UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11580
PHARMAKINETICS LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1067519
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 West Fayette Street
Baltimore, Maryland 21201
(Address of principal executive offices)
(410) 385-4500
(Registrant's telephone number, including area code)
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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 2,496,129
common shares were outstanding as of November 4, 1999.
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
FORM 10-Q
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated statements of operations for
the three months ended September 30, 1999
and 1998 (unaudited) 3
Consolidated statements of comprehensive income
(loss) for the three months ended September 30,
1999 and 1998 (unaudited) 4
Consolidated balance sheets at September 30,
1999 (unaudited) and June 30, 1999 5
Consolidated statements of cash flows for the
three months ended September 30, 1999
and 1998 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------
1999 1998
---------- ----------
Revenues $3,210,528 $2,806,132
Cost of contracts 2,411,839 2,447,473
---------- ----------
Gross profit 798,689 358,659
---------- ----------
Selling, general and
administrative expenses 660,652 607,072
Research and development expenses 27,079 133,557
---------- ----------
Earnings (loss) from operations 110,958 (381,970)
Interest expense (5,724) (8,205)
Interest income 21,971 41,431
---------- ----------
Earnings (loss) before income taxes 127,205 (348,744)
Income taxes - -
---------- ----------
Net earnings (loss) $ 127,205 $ (348,744)
========== ==========
Basic earnings (loss) per share $0.05 ($0.14)
========== ==========
Basic weighted average
shares outstanding 2,496,129 2,485,219
========== ==========
Diluted earnings (loss) per share $0.03 ($0.14)
========== ==========
Diluted weighted average
shares outstanding 4,168,861 2,485,219
========== ==========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
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<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended
September 30,
--------------------------
1999 1998
---------- ----------
Net earnings (loss) $ 127,205 $ (348,744)
Other comprehensive income:
Unrealized loss on investment (6,138) (18,137)
---------- ----------
Comprehensive income (loss) $ 121,067 $ (366,881)
========== ==========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
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<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1999 1999
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 1,334,435 $ 2,233,198
Accounts receivable, net 1,644,957 1,518,030
Contracts in process 947,203 849,768
Prepaid expenses 310,595 241,469
------------ ------------
Total Current Assets 4,237,190 4,842,465
Property, plant and equipment, net 4,377,764 4,324,543
Other assets 110,508 117,946
------------ ------------
Total Assets $ 8,725,462 $ 9,284,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 871,466 $ 1,073,455
Deposits on contracts in process 1,024,279 1,481,554
------------ ------------
Total Current Liabilities 1,895,745 2,555,009
Other liabilities 121,407 142,702
------------ ------------
Total Liabilities 2,017,152 2,697,711
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Class A Convertible Preferred stock, no
par value; authorized 1,500,000 shares;
issued and outstanding 833,300 shares 4,937,500 4,937,500
Common stock, $.005 par value; authorized,
10,000,000 shares; issued and
outstanding, 2,496,129 shares 12,481 12,481
Additional paid-in capital 11,929,886 11,929,886
Accumulated deficit (10,165,419) (10,292,624)
Accumulated comprehensive income (6,138) -
------------ ------------
Total Stockholders' Equity 6,708,310 6,587,243
------------ ------------
Total Liabilities and Stockholders' Equity $ 8,725,462 $ 9,284,954
============ ============
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
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<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
-------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 127,205 $ (348,744)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 154,304 130,172
Changes in operating assets and liabilities:
Accounts receivable, net (126,927) 165,693
Contracts in process (97,435) 247,449
Prepaid expenses and other assets (67,826) (32,898)
Accounts payable and accrued expenses (198,852) 98,622
Deposits on contracts in process (457,275) 73,313
------------ -----------
Net cash provided (used) by operating activities (666,806) 333,607
------------ -----------
Cash flows from investing activities:
Payment for purchases of property and equipment (207,525) (437,849)
------------ -----------
Net cash used by investing activities (207,525) (437,849)
------------ -----------
Cash flows from financing activities:
Payments for capital lease obligations (24,432) (26,648)
Proceeds from exercise of stock options - 63,000
------------ -----------
Net cash provided (used) by financing activities (24,432) 36,352
------------ -----------
Decrease in cash and equivalents (898,763) (67,890)
Cash and equivalents, beginning of period 2,233,198 3,358,506
------------ -----------
Cash and equivalents, end of period $ 1,334,435 $ 3,290,616
============ ===========
Supplemental Cash Flow Information:
Cash Paid for Interest: $ 5,569 $ 8,144
Cash Paid for Income Taxes: $ - $ 3,000
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
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<PAGE>
PHARMAKINETICS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of operations for the three months ended September 30, 1999 and 1998,
the consolidated statements of comprehensive income (loss) for the three months
ended September 30, 1999 and 1998, and the consolidated statements of cash flows
for the three months ended September 30, 1999 and 1998, have been prepared by
the Company without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 1999, and for all periods presented, have been made.
The balance sheet at June 30, 1999 has been derived from the audited financial
statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's fiscal 1999 report on Form 10-K.
The Company operates principally in one industry segment, the testing of
pharmaceutical products and related services. Revenues include contract revenue
and revenue from license fees under special agreements whereby the Company
receives license fees based upon the clients' actual product sales.
WARNING LETTER
At the end of July 1999, the Company received a warning letter from the
United States Food and Drug Administration ("FDA") regarding PharmaKinetics'
noncompliance with certain required protocols in bioequivalence studies which
were conducted prior to fiscal 1999. In the warning letter, the FDA advises
PharmaKinetics to take immediate corrective action and that the failure to do so
may result in regulatory action. The Company has responded to the FDA and has
taken the corrective actions it believes necessary to address the issues and
concerns raised in the warning letter.
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
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financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from these estimates.
EARNINGS (LOSS) PER SHARE
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 the three month period ended September 30,
1998, because the effect of their inclusion would be anti-dilutive. For the
period ended September 30, 1999, the weighted average shares used in computing
basic earnings per share were 2,496,129 and the dilutive common stock
equivalents totaled 1,672,732, of which 6,132 related to options outstanding.
For the period ended September 30, 1998, dilutive common stock equivalents
totaled 1,786,801, of which 120,201 related to options outstanding.
PART I.
ITEM 2. 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 Form 10-Q 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 effect on the Company's
ability to market its services and obtain new business in light of the receipt
of a warning letter from the United States Food and Drug Administration (the
"FDA"), dependence of the Company on the product development cycles of its
clients, dependence of the Company on certain customers, dependence of the
Company on its key personnel and their ability to continuously develop new
methodologies for clinical and analytical applications, dependence of the
Company on the availability of volunteer study participants, and the Company's
ability to bring its information technology and non-information technology
systems into compliance with standards for successful operations as of January
1, 2000. Other more general factors that could cause or
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<PAGE>
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. These risk
factors are discussed more specifically in the Company's Form 10-K filing for
its fiscal year ended June 30, 1999.
A warning letter, which addressed the Company's failure to conduct certain
studies in compliance with the protocol in prior years, was received from the
FDA in July 1999. As a result, a number of clients have recently elected to
place projects with competing contract research organizations, causing a
downturn in the Company's business. Therefore, the Company expects that revenues
will decline and losses will increase for at least the next two quarters.
The Company has responded to the warning letter in writing and
representatives of the Company have had a meeting with the FDA to discuss the
steps which it is taking to comply with all regulatory requirements. The Company
has also addressed this situation directly with its clients and is undertaking
an aggressive effort to regain their confidence. Although the Company has taken
these steps, it is unable to forecast with certainty the duration of the
downtown or the magnitude of the impact on revenues and losses. However, the
Company anticipates that the effect of the warning letter will be short term.
RESULTS OF OPERATIONS
The Company's total revenue, which includes contract revenue and license
fees based upon clients' actual products sales, increased 14.4%, to $3,210,528
for the three month period ended September 30, 1999, from $2,806,132 for the
same period in the prior year. The increase resulted from increased contract
revenue, offset by lower license fee income.
Contract revenues increased 15.6% to $3,176,957, for the three month period
ended September 30, 1999, compared to $2,747,751 in the same period in 1998. The
Company recognized increased revenues from its generic drug industry clients of
approximately $1,000,000, offset by decreases of approximately $620,000 for
Phase I clinical trials by innovator and pharmaceutical companies. The increase
in revenues from generic drug industry clients resulted from the completion of
several unusually long studies, initiated in the prior fiscal year, for which
revenue was recognized in the quarter ended September 30, 1999.
License fee income decreased 42.5% to $33,571 for the three month period
ended September 30, 1999, compared to $58,381 for the same period in the prior
year. The decrease is due to the expiration of one of the Company's license fee
agreements on June 30, 1999, and a decline in sales for the product covered by
the remaining license fee agreement. The Company believes it is unlikely that
its clients will wish to utilize
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<PAGE>
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 profit increased 122.7% to $798,689 for the three month
period ended September 30, 1999, compared to $358,659 for the same period of the
prior year. Gross profit as a percentage of revenue increased to 24.9% for the
three month period ended September 30, 1999, compared to 12.8% for the same
period of the prior year. Increases in the Company's gross margin resulted
primarily from increases in revenue. The Company's costs are relatively fixed
and, in keeping with its strategic plan, investment in personnel and
instrumentation has been ongoing to improve the Company's long-term competitive
position.
Selling, general and administrative expenses of $660,652 for the three
month period ended September 30, 1999, increased 8.8%, compared to $607,072 for
the same period of the prior year. The increase is primarily attributable to an
increase in salary expense related to current staffing in the Company's business
development unit. As a percentage of revenues, selling, general and
administrative expenses decreased to 20.6% in the three month period ended
September 30, 1999, from 21.6% in the same period of the prior year.
Research and development expenses of $27,079, for the three month period
ended September 30, 1999, decreased 79.7% compared to $133,557 for the same
period of the prior year. This decline was largely caused by the redeployment of
several of the Company's research and development personnel, as well as
instruments normally used to conduct research and development, to meet project
deadlines for clients during the quarter. The Company continues to invest in its
research and development efforts and plans to develop methods for use on its
LC/MS/MS instrumentation for fiscal 2000. Further, because of the slowdown in
current business it is expected that research and development efforts will be at
an increased level during the next two quarters. This should permit the Company
to undertake an aggressive business development effort to market these new
methods going forward.
No provision for income taxes has been recorded. The Company has available
unused operating loss and business tax credit carry forwards, the benefit of
which is reduced by a full valuation allowance.
YEAR 2000
At June 30, 1999, the Company had completed its Year 2000 compliance
program, the purpose of which was to identify those systems that were 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's
assessment included third party confirmations from the Company's key suppliers,
vendors and business partners, with respect to
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<PAGE>
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. The Company has located alternative sources for many of the products
or services provided by its vendors in an effort to reduce or avoid harm to the
Company's business and operations. The failure of any of the Company's vendors
to remediate Year 2000 problems in a timely manner could have a material adverse
effect on the Company.
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 was accelerated to also
afford a solution to Year 2000 issues. The Company initiated the investment of
approximately $450,000 in a new Laboratory Information Management System
("LIMS") and ancillary data acquisition systems in fiscal 1999. Of this amount,
approximately $300,000 was expended through September 30, 1999, with the
remainder expected to be paid in the second quarter of fiscal 2000. The Company
expects that the new LIMS 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. As of September 30, 1999, the
Company had initiated the purchase of the LIMS, deployed the new hardware to
system users, installed the software, validated the system, and had initiated
parallel testing. User training was initiated in February 1999 and is ongoing.
It is expected that user training will be completed before the new system is
fully operational in November 1999. The Company has experienced delays in
bringing the system fully into production due to issues encountered in the
validation and parallel testing phases of system implementation, which have been
satisfactorily resolved by the vendor.
Other Year 2000 spending is expected to total less than $150,000, of which
the Company had spent approximately $70,000 as of September 30, 1999. The total
cost estimate is based on the Company's assessment as of September 30, 1999 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
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expected that assessment, remediation and contingency planning will be on-going
throughout the first half of fiscal 2000 with the goal 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
At September 30, 1999, the Company had available $1,334,435 in current
operating cash to meet the needs of its business, compared to $2,233,198 at June
30, 1999. The decrease in cash resulted primarily from changes in the Company's
operating accounts and continued investment in equipment for utilization in the
Company's operations. During the quarter ended September 30, 1999, the Company
invested $208,000 for capital purchases, all of which was paid in cash.
The Company's primary source of funds is cash flow from operations, which
decreased by $1,000,413 in the three months ended September 30, 1999, compared
to the same period of the prior year. Cash flow from operations also decreased
by $1,040,093 in the three months ended September 30, 1999, compared to the
three months ended June 30, 1999. The Company had available a $500,000 line of
credit from Allfirst Bank, which had not been drawn upon, but which the Company
voluntarily elected to terminate on September 3, 1999, due to the fact that the
Company was not in technical compliance with the restrictive covenants at June
30, 1999, and the Company had not drawn upon the credit facility and did not
plan to draw upon it in the near future. To conserve cash, the Company has
initiated cost cutting measures and is taking other appropriate steps to manage
the Company's cash balances through the current business downturn.
At September 30, 1999, the Company reported an increase in its contracts in
process account, compared to June 30, 1999, which represents costs incurred for
studies for which revenues have not been recognized and which are currently
underway. Accounts receivable also increased at September 30, 1999, due to an
increase in the amount of revenue recognized during the three month period ended
September 30, 1999. Deposits on contracts in process have decreased indicating a
decrease in the receipt of prepayments on contracted studies. Deposits on
contracts decreased from a reduced new business inflow and from delinquent
client payments at September 30, 1999, some of which have subsequently been
collected and others of which are still due the Company. Prepaid expenses have
increased at September 30, 1999, compared to June 30, 1999, due to the timing of
payments on certain expense items related to future periods. Changes in these
account balances affect the Company's operating cash flow.
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<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risks
The exposure to market risk for changes in interest rates relates primarily
to the Company's short-term investments, which generally have maturities of
three months or less. The Company does not use derivative financial instruments
for speculative or trading purposes. The Company invests its excess cash in
short-term fixed income financial instruments with an investment strategy to buy
and hold to maturity.
Foreign Currency Risk
The Company does not have exposure to foreign currency exchange rate
fluctuations since the Company's contracts require payment to the Company in
U.S. dollars.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
On August 5, 1999, the Company filed a report on Form 8-K regarding the
issuance of a press release on August 3, 1999, with respect to its receipt of a
Warning Letter from the United States Food and Drug Administration (the "FDA")
regarding PharmaKinetics' noncompliance with certain required protocols in its
bioequivalence studies. In the Warning Letter, the FDA advises PharmaKinetics to
take immediate corrective action and that the failure to do so may result in
regulatory action.
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<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Registrant
November 15, 1999 /s/ James K. Leslie
- ----------------- ------------------
Date James K. Leslie
Chief Executive Officer
and President
November 15, 1999 /s/ Taryn L. Kunkel
- ----------------- ------------------
Date Taryn L. Kunkel
Vice-President and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 1,334,435
<SECURITIES> 17,578
<RECEIVABLES> 1,794,957
<ALLOWANCES> 150,000
<INVENTORY> 947,203
<CURRENT-ASSETS> 4,237,190
<PP&E> 7,379,122
<DEPRECIATION> 3,001,358
<TOTAL-ASSETS> 8,725,462
<CURRENT-LIABILITIES> 1,895,745
<BONDS> 0
0
4,937,500
<COMMON> 12,481
<OTHER-SE> 1,758,329
<TOTAL-LIABILITY-AND-EQUITY> 8,725,462
<SALES> 3,210,528
<TOTAL-REVENUES> 3,232,499
<CGS> 2,411,839
<TOTAL-COSTS> 3,099,570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,724
<INCOME-PRETAX> 127,205
<INCOME-TAX> 0
<INCOME-CONTINUING> 127,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,205
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.03
</TABLE>
