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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1999
Commission File No. 0-27804
COMPARE GENERIKS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3289386
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(State of or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
60 Davids Drive, Hauppauge, New York 11788
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (800) 342-6555
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.0001 per share
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(Title of Class)
Units consisting of two (2) shares of common stock, par value $.0001 per
share and one (1) Class A Redeemable Common Stock Purchase Warrant
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(Title of Class)
Class A Redeemable Common Stock Purchase Warrant
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not contained in this form, and no disclosure
will 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-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $31,723.000.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such stock as
of June 14, 1999, was approximately $622,400.
Number of shares outstanding of the issuer's common stock, as of June
14, 1999 was 4,914,845.
See Page 23 for Exhibits
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PART 1
Item 1. BUSINESS
General
Compare Generiks, Inc., a Delaware corporation (the "Company" or
"CGI"), is engaged in the distribution, marketing and sale of dietary
supplements and OTC non-prescription pharmaceuticals ("OTCs"). The Company
distributes its products under Company owned trademarks through direct sales to
major wholesalers, particularly those that service convenience stores, drug
stores, discount department stores, wholesale clubs, petroleum marketers,
hospital gift shops and airport gift shops supported by a sophisticated broker
network.
Products and Development
The Company develops and sells products for its own Energex Plus and
Compare Generiks lines and distributes products in the Max Brand and HeadsUp
lines. Its products include dietary supplements and OTCs. Each product category
contains numerous different dosage sizes and various and unique combinations of
ingredients. These product groups include Extra Strength Pain Reliever, Aspirin,
Sinus Relief, Pseudo Relief, Antacid Relief, Advanced Pain Relief, Ex-Pain,
Complete Allergy Relief, Stay Alert, Travel Ease, Multrum and Cough & Cold
Relief.
The Company markets its non-prescription products under its Compare
Generiks, Max Brand and HeadsUp brand names. These products contain active
ingredients which are identical to those contained in non-prescription products
sold under national and regional brand names, private label brands, local and
regional products sold by other national and regional direct mail markets. For
instance, the Company's tablets and capsules are similar to Actifed(Registered),
Tylenol Extra Strength(Registered), Advil(Registered), Tylenol Regular
Strength(Registered), Bayer (325 mg)(Registered), Anacin(Registered), Tylenol
Sinus Formula(Registered), Sudafed (30 mg)(Registered), Nyquil(Registered),
Dayquil(Registered), Comtrex(Registered), Excedrin(Registered) and
Benadryl(Registered).
The Company only sells OTC products which have been proven to be
generally recognized to be safe and effective for the intended uses. Proposed
rules issued by the Food and Drug Administration have established, after an
expanded review of all OTC products, those OTC drugs that will be generally
recognized as safe and effective and not misbranded.
For its sales of vitamins and nutritional supplements to retailers, the
Company employs a multi-brand strategy and associated marketing efforts designed
to access several different classes of trade. The Company's marketing strategy
with respect to each of its brands is directed at the ultimate retail consumer,
with an emphasis on the educated consumer. The Company provides a wide product
selection for the consumer, attractive price points, clear and informative
labeling, safety-conscious packaging and thoughtful shelf organization for
easier product selection. The Company works closely with retailers to help them
optimize the performance of their dietary supplement products and OTC
pharmaceutical departments, including providing retailers with various types of
merchandising assistance to maintain the inventory and appearance of the dietary
supplement products and OTC pharmaceutical sections of their stores,
sophisticated plan-
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o-grams which map out the shelf displays and shelf marketing strategies,
point-of-sale displays and topical informational materials.
The Company has expanded its vitamin and nutritional supplement line of
products. The products introduced during fiscal year end March 31, 1999 include
Joint Support, Pressur-Lo, Bright Eyes, Ginseng Energy Charger and Natural Max.
The Company introduces new products in response to anticipated consumer
trends. Product concepts are generally developed by the Company's management,
key employees and consultants. Since the Company acquired the Energex Assets and
the Compare Generiks Assets, the Company has not incurred any expenses which
have been allocated to such research and development.
This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Manufacturing and Suppliers
The Company has purchased essentially all of its products from PDK Labs
Inc. , a New York Corporation ("PDK"), pursuant to a Supply Agreement dated
October 31, 1995, as amended, (the "Supply Agreement'), and an Exclusive Supply
and Licensing Agreement dated March 24, 1997, as amended, (the "Licensing
Agreement"). The Company purchases certain products in the Energex Plus and
Compare Generiks product lines from PDK pursuant to the Supply Agreement at
prices based on PDK's material cost plus a specified mark-up. The Company was
granted an exclusive license to use the trademarks "Max Brand" and "HeadsUp"
brands of OTCs and the exclusive right to distribute products bearing such names
pursuant to the Licensing Agreement. The Company agreed to pay PDK an annual
license fee for such rights, payable, at the option of the Company, either in
cash, in shares of the Company's common stock or shares of the Company's Series
B Preferred Stock. The Company intends to satisfy the license fee due for the
most recently completed fiscal year in shares of common stock and Series B
Preferred Stock. PDK supplies the Company with certain products pursuant to the
Licensing Agreement at prices specified in the Amendment to the Licensing
Agreement dated May 1, 1999. In addition, in May 1996 the Company entered into
an Exclusive Supply Agreement with a formerly affiliated third party pursuant to
which the third party agreed to supply the Company with all of the Company's
requirements for certain vitamin and nutritional supplements. In
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addition, PDK is entitled to an additional payment based on a percentage of the
difference between the sales price to the Company's customers and the price paid
to PDK.
Marketing and Advertising
The Company markets its products to retail and wholesale customers
through in-store demonstrations, point of purchase displays, promotional
literature, direct salespersons, sales agents and manufacturer's
representatives. Advertising is through trade magazines, newspapers, in-store
flyers, radio and distributors catalogs. The Company offers placement allowances
and quarterly rebates which insure continued placement and reorders.
Competition
The market for dietary supplements and OTC pharmaceutical products is
highly competitive in each of the Company's existing and anticipated product
lines and methods of distribution. Numerous manufacturers and distributors
compete with the Company for customers throughout the United States and
internationally in the packaged dietary supplement and OTC pharmaceutical
industry selling products to retailers, such as mass merchandisers, drug store
chains, independent drug stores and health food stores. Many of the Company's
competitors are substantially larger and more experienced than the Company, have
longer operating histories and have materially greater financial and other
resources than the Company (although no implication is intended hereby regarding
the Company's industry ranking in comparison to such competitors). Many of these
competitors are private companies, and therefore, the Company cannot compare its
revenues with respect to the sales volume of each competitor. The Company's
significant competitors include Perrigo Company and Rexall Sundown, Inc. both of
whom have longer operating histories and materially greater financial and other
resources than the Company.
Although certain of the Company's competitors are substantially larger
than the Company and have greater financial resources, the Company believes that
it competes favorably with other vitamin and nutritional supplement companies
because of its access to products, competitive pricing, quality of products,
sales support and diverse product line.
Trademarks and Service Marks
The trademarks Energex Plus and Compare Generiks and an application for
a mechanical patent for the Compare Generiks tablet display and dispenser are
the property of the Company and have been assigned to the Company by PDK. The
trademarks have been registered and a patent application filed with the United
States Patent and Trademark Office ("PTO"). The trademarks Max Brand and HeadsUp
have been licensed to the Company by PDK under the Licensing Agreement, as
amended. In consideration for this Licensing Agreement, the Company agreed to
pay an annual license fee of $500,000 to PDK. This fee is payable, at the option
of the Company, either in cash or in shares of the Company's common stock or
shares of the Company's Series B Preferred Stock and the Company intends to
satisfy the license fee due during the 1999 fiscal year in stock. To the
Company's knowledge, the Company has the common law right to use such trademarks
on, and the mechanical patent with, its products and in
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the marketing of its services. The Company has retained trademark counsel and a
patent agent and presently intends to make all appropriate filings and
registrations and take all other actions necessary, to protect all of its
intellectual property rights.
Management and Employees
As of June 14, 1999, the Company employed a total of five (5) employees
on a full time basis (three (3) employees in sales and marketing and two (2)
people in administration and finances).
The Company has experienced no work stoppages and considers its
employee relations to be satisfactory. The Company's employees are not
represented by a labor union.
Government Regulation
The Company's products and/or its business operations are subject to
regulation by one or more federal agencies, including the Federal Trade
Commission ("FTC"), the United States Food and Drug Administration ("FDA"), the
Consumer Product Safety Commission and the Environmental Protection Agency.
These activities are also regulated by various agencies of the states and
localities in which the Company's products are sold.
In October 1994, the Dietary Supplement Health and Education Law was
signed into law. This new law, which amends the Federal Food, Drug and Cosmetic
Act, defines dietary supplements as a separate and distinct entity, and not as
food additives. Vitamins, minerals, amino acids, herbs and other nutritional
substances are included in the definition. It expressly provides for the use of
third party scientific literature which shall not be regulated as labeling by
the FDA, provided it is not false or misleading. The new law also delayed the
FDA's requirements for extensive product label changes which were to be applied
to products manufactured after July 1, 1995. It provides a set of different
label requirements for ingredient content information, and directs the FDA to
publish new label regulations for supplements with a mandatory effective date,
as extended, of March 23, 1999. It makes no modifications on the requirements
and proscriptions regarding health claims for dietary supplements. The new law
also introduced the concept of good manufacturing practices to the manufacture
of dietary supplements. At this time, it would be premature to predict its
overall impact on the dietary supplement industry.
Several of the raw materials contained in products marketed by the
Company are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation of these chemicals requires the filing of
importation documents with the Federal Drug Enforcement Agency. In addition,
certain foreign countries require a "letter of non-objection" for the export of
List I Chemicals.
The Drug Enforcement Administration (the "DEA") has been given the
statutory authority to regulate all ephedrine, pseudoephedrine, and PPA
over-the-counter drug products. Previously, the restrictions were limited to
certain ephedrine products. The restrictions on pseudoephedrine and PPA became
effective in October 1997 and DEA registration requirements are now effective.
Registration with the DEA is required for all companies engaged in the
distribution of any products
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containing ephedrine, pseudoephedrine, or PPA. There are certain registration
exemptions in place for retail stores. The Company has applied for its own
registration with the DEA. That registration remains pending and the Company
continues to operate under an exemption. Should the DEA ultimately deny the
Company's registration, it would no longer be permitted to distribute these
products. The Company's customers who have not applied for such registration or
have been rejected, can no longer market the Company's products containing the
three ingredients in question.
On March 10, 1998, the Company was notified by PDK, which supplies the
Company with certain products containing a List 1 Chemical, that PDK had been
notified by the Drug Enforcement Administration ("DEA") that they are
investigating PDK's pending registration. The investigation involves PDK's
purchase and the Company's distribution of List 1 Chemicals. To date, the DEA
has taken no formal action on the registrations. If the DEA denies PDK's and/or
the Company's registration, then the Company and PDK will have the right to
appeal the decision administratively within the DEA and thereafter, if
unsuccessful, in federal court. If the final determination is to deny PDK's
registration, then PDK would no longer be permitted to manufacture and
distribute products that contain List 1 Chemicals and would not be able to
distribute those products to the Company. In addition, if the final
determination is to deny the Company's registration, then the Company would no
longer be permitted to distribute products that contain List 1 Chemicals. Sales
of products containing this List 1 Chemical were approximately $28,673,000
(representing 90% of the Company's net sales) for the year ended March 31, 1999.
The FDA has proposed regulations which remain pending but, if adopted,
would remove ephedrine-containing over-the-counter drug products which are
marketed and sold by the Company from the over-the-counter market. During this
past year several states have already taken action on an individual state by
state basis, to restrict, in some fashion, the sale of ephedrine,
pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
Conflict of Interests
At present, PDK supplies essentially all of the Company's products as
well as certain management and administrative facilities and personnel. It is
anticipated that PDK will continue to supply a significant percentage of the
Company's products, at or near present levels. The Company will continue to
operate its executive offices, distribution and packaging at facilities leased
and managed by PDK. In addition, one of PDK's Board of Directors, Thomas A.
Keith is also the President, Chief Executive Officer, Chief Financial Officer
and the Vice President of Manufacturing of PDK, Raveendra Nandigam, is also a
Director of the Company. Because of PDK's role as a significant supplier to the
Company and as a holder of 17.8% of the Company's voting securities, certain
conflicts of interest may occur between the Company and PDK. In such instances,
members of the Board of Directors who are also members of the PDK Board of
Directors may be precluded from participating in corporate decisions. Although
the Board of Directors of the Company has not adopted any written policy on this
matter, the Delaware Corporation Law contains specific provisions governing such
conflicts.
Liability Insurance
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The Company, like other manufacturers of products that are ingested,
faces inherent risk of exposure to product liability claims if, among other
things, the use of its products results in an injury. With respect to product
liability coverage, the Company through its main supplier, currently has
coverage under a product liability insurance policy. There is no assurance that
any judgment against the Company will not exceed liability coverage. A judgment
significantly in excess of the amount of insurance coverage would have a
material adverse effect on the Company.
In addition to other information in this Annual Report on Form 10-K the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.
Competition. Competition in the Company's marketplace is intense. The
Company faces direct competition from a number of national and regional brands
and private label non-prescriptive products. The Company competes against
established pharmaceutical, consumer product and mail order companies which
currently market products which are equivalent or functionally similar to those
the Company markets and which have achieved broad product recognition. Most of
the Company's competitors possess substantially greater financial, technical and
other resources than the Company. Moreover, these companies possess greater
marketing capabilities than the Company, including the resources to implement
extensive advertising campaigns. There can be no assurance that the Company will
continue to compete successfully.
Government Regulation. Manufacturers of pharmaceutical products are,
generally, subject to extensive regulation by the Food and Drug Administration
("FDA") and various other federal and state governmental entities relating to
nearly every aspect of the development, manufacture and commercialization of
such products.
Under the Federal Food, Drug and Cosmetic Act ("FDA Act"), an
over-the-counter nonprescription pharmaceutical product may not be
commercialized or otherwise distributed in the United States without the prior
approval of the FDA upon submission of a new drug application or abbreviated new
drug application, unless the combination of active ingredients of such products
has been determined to be generally recognized as safe and effective for uses
under the conditions prescribed, recommended or suggested in the labeling in
accordance with final monograph rules promulgated by the FDA and the labeling is
in compliance therewith. The Company only markets nonprescription products which
are similar to national and regional brands and the active ingredients in which
have been found to be generally recognized as safe and effective for the
recommended uses by panels of medical experts appointed by the federal
government in the course of its monograph rulemaking proceedings.
The labeling of over-the-counter products as well as advertising
relating to such products is also subject to the review of the Federal Trade
Commission ("FTC"). The Company believes it is in full compliance with all FTC
labeling and advertising requirements. However, the extent of potentially
adverse or burdensome government regulations in the nonprescription product area
which might arise in future legislation or administrative action cannot be
predicted.
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Several of the raw materials used by PDK in its manufacturing process
are categorized as List I Chemicals by the Chemical Diversion Act of 1988. As
such, the importation of these chemicals requires the filing of importation
documents with the Federal Drug Enforcement Agency. In addition, certain foreign
countries require a "letter of non-objection" for the export of List I
Chemicals. In March and November 1998, the DEA advised PDK that the DEA would
not sign a letter of non-objection requested by PDK relating to the intended
importation by PDK of a List 1 Chemical. Without the letter of non-objection PDK
is unable to import the List 1 Chemical.
The Drug Enforcement Administration (the "DEA") has been given the
statutory authority to regulate all ephedrine, pseudoephedrine, and PPA
over-the-counter drug products. Previously, the restrictions were limited to
certain ephedrine products. The restrictions on pseudoephedrine and PPA became
effective in October 1997 and DEA registration requirements are now effective.
Registration with the DEA is required for all companies engaged in the
distribution of any products containing ephedrine, pseudoephedrine, or PPA.
There are certain registration exemptions in place for retail stores. The
Company has applied for its own registration with the DEA. That registration
remains pending and the Company continues to operate under an exemption. Should
the DEA ultimately deny the Company's registration, it would no longer be
permitted to distribute these products. The Company's customers who have not
applied for such registration or have been rejected, can no longer market the
Company's products containing the three ingredients in question.
Thus, the DEA, registration, identification, record keeping, and
reporting requirements may adversely affect the Company's sales of these
products.
On March 10, 1998, the Company was notified by PDK, which supplies the
Company with certain products containing a List 1 Chemical, that PDK had been
notified by the Drug Enforcement Administration ("DEA") that they are
investigating PDK's pending registration. The investigation involves PDK's
purchase and the Company's distribution of List 1 Chemicals. To date, the DEA
has taken no formal action on the registrations. If the DEA denies PDK's and/or
the Company's registration, then the Company and PDK will have the right to
appeal the decision administratively within the DEA and thereafter, if
unsuccessful, in federal court. If the final determination is to deny PDK's
registration, then PDK would no longer be permitted to manufacture and
distribute products that contain List 1 Chemicals and would not be able to
distribute those products to the Company. In addition, if the final
determination is to deny the Company's registration, then the Company would no
longer be permitted to distribute products that contain List 1 Chemicals. Sales
of products containing this List 1 Chemical were approximately $28,673,000
(representing 90% of the Company's net sales) for the year ended March 31, 1999.
The FDA has proposed regulations which remain pending but, if adopted,
would remove ephedrine-containing over-the-counter drug products which are
manufactured and sold by the Company from the over-the-counter market. During
this past year several states have already taken action on an individual state
by state basis, to restrict, in some fashion, the sale of ephedrine,
pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The issuance by any governmental body of materially adverse regulations
in the nonprescription product area which prevented the Company from obtaining
necessary regulatory approval, whether on a timely basis, by virtue of the costs
of compliance or at all, could have a
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material adverse effect on the business and financial condition of the Company.
In addition, the fact that the Company's products do not currently require
pre-marketing FDA approval does not mean that any particular product, under
certain circumstances, could not expose the Company to product liability or
other claims.
Product Liability. The Company faces inherent business risks of
exposure to product liability claims in the event that, among other things, a
product is illegally tampered with, misused or its use results in adverse
effects. While the Company takes what it believes are appropriate precautions,
including the use of tamper resistant caps and heat sealed plastic wrapping
around the entire bottle of each of its over-the-counter and vitamin products
and follows the Good Manufacturing Practices prescribed by the FDA, as well as
its own in-house quality control procedures, there can be no assurance that it
will avoid significant liability exposure. While the Company carries product
liability insurance against this risk there can be no assurance that such
coverage will always be available or available at a reasonable cost and, even if
available, adequate to protect it against material adverse effects in the event
of a successful product liability claim.
Dependence on Certain Products. Although the Company distributes in
excess of 20 products, approximately 90% of the Company's revenue in fiscal 1999
was from the sale of products containing List 1 Chemicals. The inability of the
Company to sell such products, for any reason, would have a material adverse
effect upon the business and financial condition of the Company.
No Cash Dividends. The Company has not paid any cash dividends on its
common stock and, in view of its capital needs does not presently plan to pay
any cash dividends except in accordance with the terms of the Series B Preferred
Stock.
Item 2. PROPERTIES.
The Company leases its 10,000 square foot executive offices,
distribution center and warehouse space at 60 Davids Drive, Hauppauge, NY 11788
from PDK on a month-to-month basis at a monthly rent of $5,000. In the judgment
of management, the lease with PDK reflects a rent at current fair market value.
Item 3. LEGAL PROCEEDINGS
Except as set forth below, there is no material litigation pending or
threatened against the Company nor are there any such proceedings to which the
Company is a party.
On or about April 22, 1998, Body Dynamics, Inc. ("BDI") instituted a
litigation entitled Body Dynamics, Inc. v. PDK Labs Inc. and Compare Generiks,
Inc., U.S.D.C. E.D.N.Y. against the Company, alleging, among other things, that
the Company breached a contract under which BDI was to market, for a fee,
certain of the Company's products. In February 1999, the
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Company, PDK and BDI entered into a settlement under which the outstanding
royalty payable to BDI of $1,350,000 was paid by PDK.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no matters which have been submitted to a vote
of the Company's securityholders.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's securities commenced trading in the over-the-counter
market on the effectiveness of the Company's Initial Public Offering on March 6,
1996 in the form of Units each consisting of two (2) shares of Common Stock and
one (1) Class A Warrant. The Common Stock and Class A Warrants are regularly
quoted and traded on the NASDAQ SmallCap Market under the symbols COGE and
COGEW. The Units were regularly quoted and traded on the NASDAQ SmallCap Market
under the symbol COGEU through September 1997.
The following table indicates the high and low bid prices for the
Company's Common Stock and Class A Warrants for the period up to March 31, 1999
based upon information supplied by the NASDAQ SmallCap Market. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
Common
Stock
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1998 Fiscal Year Quoted Bid Price
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High Low
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First Quarter 4 1/2 2 9/16
Second Quarter 5 1/4 3 3/8
Third Quarter 4 9/16 3 1/4
Fourth Quarter 3 11/16 1 7/8
1999 Fiscal Year Quoted Bid Price
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High Low
---- ---
First Quarter 2 1/2 1 7/16
Second Quarter 2 1 5/32
Third Quarter 5/8 2/32
Fourth Quarter 9/16 1/8
Class A Warrants
1998 Fiscal Year Quoted Bid Price
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High Low
---- ---
First Quarter 1 7/8 1 5/16
Second Quarter 1 7/16 3/4
Third Quarter 3 13/16 3/8
Fourth Quarter 3/4 1/8
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1999 Fiscal Year Quoted Bid Price
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High Low
---- ---
First Quarter 18/32 6/32
Second Quarter 13/32 3/32
Third Quarter 6/32 1/64
Fourth Quarter 1/64 1/64
On June 14, 1999 the closing price of the Common Stock as reported on
NASDAQ SmallCap Market was $.16. On June 14, 1999 the closing price for the
Class A Warrants reported on the NASDAQ SmallCap Market was $.06. The Units did
not trade. On June 14, 1999 there were 116 holders of record of Common Stock.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Fiscal Year 1999 compared to Fiscal Year 1998
Net sales for the fiscal year ended 1999 were approximately $31,723,000
as compared to net sales in 1998 of $9,151,000. The increase in sales is
principally attributable to the Company entering into an Exclusive Supply and
Licensing Agreement (the "Exclusive Agreement") with PDK Labs Inc. ("PDK"),
whereby PDK granted the Company an exclusive license to use the trademarks "Max
Brand" and Heads Up" and the exclusive right to distribute products bearing such
names. Gross profit amounted to $3,678,000 (12% of sales) in 1999 as compared to
$4,794,000 (52% of sales) in 1998. The percentage decrease is attributable to
the Company amending the payment terms of its Exclusive Agreement with PDK
covering the purchase of product in the "Max Brand" and "Heads Up" product
ranges.
Selling, general and administrative expenses were $3,245,000 in 1999
and $4,564,000 in 1998. As a percentage of sales, selling, general and
administrative expenses were 10% in 1999 and 50% in 1998. The overall decrease
as a percentage of sales is attributable to the Company experiencing significant
sales growth without incurring additional selling, general and administrative
expenses. Further, selling, general, and administrative expenses in 1998
included royalty expense of $1,825,000 related to a distribution agreement that
was terminated in March 1998.
During the fiscal year ended 1999, the Company recorded a charge to
operations of $399,000 for a loss on impairment of marketable securities. This
represents a decline in the value of an investment in marketable securities
that, in the opinion of the Company's management, was considered to be other
than temporary.
On March 24, 1997, the Company entered into the Exclusive Agreement
with PDK. In consideration for this agreement, the Company agreed to pay an
annual license fee of $500,000 to PDK payable, at the option of the Company,
either in cash or in shares of the Company's common stock. In January 1999, the
agreement was further amended to provide the Company the
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option to pay its annual license fee in shares of Series B preferred stock.
Included in selling, general and administrative expenses is $500,000 for the
fiscal year ended 1999. In May 1999, the Company satisfied the $500,000 license
fee obligation for the fiscal year ended March 31, 1999 with the issuance of
714,286 shares of common stock and 400,000 shares of Series B Preferred Stock.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company is developing a plan to ensure that its systems are compliant with the
requirements to process transactions in the Year 2000. The plan consists of four
phases: assessments, remediation, testing and implementation and encompasses
internal information technology (IT) Systems and non-IT Systems, as well as
third party exposures. The Company has completed the assessment and remediation
of its IT Systems and non-IT Systems and is in the process of testing remedial
changes to its existing software. In addition, the Company has requested from a
majority of its principal suppliers and vendors written statements regarding
their plan for meeting Year 2000 requirements. To date, the Company has not
received adequate response to such requests.
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner and that the costs of
implementing this program will not materially affect the financial position of
the Company. The Company has not yet completed all necessary phases of the Year
2000 program. In the event that the Company has not yet completed any additional
phases, the Company could experience business interruptions. In addition,
disruptions in the economy generally resulting from the Year 2000 issue could
also have a material adverse affect on the Company. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Management believes that inflation did not have a material effect on
operations or financial condition in 1999, 1998 or 1997. Management also
believes that its business in not seasonal; however, significant promotional
activities have a direct impact on sales volume in any given quarter.
Fiscal Year 1998 compared to Fiscal Year 1997
Net sales for the fiscal year ended 1998 were approximately $9,151,000
as compared to net sales in 1997 of $2,290,000. Gross profit amounted to
$4,794,000 (52% of sales) in 1998 as compared to $815,000 (36% of sales) in
1997. The increase in sales and gross profit was principally attributable to the
Exclusive Agreement with PDK.
Selling, general and administrative expenses were $4,564,000 in 1998
and $2,077,000 in 1997. As a percentage of sales, selling, general and
administrative expenses were 50% in 1998 and 91% in 1997. The overall decrease
as a percentage of sales was attributable to sales growth exceeding increases in
marketing costs incurred in connection with the Company entering into a
marketing agreement with a nonaffiliated pharmaceutical distributor (the
"distributor") dated May 5, 1997. Pursuant to this agreement, the distributor
marketed the Company's "Max Brand" and "Heads Up" products. The distributor
earned a marketing fee equal to the difference between
-13-
<PAGE>
(i) the sales price of the products sold and (ii) an amount equal to 200% of the
material cost of the products, as defined effective April 30, 1998, the Company
terminated its agreement with the distributor.
During the fiscal year ended 1998, the Company recorded a charge to
operations of $734,000 for a loss on impairment of marketable securities. This
represents a decline in the value of an investment in marketable securities
that, in the opinion of the Company's management, was considered to be other
than temporary.
Net loss for the fiscal year ended 1998 was $410,000, as compared to
net loss in 1997 of $1,165,000. The decrease in the loss reflects the increased
sales and gross profit, offset by the loss on impairment of marketable
securities.
Liquidity and Capital Resources
As of March 31,1999, the Company had working capital of approximately
$3,480,000.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $16,000, primarily due to (i) net income
of $7,000, (ii) increases in liabilities such as accounts payable ($85,000), and
due to affiliate ($5,332,000), (iii) adjustments for depreciation and
amortization expense ($326,000), a noncash license fee ($500,000), and a loss on
impairment of marketable securities ($399,000), (iv) decreases in operating
assets such as prepaid expenses and other current assets ($97,000) and other
assets ($110,000), offset by (v) increases in operating assets such as accounts
receivable ($914,000) and inventories ($5,937,000).
Net cash used in financing activities approximated $65,000 representing
payments of cash dividends.
In August 1998, the Company guaranteed the obligations of PDK and its
affiliates under a credit agreement with its banks.
The Company expects to meet its cash requirements from operations and
current cash reserves.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 13 of this Annual Report on
Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-14-
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
Name Age Position(s) with the Company
- ---- --- ----------------------------
Thomas A. Keith 38 President, Chief Executive Officer,
Chief Financial Officer and Director
Theresa Giove 40 Director
Raveendra Nandigam 49 Director
Virginia Sims 39 Director
Background of Executive Officers and Directors
Thomas A. Keith has been a Director of the Company since May 21, 1997 and the
President of the Company since October 31, 1995. Prior to joining the Company,
from December 1990 to October 1995, Mr. Keith was Vice President of Sales &
Marketing of PDK Labs Inc., a company which is engaged in the manufacture and
distribution of nutritional supplements, vitamins and OTCs. Mr. Keith will
continue to devote substantially all of his business time to the Company. In
addition, Mr. Keith has been a Director of Futurebiotics, Inc., a majority-owned
subsidiary of PDK Labs Inc. since December 2, 1997 and he has been a Director of
PDK Labs Inc. since March 11, 1998.
Theresa Giove has been a Director of the Company since December 1, 1997 and has
been engaged in the practice of psychotherapy since 1990. From 1989 to 1991, she
was a Director of the Adolescent Wellness Center at North Shore University
Hospital. She is on the faculty at Adelphi University where she is a professor
in the Graduate Social Work Department. Ms. Giove has a B.S. degree from New
York Institute of Technology and a M.B.A. degree in Professional Studies,
Clinical Counseling from New York Institute of Technology. She also received a
M.B.A. degree in Social Work from Adelphi University. She is currently working
toward her Ph.D. in Social Psychology from Union Institute.
Raveendra Nandigam has been a Director of the Company since November 2, 1998. He
has been the Vice President of Manufacturing for PDK Labs Inc. ("PDK") since
1991 and was the plant manager from 1983 to 1991. Prior to joining PDK, Mr.
Nandigam was the plant manager of Godavri Agro Chemicals in India, a
manufacturer of Zinc Sulfate and Copper Sulfate. Mr. Nandigam is a graduate of
Andhra University and received his Masters Degree in Chemistry from Bhopal
University.
-15-
<PAGE>
Virginia Sims has been a director of Compare Generiks, Inc. since November 1998.
Ms. Sims has been a principal of New York Title Research Corporation since March
1996. Prior to March 1996, Ms. Sims was a principal in Foley Square Abstract.
Ms. Sims has held various management and supervisory positions in the field of
real estate titles and abstracts.
There are no family relationships between the officers and directors of
the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely upon its review of the copies
of such reports furnished to the Company during the year ended March 31, 1999,
all Section 16(a) filing requirements applicable to its officers and directors
and greater than ten percent beneficial owners were satisfied.
-16-
<PAGE>
Executive Compensation
<TABLE>
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted LTIP All Other
Name and Other Annual Stock Options/ Payouts Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Award($) SARS(#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas A. Keith, CEO 1999 $170,000 $68,000 $-0- -0- -0- -0- $-0-
1998 $155,000 $75,000 $-0- -0- -0- -0- $-0-
1997 $135,000 $57,000 $-0- -0- -0- -0- $-0-
1996 $ 57,000 $-0- $-0- -0- 100,000 -0- $-0-
<CAPTION>
Aggregated Option/SAR Exercises -
and FY-End Option/SAR Values
--------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Shares Value Number of Securities Value of Unexercised in the Money
Acquired on Realized Underlying Unexercised Options/SARs at the
Name Exercise (#) $ Options/SARS at FY-End (#) FY-End ($)
---- ----------- -------- ----------------------------- ----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Keith 0 0 100,000 -0- $-0- -0-
</TABLE>
-17-
<PAGE>
Employment Agreements
Under a prior agreement, Mr. Keith has been granted an option to
purchase 100,000 shares of the outstanding Common Stock of the Company
exercisable (i) at an exercise price equal to the public offering price of the
shares of Common Stock of the Company , and (ii) only at a time when Mr. Keith
is employed by the Company. The Company does not currently have an employment
agreement with Mr. Keith, its President, CEO and CFO.
Stock Option Plans
1995 Stock Plan
In December 1995, the Board of Directors of the Company adopted the
1995 Stock Plan (hereinafter called the "1995 Plan"). The 1995 Plan was approved
by the Stockholders of the Company in December 1995. The purpose of the 1995
Plan is to provide an incentive and reward for those executive officers and
other key employees in a position to contribute substantially to the progress
and success of the Company, to closely align the interests of such employees
with the interests of stockholders of the Company by linking benefits to stock
performance and to retain the services of such employees, as well as to attract
new key employees. In furtherance of that purpose, the 1995 Plan authorizes the
grant to executives and other key employees of the Company and its subsidiaries
of stock options, restricted stock, deferred stock, bonus shares, performance
awards, dividend equivalent rights, limited stock appreciation rights and other
stock-based awards, or any combination thereof. The 1995 Plan is expected to
provide flexibility to the Company's compensation methods, after giving due
consideration to competitive conditions and the impact of federal tax laws.
The maximum number of shares of Common Stock with respect to which
awards may be granted pursuant to the 1995 Plan is initially 2,000,000 shares,
of which 100,000 shares have been granted as an option to the Company's Chief
Executive Officer. Shares issuable under the 1995 Plan may be either treasury
shares or authorized but unissued shares. The number of shares available for
issuance will be subject to adjustment to prevent dilution in the event of stock
splits, stock dividends or other changes in the capitalization of the Company.
The 1995 Plan is administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year, no person may be granted under the 1995 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or other changes in
capitalization of the Company).
-18-
<PAGE>
Types of Awards
Stock Options. Options granted under the 1995 Plan may be "incentive
stock options" ("Incentive Options") within the meaning of Section 422 of the
Code or stock options which are not incentive stock options ("Non-Incentive
Options" and, collectively with Incentive Options, hereinafter referred to as
"Options"). The persons to whom Options will be granted, the number of shares
subject to each Option granted, the prices at which Options may be exercised
(which shall not be less than the fair market value of shares of Common Stock on
the date of grant), whether an Option will be an Incentive Option or a
Non-Incentive Option, the time or times and the extent to which Options may be
exercised and all other terms and conditions of Options will be determined by
the Committee.
Each Incentive Option shall terminate no later than ten (10) years from
the date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined). No Incentive Option may be
granted at any time after October 2005. Each Non-Incentive Option shall
terminate not later than fifteen (15) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the Fair Market
Value of shares of Common Stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% Stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person
possessing more than 10% of the total combined voting power of all shares of
stock of the Company or a parent or subsidiary of the Company ("10%
Stockholder") shall in no event be less than 110% of the Fair Market Value of
the shares of the Common Stock at the time the Incentive Option is granted. The
term of an Incentive Option granted to a 10% Stockholder shall not exceed five
(5) years from the date of grant.
The exercise price of the shares to be purchased pursuant to each
Option shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of
shares of the Company's Common Stock owned by the optionee at the time of the
exercise of the Option, (iii) in installments, payable in cash, if permitted by
the Committee or (iv) any combination of the foregoing. The stock-for-stock
payment method permits an optionee to deliver one (1) or more shares of
previously owned Common Stock of the Company in satisfaction of the exercise
price of subsequent Options. The optionee may use the shares obtained on each
exercise to purchase a larger number of shares on the next exercise. (The
foregoing assumes an appreciation in value of previously acquired shares). The
result of the stock-for-stock payment method is that the optionee can generally
avoid immediate tax liability with respect to any appreciation in the value of
the stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option
may not be sold or otherwise disposed of for a period determined by the Board
upon grant of the Option, which period shall be not less than six (6) months nor
more than three (3) years from the date of acquisition of the shares (the
"Restricted Period"), except that, during the Restricted Period (i) the optionee
may offer the shares to the Company and the Company may, in its discretion,
purchase up to all the shares offered at the exercise price and (ii) if the
optionee's employment terminates during the
-19-
<PAGE>
Restricted Period (except in limited instances), the optionee, upon written
request of the Company, must offer to sell the shares to the Company at the
exercise price within seven (7) business days. The Restricted Period shall
terminate in the event of a Change in Control of the Company (as defined), or at
the discretion of the Board. After the Restricted Period, an optionee wishing to
sell must first offer such shares to the Company at the Fair Market Value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1995 Plan, to grant the holder of
such Option a limited stock appreciation right ("LSAR"), entitling the holder to
receive, within sixty (60) days following a Change in Control, an amount in cash
equal to the difference between the exercise price of the Option and the market
value of the Common Stock on the effective date of the Change in Control. The
LSAR may be granted in tandem with an Option or subsequent to grant of the
Option. The LSAR will only be exercisable to the extent the related Option is
exercisable and will terminate if and when the Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1995 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions as may be imposed by the
Committee at the time of grant. In the event that the holder of restricted stock
ceases to be employed by the Company during the applicable restrictive period,
restricted stock that is at the time subject to restrictions shall be forfeited
and reacquired by the Company. Except as otherwise provided by the Committee at
the time of grant, a holder of restricted stock shall have all the rights of a
stockholder including, without limitation, the right to vote restricted stock
and the right to recover dividends thereon. An award of deferred stock is an
award that provides for the issuance of stock upon expiration of a deferral
period established by the Committee. Except as otherwise determined by the
Committee, upon termination of employment of the recipient of the award during
the applicable deferral period, all stock that is at the time subject to
deferral shall be forfeited. Until such time as the stock which is the subject
of the award is issued, the recipient of the award has no rights as a
stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient
the right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of Common
Stock. A dividend equivalent right may be granted as a component of another
award or as a free standing award.
Bonus Shares and other Share Based Awards. The 1995 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1995
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
-20-
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of June 14, 1999 with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock and Preferred stock by (i) any holder of more than five percent
(5%) of the outstanding shares; (ii) the Company's officers and directors; and
(iii) the directors and officers of the Company as a group:
<TABLE>
-------------------------------- ---------------- ----------------- ---------------- -----------------
Percentage Percentage
Name and Address of Shares of Common (%) of Shares of (%) of Total
Beneficial Owner(1) Stock Owned Common Stock Preferred Stock Combined Vote
-------------------------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Walpac, Inc.(2)(3) 0.0 0.0 5,000,000 46.2
-------------------------------- ---------------- ----------------- ---------------- ----------------
Delsin Investments, Ltd.(3) 0.0 0.0 5,000,000 46.2
-------------------------------- ---------------- ----------------- ---------------- ----------------
PDK Labs Inc.(4) 1,024,845 20.9 900,000 17.8
-------------------------------- ---------------- ----------------- ---------------- ----------------
Daniel Durchslag(5) 0.0 0.0 0.0 0.0
-------------------------------- ---------------- ----------------- ---------------- ----------------
Theresa Giove(5) 0.0 0.0 0.0 0.0
-------------------------------- ---------------- ----------------- ---------------- ----------------
Thomas A. Keith(5) 100,000(6) 2.0 0.0 .9
-------------------------------- ---------------- ----------------- ---------------- ----------------
All officers and directors as
a group (three (3) persons) 100,000 2.0 0.0 .9
-------------------------------- ---------------- ----------------- ---------------- ----------------
</TABLE>
- ----------
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Instruction (b1) to Item 403 of Regulation S-B of The
Securities Exchange Act.
(2) The address of Walpac, Inc. is P.O. Box 743, Suites 41/42, Victoria House,
26 Main Street, Gibraltar.
(3) The Company has been advised that Delsin Investments, Ltd. is the sole
shareholder of Walpac, Inc. The address of Delsin Investments, Ltd. is P.O.
Box 743, Suites 41/42, Victoria House, 26 Main Street, Gibraltar.
(4) The address of PDK Labs Inc., is 145 Ricefield Lane, Hauppauge, NY 11788.
(5) The address of each stockholder shown above is c/o Compare Generiks, Inc.,
60 Davids Drive, Hauppauge, NY 11788.
(6) Includes 100,000 shares of Common Stock underlying an option to purchase
100,000 shares of Common Stock of the Company issued pursuant to Mr.
Keith's employment agreement. Does not include 900,000 shares of Preferred
Stock or 1,024,845 shares of Common Stock owned by PDK Labs Inc. Mr. Keith
is a director of PDK Labs Inc. and disclaims beneficial ownership of shares
owned by PDK Labs Inc.
-21-
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since October 31, 1995, the Company has purchased essentially all of
its products and materials from PDK, pursuant to a supply agreement, as amended,
between PDK and the Company (the "Supply Agreement"). On December 13, 1996, the
Company amended its Supply Agreement with PDK, which amendment provided for PDK
to supply the Company with certain products at prices based on PDK's material
cost plus a specified mark-up. The term of the Supply Agreement is for a period
of five (5) years, automatically renewable for successive one (1) year terms.
On March 24, 1997, the Company entered into an exclusive supply and
licensing agreement, as amended, with PDK, pursuant to which PDK granted the
Company an exclusive license to use the trade marks "Max Brand" and "HeadsUp"
brands of OTCs and the exclusive right to distribute products bearing such
names. In consideration for this Agreement, the Company agreed to pay an annual
license fee to PDK payable, at the option of the Company, either in cash or in
shares of the Company's common stock. The license fee due during the most
recently completed fiscal year will be paid in shares. In January 1999, the
agreement was amended to provide the Company the option to pay its annual
license fee in shares of Series B Preferred Stock. On May 1, 1999, the Company
amended its exclusive supply and licensing agreement with PDK, which amendment
provided for PDK to supply the Company with products at prices specified in the
amendment and prohibited the Company from supplying certain products to
convenience stores.
Since November 1997, the Company has leased 10,000 square feet of
executive offices, a distribution center and warehouse space at 60 Davids Drive,
Hauppauge, NY 11788 from PDK on a month-to-month basis at a monthly rent of
$5,000.
In August, 1998 the Company guaranteed the obligations of PDK and its
affiliates under a credit agreement with its bank. The credit agreement provides
for borrowings of up to $10,000,000 under a line of credit and $8,500,000 under
a term agreement.
-22-
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Report of Independent Certified Public Accountants F-1
Balance sheet as of March 31, 1999 F-2
Statements of operations for the years ended March 31, 1999
and March 31, 1998 F-3
Statements of stockholders' equity for the years ended
March 31, 1999 and March 31, 1998 F-4
Statements of cash flows for the years ended March 31, 1999
and March 31, 1998 F-5
Notes to financial statements F-6 - F-13
-23-
<PAGE>
(a) (2) Exhibits
1.01* Form of Underwriting Agreement.
3.01* Certificate of Incorporation of the Company dated April 25, 1995
3.02* Certificate of Amendment of Certificate of Incorporation of the
Company dated November 13, 1995.
3.03* Certificate of Amendment of Certificate of Incorporation of the
Company dated December 13, 1995.
3.04* Certificate of Amendment of Certificate of Incorporation of the
Company dated January 30, 1996.
3.05* By-Laws of the Company.
3.06* Form of Certificate of Designation of Series A Preferred Stock.
3.07* Form of Certificate of Designation of Series B Preferred Stock.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Specimen Certificate for shares of Series A Preferred Stock.
4.03* Specimen Certificate for shares of Series B Preferred Stock.
4.04* Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.
4.05* Form of Warrant Agreement by and among the Company and American
Stock Transfer & Trust Company.
4.06* Form of Underwriters' Unit Purchase Option.
10.01* Asset Purchase Agreement between the Company and PDK dated as of
October 31, 1995
10.02* Supply Agreement between the Company and PDK dated as of October
31, 1995.
10.03* Lease between the Company and PDK dated as of October 31, 1995.
10.04* Promissory Note of the Company, issued to PDK, dated as of October
31, 1995.
10.05* Employment Agreement between the Company and Thomas A. Keith dated
as of October 31, 1995, as amended.
10.06* Employment Agreement between the Company and Raymond A. Aiken dated
as of October 31, 1995, as amended.
10.07* Form of December, 1995 Bridge Loan Agreements.
10.08* Form of Selected Dealers' Agreement.
10.09* 1995 Stock Plan.
10.10* Sales Agency Agreement between PDK and International Sales
Association, Inc. dated as of April 3, 1995, as amended.
10.11** Exclusive Supply Agreement between the Company and Superior
Supplements, Inc. dated as of May 31, 1996.
10.12** Amendment to Supply Agreement between the Company and PDK dated as
of December 13, 1996.
10.13** Exclusive Supply and Licensing Agreement between the Company and
PDK dated March 24, 1997.
10.14** Marketing Agreement between the Company and Body Dynamics, Inc.
dated May 5, 1997.
10.15*** Amendment to Exclusive Supply and Licensing Agreement between the
Company and PDK dated as of April 1, 1998
-24-
<PAGE>
10.16**** Second Amendment to Supply and Licensing Agreement between the
Company and PDK Labs Inc. dated as of November 1998.
10.17 Third Amendment to Supply and Licensing Agreement between the
Company and PDK Labs Inc. dated as of January 1999.
10.18***** Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc.
and European American Bank dated as of August 20, 1997 and
certain material exhibits thereto.
10.19**** First Amendment and Waiver to Credit Agreement by and among PDK
Labs Inc., Futurebiotics, Inc., European American Bank, Bank Leumi
USA and National Bank of Canada dated as of February 18, 1998.
10.20**** Second Amendment to Credit Agreement by and among PDK Labs Inc.,
Futurebiotics Inc. and European American Bank dated as of August
13, 1998.
10.21 Company Guaranty to European American Bank dated August 13, 1998.
-25-
<PAGE>
* Incorporated by Reference to the Company's Registration Statement on Form
SB-2, No. 33-80659.
** Incorporated by Reference to the Company's Form 10-KSB for the year ended
March 31, 1997.
*** Incorporated by Reference to the Company's Form 10-KSB for the year ended
March 31, 1998
**** Incorporated by Reference to PDK Labs Inc. Form 10K for the year ended
November 30, 1998
***** Incorporated by Reference to PDK Labs Inc. Form 10K for the year ended
November 30, 1997
(b) Reports on Form 8-K.
None.
-26-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Compare Generiks, Inc.
Report of independent certified public accountants F-1
Balance sheet as of March 31, 1999 F-2
Statements of operations for the years
ended March 31, 1999 and 1998 F-3
Statement of stockholders' equity for the
years ended March 31, 1999 and 1998 F-4
Statements of cash flows for the years
ended March 31, 1999 and 1998 F-5
Notes to financial statements F-6 - F-12
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Compare Generiks, Inc.
Hauppauge, New York
We have audited the balance sheet of Compare Generiks, Inc. as of March 31,
1999, and the related statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compare Generiks, Inc. as of
March 31, 1999 and the results of its operations and its cash flows for each of
the two years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
May 7, 1999
F-1
<PAGE>
COMPARE GENERIKS, INC.
BALANCE SHEET
MARCH 31, 1999
ASSETS (Note 11)
------
CURRENT ASSETS:
Cash and cash equivalents $ 58,669
Accounts receivable, net of $10,000 allowance for
doubtful accounts 2,021,858
Inventories 7,750,282
Prepaid expenses and other current assets 88,071
Deferred income tax asset (Note 6) 94,000
-----------
Total current assets 10,012,880
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES (Note 3) 60,000
PROPERTY AND EQUIPMENT (Note 4) 53,872
INTANGIBLE ASSETS, net (Note 5) 597,409
OTHER ASSETS 115,633
-----------
$10,839,794
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 168,171
Due to affiliate 6,323,642
Income tax payable 10,761
Dividends payable (Note 7) 30,000
-----------
Total current liabilities 6,532,574
-----------
LICENSE FEE PAYABLE (Note 11) 500,000
-----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
STOCKHOLDERS' EQUITY: (Note 7)
Common stock, $.0001 par value; authorized 25,000,000
shares; 4,200,559 issued and outstanding 420
Preferred stock - Class A - $.0001 par value; authorized
10,000,000 shares; 5,000,000 issued and outstanding 500
Preferred stock - Class B - $.0001 par value; liquidation
preference of $500,000; authorized 1,000,000 shares;
500,000 issued and outstanding 50
Additional paid-in capital 5,773,313
Deficit (1,962,063)
-----------
3,812,220
Less stock subscription receivable (5,000)
-----------
3,807,220
-----------
$10,839,794
===========
See notes to financial statements
F-2
<PAGE>
COMPARE GENERIKS, INC.
STATEMENTS OF OPERATIONS
Years Ended
March 31,
------------------------------
1999 1998
----------- -----------
REVENUE (Note 12) $31,722,659 $ 9,150,739
----------- -----------
COSTS AND EXPENSES: (Notes 4, 5, 9 and 11)
Cost of sales 28,044,742 4,357,209
Selling, general and administrative 3,245,238 4,564,177
----------- -----------
31,289,980 8,921,386
----------- -----------
OPERATING INCOME 432,679 229,353
----------- -----------
OTHER INCOME (EXPENSE):
Loss on impairment of marketable
securities (Note 3) (399,000) (734,000)
Interest expense (2,129) (1,577)
Interest income 16 9,382
----------- -----------
(401,113) (726,195)
----------- -----------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION (BENEFIT) 31,566 (496,842)
INCOME TAX PROVISION (BENEFIT) (Note 6) 25,000 (87,000)
----------- -----------
NET INCOME (LOSS) $ 6,566 $ (409,842)
=========== ===========
NET LOSS PER SHARE (Note 7) $(.01) $(.12)
===== =====
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING (Note 7) 4,021,030 3,890,000
========== ==========
See notes to financial statements
F-3
<PAGE>
COMPARE GENERIKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999 AND 1998
(Notes 3, 7 and 11)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Common Stock Class A Class B
25,000,000 Shares 10,000,000 Shares 1,000,000 Shares
$.0001 Par Value $.0001 Par Value $.0001 Par Value
------------------ ----------------- ---------------- Additional
Par Par Par Paid-in
Shares Value Shares Value Shares Value Capital Deficit
--------- ------ --------- ----- ------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 3,890,000 $ 389 5,000,000 $500 500,000 $50 $5,273,344 $(1,438,787)
Dividends - - - - - - - (60,000)
Realized loss on investment
available-for-sale securities - - - - - - - -
Net loss - - - - - - - (409,842)
--------- ----- --------- ---- ------- --- ---------- -----------
Balance, March 31, 1998 3,890,000 389 5,000,000 500 500,000 50 5,273,344 (1,908,629)
Common stock issued
to satisfy obligation 310,559 31 - - - - 499,969 -
Dividends - - - - - - - (60,000)
Net income - - - - - - - 6,566
--------- ----- --------- ---- ------- --- ---------- -----------
Balance, March 31, 1999 4,200,559 $ 420 5,000,000 $500 500,000 $50 $5,773,313 $(1,962,063)
========= ===== ========= ==== ======= === ========== ===========
<CAPTION>
Unrealized
Holding
Gain on
Available-
for-Sale Subscription
Securities Receivable Total
---------- ------------ ----------
<S> <C> <C> <C>
Balance, March 31, 1997 $ 63,000 $(5,000) $3,893,496
Dividends - - (60,000)
Realized loss on investment
available-for-sale securities (63,000) - (63,000)
Net loss - - (409,842)
-------- ------- ----------
Balance, March 31, 1998 - (5,000) 3,360,654
Common stock issued
to satisfy obligation - - 500,000
Dividends - - (60,000)
Net income - - 6,566
-------- ------- ----------
Balance, March 31, 1999 $ - $(5,000) $3,807,220
======== ======= ==========
</TABLE>
See notes to financial statements
F-4
<PAGE>
COMPARE GENERIKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,566 $ (409,842)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 325,931 324,357
Non-cash license fee 500,000 500,000
Loss on impairment of marketable securities 399,000 734,000
Deferred tax benefit -- (94,000)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (914,098) (500,811)
Inventories (5,936,776) (1,171,084)
Prepaid expenses and other current assets 97,268 (19,699)
Other assets 110,367 63,706
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 85,204 (513,199)
Due to affiliate 5,332,112 411,111
Income taxes payable 10,761 --
----------- -----------
Total adjustments 9,769 (265,619)
----------- -----------
Net cash provided by (used in) operating activities 16,335 (675,461)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- (22,690)
----------- -----------
Net cash used in investing activities -- (22,690)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (65,000) (85,000)
----------- -----------
Net cash used in financing activities (65,000) (85,000)
----------- -----------
Net decrease in cash and cash equivalents (48,665) (783,151)
CASH AND CASH EQUIVALENTS, beginning of year 107,334 890,485
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 58,669 $ 107,334
=========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
COMPARE GENERIKS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
1. Organization and Nature of Operations:
Compare Generiks, Inc., a Delaware Corporation (the "Company") is engaged
in the distribution, marketing and sale of dietary supplements and
over-the-counter nonprescription pharmaceuticals.
2. Summary of Significant Accounting Policies:
a. Inventories
Inventories, consisting of finished goods, are valued at lower of cost
(first-in, first-out method) or market.
b. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs of
property and equipment are charged to operations and major improvements are
capitalized. Upon retirement, sale or other disposition of property and
equipment, the cost and accumulated depreciation are eliminated from the
accounts and gain or loss is included in operations.
Intangible assets are amortized using the straight-line method over
the following periods:
Customer list 5 years
Covenant not to compete 4 years
Patents and trademarks 7 years
Goodwill 10 years
Other 3-5 years
c. Income taxes
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax basis of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
d. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
e. Marketable securities
Available-for-sale securities are carried at fair value with the
unrealized holding gain (loss), net of deferred income taxes, included in
stockholders' equity. A decline in the market value of any available-for-sale
security below cost that is deemed other than temporary is charged to operations
resulting in the establishment of a new cost basis for the security.
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
f. 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 results could differ from those estimates.
g. Concentration of credit risk
Financial instruments which potentially expose the Company to credit
risk, as defined by Statement of Financial Accounting Standard No. 105 ("FAS
105"), consists primarily of trade accounts receivable. Wholesale distributors
of dietary supplements and over-the-counter pharmaceuticals account for a
substantial portion of trade receivables. The risk associated with this
concentration is limited due to the large number of distributors and their
geographic dispersion.
h. Advertising
The Company charges advertising costs to expense as incurred.
Advertising costs approximated $106,000 and $171,000 for the years ended March
31, 1999 and 1998, respectively.
i. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
3. Investment in Available-For-Sale Securities:
At March 31, 1999, investment in available-for-sale securities consisted
of 500,000 shares of common stock of Superior Supplements, Inc. ("Superior").
The shares were acquired in 1996 for $100,000 cash and the issuance of 200,000
shares of common stock (valued at $1,050,000).
During the years ended March 31, 1999 and 1998, there was a decline in
the market value of the common stock of Superior which, in the opinion of the
Company's management, is considered to be other than temporary. Accordingly, the
investment was written down to its estimated realizable value. The Company
recorded a charge to operations of $399,000 and $734,000 during the years ended
March 31, 1999 and 1998, respectively, for this impairment.
4. Property and Equipment:
Property and equipment, at cost, consist of the following at March 31,
1999:
Machinery and equipment $ 37,797
Furniture and fixtures 24,229
Leasehold improvements 17,456
---------
79,482
Less accumulated depreciation and amortization 25,610
---------
$ 53,872
=========
F-7
<PAGE>
4. Property and Equipment: (Cont'd)
Depreciation expense for the years ended March 31, 1999 and 1998
approximated $11,300 and $9,700, respectively.
5. Intangible Assets:
Intangible assets consist of the following at March 31, 1999:
Customer lists $1,350,000
Covenant not to compete 41,667
Patents and trademarks 74,320
Goodwill 176,242
Other 30,000
----------
1,672,229
Less accumulated amortization 1,074,820
----------
$ 597,409
==========
Amortization expense approximated $314,700 for each of the years ended
March 31, 1999 and 1998.
6. Income Taxes:
The provision (benefit) for income taxes consists of the following:
Years Ended
March 31,
------------------------------
1999 1998
---------- ---------
Current:
Federal $ 20,000 $ -
State 5,000 7,000
---------- ---------
25,000 7,000
---------- ---------
Deferred:
Federal - (9,000)
State - (85,000)
---------- ---------
- (94,000)
---------- ---------
$ 25,000 $ (87,000)
========== =========
Net deferred income tax asset (liability) is composed of the following at
March 31, 1999:
Investment in available-for sale securities $ 404,000
Intangible assets 256,000
Other (7,000)
Valuation allowance (559,000)
---------
$ 94,000
=========
The valuation allowance decreased by $3,000 during the year ended March
31, 1999.
The Company's effective tax rate for the years ended 1999 and 1998
differs from the Federal Statutory regular tax rate, principally as a result of
adjustments to the valuation allowance for the net deferred tax asset.
F-8
<PAGE>
7. Stockholders' Equity:
a. Capitalization
Pursuant to an amendment of the Company's certificate of
incorporation, the Company has authorized shares of common stock of 25,000,000,
Series A Preferred Shares to 10,000,000 and authorized 10,000,000 shares of
Series B Preferred Shares. All stock has a $.0001 par value. Each share of
common and preferred has one vote in all matters.
The Series A Preferred Shares rank senior to all common stock, do not
have any right to the payment of any dividend, and has no liquidation
preference.
The Series B Preferred Stock earns cumulative annual dividends of 12%
or $.12 per share and is callable by the Company after one year from the date of
issuance. The Series B Preferred Stock ranks senior to all series of preferred
and common stock. In the event of any voluntary or involuntary liquidation of
the Company each share shall have a liquidation preference of $1.00. The Series
B Preferred Stock is held by PDK Labs, Inc. ("PDK"), which is a major supplier
of product to the Company and shares certain common management with the Company.
b. Stock option plan
The Company has adopted, subject to shareholder approval, a Stock
Option Plan (the "Plan") covering 2,000,000 shares of common stock of the
Company. Options under the Plan are granted at terms set by the Board of
Directors at the time of issuance. To date, no options have been granted under
the Plan.
c. Warrants/Options
(i) Class A Warrants
In March 1996, the Company completed a public offering which
included 345,000 Class A warrants, each entitling the holder to purchase one
share of common stock at $4.00 per share. The warrants are exercisable at any
time during the four year period commencing one year from the date of offering.
The Class A Warrants are redeemable by the Company, for $.05 per warrant, if the
average price of the common stock equal or exceeds $10.00 per share for any
twenty trading days within a period of thirty consecutive trading days ending
five days prior to the date of the notice of redemption.
(ii) Underwriter's warrants
The Company issued to an underwriter warrants to purchase an
additional 30,000 units at an exercise price of $12.00 per unit. Each unit
consists of two shares of common stock and one Class A warrant. These warrants
are exercisable for a period of four years, commencing one year from the date of
the public offering.
(iii) Bridge lender warrants
The Company issued 3,000,000 Class A Warrants in connection
with the conversion of $30,000 of convertible bridge notes. The value of these
notes has been recorded as additional-paid-in capital.
F-9
<PAGE>
7. Stockholders' Equity: (Cont'd)
c. Warrants/Options (Cont'd)
(iv) Employee options
The Company has granted an employee options to purchase 100,000
shares of common stock at an exercise price equal to the price of the common
shares in the initial public offering ($5.00 per share). The options are
exercisable during the term of employment.
d. Net loss per share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128) requires dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock
options or convertible securities were exercised or converted into common stock.
Basic and diluted loss per share amounts were equivalent for the years
ended March 31, 1999 and 1998.
Net loss per share attributable to common shareholders was computed as
follows:
Years Ended
March 31,
--------------------------
1999 1998
---------- ---------
Net income (loss) $ 6,566 $(409,842)
Dividends on preferred shares 60,000 60,000
---------- ---------
Net loss attributable to common shareholders $ (53,434) $(469,842)
========== =========
e. Reserved shares
At March 31, 1999, the Company has 5,435,000 shares of common stock
reserved for future issuances.
8. Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
9. Retirement Plans:
Qualified employees are eligible to participate in a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
Plan is voluntary, and any participant may elect to contribute up to 17% of
earnings. The Company may, at its discretion, contribute up to 3% of any
employee's earnings. The Company contributed approximately $16,200 and $8,800 to
the Plan for the years ended March 31, 1999 and 1998, respectively.
F-10
<PAGE>
10. Supplementary Information - Statement of Cash Flows:
Cash paid was as follows:
Years Ended
March 31,
----------------------
1999 1998
------- -------
Interest $ 2,129 $ 1,577
======= =======
Income taxes $ 1,121 $11,273
======= =======
During the year ended March 31, 1999, the Company issued 310,559 shares
of common stock to satisfy an outstanding obligation of $500,000.
11. Commitments and Contingencies:
a. Supply agreements
Pursuant to various Supply Agreements, expiring in 2001 and 2002. PDK
Labs Inc. ("PDK") supplies certain of CGI's products at prices based upon PDK's
material cost plus a specified mark-up. In addition, PDK is entitled to a
royalty based upon the sales of certain products. In consideration for these
agreements, CGI agreed to pay an annual license fee of $500,000 to PDK Labs,
Inc. This fee is payable, at the option of CGI, either in cash or in shares of
CGI's common or preferred stock. During the year ended March 31, 1999, the
Company issued to PDK 310,559 shares of common stock to satisfy the 1998 fee.
The Company was party to an amended Exclusive Supply Agreement with a
non-affiliated distributor (the "Distributor") under which PDK Labs, Inc. was
granted the right to sell certain products directly to the Distributor's
customers. This Agreement was terminated in March 1998, and subsequent to
November 30, 1998 PDK Labs, Inc. and the Distributor entered into a settlement
under which CGI incurred no liability. Royalty expense incurred under this
agreement approximated $1,825,000 during the year ended March 31, 1998.
b. Guarantee of indebtedness
The Company is guarantor to certain bank facilities of PDK and its
subsidiary. The facilities include a revolving credit agreement, providing for
aggregate borrowings of up to $10,000,000 and a term loan facility providing for
aggregate borrowings of up to $8,500,000. In addition, the lending institutions
were granted a security interest in the Company's assets. At March 31, 1999,
amounts outstanding under these facilities approximated $4,635,000.
12. Government Regulation:
The Company's products and/or its business operations are subject to
regulation by one or more federal agencies, including the Federal Trade
Commission ("FTC"), the United States Food and Drug Administration ("FDA"), the
Consumer Product Safety Commission, Federal Drug Enforcement Administration
("DEA"), and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities in which the
Company's products are sold.
F-11
<PAGE>
12. Government Regulation: (Cont'd)
Several of the raw materials included in the Company's products are
categorized as List 1 Chemicals by the Chemical Diversion Action of 1988. As
such, the importation of these chemicals requires the filing of importation
documents with the DEA. In addition, certain foreign countries require a "letter
of non-objection" for the export of List 1 Chemicals. In 1998, the DEA advised
PDK, the Company's principal supplier, that the DEA would not sign a letter of
non-objection requested by PDK relating to the intended importation by the
Company of a List 1 Chemical. Without the letter of non-objection PDK is unable
to import the List 1 Chemical. To date, PDK has been able to meet its purchase
requirements through domestic sources.
The DEA has been given the statutory authority to regulate all ephedrine,
pseudoephedrine, and PPA over-the-counter drug products. Registration with the
DEA is required for all companies engaged in the distribution of any products
containing ephedrine, pseudoephedrine, or PPA. On March 10, 1998, the Company
was notified by PDK that it had been notified by the DEA that they are
investigating PDK'S pending registration. PDK supplies virtually the Company's
entire product line pursuant to the agreements discussed in Note 11. The
investigation involves PDK's purchase and the Company's distribution of List 1
chemicals. To date, the DEA has taken no formal action on the registrations. If
the DEA denies PDK's and/or the Company's registration, then the Company and PDK
will have the right to appeal the decision administratively within the DEA and
thereafter, if unsuccessful, in federal court. If the final determination is to
deny the registration, then PDK would no longer be permitted to manufacture and
distribute products that contain List 1 Chemicals.
The Company has applied for its own registration with the DEA. That
registration remains pending, and the Company continues to operate under an
exemption. Should the DEA ultimately deny the Company's registration, it would
no longer be permitted to distribute these products.
Sales of products containing List 1 Chemicals approximated $28,673,000 of
revenue for the year ended March 31, 1999.
The FDA has proposed regulations which remain pending but, if adopted,
would remove ephedrine-containing over-the-counter drug products which are
marketed and sold by the Company from the over-the-counter market. During this
past year, several states have already taken action to restrict, in some
fashion, the sale of ephedrine, pseudoephedrine, and/or phenylpropanolamine
("PPA") containing products.
F-12
<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.
Dated: New York, New York
June 24, 1999
COMPARE GENERIKS, INC.
By: /s/ Thomas A. Keith
-------------------
Thomas A. Keith
President, Chief Executive Officer,
Chief Financial Officer and Director
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas A. Keith Director June 24, 1999
- ----------------------
Thomas A. Keith
/s/ Theresa Giove Director June 24, 1999
- ----------------------
Theresa Giove
/s/ Raveendra Nandigam Director June 24, 1999
- ----------------------
Raveendra Nandigam
/s/ Virginia Sims Director June 24, 1999
- ----------------------
Virginia Sims
<PAGE>
AMENDMENT AGREEMENT
THIRD AMENDMENT AGREEMENT, dated as of January 4, 1999 by and between
PDK Labs Inc., a New York corporation, with offices at 145 Ricefield Lane,
Hauppauge, NY 11788 ("PDK") and Compare Generiks, Inc., a Delaware corporation,
with offices at 300 Oser Avenue, Hauppauge, NY 11788 ("CGI").
WHEREAS, PDK and CGI have heretofore entered into an Exclusive Supply
and Licensing Agreement, dated as of March 24, 1997, which has been amended
pursuant to the Amendment Agreements dated as of April 1, 1998 and November 1,
1998 (the "Agreement");
WHEREAS, Section 6.1(c) of the Agreement requires CGI to pay to PDK a
license fee of $500,000 ("License Fee") for each Agreement Year (as defined in
the Agreement) in consideration of the License (as defined in the Agreement)
granted by PDK to CGI which License Fee is payable in cash or common stock of
CGI
WHEREAS, the parties desire to grant CGI the additional option of
paying the License Fee in shares of its Series B Preferred Stock. The terms
which are not defined herein shall have the respective meanings ascribed to them
in the Agreement.
NOW, THEREFORE, for valid and good consideration, the parties hereto
agree as follows:
1. The second sentence of Section 6.1(c) of the Agreement shall be
deleted in its entirety and shall be replaced with the following sentence:
"Such License Fee shall be payable, at the sole option of CGI,
either in cash or satisfied by the issuance of (i) 500,000 shares
of Series B Preferred Stock, par value
<PAGE>
$.0001 per share of CGI, or (ii) such aggregate number of shares
of common stock, par value $.0001 per share of CGI as shall be
equal to the License Fee calculated by assuming a per share value
of fifty percent (50%) of the "Market Price" of CGI's common
stock."
2. Except as hereinabove amended, all of the terms and provisions of
the Agreement shall remain in full force and effect.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York, without regard to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
as of the day and year first above written.
PDK LABS INC.
By: /s/ Reginald Spinello
----------------------------
Reginald Spinello, President
COMPARE GENERIKS, INC.
By: /s/ Thomas A. Keith
----------------------------
Thomas A. Keith, President
<PAGE>
GUARANTY
WHEREAS, European American Bank and the parties identified. as "Banks"
therein (the "Banks") have entered into a Credit Agreement (the "Credit
Agreement", dated August 20, 1997, with PDK Labs Inc. and Futurebiotics, Inc.
(the "Debtor); and
WHEREAS, under the terms of the Credit Agreement, the Banks have agreed
to extend credit to the Debtors, which indebtedness is evidenced by certain
promissory notes of the Debtors (the "Notes"), to be dated on and after August
13, 1998, in the aggregate principal amount of $18,500,000;
WHEREAS, the undersigned (the "Guarantor") has derived or will derive
direct benefit from the extension of credit to the Debtors; and
WHEREAS, the Banks will not extend such credit unless, among other
conditions, the undersigned Guarantor shall have executed and delivered this
Guaranty,
NOW, THEREFORE, in consideration of the Banks extending such credit to
the Debtors and other benefits accruing to the Guarantor, the receipt and
sufficiency of which are hereby acknowledged, the Guarantor hereby makes the
following representations and warranties to the Banks and hereby covenants and
agrees with the Banks as follows:
1. Subject to the provisions of Section 13 hereof, the Guarantor
irrevocably and unconditionally, guarantees to the Banks (i) timely payment in
full by Debtors to the Banks of all payments due pursuant to the Notes (it being
understood that this is a guarantee of payment and not of collection), and (ii)
timely payment and/or performance, as applicable, of all other
1
<PAGE>
payment and performance obligations of Debtors pursuant to the Notes, the Credit
Agreement and all other documents and instruments executed in connection
therewith, or pursuant to any amendment, modification or supplement to any of
the foregoing (all of the foregoing under clauses (i) and (ii) being
collectively referred to as the "Guaranteed Obligations"). If Debtors shall
default in payment of any amount due pursuant to the Notes beyond any applicable
grace period or otherwise default beyond any applicable grace period in the
performance of the Guaranteed Obligations, the Guarantor irrevocably and
unconditionally agrees to pay to the Banks upon demand the amount in default or
to cure the default if it is a non-payment default (it being understood,
however, that a non-payment may result in the acceleration of all indebtedness
and a demand for payment in full by the Guarantor under the Guaranty). The
Guarantor understands, agrees and confirms that the Banks may enforce this
Guaranty up to the full amount of the Guaranteed Obligations owing against the
Guarantor without proceeding against the Debtors, or any of them, against any
security for the Guaranteed Obligations or against any other guarantor under any
other guarantee covering the Guaranteed Obligations.
2. The Guarantor hereby acknowledges the Guaranteed Obligations and
hereby expressly waives: (i) presentment and demand for payment of the principal
of or interest thereon or any other sums of any nature whatsoever with respect
thereto, (ii) notice of acceptance of this Guaranty, or of the extension of
credit to the Debtors, (iii) notice of any default hereunder or under any
agreements between the Banks and the Debtors with respect to the Guaranteed
Obligations, and of all indulgences with respect thereto, (iv) demand on the
Debtors for observance or performance of, or enforcement of any terms or
provisions of any agreements between the Banks and the Debtors with respect to
the Guaranteed Obligations, (v) to the
2
<PAGE>
maximum extent permitted by applicable law and except as otherwise provided
herein, the benefit of all laws now or hereafter in effect in any way limiting
or restricting the liability of the Guarantor under this Guaranty, including any
and all right to stay of execution and exemption of property in any action to
enforce the liability of the Guarantor hereunder and (vi) any other event or
circumstance which may constitute a release of or defense to the obligors under
any of the Guaranteed Obligations or the Guarantor under this Guaranty. In the
event this Guaranty shall be enforced by suit or otherwise, the Guarantor shall
pay the Banks, on demand, for all reasonable fees and expenses incurred by the
Banks in connection therewith, including, without limitation, the reasonable
fees and expenses of the Banks' counsel.
3. The Banks, in their sole and absolute discretion, may at any time
and from time to time without the consent of, or notice to, the Guarantor
without incurring responsibility to the Guarantor, without impairing or
releasing the obligations of Guarantor hereunder, upon or without any terms or
conditions. and in whole or in part (but in all events subject to the applicable
provisions of the Credit Agreement);
(a) by agreement with the Debtors, change the manner, place or
terms of payment of, and/or change or extend the time of payment of, increase
the amount of, or renew or alter any of the Guaranteed Obligations, any security
therefor, or any liability incurred directly or indirectly in respect thereof,
and the Guaranty herein made shall apply to the Guaranteed Obligations as so
changed, extended, increased, renewed or altered;
(b) exercise or refrain from exercising any rights against the
Debtors, or any of them or others or otherwise act or refrain from acting;
3
<PAGE>
(c) release, settle or compromise any of the Guaranteed
Obligations, any security therefor or any liability (including any of those
hereunder) incurred directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the payment of any
liability (whether due or not) of Debtors, or any of them, to creditors of
Debtors, or any of them, other than Guarantor;
(d) consent to or waive any breach of, or any act, omission or
default under, the Credit Agreement or the Notes, or any of the instruments or
agreements referred to therein, or otherwise amend, modify or supplement any of
the foregoing;
(e) agree to the substitution, exchange, release or other
disposition of all or any part of any property securing the Guaranteed
Obligations;
(f) make advances for the purposes of performing any term or
covenant contained in any agreement between the Banks and the Debtors with
respect to which the Debtors may be in default;
(g) assign or otherwise transfer all or any part of the Guaranteed
Obligations; and
(h) deal in all respects with the Debtors as if this Guaranty were
not in affect.
4. No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations or of any security therefor shall affect, impair
or be a defense to this Guaranty, and this Guaranty is a primary obligation of
the Guarantor.
5. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of the
Banks (whether acting individually or through an agent), or
4
<PAGE>
any of them, in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein expressly specified are cumulative and not exclusive of any rights or
remedies which the Banks (whether acting individually or through an agent), or
any of them, or any subsequent holder of any Guaranteed Obligations would
otherwise have. No notice to or demand on the Guarantor in any case shall
entitle the Guarantor to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the rights of the Banks (whether
acting individually or through an agent), or any of them, or any holder of any
Guaranteed Obligations to any other or further action in any circumstances
without notice or demand.
6. This is a guarantee of payment and not of collection, and the
liability of the Guarantor under this Guaranty shall be primary, direct and
immediate, and not conditional or contingent upon pursuit by the Banks of any
remedies they may have against the Debtors, or any of them, with respect to the
Guaranteed Obligations, whether pursuant to the terms thereof or by law, or
against any other person or entity or against any other collateral. Without
limiting the generality of the foregoing, the Banks shall not be required to
make any demand on the Debtors, or any of them, or to sell at foreclosure or
otherwise pursue or exhaust their remedies against the property securing the
Debtor's obligations for the Guaranteed Obligations or against the Debtors, or
any of diem, or against any other person or entity or against any other
collateral whatsoever, before, simultaneously with or after enforcing their
rights and remedies hereunder against the Guarantor, Any one or more successive
or concurrent actions may be brought hereon against the Guarantor
5
<PAGE>
either in the same action, if any, brought against the Debtors, or any of them,
or in separate actions, as often as the Banks may deem advisable.
7. The Guarantor represents and warrants to the Banks that:
(a) It is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all corporate power and authority to own all of its properties and to carry on
its business as presently conducted and as contemplated by this Guaranty and has
corporate power and authority to execute and deliver this Guaranty and to
perform its obligations hereunder.
(b) This Guaranty is and will be the legal, valid and binding
obligation of the Guarantor, enforceable in accordance with its terms, and the
execution, delivery and performance of this Guaranty and such other agreements,
documents and instruments and the performance of the transactions contemplated
hereunder have been and will be duly and validly authorized and approved by the
Board of Directors, and do not and will not require any consent or approval of
any third party or of the stockholders of the Guarantor other than consents
which have previously been obtained.
(c) The execution and delivery of this Guaranty do not, and the
consummation of the transactions contemplated hereby will not, constitute a
violation of, and are not, and will not, be a default under or conflict with the
terms of the Certificate of Incorporation or By-laws of the Guarantor, or any
contract, lease, indenture, agreement, order, judgment, or decree to which it is
a party or by which it is bound or to which any of its assets are subject, which
in any case, or in the aggregate, could have a material adverse effect on its
ability to carry out its obligations under this Guaranty, and do not, and will
not, violate or constitute a default under any statute,
6
<PAGE>
rule, regulation, order or ordinance of any governmental, judicial or arbitral
body, which in any case, or in the aggregate, could have a material adverse
effect on its ability to carry out its obligations under this Guaranty.
(d) Neither the execution, delivery or performance of this
Guarantee, nor the consummation of the transactions contemplated hereby,
requires the Guarantor to obtain any consent, authorization, approval or
registration under any law, rule or regulation, other than as contemplated
hereby or as previously obtained.
(e) There is no suit, action or legal, administrative. arbitration
or other proceeding of any nature pending, or, to the knowledge of the
Guarantor, threatened, against it which might affect the legality or validity of
this Guaranty, or the transactions contemplated hereby, and there is not any
factual basis known to it for any such suit, action or proceeding.
8. This Guaranty shall be binding upon the Guarantor and its successors
and assigns and shall inure to the benefit of the Banks and their respective
successors and permitted assigns. This Guaranty may not under any circumstances
be assigned by the Guarantor to any other person or entity without the express
prior written consent of each of the Banks.
9. Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated except with the written consent of each of the
Banks.
10. In the event that either Bank shall receive any payments on account
of any of the Guaranteed Obligations, whether directly or indirectly, and it
shall subsequently be determined that such payments were for any reason
improper, or a claim shall be made against such Bank that the same were
improper, and such Bank pursuant to court order shall return the same, the
Guarantor shall be liable, with the same effect as if the said payment had never
been paid to, or
7
<PAGE>
received by such Bank, for the amount of such repaid or returned payments,
notwithstanding the fact that they may theretofore have been credited on account
of the Guaranteed Obligations or any of them. Moreover, this Guaranty shall
remain effective or be reinstated, as the case may be, if at any time payment or
performance, or any part thereof, or any or all of the Guarantor's obligations
under this Guaranty is rescinded or must otherwise be restored or returned by
the Banks, or any of them, in connection with the insolvency, bankruptcy or
reorganization of the Guarantor or otherwise, all as though such payment or
performance had not been rendered. Notwithstanding any compromise, release,
discharge, settlement, extension, or adjustment of the Debtor's obligations or
any amendment, modification or stay of the Banks' rights against the Debtor that
may occur in any bankruptcy or reorganization case or proceeding concerning the
Debtor, whether or not assented to by the Banks, the Guarantor shall remain
fully obligated to discharge the Guarantor's obligations hereunder in accordance
with the terms of this Guaranty in effect on the date hereof. The Guarantor
assumes all risks of a bankruptcy or reorganization with respect to the Debtor.
In furtherance of this Section, the Banks shall not otherwise indicate the
satisfaction of the obligations of the parties represented herein until the
expiration of all applicable bankruptcy-related periods of time during which the
Debtor, the Guarantor or any third party would have the right to commence a
bankruptcy or reorganization proceeding with regard to the Debtor or the
Guarantor.
11. All notices and other communications provided for under this
Guaranty and under any other document executed in connection herewith shall be
in writing (including telegraphic or telefax communication) and, unless the
party to be notified otherwise notifies the other party in writing as provided
herein, notices shall be given by telecopier, by certified or registered mail or
8
<PAGE>
by recognized overnight delivery service. If such notice is delivered to the
Guarantor such notice shall be addressed to the Guarantor at 60 Davids Drive,
Hauppauge, New York 11788, telecopier (516) 273-0021, Attn: Thomas A. Keith,
President and, if to the Banks, at the Agent's address listed on the signature
pages of the Credit Agreement; or as to each party, at such other address as
shall be designated by such party in a written notice to the other parties
complying as to delivery with the terms of this Section 11. Notices shall be
effective (a) if given by registered or certified mail, on the third day after
deposit in the mails with postage prepaid, addressed as aforesaid; (b) if given
by recognized overnight delivery service, on the business day following deposit
with such service, addressed as aforesaid; and (c) if given by telecopy, when
the telecopy is transmitted to the telecopy number, as aforesaid; provided that
all notices to the Banks shall be effective on receipt.
12. This Guaranty and the rights and obligations of the Banks and of
the undersigned hereunder shall be governed and be construed in accordance with
the laws of the State of New York applicable to agreements made and to be wholly
performed in the State of New York. The Guarantor hereby irrevocably submits to
the jurisdiction of any New York State or United States Federal Court sitting in
New York County, Nassau County or Suffolk County over any action or proceeding
arising out of or relating to the Guaranty, and the Guarantor hereby irrevocably
agrees that all claims in respect of such action or proceeding may be heard and
determined in such New York State or Federal court. The Guarantor irrevocably
consents to service of any and all process in any such action or proceeding by
the mailing (by registered or certified mail) of copies of such process to it as
its address specified in Section 11. The Guarantor agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other
9
<PAGE>
jurisdictions by suit on the judgment or in any other manner provided by law.
The Guarantor further waives any objection to venue in such State or Federal
court and any objection to an action or proceeding in such State or Federal
Court on the basis of forum non conveniens. Nothing in this Section shall limit
the rights of any Bank to serve legal process in any other manner permitted by
law or affect the right of the Banks to bring any action or proceeding against
the Guarantor in the courts of any other jurisdiction. To the extent that the
Guarantor has or hereafter may acquire immunity from jurisdiction of any court
or from any legal process with respect to themselves or their property, the
Guarantor hereby waives, to the extent permitted by applicable law, such
immunity respect of its obligations hereunder.
13. Notwithstanding any other provision of this Guaranty, in no event
that the Guarantor's obligations hereunder exceed the sum of (i) the Debtor's
investment in the Guarantor as reflected on the Debtor's financial statements at
such time plus (ii) the aggregate amount of accounts payable by the Guarantor to
the Debtor at such time.
14. THE PARTIES HERETO WAIVE ANY RIGHT TO A TRIAL BY JURY IN CONNECTION
HEREWITH TO THE EXTENT PERMITTED BY APPLICABLE LAW.
IN WITNESS WHEREOF, the Guarantor have caused this Guaranty to be
executed and delivered as of August 13, 1998.
THE GUARANTOR:
COMPARE GENERIKS, INC.
By:
------------------------------------
, President
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the financial
statements and is qualified in its entirety by reference to such financial
statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 58,669
<SECURITIES> 0
<RECEIVABLES> 2,031,858
<ALLOWANCES> 10,000
<INVENTORY> 7,750,282
<CURRENT-ASSETS> 10,012,880
<PP&E> 79,482
<DEPRECIATION> 25,610
<TOTAL-ASSETS> 10,839,794
<CURRENT-LIABILITIES> 6,532,574
<BONDS> 0
0
550
<COMMON> 420
<OTHER-SE> 3,806,250
<TOTAL-LIABILITY-AND-EQUITY> 10,839,794
<SALES> 31,722,659
<TOTAL-REVENUES> 31,722,659
<CGS> 28,044,742
<TOTAL-COSTS> 28,044,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,129
<INCOME-PRETAX> 31,566
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 6,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,566
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
