<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 June 30, 2000
-------------
Commission File No. 0-22133
SUPERIOR SUPPLEMENTS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3320172
--------------------------------- ---------------------------------
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
270 Oser Avenue, Hauppauge, New York 11788
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (631) 231-0783
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 two (2) Class A Redeemable Common Stock Purchase Warrants
-------------------------------------------------------------------
(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/
<PAGE>
Issuer's revenues for its most recent fiscal year were $6,102,473.
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 September 26, 2000, was approximately $186,000.
Number of shares outstanding of the issuer's common stock, as of
September 26, 2000 was 4,000,000.
See Page 25 for Exhibits
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PART 1
Item 1. BUSINESS
--------
General
-------
Superior Supplements, Inc., a Delaware corporation (the "Company" or
"SSI"), was formed on April 24, 1996. The Company is engaged in the development,
manufacture, packaging, marketing and sale of dietary supplements including
vitamins, minerals, herbs and specialty nutritional supplements, in bulk tablet,
capsule and powder form. The Company manufactures a wide variety of products for
companies which package and sell through many different channels of
distribution, including health food, drug, convenience and mass market stores.
On February 26, 1997, the Company completed an underwritten public
offering (the "Initial Public Offering") of its securities by selling 250,000
units (the "Units") consisting of 500,000 shares of Common Stock and 500,000
Class A Warrants to purchase an additional 500,000 shares of Common Stock.
Supply and Licensing Agreements
-------------------------------
On May 14, 1996, the Company entered into a supply agreement with PDK
Labs Inc., a New York corporation ("PDK") pursuant to which the Company supplies
PDK with vitamins and dietary supplements manufactured to PDK's specifications
in bulk tablet form. The supply agreement expires in May 2001 and is
automatically renewable for successive one (1) year periods thereafter. Under
the terms of the agreement, PDK has agreed to purchase products for fair market
value, such products having a minimum aggregate sales price of $2,500,000 per
annum during the term of the agreement. In the event that PDK fails to purchase
$2,500,000 of product in any given year, the Company will be paid up to
$100,000, on a pro-rated basis, as liquidated damages. Sales to PDK approximated
72% of total sales for the year ended June 30, 2000. See "Certain Relationships
and Related Transactions."
In addition, on November 30, 1997, the Company entered into a packaging
agreement with PDK. The Company agreed to package Futurebiotics products for PDK
for a fixed price based on component cost plus a direct labor charge per unit.
The agreement expired on November 30, 1999. See "Certain Relationships and
Related Transactions."
In November 1998, the Company entered into an agreement to acquire
certain private label customers from Futurebiotics, a subsidiary of PDK. As
consideration for these customers, the Company is obligated to pay Futurebiotics
10% of all revenues derived from the customers for three years.
The Company is also party to a supply agreement with Compare Generiks,
Inc., a Delaware Corporation ("CGI"). Terms of this agreement are similar to the
agreement with PDK, except there are no minimum purchase requirements. See
"Certain Relationships and Related Transaction."
PDK supplies certain management and personnel to the Company and
Reginald Spinello, one of the Company's directors, is also the President and
Chief Executive Officer of PDK and Raveendra Nandigam, one of the Company's
directors, is also the Vice President of Manufacturing of PDK. In addition,
Reginald Spinello, Lawrence Simon and Raveendra Nandigam have voting power over
3
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more than fifty percent (50%) of the Common Stock and the Preferred Stock of the
Company pursuant to the Voting Trust Agreement with PMF. Messrs. Spinello and
Simon may be deemed to be founders of the Company.
Manufacturing
-------------
The Company's manufacturing facility has production equipment
consisting of tablet presses and encapsulating machines with a capacity of
producing per annum, in excess of one billion two hundred million
(1,200,000,000) tablets and capsules of various sizes and shapes. In addition,
the Company has the capacity to package in excess of five million bottles per
annum. The Company is currently operating at approximately 30% of its capacity.
The Company manufactures single ingredient herbal products and multi-ingredient
vitamins in tablet, capsule and bottled form. All manufacturing is conducted in
accordance with Good Manufacturing Practice Standards of the United States Food
and Drug Administration and other applicable regulatory standards.
The vitamin production process includes the following stages: testing
of raw materials, pharmacy, blending, compression or encapsulation, coating
(where required) and testing of finished tablets or capsules. The vitamin
production process involves sending the raw materials through each stage of
production in order to form vitamin products.
The principal raw materials needed in the manufacturing process are
natural and synthetic vitamins which are purchased from manufacturers in the
United States, Japan and Europe. The Company can purchase raw materials from
numerous sources and is not dependent on any major supplier. The Company
believes that the capacity of its manufacturing and distribution facility is
adequate to meet the requirements of its current business.
Quality Control
---------------
All of the Company's products are manufactured in accordance with the
Good Manufacturing Practices of the FDA and all other applicable regulatory
standards. The Company places special emphasis on quality control. All raw
materials and finished products are subjected to sample testing, weight testing,
and purity testing. The Company has adopted formal written quality control
procedures. The Company maintains records on all material testing, production
processes, inspections carried out in the manufacturing process, and labeling
procedures. All products are subject to the Company's rigorous quality control
procedures. The Company maintains a modern well-equipped pharmaceutical
laboratory, that has the capability of adhering to any current and anticipated
regulatory requirements. All raw materials used in production are initially held
in quarantine during which time the Company's quality assurance department
assays the product against the manufacturer's certificate of analysis. Once
cleared, a lot number is assigned, samples are retained and the material is
processed by formulating, blending, compressing or encapsulating and where
required, coating operations. Throughout the manufacturing process the quality
control department conducts "in process" testing procedures. After tablets or
capsules are manufactured, the quality assurance department tests for weight,
purity, potency, dissolution and stability.
Marketing and Distribution Strategies
-------------------------------------
The Company manufactures a full line of dietary supplements including
vitamins, minerals, herbs and specialty nutritional supplements in bulk tablet
and capsule form, which are marketed to companies, such as PDK and CGI, that
package and sell through many different channels of distribution, including
health food, drug, convenience and mass market stores. In addition, the
4
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Company packages certain products in bottled form for PDK. The Company also
supplies other manufacturers which "outsource" a portion of their needs on an
ongoing basis to supplement their own capacities.
Competition
-----------
The market for dietary supplement 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 bulk
packaged dietary supplement industry, selling products to distributors who
service health food, drug, convenience and mass market stores, companies that
market a branded or generic line of products but do not manufacture these items
("repackagers"), and other manufacturers who "outsource" a portion of their
needs to supplement their own capacities. 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. 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
International Vitamin Corporation and Nature's Bounty both of whom have longer
operating histories and 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).
Management and Employees
------------------------
As of July 9, 2000, the Company employed twelve (12) full time persons.
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 processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the United States Food and Drug Administration (the "FDA"), the
Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission,
the United States Department of Agriculture and the Environmental Protection
Agency. 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. The new law also delayed the
FDA's requirements for extensive product label changes which were to be applied
to products manufactured after July 1, 1995. It provides a set of different
label requirements for ingredient content information, and directs the FDA to
publish new label regulations for supplements with a mandatory effective date,
as extended, of March 23, 1999. It makes no modifications on the requirements
and proscriptions regarding health claims for dietary supplements. The new law
also introduced the concept of good manufacturing practices to the manufacture
of dietary supplements. At this time, it would be premature to predict its
overall impact on the dietary supplement industry.
5
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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 result in an injury. Accordingly, currently the
Company maintains product liability insurance as a named insured on each of its
suppliers' policies. The Company requires that its suppliers have minimum
coverage of $1,000,000 and that the Company is named insured on the policy.
While management believes that its insurance coverage is adequate, there can be
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.
Net Losses and Accountant's Report with Going Concern
-----------------------------------------------------
The Company has incurred a net loss from operations of $1,504,000 for
the year ended June 30, 2000. In addition, the Company has a working capital
deficit $1,749,000 at June 30, 2000. The report of the Company's independent
auditors with respect to the Company's financial statements for the year ended
June 30, 2000, contains an explanatory paragraph to the effect that these
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company's working capital deficit may result in the Company's
failure to be able to make timely payments on its obligations including but not
limited to payments to trade creditors. There can be no assurance that the
Company will not continue to incur net losses in the future or that it will be
able to operate profitably.
Significant Industry Competition. The market for dietary supplement
products is highly competitive in each of the Company's existing and anticipated
product lines and methods of distribution. Numerous manufacturers and
distributors compete for customers throughout the United States and
internationally in the "bulk" packaged dietary supplement industry, selling
products to distributors who service health food, drug, convenience and mass
market store, companies that market a branded or generic line of products but do
not manufacture these items ("repackagers"), and other manufacturers who
"outsource" a portion of their need s to supplement their own capacities. 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. 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 Nature's Bounty and International Vitamin Corporation, both
of whom have longer operating histories and 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.)
There can be no assurance that the Company will be able to compete successfully
with its more established and better capitalized competitors.
Dependence on PDK and CGI. The Company's core business consists of two
supply agreements entered into by the Company and PDK and CGI. PDK accounted for
72% of the total sales of the Company for the year ended June 30, 2000. The
supply agreement with PDK terminates in May, 2001. There can be no assurance
that PDK will maintain its volume of business with the Company or that CGI's
volume of business will increase. Although
6
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the Company believes that other customers are available for the purchase of such
products from the Company, there can be no assurance that the Company would be
able to replace these customers, in the event either supply agreement is
terminated. Even if the Company is able to develop alternative customer sources,
there can be no assurance that it can do so without material delay or on a cost
effective basis at prices similar to those paid by PDK or CGI. As a result, any
interruption or discontinuance of supplies to PDK or CGI could result in
considerable expense, delay the Company's operations, and have a material
adverse effect on the Company.
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.
No Cash Dividends. The Company has not paid any cash dividends on its
common stock and, in view of its capital needs, and restrictions on the payment
of dividends under the Company's current loan agreement, does not presently plan
to pay any cash dividends except in accordance with the terms of the Series A
Preferred Stock.
Item 2. PROPERTIES.
----------
The Company's headquarters, plant operations, warehousing and shipping
facilities are housed in a modern forty thousand (40,000) square foot building.
The Company leases the building pursuant to a lease which expires on October 14,
2002. The lease provides for monthly rental payments ranging from $22,500 to
$24,800 through October 2002. In the judgment of management, the lease with the
landlord 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.
---------------------------------------------------
No matters which have been submitted to the Company's shareholders for
vote during the last quarter of its fiscal year.
7
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PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Company's securities commenced trading on the OTC Bulletin Board on
the effectiveness of the Company's Initial Public Offering on February 27, 1997
in the form of Units each consisting of two (2) shares of Common Stock and two
(2) Class A Warrants. The Common Stock and Class A Warrants are regularly quoted
and traded on the OTC Bulletin Board under the symbols SPSU and SPSUW.
The following table indicates the high and low bid prices for the
Company's Units, Common Stock and Class A Warrants for the period up to June 30,
1999 based upon information supplied by the OTC Bulletin Board. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
Common
Stock
-----
1998 Calendar Year Quoted Bid Price
High Low
---- ---
First Quarter 8 1/8 3
Second Quarter 4 1/4 1
Third Quarter 1 1/2 1/4
Fourth Quarter 1 3/8 14/32
1999 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
First Quarter 1 1/32
Second Quarter 5/32 2/32
Third Quarter 3/16 3/64
Fourth Quarter 17/64 1/64
2000 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
First Quarter 3/8 1/16
Second Quarter 1/4 3/32
Class A
Warrants
--------
1998 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
First Quarter 5 1/4 2
Second Quarter 2 1/8 5/32
Third Quarter 1 2/32 9/32
Fourth Quarter 1 3/8
1999 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
First Quarter 23/32 2/32
Second Quarter 2/32 1/96
Third Quarter 1/64 1/64
Fourth Quarter 1/32 1/64
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2000 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
First Quarter 1/64 1/64
Second Quarter 1/64 1/64
On September 26, 2000 the closing price of the Common Stock as reported
on the OTC Bulletin Board was $.08. On September 26, 2000 the closing price for
the Class A Warrants reported on the OTC Bulletin Board was $.005. On September
26, 2000 there were 32 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.
----------------------------------------------
The Company incurred a net loss of $1,504,000 from operations for the
fiscal year ended 2000. In addition, the Company has a working capital deficit
of $1,749,000 at June 30, 2000. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
Net sales for the fiscal year ended 2000 were approximately $6,102,000
as compared to net sales in 1999 of $6,265,000. The Company realized a decline
in sales to PDK and the revenues were replaced by an increase in sales to
Compare Generiks, Inc.
Cost of sales for the year ended June 30, 2000 reflects increased raw
material production costs and reduced direct labor rates and reduced operating
expenses. Management's plan for improving future operations and liquidity
include soliciting new customers, developing new product lines and controlling
its overhead and fixed expenses.
Selling, general and administrative expenses approximated $662,000 in
2000 and $741,000 in 1999. As a percentage of sales, selling, general and
administrative expenses were 11% in 2000 and 12% in 1999.
The Company is operating under a supply agreement with PDK which
expires in May 2001 and provides for the Company to supply PDK with vitamins and
dietary supplements in bulk tablet form. The agreement, as amended, provides for
PDK to purchase certain products at specified prices. PDK agreed to purchase
products having a minimum aggregate sales price of $2,500,000 per year during
the term of the agreement. In the event that PDK fails to purchase the minimum
amount of products in any year, the company will be paid up to $100,000 on a
pro-rated basis as liquidated damages. Sales to PDK approximated $4,377,000 and
$4,921,000 for the fiscal years ended June 30, 2000 and 1999, respectively.
The Company also operated under a packaging agreement with PDK, which
provided for the Company to package certain products for PDK. The agreement
expired in November 1999.
The Company is also party to a supply agreement with CGI terms of this
agreement are similar to the agreement with PDK, except there are no minimum
purchase requirements. Sales
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under this agreement approximated $1,052,000 and $475,000 for the fiscal years
ended June 30, 2000 and 1999, respectively.
The Company entered into an agreement to acquire certain private label
customers from Futurebiotics, a subsidiary of PDK. As consideration for these
customers, the Company is obligated to pay Futurebiotics 10% of all revenues
derived from these customers for three years. Commissions earned by
Futurebiotics approximated $53,000 and $48,000 for the fiscal years ended June
30, 2000 and 1999, respectively.
The Company is also obligated under a management agreement with PDK,
which provides for PDK to supply the Company with certain management services in
consideration for the payment by the Company of a management fee ranging between
$2,500 and $10,000 per month.
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.
Management believes that inflation did not have a material effect on
operations or financial condition in 2000 or 1999. Management also believes that
its business is not seasonal; however, significant promotional activities can
have a direct impact on sales volume in any given quarter.
Fiscal Year 1999 compared to Fiscal Year 1998.
----------------------------------------------
Net sales for the fiscal year ended 1999 were approximately $6,265,000
as compared to net sales in 1998 of $10,256,000. The Company has realized a
decline in sales to PDK and customers which outsource a portion of their
business to supplement their own capacities. Efforts are being made to replace
these revenues. In November 1998, the Company entered into an agreement to
acquire certain private label customers from Futurebiotics, a subsidiary of PDK.
As consideration for these customers, the Company is obligated to pay
Futurebiotics 10% of all revenues derived from these customers for three years.
Selling, general and administrative expenses were $741,000 in 1999 and
$747,000 in 1998. As a percentage of sales, selling, general and administrative
expenses were 12% in 1999 and 7% in 1998. The overall decrease as a percentage
of sales is attributable to the Company's growth in sales without incurring any
significant additional expenses.
Total sales to PDK under various supply agreements approximated
$4,921,000 and $9,054,000 for the fiscal years ended June 30, 1999 and 1998,
respectively.
Sales to CGI under a supply agreement approximated $475,000 and $7,000
for the fiscal year ended June 30, 1999 and 1998, respectively.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2000, the Company had a working capital deficit of
approximately $1,749,000.
The Company's statements of cash flows reflects cash used in operating
activities of approximately $15,000, primarily due to (i) increases in
liabilities such as due to affiliate ($103,000); (ii) decreases in operating
assets such as accounts receivable ($15,000), due from affiliate ($317,000) and
inventories ($2,469,000); and (iii) adjustments for depreciation and
amortization expense
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($246,000) and inventory allowance ($75,000), offset by a net loss of
($1,504,000) and decreases in liabilities such as accounts payable and accrued
expenses ($1,724,000).
The statement also reflects net cash used in investing activities of
approximately ($5,000) which is attributable to the acquisition of property and
equipment.
11
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Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
12
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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.
13
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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
---- --- ----------------------------
Lawrence D. Simon 34 President, Chairman, Chief Financial
Officer and Director
Reginald Spinello 48 Director
Raveendra Nandigam 51 Director
Background of Executive Officers and Directors
Lawrence D. Simon has been the President, Chairman, Chief Financial Officer and
a Director of the Company since May 1, 1996. He was the National Sales Director
for Futurebiotics from October 1, 1995, until his resignation on April 30, 1996.
Futurebiotics distributes, markets and sells vitamins, minerals, herbal
formulations and specialty nutritional supplements principally to health food
stores through regional distributors. Prior to joining Futurebiotics Mr. Simon
was Regional Sales Manager for PDK (from April 10, 1992 to September 30, 1995).
Prior to PDK Mr. Simon was President of LDS Products Inc. (from March 1990 to
March 1991). LDS Products Inc., is a brokerage corporation specializing in sales
to wholesale companies in Eastern Europe. Prior to LDS Products Inc., Mr. Simon
was an Auditor with Coopers & Lybrand LLP (from December 1988 to March 1990). He
is a graduate of Cleveland State University with a Bachelors Degree in Business
Administration.
Reginald Spinello has been a Director of the Company since May 1, 1996. He has
been the President and a Director of Futurebiotics since its formation in March,
1994 and Chief Executive Officer since December 2, 1997. Futurebiotics
distributes, markets and sells vitamins, minerals, herbal formulations and
specialty nutritional supplements principally to health food stores through
regional distributors. In addition, he is the President and Chief Executive
Officer of PDK Labs Inc., a position he has held since August 21, 1998 and he
was the Executive Vice President of PDK Labs Inc., from September 1993 until
August 21, 1998 and a Director of PDK Labs Inc. since August 5, 1997. Mr.
Spinello joined PDK Labs Inc. in September 1991 as Vice President of Operations.
Mr. Spinello graduated from Bryant College with a B.S. Degree in Business
Administration. Additionally, he has studied in the field of nutrition and is a
non-practicing nutrition consultant.
Raveendra Nandigam has been a Director of the Company since June 1, 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. PDK is a manufacturer of over the
counter pharmaceuticals. 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.
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
--------------------------------------------------------------------
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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 June 30, 1999,
all Section 16(a) filing requirements applicable to its officers and directors
and greater than ten percent beneficial owners were satisfied.
Executive Compensation
----------------------
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted LTIP
Name and Principal Other Annual Stock Options/ Payouts All Other
Position Year Salary ($) Bonus ($) Compensation($) Award($) SARs(#) ($) Compensation
-------- ---- ---------- --------- --------------- -------- ------- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence Simon,
President 2000 $132,000 $37,500 -0- -0- -0- -0- -0-
1999 $100,000 $25,000 -0- -0- -0- -0- -0-
1998 $87,000 $44,000 -0- -0- -0- -0- -0-
</TABLE>
(1) Represents issuance of options to acquire 100,000 shares of common
stock at $6.00 per share exercisable one year from the effective date
of the Company's Initial Public Offering.
Aggregated Option/SAR Exercises -
and FY-End Option/SAR Values
----------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Shares Value Number of Securities Value of Unexercised in the Money
Acquired on Realized Underlying Unexercised Options/SARs at the
Name Exercise (#) $ Options/SARs at FY-End (#) FY-End ($)
---- ------------ - -------------------------- ----------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Simon (2) 0 0 100,000 100,000 $-0- -0-
</TABLE>
(2) The exercise price of the options is $6.00 per share.
Employment Agreements
---------------------
Under a prior agreement, Mr. Simon 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 included in the Units offered for sale in
the Initial Public Offering commencing one year from the effective date of the
Initial Public Offering, and (ii) only at a time when Mr. Simon is employed by
the Company. The Company does not currently have an employment agreement with
Mr. Simon, its President, CEO and CFO.
1996 Stock Plan
---------------
In June 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The
15
<PAGE>
purpose of the 1996 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 1996 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 1996 Plan provides 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 1996 Plan is initially 2,000,000 shares.
Shares issuable under the 1996 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 1996 Plan will be 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
Company does not presently have two "disinterested" directors and, accordingly,
no awards will be granted under the 1996 Plan until such time as there are two
"disinterested" directors. 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 1996 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).
Types of Awards
---------------
Stock Options. Options granted under the 1996 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 May 2006. 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.
16
<PAGE>
The exercise price of an Incentive Option granted to a person
possessing more than 10% of the total combined voting power of all shares of
stock of the Company or a parent or subsidiary of the Company ("10%
Stockholder") shall in no event be less than 110% of the Fair Market Value of
the shares of the Common Stock at the time the Incentive Option is granted. The
term of an Incentive Option granted to a 10% Stockholder shall not exceed five
(5) years from the date of grant.
The exercise price of the shares to be purchased pursuant to each
Option shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of
shares of the Company's Common Stock owned by the optionee at the time of the
exercise of the Option, (iii) in installments, payable in cash, if permitted by
the Committee or (iv) any combination of the foregoing. The stock-for-stock
payment method permits an optionee to deliver one (1) or more shares of
previously owned Common Stock of the Company in satisfaction of the exercise
price of subsequent Options. The optionee may use the shares obtained on each
exercise to purchase a larger number of shares on the next exercise. (The
foregoing assumes an appreciation in value of previously acquired shares). The
result of the stock-for-stock payment method is that the optionee can generally
avoid immediate tax liability with respect to any appreciation in the value of
the stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option
may not be sold or otherwise disposed of for a period determined by the Board
upon grant of the Option, which period shall be not less than six (6) months nor
more than three (3) years from the date of acquisition of the shares (the
"Restricted Period"), except that, during the Restricted Period (i) the optionee
may offer the shares to the Company and the Company may, in its discretion,
purchase up to all the shares offered at the exercise price and (ii) if the
optionee's employment terminates during the 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 1996 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 1996 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.
17
<PAGE>
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 1996 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 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information, as of September 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:
<TABLE>
<CAPTION>
Shares of Percentage (%)
Name and Address of Common Stock Percentage (%) of Shares of Total Combined
Beneficial Owner(1) Owned Common Stock Preferred Stock Vote
------------------- ----- ------------ --------------- ----
<S> <C> <C> <C> <C>
PMF, Inc.(3)(4) 3,322,650 54.0 5,000,000 74.6
Compare Generiks, Inc.(5) 500,000 12.5 0 5.6
Lawrence D. Simon(2)(6)(7) 100,000 2.4 5,000,000 56.0
Reginald Spinello(2)(7) 0.0 0.0 5,000,000 55.6
Raveendra Nandigam(2)(7) 0.0 0.0 5,000,000 55.6
All officers and directors as a
group (three (3) persons)(7) 100,000 2.4 5,000,000 56.0
</TABLE>
(1) Beneficial ownership as reported in the table above has been determined
in accordance with Instruction (b1) to Item 403 of Regulation S-B of
the Securities Exchange Act.
(2) The address of the stockholders noted above is c/o Superior
Supplements, Inc., 270 Oser Avenue, Hauppauge, NY 11788.
(3) Includes 2,150,000 shares of common stock issuable upon the exercise of
2,150,000 Class A Warrants held by PMF, Inc. PMF, Inc., a corporation
wholly owned by Barry Gersten, the founder of the Company, is record
holder of such shares. Mr. Gersten may be deemed to hold sole
investment and voting power over such shares.
(4) The address of PMF, Inc. is c/o Ganer Grossbach Ganer, P.C. 1995
Broadway, New York, NY 10023.
(5) The address of Compare Generiks, Inc. is 60 Davids Drive, Hauppauge,
New York 11788.
(6) Includes 100,000 shares of common stock underlying option to purchase
100,000 shares of Common Stock of the Company issued pursuant to Mr.
Simon's employment agreement which became exercisable one year from the
effective date of the Company's Initial Public Offering.
(7) Includes 5,000,000 shares of Preferred Stock owned by PMF, Inc. PMF,
Inc. granted a voting trust on May 1, 1996 for a period of five (5)
years to Lawrence D. Simon, Reginald Spinello and Dr. Durchslag or any
director succeeding any of such persons. Dr. Durchslag resigned on May
2, 1998 and, therefore, no longer holds the voting trust. Mr. Nandigam
was appointed as a director of the Company on June 1, 1998 and has held
the voting trust since that date. Any disagreement is to be resolved by
the vote of a majority of the trustees. Accordingly, each of them may
be deemed to hold voting power over such shares. PMF, Inc. has retained
all other rights of beneficial ownership in such shares.
18
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On April 24, 1996, the Company was formed in the State of Delaware.
On April 24, 1996, PMF, Inc., a company wholly-owned and controlled by
Barry Gersten, acquired (i) (a) 3,000,000 shares of Common Stock of the Company,
par value $.0001 per share, and (b) 3,000,000 Class A Warrants for a cash
consideration of $50,000, and (ii) 5,000,000 shares of Series A Preferred Stock
of the Company, par value $.0001, per share, for a cash consideration of $5,000.
The Series A Preferred Stock has no dividend rights and has a liquidation right
of $.02 per share. Each share of Series A Preferred Stock shall be entitled to
one (1) vote per share on all matters presented to stockholders of the Company.
Each Class A Warrant entitles the holder to purchase one (1) share of Common
Stock of the Company at the initial public offering price, commencing one (1)
year after the Effective Date of the Company's initial public offering (the
"Initial Public Offering"). Simultaneously, with the Company's Initial Public
Offering, PMF, also completed an underwritten public offering of securities by
selling 325,000 Units consisting of 650,000 shares of Common Stock and 650,000
Class A Warrants to purchase an additional 650,000 shares of Common Stock. The
Company did not receive any of the proceeds of the sale of securities by PMF.
On May 1, 1996 PMF, Inc. granted a voting trust for a period of five
(5) years to Lawrence D. Simon, Reginald Spinello and Dr. Daniel Durchslag (or
any director succeeding any such person) over the 5,000,000 Preferred Shares
owned by PMF, Inc. Dr. Durchslag resigned as a Director on May 2, 1998 and lost
voting power under the voting trust. His successor, Raveendra Nandigam, was
appointed as a Director on June 1, 1998 and holds voting power under the voting
trust. The voting trust provides for the majority decision to control the vote
in the event of any disagreement between the trustees.
On May 14, 1996, the Company entered into an agreement to supply PDK
with vitamins and dietary supplements in bulk tablet form (the "PDK Agreement").
The agreement, as amended, provides for PDK to purchase certain products at fair
market value. PDK agreed to purchase products having a minimum aggregate sales
price of $2,500,000 per annum for each year during the term of the PDK
Agreement. In the event that PDK fails to purchase the minimum amount of
products in any year, the Company will be paid $100,000 as liquidated damages
(pro-rated by reference to the percentage of said minimum amount purchased
during the related year). The term of the PDK Agreement is for a period of three
(3) years, automatically renewable for successive one (1) year terms. Sales to
PDK approximated 72% of total sales for the year ended June 30, 2000.
On May 31, 1996, the Company agreed to exclusively supply CGI with
vitamins in bulk tablet form (other than any vitamins sold under the "Energex"
trademark or as part of the "Energex" product line) at the Company's cost plus
fifteen percent (15%) pursuant to a supply agreement between the Company and
Compare Generiks, Inc. (the "Compare Agreement"). The term of the Compare
Agreement is for a period of three (3) years, automatically renewable for
successive one (1) year terms.
In June, 1996, the Company borrowed $200,000 from PMF, Inc., the
Company's founder, at an annual interest rate of eight percent (8%) pursuant to
a promissory note dated June 26, 1996, repayable on June 25, 1998. The Company
has received a demand for repayment of the sums outstanding under this note. The
Company intends to request a change or an extension in the terms of the note.
19
<PAGE>
On July 21, 1997, the Company entered into a management agreement with
PDK Labs Inc. pursuant to which PDK agreed to supply certain management services
to the Company in consideration for the payment by the Company of a management
fee ranging from $2,500 to $10,000 per month.
In addition, on November 30, 1997, the Company entered into a packaging
agreement with PDK to package Futurebiotics products for PDK. The agreement
expired in November 1999. At the date of expiration all provisions of the
agreement were satisfied.
In November 1998, the Company entered into an agreement to acquire
certain private label customers from Futurebiotics. As consideration for these
customers, the Company is obligated to pay Futurebioitics 10% of all revenues
derived from these customers for three years.
Conflict of Interests
---------------------
PMF, a company wholly-owned and controlled by Barry Gersten, owns 30.3%
of the Company's outstanding shares of Common Stock, 100% of the shares of
Series A Preferred Stock of the Company, par value $.0001 per share (the "Series
A Preferred Stock") and 61.4% of the Company's outstanding Class A Warrants. In
addition, in June 1996, PMF made a loan of $200,000 to the Company pursuant to a
promissory note, repayment of which loan has been demanded and remains
outstanding. At present, PDK is a major customer of the Company, accounting for
a significant percentage of the Company's total sales revenue and also supplies
certain management and personnel to the Company. In addition, Reginald Spinello,
one of the Company's Directors, is the President, Chief Executive Officer and a
Director of PDK, Raveendra Nandigam, one of the Company's Directors, is the Vice
President of Manufacturing of PDK and Lawrence Simon, the Company's Chairman,
President and Chief Executive Officer is a director of PDK. Reginald Spinello,
Raveendra Nandigam and Lawrence Simon have voting power over more than fifty
percent (50%) of the Common Stock and Preferred Stock of the Company pursuant to
a voting trust agreement with PMF. Because of PMF's ownership interest in the
Company, PMF's role as a creditor of the Company, the identity of certain
management, the voting control of certain management over PMF's Preferred Stock
and PDK's role as a significant customer to the Company, certain conflicts of
interest may occur between the Company and PMF or PDK.
General
-------
The Company believes that material affiliated transactions and loans
between the Company and its directors, officers and principal shareholders or
any affiliates thereof have been and will be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.
20
<PAGE>
PART IV
-------
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)(1) Financial Statements.
--------------------
<TABLE>
The following financial statements are included in Part II, Item 7:
<S> <C>
Report of Independent Certified Public Accountants F- 1
Balance sheet as of June 30, 2000 F- 2
Statements of operations for the years ended June 30, 2000
and June 30, 1999 F- 3
Statement of stockholders' (deficiency) equity for the years
ended June 30, 2000 and June 30, 1999 F- 4
Statements of cash flows for the years ended June 30, 2000
and June 30, 1999 F- 5
Notes to financial statements F- 6 - F- 11
</TABLE>
21
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors and Stockholders
Superior Supplements, Inc.
Hauppauge, New York
We have audited the balance sheet of Superior Supplements, Inc. as of June 30,
2000, and the related statements of operations, stockholders' deficiency
(equity) and cash flows for the years ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Superior Supplements, Inc. as
of June 30, 2000 and the results of its operations and its cash flows for the
years ended June 30, 2000 and 1999, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Superior
Supplements, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, Superior Supplements, Inc. incurred a net loss of
$1,504,000 from operations, generated a negative gross profit during the year,
and negative working capital and stockholders' deficiency of $1,749,000 and
$588,000, respectively at June 30, 2000. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these factors are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Holtz Rubenstein & Co., LLP
-----------------------------------
Holtz Rubenstein & Co., LLP
Melville, New York
September 15, 2000
F-1
<PAGE>
SUPERIOR SUPPLEMENTS, INC.
--------------------------
BALANCE SHEET
-------------
JUNE 30, 2000
-------------
<TABLE>
<S> <C>
ASSETS (Note 9)
------
CURRENT ASSETS:
Cash and cash equivalents $ 7,406
Accounts receivable, no allowance for doubtful accounts (Note 9) 9,240
Due from affiliate (Note 9) 4,459
Inventories (Note 3) 156,792
Prepaid expenses 61,410
-----------
Total current assets 239,307
PROPERTY AND EQUIPMENT, net (Note 4) 1,132,418
OTHER ASSETS, net 28,911
-----------
$ 1,400,636
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 444,172
Note payable (Note 5) 200,000
Due to affiliate (Note 9) 1,344,206
-----------
Total current liabilities 1,988,378
-----------
COMMITMENTS (Note 8)
STOCKHOLDERS' DEFICIENCY: (Note 6)
Common stock, $.0001 par value; authorized 25,000,000
shares; 4,000,000 shares issued and outstanding 400
Preferred stock, $.0001 par value; authorized 10,000,000
shares; 5,000,000 shares issued and outstanding 500
Additional paid-in capital 3,145,441
Deficit (3,734,083)
-----------
(587,742)
-----------
$ 1,400,636
===========
</TABLE>
See notes to financial statements
F-2
<PAGE>
SUPERIOR SUPPLEMENTS, INC.
--------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Years Ended
June 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
NET SALES (Note 9) $ 6,102,473 $ 6,264,885
----------- -----------
COSTS AND EXPENSES:
Cost of sales 6,927,136 7,273,591
Selling, general and administrative (Notes 8, 9 and 12) 661,647 741,133
----------- -----------
7,588,783 8,014,724
----------- -----------
OPERATING LOSS (1,486,310) (1,749,839)
OTHER EXPENSE:
Interest expense, net (17,952) (16,711)
----------- -----------
LOSS FROM OPERATIONS BEFORE
INCOME TAX BENEFIT (1,504,262) (1,766,550)
INCOME TAX BENEFIT (Note 7) -- (9,000)
----------- -----------
NET LOSS $(1,504,262) $(1,757,550)
=========== ===========
NET LOSS PER SHARE (Note 6) $ (.38) $ (.44)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING (Note 6) 4,000,000 4,000,000
=========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
SUPERIOR SUPPLEMENTS, INC.
--------------------------
STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
----------------------------------------------
(Note 6)
--------
<TABLE>
<CAPTION>
Common Stock Preferred Stock
25,000,000 Shares 10,000,000 Shares
$.0001 Par Value $.0001 Par Value
-------------------------- --------------------- Additional
Par Par Paid-in
Shares Value Shares Value Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 4,000,000 $ 400 5,000,000 $ 500 $ 3,145,441 $ (472,271) $ 2,674,070
Net loss -- -- -- -- -- (1,757,550) (1,757,550)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 4,000,000 400 5,000,000 500 3,145,441 (2,229,821) 916,520
Net loss -- -- -- -- -- (1,504,262) (1,504,262)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 4,000,000 $ 400 5,000,000 $ 500 $ 3,145,441 $(3,734,083) $ (587,742)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
SUPERIOR SUPPLEMENTS, INC.
--------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Years Ended
June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,504,262) $(1,757,550)
----------- -----------
Adjustments to reconcile net loss to net cash
(used in) provided by operations:
Deferred income taxes -- (9,000)
Depreciation and amortization 246,112 242,527
Inventory allowance 75,000 --
(Increase) decrease in assets:
Accounts receivable 14,707 77,939
Due from affiliate 316,837 482,297
Inventories 2,469,213 1,373,269
Prepaid expenses (21,664) 21,335
Other assets 9,582 32,143
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1,723,834) (1,621,345)
Due to affiliates 102,862 1,241,344
Taxes payable -- (2,000)
----------- -----------
Total adjustments 1,488,815 1,838,509
----------- -----------
Net cash (used in) provided by operating activities (15,447) 80,959
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,883) (90,204)
----------- -----------
Net cash used in investing activities (4,883) (90,204)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,330) (9,245)
CASH AND CASH EQUIVALENTS, beginning of year 27,736 36,981
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 7,406 $ 27,736
=========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
SUPERIOR SUPPLEMENTS, INC.
--------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
YEARS ENDED JUNE 30, 2000 AND 1999
----------------------------------
1. Organization and Nature of Operations:
-------------------------------------
Superior Supplements, Inc. (the "Company") is a Delaware Corporation
engaged in the manufacturing, packaging and marketing of dietary supplement
products including vitamins, minerals, herbs and specialty nutritional
supplements, in bulk tablet, capsule and powder form.
The Company's financial statements for the year ended June 30, 2000
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. During 2000, the Company experienced a decline in revenues
resulting from the loss of certain customer product lines. As a result, the
Company incurred a net loss of $1,504,000 from operations and generated a
negative gross profit during the year, and reflected negative working capital
and stockholders' deficiency of $1,749,000 and $588,000, respectively as of June
30, 2000. Such losses continued subsequent to year end. Management's plans
regarding improving the results of future operations and liquidity include
soliciting new customers, developing new product lines, and controlling its
overhead and fixed expenses. The accompanying financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
2. Summary of Significant Accounting Policies:
------------------------------------------
a. Inventories
-----------
Inventories are valued at lower of cost (first-in, first-out method) or
market.
b. Investments
-----------
Available-for-sale securities are carried at fair value with the
unrealized holding gain (loss) 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 earnings resulting in the establishment of a
new cost basis for the security.
c. Depreciation
------------
Depreciation is computed on the straight-line method over the useful
lives of the related assets (5-10 years). Leasehold improvements are amortized
over their expected useful lives.
d. Income taxes
------------
Deferred tax assets and liabilities are determined based on 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.
e. 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.
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.
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 and due from affiliates.
Wholesale distributors of dietary supplements and over-the-counter
pharmaceuticals account for all of the Company's trade receivables and due from
affiliates. The risk associated with this concentration is limited due to their
geographic dispersion.
h. Accounting for stock-based compensation
---------------------------------------
The Company accounts for its stock-based compensation costs using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25 and
will provide pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by Financial Accounting Standards Board
Statement No. 123 ("FASB") had been applied in measuring compensation expense.
3. Inventories:
-----------
<TABLE>
Inventories consist of the following at June 30, 2000:
<S> <C>
Raw material $ 132,749
Work-in-process 24,043
-----------
$ 156,792
===========
</TABLE>
4. Property and Equipment:
-----------------------
<TABLE>
Property and equipment consists of the following at June 30, 2000:
<S> <C>
Equipment $ 1,348,409
Leasehold improvements 567,529
Furniture and fixtures 32,193
-----------
1,948,131
Less accumulated depreciation 815,713
-----------
$ 1,132,418
===========
</TABLE>
Depreciation expense approximated $246,000 and $242,500 for the years
ended June 30, 2000 and 1999, respectively.
F-7
<PAGE>
5. Note Payable:
-------------
The Company borrowed $200,000 from PMF, Inc., the Company's founder.
This note, bearing interest at 8% per annum, was due on June 25, 1998. The note
was unpaid as of June 30, 2000.
6. Stockholders' Equity:
--------------------
a. Capitalization
--------------
Pursuant to the Company's certificate of incorporation, the Company is
authorized to issue 25,000,000 shares of common stock and 10,000,000 shares of
preferred stock. All stock has a $.0001 par value. Each share of common and
preferred has one vote in all matters.
b. Initial capitalization
----------------------
The preferred shares outstanding are designated as Series A Preferred
Shares. The Board of Directors has the authority to issue preferred stock in one
or more series and to fix the rights and other terms. The Series A Preferred
Shares rank senior to all series of preferred and common stock, do not have any
right to the payment of any dividend, and in the event of any voluntary or
involuntary liquidation of the Company are entitled to $.02 per share.
c. Public offering
---------------
In February 1997, the Company completed its Initial Public Offering of
securities. During the offering an aggregate of 575,000 units, each of which
included two (2) shares of the Company's Common Stock and two (2) Class A
Redeemable Purchase Warrants, were sold. 325,000 of said units were sold by PMF,
Inc., as Selling Securityholder and 250,000 of said units were sold by the
Company which raised gross proceeds of $3,000,000 for the Company.
In addition, the Company issued to the underwriter an option
("Underwriters' Option") to purchase up to 50,000 units at an exercise price of
$19.80 per unit. The option is exercisable through February 2001.
Each Class A Warrant entitles the holder to purchase one (1) share of
common stock of the Company at the initial public offering price ($6.00 per
share).
d. Reserved shares
---------------
At June 30, 2000, the Company has 5,800,000 shares of common stock
reserved for future issuances.
e. Stock option plan
-----------------
The Company has adopted 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. Options
-------
In 1997, the Company granted an officer an option to purchase 100,000
shares of the outstanding common stock of the Company exercisable, at an
exercise price equal to the initial public offering price of $6.00 per share,
one (1) year after the effective date of the Company's initial public offering.
The option expires upon the officer's termination of employment.
F-8
<PAGE>
6. Stockholders' Equity: (Cont'd)
--------------------
g. Net income (loss) per share
---------------------------
Basic EPS excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if stock options or convertible securities were exercised or
converted into common stock.
Basic and diluted loss per share amounts were equivalent for the years
ended June 30, 2000 and 1999.
7. Income Taxes:
------------
Income tax (benefit) provision consists of the following:
Years Ended
June 30,
-----------------------------
2000 1999
------- -------
Federal:
Current $ -- $ --
Deferred -- (7,200)
------- -------
-- (7,200)
------- -------
State:
Current -- --
Deferred -- (1,800)
------- -------
-- (1,800)
------- -------
$ -- $(9,000)
======= =======
Net deferred income tax asset (liability) is composed of the following
at June 30, 2000:
Net operating loss carryforward $ 1,375,000
Capital loss carryforward 183,000
Depreciation (61,000)
Other 41,000
Valuation allowance (1,538,000)
-----------
$ --
===========
The difference between the corporation's effective income tax rate and
the United States Statutory rate is a result of the valuation allowance against
the net deferred tax asset. During the year ended June 30, 2000 the allowance
increased by $606,000.
At June 30, 2000, the Company has available approximately $25,000 of
unused investment credits, that may provide future tax benefits. The credits
expire in 2004.
The Company has available approximately $3,333,000 of unused net
operating loss carryforwards that may be applied against future earnings. The
carryforwards expire from 2017 to 2018. The Company also has available
approximately $415,000 of unused capital loss carryforwards that may be applied
against future capital gains. The loss carryforwards expire through 2002.
F-9
<PAGE>
8. Commitments:
-----------
The Company is obligated under a non-cancellable lease for its
manufacturing and office facility. The lease requires minimum future rental
payments of $279,600, $293,500 and $86,800 for the years ending June 30, 2001,
2002 and 2003, respectively.
Net rent expense approximated $182,500 and $267,000 for the years ended
June 30, 2000 and 1999, respectively. The Company recognized sublease rental
income from PDK Labs Inc. ("PDK") of $87,500 in 2000.
9. Supply Agreements/Major Customer:
--------------------------------
a. PDK Labs
--------
The Company is party to an amended supply agreement with PDK. The
agreement, which expires in May 2001, provides for PDK to purchase certain
products at specified prices. In the event that PDK fails to purchase a minimum
amount ($2,500,000) of products in any given year, the Company will be paid up
to $100,000, on a pro-rata basis, as liquidated damages.
In addition, the Company was party to a packaging agreement with PDK
under which it agreed to package specified products for PDK for a fixed price
based on component costs plus a direct labor charge per unit. This agreement
expired in November 1999.
Sales to PDK approximated $4,377,000 and $4,921,000 for the periods
ended June 30, 2000 and 1999, respectively.
The Company is also obligated under a management agreement with PDK
pursuant to which PDK agreed to supply certain management services to the
Company in consideration for the payment of a management fee, ranging from
$2,500 to $10,000 per month. The term of the agreement is one year, and is
automatically renewable for one year terms at the option of both parties.
Management fees under this agreement were $67,500 and $120,000 for the years
ended June 30, 2000 and 1999, respectively.
In November 1998, the Company entered into an agreement to acquire
certain private label customers from Futurebiotics, a subsidiary of PDK. As
consideration for these customers, the Company is obligated to pay Futurebiotics
10% of all revenue derived from these customers for a three year period.
Royalties under this agreement approximated $53,000 and $48,000 during the years
ended June 30, 2000 and 1999, respectively.
The net amount due to PDK and Futurebiotics approximated $1,343,000 at
June 30, 2000, and is collateralized by essentially all of the Company's assets.
b. Compare Generiks
----------------
The Company is also party to a supply agreement with Compare Generiks,
Inc. ("Compare"). Terms of this agreement are similar to the agreement with PDK,
except there are no minimum purchase requirements. Sales under this agreement
approximated $1,052,000 and $475,000 for the years ended June 30, 2000 and 1999,
respectively.
Net amounts due from Compare approximated $4,000 at June 30, 2000.
F-10
<PAGE>
10. Fair Value of Financial Instruments:
-----------------------------------
The methods and assumptions used to estimate the 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.
At June 30, 2000, the carrying amount of the Company's financial
instruments approximate their fair value.
11. Supplementary Information - Statement of Cash Flows:
---------------------------------------------------
Cash paid for interest and income taxes was $2,234 and $224,
respectively, for the year ended June 30, 2000. Cash paid for interest and
income taxes was $910 and $5,071, respectively, for the year ended June 30,
1999.
12. Retirement Plan:
---------------
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 an
employee's earnings. The Company contributed approximately $6,300 and $9,800 to
the Plan for the years ended June 30, 2000 and 1999, respectively.
F-11
<PAGE>
(a) (2) Exhibits
1.01* Form of Underwriting Agreement.
1.02* Form of Agreement Among Underwriters.
1.03* Form of Consulting Agreement.
1.04* Form of Selected Dealer Agreement.
1.05* Form of Warrant Exercise Fee Agreement.
3.01* Certificate of Incorporation of the Company dated April 24,
1996.
3.02* By-Laws of the Company.
3.03* Form of Certificate of Designation of Series A 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 Class A Redeemable Common Stock
Purchase Warrant.
4.04* Form of Warrant Agreement by and among the Company and
American Stock Transfer & Trust Company.
4.05* Form of Underwriters' Unit Purchase Warrant.
9.01* Form of Voting Trust Agreement.
10.01* Supply Agreement between the Company and PDK dated as of
May 14, 1996.
10.02* Supply Agreement between the Company and CGI dated as of
May 31, 1996.
10.03* Lease between the Company and Park Associates dated as of
May 1, 1996.
10.04* Subscription Agreement between the Company and CGI dated as of
May 31, 1996.
10.05* Employment Agreement between the Company and Lawrence D. Simon
dated as of May 1, 1996.
10.06* Form of May, 1996 Bridge Loan Agreements.
10.07* Revolving Credit Agreement between the Company and Dune dated
May 31, 1996.
10.08* Promissory Note in favor of PMF dated June 26, 1996.
10.09* 1996 Stock Plan.
10.10** Amendment to Supply Agreement between the Company and PDK Labs
Inc. dated as of July 21, 1997.
10.11** Management Agreement between the Company and PDK Labs Inc.
dated as of July 21, 1997.
10.12** Amendment to Employment Agreement between the Company and
Lawrence D. Simon dated as of April 30, 1997.
10.13*** Packaging Agreement between the Company and PDK Labs Inc.
dated as of November 30, 1997.
10.14*** Amendment No. 2 to Employment Agreement between the Company
and Lawrence D. Simon dated as of April 30, 1998.
10.15**** Asset Purchase Agreement by and among the Company and
Futurebiotics, Inc. dated as of November 19, 1998.
10.15 Second Lease Amendment between the Company and Park Associates
dated April 13, 2000.
* Incorporated by Reference to the Company's Registration Statement on
Form SB-2, No. 333-9761.
** Incorporated by Reference to the Company's Form 10-KSB for the year
ended June 30, 1997.
*** Incorporated by Reference to the Company's Form 10-KSB for the year
ended June 30, 1998.
**** Incorporated by Reference to the Form 10-KSB of Futurebiotics, Inc. for
the year ended November 30, 1998.
22
<PAGE>
(b) Reports on Form 8-K.
None.
23
<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
September 27, 2000
SUPERIOR SUPPLEMENTS, INC.
By: /s/ Lawrence D. Simon
-------------------------------------
Lawrence D. Simon
President, Chairman, Chief Financial
Officer, Principal Accounting 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/ Lawrence D. Simon President, Chairman, September 27, 2000
--------------------------- Chief Financial Officer,
Lawrence D. Simon Principal Accounting
Officer and Director
/s/ Reginald Spinello Director September 27, 2000
---------------------------
Reginald Spinello
/s/ Raveendra Nandigam Director September 27, 2000
---------------------------
Raveendra Nandigam
