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, 1999 Commission file number 0-11580
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PHARMAKINETICS LABORATORIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1067519
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(State of Incorporation) (I.R.S. Employer Identification No.)
302 WEST FAYETTE STREET
BALTIMORE, MARYLAND 21201
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(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (410) 385-4500
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
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(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 1, 1999, 2,496,129 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 $2,660,028.
Portions of the registrant's definitive proxy statement for its 1999 annual
meeting of stockholders, to be filed pursuant to Regulation 14A on or prior to
October 28, 1999, are incorporated into Part III of this report.
<PAGE>
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. As a result of the increasingly competitive market for
its services, the Company has elected to focus its business development efforts
in North America. Business development efforts in Europe and building upon the
technology sharing agreement with Aster.Cephac S.A. became a lower priority in
fiscal 1999.
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
At the end of July 1999, the Company received a Warning Letter from the
United States Food and Drug Administration ("FDA") regarding the Company's
noncompliance with certain required protocols in bioequivalence studies which
were conducted prior to fiscal 1999. In the Warning Letter, the FDA advises the
Company 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.
The Company does not know what effect, if any, the receipt of the
Warning Letter will have on its future operating results. Management has been
proactive in its approach to its clients and has encouraged them to review the
Company's current performance. As of September 15, 1999, the Warning Letter has
resulted in the cancellation of three scheduled studies and it appears to have
resulted in a reduction in the rate of placement of orders for new studies.
However, at this time, it is management's belief that this negative impact will
be short-term in nature.
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
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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.
Bioavailability data is also used to evaluate the adequacy of proposed labeling
recommendations regarding dosage and administration of a drug product, to define
its profile in order to evaluate product reformulations or changes in
recommended dosage strength or dosage regimens, and to evaluate and substantiate
controlled release claims.
Bioequivalency testing compares the bioavailability of similar generic
and brand name drugs. The FDA has established bioequivalency requirements for
certain drug products or classes of drug products which are intended to be
interchangeable. As a result, bioequivalency data is required in the case of new
formulations of certain drug products developed by generic pharmaceutical
manufacturers for marketing upon expiration of patents on brand name drugs
previously found to be safe and effective. Bioequivalency testing is also
required for certain drug products in the case of new formulations or new dosage
forms intended to be used by the manufacturer which obtained the original
approval.
The 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 ("IRB"),
which independently evaluates and, if necessary, requests revisions of the
protocol in order to safeguard the rights and welfare of the human subjects. The
current Institutional Review Board consists of one affiliated (non-voting)
individual and ten non-affiliated (voting) individuals, four of whom are medical
doctors (one of these serving as chairman), one pharmacologist, one clergy, and
four representatives of the community.
For each clinical study, the Company uses volunteer study
participants. The availability of sufficient numbers of qualified and willing
study participants has at times been, and could in the future be, a limitation
on the Company's business.
Each prospective participant is screened at the Company's 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 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 includes physical observation by medical personnel and a strict schedule
of collecting blood, urine and other specimens which are subjected to 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
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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.
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 may be involved in document development,
investigator recruitment and selection, site evaluation, investigator meeting
coordination, on-site study monitoring, data management and statistical
services.
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 use completed CRFs, once
reviewed for consistency and accuracy, to enter data 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
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data analysis, and liaison with the FDA.
LIABILITY EXPOSURE
The Company's clinical research services center on the testing of new
and generic (already marketed) drugs on human volunteers pursuant to a study
protocol. Clinical research involves a risk of liability for personal injury or
death to participants due, among other reasons, to possible unforeseen adverse
side effects or improper administration of the drug.
The Company believes that the risk of liability to participants in
clinical research is mitigated by various regulatory requirements, including the
role of IRBs and the need to obtain each participant's informed consent. The FDA
requires that each human clinical trial be reviewed and approved by the IRB at
each study site. The Company has its own independent IRB. This 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 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 general aggregate limit of $2,000,000, a professional liability
policy with a general aggregate limit of $1,000,000, a workmen's compensation
liability policy which provides coverage of $1,000,000, and an umbrella
liability policy which has a limit of $10,000,000 for each occurrence in excess
of primary. In addition, the Company also carries a Directors and Officers
liability policy with a general aggregate limit of $2,000,000. 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 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
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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.
At the end of July 1999, the Company received a Warning Letter from the
FDA regarding the Company's noncompliance with certain required protocols in
bioequivalence studies which were conducted prior to fiscal 1999. In the Warning
Letter, the FDA advises the Company 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.
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 can compete effectively in these areas.
However, during fiscal 1999, the Company had a reduced number of contracts for
its Phase I and bioequivalence services, compared to fiscal 1998, resulting from
the increasingly competitive market for its services.
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 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, 1999, 1998 and 1997, one customer contributed in excess of 10% of
contract revenue, accounting for 23%, 19%, and 29%, respectively, of contract
revenue. The Company does not expect this one customer to continue to contribute
in excess of 10% of contract revenue in future years.
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
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eliminating currency exchange risk to the Company. The Company's recognized
revenue from its clients outside of the United States approximates the
following:
Year Ended June 30,
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1999 1998 1997
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Canada $2,679,000 $2,597,000 $2,718,000
Europe & other 391,000 453,000 503,000
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Total $3,070,000 $3,050,000 $3,221,000
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BACKLOG
The Company maintains a backlog of its business, representing studies
underway in-house for which revenue has not yet been recognized, and studies
that have been awarded to the Company by its various clients but have yet to
begin. At June 30, 1999, the backlog was approximately $5.3 million. At June 30,
1998, the Company's backlog was approximately $6.3 million. The Company expects
to recognize revenue from studies included in the June 30, 1999 backlog during
fiscal 2000 and future fiscal years.
EMPLOYEES
At July 31, 1999, the Company had 150 employees (50 of whom were
part-time employees), of which 10 hold Ph.D. or M.D. degrees and 14 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.
Through July 31, 1999, the Company also leased 1,000 square feet of
office space in a Baltimore suburb for utilization as a screening location. The
Company established this location on a trial basis and found that the site did
not generate sufficient interest from potential volunteer study participants to
justify continued operation.
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 Denver,
Colorado. The Environmental Protection Agency ("EPA") has identified
approximately 800 entities that
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shipped wastes to the site and has conducted 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 disposed of 15 cubic feet, or two drums,
of waste at this site. On August 3, 1999, the Company entered into a Consent
Decree in this matter and agreed to pay $324.73 as a settlement amount with
regard to past cleanup costs at this site. It is unknown whether further costs
will be incurred by the Company with regard to this matter; however, management
does not believe that any further costs 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
No matters were submitted to security holders for a vote during the
fourth quarter of the fiscal year ended June 30, 1999.
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.
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, 1999 June 30, 1998
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Quarter High Low High Low
- ------- ---- --- ---- ---
First $5.00 $2.63 $3.05 $1.25
Second 3.50 1.31 5.78 3.05
Third 1.56 .75 8.60 4.55
Fourth 1.31 .88 7.75 3.63
Such quotations, which have been restated to give effect to the reverse
stock split described below, 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 1, 1999, was 1,013.
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.
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
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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.
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C>
Years ended June 30,
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1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $ 9,828,369 $ 12,326,009 $ 9,597,536 $ 10,962,160 $ 9,893,762
Net earnings (loss)
before deemed
preferred stock dividend ($ 1,327,715) $ 622,747 ($ 109,513) $ 778,895 $ 127,827
Deemed preferred stock dividend -- ($ 1,020,793) -- -- --
Net earnings (loss) applicable to
common stockholders ($ 1,327,715) ($ 398,046) ($ 109,513) $ 778,895 $ 127,827
Basic earnings (loss) per share ($ 0.53) ($ 0.16) ($ 0.04) $ 0.32 $ 0.05
Basic weighted average
shares outstanding 2,493,349 2,440,429 2,439,129 2,439,129 2,479,178
Diluted earnings (loss) per share ($ 0.53) ($ 0.16) ($ 0.04) $ 0.32 $ 0.05
Diluted weighted average
shares outstanding 2,493,349 2,440,429 2,439,129 2,470,109 2,519,620
Total assets $ 9,284,954 $ 10,107,478 $ 5,958,732 $ 6,622,959 $ 6,553,348
Working capital (deficiency) $ 2,287,456 $ 4,082,645 $ 282,538 $ 411,498 ($ 63,474)
Long-term liabilities $ 142,702 $ 235,074 $ 1,538,945 $ 1,784,876 $ 2,074,109
Stockholders' equity $ 6,587,243 $ 7,873,583 $ 2,438,241 $ 2,547,754 $ 1,768,859
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
PharmaKinetics Laboratories, Inc. ("the Company") is a contract
research organization ("CRO") providing a range of clinical research and
development services to the worldwide pharmaceutical industry and to the
biotechnology industry in the development of prescription and non-prescription
drug products. The Company also provides bioanalytical laboratory services and
management and monitoring of clinical trials conducted at remote sites,
including ancillary services such as protocol and case report form design, data
management and biostatistics and regulatory consulting. The nature of the
Company's services and recurring business with major clients results in the
Company having 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.
Net earnings have been adjusted for the fiscal year ended June 30,
1998, for a deemed preferred stock
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dividend, 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 in 1997. The dividend
was recorded for financial reporting purposes only and was not paid to the
Preferred Stockholders.
The effect of an April 1998 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
(decrease) by each item as a percentage of the amount for the previous period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Percentage of Period to Period
Total Revenues Change
------------------------- ----------------
Years ended June 30, 1999 1998
------------------------- Compared to
1999 1998 1997 1998 1997
------------------------- ----------------
Contract revenue 97.9% 94.3% 91.3% (17.3)% 32.6 %
License fees 2.1 5.7 8.7 (70.0) (15.7)
----- ----- ----- ----- ------
Total 100.0 100.0 100.0 (20.3) 28.4
Cost of contracts 82.5 72.5 73.5 (9.2) 26.6
----- ----- ----- ----- ------
Gross margin 17.5 27.5 26.5 (49.5) 33.5
Research and development 5.2 4.6 4.7 (10.0) 27.3
Selling, general, and administrative 26.1 17.9 21.4 16.2 7.4
----- ----- ----- ----- ------
Operating income (loss) (13.8) 5.0 0.4 (321.2) 1438.6
Interest expense (0.3) (1.0) (1.9) (77.5) (30.6)
Interest income 1.3 1.2 0.4 (8.3) 295.3
Write-down of investments (0.7) -- -- -- --
----- ----- ----- ----- ------
Earnings (loss) before taxes (13.5) 5.2 (1.1) (310.4) 676.1
Income taxes -- (0.1) -- (100.0) 100.0
----- ----- ----- ----- ------
Net earnings (loss) (13.5)% 5.1% (1.1)% (313.2)% 668.6%
===== ===== ===== ===== ======
</TABLE>
1999 COMPARED TO 1998
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, decreased 20.3% from
$12.3 million in fiscal 1998 to $9.8 million in fiscal 1999. The decrease
resulted from a reduced number of contracts and significantly lower license fee
income.
Contract revenues decreased 17.3% to $9.6 million in fiscal 1999, from
$11.6 million in fiscal 1998, primarily as a result of a reduction in revenues
of approximately $3.2 million for Phase 1 and bioequivalence studies. The
Company believes that the decline in revenue for its Phase 1 and bioequivalence
services is the result of an increasingly competitive market for its services.
This decrease was offset by an increase in revenues for Clinical Trials
Management studies of approximately $1.1 million.
License fee income of $210,000 was recorded in fiscal 1999, compared to
$703,000 in fiscal 1998, a decrease of 70.0%, due to the expiration of the
Company's first license fee agreement in October 1997 and declining sales for
the more significant of the two agreements under which the Company received
license fee income in fiscal 1999. 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 expired on June 30, 1999. The Company believes it is
unlikely that its clients will wish to utilize license fee
10
<PAGE>
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 decreased 49.5% from $3.4 million in fiscal
1998 to $1.7 million in fiscal 1999. As a percentage of revenue, the Company's
gross margin decreased from 27.5% in fiscal 1998 to 17.5% in fiscal 1999, on a
20.3% decrease in total revenue. The decrease in gross margin is reflective of
the fact that 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. As a result, staffing
remained at levels comparable to the prior year despite decreases in revenue.
The Company's gross margin for fiscal year 1999 includes the reversal of an
accrued expense totaling $116,000 as a result of a liability which did not
materialize, and the recognition of an expected refund of approximately $122,000
for which expenses had previously been recognized. The Company's gross margin,
excluding these adjustments, would have decreased 56.5% for the fiscal year
ended 1999, compared to fiscal year 1998.
Selling, general and administrative expenses totaled $2.6 million in
fiscal 1999, compared to $2.2 million in fiscal 1998, representing a 16.2%
increase. As a percentage of revenue, selling, general and administrative
expenses were 26.1% in fiscal 1999 and 17.9% in fiscal 1998. The increase is
attributable to the implementation of the Company's plan to enhance its sales
and marketing efforts through the development and introduction of new marketing
materials, the addition of new business development personnel and the resulting
increase in travel expenditures necessary to have these individuals visit
existing and potential clients from whom the Company wishes to generate revenue.
Research and development expenses decreased 10.0% from $568,000 in
fiscal 1998 to $512,000 in fiscal 1999. The decrease in the level of
expenditures in fiscal 1999 is primarily attributable to the loss of certain of
the Company's research and development staff for which the Company is currently
recruiting replacements. The Company has continued to invest in its research and
development effort in fiscal 1999 to develop methods for utilization in current
and future studies related primarily to its LC/MS/MS instrumentation. In October
1998, the Company acquired the fourth of these instruments. The Company believes
that these investments will result in the generation of new business and
improvement in its competitive position.
Interest expense decreased by 77.5% from $129,000 in fiscal 1998 to
$29,000 in fiscal 1999. The decrease is primarily attributable to the Company's
elimination of its bank debt in February 1998. Interest income decreased 8.3% in
fiscal 1999, compared to fiscal 1998, due to the declining cash balances
maintained by the Company. The cash balances have declined due to continued
investment in property and equipment, especially in the Company's laboratory.
In fiscal 1998, net earnings were adjusted for a deemed preferred stock
dividend, resulting in a net loss applicable to common stockholders. The
dividend was recorded for financial reporting purposes only and was not paid to
the purchasers of the preferred stock.
No provision for income taxes was recorded for fiscal 1999. A provision
was recorded in fiscal 1998 for alternative minimum tax obligations in the
amount of $8,200. The Company has available tax loss carryforwards of
approximately $6,900,500, which begin expiring in 2006 through 2019, and general
business credits of approximately $1,514,500, which begin expiring in 1999
through 2013. Approximately $6,730,900 of the net operating loss carryforwards
and general business credits are subject to limitations under Section 382 of the
Internal Revenue Code.
1998 COMPARED TO 1997
Total revenue 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 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.
11
<PAGE>
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.
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
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 a deemed preferred stock dividend,
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 in December 1997. The dividend was
recorded for financial reporting purposes only and was not paid to the Preferred
Stockholders.
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, which begin expiring in 2006 through 2011, and general business
credits of approximately $1,467,000, which begin expiring during the period 1999
to 2010.
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 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 affect 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 and
ancillary data acquisition systems in fiscal 1999. Of this amount, approximately
$144,000 was expended through June 30, 1999, with the remaining $306,000
expected to be paid in the first and second quarters 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 June 30, 1999,
12
<PAGE>
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 and is ongoing. It is
expected that user training will be completed before the LIMS is fully
operational in October 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 $55,000 as of June 30, 1999. The total
cost estimate is based on the Company's assessment as of June 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 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
On June 30, 1999, the Company had cash and equivalents of $2,233,198
compared to $3,358,506 at June 30, 1998. The decrease in cash resulted primarily
from the purchase of furniture and equipment for utilization in the Company's
operations, and payments for capital lease obligations. The Company invested
$1,107,805 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 $188,437 in fiscal 1999 from fiscal 1998, principally as a
result of the Company's 1999 results of operations as compared to 1998, offset
by reduced working capital requirements. The Company also had available a
$500,000 line of credit from Allfirst Bank, which had not been drawn upon. Terms
of the credit facility provided for interest at the greater of the Bank's prime
rate or the daily adjusting rate of the one month London Interbank Offered Rate,
plus 215 basis points. The borrowing agreement was collateralized by
substantially all of the Company's assets, placed restrictions on borrowings and
investments, and required maintenance of specified amounts of net worth and
minimum financial ratios. At June 30, 1999, the Company was not in technical
compliance with its minimum net worth covenant requirement of $6,700,000. On
September 3, 1999, the Company elected to voluntarily terminate its line of
credit with Allfirst Bank, due to the fact that the Company had not drawn upon
the credit facility and did not plan to draw upon it in the near future. The
Company's decision was also driven by the desire to reduce the internal costs
associated with continued measurement and reporting of its restrictive covenants
and to avoid those costs associated with a compliance waiver.
At June 30, 1999 the Company's account balance for accounts receivable,
as compared to June 30, 1998, decreased primarily due to the overall decreases
in the levels of business as evidenced by the Company's operating performance
for fiscal 1999. The account balances for contracts in process and deposits on
contract in process at June 30, 1999, as compared to June 30, 1998, increased
due to an increase in the level of business at the end of the fiscal year. The
studies underway at fiscal year end are expected to generate revenue in the
first and second quarters of fiscal 2000. In addition, other assets have
decreased primarily due to the write-down in carrying value of 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), to $23,716 at June 30, 1999. 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, 1999, which was $0.53 per share. The
Company received the stock and warrants in fiscal 1998 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.
As of June 30, 1999, the Company's stockholders' equity totaled
$6,587,243 compared to $7,873,583 at June 30, 1998. The Company had working
capital of $2,287,456 at June 30, 1999, compared to working capital of
$4,082,645 at June 30, 1998. The decrease in working capital primarily reflects
the decrease in cash balances caused by the Company's investment in furniture
and equipment.
13
<PAGE>
RISK FACTORS AND CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis and
elsewhere in this 1999 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 those set forth
under the following captions. 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.
WARNING LETTER
At the end of July 1999, the Company received a Warning Letter from the
United States Food and Drug Administration ("FDA") regarding the Company's
noncompliance with certain required protocols in bioequivalence studies which
were conducted prior to fiscal 1999. In the Warning Letter, the FDA advises the
Company 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. In the event that the FDA is not satisfied with
the Company's response or corrective actions, it could take further regulatory
action. The receipt of this letter, or any further regulatory action, could have
a material adverse effect on the Company's ability to market its services and
obtain new business, and could negatively effect the Company's financial
condition and results of operations.
DEPENDENCE OF THE COMPANY ON THE PRODUCT DEVELOPMENT CYCLES OF ITS
CLIENTS
Most of the Company's contracts are short term in duration. As a
result, the Company must continually replace its contracts with new contracts to
sustain its revenue. A client's product development cycle is the driving force
in the Company's ability to initiate new contracts. In addition, a client has
the ability to cancel or delay existing contracts if their product is not ready
for testing or if the testing results are not satisfactory. The Company's
inability to generate new contracts on a timely basis would have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, since a large portion of the Company's operating costs
are relatively fixed, variations in the timing and progress of contracts can
affect results materially.
DEPENDENCE OF THE COMPANY ON CERTAIN CUSTOMERS
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, 1999, 1998 and 1997, one customer contributed in excess of
10% of contract revenue, accounting for 23%, 19%, and 29%, respectively, of
contract revenue. The Company does not expect this one customer to continue to
contribute in excess of 10% of contract revenue in future years.
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
business, financial condition, or results of operations.
DEPENDENCE OF THE COMPANY ON KEY PERSONNEL
The Company depends on a number of key individuals, the loss of any one
of which could have a material adverse effect on the Company's operations. The
Company also depends on its ability to attract and retain qualified scientific,
medical and technical employees. The Company has experienced difficulty
recruiting individuals for such positions due to intense competition in the
marketplace. There can be no assurance that the Company will be able to retain
its existing, scientific, medical and technical personnel, or to attract and
retain qualified employees. The Company's inability to attract and retain
qualified individuals would have a material adverse effect on the Company's
business, financial condition, and results of operations.
ABILITY TO CONTINUOUSLY DEVELOP NEW METHODOLOGIES FOR CLINICAL AND
ANALYTICAL APPLICATIONS
The Company must continuously develop analytical methodology for drug
products in order to obtain the
14
<PAGE>
business of its clients. Clients typically request evidence of suitable
validated analytical methods before placing work with the Company. In addition,
the Company must continue to be able to provide solutions and advice for its
clients for whom both traditional and non-traditional drug delivery systems are
used. This requires staying abreast of current regulatory requirements and
identifying applications that will assist clients in obtaining approval for
their products. The Company's inability to provide these services on demand
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
DEPENDENCE OF THE COMPANY ON THE AVAILABILITY OF VOLUNTEER STUDY
PARTICIPANTS
The Company uses volunteer study participants for each clinical study.
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. The Company's inability to attract qualified individuals for
its studies would have a material adverse effect on the Company's business,
financial condition, and results of operations.
COMPETITION AND CONSOLIDATION WITHIN THE COMPANY'S MARKET
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. This consolidation has generated increased
competition for clients and placed pressures on small specialty providers. 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. This may lead to price and other forms of
competition that may have a material adverse effect on the Company and its
results of operations. During fiscal 1999, the Company had a reduced number of
contracts for its Phase I and bioequivalence services, compared to fiscal 1998,
resulting from the increasingly competitive market for its services.
YEAR 2000 READINESS
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. It is 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
15
<PAGE>
PricewaterhouseCoopers LLP
REPORT OF INDEPENDENT ACCOUNTANTS
------------
To the Board of Directors and Stockholders
of PharmaKinetics Laboratories, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 31 present fairly, in all material
respects, the financial position of PharmaKinetics Laboratories, Inc. and its
subsidiary at June 30, 1999 and 1998, and the results of their operations, and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 31 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits 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.
As discussed in Note I to the financial statements, the Company
received a Warning Letter from the United States Food and Drug Administration
(FDA) on July 30, 1999, regarding PharmaKinetics' non-compliance 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.
/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Baltimore, Maryland
August 13, 1999
except for the third paragraph
of note G as to which the date
is September 3, 1999
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C>
Years ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
Revenues $ 9,828,369 $ 12,326,009 $ 9,597,536
Cost of contracts 8,112,227 8,930,681 7,053,560
------------ ------------ ------------
Gross profit 1,716,142 3,395,328 2,543,976
Selling, general and administrative expenses 2,568,900 2,210,137 2,057,212
Research and development expenses 511,681 568,444 446,677
------------ ------------ ------------
Earnings (loss) from operations (1,364,439) 616,747 40,087
Interest expense (29,057) (128,970) (185,817)
Interest income 131,349 143,170 36,217
Write-down of investment (65,568) -- --
------------ ------------ ------------
Earnings (loss) before income taxes (1,327,715) 630,947 (109,513)
Provision for income taxes -- 8,200 --
------------ ------------ ------------
Net earnings (loss) (1,327,715) 622,747 (109,513)
Deemed preferred stock dividend -- (1,020,793) --
------------ ------------ ------------
Net earnings (loss) applicable
to common stockholders ($ 1,327,715) ($ 398,046) ($ 109,513)
============ ============ ============
Basic earnings (loss) per share ($ 0.53) ($ 0.16) ($ 0.04)
============ ============ ============
Basic weighted average shares outstanding 2,493,349 2,440,429 2,439,129
============ ============ ============
Diluted earnings (loss) per share ($ 0.53) ($ 0.16) ($ 0.04)
============ ============ ============
Diluted weighted average shares outstanding 2,493,349 2,440,429 2,439,129
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
17
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended June 30,
-----------------------------------------
1999 1998 1997
---- ---- ----
Net earnings (loss) ($ 1,327,715) $ 622,747 ($ 109,513)
Other comprehensive income:
Unrealized gain (loss) on investment (21,625) 21,625 --
----------- ----------- -----------
Comprehensive income (loss) ($1,349,340) $ 644,372 ($ 109,513)
=========== =========== ===========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
18
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------
1999 1998
---- ----
ASSETS
Current Assets:
Cash and equivalents $ 2,233,198 $ 3,358,506
Accounts receivable, net 1,518,030 1,731,853
Contracts in process 849,768 740,084
Prepaid expenses 241,469 251,023
------------ ------------
Total Current Assets 4,842,465 6,081,466
Property, plant and equipment, net 4,324,543 3,822,373
Other assets 117,946 203,639
------------ ------------
Total Assets $ 9,284,954 $ 10,107,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,073,455 $ 916,816
Deposits on contracts in process 1,481,554 1,082,005
------------ ------------
Total Current Liabilities 2,555,009 1,998,821
Other liabilities 142,702 235,074
------------ ------------
Total Liabilities 2,697,711 2,233,895
------------ ------------
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 4,937,500
Common Stock, $.005 par value; authorized,
10,000,000 shares; issued and outstanding,
2,496,129 and 2,456,129 shares, respectively 12,481 12,281
Additional paid-in capital 11,929,886 11,867,086
Accumulated deficit (10,292,624) (8,964,909)
Accumulated comprehensive income -- 21,625
------------ ------------
Total Stockholders' Equity 6,587,243 7,873,583
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,284,954 $ 10,107,478
============ ============
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
19
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Years ended June 30,
-----------------------------------------------
1999 1998 1997
---- ---- ----
CLASS A CONVERTIBLE PREFERRED STOCK
Balance, beginning of year $ 4,937,500 $ -- $ --
Stock issued (833,300 shares) -- 4,937,500 --
------------ ------------ ------------
Balance, end of year 4,937,500 4,937,500 --
------------ ------------ ------------
(Shares outstanding: 833,300 at
June 30, 1999 and 1998)
COMMON STOCK
Balance, beginning of year 12,281 12,196 12,196
Exercise of stock options
(40,000, and 16,960 shares, respectively) 200 85 --
------------ ------------ ------------
Balance, end of year 12,481 12,281 12,196
------------ ------------ ------------
(Shares outstanding: 2,496,129 at
June 30, 1999; 2,456,129 at June 30, 1998,
and 2,439,129 at June 30, 1997)
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 11,867,086 12,013,701 12,013,701
Preferred stock issue costs -- (254,114) --
Common stock warrants issued -- 62,500 --
Exercise of stock options 62,800 44,999 --
------------ ------------ ------------
Balance, end of year 11,929,886 11,867,086 12,013,701
------------ ------------ ------------
ACCUMULATED DEFICIT
Balance, beginning of year (8,964,909) (9,587,656) (9,478,143)
Net earnings (loss) (1,327,715) 622,747 (109,513)
------------ ------------ ------------
Balance, end of year (10,292,624) (8,964,909) (9,587,656)
------------ ------------ ------------
ACCUMULATED COMPREHENSIVE INCOME -- 21,625 --
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 6,587,243 $ 7,873,583 $ 2,438,241
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
20
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($1,327,715) $ 622,747 ($ 109,513)
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 605,635 531,330 457,785
Bad debt expense 86,600 150,000 --
Write-down of investment 65,568 -- --
Changes in operating assets and liabilities:
Accounts receivable, net 127,223 (956,599) 233,755
Contracts in process (109,684) (236,921) (166,233)
Prepaid expenses and other assets 8,054 (112,894) (46,234)
Accounts payable and accrued expenses 163,702 (10,026) (306,386)
Deposits on contracts in process 399,549 219,733 (71,038)
----------- ----------- -----------
Net cash provided (used) by operating activities 18,932 207,370 (7,864)
----------- ----------- -----------
Cash flows from investing activities:
Payment for purchases of property and equipment (1,107,805) (359,406) (195,367)
----------- ----------- -----------
Net cash used by investing activities (1,107,805) (359,406) (195,367)
----------- ----------- -----------
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)
Payments for capital lease obligations (99,435) (129,649) (85,916)
Proceeds from exercise of stock options 63,000 45,084 --
----------- ----------- -----------
Net cash provided (used) by financing activities (36,435) 2,954,502 (231,130)
----------- ----------- -----------
Increase (decrease) in cash and equivalents (1,125,308) 2,802,466 (434,361)
Cash and equivalents, beginning of year 3,358,506 556,040 990,401
----------- ----------- -----------
Cash and equivalents, end of year $ 2,233,198 $ 3,358,506 $ 556,040
=========== =========== ===========
Non-cash transactions:
Equipment acquired through capital leases -- $ 340,165 $ 53,840
Conversion of account receivable to investment -- $ 89,284 --
Deemed preferred stock dividend -- $ 1,020,793 --
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
21
<PAGE>
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.
In fiscal year 1999, the Company had two license fee agreements from which it
received license fee income. The Company had a third license fee arrangement
which expired in October 1997. License fee income of $210,648, $702,798, and
$833,701, was recorded during fiscal years ended June 30, 1999, 1998, and 1997,
respectively. License fee income, based on clients' sales of approved drugs,
will continue through the expiration of the license fee agreements, the more
significant of which is expected to expire in fiscal 2004 and the other of which
expired June 30, 1999.
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.
For the years ended June 30, 1999, 1998, and 1997 one client
contributed in excess of 10% of contract revenue, accounting for 23%, 19%, and
29% 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 approximates the following:
Year Ended June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Canada $2,679,000 $2,597,000 $2,718,000
Europe & other 391,000 453,000 503,000
---------- ---------- ----------
Total $3,070,000 $3,050,000 $3,221,000
========== ========== ==========
CONTRACTS IN PROCESS AND DEPOSITS ON CONTRACTS
Contracts in process includes direct and indirect costs related to
contract performance. Deposits on contracts
22
<PAGE>
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
Basic earnings (loss) per share ("EPS") is calculated by dividing net
earnings (loss) applicable to common stockholders 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 1999, 1998 and 1997 because the effect
of their inclusion would be anti-dilutive.
For fiscal years 1999, 1998 and 1997, dilutive common stock
equivalents totaled 1,682,696, 1,056,443, and 30,984, respectively, of which
16,096, 188,898, and 30,984, respectively, related to outstanding options.
CASH AND EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity
of ninety days or less at date of purchase.
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 accounted for 74.9% of the outstanding
accounts receivable balance at June 30, 1999. In addition, 12.6% of the
outstanding accounts receivable balance at June 30, 1999 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. Declines considered to be other than temporary are
reflected as write-downs in the Statements of Operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are generally stated at cost.
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 differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
by applying currently enacted statutory rates applicable to future years.
Valuation allowances are established when the deferred tax assets are not
currently assured of realization.
23
<PAGE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from these estimates.
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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as a part of results of operations in the period in
which they are recognized. The statement requires reclassification of earlier
statements in comparative financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement during the
quarter ended September 30, 1998.
SEGMENT INFORMATION
In 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way that
public business enterprises report information in the annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas and major customers. The Company adopted this statement in its
fiscal 1999 year end reporting. SFAS 131 did not affect the Company's results of
operations, financial position or financial statement disclosures.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. SFAS 133 is
effective for years beginning after June 15, 2000. The Company believes that the
effect of adoption of SFAS 133 will not be material.
C. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 1999 and 1998 are shown net of an
allowance for doubtful accounts of $150,000.
24
<PAGE>
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at June 30, is summarized as follows:
1999 1998
------------ ------------
Land $ 200,000 $ 200,000
Building and improvements 3,098,720 3,031,862
Furniture and equipment 3,872,877 2,831,930
------------ ------------
7,171,597 6,063,792
Less: accumulated depreciation
and amortization (2,847,054) (2,241,419)
------------ ------------
$ 4,324,543 $ 3,822,373
============ ============
Assets held under capital lease at June 30, 1999 and 1998, were
$394,005 and $441,922, respectively. Accumulated amortization of assets held
under capital lease at June 30, 1999 and 1998, was $128,969, and $75,324,
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:
1999 1998
------------- -------------
Trade accounts payable $ 538,913 $ 388,389
Accrued payroll and related expenses 275,920 145,220
Other accrued expenses 258,622 383,207
------------- -------------
$ 1,073,455 $ 916,816
============== =============
F. OTHER ASSETS
At June 30, 1999, 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 $23,716. 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,
1999, which was $0.53 per share. The Company received the stock and warrants in
fiscal 1998 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, 1999, the market value of the Hybridon Stock was less than
the adjusted cost basis of $89,284. The difference of $65,568 was recorded as a
write-down of the investment and was reflected in the Consolidated Statements of
Operations, as the impairment of such investment was considered to be other than
temporary.
G. DEBT
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 had available a $500,000 working capital borrowing
facility, from Allfirst Bank, which was unused at June 30, 1999. Terms of the
credit facility provided for interest at the greater of the Bank's prime rate or
the daily adjusting rate of the one month London Interbank Offered Rate, plus
215 basis points. The borrowing agreement was collateralized by substantially
all of the Company's assets, placed restrictions on borrowings and investments,
and required maintenance of specified amounts of net worth and minimum financial
ratios. At June 30, 1999, the Company was not in technical compliance with its
minimum net worth covenant requirement of $6,700,000.
25
<PAGE>
On September 3, 1999, the Company elected to voluntarily terminate its
line of credit with Allfirst Bank, due to the fact that the Company had not
drawn upon the credit facility and did not plan to draw upon it in the near
future. The Company's decision was also driven by the desire to reduce the
internal costs associated with continued measurement and reporting of its
restrictive covenants and to avoid those costs associated with a compliance
waiver.
Cash payments for interest were $28,556, $132,495, and $181,722, in
fiscal years 1999, 1998, and 1997, respectively.
H. INCOME TAXES
The Company's expense for income taxes in fiscal year 1998 resulted
from the impact of alternative minimum tax charges.
Deferred tax balances are comprised of the following:
June 30,
-------------------------
1999 1998
---- ----
Deferred tax assets:
Accounts receivable $ 58,500 $ 58,500
Property, plant and equipment 136,690 279,201
Accrued liabilities 37,283 40,802
Net operating loss carryforwards 2,691,185 2,028,418
Alternative minimum tax credits 16,529 14,936
General business credits 1,514,503 1,466,998
----------- -----------
Total deferred tax assets 4,454,690 3,888,855
Less: valuation allowance (4,454,690) (3,888,855)
----------- -----------
Deferred income taxes $ -- $ --
=========== ===========
Based on the weight of evidence available at June 30, 1999, in
management's opinion, a full valuation allowance is required to be recorded
against the Company's deferred income tax assets.
At June 30, 1999, the Company had tax loss carryforwards of
approximately $6,900,500, which begin expiring in 2006 through 2019, and general
business credits of approximately $1,514,500 which begin expiring in 1999
through 2013. Approximately $6,730,900 of the net operating loss carryforwards
and general business credits are subject to limitations under Section 382 of the
Internal Revenue Code.
The principal differences between the actual effective tax rate and
the statutory federal tax rate are as follows:
Year ended June 30,
----------------------
1999 1998 1997
---- ---- ----
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 --
Alternative minimum tax credits -- (.7) --
Loss carryforwards 38.9 (38.9) 38.9
---- ---- ----
Effective rate --% 1.3% --%
==== ==== ====
The Company made cash payments for income taxes in the fiscal years
ended June 30, 1999, 1998 and 1997, in the amounts of $4,200, $3,000 and $5,800,
respectively.
26
<PAGE>
The components of the Company's current and deferred income tax
provisions are as follows:
Year ended June 30,
----------------------------
1999 1998 1997
------ ------ ------
Current provision
Federal $ -- $8,200 $ --
State -- -- --
------ ------ ------
Total current $ -- $8,200 $ --
====== ====== ======
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 $195,400, $215,100, and $168,000, for the
years ended June 30, 1999, 1998 and 1997, respectively. The future expected
payout of operating leases with terms in excess of one year is as follows:
Year ending June 30,
--------------------
2000 $ 82,092
2001 32,215
2002 22,591
2003 20,755
2004 10,023
-----------
$ 167,676
===========
The Company has capital lease arrangements for the purchase of
laboratory instrumentation, which includes one LC/MS/MS, in the aggregate amount
of $394,005. 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,
--------------------
2000 110,960
2001 152,721
less: interest portion (28,605)
---------
$ 235,076
=========
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 has
conducted 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 disposed of 15 cubic feet, or two drums, of waste at this site. On
August 3, 1999, the Company entered into a Consent Decree in this matter and
agreed to pay $324.73 as a settlement amount with regard to past cleanup costs
at this site. It is unknown whether further costs will be incurred by the
Company with regard to this matter; however, management does not believe that
any further costs will be material to the Company's financial position, results
of operations, or cash flows.
27
<PAGE>
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.
The Company does not know what effect, if any, the receipt of the
Warning Letter will have on the Company's future operating results. Management
has been proactive in its approach to its clients and has encouraged them to
review the Company's current performance.
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.
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 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.
28
<PAGE>
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,
1999, the plans provide for the delivery of up to 300,240 shares of common stock
upon exercise of outstanding options granted, of a total of 507,240 options
authorized for issuance under the plans, 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 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, 1999,
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. As of June 30, 1999, 4,920 of these options were outstanding. In
July 1998, one option holder exercised 40,000 options and allowed the remaining
12,000 options to expire. 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 1999, 1998 and 1997 consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share would have been adjusted
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C>
Year Ended June 30,
-----------------------------------------------
1999 1998 1997
---- ---- ----
Net earnings (loss) applicable to
common stockholders- as reported ($1,327,715) ($ 398,046) ($ 109,513)
Net earnings (loss) applicable to
common stockholders- pro forma ($1,576,140) ($ 526,181) ($ 153,451)
Basic earnings (loss) per share - as reported ($0.53) ($0.16) ($0.04)
Basic earnings (loss) per share - pro forma ($0.63) ($0.22) ($0.06)
Diluted earnings (loss) per share - as reported ($0.53) ($0.16) ($0.04)
Diluted earnings (loss) per share - pro forma ($0.63) ($0.22) ($0.06)
Year Ended June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
Weighted average fair value of options granted: $0.63 $4.12 $1.47
</TABLE>
29
<PAGE>
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, 1999, 1998,
and 1997: dividend yield of 0%, expected term of 5 years, expected volatility of
71.5% in fiscal 1999, and 69.4% in fiscal 1998 and 1997, 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 5.23% in fiscal
1999, 5.7% in fiscal 1998, and 6.48% in fiscal 1997.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Options
Option Price Number of Shares Price per Share Exercisable
------------ ---------------- --------------- -----------
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
Granted ($0.9375 - $2.09 per share) 25,200 $1.00
Exercised ($1.575 per share) (40,000) $1.58
Forfeited ($0.9375 - $7.50 per share) (59,965) $4.97
-------
Balance
June 30, 1999 ($0.9375 - $26.25 per share) 453,660 $4.40 255,980
=======
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
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
1999 contractual life 1999
- ----------------------------------------------------------------------------------- -----------------------------------------
$ years $ $
0.94 - 5.00 250,430 6.4 2.34 165,250 2.66
5.01 - 26.25 203,230 8.4 6.94 90,730 6.64
- ----------------------------------------------------------------------------------- -----------------------------------------
0.94 - 26.25 453,660 7.3 4.40 255,980 4.07
</TABLE>
Options exercised to date total 198,962. Of the options exercised to
date, 40,000 shares were returned to the Company and canceled when a note
receivable for common stock subscribed was canceled effective June 30, 1995.
As of June 30, 1999, the Company has reserved 453,660 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
30
<PAGE>
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 1999 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, 1999.
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 1999 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, 1999.
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 1999 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, 1999.
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 1999 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, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
Page(s)
(A) 1. FINANCIAL STATEMENTS
Report of Independent Accountants 16
Consolidated statements of operations for each of the
three years in the period ended June 30, 1999 17
Consolidated statements of comprehensive income (loss) for
each of the three years in the period ended June 30, 1999 18
Consolidated balance sheets at June 30, 1999 and 1998 19
Consolidated statements of stockholders' equity for each
of the three years in the period ended June 30, 1999 20
Consolidated statements of cash flows for each of the
three years in the period ended June 30, 1999 21
Notes to consolidated financial statements 22
2. FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule 16
Schedule IX - Valuation and Qualifying Accounts 32
3. EXHIBITS
See Exhibit Index 34
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
31
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
1999 $ 150,000 $ 86,600 -- ($86,600) $ 150,000
1998 $ -- $300,000 -- ($150,000) $ 150,000
1997 $ -- -- -- -- $ --
Deferred tax assets (a)
1999 $ 3,888,855 -- $565,835 -- $4,454,690
1998 $ 4,096,383 -- ($207,528) -- $3,888,855
1997 $ 3,534,082 -- $562,301 -- $4,096,383
</TABLE>
Notes:
(a) Represents charges to deferred tax asset account.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHARMAKINETICS LABORATORIES, INC.
Date: September 27, 1999 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 27, 1999 /s/James K. Leslie
------------------ -----------------------------------
James K. Leslie,
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: September 27, 1999 /s/Taryn L. Kunkel
------------------ -----------------------------------
Taryn L. Kunkel,
Vice-President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Date: September 27, 1999 /s/ Leslie B. Daniels
------------------ -----------------------------------
Leslie B. Daniels,
Director
Date: September 27, 1999 /s/ Thomas F. Kearns
------------------ -----------------------------------
Thomas F. Kearns, Jr.,
Director
Date: September 27, 1999 /s/ Kamal K. Midha
------------------ -----------------------------------
Kamal K. Midha, C.M., Ph.D., D.SC.,
Director
Date: September 27, 1999 /s/ Roger C. Thies
------------------ -----------------------------------
Roger C. Thies,
Director
Date: September 27, 1999 /s/ Grover C. Wrenn
------------------ -----------------------------------
Grover C. Wrenn,
Director
33
<PAGE>
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
(incorporated by reference to Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998).
(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 September 30, 1998, between the First National
Bank of Maryland (now, Allfirst Bank) and PharmaKinetics Laboratories,
Inc. (incorporated by reference to Exhibits 10(a) - (e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).
(i) Commercial Promissory Note
(ii) Loan Agreement
(iii) Financial Covenants Addendum
(iv) Negative Pledge Agreement
(v) Corporate Banking and Borrowing Resolutions
(i) 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).
34
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-19865, 33-51840, 33-51838 and 333-59647)
of PharmaKinetics Laboratories, Inc. of our report, dated August 13, 1999,
except for the third paragraph of Note G, as to which the date is September 3,
1999, related to the consolidated financial statements and financial statement
schedule of PharmaKinetics Laboratories, Inc. at June 30, 1999 and 1998, and for
each of the three years in the period ended June 30, 1999, which appears in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,233,198
<SECURITIES> 23,716
<RECEIVABLES> 1,668,030
<ALLOWANCES> 150,000
<INVENTORY> 849,768
<CURRENT-ASSETS> 4,842,465
<PP&E> 7,171,597
<DEPRECIATION> 2,847,054
<TOTAL-ASSETS> 9,284,954
<CURRENT-LIABILITIES> 2,555,009
<BONDS> 0
0
4,937,500
<COMMON> 12,481
<OTHER-SE> 1,637,262
<TOTAL-LIABILITY-AND-EQUITY> 9,284,954
<SALES> 9,828,369
<TOTAL-REVENUES> 9,959,718
<CGS> 8,112,227
<TOTAL-COSTS> 11,192,808
<OTHER-EXPENSES> 65,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,057
<INCOME-PRETAX> (1,327,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,327,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,327,715)
<EPS-BASIC> (.53)
<EPS-DILUTED> (.53)
</TABLE>
