<PAGE>
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, 2000
Commission File No. 0-27804
COMPARE GENERIKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3289386
--------- ----------
(State of or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
60 Davids Drive, Hauppauge, New York 11788
------------------------------------- -----
(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
----------------------------------------
(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
------------------------------------------------------------------
(Title of Class)
Class A Redeemable Common Stock Purchase Warrant
------------------------------------------------
(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 $41,310,000.
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 26, 2000, was approximately $1,323,000.
Number of shares outstanding of the issuer's common stock, as of June 26,
2000 was 4,914,845.
See Page 23 for Exhibits
<PAGE>
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(R), Tylenol
Extra Strength(R), Advil(R), Tylenol Regular Strength(R), Bayer (325 mg)(R),
Anacin(R), Tylenol Sinus Formula(R), Sudafed (30 mg)(R), Nyquil(R), Dayquil(R),
Comtrex(R), Excedrin(R) and Benadryl(R).
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-o-
-1-
<PAGE>
grams which map out the shelf displays and shelf marketing strategies,
point-of-sale displays and topical informational materials.
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 a majority 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 satisfied the license fee due for the most
recently completed fiscal year in cash. 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, 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.
The Company also 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.
-2-
<PAGE>
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 satisfied the
license fee due during the 2000 fiscal year in cash. 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 the marketing of its services. The
Company has retained trademark counsel and a patent agent and presently
-3-
<PAGE>
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 20, 2000, the Company employed a total of three (3) employees
on a full time basis (two (2) employees in sales and marketing and one (1)
person 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 its business operations are subject to
regulation by one or more federal agencies, including the United States Food and
Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission, the United States Department of Agriculture and the
Environmental Protection Agency ("EPA"). These activities may also be 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. On March 17, 1999, the FDA
published final regulations which will require the re-labeling of the OTC drug
products. The regulation, which became effective April 16, 1999, requires that
companies begin phase-in of the new label format commencing May 2001. There is
no reason to expect that compliance with this regulation will affect the Company
any differently than any other industry member.
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 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
-4-
<PAGE>
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 $37,040,000
(representing 90% of the Company's net sales) for the year ended March 31, 2000.
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 a majority 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
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
-5-
<PAGE>
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.
Several of the raw materials used by the Company in its manufacturing
process are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation
-6-
<PAGE>
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. Without the letter
of non-objection the Company is unable to import the List 1 Chemical.
The FDA 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 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. The
Company is not able to engage in any importation activities until such time as
the DEA approves its registration Should the DEA ultimately deny the Company's
registration, it would no longer be permitted to manufacture and distribute
these products, though it would have the option of seeking legal redress
challenging the validity of any such activity by the DEA. 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 and the Company'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 $37,040,000
(representing 90% of the Company's net sales) for the year ended March 31, 2000.
The issuance by any governmental body of materially adverse regulations in
the nonprescription product area which prevented the Company from obtaining
necessary regulatory
-7-
<PAGE>
approval, whether on a timely basis, by virtue of the costs of compliance or at
all, could have a 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 2000
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
There is no material litigation pending or threatened against the Company
nor are there any such proceedings to which the Company is a party.
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.
-8-
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock and Class A Warrants are quoted and traded on the OTC
Bulletin Board under the symbols COGE and COGEW.
The following table indicates the high and low prices for the Company's
Common Stock and Class A Warrants for the period up to March 31, 2000. Prices
represent quotations between dealers without adjustments for retail markups,
markdowns or commissions, and may not represent actual transactions.
Common
Stock
1999 Fiscal Year Quoted Price
---------------- ------------
High Low
---- ---
First Quarter 2 1/2 1 7/16
Second Quarter 2 15/32
Third Quarter 5/8 2/32
Fourth Quarter 9/16 1/8
2000 Fiscal Year Quoted Price
---------------- ------------
High Low
---- ---
First Quarter 19/64 1/8
Second Quarter 13/32 5/32
Third Quarter 9/64 5/64
Fourth Quarter 1 3/32
Class A Warrants
1999 Fiscal Year Quoted Price
---------------- ------------
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
2000 Fiscal Year Quoted Price
---------------- ------------
High Low
---- ---
1/16 1/16
First Quarter 1/16 1/16
Second Quarter 1/16 1/16
Third Quarter 1/16 1/16
Fourth Quarter 1/16 1/16
-9-
<PAGE>
On June 26, 2000 the closing price of the Common Stock as reported on the
OTC Bulletin Board was $.34. On June 26, 2000 the closing price for the Class A
Warrants reported on the OTC Bulletin Board was $.0625. On June 26, 2000 there
were 124 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 2000 compared to Fiscal Year 1999
Net sales for the fiscal year ended 2000 were $41,310,000 as compared to
net sales in 1999 of $31,723,000. The sales growth reflects a significant
increase in sales of the "Max Brand" product line and sales of a new product
line. Gross profit amounted to $4,760,000 (12% of sales) in 2000 as compared to
$3,678,000 (12% of sales) in 1999.
The Company is operating under 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 "MaxBrand" and "Heads Up"
brands of OTC's and the exclusive right to distribute products bearing such
names. The payment terms of the agreement provides for the purchase price of
products and an annual license fee of $500,000 payable to PDK. The license is
payable, at the option of the Company, either in cash or in shares of the
Company's common or preferred stock.
Selling, general and administrative expenses approximated $4,300,000 in
2000 and $3,245,000 in 1999. As a percentage of sales, selling, general and
administrative expenses approximated 10% in each year.
The Company has satisfactorily implemented a plan to ensure that its
Systems are compliant with the requirements to process transactions in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
-10-
<PAGE>
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 Exclusive Supply and Licensing Agreement with
PDK. 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.
Management believes that inflation did not have a material effect on
operations or financial condition in 2000, 1999 or 1998. Management also
believes that its business in not seasonal; however, significant promotional
activities have a direct impact on sales volume in any given quarter.
Liquidity and Capital Resources
As of March 31, 2000, the Company had working capital of $3,826,000.
The Company's statement of cash flows reflects cash provided by operating
activities of approximately $115,000, primarily due to net income of $270,000,
adjustments for depreciation and amortization expense ($322,000), a noncash
license fee ($500,000), and increases in liabilities such as due to affiliate
($1,242,000) and income taxes payable ($93,000), offset by increases in
operating assets such as accounts receivable ($794,000), inventories
($1,145,000) and prepaid expenses ($231,000), and a decrease in accounts payable
($109,000).
Net cash used in financing activities approximated $121,000 representing
payments of cash dividends.
In May 1999, the Company issued 714,286 shares of common stock and 400,000
shares of Series B preferred stock to satisfy an outstanding obligation of
$500,000.
The Company expects to meet its cash requirements from operations
-11-
<PAGE>
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.
-12-
<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 39 President, Chief Executive
Officer, Chief Financial Officer
and Director
Theresa Spinello 41 Director
Raveendra Nandigam 50 Director
Virginia Sims 40 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 Spinello 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. Spinello 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 and 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.
-13-
<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, 2000, all
Section 16(a) filing requirements applicable to its officers and directors and
greater than ten percent beneficial owners were satisfied.
-14-
<PAGE>
Executive Compensation
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
<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 2000 $170,000 $110,000 $-0- -0- -0- -0- $-0-
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-
</TABLE>
Aggregated Option/SAR Exercises -
---------------------------------
and FY-End Option/SAR Values
----------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Shares Number of Securities Value of Unexercised in the Money
Acquired on Value 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>
-15-
<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).
-16-
<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
-17-
<PAGE>
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 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
-18-
<PAGE>
Common Stock or awards determined by reference to the value of securities of, or
the performance of, specified subsidiaries.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of June 26, 2000 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:
-----------------------------------------------------------------------------
Percentage Percentage
Shares of (%) of Shares of (%) of Total
Name and Address of Common Common Preferred Combined
Beneficial Owner (1) Stock Owned Stock Stock Vote
-------------------- ----------- ----- ----- ----
-----------------------------------------------------------------------------
Walpac, Inc.(2)(3) 0.0 0.0 5,000,000 46.2
-----------------------------------------------------------------------------
Delsin Investments, 0.0 0.0 5,000,000 46.2
Ltd.(3)
-----------------------------------------------------------------------------
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 Spinello(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
-----------------------------------------------------------------------------
(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.
-19-
<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 2000, 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.
-20-
<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, 2000 F-2
Statements of operations for the years ended March 31, 2000
and March 31, 1999 F-3
Statements of stockholders' equity for the years ended
March 31, 2000 and March 31, 1999 F-4
Statements of cash flows for the years ended March 31, 2000
and March 31, 1999 F-5
Notes to financial statements F-6 - F-12
-21-
<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
-22-
<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.
10.22++ Fourth Amendment to Supply Agreement between the Company and PDK
Labs Inc. dated May 1, 1999.
-23-
<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.
+ Incorporated by Reference to the Company's Form 10-KSB for the year ended
March 31, 1999.
++ Incorporated by Reference to PDK Labs Inc. Form 10-K for the year ended
November 30, 1999.
(b) Reports on Form 8-K.
None.
-24-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
Compare Generiks, Inc.
Report of independent certified public accountants F-1
Balance sheet as of March 31, 2000 F-2
Statements of operations for the years
ended March 31, 2000 and 1999 F-3
Statement of stockholders' equity for the
years ended March 31, 2000 and 1999 F-4
Statements of cash flows for the years
ended March 31, 2000 and 1999 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,
2000, and the related statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended March 31, 2000. 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, 2000 and the results of its operations and its cash flows for each of
the two years in the period ended March 31, 2000, in conformity with generally
accepted accounting principles.
/s/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
May 17, 2000
<PAGE>
COMPARE GENERIKS, INC.
BALANCE SHEET
MARCH 31, 2000
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 53,075
Accounts receivable, net of $10,000 allowance for doubtful accounts 2,815,569
Inventories 8,895,513
Prepaid expenses and other current assets 319,209
--------------
Total current assets 12,083,366
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES (Note 4) 60,000
PROPERTY AND EQUIPMENT (Note 5) 42,603
INTANGIBLE ASSETS, net (Note 6) 287,089
DEFERRED TAX ASSET (Note 7) 163,000
OTHER ASSETS 98,007
--------------
$ 12,734,065
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 59,573
License fee payable (Note 12) 500,000
Due to affiliates 7,565,222
Income tax payable (Note 7) 103,350
Dividends payable 9,000
Deferred tax liability (Note 7) 20,000
--------------
8,257,145
--------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
STOCKHOLDERS' EQUITY: (Note 8)
Common stock, $.0001 par value; authorized 25,000,000
shares; 4,914,845 issued and outstanding 491
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 $900,000; authorized 1,000,000 shares;
900,000 issued and outstanding 90
Additional paid-in capital 6,273,202
Deficit (1,792,363)
--------------
4,481,920
Less stock subscription receivable (5,000)
--------------
4,476,920
--------------
$ 12,734,065
==============
</TABLE>
See notes to financial statements
F-2
<PAGE>
COMPARE GENERIKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
March 31,
-------------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
REVENUE (Note 13) $41,309,872 $ 31,722,659
--------------- --------------
COSTS AND EXPENSES: (Notes 3,5,6,10 and 12)
Cost of sales 36,549,384 28,044,742
Selling, general and administrative 4,299,659 3,245,238
--------------- --------------
40,849,043 31,289,980
--------------- --------------
OPERATING INCOME 460,829 432,679
--------------- --------------
OTHER INCOME (EXPENSE):
Loss on impairment of marketable securities (Note 4) - (399,000)
Interest expense (2,129) (2,113)
--------------- --------------
(2,129) (401,113)
--------------- --------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 458,700 31,566
PROVISION FOR INCOME TAXES (Note 7) 189,000 25,000
--------------- --------------
NET INCOME $ 269,700 $ 6,566
=============== ==============
NET INCOME (LOSS) PER SHARE (Note 8) $ 0.04 $ (0.01)
================ ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING (Note 8) 4,838,524 4,021,030
=============== ==============
</TABLE>
See notes to financial statements
F-3
<PAGE>
COMPARE GENERIKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000 AND 1999
(Note 8)
<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
---------- ------ ---------- ------ ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 3,890,000 $ 389 5,000,000 $500 500,000 $50 $ 5,273,344
Common stock issued to
satisfy obligation 310,559 31 - - - - 499,969
Dividends - - - - - - -
Net income - - - - - - -
---------- ------ ---------- ------ ------- -------- -----------
Balance, March 31, 1999 4,200,559 420 5,000,000 500 500,000 50 5,773,313
Stock issued
to satisfy obligation 714,286 71 - - 400,000 40 499,889
Dividends - - - - - - -
Net income - - - - - - -
---------- ------ ---------- ------ ------- -------- -----------
Balance, March 31, 2000 4,914,845 $491 5,000,000 $500 900,000 $90 $6,273,202
========== ====== ========== ====== ======= ======== ===========
<CAPTION>
Subscription
Deficit Receivable Total
------------- ------------- ------------
<S> <C> <C> <C>
Balance, March 31, 1998 $ (1,908,629) $ (5,000) $3,360,654
Common stock issued to
satisfy obligation - - 500,000
Dividends (60,000) - (60,000)
Net income 6,566 - 6,566
------------- ------------- ------------
Balance, March 31, 1999 (1,962,063) (5,000) 3,807,220
Stock issued
to satisfy obligation - - 500,000
Dividends (100,000) - (100,000)
Net income 269,700 - 269,700
------------- ------------- ------------
Balance, March 31, 2000 $ (1,792,363) $ (5,000) $4,476,920
============= ============= ============
</TABLE>
See notes to financial statements
F-4
<PAGE>
COMPARE GENERIKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
March 31,
------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 269,700 $ 6,566
-------------- --------------
Adjustments to reconcile net income
to net cash provided by in operating activities:
Depreciation and amortization 321,589 325,931
Non-cash license fee 500,000 500,000
Loss on impairment of marketable securities - 399,000
Deferred tax benefit (49,000) -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (793,711) (914,098)
Inventories (1,145,231) (5,936,776)
Prepaid expenses and other current assets (231,138) 97,268
Other assets 17,626 110,367
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (108,598) 85,204
Due to affiliate 1,241,580 5,332,112
Income taxes payable 92,589 10,761
-------------- --------------
Total adjustments (154,294) 9,769
-------------- --------------
Net cash provided by operating activities 115,406 16,335
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (121,000) (65,000)
-------------- --------------
Net cash used in financing activities (121,000) (65,000)
-------------- --------------
Net decrease in cash and cash equivalents (5,594) (48,665)
CASH AND CASH EQUIVALENTS, beginning of year 58,669 107,334
-------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 53,075 $ 58,669
============== ==============
</TABLE>
See notes to financial statements
F-5
<PAGE>
COMPARE GENERIKS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000 AND 1999
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
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 $302,000 and $106,000 for the years ended March
31, 2000 and 1999, 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").
j. Comprehensive income
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. Comprehensive income
was equivalent to net income for the years ended March 31, 2000 and 1999.
3. Related Party Transactions:
The Company rents its office and warehouse space from an affiliated
entity on a month to month basis. Rent expense was $60,000 for each of the years
ended March 31, 2000 and 1999.
4. Investment in Available-For-Sale Securities:
At March 31, 2000, 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).
F-7
<PAGE>
4. Investment in Available-For-Sale Securities: (Cont'd)
During the year ended March 31, 1999, 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 during the year ended March 31,
1999, for this impairment.
5. Property and Equipment:
Property and equipment, at cost, consist of the following at March 31,
2000:
Machinery and equipment $ 37,797
Furniture and fixtures 24,229
Leasehold improvements 17,456
---------
79,482
Less accumulated depreciation and amortization 36,879
---------
$ 42,603
=========
Depreciation expense approximated $11,300 for each of the years ended
March 31, 2000 and 1999.
6. Intangible Assets:
Intangible assets consist of the following at March 31, 2000:
Customer lists $ 1,350,000
Patents and trademarks 74,320
Goodwill 176,242
Other 30,000
-------------
1,630,562
Less accumulated amortization 1,343,473
-------------
$ 287,089
=============
Amortization expense approximated $310,300 and $314,700 respectively for
the years ended March 31, 2000 and 1999.
7. Income Taxes:
The provision for income taxes consists of the following:
Years Ended
March 31,
--------------------------------
2000 1999
---------- -----------
Current:
Federal $ 119,000 $ 20,000
State 21,000 5,000
---------- -----------
140,000 25,000
---------- -----------
Deferred:
Federal 41,000 -
State 8,000 -
---------- -----------
49,000 -
---------- -----------
$ 189,000 $ 25,000
========== ===========
F-8
<PAGE>
7. Income Taxes: (Cont'd)
Net deferred income tax asset (liability) is composed of the following at
March 31, 2000:
Investment in available-for sale securities $ 412,000
Intangible assets 336,000
Other (8,650)
Valuation allowance (596,350)
----------
$ 143,000
==========
The valuation allowance increased by $37,350 during the year ended March
31, 2000.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
Years Ended March 31,
-----------------------
2000 1999
--------- ----------
U.S. Federal statutory income tax rate 34.0% 34.0%
State income tax, net of federal tax benefit 3.5 10.5
Valuation allowance 3.3 9.5
Permanent differences 1.1 26.9
Other (.7) (1.7)
--------- ----------
41.2% 79.2%
========= =========
8. Stockholders' Equity:
a. Capitalization
Pursuant to an amendment of the Company's certificate of
incorporation, the Company has authorized 25,000,000 shares of common stock,
10,000,000 shares of Series A Preferred Stock and 1,000,000 shares of Series B
Preferred Stocks. 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.
F-9
<PAGE>
8. Stockholders' Equity: (Cont'd)
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 equals 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.
(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 earnings (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 income (loss) per share amounts were equivalent for
the years ended March 31, 2000 and 1999.
Net income (loss) per share attributable to common shareholders was
computed as follows:
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------------
2000 1999
---------- ------------
<S> <C> <C>
Net income $ 269,700 $ 6,566
Dividends on preferred shares 100,000 60,000
---------- ------------
Net income (loss) attributable to common shareholders $ 169,700 $ (53,434)
========== ============
</TABLE>
F-10
<PAGE>
8. Stockholders' Equity: (Cont'd)
e. Reserved shares
At March 31, 2000, the Company has 5,435,000 shares of common stock
reserved for future issuances.
9. 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.
10. 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 $9,100 and $16,200 to
the Plan for the years ended March 31, 2000 and 1999, respectively.
11. Supplementary Information - Statement of Cash Flows:
Cash paid was as follows:
Years Ended
March 31,
----------------------------
2000 1999
----------- --------
Interest $ 2,155 $ 2,129
=========== ========
Income taxes $ 134,695 $ 1,121
=========== ========
During the year ended March 31, 2000, the Company issued 714,286 shares
of common stock and 400,000 shares of Series B Preferred stocks to satisfy an
outstanding obligation of $500,000.
12. Commitments and Contingencies:
Pursuant to various Supply Agreements, expiring in 2001 and 2002, PDK
supplies certain of CGI's products at specified prices. In addition, PDK is
entitled to a royalty based upon the sales of certain products.
Purchases/royalties under these agreements approximated $36,400,000 and
$33,960,000 for the years ended March 31, 2000 and 1999. 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, 2000,
the Company issued to PDK 714,286 shares of common stock and 400,000 shares of
Series B Preferred stock to satisfy the 1999 fee.
F-11
<PAGE>
13. 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.
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 phenylpropanolamine ("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 $37,040,000 of
revenue for the year ended March 31, 2000.
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 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 27, 2000
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 27, 2000
------------------------------------
Thomas A. Keith
/s/ Theresa Spinello Director June 27, 2000
------------------------------------
Theresa Spinello
/s/ Raveendra Nandigam Director June 27, 2000
------------------------------------
Raveendra Nandigam
/s/ Virginia Sims Director June 27, 2000
------------------------------------
Virginia Sims
