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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, 2000 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
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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
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As of September 1, 2000, 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 $1,518,490.
Portions of the registrant's definitive proxy statement for its 2000 annual
meeting of stockholders, to be filed pursuant to Regulation 14A on or prior to
October 28, 2000, are incorporated into Part III of this report.
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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 became a lower priority in fiscal 1999
and 2000.
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.
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 advised the
Company to take immediate corrective action and that the failure to do so may
result in regulatory action. The Company 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 has also addressed this situation
directly with its clients and is undertaking an aggressive effort to regain
their confidence. The Company's efforts resulted in an increase in order
placement during the quarters ended March 31 and June 30, 2000.
Services
Clinical Evaluation Services
The Company offers complete services for the testing of generic
pharmaceutical products to determine bioavailability and bioequivalency.
Bioavailability testing determines the rate and extent to which an active
drug ingredient is absorbed from a drug product and becomes available at the
site of drug action in the human body. Typically, the determination of
bioavailability is performed through the collection and laboratory analysis of
blood, urine or other specimens. However, for certain drug products which are
not absorbed or are minimally absorbed, for example ointments and creams, the
determination of bioavailability must be performed using special procedures and
equipment. Drug manufacturers are required to include information obtained from
human testing in detailed laboratory and clinical studies as part of
applications for approval to market certain new drug products, submitted to
regulatory authorities, such as the United States Food and Drug Administration.
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
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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
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,
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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
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investigators, complying with Standard Operating Procedures ("SOPs"), reporting
adverse reactions to drugs, and maintaining thorough and accurate records. The
Company must maintain source documents for each study for specified periods.
Such documents are frequently reviewed by the study sponsor during visits to the
Company's facility and may be reviewed by the FDA during audits. Non-compliance
with FDA regulations can result in the disqualification of data collected during
a study.
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 advised 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 several "full service" CROs and many small specialty providers.
Many of the large full service CROs have substantially greater capital and other
resources, are better known, and have more experienced personnel than the
Company. The continuing 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.
Clients
The Company has served most of the leading U.S. and Canadian generic drug
firms and several of the leading U.S. and European pharmaceutical companies.
The Company's clients also include companies which utilize biotechnology and
other emerging technologies to develop new drugs.
The Company has in the past derived, and may in the future derive, a
significant portion of its revenue from a relatively limited number of major
clients. Concentrations of business in the CRO industry are not uncommon and
the Company is likely to experience such concentration in future years. For the
year ended June 30, 2000, two clients each contributed in excess of 10% of
contract revenue, accounting for 29% of contract revenue. For the years ended
June 30, 1999, and 1998, one client contributed in excess of 10% of contract
revenue, accounting for 23%, and 19%, respectively, of contract revenue.
While an individual client may represent a significant percent of revenues,
these revenues are the result of the sum of a number of different contracts
during the year. While the complete loss of a significant client could have a
material adverse effect on the Company, the termination or loss of any one
contract would typically not have a material adverse effect on the Company's
results of operations.
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Export Sales
The Company conducts studies for a number of companies outside of the U.S.,
primarily in Canada and Europe, in addition to many domestic companies. This
work is billed and paid in U.S. dollars, therefore eliminating currency exchange
risk to the Company. The Company's recognized revenue from its clients outside
of the United States approximates the following:
<TABLE>
<CAPTION>
Year Ended June 30,
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2000 1999 1998
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<S> <C> <C> <C>
Canada $ 964,000 $2,679,000 $2,597,000
Europe & other 402,000 391,000 453,000
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Total $1,366,000 $3,070,000 $3,050,000
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</TABLE>
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, 2000, the backlog was approximately $7.1 million. At June 30,
1999, the Company's backlog was approximately $5.3 million. The Company expects
to recognize revenue from studies included in the June 30, 2000 backlog during
fiscal 2001 and future fiscal years.
Employees
At July 31, 2000, the Company had 113 employees (31 of whom were part-time
employees), of which 11 hold Ph.D. or M.D. degrees and 10 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.
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(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 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.
In December 1999, the Company received a Summons in a Civil Action entitled
Altana, Inc. vs. PharmaKinetics Laboratories, Inc. (Case number CV-99 7917).
The complaint was filed in the United States District Court for the Eastern
District of New York and alleged, among other things, that PharmaKinetics
performed certain clinical studies for Altana, Inc., which were deemed
unsatisfactory by Altana. The Complaint requested damages for five causes of
action in an amount exceeding $1 million each, plus legal fees, costs of the
action, punitive damages, and other relief deemed proper by the Court. The
Company entered into a settlement agreement with Altana, Inc. as of April 17,
2000. The settlement called for Altana to receive 250,000 shares of a newly
created Class B Convertible Preferred Stock and warrants to purchase 100,000
shares of the Company's Common Stock at $6.00 per share. Altana can elect to
exchange shares of the preferred stock for future studies performed by
PharmaKinetics.
(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, 2000.
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.
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<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 2000 June 30, 1999
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Quarter High Low High Low
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<S> <C> <C> <C> <C>
First $1.44 $.88 $5.00 $2.63
Second 1.31 .63 3.50 1.31
Third 1.38 .78 1.56 .75
Fourth 1.19 .63 1.31 .88
</TABLE>
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, 2000, was 966.
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 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> Years ended June 30,
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2000 1999 1998 1997 1996
------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 8,023,905 $ 9,828,369 $ 12,326,009 $9,597,536 $10,962,160
Net earnings (loss)
before deemed
preferred stock dividend ($2,958,054) ($1,327,715) $ 622,747 ($109,513) $ 778,895
Deemed preferred stock dividend - - ($1,020,793) - -
Net earnings (loss) applicable to
common stockholders ($2,958,054) ($1,327,715) ($398,046) ($109,513) $ 778,895
Basic earnings (loss) per share ($1.19) ($0.53) ($0.16) ($0.04) $ 0.32
Basic weighted average
shares outstanding 2,496,129 2,493,349 2,440,429 2,439,129 2,439,129
Diluted earnings (loss) per share ($1.19) ($0.53) ($0.16) ($0.04) $ 0.32
Diluted weighted average
shares outstanding 2,496,129 2,493,349 2,440,429 2,439,129 2,470,109
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets $ 6,550,186 $ 9,284,954 $ 10,107,478 $5,958,732 $ 6,622,959
Working capital (deficiency) ($116,650) $ 2,287,456 $ 4,082,645 $ 282,538 $ 411,498
Long-term liabilities $ 62,051 $ 142,702 $ 235,074 $1,538,945 $ 1,784,876
Stockholders' equity $ 3,902,627 $ 6,587,243 $ 7,873,583 $2,438,241 $ 2,547,754
</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 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 Class A Convertible
Preferred Stock was convertible, over the purchase price of the Class A
Convertible Preferred Stock at the time of issue in 1997. The dividend was
recorded for financial reporting purposes only and was not paid to the holders
of Class A Convertible Preferred Stock.
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:
10
<PAGE>
<TABLE>
<CAPTION>
Percentage of Period to Period
Total Revenues Change
----------------------- -----------------
2000 1999
Years ended June 30, Compared to
-----------------------
2000 1999 1998 1999 1998
----------------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract revenue 99.2% 97.9% 94.3% (17.3)% (17.3)%
License fees 0.8 2.1 5.7 (67.9) (70.0)
------ ------ ----- ------- -------
Total 100.0 100.0 100.0 (18.4) (20.3)
Cost of contracts 106.1 82.5 72.5 4.9 (9.2)
------ ------ ----- ------- -------
Gross profit (6.1) 17.5 27.5 (128.5) (49.5)
Research and development 2.0 5.2 4.6 (69.1) (10.0)
Selling, general, and administrative 30.7 26.1 17.9 (4.2) 16.2
------ ------ ----- ------- -------
Operating income (loss) (38.8) (13.8) 5.0 (127.9) (321.2)
Interest expense (0.2) (0.3) (1.0) (31.8) (77.5)
Interest income 0.6 1.3 1.2 (60.4) (8.3)
Loss on disposal of equipment (0.4) - - 100.0 -
Gain on sale of investments 1.9 - - 100.0 -
Write-down of investments - (0.7) - (100.0) -
------ ------ ----- ------- -------
Earnings (loss) before taxes (36.9) (13.5) 5.2 (122.8) (310.4)
Income taxes - - (0.1) - (100.0)
------ ------ ----- ------- -------
Net earnings (loss) (36.9)% (13.5)% 5.1% (122.8)% (313.2)%
====== ====== ===== ======= =======
</TABLE>
2000 Compared to 1999
Total revenue, which includes contract revenue and revenue from
licensing technologies under special agreements whereby the Company receives
license fees based upon the client's actual product sales, decreased 18.4%, from
$9.8 million in fiscal 1999 to $8.0 million in fiscal 2000. The decrease
resulted from a reduced number of contracts and significantly lower license fee
income.
Contract revenues decreased 17.3% to $8.0 million in fiscal 2000, from
$9.6 million in fiscal 1999, primarily as a result of a reduction in revenues of
approximately $1.8 million for Phase I and Clinical Trial Management studies,
offset by increases in demand for the Company's bioanalytical services. The
Company believes that the decrease in revenues in the fiscal year ended June 30,
2000 reflects the downturn in business resulting from receipt of a warning
letter in July 1999.
License fee income of $68,000, from the Company's sole remaining
agreement, was recorded in fiscal 2000, compared to $210,000 in fiscal 1999, a
decrease of 67.9% due to a decline in the client's sales of its approved drug.
In addition, the Company's other license agreement had expired in June 1999, and
as a result, the Company received license fees in fiscal 2000 from only one
agreement, which is expected to expire in fiscal 2004. The Company believes it
is unlikely that its clients will wish to utilize license fee arrangements in
the future as compensation for work performed. As a result, contract revenues,
rather than licensing income, will continue to be the primary source of
revenues.
The Company's gross profit decreased 128.5% from $1.7 million in
fiscal 1999 to ($.5) million in fiscal 2000. As a percentage of revenue, the
Company's gross profit decreased from 17.5% in fiscal 1999 to (6.1%) in fiscal
2000, on an 18.4% decrease in total revenue. The decrease in gross profit
reflects the fact that, in the short term, the Company's costs are relatively
fixed. The Company has continued to invest in personnel and instrumentation on a
selective basis, although staffing levels have decreased through normal
attrition. The Company's gross profit for fiscal year 1999 included the reversal
of an accrued expense totaling $116,000 as a result of a liability which did not
materialize, and the recognition of a refund of approximately $122,000 for which
expenses had previously been recognized. The Company's gross profit, excluding
these adjustments would have decreased 133.1% for the fiscal year ended 2000,
compared to fiscal year 1999.
Selling, general and administrative expenses totaled $2.5 million in
fiscal 2000, compared to $2.6 million in fiscal 1999, representing a 4.2%
decrease. As a percentage of revenue, selling, general and administrative
expenses were 30.7% in fiscal 2000 and 26.1% in fiscal 1999. The decrease is
primarily
11
<PAGE>
attributed to a restructuring of the Company's business development department
and the corresponding loss of one of the Company's executives, offset by
increased spending for business development related efforts, a non-recurring
item related to the issuance of the Company's Class B Convertible Preferred
Stock, spending on the Company's Year 2000 compliance effort, and other non-
recurring items. The Company continues to focus its business development efforts
on generating revenues from existing and potential clients.
Research and development expenses decreased 69.1% from $512,000 in fiscal
1999 to $158,000 in fiscal 2000. The decrease in the level of expenditures in
fiscal 2000 is primarily attributable to the loss of certain of the Company's
research and development staff for which the Company continues to recruit
replacements. In addition, the Company has periodically re-deployed certain of
its research and development personnel, as well as instruments normally used to
conduct research and development, to activities necessary to meet project
deadlines for clients. Several of the Company's development efforts in fiscal
2000 have been subsidized by clients for whom sample analysis and method
development are contracted services. The Company has continued to invest in its
research and development effort in fiscal 2000 to develop methods for
utilization in current and future studies related primarily to its LC/MS/MS
instrumentation.
Interest expense decreased by 31.8% from $29,000 in fiscal 1999 to $20,000
in fiscal 2000. The decrease is primarily attributable to the expiration of
certain of the Company's capital leases. Interest income decreased 60.4% in
fiscal 2000, compared to fiscal 1999, due to the declining cash balances
maintained by the Company.
No provision for income taxes was recorded for fiscal 2000 or fiscal 1999.
The Company has available tax loss carryforwards of approximately $7,967,595,
which begin expiring in 2006 through 2020, and general business credits of
approximately $1,557,822, which begin expiring in 2000 through 2014.
Approximately $6,404,154 of the net operating loss carryforwards and general
business credits are subject to limitations under Section 382 of the Internal
Revenue Code.
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 I and bioequivalence studies. The
Company believes that the decline in revenue for its Phase I and bioequivalence
services was 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's gross profit 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
profit 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 profit was reflective of the
fact that the Company's costs are relatively fixed and 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 profit for
fiscal year 1999 included 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 profit, excluding these adjustments, would have
12
<PAGE>
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 was 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 was 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 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.
Interest expense decreased by 77.5% from $129,000 in fiscal 1998 to $29,000
in fiscal 1999. The decrease was 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 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.
YEAR 2000
As of December 31, 1999, the Company had completed its Year 2000 compliance
program, replaced or remediated computer systems and related software for
continued operation in the Year 2000, and identified alternative sources for its
key vendors. The activities encompassed all major categories of systems used by
the Company, including laboratory instrumentation, clinical systems, building
systems, and sales and finance 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 invested
approximately $439,000 in a new Laboratory Information Management System
("LIMS") and ancillary data acquisition system, which was fully operational as
of December 31, 1999. Other Year 2000 spending totaled approximately $66,000.
The capital improvements and expenses required for the Year 2000 effort
were included as part of the Company's annual budgets. The capital spending or
period expense associated with the Year 2000 issues did not have a material
effect on the Company's financial position or results of operations. The
Company expensed all costs related to its Year 2000 compliance program unless
the useful life of the technological asset was extended or increased.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, the Company had cash and equivalents of $346,574 compared
to $2,233,198 at June 30, 1999. The decrease in cash resulted primarily from
the Company's net loss from operations for fiscal year 2000, which was
attributable to the loss of revenues resulting from the effect of the warning
letter
13
<PAGE>
received in July 1999. Changes in the Company's operating accounts and
investment in equipment for utilization in the Company's operations adversely
affected the Company's cash position. The Company invested $354,983 for capital
purchases, all of which was paid in cash.
The Company's primary source of funds is cash flow from operations, which
decreased by $1,636,074 in fiscal 2000 from fiscal 1999, principally as a result
of the Company's 2000 results of operations as compared to 1999. Through August
1999, 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. To conserve cash, the Company has initiated cost
cutting measures and is taking other appropriate steps to manage the Company's
cash balances. Although the Company has seen an increase in its order
placements, no assurances can be given that the Company's current cash balances
will be sufficient to meet the Company's ongoing operating needs.
At June 30, 2000 the Company's account balances for accounts receivable,
contracts in process and deposits on contract in process, as compared to June
30, 1999, decreased primarily due to the overall decreases in the levels of
business as evidenced by the Company's operating performance for fiscal 2000.
In addition, other assets have decreased primarily due to the sale of the
Company's holdings of 44,642 shares of common stock of Hybridon, Inc.
(OTCBB:HYBN), generating cash proceeds of $177,874 and a gain of $154,158. The
Company continues to hold 11,161 warrants to acquire common stock of Hybridon,
Inc., which expire on May 4, 2003 and are not subject to a call provision. The
Company had acquired the stock and warrants in fiscal 1998 in exchange for an
account receivable in the amount of $89,284.
As of June 30, 2000, the Company's stockholders' equity totaled $3,902,627
compared to $6,587,243 at June 30, 1999. The Company had a deficiency in
working capital of $116,650 at June 30, 2000, compared to working capital of
$2,287,456 at June 30, 1999. The decrease in working capital primarily reflects
the decrease in cash balances caused by the Company's net loss from operations.
Management's plans to overcome the recent difficulties include increasing
the Company's sales efforts to generate additional business volume and to
monitor expenses. The Company is also looking to sublet a portion of its
building to generate additional income. The Company believes that it has
experienced the majority of the negative effects related to the Warning Letter,
which is evidenced by the $1,227,457 or 144% increase in revenues from the
quarter ended March 31, 2000 to June 30, 2000. The Company believes that the
results from operations will be sufficient to support the Company's liquidity
requirements through June 30, 2001 and beyond.
RISK FACTORS AND CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis and
elsewhere in this 2000 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 advised 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
14
<PAGE>
the Company's response or corrective actions, it could take further regulatory
action. The receipt of this letter has had, and any further regulatory action
could have, a material adverse effect on the Company's ability to market its
services and obtain new business. The resulting downturn in business has
negatively affected, and could continue to negatively affect, 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 Clients
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 year ended June 30, 2000, two clients each contributed in excess of 10% of
contract revenue, accounting for 29% of contract revenue. For the years ended
June 30, 1999, and 1998, one client contributed in excess of 10% of contract
revenue, accounting for 23%, and 19%, respectively, of contract revenue.
While an individual client may represent a significant percent of revenues,
these revenues are the result of the sum of a number of different contracts
during the year. While the complete loss of a significant client could have a
material adverse effect on the Company, the termination or loss of any one
contract would typically not have a material adverse effect on the Company's
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 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
15
<PAGE>
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 several "full service" CROs and many small specialty providers.
Many of the large full service CROs have substantially greater capital and other
resources, are better known, and have more experienced personnel than the
Company. The continuing 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.
Sufficiency of Cash Balances
The Company's primary source of funds is cash flow from operations. To
conserve cash the Company has initiated cost cutting measures and is taking
other appropriate steps to manage the Company's cash balances. However, no
assurances can be given that the Company's current cash balances will be
sufficient to meet the Company's ongoing operating needs. While the Company has
seen an increase in its order rate, another business downturn would adversely
affect the Company's cash balances. Therefore, no assurances can be given that
the Company will be able to maintain a going concern should a downturn in the
Company's business be protracted.
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.
16
<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 35 present fairly, in all material
respects, the financial position of PharmaKinetics Laboratories, Inc. and its
subsidiary at June 30, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2000,
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 35 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 auditing standards
generally accepted in the United States of America, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Baltimore, Maryland
September 21, 2000
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 8,023,905 $ 9,828,369 $ 12,326,009
Cost of contracts 8,513,540 8,112,227 8,930,681
------------ ------------ ------------
Gross profit (489,635) 1,716,142 3,395,328
Selling, general and administrative expenses 2,462,011 2,568,900 2,210,137
Research and development expenses 158,255 511,681 568,444
------------ ------------ ------------
Earnings (loss) from operations (3,109,901) (1,364,439) 616,747
Interest expense (19,813) (29,057) (128,970)
Interest income 51,989 131,349 143,170
Loss on disposal of equipment (34,487) - -
Gain on sale of investments 154,158 - -
Write-down of investment - (65,568) -
------------ ------------ ------------
Earnings (loss) before income taxes (2,958,054) (1,327,715) 630,947
Provision for income taxes - - 8,200
------------ ------------ ------------
Net earnings (loss) (2,958,054) (1,327,715) 622,747
Deemed preferred stock dividend - - (1,020,793)
------------ ------------ ------------
Net earnings (loss) applicable
to common stockholders $ (2,958,054) $ (1,327,715) $ (398,046)
============ ============ ============
Basic earnings (loss) per share $ (1.19) $ (0.53) $ (0.16)
============ ============ ============
Basic weighted average shares outstanding 2,496,129 2,493,349 2,440,429
============ ============ ============
Diluted earnings (loss) per share $ (1.19) $ (0.53) $ (0.16)
============ ============ ============
Diluted weighted average shares outstanding 2,496,129 2,493,349 2,440,429
============ ============ ============
</TABLE>
________________________________________________________________________________
See notes to consolidated financial statements.
18
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended June 30,
---------------------------------------
2000 1999 1998
----------- ----------- ---------
Net earnings (loss) $(2,958,054) $(1,327,715) $ 622,747
Other comprehensive income:
Unrealized gain (loss) on investment - (21,625) 21,625
----------- ----------- ---------
Comprehensive income (loss) $(2,958,054) $(1,349,340) $ 644,372
=========== =========== =========
________________________________________________________________________________
See notes to consolidated financial statements.
19
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 346,574 $ 2,233,198
Accounts receivable, net 1,161,169 1,518,030
Contracts in process 737,635 849,768
Prepaid expenses 223,480 241,469
------------ ------------
Total Current Assets 2,468,858 4,842,465
Property, plant and equipment, net 3,992,016 4,324,543
Other assets 89,312 117,946
------------ ------------
Total Assets $ 6,550,186 $ 9,284,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,245,032 $ 1,073,455
Deposits on contracts in process 1,340,476 1,481,554
------------ ------------
Total Current Liabilities 2,585,508 2,555,009
Other liabilities 62,051 142,702
------------ ------------
Total Liabilities 2,647,559 2,697,711
------------ ------------
Commitments and Contingent Liabilities
Stockholders' Equity:
Preferred Stock, no par value; authorized 1,500,000 shares
Class A Convertible Preferred Stock, no par value;
issued and outstanding, 833,300 shares 4,937,500 4,937,500
Class B Convertible Preferred Stock, no par value;
issued and outstanding, 250,000 shares 273,438 -
Common Stock, $.005 par value; authorized,
10,000,000 shares; issued and outstanding,
2,496,129 shares 12,481 12,481
Additional paid-in capital 11,929,886 11,929,886
Accumulated deficit (13,250,678) (10,292,624)
------------ ------------
Total Stockholders' Equity 3,902,627 6,587,243
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,550,186 $ 9,284,954
============ ============
</TABLE>
________________________________________________________________________________
See notes to consolidated financial statements.
20
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CLASS A CONVERTIBLE PREFERRED STOCK
Balance, beginning of year $ 4,937,500 $ 4,937,500 $ -
Stock issued (833,300 shares) - - 4,937,500
------------ ------------ ------------
Balance, end of year 4,937,500 4,937,500 4,937,500
------------ ------------ ------------
CLASS B CONVERTIBLE PREFERRED STOCK
Balance, beginning of year $ - $ - $ -
Stock issued (250,000 shares) 273,438 - -
------------ ------------ ------------
Balance, end of year 273,438 - -
------------ ------------ ------------
COMMON STOCK
Balance, beginning of year 12,481 12,281 12,196
Exercise of stock options
(0, 40,000, and 16,960 shares, respectively) - 200 85
------------ ------------ ------------
Balance, end of year 12,481 12,481 12,281
------------ ------------ ------------
(Shares outstanding: 2,496,129 at June 30, 2000
and 1999; and 2,456,129 at June 30, 1998)
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 11,929,886 11,867,086 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 11,929,886 11,867,086
------------ ------------ ------------
ACCUMULATED DEFICIT
Balance, beginning of year (10,292,624) (8,964,909) (9,587,656)
Net earnings (loss) (2,958,054) (1,327,715) 622,747
------------ ------------ ------------
Balance, end of year (13,250,678) (10,292,624) (8,964,909)
------------ ------------ ------------
ACCUMULATED COMPREHENSIVE INCOME - - 21,625
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 3,902,627 $ 6,587,243 $ 7,873,583
------------ ------------ ------------
</TABLE>
________________________________________________________________________________
See notes to consolidated financial statements.
21
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($2,958,054) ($1,327,715) $ 622,747
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 653,023 605,635 531,330
Issuance of preferred stock in settlement of lawsuit 273,438 - -
Gain on sale of investment (154,158) - -
Loss on disposal of equipment 34,487 - -
Bad debt expense - 86,600 150,000
Write-down of investment - 65,568 -
Changes in operating assets and liabilities:
Accounts receivable, net 356,861 127,223 (956,599)
Contracts in process 112,133 (109,684) (236,921)
Prepaid expenses and other assets 22,907 8,054 (112,894)
Accounts payable and accrued expenses 183,299 163,702 (10,026)
Deposits on contracts in process (141,078) 399,549 219,733
------------ ------------ -----------
Net cash provided (used) by operating activities (1,617,142) 18,932 207,370
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sale of investment 177,874 - -
Payment for purchases of property and equipment (354,983) (1,107,805) (359,406)
------------ ------------ -----------
Net cash used by investing activities (177,109) (1,107,805) (359,406)
------------ ------------ -----------
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)
Payments for capital lease obligations (92,373) (99,435) (129,649)
Proceeds from exercise of stock options - 63,000 45,084
------------ ------------ -----------
Net cash provided (used) by financing activities (92,373) (36,435) 2,954,502
------------ ------------ -----------
Increase (decrease) in cash and equivalents (1,886,624) (1,125,308) 2,802,466
Cash and equivalents, beginning of year 2,233,198 3,358,506 556,040
------------ ------------ -----------
Cash and equivalents, end of year $ 346,574 $ 2,233,198 $ 3,358,506
============ ============ ===========
Non-cash investing and financing transactions:
Equipment acquired through capital leases - - $ 340,165
Conversion of account receivable to investment - - $ 89,284
Deemed preferred stock dividend - - $ 1,020,793
</TABLE>
________________________________________________________________________________
See notes to consolidated financial statements.
22
<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 2000, the Company had one license fee agreement from which it
received license fee income. This license fee income, based on the client's
sales of approved drugs, will continue through the expiration of the license fee
agreement in fiscal 2004. In fiscal years 1999 and 1998, the Company received
license fees from two additional license fee arrangements, one of which expired
in October 1997 and the other in June 1999. License fee income of $67,579,
$210,648, and $702,798, was recorded during fiscal years ended June 30, 2000,
1999, and 1998, respectively.
B. FINANCIAL RESULTS AND LIQUIDITY
The Company incurred net losses of $2,958,054 and $1,327,715 in fiscal 2000
and 1999, respectively. The growth in these losses primarily resulted from the
loss of sales that occurred after the Company received a warning letter from the
United States Food and Drug Administration ("FDA") in July 1999. The Company
has relatively fixed costs, which contributed substantially to the losses
incurred by the Company in fiscal 2000 and 1999.
23
<PAGE>
The Warning Letter cited the Company's noncompliance with certain required
protocols in bioequivalence studies which were conducted prior to fiscal 1999.
The FDA advised the Company to take immediate corrective action and that the
failure to do so may result in regulatory action. The Company 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's cash balance decreased from $2,233,198 at June 30, 1999 to
$346,574 at June 30, 2000. During fiscal 2000, the Company sold investments,
which resulted in cash proceeds of $177,874 to the Company. At June 30, 1999,
the Company was not in compliance with the covenants of its credit facility, and
elected to terminate its line of credit. The Company does not have a line of
credit at June 30, 2000. In the absence of long-term financial support, there
can be no assurance that additional financing can be obtained from conventional
sources.
Management's plans to overcome the recent difficulties include increasing
the Company's sales efforts to generate additional business volume and to
monitor expenses. The Company is also looking to sublet a portion of its
building to generate additional income. The Company believes that it has
experienced the majority of the negative effects related to the Warning Letter,
which is evidenced by the $1,227,457 or 144% increase in revenues from the
quarter ended March 31, 2000 to June 30, 2000. The Company believes that the
results from operations will be sufficient to support the Company's liquidity
requirements through June 30, 2001 and beyond.
C. 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 year ended June 30, 2000, two clients each contributed in excess of
10% of contract revenue, accounting for 29% of contract revenue. For the years
ended June 30, 1999 and 1998, one client contributed in excess of 10% of
contract revenue, accounting for 23% and 19% 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:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Canada $ 964,000 $2,679,000 $2,597,000
Europe & other 402,000 391,000 453,000
---------- ---------- ----------
Total $1,366,000 $3,070,000 $3,050,000
========== ========== ==========
</TABLE>
Contracts in Process and Deposits on Contracts
Contracts in process includes direct and indirect costs related to contract
performance. Deposits on contracts represent interim payments. Upon completion
of contracts, the customer is billed for the total contract amount less any
deposits or interim payments.
24
<PAGE>
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, Class B 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 2000, 1999 and 1998 because the effect of their inclusion would be anti-
dilutive.
For fiscal years 2000, 1999 and 1998, dilutive common stock equivalents
would have totaled 1,750,962, 1,682,696, and 1,056,443, respectively, of which
1,393, 16,096, and 188,898, 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 clients accounted for 75.3% of the outstanding
accounts receivable balance at June 30, 2000. In addition, 25.6% of the
outstanding accounts receivable balance at June 30, 2000 was from clients
outside of the U.S.
Investment
The Company's investment, which was sold in fiscal year 2000, was
considered available for sale and recorded at market value for the fiscal years
ended June 30, 1999 and 1998. Fluctuations in the market value of the
investment were reported as unrealized holding gains or losses as a separate
component in stockholders' equity. Declines considered to be other than
temporary were 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
25
<PAGE>
currently enacted statutory rates applicable to future years. Valuation
allowances are established when the deferred tax assets are not currently
assured of realization.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from these estimates.
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.
D. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2000 is shown net of an allowance for
doubtful accounts of $47,962. Accounts receivable at June 30, 1999 is shown net
of an allowance for doubtful accounts of $150,000.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at June 30, is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Land $ 200,000 $ 200,000
Building and improvements 3,109,431 3,098,720
Furniture and equipment 3,899,582 3,872,877
----------- -----------
7,209,013 7,171,597
Less: accumulated depreciation
and amortization (3,216,997) (2,847,054)
----------- -----------
$ 3,992,016 $ 4,324,543
=========== ===========
</TABLE>
Assets held under capital lease at June 30, 2000 and 1999, were $340,165
and $394,005, respectively. Accumulated depreciation of assets held under
capital lease at June 30, 2000 and 1999, was $170,082 and $128,969,
respectively.
During fiscal year 2000, the Company wrote off certain fully depreciated
assets and other obsolete equipment for which a loss of $34,487 was recorded.
The historical cost basis of these assets was $317,568.
26
<PAGE>
F. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At June 30, accounts payable and accrued expenses consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Trade accounts payable $ 597,477 $ 538,913
Accrued payroll and related expenses 140,175 275,920
Other accrued expenses 507,380 258,622
---------- ----------
$1,245,032 $1,073,455
========== ==========
</TABLE>
G. 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 4, 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.
During fiscal year 2000, the Company liquidated its common stock holdings
in Hybridon, Inc. generating cash proceeds of $177,874 and a gain on the sale of
$154,158.
H. DEBT
Through August 1999, 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.
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 $19,277, $28,556, and $132,495, in fiscal
years 2000, 1999, and 1998, respectively.
I. 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:
27
<PAGE>
June 30,
-------------------------
2000 1999
----------- -----------
Deferred tax assets:
Accounts receivable $ 18,705 $ 58,500
Property, plant and equipment (99,677) 136,690
Accrued liabilities 130,927 37,283
Net operating loss carryforwards 3,910,034 2,691,185
Alternative minimum tax credits 4,095 16,529
General business credits 1,557,822 1,514,503
----------- -----------
Total deferred tax assets 5,521,906 4,454,690
Less: valuation allowance (5,521,906) (4,454,690)
----------- -----------
Deferred income taxes $ - $ -
=========== ===========
Based on the weight of evidence available at June 30, 2000 and 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, 2000, the Company had tax loss carryforwards of approximately
$7,967,595, which begin expiring in 2006 through 2020, and general business
credits of approximately $1,557,822 which begin expiring in 2000 through 2014.
Approximately $6,404,154 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:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
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 %
====== ====== ======
</TABLE>
The Company made cash payments for income taxes in the fiscal years ended
June 30, 2000, 1999, and 1998, in the amounts of $0, $4,200, and $3,000,
respectively.
The components of the Company's current and deferred income tax provisions
are as follows:
Year ended June 30,
----------------------------
2000 1999 1998
------- ------- --------
Current provision
Federal $ - $ - $ 8,200
State - - -
------- ------- --------
Total current $ - $ - $ 8,200
======= ======= ========
28
<PAGE>
Deferred provision
Federal $ - $ - $ -
State - - -
------- ------- --------
Total deferred $ - $ - $ -
======= ======= ========
J. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
Lease expense for all operating leases, including leases with terms of less
than one year, amounted to $84,100, $195,400, and $215,100, for the years ended
June 30, 2000, 1999, and 1998, respectively. The future expected payout of
operating leases with terms in excess of one year is as follows:
Year ending June 30,
--------------------
2001 35,215
2002 25,478
2003 23,642
2004 12,911
2005 3,568
---------
$ 100,814
=========
The Company has capital lease arrangements for the purchase of laboratory
instrumentation, which includes one LC/MS/MS, in the aggregate amount of
$340,165. 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 this capital lease is as follows:
Year ending June 30,
--------------------
2001 98,296
2002 54,426
less: interest portion (10,018)
---------
$ 142,704
=========
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.
In December 1999, the Company received a Summons in a Civil Action entitled
Altana, Inc. Vs. PharmaKinetics Laboratories, Inc. (Case number CV-99 7917).
The complaint was filed in the United States District Court for the Eastern
District of New York and alleges, among other things, that PharmaKinetics
performed certain clinical studies for Altana, Inc., which were deemed
unsatisfactory by Altana. The Complaint requested damages for five causes of
action in an amount exceeding $1 million each, plus legal fees, costs of the
action, punitive damages, and other relief deemed proper by the Court. The
Company entered into a
29
<PAGE>
settlement agreement with Altana, Inc. as of April 17, 2000. The settlement
called for Altana to receive 250,000 shares of a newly created Class B
Convertible Preferred Stock and warrants to purchase 100,000 shares of the
Company's Common Stock at $6.00 per share. Altana can elect to exchange shares
of the preferred stock for future studies performed by PharmaKinetics.
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 advised
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.
K. 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 43% of the Company's voting securities without giving effect to
the possible exercise of warrants, or approximately 56% 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 (1) share of Preferred Stock for two point
one seven (2.17) 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.
On April 17, 2000, the Company issued 250,000 shares of a newly created
Class B Convertible Preferred Stock and warrants to purchase 100,000 shares of
the Company's Common Stock to Altana, Inc. The securities were issued pursuant
to a Settlement Agreement with Altana, Inc., which was issued in response to a
Summons in a Civil Action entitled Altana, Inc. vs. PharmaKinetics Laboratories,
Inc. (Case number CV-99 7917) received by the Company in December 1999. The
Preferred Stock is convertible at any time into shares of Common Stock at a
conversion ratio of one (1) share of Preferred Stock for one (1) share of Common
Stock. The conversion ratio is subject to adjustment under certain
circumstances to prevent dilution. There are no liquidation preferences. The
warrants are fully exercisable at $6.00 per share and expire on April 17, 2003.
Altana can elect to exchange shares of the preferred stock for future studies
performed by PharmaKinetics.
Net earnings have been adjusted for the fiscal year ended June 30, 1998,
for the deemed preferred stock dividend, resulting in a net loss applicable to
common stockholders. The dividend was
30
<PAGE>
computed based on the excess of the fair market value of the Company's Common
Stock, into which the Class A Convertible Preferred Stock was convertible, over
the purchase price of the Class A Convertible Preferred Stock at the time of
issue in 1997. The dividend was recorded for financial reporting purposes only
and was not paid to the holders of Class A Convertible Preferred Stock.
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.
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, 2000, the plans
provide for the delivery of up to 326,430 shares of common stock upon exercise
of outstanding options granted, of a total of 602,180 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 four 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, 2000,
there were 102,500 options outstanding, 78,500 of which were exercisable, but
not exercised, and 85,500 options were available for future issuance under the
1996 Plan. To date, 12,000 options have been exercised. 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 211,420 shares of the Company's Common Stock to
non-employees. As of June 30, 2000, 159,420 of these options were outstanding.
In July 1998, one option holder exercised 40,000 options and allowed the
remaining 12,000 options to expire. All of the options were granted at fair
market value of the stock on the effective date of the grant, except for 74,500
options, which were granted to the Company's former President and CEO, Mr. James
K. Leslie, in exchange for relinquishing all of his vested incentive stock
options, at the exercise prices at which the options were originally granted
under the Company's 1996 Incentive Stock Option Plan. The new options were
granted in an amount equal to the number of vested options held by Mr. Leslie on
his date of departure from the Company. All of his options had exercise prices
above the fair market value
31
<PAGE>
of the Company's stock on the date of grant and were fully vested on the date of
grant. Of the remaining options granted, 44,920 were exercisable at June 30,
2000.
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's stock option plans been determined based on the fair value at the date
of grant for awards in 2000, 1999 and 1998 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>
Year Ended June 30,
--------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss) applicable to
common stockholders- as reported ($2,958,054) ($ 1,327,715) ($ 398,046)
Net earnings (loss) applicable to
common stockholders- pro forma ($2,956,112) ($ 1,576,140) ($ 526,181)
Basic earnings (loss) per share - as reported ($1.19) ($0.53) ($0.16)
Basic earnings (loss) per share - pro forma ($1.18) ($0.63) ($0.22)
Diluted earnings (loss) per share - as reported ($1.19) ($0.53) ($0.16)
Diluted earnings (loss) per share - pro forma ($1.18) ($0.63) ($0.22)
<CAPTION>
Year Ended June 30,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average fair value of options granted:
Exercise price = market price on date of grant $ 0.81 $ 0.63 $ 4.12
Exercise price * market price on date of grant $ 0.16 - -
Exercise price ** market price on date of grant - - -
</TABLE>
* means greater than
** means less than
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, 2000, 1999, and 1998:
dividend yield of 0%, expected terms of two to five years, expected volatility
of 80.8% in fiscal 2000, 71.5% in fiscal 1999, and 69.4% in fiscal 1998, 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
6.44% in fiscal 2000, 5.23% in fiscal 1999, and 5.70% in fiscal 1998.
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:
32
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Options
Option Price Number of Shares Price per Share Exercisable
------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C>
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
Granted ($0.9219 - $7.42 per share) 368,600 $1.54
Exercised - -
Forfeited ($0.9375 - $26.25 per share) (233,910) $4.27
--------
Balance
June 30, 2000 ($0.9219 - $7.50 per share) 588,350 $2.66 293,920
========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 2000:
<TABLE>
<CAPTION>
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
2000 contractual life 2000
------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ years $ $
0.92 - 5.00 476,180 7.3 1.64 213,750 2.18
5.01 - 7.50 112,170 6.9 6.96 80,170 6.77
------------------------------------------------------------------- --------------------------------------
0.92 - 7.50 588,350 7.2 2.66 293,920 3.43
</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, 2000, the Company has reserved 588,350 shares of Common
Stock for future issuance under authorized option grants.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, the information required
by this Item with respect to directors is contained in the Company's Proxy
Statement for its 2000 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, 2000.
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
2000 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, 2000.
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 2000 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, 2000.
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 2000 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, 2000.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page(s)
<S> <C>
(a) 1. FINANCIAL STATEMENTS
Report of Independent Accountants 17
Consolidated statements of operations for each of the
three years in the period ended June 30, 2000 18
Consolidated statements of comprehensive income (loss) for
each of the three years in the period ended June 30, 2000 19
Consolidated balance sheets at June 30, 2000 and 1999 20
Consolidated statements of stockholders' equity for each
of the three years in the period ended June 30, 2000 21
Consolidated statements of cash flows for each of the
three years in the period ended June 30, 2000 22
Notes to consolidated financial statements 23
2. FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule 17
Schedule IX - Valuation and Qualifying Accounts 36
3. EXHIBITS
See Exhibit Index 38
</TABLE>
(b) REPORTS ON FORM 8-K
On April 21, 2000, the Company filed a Report of Form 8-K announcing that
the Company had entered into a Settlement Agreement as of April 17, 2000, with
Altana, Inc. Under the Settlement Agreement, the Company issued 250,000 shares
of a newly created Class B Convertible Preferred Stock and warrants to purchase
100,000 shares of the Company's Common Stock to Altana, Inc. in response to a
Summons in a Civil Action entitled Altana, Inc. vs. PharmaKinetics Laboratories,
Inc. (Case number CV-99 7917) received by the Company in December 1999. The
complaint was filed in the United States District Court for the Eastern District
of New York and alleged, among other things, that PharmaKinetics performed
certain clinical studies for Altana, Inc., which were deemed unsatisfactory by
Altana. The complaint requested damages for five causes of action, punitive
damages, and other relief deemed proper by the Court. The warrants are fully
exercisable at $6.00 per share and expire on April 17, 2003. Altana can elect to
exchange shares of the preferred stock for future studies performed by
PharmaKinetics. Articles Supplementary were filed by the Company on April 18,
2000 with respect to the designation of the new class of preferred stock issued
in connection with the settlement.
35
<PAGE>
PHARMAKINETICS LABORATORIES, INC.
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
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
----------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Valuation Allowances:
Doubtful accounts
2000 $ 150,000 $ - - ($102,038) $ 47,962
1999 $ 150,000 $ 86,600 - ($86,600) $ 150,000
1998 $ - $300,000 - ($150,000) $ 150,000
Deferred tax assets (a)
2000 $4,454,690 - $1,067,216 - $5,521,906
1999 $3,888,855 - $ 565,835 - $4,454,690
1998 $4,096,383 - $ (207,528) - $3,888,855
</TABLE>
Notes:
------
(a) Represents charges to deferred tax asset account.
36
<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 28, 2000 By: /s/ James M. Wilkinson, II, Ph.D.
------------------ ----------------------------------
James M. Wilkinson, II,Ph.D.
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Date: September 28, 2000 /s/ James M. Wilkinson, II, Ph.D.
------------------ -----------------------------------
James M. Wilkinson, II, Ph.D.
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: September 28, 2000 /s/ Taryn L. Kunkel
------------------ -----------------------------------
Taryn L. Kunkel,
Vice-President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Date: September 28, 2000 /s/ Leslie B. Daniels
------------------ -----------------------------------
Leslie B. Daniels,
Director
Date: September 28, 2000 /s/ Jerome A. Halperin
------------------ -----------------------------------
Jerome A. Halperin,
Director
Date: September 28, 2000 /s/ Thomas F. Kearns
------------------ -----------------------------------
Thomas F. Kearns, Jr.,
Director
Date: September 28, 2000 /s/ Kamal K. Midha
------------------ -----------------------------------
Kamal K. Midha, C.M., Ph.D., D.SC.,
Director
Date: September 28, 2000 /s/ Roger C. Thies
------------------ -----------------------------------
Roger C. Thies,
Director
37
<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) Articles Supplementary relating to Class B Convertible Preferred
Stock of the Company (incorporated by reference to Exhibit 4.1 to
the Company's 8-K filing on April 21, 2000).
(c) 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 Statements on Form S-8,
Nos. 333-19865 and 333-31062).
(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
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).
(f) 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).
38
