-----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, O81kuYG9DBmfUIWPB1c1KP+GNi6r8YZDXwo/qnvC/3wAJ8Kr9FoLEpFA9NLwCLvF goHVHmV8eMHwtHSk1tA7ww== 0000351506-98-000013.txt : 19980929 0000351506-98-000013.hdr.sgml : 19980929 ACCESSION NUMBER: 0000351506-98-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 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: 98716010 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, 1998 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, $.005 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 4, 1998, 2,476,129 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 $9,585,111. Portions of the registrant's definitive proxy statement for its 1998 annual meeting of stockholders, to be filed pursuant to Regulation 14A on or prior to October 28, 1998, are incorporated into Part III of this report. 2 PART I ITEM 1. BUSINESS PharmaKinetics Laboratories, Inc. (the "Company") is a contract research organization ("CRO") 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 pursues various business opportunities in 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. Recent Developments In December 1997, the Company initiated a strategic working relationship with Aster.Cephac S.A., a French CRO, in connection with a private placement of $5 million of securities to investors, including certain affiliates of Aster.Cephac S.A. and CAI Advisors & Co. (collectively the "Purchasers"). The two entities have entered into a Technology Sharing Agreement under which both have agreed to share analytical methodology in an effort to expand the bioanalytical services offered by each entity. The strategic partnership enables the Company to have a global presence and provides access to the European markets. On December 23, 1997, the Company issued 833,300 shares of a newly created Class A Convertible Preferred Stock and warrants to purchase 1,250,000 shares of the Company's Common Stock, and entered into a Registration Rights Agreement in connection therewith, to the Purchasers. The securities were issued pursuant to a Preferred Share and Warrant Purchase Agreement dated as -2- 3 of December 4, 1997. The Purchasers beneficially own approximately 41% of the Company's voting securities without giving effect to the possible exercise of warrants, or approximately 54% of the Company's voting securities if all the warrants are exercised. On April 6, 1998, the Company's stockholders approved a five-to-one reverse split of the Company's Common Stock, the change of authorized shares of the Company's Common Stock to 10,000,000 shares, par value $0.005 per share, and the reduction of capital for payment of fractional shares and amendment of the Company's Charter in connection therewith. The reverse split, which became effective at the close of business on April 17, 1998, did not affect the rights and privileges of holders of Common Stock, either before or after the reverse split. The Company did not issue fractional shares as a result of the reverse split, and each fraction of a share was exchanged for cash. The Company's capital was reduced by the amount of cash paid for fractional shares, the total payment of which was immaterial. The effect of the reverse stock split has been retroactively applied to prior periods presented herein. 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 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 -3- 4 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 has expanded 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. Study participants usually arrive at the Company's controlled environment facility the night before testing is to begin. To maximize reliability of the -4- 5 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 change in 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. -5- 6 Clinical Trial Management and Monitoring The Company provides project management and monitoring of Phase II, III 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 -6- 7 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 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 could 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 -7- 8 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 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 has resulted 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. -8- 9 The Company expects that its relationship with Aster.Cephac S.A. will enhance its competitive position by providing access to the European markets and expanding bioanalytical services capabilities, as provided by the Technology Sharing Agreement signed by both entities. 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, 1998, 1997 and 1996, one customer contributed in excess of 10% of contract revenue, accounting for 19%, 29%, and 27%, 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 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, therefore eliminating currency exchange risk to the Company. The Company's recognized revenue from its clients outside of the United States is as follows: Year Ended June 30, 1998 1997 1996 ---------- ---------- ---------- Canada $2,597,000 $2,718,000 $3,124,000 Europe & other 453,000 503,000 177,000 ---------- ---------- ---------- Total $3,050,000 $3,221,000 $3,301,000 ---------- ---------- ---------- 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 -9- 10 begin. At June 30, 1998, the backlog was approximately $6.3 million. At June 30, 1997, the Company's backlog was approximately $6.0 million. The Company expects to recognize revenue from studies included in the June 30, 1998, backlog during fiscal 1999 and future fiscal years. Employees At July 31, 1998, the Company had 173 employees (69 of whom were part- time employees), of which 8 hold Ph.D. or M.D. degrees and 15 others hold advanced degrees. The Company does not have collective bargaining agreements with any of its employees and considers its employee relations to be satisfactory. 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 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 working capital credit facility with NationsBank, N.A. (see Note G to the Consolidated 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, thereby closing the bankruptcy case. (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 -10- 11 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. (c) Other From time to time the Company is involved in disputes and/or litigation encountered in the ordinary course of its business. The Company does not believe that the ultimate impact of the resolution of such outstanding matters will have a material effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting in Lieu of Annual Meeting of Stockholders was held Monday, April 6, 1998, at 11:00 A.M., local prevailing time, at the corporate offices, 302 W. Fayette Street, Baltimore, Maryland 21201, to consider and vote upon: 1. The election of eight directors to serve until the next Annual Meeting of Stockholders, and until their successors are duly elected and qualified. For Against Class A: Common Stock and Preferred Stock Voting Together: Thomas F. Kearns, Jr. 19,740,674 98,899 James K. Leslie 19,762,374 77,199 Roger C. Thies 19,765,374 74,199 Grover C. Wrenn 19,765,374 74,199 Class B: Preferred Stock Voting Alone: Leslie B. Daniels 8,333,000 David von Kauffmann 8,333,000 Kamal K. Midha, Ph.D., D.Sc. 8,333,000 John J. Thebault, M.D. 8,333,000 2. A proposal to ratify the selection of PricewaterhouseCoopers LLP, as the Company's independent auditors for the fiscal year ending June 30, 1998. Broker non-votes For Against or Abstentions 19,764,849 50,860 23,864 -11- 12 3. A proposal to approve and adopt the restatement and amendment of the Company's Charter, among other things, in order to increase the number of authorized shares of the Company's Common Stock. Broker non-votes For Against or Abstentions 19,455,846 266,382 35,044 4. A proposal to approve of a five to one reverse split of the Company's Common Stock, the change of authorized shares of the Company's Common Stock to 10,000,000 shares, par value $.005 per share, and the reduction of capital and amendment of the Company's Charter in connection therewith. Broker non-votes For Against or Abstentions 19,094,586 536,512 126,174 5. A proposal to ratify the adoption of the PharmaKinetics Laboratories, Inc. 1996 Non-Employee Directors Stock Option Plan, as amended. Broker non-votes For Against or Abstentions 19,173,522 471,162 116,588 All proposals presented were approved by the Stockholders of the Company. 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 market for the Company's stock is limited and sporadic. In April 1998, the Company effected a five-to-one reverse stock split of its Common Stock with the belief that the action would raise the Company's minimum bid price per share above $4.00 thereby enabling the Company to meet the requirements for listing on the Nasdaq SmallCap Market. The Company made application to the Nasdaq SmallCap market in early June 1998, at which time it met all of the criteria for listing. However, during the course of the review process, the Company's minimum bid price per share fluctuated and at times was less than $4.00 per share. As a result, the Company no longer met the criteria for listing on the Nasdaq SmallCap Market. As of September 2, 1998, the Company voluntarily withdrew its application. The Company will continue to monitor its minimum bid price and intends to again make application as soon as the Company meets all of the criteria for listing. -12- 13 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, 1998 June 30, 1997 ------------------ ------------------ Quarter High Low High Low First $ 3.05 $ 1.25 $ 3.28 $ 1.56 Second 5.78 3.05 3.13 2.03 Third 8.60 4.55 2.19 1.88 Fourth 7.75 3.63 1.88 1.23 Such quotations, which have been restated to give effect to the reverse stock split, 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 14, 1998, was 1,048. 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. Sale of Unregistered Securities On December 23, 1997, the Company issued 833,300 shares of a newly created Class A Convertible Preferred Stock and warrants to purchase 1,250,000 shares of the Company's Common Stock, for an aggregate offering price of $5 million, and entered into a Registration Rights Agreement in connection therewith, to 14 investors including affiliates of Aster.Cephac S.A. and CAI Advisors & Co. The securities were issued pursuant to a Preferred Share and Warrant Purchase Agreement dated as of December 4, 1997. No underwriter or selling agent was involved in the transaction, and no remuneration was paid to any party in connection with the sale of the securities. These securities were issued in a private transaction in reliance upon Section 4(2) of the Securities Act of 1933, as amended. In issuing the securities, neither the Company nor any person acting on its behalf offered the securities by means of general advertising or solicitation. The securities were issued only to a limited number of sophisticated investors who had access to all financial and other information about the Company and the offered securities. Prior to acquiring the securities, each investor acknowledged that the securities were not registered under the Securities Act of 1933, as amended, that the investor was acquiring the securities for investment only and not with a view to distribution, and that the securities are subject to restrictions on transferability. The certificates evidencing the securities bear a legend reflecting the restrictions on transferability. -13- 14 The Agreement provided for the sale to the Purchasers of a total of 833,300 shares of Class A Convertible Preferred Stock for $4,937,500 or $5.925 per share. The Preferred Stock is convertible at any time into shares of Common Stock at a conversion ratio of one share of Preferred Stock for two shares of Common Stock. The conversion ratio is subject to adjustment under certain circumstances to prevent dilution. In the event of liquidation of the Company, the holders of the shares of Preferred Stock who do not convert their shares into Common Stock are entitled to receive $5.925 per share, prior to any distributions being made to the holders of any other class or series of the Company's capital stock. In addition, the Agreement provided for the sale to the Purchasers, for $62,500, of warrants to purchase 1,250,000 shares of Common Stock. The warrants are fully exercisable at $6.00 per share and expire on December 23, 2000. ITEM 6: SELECTED FINANCIAL DATA Years ended June 30, -------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ---------- ----------- ---------- ---------- Revenues $12,326,009 $9,597,536 $10,962,160 $9,893,762 $8,847,674 Net earnings (loss): Before deemed preferred stock dividend $622,747 ($109,513) $778,895 $127,827 $204,851 Deemed preferred stock dividend ($1,020,793) - - - - Net earnings (loss) available to common stockholders ($398,046) ($109,513) $778,895 $127,827 $204,851 Basic earnings (loss) per share ($0.16) ($0.04) $0.32 $0.05 $0.08 Basic weighted average shares outstanding 2,440,429 2,439,129 2,439,129 2,479,178 2,470,192 Diluted earnings (loss) per share ($0.16) ($0.04) $0.32 $0.05 $0.08 Diluted weighted average shares outstanding 2,440,429 2,439,129 2,470,109 2,519,620 2,556,137 Total assets $10,107,478 $5,958,732 $6,622,959 $6,553,348 $6,163,128 Working capital (deficiency) $4,082,645 $282,538 $411,498 ($63,474) $262,632 Long-term liabilities $235,074 $1,538,945 $1,784,876 $2,074,109 $2,437,373 Stockholders' equity $7,873,583 $2,438,241 $2,547,754 $1,768,859 $1,540,669
-14- 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN FORWARD-LOOKING INFORMATION Certain statements in this Management's Discussion and Analysis and elsewhere in this 1998 Annual Report on Form 10-K are forward-looking statements based on current expectations, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Such risks and uncertainties include the fluctuation in quarterly operating results which arise from the timing of orders and the Company's ability to complete projects in a timely manner once awarded to the Company, dependence of the Company on the product development cycles of its clients, dependence of the Company on certain customers, and dependence of the Company on its key personnel and their ability to continuously develop new methodology for clinical and analytical applications. Other more general factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, conditions affecting the pharmaceutical industry, and consolidation resulting in increased competition within the Company's market. 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 individual 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. On December 23, 1997, the Company issued 833,300 shares of a newly created Class A Convertible Preferred Stock and warrants to purchase 1,250,000 shares of the Company's Common Stock, and entered into a Registration Rights Agreement and Technology Sharing Agreement in connection therewith, to investors including certain affiliates of Aster.Cephac S.A. and CAI Advisors & Co. (collectively, the "Purchasers"). The securities were issued pursuant to a Preferred Share and Warrant Purchase Agreement dated as of December 4, 1997. -15- 16 The Purchasers beneficially own approximately 41% of the Company's voting securities without giving effect to the possible exercise of the warrants, or approximately 54% of the Company's voting securities if all the warrants are exercised. The Agreement provided for the sale to the Purchasers of a total of 833,300 shares of Class A Convertible Preferred Stock for $4,937,500 or $5.925 per share. The Preferred Stock is convertible at any time into shares of Common Stock at a conversion ratio of one share of Preferred Stock for two shares of Common Stock. The conversion ratio is subject to adjustment under certain circumstances to prevent dilution. In the event of liquidation of the Company, the holders of the shares of Preferred Stock who do not convert their shares into Common Stock are entitled to receive $5.925 per share, prior to any distributions being made to the holders of any other class or series of the Company's capital stock. In addition, the Agreement provided for the sale to the Purchasers, for $62,500, of warrants to purchase 1,250,000 shares of Common Stock. The warrants are fully exercisable at $6.00 per share and expire on December 23, 2000. Net earnings have been adjusted for the fiscal year ended June 30, 1998, for the deemed preferred stock dividend to the Purchasers, resulting in a net loss applicable to common stockholders. The dividend was computed based on the excess of the fair market value of the Company's Common Stock, into which the Preferred Stock is convertible, over the purchase price of the Preferred Stock at the time of issue. The dividend was recorded for financial reporting purposes only and was not paid to the Preferred Stockholders. On April 6, 1998, the Company's stockholders approved a five-to-one reverse split of the Company's Common Stock, the change of authorized shares of the Company's Common Stock to 10,000,000 shares, par value $0.005 per share, and the reduction of capital for payment of fractional shares and amendment of the Company's Charter in connection therewith. The reverse split, which became effective at the close of business on April 17, 1998, did not affect the rights and privileges of holders of Common Stock, either before or after the reverse split. The Company did not issue fractional shares as a result of the reverse split, and each fraction of a share was exchanged for cash. The Company's capital was reduced by the amount of cash paid for fractional shares, the total payment of which was immaterial. The effect of the reverse stock split has been retroactively applied to prior periods presented herein. 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 -16- 17 (decrease) by each item as a percentage of the amount for the previous period: Percentage of Period to Period Total Revenues Change -------------------- ---------------- 1998 1997 Years ended June 30, Compared to -------------------- ---------------- 1998 1997 1996 1997 1996 ------ ------ ------ ------ ------ Contract revenue 94.3% 91.3% 95.5% 32.6% (16.3)% License fees 5.7 8.7 4.5 (15.7) 69.1 ------ ------ ------ ------ ------ Total 100.0 100.0 100.0 28.4 (12.4) Cost of contracts 72.5 73.5 66.5 26.6 (3.2) ------ ------ ------ ------ ------ Gross margin 27.5 26.5 33.5 33.5 (30.7) Research and development 4.6 4.7 3.6 27.3 12.6 Selling, general, and administrative 17.9 21.4 20.9 7.4 (10.2) ------ ------ ------ ------ ------ Operating income 5.0 0.4 9.0 1438.6 (95.9) Interest expense (1.0) (1.9) (2.0) (30.6) (16.7) Interest income 1.2 0.4 0.4 295.3 (11.1) Loss on disposal of equipment - - (0.2) - (100.0) ------ ------ ------ ------ ------ Earnings (loss) before taxes 5.2 (1.1) 7.2 676.1 (114.0) Income taxes (0.1) - - 100.0 (100.0) ------ ------ ------ ------ ------ Net earnings (loss) 5.1% (1.1)% 7.2% 668.6% (114.1)% ------ ------ ------ ------ ------ 1998 Compared to 1997 Total revenue, which includes contract revenue and revenue from licensing technologies under special agreements whereby the Company receives license fees based upon the clients' actual product sales, increased 28.4% from $9.6 million in fiscal 1997 to $12.3 million in fiscal 1998. The increase resulted from an increase of approximately $1.6 million in revenues from innovator pharmaceutical and biotechnology companies due to the Company's marketing efforts; the initiation of new clinical trial management contracts which generated an additional $.4 million in revenue in the current fiscal year compared to fiscal 1997; and expansion of the Company's list of active clients, and the impact of the availability of the Company's LC/MS/MS -17- 18 technology, which collectively contributed approximately $.8 million to the increase in revenue. The Company's contract revenue increased 32.6% for fiscal 1998, compared to fiscal 1997. License fee income of $703,000 was recorded in fiscal 1998, compared to $834,000 in fiscal 1997, a decrease of 15.7% due to the cessation of the Company's first license fee agreement in October 1997. At June 30, 1998, the Company had two license fee agreements from which it was receiving license fee income. License fee income, based on clients' sales of approved drugs, will continue through the expiration of the license fee agreements, the most significant of which is expected to expire in fiscal 2004 and the other of which is expected to expire in fiscal 2000. 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, contract revenues, rather than licensing income, will continue to be the primary source of revenues. The Company's gross margin increased 33.5% from $2.5 million in fiscal 1997 to $3.4 million in fiscal 1998. As a percentage of revenue, the Company's gross margin increased from 26.5% in fiscal 1997 to 27.5% in fiscal 1998, on a 28.4% increase in total revenue. The increase in gross margin reflects the increase in the use of the Company's LC/MS/MS instrumentation, which helped increase efficiencies, and the overall increase in the level of business and diversification of services which culminated in the realization of certain economies of scale. Selling, general and administrative expenses totaled $2.2 million in fiscal 1998, compared to $2.1 million in fiscal 1997, representing a 7.4% increase. As a percentage of revenue, selling, general and administrative expenses were 17.9% in fiscal 1998 and 21.4% in fiscal 1997. The increase is primarily attributable to the establishment of an allowance for doubtful accounts, which had the effect of increasing selling, general and administrative expenses by $150,000, notwithstanding a decrease in expenditures associated with the loss of personnel in fiscal 1997 for which certain positions remained vacant until the second half of fiscal 1998. Research and development expenses increased 27.3% from $447,000 in fiscal 1997 to $568,000 in fiscal 1998. The Company has continued to invest in its research and development effort in fiscal 1998 in an effort to bring new analytical methods on-line to meet client demands. In June 1998, the Company acquired its third LC/MS/MS instrument for use in its laboratory and has invested in research and development to bring this instrument on-line and to develop LC/MS/MS 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 by 30.6% from $186,000 in fiscal 1997 to $129,000 in fiscal 1998. In February 1998 the Company utilized $1.6 million of the $5 million cash received from the Purchasers in the December 23, 1997 -18- 19 transaction to pay the remaining principal balance of its term note payable to NationsBank N.A., thereby eliminating its bank debt. Interest income increased 295.3% in fiscal 1998, compared to fiscal 1997, due to the investment of the remaining funds in interest bearing financial instruments. Net earnings have been adjusted for the deemed preferred stock dividend to the Purchasers, resulting in a net loss applicable to common stockholders. The dividend was computed based on the excess of the fair market value of the Company's Common Stock, into which the Preferred Stock is convertible, over the purchase price of the Preferred Stock at the time of issue. The dividend was recorded for financial reporting purposes only and was not paid to the Purchasers. A provision for income taxes of $8,200 has been recorded in fiscal 1998 for Alternative Minimum Tax obligations. No provision was recorded for fiscal 1997. The Company has available tax loss carryforwards of approximately $5,201,000, expiring in 2006 through 2011, and general business credits of approximately $1,467,000, expiring during the period 1999 to 2010. 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 of approximately $200,000 for projects not completed by June 30, 1997. The Company 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 began receiving license fees in 1997 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 two other license fee arrangements. The Company believes it 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 -19- 20 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 was 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. These measures primarily involved the termination of certain individuals no longer deemed an integral part of the Company's operations. The Company terminated these individuals on January 21, 1997. The Company did not incur restructuring charges related to the terminations as no severance pay was offered to the individuals terminated. 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 were not filled 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 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 invested in research and development to bring the instrument on-line and to develop methods for utilization in future studies. Interest expense decreased 16.7% from $223,000 in fiscal 1996 to $186,000 in fiscal 1997. The decrease was primarily attributable to decreases in the Company's interest bearing obligations. No provision for income taxes was recorded in fiscal 1997, compared to minimal amounts for Alternative Minimum Tax obligations in fiscal 1996. The Company had available tax loss carryforwards of approximately $5,770,000 expiring in 2006 through 2010, and general business credits of approximately $1,433,000, expiring during the period 1999 to 2009. YEAR 2000 The Company has initiated its Year 2000 compliance program, the purpose of which is to identify those systems that are not yet Year 2000 compliant, and to initiate replacement or other remedial action to assure that systems will continue to operate in the Year 2000. The Company expects to complete its assessment by December 31, 1998, which includes third party confirmations from the Company's key suppliers, vendors and business partners, with respect to their computers, software and systems, and their ability to maintain normal operations in the Year 2000, and a listing of all equipment subject to Year 2000 concerns. To the extent that the Company is not satisfied with the -20- 21 status of a vendor's Year 2000 compliance or remediation plans, the Company expects to develop and implement appropriate contingency plans. Such contingency plans will include the development of alternative sources for the product or service provided by any non-compliant vendor. The Company has already initiated the removal and exchange of some non- compliant systems and expects to continue such replacement or other remedial action to ensure that its computers, software and systems, and other systems will continue to operate in the Year 2000. These activities are intended to encompass all major categories of systems used by the Company, including laboratory instrumentation, clinical systems, building systems, and sales and financial systems, among others. In some instances, the installation of new software and hardware in the normal course of business is being accelerated to also afford a solution to Year 2000 issues. The Company has planned for the investment of approximately $300,000 in a new Laboratory Information Management System in fiscal 1999, which it expects will streamline data calculation and reporting ability and allow for customized report formats, as well as provide the laboratory with an operating system that is Year 2000 compliant. Other Year 2000 spending is expected to total less than $150,000, of which the Company had spent approximately $10,000 as of June 30, 1998. The total cost estimate is based on the Company's assessment as of June 30, 1998 and is subject to change as the compliance program progresses. The capital improvements and expenses required for the Year 2000 effort have been included as part of the Company's annual budgets. The Company does not expect that the capital spending or period expense associated with the Year 2000 issues will have a material effect on its financial position or results of operations. The Company's policy is to expense all costs related to its Year 2000 compliance program unless the useful life of the technological asset is extended or increased. It is expected that assessment, remediation and contingency planning will be on-going throughout fiscal 1999 with the goals of appropriately resolving all material internal systems and third party issues. There can be no assurances, however, that the Company's computer systems and the applications of other companies on which the Company's operations rely will be timely converted or that any such failure to convert by another company will not have a material adverse effect on the Company's operations. LIQUIDITY AND CAPITAL RESOURCES On June 30, 1998, the Company had cash and equivalents of $3,358,506 compared to $556,040 at June 30, 1997. The increase in cash resulted from the receipt of $5,000,000, in December 1997, from the Company's sale of Class A Convertible Preferred Stock and Warrants to acquire Common Stock to a group of Purchasers led by CAI Advisors & Co. and Aster.Cephac S.A. Cash was reduced by a payment of $1,630,390, on February 5, 1998, to NationsBank N.A., representing the remaining principal balance plus accrued interest on the Company's term note payable to the Bank, payments for capital lease obligations and the purchase of equipment for utilization in the Company's operating units. -21- 22 The Company invested $699,571 in capital equipment purchases, $359,406 of which was paid in cash with the remaining $340,165 financed through a capital lease. The Company's capital leases have terms expiring through fiscal 2001. The Company made contractual and discretionary principal payments of $1,706,819 on its long-term debt obligations during fiscal 1998, thereby eliminating its bank debt. The Company's primary source of funds is cash flow from operations, which increased by $215,234 in fiscal 1998 from fiscal 1997, principally as a result of the Company's 1998 results of operations as compared to 1997, offset by a $590,571 increase in working capital. The Company also has available a $500,000 line of credit from NationsBank, N.A. which has not been drawn upon. Terms of the credit facility provide for interest at the Bank's prime rate and advances against eligible receivables. The borrowing agreement is collateralized by substantially all of the Company's assets, places restrictions on borrowings and investments, and requires maintenance of specified amounts of working capital, net worth and cash flow ratios. Increases in the Company's account balances at June 30, 1998 for accounts receivable, contracts in process and deposits on contracts in process accounts, as compared to June 30, 1997, are primarily attributable to overall increases in the levels of business as evidenced by the Company's operating performance for fiscal 1998. Prepaid expenses have increased at June 30, 1998, compared to June 30, 1997, due to the timing of the payments of certain property tax and insurance obligations for fiscal year 1999. In addition, other assets have increased primarily due to the placement of a security deposit on the Company's new capital lease obligation and the Company's holdings of 44,642 shares of common stock and warrants to acquire 11,161 shares of common stock, at an exercise price of $2.40 per share, of Hybridon, Inc. (OTCBB:HYBN), with a carrying value of $110,909 at June 30, 1998. The carrying value of the stock was determined by the average of the bid and ask prices of the stock as reported by the National Quotation Bureau on June 30, 1998, which was $2.48 per share. The Company received the stock and warrants in exchange for an account receivable in the amount of $89,284. The warrants expire on May 5, 2003 and are not subject to a call provision. At June 30, 1998, the market value of the Hybridon stock was greater than the adjusted cost basis of $89,284. The difference of $21,625 was recorded as an Unrealized Gain on Investment (a non-cash transaction) and was reflected in the Stockholders' Equity section of the balance sheet. As of June 30, 1998, the Company's stockholders' equity totaled $7,873,583 compared to $2,438,241 at June 30, 1997. The Company had working capital of $4,082,645 at June 30, 1998, compared to working capital of $282,538 at June 30, 1997. The increase in working capital primarily reflects the increase in cash balances caused by the Company's issuance of Class A Convertible Preferred Stock and warrants in fiscal 1998. The Company's performance in fiscal 1998 can be attributed to its efforts to expand its client base and services within the pharmaceutical and biotechnology industries. -22- 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable to this registrant in 1998 [Remainder of page intentionally left blank] -23- 24 PricewaterhouseCoopers LLP REPORT OF INDEPENDENT ACCOUNTANTS ---------------- To the Board of Directors and Stockholders of PharmaKinetics Laboratories, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows, present fairly, in all material respects, the consolidated financial position of PharmaKinetics Laboratories, Inc. at June 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Baltimore, Maryland August 14, 1998 -24- 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, ---------------------------------- 1998 1997 1996 ----------- ---------- ----------- Revenues $12,326,009 $9,597,536 $10,962,160 Cost of contracts 8,930,681 7,053,560 7,289,138 ----------- ---------- ----------- Gross profit 3,395,328 2,543,976 3,673,022 Selling, general and administrative expenses 2,210,137 2,057,212 2,290,828 Research and development expenses 568,444 446,677 396,741 ----------- ---------- ----------- Earnings from operations 616,747 40,087 985,453 Interest expense (128,970) (185,817) (223,028) Interest income 143,170 36,217 40,748 Loss on disposal of equipment - - (19,848) ----------- ---------- ----------- Earnings (loss) before income taxes 630,947 (109,513) 783,325 Provision for income taxes 8,200 - 4,430 ----------- ---------- ----------- Net earnings (loss) 622,747 (109,513) 778,895 Deemed preferred stock dividend (1,020,793) - - ----------- ---------- ----------- Net earnings (loss) applicable to common stockholders ($398,046) ($109,513) $778,895 =========== ========== =========== Basic earnings (loss) per share ($0.16) ($0.04) $0.32 ----------- ---------- ----------- Basic weighted average shares outstanding 2,440,429 2,439,129 2,439,129 ----------- ---------- ----------- Diluted earnings (loss) per share ($0.16) ($0.04) $0.32 ----------- ---------- ----------- Diluted weighted average shares outstanding 2,440,429 2,439,129 2,470,109 ----------- ---------- ----------- - ----------------------------------------------------------------------------- See notes to consolidated financial statements.
-25- 26 PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED BALANCE SHEETS
June 30, ------------------------ 1998 1997 ----------- ---------- ASSETS Current Assets: Cash and equivalents $3,358,506 $556,040 Accounts receivable, net 1,731,853 1,014,538 Contracts in process 740,084 503,163 Prepaid expenses 251,023 190,343 ----------- ---------- Total Current Assets 6,081,466 2,264,084 Property, plant and equipment, net 3,822,373 3,654,132 Other assets 203,639 40,516 ----------- ---------- Total Assets $10,107,478 $5,958,732 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $916,816 $912,686 Deposits on contracts in process 1,082,005 862,272 Current portion of long-term debt - 206,588 ----------- ---------- Total Current Liabilities 1,998,821 1,981,546 Long-term debt - 1,500,231 Other liabilities 235,074 38,714 ----------- ---------- Total Liabilities 2,233,895 3,520,491 ----------- ---------- Commitments and Contingent Liabilities Stockholders' Equity: Class A Convertible Preferred Stock, no par value; authorized 1,500,000 shares; issued and outstanding 833,300 shares 4,937,500 - Common Stock, $.005 par value; authorized, 10,000,000 shares; issued and outstanding, 2,456,129 and 2,439,129 shares, respectively 12,281 12,196 Additional paid-in capital 11,867,086 12,013,701 Accumulated deficit (8,964,909) (9,587,656) Unrealized gain on investment 21,625 - ----------- ---------- Total Stockholders' Equity 7,873,583 2,438,241 ----------- ---------- Total Liabilities and Stockholders' Equity $10,107,478 $5,958,732 =========== ========== - ------------------------------------------------------------------------------ See notes to consolidated financial statements.
-26- 27 PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- CLASS A CONVERTIBLE PREFERRED STOCK Balance, beginning of year $ - $ - $ - Stock issued (833,300 shares) 4,937,500 - - ---------- ---------- ---------- Balance, end of year 4,937,500 - - ---------- ---------- ---------- (Shares outstanding: 833,300 at June 30, 1998) COMMON STOCK Balance, beginning of year 12,196 12,196 12,196 Exercise of stock options (16,960 shares) 85 - - ---------- ---------- ---------- Balance, end of year 12,281 12,196 12,196 ---------- ---------- ---------- (Shares outstanding: 2,456,129 at June 30, 1998; and 2,439,129 at June 30, 1997 and 1996) ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 12,013,701 12,013,701 12,013,701 Preferred stock issue costs (254,114) - - Common stock warrants issued 62,500 - - Exercise of stock options 44,999 - - ---------- ---------- ---------- Balance, end of year 11,867,086 12,013,701 12,013,701 ---------- ---------- ---------- ACCUMULATED DEFICIT Balance, beginning of year (9,587,656) (9,478,143)(10,257,038) Net earnings (loss) 622,747 (109,513) 778,895 ---------- ---------- ---------- Balance, end of year (8,964,909) (9,587,656) (9,478,143) ---------- ---------- ---------- UNREALIZED GAIN ON INVESTMENT Balance, beginning of year - - - Unrealized gain 21,625 - - ---------- ---------- ---------- Balance, end of year 21,625 - - ---------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $7,873,583 $2,438,241 $2,547,754 ========== ========== ========== - ---------------------------------------------------------------------------- See notes to consolidated financial statements.
-27- 28 PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, ----------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net earnings (loss) $622,747 ($109,513) $778,895 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 531,330 457,785 405,703 Loss on disposal of equipment - - 19,848 Changes in operating assets and liabilities: Accounts receivable, net (806,599) 233,755 (473,609) Contracts in process (236,921) (166,233) 358,429 Prepaid expenses and other assets (112,894) (46,234) (62,522) Refundable income taxes - - 29,364 Accounts payable and accrued expenses (10,026) (306,386) (327,781) Deposits on contracts in process 219,733 (71,038) (200,237) --------- --------- --------- Net cash provided (used) by operating activities 207,370 (7,864) 528,090 --------- --------- --------- Cash flows from investing activities: Payment for purchases of property and equipment (359,406) (195,367) (164,474) Proceeds from sale of equipment - - 71,400 --------- --------- --------- Net cash used by investing activities (359,406) (195,367) (93,074) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net 4,683,386 - - Proceeds from issuance of warrants 62,500 - - Payments on long-term debt (1,706,819) (145,214) (304,264) Payments for capital lease obligations (129,649) (85,916) (224,169) Proceeds from exercise of stock options 45,084 - - --------- --------- --------- Net cash provided (used) by financing activities 2,954,502 (231,130) (528,433) --------- --------- --------- Increase (decrease) in cash and equivalents 2,802,466 (434,361) (93,417) Cash and equivalents, beginning of year 556,040 990,401 1,083,818 --------- --------- --------- Cash and equivalents, end of year $3,358,506 $556,040 $990,401 ========= ========= ========= Non-cash transactions: Fixed assets acquired through capital leases $340,165 $53,840 $347,167 Conversion of account receivable to investment $89,284 - - Deemed preferred stock dividend $1,020,793 - - - ------------------------------------------------------------------------------ See notes to consolidated financial statements.
-28- 29 PHARMAKINETICS LABORATORIES, INC. NOTES TO CONSOLIDATED 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 accompanying consolidated financial statements include the results of the Company and the PKLB Limited Partnership, which owns the building the Company occupies. The Company includes 100% of the building operations in its financial statements. 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, 1998, the Company had two license fee agreements from which it was receiving license fee income. The Company had a third license fee arrangement which expired in October 1997. License fee income of $702,798, $833,701, and $493,076, was recorded during fiscal years ended June 30, 1998, 1997, and 1996, respectively. License fee income, based on clients' sales of approved drugs, will continue through the expiration of the license fee agreements, the most significant of which is expected to expire in fiscal 2004 and the other of which is expected to expire in fiscal 2000. 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. License fee income is recognized as a percentage of client sales when client sales are reported monthly to the Company. -29- 30 For the years ended June 30, 1998, 1997, and 1996 one client contributed in excess of 10% of contract revenue, accounting for 19%, 29%, and 27% 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's recognized revenue from its clients outside of the United States is as follows: Year Ended June 30, 1998 1997 1996 ---------- ---------- ---------- Canada $2,597,000 $2,718,000 $3,124,000 Europe & other 453,000 503,000 177,000 ---------- ---------- ---------- Total $3,050,000 $3,221,000 $3,301,000 ---------- ---------- ---------- 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 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 regarding the computation of earnings per share. This Statement requires the Company to present basic and diluted earnings per share in the financial statements. The Company adopted the requirements of this Statement in fiscal 1998. Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) by the weighted average common shares outstanding during the period. Diluted EPS reflects the potential dilution to EPS that could occur upon conversion or exercise of securities, options or other such items, to common shares using the treasury stock method based upon the weighted average fair value of the Company's common stock during the period. The Company's Class A Convertible Preferred Stock, warrants to acquire common stock, outstanding stock options granted under the Company's stock option plans and other options granted outside of the Company's plans are considered common stock equivalents for the purpose of the diluted earnings (loss) per share data; however, they are excluded from the calculations for fiscal 1998 and 1997 because the effect of their inclusion would be anti-dilutive. In 1996 dilutive common stock equivalents related to options outstanding totaled 30,980. All periods presented have been restated to conform to the new standard. Cash and Equivalents Cash equivalents consist of highly liquid investments with an original -30- 31 maturity of ninety days or less. 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 59.5% of the outstanding accounts receivable balance at June 30, 1998. In addition, 11.6% of the outstanding accounts receivable balance at June 30, 1998 was from clients outside of the U.S. Investment The Company's investment, which is considered available for sale, is recorded at market value. Fluctuations in the market value of the investment are reported as unrealized holding gains or losses as a separate component in stockholders' equity. 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. 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 -31- 32 reporting period. Actual amounts could differ from these estimates. Research and Development Expenses The nature of the Company's bioanalytical laboratory services requires that the Company develop new assay methods for use in testing pharmaceutical products to determine the amount of drug present in each of the biological specimens tested. 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 Company charges research and development expenses to operations as incurred. Year 2000 The Company's policy is to expense all costs related to its Year 2000 compliance program unless the useful life of the technological asset is extended or increased. New Accounting Standards 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. Adoption of these Standards is not expected to have a material impact on the Company's financial presentation and disclosure. C. ACCOUNTS RECEIVABLE Accounts receivable at June 30, 1998 and 1997 are shown net of an allowance for doubtful accounts of $150,000 and $0, respectively. D. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at June 30, is summarized as follows: 1998 1997 ----------- ----------- Land $ 200,000 $ 200,000 Building and improvements 3,031,862 2,880,085 Furniture and equipment 2,831,930 2,461,118 ----------- ----------- 6,063,792 5,541,203 Less: accumulated depreciation and amortization (2,241,419) (1,887,071) ----------- ----------- $ 3,822,373 $ 3,654,132 =========== =========== -32- 33 Assets held under capital lease at June 30, 1998 and 1997, were $441,922 and $289,990, respectively. Accumulated amortization of assets held under capital lease at June 30, 1998 and 1997, was $75,324, and $119,267, respectively. During fiscal year 1998, the Company wrote off certain fully depreciated assets with an historical cost basis of $176,982. E. ACCOUNTS PAYABLE AND ACCRUED EXPENSES At June 30, accounts payable and accrued expenses consisted of the following: 1998 1997 ----------- ----------- Trade accounts payable $ 388,389 $ 488,522 Accrued payroll and related expenses 145,220 94,647 Other accrued expenses 383,207 329,517 ----------- ----------- $ 916,816 $ 912,686 =========== =========== F. OTHER ASSETS At June 30, 1998, the Company held 44,642 shares of common stock and warrants to acquire 11,161 shares of common stock, at an exercise price of $2.40 per share, of Hybridon, Inc. (OTCBB:HYBN) with a carrying value of $110,909. The carrying value of the stock was determined by the average of the bid and ask prices of the stock as reported by the National Quotation Bureau on June 30, 1998, which was $2.48 per share. The Company received the stock and warrants in exchange for an account receivable in the amount of $89,284. The warrants expire on May 5, 2003 and are not subject to a call provision. G. DEBT At June 30, long-term debt consisted of the following: 1998 1997 ----------- ----------- Note payable $ - $ 1,706,819 Less: current portion - (206,588) ----------- ----------- $ - $ 1,500,231 =========== =========== On February 5, 1998, the Company elected to repay the remaining principal balance on its term note payable to NationsBank, N.A. , thereby eliminating its bank debt. The Company continues to have available a $500,000 working -33- 34 capital borrowing facility which was unused at June 30, 1998. Terms of the credit facility provide for interest at the Bank's prime rate and advances against eligible receivables. The borrowing agreement is collateralized by substantially all of the Company's assets, places restrictions on borrowings and investments, and requires maintenance of specified amounts of working capital, net worth and cash flow ratios. Cash payments for interest were $132,495, $181,722, and $362,946, in fiscal years 1998, 1997, and 1996, respectively. H. INCOME TAXES The Company's expenses for income taxes result from the impact of alternative minimum tax charges and credits. Deferred tax balances are comprised of the following: June 30, --------------------------- 1998 1997 ----------- ----------- Deferred tax assets: Accounts receivable $ 58,500 $ - Property, plant and equipment 279,201 388,964 Accrued liabilities 40,802 20,644 Net operating loss carryforwards 2,028,418 2,250,142 Alternative minimum tax credits 14,936 4,095 General business credits 1,466,998 1,432,538 ----------- ----------- Total deferred tax assets 3,888,855 4,096,383 Less: valuation allowance (3,888,855) (4,096,383) ----------- ----------- Deferred income taxes per balance sheet $ - $ - =========== =========== Based on the weight of evidence available at June 30, 1998, in management's opinion, a full valuation allowance is required to be recorded against the Company's deferred income tax assets. At June 30, 1998, the Company had tax loss carryforwards of approximately $5,201,000, expiring in 2006 through 2011, and general business credits of approximately $1,467,000 expiring during the period 1999 through 2010. The principal differences between the actual effective tax rate and the statutory federal tax rate are as follows: -34- 35 Year ended June 30, 1998 1997 1996 ---------- ---------- ---------- Statutory rate 34.0 % 34.0 % 34.0 % State income taxes - net of federal benefit 4.9 4.9 4.9 Alternative minimum tax 2.0 - .8 Alternative minimum tax credits (.7) - (.2) Loss carryforwards (38.9) (38.9) (38.9) ---------- ---------- ---------- Effective rate 1.3 % - % .6 % ========== ========== ========== The Company made cash payments for income taxes in the fiscal years ended June 30, 1998 and 1997, in the amounts of $3,000 and $5,800, respectively. The Company received a refund for income taxes of $29,000 in the fiscal year ended June 30, 1996. The components of the Company's current and deferred income tax provisions are as follows: Year ended June 30, 1998 1997 1996 ---------- ---------- ---------- Current provision Federal $ 8,200 $ - $ 4,430 State - - - ---------- ---------- ---------- Total current $ 8,200 $ - $ 4,430 ========== ========== ========== Deferred provision Federal $ - $ - $ - State - - - ---------- ---------- ---------- Total deferred $ - $ - $ - ========== ========== ========== I. 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 terms of less than one year, amounted to $215,100, $168,000, and $50,700 for the years ended June 30, 1998, 1997 and 1996, respectively. The future expected payout of leases with terms in excess of one year is as follows: -35- 36 Year ending June 30, ------------------- 1999 $ 166,424 2000 54,149 2001 7,996 2002 2,125 ---------- $ 230,694 ========== The Company has entered into capital lease arrangements for the purchase of furniture and laboratory equipment, which included one LC/MS/MS, in the aggregate amount of $441,922. 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, ------------------- 1999 $ 127,991 2000 110,960 2001 152,721 less: interest portion (57,161) ---------- $ 334,511 ========== 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. J. CAPITAL STOCK AND STOCK PLANS Preferred Stock and Warrants The Board of Directors is authorized to issue up to 1,500,000 shares of preferred stock at such time or times, in such series, with such designations, preferences, or other special rights, as it may determine. -36- 37 On December 23, 1997, the Company issued 833,300 shares of a newly created Class A Convertible Preferred Stock and warrants to purchase 1,250,000 shares of the Company's Common Stock, and entered into a Registration Rights Agreement and Technology Sharing Agreement in connection therewith, to investors including certain affiliates of Aster.Cephac S.A. and CAI Advisors & Co. (collectively, the "Purchasers"). The securities were issued pursuant to a Preferred Share and Warrant Purchase Agreement dated as of December 4, 1997. The Purchasers beneficially own approximately 41% of the Company's voting securities without giving effect to the possible exercise of warrants, or approximately 54% of the Company's voting securities if all the warrants are exercised. The Agreement provided for the sale to the Purchasers of a total of 833,300 shares of Class A Convertible Preferred Stock for $4,937,500 or $5.925 per share. The Preferred Stock is convertible at any time into shares of Common Stock at a conversion ratio of one share of Preferred Stock for two shares of Common Stock. The conversion ratio is subject to adjustment under certain circumstances to prevent dilution. In the event of liquidation of the Company, the holders of the shares of Preferred Stock who do not convert their shares into Common Stock are entitled to receive $5.925 per share, prior to any distributions being made to the holders of any other class or series of the Company's capital stock. In addition, the Agreement provided for the sale to the Purchasers, for $62,500, of warrants to purchase 1,250,000 shares of Common Stock. The warrants are fully exercisable at $6.00 per share and expire on December 23, 2000. Net earnings have been adjusted for the fiscal year ended June 30, 1998, for the deemed preferred stock dividend to the Purchasers, resulting in a net loss applicable to common stockholders. The dividend was computed based on the excess of the fair market value of the Company's Common Stock, into which the Preferred Stock was convertible, over the purchase price of the Preferred Stock at the date of issue. The dividend was recorded for financial reporting purposes only and was not paid to the Purchasers. Reverse Stock Split On April 6, 1998, the Company's stockholders approved a five-to-one reverse split of the Company's Common Stock, the change of authorized shares of the Company's Common Stock to 10,000,000 shares, par value $0.005 per share, and the reduction of capital for payment of fractional shares and amendment of the Company's Charter in connection therewith. The reverse split, which became effective at the close of business on April 17, 1998, did not affect the rights and privileges of holders of Common Stock, either before or after the reverse split. The Company did not issue fractional shares as a result of the reverse split, and each fraction of a share was exchanged for cash. The Company's capital was reduced by the amount of cash paid for fractional shares, the total payment of which was immaterial. -37- 38 All share and per share information in the consolidated financial statements have been restated to give effect to the reverse stock split. 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, 1998, the plans provide for the delivery of up to 323,005 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. 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 (the "1996 Plan") effective November 25, 1996. The 1996 Plan was amended by resolution of the Board of Directors on January 20, 1998 in order to increase the number of shares of Common Stock subject to options available for grant under the 1996 Plan. Each non-employee director shall be granted options to purchase 24,000 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 6,000 shares shall vest in each serving director who is reelected to the Board. The 1996 Plan, as amended, 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 1996 Plan shall not exceed in the aggregate 200,000 shares. As of June 30, 1998, there were 160,500 options granted and 148,500 options outstanding under the 1996 Plan. The 1996 Plan was ratified by the Company's stockholders at the Company's Special Meeting in lieu of Annual Meeting of Stockholders held April 6, 1998. In addition to the options described above, the Company has granted non- qualified options to purchase 56,920 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 1998, 1997 and 1996 consistent with the provisions -38- 39 of SFAS No. 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts indicated below: 1998 1997 1996 ---------- ---------- ---------- Net earnings (loss) applicable to common stockholders- as reported ($ 398,046)($ 109,513) $778,895 Net earnings (loss) applicable to common stockholders- pro forma ($ 526,181)($ 153,451) $768,854 Basic earnings (loss) per share - as reported ($0.16) ($0.04) $0.32 Basic earnings (loss) per share - pro forma ($0.22) ($0.06) $0.32 Diluted earnings (loss) per share - as reported ($0.16) ($0.04) $0.32 Diluted earnings (loss) per share - pro forma ($0.22) ($0.06) $0.31 Year Ended June 30, 1998 1997 1996 ---------- ---------- ---------- Weighted average fair value of options granted: $4.12 $1.47 $1.50 The fair value of each option grant is estimated on the date of grant using a type of Black-Scholes option-pricing model with the following assumptions used for grants issued during the years ended June 30, 1998, 1997, and 1996: dividend yield of 0%, expected volatility of 69.4%, expected term of 5 years, and risk free interest rates which varied from grant to grant based on the 10 year Treasury Rate in effect at the time of grant, the weighted average of which was 5.7% in fiscal 1998, 6.48% in fiscal 1997, and 6.12% in fiscal 1996. 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: -39- 40 Weighted Average Number Price Options Option Price of Shares per Share Exercisable ------------------------ --------- --------- ----------- Balance June 30, 1995 ($1.40 - $26.25 per share) 216,213 $2.95 158,532 Granted ($2.1875 - $2.50 per share) 56,340 $2.40 Exercised - - Forfeited ($2.1875 - $7.50 per share) (34,540) $3.20 -------- Balance June 30, 1996 ($1.40 - $26.25 per share) 238,013 $2.80 172,687 Granted ($1.80 - $2.7345 per share) 145,120 $2.35 Exercised - - Forfeited ($1.575 - $10.00 per share) (62,398) $2.94 -------- Balance June 30, 1997 ($1.40 - $26.25 per share) 320,735 $2.56 157,795 Granted ($4.05 - $7.42 per share) 242,600 $6.63 Exercised ($2.1875 - $3.4375 per share) (16,960) $2.66 Forfeited ($1.925 - $7.50 per share) (17,950) $2.98 -------- Balance June 30, 1998 ($1.40 - $26.25 per share) 528,425 $4.41 216,120 ======== The following table summarizes information about stock options outstanding at June 30, 1998: Options outstanding Options exercisable - --------------------------------------------------- -------------------------- Range of Number Weighted Weighted Number Weighted exercise outstanding at average average exercisable at average prices June 30, remaining exercise price June 30, exercise price 1998 contractual life 1998 - --------------------------------------------------- -------------------------- $ years $ $ 1.40 - 5.00 291,845 5.9 2.39 173,540 2.30 5.01 - 26.25 236,580 9.4 6.92 42,580 6.40 - --------------------------------------------------- -------------------------- 1.40 - 26.25 528,425 7.4 4.41 216,120 3.11 Options exercised to date total 158,962. Of the options exercised to date, 40,000 shares were returned to the Company and canceled when a note -40- 41 receivable for common stock subscribed was canceled effective June 30, 1995. As of June 30, 1998, the Company has reserved 528,425 shares of Common Stock for future issuance under authorized option grants. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item with respect to directors is contained in the Company's Proxy Statement for its 1998 annual meeting and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1998. ITEM 11. EXECUTIVE COMPENSATION Pursuant to General Instruction G(3) to Form 10-K, the information required with respect to this Item is contained in the Company's Proxy Statement for its 1998 annual meeting and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item with respect to directors is contained in the Company's Proxy Statement for its 1998 annual meeting and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item with respect to directors is contained in the Company's Proxy Statement for its 1998 annual meeting and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1998. -41- 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K Page(s) (a)1. FINANCIAL STATEMENTS Report of Independent Accountants 24 Consolidated statements of operations for each of the three years in the period ended June 30, 1998 25 Consolidated balance sheets at June 30, 1998 and 1997 26 Consolidated statements of stockholders' equity for each of the three years in the period ended June 30, 1998 27 Consolidated statements of cash flows for each of the three years in the period ended June 30, 1998 28 Notes to consolidated financial statements 29 2. FINANCIAL STATEMENT SCHEDULE Report of Independent Accountants on Financial 43 Statement Schedule Schedule IX - Valuation and Qualifying Accounts 44 3. EXHIBITS See Exhibit Index 46 (b) REPORTS ON FORM 8-K On April 21, 1998, the Company filed a Report on Form 8-K stating that as a result of a stockholder vote on April 6, 1998, approving a five-to-one reverse split of the Company's Common Stock, effective on the close of business on Friday, April 17, 1998, the Company's authorized shares of Common Stock is now 10 million and the total number of shares of Common Stock outstanding approximates 2.4 million. The Common Stock traded in the over- the-counter market on a post-split basis on Monday, April 20, 1998. -42- 43 PricewaterhouseCoopers LLP Report of Independent Accountants on Financial Statement Schedule -------------- To the Board of Directors and Stockholders of PharmaKinetics Laboratories, Inc. Our report on the consolidated financial statements of PharmaKinetics Laboratories, Inc. is included on Page 24 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 44 of this Form 10-K. 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 herein. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Baltimore, Maryland August 14, 1998 -43- 44 PHARMAKINETICS LABORATORIES, INC. SCHEDULE IX VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 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 Allowances: Doubtful accounts 1998 $ - $300,000 - ($150,000) $ 150,000 1997 $ - - - - $ - 1996 $ - - - - $ - Deferred tax assets (a) 1998 $ 4,096,383 - ($207,528) - $3,888,855 1997 $ 3,534,082 - $562,301 - $4,096,383 1996 $ 3,866,842 - ($332,760) - $3,534,082 Notes: - ----- (a) Represents charges to deferred tax asset account.
-44- 45 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 28, 1998 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 28, 1998 /s/James K. Leslie ------------------ James K. Leslie, Chief Executive Officer, President and Director (Principal Executive Officer) Date: September 28, 1998 /s/Taryn L. Kunkel ------------------ Taryn L. Kunkel, Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: September 28, 1998 /s/ Leslie B. Daniels --------------------- Leslie B. Daniels, Director Date: September 28, 1998 /s/ David von Kauffmann ----------------------- David von Kauffmann, Director Date: September 28, 1998 /s/ Thomas F. Kearns -------------------- Thomas F. Kearns, Jr., Director Date: September 28, 1998 /s/ Kamal K. Midha ------------------ Kamal K. Midha,Ph.D.,D.SC., Director Date: September 28, 1998 /s/ John J. Thebault -------------------- John J. Thebault, M.D., Director Date: September 28, 1998 /s/ Roger C. Thies ------------------ Roger C. Thies, Director Date: September 28, 1998 /s/ Grover C. Wrenn ------------------- Grover C. Wrenn, Director -45- 46 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) Amended and Restated Articles of Incorporation, dated April 6, 1998 (filed herewith). (b) Bylaws, as amended and restated (incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 4. Registration Rights Agreement dated as of December 23, 1997 (incorporated by reference to Exhibit 4.4 to the Company's January 7, 1998 filing on Form 8-K). 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. Amended and Restated 1996 Non-Employee Director's Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, No. 333- 59647). (e) Severance Agreement, dated April 15, 1997, between the Company and James K. Leslie (incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (f) Severance Agreement, dated April 15, 1997, between the Company and Taryn L. Kunkel (incorporated by reference to Exhibit 3(f) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (g) Promissory Note, dated September 20, 1996, from James M. Wilkinson II, Ph.D. in favor of the Company (incorporated by reference to Exhibit 3(g) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (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 -46- 47 (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). (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. (incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (n) Third Amendment to Loan Agreement, dated November 30, 1996, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (o) Second Note Modification Agreement dated August 1, 1997, between NationsBank N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). (p) Fourth Amendment to Loan Agreement, dated August 1, 1997, between NationsBank, N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). -47- 48 (q) Fifth Amendment to Loan Agreement, dated November 30, 1997, between NationsBank N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). (r) Third Note Modification Agreement, dated November 30, 1997, between NationsBank N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). (s) Third Commercial Promissory Note Modification Agreement, dated November 30, 1997, between NationsBank N.A. and PharmaKinetics Laboratories, Inc. (incorporated by reference to Exhibit 10(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). (t) Technology Sharing Agreement dated as of December 23, 1997 (incorporated by reference to Exhibit 99.2 to the Company's January 7, 1998 filing on Form 8-K). 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). -48- EX-3 2 1 EXHIBIT 3(a) ARTICLES OF AMENDMENT AND RESTATEMENT OF PHARMAKINETICS LABORATORIES, INC. PHARMAKINETICS LABORATORIES, INC., a Maryland corporation, having its principal office at 302 West Fayette Street, Baltimore, Maryland 21201 (hereinafter referred to as the "Corporation") hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Corporation desires to amend and restate its charter as currently in effect as hereinafter provided. The provisions set forth in these Articles of Amendment and Restatement are all the provisions of the charter of the Corporation as currently in effect. SECOND: The charter of the Corporation is hereby amended by striking in its entirety Articles FIRST through TWELFTH, inclusive, and by substituting in lieu thereof the following Articles FIRST through TENTH: FIRST: That we, the subscribers, W.D. Zander, Bernhard E. Holzapfel, and Alan G. Woodman, all of whom have a post office address of 750 Third Avenue, New York, New York 10017, and all of whom are at least eighteen years of age, intend to form a corporation under the general laws of the State of Maryland. SECOND: That the name of the Corporation is PHARMAKINETICS LABORATORIES, INC. THIRD: The purposes for which the Corporation is formed are as follows: A. To engage in the business for profit of bioavailability testing in human volunteers with complete laboratory capabilities in microbiological and chemical assays. -1- 2 B. To engage in the business for profit of providing complete in vitro and in vivo evaluations of drug dosage forms. C. To engage in the business for profit of general pharmaceutical and medical research. D. To acquire by purchase, lease, or otherwise, and to improve, and develop real property which is deemed necessary or useful in conducting the business of the Corporation. E. To acquire by purchase, lease, manufacture, or otherwise any personal property which is deemed necessary or useful in conducting the business of the Corporation. F. To engage in all other businesses, occupations, and activities which may be conducive to achieving the above-enumerated purposes and to engage in any and all businesses, occupations, and activities in which a corporation may lawfully engage. FOURTH: The post office address of the principal office of the Corporation in this state is 302 West Fayette Street, Baltimore, Maryland 21201. FIFTH: The resident agent of the Corporation is Taryn L. Kunkel, whose post office address is 302 West Fayette Street, Baltimore, Maryland 21201, said resident agent being a citizen of the State of Maryland, and actually residing therein. SIXTH: The total number of shares of stock of all classes which the Corporation has authority to issue is 11,500,000 shares, divided into 10,000,000 shares of Common Stock, par value $.005, and 1,500,000 shares of Preferred Stock, without par value, 833,300 shares of which have been classified as Class A Convertible Preferred Stock. The aggregate par value of all shares having par value is $50,000. Each share of Common Stock, par value $.001, issued and outstanding at 5:00 p.m. local time on -2- 3 April 17, 1998 shall be and is by this means automatically reclassified and changed into one-fifth fully-paid and nonassessable share of Common Stock, par value $.005. The preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each class are as follows: A. Common Stock. Subject to the voting rights of any series of Preferred Stock pursuant to the terms of such series, each outstanding share of Common Stock shall be entitled to one vote on each matter submitted to a vote or approval of stockholders. Subject to the provisions of law and any preferences of Preferred Stock, dividends may be paid on the Common Stock at such time and in such amounts as the Board of Directors may from time to time determine. Upon any voluntary or involuntary liquidation or dissolution of the Corporation, after payment or provision for the payment of the debts and other liabilities of the Corporation and of the amounts to which holders of any Preferred Stock may be entitled, the holders of shares of Common Stock shall be entitled to share ratably in all remaining assets of the Corporation. B. Preferred Stock. The Preferred Stock may be issued, from time to time, in one or more series as authorized by the Board of Directors. Prior to issuance of each series, the Board of Directors by resolution shall designate that series to distinguish it from all other series and classes of stock of the Corporation, shall specify the number of shares to be included in the series, and shall fix the terms, rights, restrictions, qualifications and limitations of the shares of the series, including any preferences, voting powers, dividend rights, liquidation rights, and redemption, sinking fund and conversion rights. Subject to the express terms of any other series of Preferred Stock outstanding at the time, and notwithstanding any other provision of the charter, the Board of Directors may increase or decrease the number of shares or alter the designation or classify or reclassify any unissued -3- 4 shares of a particular series of Preferred Stock by setting or changing in any one or more respects, from time to time before issuing the shares, the preferences, conversion or other rights, voting powers, restrictions, limitation as to dividends, qualifications, terms or conditions of redemption, or any other terms of such series of Preferred Stock. C. Class A Convertible Preferred Stock. 1. DESIGNATION AND AMOUNT A total of 833,300 shares of the Corporation's Preferred Stock shall be designated the "Class A Convertible Preferred Stock." 2. VOTING RIGHTS 2.1 General. Each holder of Class A Convertible Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of the Common Stock of the Corporation and, with respect to each such matter, shall be entitled to that number of votes equal to the number of whole shares of Common Stock into which such holder's shares of Class A Convertible Preferred Stock could be converted, pursuant to the provisions of Section 5 of this Article SIXTH, Paragraph C, on the record date for the determination of stockholders entitled to vote on such matters, or if no such record date is established, on the date such vote is taken. Except as otherwise provided herein or otherwise required by law, the holders of shares of Class A Convertible Preferred Stock and the holders of shares of Common Stock shall vote together as a single class on all matters submitted to the stockholders of the Corporation. 2.2 Director Election Rights. (a) Definitions. For purposes of this Subsection 2.2: -4- 5 "Affiliate", with respect to any person, shall mean any other person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such person, or any other person that is a partner of such person in any general or limited partnership; "Conversion Shares" means the sum of (A) the number of whole shares of Common Stock into which the outstanding shares of Class A Convertible Preferred Stock are convertible pursuant to the provisions of Section 5, plus (B) the number of shares of Common Stock owned of record by the Initial Holders, regardless of how or when acquired. "Initial Holders" means CAI Advisors & Co., Aster.Cephac S.A., and any Affiliate of CAI Advisors & Co. or Aster.Cephac S.A. or any holder of Class A Convertible Preferred Stock or warrants to purchase Common Stock that obtained such preferred stock or warrants by assignment from CAI Advisors & Co. or Aster.Cephac S.A. pursuant to the terms of that certain Preferred Stock and Warrant Purchase Agreement dated December 4, 1997 by and among the Corporation, CAI Advisors & Co., and Aster.Cephac S.A. (the "Purchase Agreement"); "Total Shares Outstanding" means the sum of (A) the total number of shares of Common Stock outstanding and (B) the number of whole shares of Common Stock into which the outstanding shares of Class A Convertible Preferred Stock are convertible pursuant to the provisions of Section 5 of this Article SIXTH, Paragraph C. (b) Director Election Rights of Holders. So long as the Conversion Shares constitute at least ten percent (10%) of the Total Shares Outstanding, the holders of Class A Convertible Preferred Stock, voting as a separate class, shall have the right to elect that number of Directors to the Board of Directors of the Corporation (the "Board") that bears the same proportion to the total number of directors on the Board as the Conversion Shares bear to the Total Shares -5- 6 Outstanding, rounded up to the next whole number; provided, however, that so long as the Conversion Shares constitute at least thirty-five percent (35%) of the Total Shares Outstanding, the holders of Class A Convertible Preferred Stock shall have the right to elect at least fifty percent (50%) of the Board members. For purposes of this Subsection 2.2(b), the number of Conversion Shares shall be determined on the record date for the determination of stockholders entitled to vote on the election of directors, or if no such record date is established, on the date such vote is taken. 3. DIVIDENDS If the Corporation declares a dividend on its Common Stock, each holder of shares of Class A Convertible Preferred Stock shall be entitled to participate in such dividend as if such holder was the holder of the number of whole shares of Common Stock into which such holder's shares of Class A Convertible Preferred Stock could be converted, pursuant to the provisions of Section 5 of this Article SIXTH, Paragraph C, on the record date for the determination of holders of Common Stock entitled to receive the declared dividend. 4. LIQUIDATION, DISSOLUTION, OR WINDING-UP 4.1 Preference Right. Upon the liquidation, dissolution, or winding-up of the Corporation, whether voluntary or involuntary, before any payment or distribution shall be made to any holders of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Class A Convertible Preferred Stock, the holders of Class A Convertible Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings (the "Proceeds"), an amount per share equal to the Preference Amount (as defined in Subsection 4.2 below). If the Proceeds are insufficient to pay each holder of Class A Convertible -6- 7 Preferred Stock an amount per share equal to the Preference Amount, then each such holder shall share in the Proceeds in the same proportion that the number of shares of Class A Convertible Preferred Stock registered in the name of such holder bears to the total number of shares of Class A Convertible Preferred Stock outstanding. 4.2 Preference Amount. The Preference Amount per share of Class A Convertible Preferred Stock shall be Five and 92.5/100 Dollars ($5.925). 4.3 Merger, Consolidation, etc. Upon any merger, consolidation or other corporate reorganization or combination to which the Corporation is a non- surviving party (other than a merger into a wholly- owned subsidiary of the Corporation), or any sale of all or substantially all of the assets of the Corporation, the holders of Class A Convertible Preferred Stock that have not converted their shares to Common Stock pursuant to Section 5 shall be entitled to receive the cash, securities or other property in the amount that they would have received under Subsection 4.1, above, upon a liquidation. 5. CONVERSION. 5.1 Conversion Right and Conversion Rate. Any holder of Class A Convertible Preferred Stock shall have the right, at the holder's option, to convert at any time, or from time to time, any or all of the such holder's shares of Class A Convertible Preferred Stock into fully-paid and nonassessable shares of the Common Stock of the Corporation, subject to the terms and conditions of this Section 5. The number of shares of Common Stock issuable for each share of Class A Convertible Preferred Stock upon any such conversion (herein called the "Conversion Rate") shall be 10 shares of Common Stock for each share of Class A Convertible Preferred Stock; provided, however, that if the application of the then current Conversion Rate to the aggregate number of shares of Class A Convertible Preferred Stock surrendered by a single -7- 8 holder in a single transaction would result in a fraction, then the next lower whole number of shares of Common Stock shall be issuable upon such conversion. The Conversion Rate shall be subject to adjustment from time to time in certain instances as provided in Section 5.3 of this Article SIXTH, Paragraph C. The Corporation shall make no payment or adjustment on account of any dividends accrued on the Common Stock issuable upon such conversion, or on account of the rounding down to the next lower whole number of shares issuable upon any conversion. 5.2 Manner of Conversion. In order to convert shares of Class A Convertible Preferred Stock into Common Stock, the record holder of such shares shall surrender the certificate or certificates therefor, duly endorsed or accompanied by duly executed stock powers, at the principal office of the Corporation. Together with such certificates, the converting holder shall give a written conversion notice to the Corporation of the election to convert a specified number of shares of Class A Convertible Preferred Stock. The converting holder shall state in its notice of conversion the name or names that shall appear on the certificate or certificates for Common Stock issuable upon such conversion. The Corporation shall, as soon as practicable thereafter, cause to be issued and delivered to the converting holder, or to the converting holder's designated transferees or nominees, if permitted by applicable law, certificates for the number of full shares of Common Stock to which the converting holder is entitled. If the converting holder has elected to convert only a portion of the shares of Class A Convertible Preferred Stock represented by the surrendered certificates, the Corporation shall issue, at its expense, a new certificate representing the unconverted shares of Class A Convertible Preferred Stock, registered in the name of the converting holder, or in the name or names of the converting holder's designated transferees or nominees, if permitted by applicable law. Shares of Class A Convertible Preferred Stock shall be deemed to have been converted as of the close of business on the -8- 9 date when the surrender of the certificates therefor and the giving of notice as required above has been completed. The person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at and after such time. 5.3. Adjustment to Conversion Rate. (a) Generally. In order to prevent dilution of the conversion rights granted under Section 5.1 hereof, the Conversion Rate in effect at any time shall be subject to adjustment from time to time pursuant to this Section 5.3. Any such adjustment shall be automatic and shall not require any further action on the part of the Corporation (except for the preparation of an Adjustment Certificate pursuant to Section 5.4 below) or of any registered owner of Class A Convertible Preferred Stock. (b) Sale or Issuance of Common Stock. If and whenever the Corporation issues or sells, or in accordance with paragraph (c) of this Section 5.3 is deemed to have issued or sold, any shares of its Common Stock for consideration per share less than Fifty-Nine and 25/100 Cents ($0.5925) (hereafter, the "Adjustment Trigger Price"), then immediately upon such issuance or sale (or deemed issuance or sale) the Conversion Rate then in effect shall be increased by multiplying such Conversion Rate by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale (or deemed issuance or sale) plus (ii) the number of shares of Common Stock so issued or sold (or deemed issued or sold), and the denominator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issuance or sale (or deemed issuance or sale) plus the number of shares of Common Stock that the aggregate consideration received by the Corporation (or deemed received by the Corporation) in connection with such issuance or sale (or deemed issuance or sale), determined in accordance with Subsection 5.3(e) hereof, would purchase at a -9- 10 price per share equal to the Adjustment Trigger Price. For purposes of this Section 5.3, the term "Common Stock" shall include all securities of the Corporation having characteristics substantially equivalent to those of the Corporation's Common Stock. (c) Deemed Sale or Issuance of Common Stock. For purposes of this Section 5.3, the following events shall be deemed an issuance or sale of Common Stock: (i) Issuance of Rights, Warrants or Options. If the Corporation in any manner grants any rights, warrants or options to subscribe for or to purchase Common Stock (such rights, warrants or options being herein called "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Adjustment Trigger Price, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options shall be deemed to have been issued and sold by the Corporation upon the grant of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" will be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options. No further adjustment of the Conversion Rate shall be made when shares of Common Stock are actually issued upon the exercise of such Options. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any securities convertible into or exchangeable for Common Stock (such convertible or exchangeable securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Adjustment Trigger Price, then the total maximum number of shares -10- 11 of Common Stock issuable upon the conversion or exchange of such Convertible Securities shall be deemed to have been issued and sold by the Corporation for such price per share upon the issuance or sale of such Convertible Securities. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (x) the total amount received or receivable by the Corporation as consideration for the issuance or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Rate shall be made when shares of Common Stock are actually issued upon the conversion or exchange of such Convertible Securities. (iii) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities without exercise of the underlying option or right, provided such Options or Convertible Securities are not reissued by the Corporation, the Conversion Rate then in effect hereunder will be adjusted to the Conversion Rate that would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (iv) Integrated Transactions. In case any Option is issued in connection with the issuance or sale of other securities of the Corporation together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of One Cent ($0.01). (d) Certain Events Excepted. Notwithstanding the other provisions of this Section 5.3, the following -11- 12 events shall not trigger an adjustment to the Conversion Rate: (i) the issuance or sale (or deemed issuance or sale) of Common Stock reserved for issuance in connection with the Conversion of Class A Convertible Preferred Stock; (ii) the issuance or sale (or deemed issuance or sale) of Common Stock reserved for issuance upon the exercise of warrants purchased under the Purchase Agreement; and (iii) the grant of Options, or the issuance or sale (or deemed issuance or sale) of Common Stock, to officers, employees, directors, consultants or advisors of the Corporation pursuant to any stock option plan or restricted stock purchase plan adopted by the Corporation. (e) Calculation of Consideration Received. If any Common Stock, Option or Convertible Security is issued or sold, or deemed to have been issued or sold, for cash, the consideration received therefor shall be deemed to be the net amount of cash received by the Corporation therefor. In case any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair market value of such consideration. If any Common Stock, Option or Convertible Security is issued in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Option or Convertible Security, as the case may be. The fair market value of any consideration other than cash and securities shall be determined by the Board of Directors of the Corporation. (f) Dividend in Common Stock. If the Corporation pays a dividend in shares of its Common Stock, the -12- 13 Conversion Rate shall be increased by multiplying the Conversion Rate then in effect by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding at the opening of business on the date fixed for such dividend plus (B) the total number of shares constituting such dividend, and the denominator of which shall be the number of shares of Common Stock outstanding at the opening of business on the date fixed for such dividend. (g) Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) the outstanding shares of Common Stock into a greater number of shares, the Conversion Rate and the Adjustment Trigger Price in effect immediately prior to such subdivision will be, respectively, proportionately increased and decreased. If the Corporation at any time combines (by reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares, the Conversion Rate and the Adjustment Trigger Price in effect immediately prior to such combination will be, respectively, proportionately decreased and increased. (h) Waiver of Automatic Adjustment. An automatic adjustment to the Conversion Rate or the Adjustment Trigger Price pursuant to this Section 5.3 may not be waived except by written notice to the Corporation executed by the registered owners of 100 percent of then outstanding shares of Class A Convertible Preferred Stock. 5.4 Adjustment Certificate. The Treasurer or Chief Financial Officer of the Corporation shall compute all required adjustments to the Conversion Rate or the Adjustment Trigger Price under this Section 5 and shall prepare a certificate setting forth the adjusted Conversion Rate or Adjustment Trigger Price and showing in detail the facts upon which the adjustment was based (the "Adjustment Certificate"). The Treasurer or Chief Financial Officer shall promptly file the Adjustment Certificate with the Transfer -13- 14 Agent, if any, for the Class A Convertible Preferred Stock and shall promptly mail a copy of the Adjustment Certificate to each record holder of Class A Convertible Preferred Stock. 5.5 Notice of Certain Events. In case: (i) the Corporation shall declare a dividend payable in Common Stock; (ii) of any capital reorganization of the Corporation, reclassification of the capital stock of the Corporation, consolidation or merger of the Corporation with or into another corporation, or conveyance of all or substantially all of the assets of the Corporation to another corporation; or (iii)of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, and in any such case, the Corporation shall cause to be mailed to the Transfer Agent, if any, for the Class A Convertible Preferred Stock and to the record holders of the outstanding shares of Class A Convertible Preferred Stock, at least twenty days prior to the record date for any such event, a notice disclosing the event to occur and the record date for determination of the stockholders entitled to participate in such event. 5.6 Common Stock Reserve. The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the shares of Class A Convertible Preferred Stock, the full number of shares of Common Stock issuable upon the conversion of all shares of Class A Convertible Preferred Stock from time to time outstanding. 5.7 Taxes. The Corporation shall pay any and all issue taxes that may be payable in respect of the issuance or delivery of shares of Common Stock upon conversion of shares of Class A Convertible Preferred Stock. -14- 15 6. RESTRICTIONS AND LIMITATIONS ON CORPORATE ACTION The approval by vote of the holders of at least a majority of the outstanding shares of Class A Convertible Preferred Stock, voting as a single class, each share of Class A Convertible Preferred Stock to be entitled to one vote in each instance, shall be required for any action by the Corporation or any amendment to the corporate charter if such corporate action or amendment would (i) change or limit any of the rights, preferences, or privileges of the Class A Convertible Preferred Stock, or (ii) authorize, create, or issue, or obligate the Corporation to authorize, create, or issue, additional shares of Class A Convertible Preferred Stock or shares of any other class or series of stock having rights, preferences, or privileges senior to or on a parity with those of the Class A Convertible Preferred Stock. 7. NO IMPAIRMENT The Corporation will not, by amendment of its corporate charter or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities, or through any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Class A Convertible Preferred Stock, but will at all times in good faith assist in the carrying out of all such terms. 8. NO REISSUANCE OF CLASS A CONVERTIBLE PREFERRED STOCK; TERMINATION No share or shares of Class A Convertible Preferred Stock acquired by the Corporation by reason of conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation is authorized to issue. Upon the cancellation of all outstanding shares of the Class A Convertible Preferred Stock, these charter provisions regarding the Description and -15- 16 Designation of Class A Convertible Preferred Stock shall terminate and have no further force and effect. SEVENTH: The number of directors of the Corporation shall be three (3), which number may be increased pursuant to the By-Laws of the Corporation, but shall never be less than three (3); and the names of the directors who shall act until the next annual meeting of stockholders or until their successors are duly chosen and qualified are: Leslie B. Daniels James K. Leslie Thomas F. Kearns John J. Thebault Roger C. Thies Grover C. Wrenn EIGHTH: No holders of any class of stock of the Corporation shall have any preemptive rights to acquire additional stock in the Corporation. NINTH: A. Directors and officers of the Corporation shall not be liable to the Corporation or its stockholders for money damages. The purpose of this limitation of liability is to limit liability to the maximum extent that the liability of directors and officers of Maryland corporations is permitted to be limited by Maryland law. This limitation of liability shall apply to events which occurred during the term of office of any director or officer whether or not such director or officer is serving as such at the time any proceeding in which liability is asserted commences. B. To the maximum extent permitted by Maryland law, the Corporation shall indemnify its currently acting and its former directors against any and all liabilities and expenses incurred in connection with their services in such capacities, and shall indemnify its currently acting and its former officers to the full extent that indemnification shall be provided to directors, and may indemnify, to the same extent, persons who serve and have served, at its request, as a director, officer, partner, trustee, employee or agent of another corporation, -16- 17 partnership, joint venture or other enterprise. This indemnification of directors and officers shall also apply to directors and officers who are also employees, in their capacity as employees. The Board of Directors may by By- Law, resolution or agreement make further provision for indemnification of employees and agents to the extent permitted by Maryland law and for advancing expenses to the Corporation's directors and officers and the other persons referred to above to the extent permitted by Maryland law. C. References to Maryland law shall include the Maryland General Corporation Law as from time to time amended. Neither the repeal or amendment of this Article NINTH nor any other amendment to these Articles of Incorporation, shall eliminate or reduce the protection afforded to any person by the foregoing provisions of this Article NINTH with respect to any act or omission which shall have occurred prior to such repeal or amendment. TENTH: The following provisions are adopted for the purposes of defining, limiting and regulating certain powers of the Corporation and of the directors and the stockholders: A. The Board of Directors of the Corporation is hereby authorized and empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized. B. The Board of Directors may classify or reclassify any unissued shares by fixing or altering in any one or more respects, from time to time before issuance of such shares, the preferences, rights, voting powers, restrictions and qualifications of, the dividends on, the times and prices of redemption of, and the conversion rights of, such shares. C. The Corporation reserves the right to amend its Charter so that such amendment may alter the contract rights as expressly set forth in the Charter of any outstanding stock but no such amendment may -17- 18 change the terms of any class or series of any class of outstanding stock unless such change of terms shall have been authorized by the holders of not less than two-thirds of all shares of such class or series of such class at the time outstanding. D. For so long as directors are elected by holders of the Class A Convertible Preferred Stock, the Corporation shall not declare any dividend on any class or series of the capital stock of the Corporation unless such dividend shall have been approved by all of the members of the Board of Directors elected by the holders of the Class A Convertible Preferred Stock. THIRD: Immediately before the effective date of this amendment, the Corporation had authority to issue 51,500,000 shares of capital stock, divided into 50,000,000 shares of Common Stock, par value $0.001 per share, and 1,500,000 shares of Preferred Stock, without par value, 833,300 of which have been classified as Class A Convertible Preferred Stock. The aggregate par value of all shares having par value was $50,000. Immediately after the effective date of this amendment, the Corporation had authority to issue 11,500,000 shares of capital stock, divided into 10,000,000 shares of Common Stock, $0.005 par value per share, and 1,500,000 shares of Preferred Stock, without par value, 833,300 of which have been classified as Class A Convertible Preferred Stock. The aggregate par value of all shares having par value is $50,000. FOURTH: At a duly called meeting of the Board of Directors on January 20, 1998, the Board of Directors of the Corporation duly advised the foregoing Articles of Amendment and Restatement, and at a duly called meeting of the stockholders of the Corporation on April 6, 1998, the stockholders of the Corporation duly approved said Articles of Amendment and Restatement. [Remainder of page intentionally left blank.] -18- 19 IN WITNESS WHEREOF, PHARMAKINETICS LABORATORIES, INC. has caused these presents to be signed in its name and on its behalf by its President and its corporate seal to be affixed hereunder and attested by its Secretary on this 6th day of April, 1998, and its President acknowledges that these Articles of Amendment and Restatement are the act and deed of PHARMAKINETICS LABORATORIES, INC., and, under the penalties of perjury, that the matters and facts set forth herein with respect to authorization and approval are true in all material respects to the best of his knowledge, information and belief. ATTEST PHARMAKINETICS LABORATORIES, INC. /s/ Taryn L. Kunkel By:/s/ James K. Leslie (SEAL) --------------- --------------- Taryn L. Kunkel, Secretary James K. Leslie, President -19- EX-23 3 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statements of PharmaKinetics Laboratories, Inc. on Forms S-8 (File Nos. 333-19865 and 333-59647) of our report, dated August 14, 1998, on our audits of the consolidated financial statements and financial statement schedule of PharmaKinetics Laboratories, Inc. as of June 30, 1998 and 1997, and for each of the three years in the period ended June 30, 1998, which report is included in this Annual Report on Form 10-K. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Baltimore, Maryland September 28, 1998 EX-27 4
5 This schedule contains summary financial information extracted from the Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1998 JUN-30-1998 3,358,506 110,909 1,881,853 150,000 740,084 6,081,466 6,063,792 2,241,419 10,107,478 1,998,821 0 12,281 0 4,937,500 2,923,802 10,107,478 12,326,009 12,469,179 8,930,681 11,709,262 0 0 128,970 630,947 8,200 622,747 0 0 0 622,747 (.16) (.16)
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