<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27804
COMPARE GENERIKS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3289396
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number
incorporation or organization)
60 Davids Drive
Hauppauge, New York
---------------------------------------
(Address of principal executive offices)
11788
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(Zip Code)
----------
(800) 342-6555
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Class Outstanding at February 5, 1999
------------ -------------------------------
Common Stock 4,200,559
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COMPARE GENERIKS, INC.
----------------------
FORM 10-QSB
-----------
NINE MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Balance sheet............................................1
Statements of operations.................................2
Statements of cash flows.................................3
Notes to financial statements..........................4-6
Item 2. Management's discussion and analysis
of financial condition and results of
operations..........................................7-8
PART II - OTHER INFORMATION
Item 1. Legal proceedings.................................................9
SIGNATURES................................................................10
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COMPARE GENERIKS, INC.
----------------------
BALANCE SHEET
-------------
(Unaudited)
-----------
DECEMBER 31, 1998
-----------------
<TABLE>
<S> <C>
ASSETS
- ------
CURRENT ASSETS:
Accounts receivable, net of $10,000 allowance
for doubtful accounts $ 2,366,863
Inventories 8,524,077
Prepaid expenses and other current assets 188,139
Deferred tax asset 85,000
------------
Total current assets 11,164,079
PROPERTY AND EQUIPMENT, net 56,690
INVESTMENT IN AVAILABLE FOR SALE SECURITIES 110,000
INTANGIBLE ASSETS, net 676,074
OTHER ASSETS 215,725
------------
$ 12,222,568
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,129,699
Dividend payable 15,000
------------
Total current liabilities 8,144,699
------------
LICENSE FEE PAYABLE 375,000
------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
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;
authorized 10,000,000 shares; 500,000 issued
and outstanding 50
Additional paid-in capital 5,773,313
Accumulated deficit (2,066,414)
------------
3,707,869
Less stock subscription receivable (5,000)
------------
3,702,869
------------
$ 12,222,568
============
</TABLE>
-1-
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COMPARE GENERIKS, INC.
----------------------
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
-------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 22,687,943 $ 6,503,625 $ 8,073,237 $ 2,082,973
------------ ------------ ------------- -----------
COSTS AND EXPENSES:
Cost of sales 17,926,096 2,886,635 6,175,251 828,670
Selling, general and administrative 4,519,230 3,448,588 1,821,478 1,203,659
------------ ------------ ------------- -----------
22,445,326 6,335,223 7,996,729 2,032,329
------------ ------------ ------------- -----------
OPERATING INCOME 242,617 168,402 76,508 50,644
INTEREST INCOME/(EXPENSE), net (1,076) 8,131 (444) (588)
LOSS ON IMPAIRMENT OF
MARKETABLE SECURITIES (349,000) - (349,000) -
------------ ------------ ------------- -----------
(LOSS) EARNINGS BEFORE
PROVISION FOR INCOME TAXES (107,459) 176,533 (272,936) 50,056
PROVISION (BENEFIT) FOR
INCOME TAXES 5,326 (86,900) 1,661 9,100
------------ ------------ ------------- -----------
NET (LOSS) EARNINGS $ (112,785) $ 263,433 $ (274,597) $ 40,956
============ ============ ============= ============
NET (LOSS) EARNINGS PER SHARE $ (.04) $ .06 $ (.07) $ .01
============ ============ ============= ============
WEIGHTED AVERAGE
NUMBER OF SHARES
OF COMMON STOCK
OUTSTANDING 3,961,146 3,890,000 4,102,665 3,890,000
============ ============ ============= ============
</TABLE>
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COMPARE GENERIKS, INC.
----------------------
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (112,785) $ 263,433
------------ -------------
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Amortization and depreciation 244,448 297,427
Non-cash license fee 375,000 -
Deferred income tax provision (benefit) 9,000 (94,000)
Loss on impairment of marketable securities 349,000 -
Changes in operating assets and liabilities:
(Increase)/decrease in assets:
Accounts receivable (1,259,103) 11,056
Inventories (6,710,571) (2,479,547)
Prepaid expenses and other current assets (2,800) 14,193
Other assets 10,275 (31,500)
Increase in liabilities:
Accounts payable and accrued expenses 7,055,202 1,503,823
------------ -------------
Total adjustments 70,451 (778,548)
------------ -------------
Net cash used in operating activities (42,334) (515,115)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - (8,442)
------------ -------------
Net cash used in investing activities - (8,442)
------------ -------------
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 (107,334) (608,557)
CASH AND CASH EQUIVALENTS, beginning of period 107,334 890,485
------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 281,928
============ =============
</TABLE>
-3-
<PAGE>
COMPARE GENERIKS, INC.
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
NINE MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
1. Basis of Presentation:
----------------------
The interim financial statements furnished reflect all adjustments
which are, in the opinion of management, necessary to present a fair statement
of the financial position and results of operations for the nine month periods
ended December 31, 1998 and 1997. The financial statements should be read in
conjunction with the summary of significant accounting policies and notes to
financial statements included in the Company's Form 10-KSB for the fiscal year
ended March 31, 1998. The results of operations for the nine months ended
December 31, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. 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.
3. Inventories:
------------
Inventories, consisting principally of finished goods at December 31,
1998 have been estimated using the gross profit method.
4. Investment in Available-For-Sale Securities:
--------------------------------------------
At December 31, 1998, investment in available-for-sale securities
consists 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.
During the three months ended December 31, 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 $349,000 for this impairment.
-4-
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COMPARE GENERIKS, INC.
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
NINE MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
(Continued)
5. Income Taxes:
-------------
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately $287,000 available to offset against future Federal
income tax liabilities.
Net deferred income tax asset (liability) is composed of the following
at December 31, 1998.
<TABLE>
<S> <C>
Net operating loss carryforward $ 104,000
Unrealized holding gain on available-for-sale securities 377,000
Intangible assets 232,000
Other 2,600
Valuation allowance (630,600)
-------------
$ 85,000
============
</TABLE>
6. Stockholders' Equity:
---------------------
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings Per Share." (Loss)/earnings per common share is
computed by dividing net (loss)/earnings less dividends on Series B preferred
shares by the weighted average number of common stock outstanding during the
period. The effect of common stock equivalents on the computation of (loss)/
earnings per share is anti-dilutive. Earnings per share was retroactively
restated to reflect FASB No. 128 for the nine month period ended December 31,
1997.
Series B preferred stockholders are entitled to cumulative annual
dividends at $.12 per share, payable one year from the date of issuance.
Dividends earned for the nine month period ended December 31, 1998 totaled
$45,000.
-5-
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COMPARE GENERIKS, INC.
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
NINE MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
(Continued)
6. Stockholders' Equity: (Continued)
Net (loss)/earnings available to common shareholders was computed as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
December 31, December 31,
------------ ------------
(Unaudited) (Unaudited)
----------- -----------
1998 1997 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) earnings $ (112,785) $ 263,433 $ (274,597) $ 40,956
Dividends 45,000 45,000 15,000 15,000
----------- ----------- ------------ ------------
(Loss) earnings available to
common shareholders $ (157,785) $ 218,433 $ (289,597) $ 25,956
------------ ----------- ------------- ------------
Weighted average number
of shares 3,961,146 3,890,000 4,102,665 3,890,000
------------ ----------- ------------ ----------
(Loss) earnings per common
share $ (.04) $ .06 $ (.07) $ .01
============ =========== ============ ============
</TABLE>
7. Commitments:
------------
The Company is party to an exclusive supply and licensing agreement
with PDK Labs Inc. ("PDK"), pursuant to which PDK granted the Company an
exclusive license to use the trademarks "Max Brand" and "Heads Up" brands of
OTCs and the exclusive right to distribute products bearing such names. In
April, 1998 and November 1998, the payment terms of this Agreement were amended
wherein the purchase price of the products were set at a (i) base price plus
(ii) the difference between 93% of the sales price to the Company's customers
and the base price. The amendment also prohibits PDK from supplying certain
products to convenience stores. In consideration for this 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. In January 1999, the agreement was further amended to
provide the Company the option to pay its annual license fee in shares of
Series B preferred stock. Included in selling, general and administrative
expenses is $375,000 of this license fee for the nine months ended December 31,
1998.
-6-
<PAGE>
COMPARE GENERIKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales for the nine and three month periods ended December 31, 1998
were approximately $22,688,000 and $8,073,000, respectively as compared to
$6,504,000 and $2,083,000 in the corresponding periods of the prior year. The
sales growth reflects significant increases in sales of the "Max Brand" product
line. Gross profit for the nine and three month periods ended December 31, 1998
approximated $4,762,000 (21% of sales) and $1,898,000 (24% of sales)
respectively, as compared to $3,617,000 (56% of sales) and $1,254,000 (60% of
sales) in the corresponding periods of the prior year. The percentage decrease
is attributable to the Company amending the payment terms of its Supply
Agreement with PDK Labs Inc. covering the purchase of products in the "Max
Brand" and "Heads Up" product ranges.
Selling, general and administrative expenses approximated $4,519,000
and $1,821,000 for the nine and three month periods ended December 31, 1998,
respectively. As a percentage of sales, these amounts represent 20% and 23 %
respectively, as compared to 53% and 58% in the corresponding periods in the
prior years. The overall decrease is a result of the Company experiencing
significant sales growth without incurring additional selling, general and
administrative expenses. The Company also recorded a loss on impairment of
marketable securities of $349,000.
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 has engaged computer consultants and is establishing processes for
evaluating and managing the risks and costs associated with this problem. In
the opinion of management, the cost of addressing this problem will not
materially affect the financial position of the Company.
Liquidity and Capital Resources
As of December 31, 1998, the Company had working capital of
approximately $3,019,000.
The Company's statement of cash flows reflects net cash used in
operating activities of approximately $42,000, primarily due to a net loss of
$113,000, increases in operating assets such as accounts receivable
($1,259,000) and inventories ($6,711,000), offset by an increase of accounts
payable ($7,055,000), and non-cash charges including a license fee ($375,000),
an adjustment for depreciation and amortization expense of ($244,000), and a
loss on impairment of marketable securities ($349,000).
Net cash used in financing activities approximated $65,000
representing payment of cash dividends.
-7-
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COMPARE GENERIKS, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
The Company expects to meet its cash requirements from operations.
This report on Form 10-QSB contains certain forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations and business of the
Company. All of these forward looking statements, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not be
placed upon such estimates and statements.
-8-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
Reference is made to Item 3 in the Company's Form 10-KSB for the year
ended March 31, 1998.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPARE GENERIKS, INC.
Dated: February 9, 1999 By: /s/ Thomas A. Keith
-----------------------
Thomas A. Keith
President and Chief
Executive Officer
Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,376,863
<ALLOWANCES> 10,000
<INVENTORY> 8,524,077
<CURRENT-ASSETS> 11,164,079
<PP&E> 79,482
<DEPRECIATION> 22,792
<TOTAL-ASSETS> 12,222,568
<CURRENT-LIABILITIES> 8,144,699
<BONDS> 0
0
550
<COMMON> 420
<OTHER-SE> 3,701,899
<TOTAL-LIABILITY-AND-EQUITY> 12,222,568
<SALES> 22,687,943
<TOTAL-REVENUES> 22,687,943
<CGS> 17,926,096
<TOTAL-COSTS> 17,926,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,076
<INCOME-PRETAX> (107,459)
<INCOME-TAX> 5,326
<INCOME-CONTINUING> (112,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (112,785)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>