10-Q 1 d11944.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Period Ended December 31, 2002 Commission file number 0-11580 PHARMAKINETICS LABORATORIES, INC. (Exact Name of Registrant as Specified in its Charter) Maryland 52-1067519 (State of Incorporation) (I.R.S. Employer Identification No.) 302 West Fayette Street Baltimore, Maryland 21201 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code (410) 385-4500 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 |_| Class Outstanding February 14, 2003 Common Stock, $.005 par value 2,496,129 PHARMAKINETICS LABORATORIES, INC. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operation 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 Item 4. Controls and Procedures 11 Part II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 12 1 Part I. FINANCIAL INFORMATION Item 1. Financial Statements The consolidated financial statements included in this report have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and the related notes included in our annual report on Form 10-K/A for the fiscal year ended June 30, 2002. In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature necessary to present fairly its financial position, results of operations, cash flows as of and for the three-month and six-month periods ended December 31, 2002. Interim results are not necessarily indicative of results for the full fiscal year. PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See accompanying notes to consolidated financial statements. 2 PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except for share data) Three Months Ended Six Months Ended December 31, December 31, ------------ ------------ 2002 2001 2002 2001 ---- ---- ---- ---- Revenues $ 1,084 $ 1,726 $ 2,278 $ 3,908 Cost and expenses: Cost of contracts 1,160 1,385 2,432 3,665 Selling, general and administrative 369 429 767 873 Research and development -- 29 1 73 ------- ------- ------- ------- Total costs and expenses 1,529 1,843 3,200 4,611 ------- ------- ------- ------- Loss from operations (445) (117) (922) (703) Other income and (expenses): Interest income 1 6 2 12 Interest expense (20) (1) (34) (2) ------- ------- ------- ------- (19) 5 (32) 10 ------- ------- ------- ------- Net loss applicable to common stockholders $ (464) $ (112) $ (954) $ (693) ======= ======= ======= ======= Basic and diluted loss per common share $ (0.19) $ (0.04) $ (0.38) $ (0.28) ======= ======= ======= ======= Weighted-average shares used to compute basic and diluted loss per common share 2,496 2,496 2,496 2,496 ======= ======= ======= ======= See accompanying notes to consolidated financial statements. 3 PHARMAKINETICS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands, except share data) Six Months Ended, December 31, 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (954) $ (693) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 242 266 Changes in operating assets and liabilities: Accounts receivable, net 226 923 Contracts in process 4 50 Prepaid expenses (27) 57 Accounts payable and accrued expenses 107 605 Deposits on contracts in process 39 (1,172) ------- ------- Net cash (used in) provided by operating activities (363) 36 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (38) (265) ------- ------- Net cash used in investing activities (38) (265) ------- ------- CASH FLOWS FROM FINANCING ACTIVITES: Proceeds from issuance of notes payable 583 -- ------- ------- Net cash provided by financing activities 583 -- ------- ------- Net increase (decrease) in cash and cash equivalents 182 (229) CASH AND CASH EQUIVALENTS AT THE BEG. OF PERIOD 46 414 ------- ------- CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 228 $ 185 ======= ======= See accompanying notes to consolidated financial statements. 4 PHARMAKINETICS LABORATORIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Organization and Description of Business Description of Business PharmaKinetics Laboratories, Inc. ("PKLB") is a contract research organization ("CRO"), located in Baltimore, Maryland, providing a range of clinical research and development services to the worldwide pharmaceutical and biotechnology industries in the development of prescription and non-prescription drug products. These services include Phase I clinical research, bioanalytical laboratory testing, and the management and monitoring of multi-center clinical trials. PKLB offers ancillary services in these areas such as protocol development, case report form design, data management, biostatistics and regulatory consulting. Financial Results and Liquidity PKLB had cash and cash equivalents of $228,000 at December 31, 2002. PKLB's primary source of funds is cash flow from operations, although PKLB from time to time has borrowed funds from a director and Bioanalytical Systems Inc. ("BASi") to cover short-term operating requirements. During the six-month period ended December 31, 2002, cash and cash equivalents increased by $182,000. The increase is due to the issuance of notes payable of approximately $583,000 offset by cash used in operations in the amount of $363,000, principally due to the net loss of $954,000 offset by an increase in working capital of $349,000 and a non-cash charge of $242,000 for depreciation and amortization, and cash used in investing activities of approximately $38,000. The operating environment confronting PKLB raises substantial doubt about PKLB's ability to continue as a going concern. PKLB's near term and long-term operating strategies focus on its sales and marketing efforts to gain new as well as previous customers. In addition, PKLB has and is pursuing cost cutting measures and is taking other appropriate steps to manage PKLB's cash balances. However, there can be no assurance that these strategies and measures will be effective. On June 20, 2002, PKLB entered into an Agreement and Plan of Merger with BASi, as amended by Amendment No. 1 to Agreement and Plan of Merger dated as of July 24, 2002, and as amended by Amendment No.2 to Agreement and Plan of merger dated as of November 21, 2002 (the "Merger Agreement"), that provides for the merger of PKLB with a wholly-owned subsidiary of BASi, with PKLB being the survivor of the merger. Shares of PKLB common stock outstanding at the effective time of the merger contemplated by the Merger Agreement will be converted into shares of BASi common stock at a rate of one BASi share for each 12 PKLB shares; shares of PKLB Class A Convertible Preferred Stock will be converted into 6% subordinated convertible promissory notes issued by BASi in an aggregate principal amount of $4,000,000 and shares of PKLB Class B Convertible Preferred Stock will be converted into shares of BASi common stock at a rate of one BASi share for every 12 PKLB common shares into which the shares of PKLB Class B Convertible Preferred Stock are convertible. The convertible promissory notes issued to holders of PKLB Class A Convertible Preferred Stock in the merger will mature on January 1, 2008, will not bear interest for the first year following the effective time of the merger, and will be convertible at the option of the holder into BASi common stock at a conversion price of $16 per share, after the expiration of one year following the date of the merger. The proposed transaction is subject to the satisfaction of certain closing conditions, including, among others, PKLB shareholder approval. On November 14, 2002, PKLB executed a Secured Convertible Revolving Note (the "Note") in the principal amount of up to $925,000 to BASi to replace the existing notes payable to BASi and to allow PKLB to borrow additional amounts from BASi to cover short-term operating requirements. As of December 31, 2002, $783,000 was outstanding under this Note. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Note is convertible by BASi at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. The loans provided for by the Note are secured by a security interest in favor of BASi in all of the assets of PKLB. PKLB Limited Partnership has guaranteed the repayment of the Note to BASi and has pledged the real property located at 302 W. Fayette Street, Baltimore, Maryland to BASi as security for its guaranty. On November 13, 2002, the Board of Directors of PKLB approved the grant of a debt conversion option similar to that granted to BASi with respect to the principal balance of the outstanding notes payable to Leslie B. Daniels, a director of PKLB. On November 22, 2002, PKLB issued a Convertible Promissory Note payable to Mr. Daniels in the original 5 principal amount of $350,000, which note was issued in replacement of the outstanding notes payable to Mr. Daniels. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Convertible Promissory Note is convertible at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. The issuance of the Note to BASi and the Convertible Promissory Note to Mr. Daniels trigger adjustments to the conversion prices of the PKLB Class A Convertible Preferred Stock and the PKLB Class B Convertible Preferred Stock. PKLB has obtained a waiver from the sole holder of PKLB Class B Convertible Preferred Stock of the adjustments to its conversion rate resulting from the issuance of the Note to BASi and the Convertible Promissory Note to Mr. Daniels. Pursuant to the second amendment to the Merger Agreement, PKLB and BASi amended the Merger Agreement to allow BASi to terminate the Merger Agreement in the event that any of the holders of the Class A Convertible Preferred Stock exercise their conversion rights prior to the consummation of the merger. However, there can be no assurance that no holders of PKLB Class A Convertible Preferred Stock will exercise their conversion rights. PKLB cannot guarantee that the results from operations will be sufficient to support PKLB's liquidity requirements through December 31, 2003 and beyond. There can be no assurance that the proposed transaction with BASi will be completed or the strategies underlying the merger will be accomplished or whether, if accomplished, they will be adequate to allow PKLB to meet its cash needs. 2. Summary of Significant Accounting Policies and Practices Principles of Consolidation The accompanying consolidated financial statements include the results of PKLB and PKLB Limited Partnership, a wholly owned subsidiary, which owns the building PKLB occupies. PKLB includes 100% of the building operations in its financial statements. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates The preparation of PKLB's financial statements in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts will differ from these estimates. Earnings (Loss) per Share Basic earnings (loss) per share ("EPS") is computed by dividing earnings (loss) by the weighted-average number of shares outstanding for the period. The computation of Diluted EPS is similar to Basic EPS except that the weighted-average number of shares outstanding for the period is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares are excluded if the effect on earnings (loss) per share is antidilutive. 6 The following table presents the computations of basic and diluted EPS (in thousands, except share data):

For the three and six-month periods ended December 31, 2002 and 2001, 9,206,000 2,058,000 of common stock issuable upon the assumed conversion of convertible debt and preferred stock were anti-dilutive and were not included in the calculation of diluted loss per common share due to recorded net losses. For the three and six-month periods ended December 31, 2002 and 2001, outstanding stock options and warrants representing 489,000 and 683,000 shares, respectively, were not included in the calculation of diluted loss per share, as the effect would also be anti-dilutive. 3. Merger with Bioanaytical Systems, Inc. On June 20, 2002, PKLB entered into a Merger Agreement with BASi, as amended by Amendment No. 1 to Agreement and Plan of Merger dated as of July 24, 2002, and as amended by Amendment No.2 to Agreement and Plan of merger dated as of November 21, 2002 that provides for the merger of PKLB with a wholly-owned subsidiary of BASi, with PKLB being the survivor of the merger. Shares of PKLB common stock outstanding at the effective time of the merger contemplated by the Merger Agreement will be converted into shares of BASi common stock at a rate of one BASi share for each 12 PKLB shares; shares of PKLB Class A Convertible Preferred Stock will be converted into 6% subordinated convertible promissory notes issued by BASi in an aggregate principal amount of $4,000,000 and shares of PKLB Class B Convertible Preferred Stock will be converted into shares of BASi common stock at a rate of one BASi share for every 12 PKLB common shares into which the shares of PKLB Class B Convertible Preferred Stock are convertible. The convertible promissory notes issued to holders of PKLB Class A Convertible Preferred Stock in the merger will mature on January 1, 2008, will not bear interest for the first year following the effective time of the merger, and will be convertible at the option of the holder into BASi common stock at a conversion price of $16 per share, after the expiration of one year following the date of the merger. The proposed transaction is subject to the satisfaction of certain closing conditions, including, among others, PKLB shareholder approval. 4. Related Party Transactions Convertible Promissory Note In fiscal year 2002, PKLB issued notes payable of $500,000 in the aggregate to Mr. Leslie Daniels, a director, to cover short-term operating requirements. These notes carry an annual interest rate of 8% and are payable upon demand. On November 13, 2002, the Board of Directors of PKLB approved the grant of a debt conversion option similar to that granted to BASi with respect to the principal balance of the outstanding notes payable. On November 22, 2002, PKLB issued a Convertible Promissory Note payable to Mr. Daniels in the original principal amount of $350,000, which note was issued in replacement of the outstanding notes payable to Mr. Daniels. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Convertible Promissory Note is convertible at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. At December 31, 2002, PKLB had $350,000 in outstanding convertible promissory note payable to Mr. Daniels, which is included in the accompanying Consolidated Balance Sheets as "Convertible Notes Payable". 7 PKLB recorded approximately $7,000 and $14,000, as interest expense in connection with the Convertible Promissory Note payable to Mr. Daniels for the three-month and six-month periods ended December 31, 2002. Secured Convertible Revolving Note In fiscal year 2002, PKLB issued notes payable of $200,000 in the aggregate to BASi to cover short-term operating requirements. These notes carry an annual interest rate of 8% and are due between December 2002 and March 30, 2003. On November 14, 2002, PKLB executed a Secured Convertible Revolving Note (the "Note") in the principal amount of up to $925,000 to BASi to replace the existing notes payable to BASi and to allow PKLB to borrow additional amounts from BASi to cover short-term operating requirements. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Note is convertible by BASi at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. The loans provided for by the Note are secured by a security interest in favor of BASi in all of the assets of PKLB. PKLB Limited Partnership has guaranteed the repayment of the Note to BASi and has pledged the real property located at 302 W. Fayette Street, Baltimore, Maryland to BASi as security for its guaranty. At December 31, 2002, PKLB had $782,732 outstanding under the Note, which is included in the accompanying Consolidated Balance Sheets as " Convertible Notes Payable". PKLB recorded approximately $12,000 and $18,000, as interest expense in connection with the Note payable to BASi for the three-month and six-month periods ended December 31, 2002. 5. Restatement During 2002, PKLB determined that its Class A Convertible Preferred Stock is mandatorily redeemable and accordingly, should have been classified outside of stockholders' deficit. The June 30, 2002 balance sheet has been restated to reflect this change, which had the effect of reducing stockholders' equity by $4,938,000 at June 30, 2002. PKLB intends to file an amended 10-K shortly reflecting this change. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources PKLB had cash and cash equivalents of $228,000 at December 31, 2002. PKLB's primary source of funds is cash flow from operations, although PKLB from time to time has borrowed funds from a director and BASi to cover short-term operating requirements. During the six-month period ended December 31, 2002, cash and cash equivalents increased by $182,000. The increase is due to the issuance of notes payable of approximately $583,000 offset by cash used in operations in the amount of $363,000, principally due to the net loss of $954,000 offset by an increase in working capital of $349,000 and a non-cash charge of $242,000 for depreciation and amortization, and cash used in investing activities of approximately $38,000. The operating environment confronting PKLB raises substantial doubt about PKLB's ability to continue as a going concern. PKLB's near term and long-term operating strategies focus on its sales and marketing efforts to gain new as well as previous customers. In addition, PKLB has and is pursuing cost cutting measures and is taking other appropriate steps to manage PKLB's cash balances. However, there can be no assurance that these strategies and measures will be effective. On June 20, 2002, PKLB entered into an Agreement and Plan of Merger with BASi, as amended by Amendment No. 1 to Agreement and Plan of Merger dated as of July 24, 2002, and as amended by Amendment No.2 to Agreement and Plan of merger dated as of November 21, 2002 ( the "Merger Agreement"), that provides for the merger of PKLB with a wholly-owned subsidiary of BASi, with PKLB being the survivor of the merger. Shares of PKLB common stock outstanding at the effective time of the merger contemplated by the Merger Agreement will be converted into shares of BASi common stock at a rate of one BASi share for each 12 PKLB shares; shares of PKLB Class A Convertible Preferred Stock will be converted into 6% subordinated convertible promissory notes issued by BASi in an aggregate principal amount of $4,000,000 and shares of PKLB Class B Convertible Preferred Stock will be converted into shares of BASi common stock at a rate of one BASi share for every 12 PKLB common shares into which the shares of PKLB Class B Convertible Preferred Stock are convertible. The convertible promissory notes issued to holders of PKLB Class A Convertible Preferred Stock in the merger will mature on January 1, 2008, will not bear interest for the first year following the effective time of the merger, and will be convertible at the option of the holder into BASi common stock at a conversion price of $16 per share, after the expiration of one year following the date of the merger. 8 The proposed transaction is subject to the satisfaction of certain closing conditions, including, among others, PKLB shareholder approval. On November 14, 2002, PKLB executed a Secured Convertible Revolving Note (the "Note") in the principal amount of up to $925,000 to BASi to replace the existing notes payable to BASi and to allow PKLB to borrow additional amounts from BASi to cover short-term operating requirements. As of December 31, 2002, $783,000 was outstanding under this Note. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Note is convertible by BASi at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. The loans provided for by the Note are secured by a security interest in favor of BASi in all of the assets of PKLB. PKLB Limited Partnership has guaranteed the repayment of the Note to BASi and has pledged the real property located at 302 W. Fayette Street, Baltimore, Maryland to BASi as security for its guaranty. On November 13, 2002, the Board of Directors of PKLB approved the grant of a debt conversion option similar to that granted to BASi with respect to the principal balance of the outstanding notes payable to Leslie B. Daniels, a director of PKLB. On November 22, 2002, PKLB issued a Convertible Promissory Note payable to Mr. Daniels in the original principal amount of $350,000, which note was issued in replacement of the outstanding notes payable to Mr. Daniels. The Note carries an annual interest rate of 8% and is due May 1, 2003. The outstanding principal amount of the Convertible Promissory Note is convertible at any time into PKLB common stock at a price of $0.1585 per PKLB common share, the fair market value on the date of issuance. The issuance of the Note to BASi and the Convertible Promissory Note to Mr. Daniels trigger adjustments to the conversion prices of the PKLB Class A Convertible Preferred Stock and the PKLB Class B Convertible Preferred Stock. PKLB has obtained a waiver from the sole holder of PKLB Class B Convertible Preferred Stock of the adjustments to its conversion rate resulting from the issuance of the Note to BASi and the Convertible Promissory Note to Mr. Daniels. PKLB and BASi have amended the Merger Agreement to allow BASi to terminate the Merger Agreement in the event that any of the holders of the Class A Convertible Preferred Stock exercise their conversion rights prior to the consummation of the merger. However, there can be no assurance that no holders of PKLB Class A Convertible Preferred Stock will exercise their conversion rights. PKLB cannot guarantee that the results from operations will be sufficient to support PKLB's liquidity requirements through December 31, 2003 and beyond. There can be no assurance that the proposed transaction with BASi will be completed or the strategies underlying the merger will be accomplished or whether, if accomplished, they will be adequate to allow PKLB to meet its cash needs. Results of Operations Revenues Revenues consisted of the following: Three Months Ended Six Months Ended December 31, December 31, ------------ ------------ 2002 2001 2002 2001 ---- ---- ---- ---- Phase I Services $ 892 $ 653 $1,958 $1,019 Bioanalytical Laboratory Services 146 101 257 354 Clinical Trial Mgt and Monitoring 41 902 41 2,383 Licensing 5 21 10 23 Consulting Services -- 49 12 129 ------ ------ ------ ------ Total $1,084 $1,726 $2,278 $3,908 ====== ====== ====== ====== Total revenues were $1.1 million and $1.7 million for the three-month periods ended December 31, 2002 and 2001, respectively. Clinical trial management and monitoring services decreased by $0.9 million due to i) the postponement and cancellation of certain studies in fiscal year 2002 negatively impacting current and future periods, and ii) the conclusion of certain studies in fiscal year 2002. Recent contracted studies are relatively smaller in patient population, duration and contract value. Phase I services increased by $0.2 million primarily in the area of Phase I clinical trials. 9 Total revenues were $2.3 million and $3.9 million for the six-month periods ended December 31, 2002 and 2001, respectively. Clinical trial management and monitoring services decreased by $2.3 million due to i) the postponement and cancellation of certain studies in fiscal year 2002 negatively impacting current and future periods, and ii) the conclusion of certain studies in fiscal year 2002. Phase I services increased by $0.9 million. Demand for Phase I services has increased since the second half of fiscal year 2002 as evidenced by the increase in the number of contracts for both clinical trials and bioequivalence testing. Cost of Contracts Cost of contracts were $1.2 million and $1.4 million for the three-month periods ended December 31, 2002 and 2001, respectively. As a percentage of revenue, cost of contracts increased to 107% for the three-month period ended December 31, 2002, compared to 80% for the three-month period ended December 31, 2001. This increase as a percentage of revenue is due primarily to lower sales levels in relation to fixed labor and overhead costs. Cost of contracts were $2.4 million and $3.7 million for the six-month periods ended December 31,2002 and 2001, respectively. As a percentage of revenue, cost of contracts increased to 107% for the six-month period ended December 31, 2002, compared to 94% for the six-month period ended December 31, 2001. This increase as a percentage of revenue is due primarily to lower sales levels in relation to fixed labor and overhead costs. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses were $369,000 and $429,000 for the three-month periods ended December 31, 2002 and 2001, respectively. The decrease in SG&A expenses is primarily due to a reduction in certain SG&A expenses such as employee related costs ($54,000), allowance for doubtful accounts ($18,000) and routine operating expenses ($39,000) offset by an increase in outside services ($51,000), primarily legal and accounting fees. Selling, general and administrative ("SG&A") expenses were $767,000 and $873,000 for the six-month periods ended December 31, 2002 and 2001, respectively. The decrease in SG&A expenses is primarily due to a reduction in certain SG&A expenses such as employee related costs ($79,000), allowance for doubtful accounts ($36,000) and routine operating expenses ($71,000) offset by an increase in outside services ($80,000), primarily legal and accounting fees. Research and Development Research and development ("R&D") expenses were $-0- and $29,000 for the three-month periods ended December 31, 2002 and 2001, respectively, and $1,000 and $73,000 for the six-month periods ended December 31, 2002 and 2001, respectively. The decrease in R&D expenses are attributable to the utilization of certain of PKLB's R&D personnel for activities necessary to meet project deadlines for clients, including contracted development work. R&D expenses will fluctuate from time to time as PKLB re-allocates existing scientific personnel whenever practical to focus on developing methods for utilization in current and future studies related primarily to its LC/MS/MS instrumentation. Other Income and Expenses Other income and expenses consists primarily of interest income earned on overnight investments and interest expense related to the Convertible Promissory Note and Secured Convertible Revolving Note. Interest income was approximately $1,000 and $6,000 for the three-month periods ended December 31, 2002 and 2001, respectively, and $2,000 and $12,000 for the six-month periods ended December 31, 2002 and 2001, respectively. The decrease in interest income is primarily related to a reduction in the average invested cash balances. Interest expense was approximately $20,000 and$1,000 for the three-month periods ended December 31, 2002 and 2001, respectively, $34,000 and $2,000 for the six-month periods ended December 31, 2002 and 2001, respectively. The increase in interest expense is due to the borrowings related to the Convertible Promissory Note and the Secured Convertible Revolving Note. Income Taxes No benefit for income taxes was recorded for the three-month and six-month periods ended December 31, 2002 and 2001, due to the uncertainty of utilizing such benefits. 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risks The exposure to market risk for changes in interest rates is not material. Foreign Currency Risk PKLB does not have exposure to foreign currency exchange rate fluctuations since PKLB's contracts require payment to PKLB in U.S. dollars. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer (CEO) and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended) within 90 days prior to the filing date of this quarterly report. Based upon their evaluation, the CEO and Principal Financial Officer concluded that the disclosure controls and procedures are effective in ensuring all required information relating to PKLB is included in this quarterly report. Changes in Internal Controls. There have been no significant changes in our internal controls or in other factors that could significantly affect the disclosure controls and procedures subsequent to the date of evaluation. Part II. OTHER INFORMATION Item 1. Legal Proceedings: None Item 2. Changes In Securities: None Item 3. Defaults Upon Senior Securities: None Item 4. Submission of Matters to a Vote of Security Holders: None Item 5. Other Information: None 11 Item 6. Exhibits and Reports on Form 8-K: A. Exhibits 10(j) Convertible Promissory Note dated November 22, 2002, between and PKLB and Leslie B. Daniels (filed herewith). 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. Reports on Form 8-K (1) On November 15, 2002, PKLB filed a Current Report on Form 8-K, the purpose of which was to file the Secured Convertible Revolving Note dated November 14, 2002, payable by the Registrant to Bioanalytical Systems, Inc. in the original principal amount of up to $925,000. (2) On November 21, 2002, PKLB filed a Current Report on Form 8-k the purpose of which was to file the Amendment No. 2 to Agreement and Plan of Merger dated as of November 21, 2002, by and among the Registrant, Bioanalytical Systems, Inc. and PI Acquisition Corp. and the related Press Release dated November 22, 2002. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMAKINETICS LABORATORIES, INC. Date: February 14, 2003 By: /s/James M. Wilkinson, II, Ph.D. ---------------------------------------- James M. Wilkinson, II, Ph.D. President and Chief Executive Officer Date: February 14, 2003 /s/Jeffrey A. Scheidt ---------------------------------------- Jeffrey A. Scheidt Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 13 CERTIFICATIONS I, James M. Wilkinson, II, Ph.D., certify that: 1. I have reviewed this quarterly report on Form 10-Q of PharmaKinetics Laboratories, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 By: /s/James M. Wilkinson, II, Ph.D. -------------------------------- James M. Wilkinson, II, Ph.D. President and Chief Executive Officer 14 I, Jeffrey A. Scheidt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PharmaKinetics Laboratories, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 By: /s/Jeffrey A. Scheidt --------------------- Jeffrey A. Scheidt Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 15

PHARMAKINETICS LABORATORIES INC 10-Q