, or any delay or omission in exercising any right or remedy shall operate as a waiver of any right or remedy, and every right and remedy may be -1- 2 exercised from time to time and as often as shall be deemed appropriate by PK. This note shall be governed, interpreted, and enforceable in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the undersigned has executed this Note on the first above written. /s/Sheila Hook /s/James M. Wilkinson, II(SEAL) - -------------- ------------------------- Sheila Hook James M. Wilkinson, II Ph.D. -2- EX-10 8 1 EXHIBIT 10(m) MATERIAL CONTRACTS SECOND COMMERCIAL PROMISSORY NOTE MODIFICATION AGREEMENT THIS SECOND COMMERCIAL PROMISSORY NOTE MODIFICATION AGREEMENT is made this 30th day of November, 1996, by and between PHARMAKINETICS LABORATORIES, INC., a corporation organized under the laws of the State of Maryland (the "Borrower") and NATIONSBANK, N.A., formerly known as NATIONSBANK OF MARYLAND, N.A., successor by merger to MARYLAND NATIONAL BANK, a national banking association (the "Lender"). WHEREAS, by that certain Commercial Promissory Note dated May 13, 1993 (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Note") the Borrower became indebted to the Lender in an amount not to exceed $500,000 (the "Revolving Credit Committed Amount") under a revolving line of credit made by the Lender to the Borrower pursuant to that certain Loan Agreement dated May 13, 1993 (as amended, modified, substituted, extended, and renewed from time to time, the "Loan Agreement"); and WHEREAS, the Note matures on the date hereof and the Borrower and the Lender wish to provide for the extension of the Note's maturity as herein set forth. NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Lender and the Borrower covenant and agree as follows: 1. The Borrower acknowledges that the present principal balance of the Note is due and owing, subject to the terms of repayment hereinafter set forth, without defense, recoupment, counterclaim or offset. 2. The borrower and Lender agree that the maturity date in the Note is hereby changed from November 30, 1996 to November 30, 1997. 3. The terms, provisions and covenants of the Note are in all other respects hereby ratified and confirmed and remain in full force and effect. -1- 2 4. It is expressly agreed that the indebtedness evidenced by the Note has not extinguished or discharged hereby. The Borrower and the Lender agree that the execution of this Agreement is not intended to and shall not cause or result in a novation with regard to the Note. WITNESS the signatures and seals of the Borrower and the Lender the day and year first above written. WITNESS OR ATTEST: PHARMAKINETICS LABORATORIES, INC. /s/ Taryn L. Kunkel By:/s/ James K. Leslie (SEAL) - ------------------- ----------------------- James K. Leslie President and Chief Operating Officer WITNESS: NATIONSBANK, N.A. /s/ Taryn L. Kunkel By:/s/ James W. Kirschner (SEAL) - ------------------- -------------------------- James W. Kirschner Vice President GUARANTOR ACKNOWLEDGEMENT AND AGREEMENT The undersigned respectively guaranteed to the Lender all of the Obligations (as defined in the Loan Agreement), including without limitation, the per annum rate of interest (as defined in the annexed Second Commercial Promissory Note Modification Agreement) and hereby covenants and agrees with the Lender that the execution of the foregoing Second Commercial Promissory Note Modification Agreement of even date herewith and the transactions described therein and contemplated thereby do not and shall not in any manner affect its obligations and liabilities under its guaranty dated May 13, 1993 (the "Guaranty"), and that the Guaranty is hereby ratified and confirmed and remains in full force and effect. Dated effective as of this 30th day of November, 1996. WITNESS: 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 Operating Officer -2- EX-10 9 1 EXHIBIT 10(n) MATERIAL CONTRACTS THIRD AMENDMENT TO LOAN AGREEMENT THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Agreement") is made as of the 30th day of November, 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 same, as amended, modified, substituted, extended, and renewed from time to time, the "Loan Agreement"). The Loan Agreement provides for some of the agreements between the Obligor and the Bank with respect to the "Loans" (as defined in the Loan Agreement), including revolving credit facility in an amount not to exceed $500,000 and term facilities in an original principal amount of $2,400,000. B. The Obligor has requested that the Bank amend the interest rates under the Loans and amend certain other conditions and covenants under 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. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, 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 returned items and other adjustments made in the ordinary course of business) is $0. -1- 2 3. The Loan Agreement is hereby amended as follows: (a) The section "The Revolving Loan" (which section was added in the First Amendment) is hereby amended by changing the Revolving Credit Termination Date from "November 30, 1996" to November 30, 1997. (b) The section "Deposits" (which section was added in the First Amendment) is hereby amended by changing the amount from "$100,000" to "$200,000." 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. 5. The Obligor 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 a 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 WITNESS: NATIONSBANK, N.A. /s/ Taryn L. Kunkel By:/s/ James W. Kirschner (SEAL) - ------------------- --------------------------- Name: James W. Kirschner Title: 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, covenants, grants, assignments, security agreements, agreements, 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) include, without limitation, the amendments described in the foregoing Agreement and that the Obligations 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-10 10 1 EXHIBIT 10(o) MATERIAL CONTRACTS SECOND NOTE MODIFICATION AGREEMENT THIS SECOND NOTE MODIFICATION AGREEMENT is made as of the 1st day of August, 1997, by and between PHARMAKINETICS LABORATORIES, INC., a corporation organized under the laws of the State of Maryland (the "Borrower") and NATIONSBANK, N.A. (formerly known as "NationsBank, N.A. (Carolinas)" and successor by merger to NationsBank, N.A., which was formerly known as "NationsBank of Virginia, N.A.," NationsBank of Virginia, N.A. being the successor by merger to NationsBank, N.A. which was formerly known as "NationsBank of Maryland N.A." and was the successor by merger to Maryland National Bank), a national banking association (the "Lender"). WHEREAS, by that certain Note dated May 13, 1993 (as modified by First Note Modification Agreement dated May 11, 1995 and (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Note") the Borrower became indebted to the Lender in an amount not to exceed $2,400,000 (the "Term Loan Amount") under a line of credit made by the Lender to the Borrower pursuant to that certain Loan Agreement dated May 13, 1993 (as amended, modified, substituted, extended, and renewed from time to time, the "Loan Agreement"); and WHEREAS, the Lender and Borrower have agreed to amend the per annum rate of interest as hereinafter more fully set forth. NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Lender and the Borrower covenant and agree as follows: 1. The Borrower acknowledges that the present principal balance of the Note is $1,682,753.57 (as of August 15, 1997) and is due and owing, subject to the terms of repayment hereinafter set forth, without defense, recoupment, counterclaim or offset. 2. The Note is hereby amended at the section headed "Interest Rate" by increasing the rate of interest under that section from the Bank's Prime Rate (as that term is defined in the Note) plus one-half percent (1/2%) to the Bank's Prime Rate plus three-quarters percent (3/4%). The Prime Rate does not necessarily represent the lowest rate of interest charged by the -1- 2 Bank to borrowers. 3. The terms, provisions and covenants of the Note are in all other respects hereby ratified and confirmed and remain in full force and effect. 4. It is expressly agreed that the indebtedness evidenced by the Note has not been extinguished or discharged hereby. The Borrower and the Lender agree that the execution of this Agreement is not intended to and shall not cause or result in a novation with regard to the Note. WITNESS the signatures and seals of the Borrower and the Lender the day and year first above written. WITNESS OR ATTEST: PHARMAKINETICS LABORATORIES, INC. /s/ Taryn L. Kunkel By: /s/ James K. Leslie (SEAL) - ------------------- ----------------------- James K. Leslie President and Chief Executive Officer WITNESS: NATIONSBANK, N.A. /s/ Katherine Bush By:/s/ James W. Kirschner (SEAL) - ------------------- ------------------------- James W. Kirschner Vice President GUARANTOR ACKNOWLEDGEMENT AND AGREEMENT The undersigned guaranteed to the Lender all of the Obligations (as defined in the Loan Agreement), including without limitation, the per annum rate of interest (as defined in the annexed First Note Modification Agreement) and hereby covenants and agrees with the Lender that the execution of the foregoing First Note Modification Agreement of even date herewith and the transactions described therein and contemplated thereby do not and shall not in any manner affect its obligations and liabilities under its respective guaranty dated May 13, 1993, (the "Guaranty"), and that the Guaranty is hereby ratified and confirmed and remains in full force and effect. Dated effective as of August 1, 1997. WITNESS: 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 -2- EX-10 11 1 EXHIBIT 10(p) MATERIAL CONTRACTS FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Agreement") is made as of the 1st day of August, 1997, 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, N.A. (Carolinas)" and successor by merger to NationsBank, N.A., which was formerly know as "NationsBank of Virginia, N.A.," NationsBank of Virginia, N.A., being the successor by merger to NationsBank, N.A., which was formerly known as "NationsBank of Maryland N.A." and was the 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 same, as modified by First Amendment to Loan Agreement dated May 11, 1995, by Second Amendment to Loan Agreement dated July 31, 1996, and by Third Amendment to Loan Agreement dated November 30, 1996, and as amended, modified, substituted, extended, and renewed from time to time, the "Loan Agreement"). The Loan Agreement provides for some of the agreements between the Obligor and the Bank with respect to the "Loans" (as defined in the Loan Agreement), including revolving credit facility in an amount not to exceed $500,000 and term facilities in an original principal amount of $2,400,000. B. The Obligor has requested that the Bank waive compliance with the Obligor's Cash Flow Coverage ratio for the period ended June 30, 1997. C. The Bank is willing to agree to the Obligor's request on the condition, among others, that this Agreement be executed. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, 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. -1- 2 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 returned items and other adjustments made in the ordinary course of business) is $0. The Obligor agrees that the Bank shall not be obligated to make any further advances under the Revolving Credit Note unless all obligations with respect thereto are fully secured by a perfected, unavoidable, first lien pledge of cash deposits held by the Bank. 3. It is a condition of the Bank's agreements under this Agreement and under the Second Note Modification dated the same date as this Agreement (the "Second Term Note Modification") between the Bank and the Obligor that the Maryland Industrial Development Financing Authority (the "Authority") in writing: (a) consent to the execution the execution and delivery of this Second Amendment to Term Note and this Agreement; and (b) acknowledge that, with respect to the Amended and Restated Insurance Agreement dated May 13, 1993 (as modified by Modification to Amended and Restated Insurance Agreement dated July 17, 1995, and amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Insurance Agreement") between the Authority and the Bank, (i) there is no Authority's Insurance Premium (as that term is defined in the Insurance Agreement) required under the Insurance Agreement, (ii) the Authority shall refund the Authority's Insurance Premium paid by the Bank in 1997 upon the Authority's receipt of satisfactory proof of such payment, and (iii) if there is any Authority's Insurance Premium in the future such payment shall be due from the Obligor alone and not the Bank. 4. On the condition that the Obligor shall have complied with the terms and conditions of Paragraph 3 of this Agreement, the Lender hereby waives compliance with the Obligor's Cash Flow Coverage ratio for the period ended June 30, 1997; provided, however that this Paragraph shall not be deemed to waive any defaults under that ratio after the date of this Agreement or after the period stated, or any other defaults arising out of non-compliance by the Obligor with the Loan Agreement or any other agreement, whether or not the events, facts or circumstances giving rise to such non-compliance existed on or prior to the date hereof. 5. 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. -2- 3 6. The Obligor acknowledges and warrants that the Bank has acted in good faith and has conducted in a commercially reasonable manner in 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. 7. 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 a 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. WITNESS OR ATTEST: PHARMAKINETICS LABORATORIES, INC. /s/ Taryn L. Kunkel By:/s/ James K. Leslie (SEAL) - ------------------- ---------------------- James K. Leslie President and Chief Executive Officer WITNESS: NATIONSBANK, N.A. /s/ Katherine Bush By: /s/ James W. Kirschner (SEAL) - ------------------- -------------------------- James W. Kirschner Vice President 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, covenants, grants, assignments, security agreements, agreements, 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) include, without limitation, the amendments described -3- 4 in the foregoing Agreement and that the Obligations are covered by the Guaranty. WITNESS signature and seal of the undersigned as of the date of the Agreement. WITNESS: 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 -4- EX-23 12 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statement of PharmaKinetics Laboratories, Inc. on Form S-8 (File No. 333-19865) of our report, dated August 14, 1997, on our audits of the financial statements and financial statement schedule of PharmaKinetics Laboratories, Inc. as of June 30, 1997 and 1996, and for each of the three years ended in the period ended June 30, 1997, which report is included in this Annual Report on Form 10-K. Baltimore, Maryland September 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----