<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-19121
PDK LABS INC.
(Exact name of Registrant as specified in its charter)
New York 1-2590436
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
145 Ricefield Lane
Hauppauge, New York
(Address of principal executive offices)
11788
(Zip Code)
(516) 273-2630
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
Class Outstanding at October 7, 1996
Common Stock 3,191,966
<PAGE>
PDK LABS INC.
FORM 10-QSB
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED AUGUST 31, 1996
TABLE OF CONTENTS
Page to Page
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance sheet....................................................1
Statements of operations.........................................2
Statements of cash flows.........................................3
Notes to financial statements..................................4-6
Item 2. Management's discussion and analysis
of financial condition and results
of operations.........................................7-8
PART 11. OTHER INFORMATION
Item 1. Legal proceedings.......................................9
Item 4. Submission of matters to a vote of security-holders.....9
SIGNATURES...............................................................10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
AUGUST 31, 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,687,113
Accounts receivable - less allowance
for doubtful accounts of $42,000 7,764,806
Inventories 19,595,003
Prepaid expenses and other current assets 1,624,275
Deferred tax asset 114,961
--------------
Total current assets 33,786,158
--------------
INVESTMENTS IN MARKETABLE SECURITIES 1,998,387
PROPERTY, PLANT AND EQUIPMENT, net 5,099,010
INTANGIBLE ASSETS, net 4,155,789
INVESTMENT IN COMPARE GENERIKS, INC. 500,000
OTHER ASSETS 4,014,861
--------------
$49,554,205
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,435,672
Dividends payable 135,817
Current portion of long-term debt 1,246,309
--------------
Total current liabilities 6,817,798
--------------
LONG-TERM DEBT 11,600,975
DEFERRED INCOME TAXES 1,314,343
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 4,150,948
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 3,191,986 issued and
outstanding 31,919
Preferred stock, $.01 par value; authorized
5,000,000 shares; 739,555 issued and
outstanding 7,396
Additional paid-in capital 27,640,862
Unearned compensation (5,405,785)
Retained earnings 3,695,749
Treasury stock, at cost; 30,000 shares (300,000)
--------------
25,670,141
--------------
$49,554,205
==============
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
1996 1995 1996 1995
---- ---- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $33,214,488 $20,723,535 $11,935,799 $8,112,306
------------ ----------- -------------- -----------
COSTS AND EXPENSES:
Cost of sales 21,337,619 11,209,978 7,959,114 4,321,944
Selling, general and administrative 10,655,220 8,294,938 3,899,466 3,238,771
------------ ----------- -------------- -----------
31,992,839 19,504,916 11,858,580 7,560,715
------------ ----------- -------------- -----------
OPERATING INCOME 1,221,649 1,218,619 77,219 551,591
------------ ----------- -------------- -----------
OTHER:
Interest income (330,822) (461,908) (124,933) (188,158)
Interest expense 659,872 420,812 237,312 149,141
Minority interest in (loss) earnings of
subsidiary (68,362) 154,726 (93,634) 36,751
Gain on sale of subsidiary stock - (219,531) - -
Gain on sale of securities (574,954) - - -
Loss on disposition of product line - 600,000 - 600,000
------------ ----------- -------------- -----------
(314,266) 494,099 18,745 597,734
------------ ----------- -------------- -----------
EARNINGS (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,535,915 724,520 58,474 (46,143)
INCOME TAX PROVISION (BENEFIT) 757,000 473,000 144,000 (54,000)
------------ ----------- -------------- -----------
NET EARNINGS (LOSS) $ 778,915 $ 251,520 $ (85,526) $ 7,857
============ =========== ============== ===========
EARNINGS (LOSS) PER SHARE $ .16 $ (.01) $ (.05) $ (.04)
------------ ----------- -------------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,191,986 2,124,742 3,191,986 2,141,970
========== ============ ========== ==========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 778,915 $ 251,520
------------- -------------
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 2,915,914 2,265,162
Minority interest (loss) in earnings of subsidiary (68,362) 154,726
Gain on sale of securities (574,954) -
Gain on sale of subsidiary stock - (219,531)
Loss on disposition of product line - 600,000
Deferred income tax provision 240,190 197,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,437,441) (374,360)
Inventories (6,347,858) (3,631,171)
Prepaid expenses and other current assets (547,901) (1,419,390)
Other assets 24,385 (90,745)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,881,511 (352,707)
Income taxes payable (117,820) (122,748)
------------- -------------
Total adjustments (3,032,336) (2,993,764)
------------- -------------
Net cash used in operating activities (2,253,421) (2,742,244)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in investments 5,473,931 (6,151,857)
Purchase of property, plant and equipment (2,129,906) (605,491)
Acquisition of intangible assets (2,137,810) (1,808,232)
Proceeds from sale of intangible asset - 50,000
------------- -------------
Net cash provided by (used in) investing activities 1,206,215 (8,515,580)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of note payable - 4,000,000
Net proceeds of revolving credit line 2,750,000 (500,000)
Net increase in stockholder loans (11,880) -
Repayment of debt (1,022,627) (270,010)
Net proceeds from sale of securities 1,774,954 -
Net proceeds from sale of subsidiary stock - 2,177,000
Proceeds of term loan 1,500,000 -
Payments of unearned compensation - (200,000)
Reverse stock split cash in lieu - (250)
Cash dividends paid (184,889) -
------------- -------------
Net cash provided by financing activities 4,805,558 5,206,740
------------- -------------
Net increase (decrease) of cash and cash equivalents 3,758,352 (6,051,084)
Cash and cash equivalents at beginning of period 928,761 9,320,200
------------- -------------
Cash and cash equivalents at end of period $4,687,113 $ 3,269,116
============= =============
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1996
1. Basis of Presentation:
The interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to
present a fair statement of the financial position and results of
operations for the nine and three month periods ended August 31, 1996
and August 31, 1995. The financial statements should be read in
conjunction with the summary of significant accounting policies and
notes to financial statements included in the Company's Form 10-KSB
for the fiscal year ended November 30, 1995. The results of operations
for the nine month periods ended August 31, 1996 and 1995 are not
necessarily indicative of the results to be expected for the full
year.
2. Principles of Consolidation:
The accompanying consolidated financial statements
include the accounts of PDK Labs Inc. ("PDK") and its subsidiary,
Futurebiotics, Inc. ("Futurebiotics") (collectively the "Company").
All intercompany balances and transactions have been eliminated.
3. Concentration of Credit Risk:
Financial instruments which potentially expose the
Company to concentrations of credit risk, as defined by Statement of
Accounting Standards No., 105, include U.S. treasury notes and other
government backed securities.
4. Investment in Marketable Securities:
The Company has adopted Financial Accounting Standards
Board ("FASB") Statement No. 115, "Accounting for certain Investments
in Debt and Equity Securities." FASB No. 115 requires that investments
in debt and equity securities be designated as trading,
held-to-maturity, or available for sale. Management considers the
Company's marketable securities, consisting principally of government
and government-backed debt securities, to be available-for-sale.
Available-for-sale securities are reported at amounts which
approximate fair value.
5. Inventories:
Inventories at August 31, 1996 have been estimated using the
gross profit method.
Inventories at November 30, 1995 consisted of the following:
Raw materials $ 4,041,070
Work-in-process 2,314,049
Finished goods 6,892,026
-------------
$13,247,145
=============
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1996
(Continued)
6. Investment in Compare Generiks, Inc.:
On October 31, 1995, the Company entered into an agreement
to transfer certain assets, liabilities and the on-going business of
its Energex/Compare Division product lines to Compare Generiks, Inc.
("CGI"). Consideration consisted of 500,000 shares of CGI common stock
(valued at $1,200,000) and a $500,000 promissory note.
On January 30, 1996, the $500,000 promissory note was
converted to 500,000 shares of CGI's Series B Preferred Stock. The
Series B Preferred Stock earns cumulative annual dividends of 12% or
$.12 per share, and is redeemable by CGI after one year from the date
of issuance.
In March 1996, the Company sold 500,000 shares of Compare
Generiks, Inc. common stock (valued at $1,200,000) for gross proceeds
of $1,875,000.
7. Stockholders' Equity:
Earnings (loss) per common share were computed by dividing
net earnings (loss) less dividends on preferred shares by the weighted
average number of shares of common stock outstanding during the
period. The effect of common stock equivalents on the computation of
earnings per share is not material. Shares held in escrow and treasury
shares have been excluded from the weighted average number of shares.
Preferred stockholders are entitled to cumulative annual
dividends of $.49 per share, payable at the election of the Company in
cash, common stock, or a combination thereof. Such dividends are
payable semi-annually on or about April 15 and October 15 of each
year. Dividends earned for the nine month periods ended August 31,
1996 and August 31, 1995 approximated $275,000. The Company paid a
cash dividend in April 1996 and a common stock dividend in April 1995.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 778,915 $ 251,520 $ (85,526) $ 7,857
Dividends 275,483 275,483 90,594 90,594
---------- ----------- ------------ -----------
Earnings (loss) available to common
shareholders $ 503,432 $ (23,963) $(176,120) $ (82,737)
---------- ----------- ------------ -----------
Weighted average number of
shares 3,191,986 2,124,742 3,191,986 2,141,970
---------- ----------- ------------ -----------
Earnings (loss) per share $ .16 $ (.01) $ (.05) $ (.04)
---------- ----------- ------------ -----------
</TABLE>
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1996
(Continued)
8. Major Customer:
Sales to a major customer approximated 53% of total sales for
the nine month period ended August 31, 1996.
9. Income Taxes:
Effective December 1, 1993, the Company adopted FASB
Statement No. 109, "Accounting for Income Taxes", which requires a
liability approach to financial accounting and reporting for income
taxes.
The tax effects of temporary differences that give rise to
the deferred tax liability at August 31, 1995 consist principally of
the Company's investment in subsidiary, depreciation and amortization.
10. Revolving Credit Agreement:
a. Term Loan Agreements
On July 6, 1995, the Company entered into a term loan
agreement with its bank. The term loan, aggregating $4,000,000, is
payable in 19 quarterly principal installments of $200,000 plus
interest at prime. Payments commenced on the last business day of
November 1995 and continue through August 2000 when the remaining
principal amount is due. A portion of the proceeds was used to repay
existing indebtedness under the Company's revolving credit agreement.
On March 28, 1996, the Company entered into a second term
loan with its bank. The term loan aggregating $1,500,000, is payable
in 19 quarterly principal installments of $75,000, plus interest at
prime. Payments commenced on the last business day of May 1996 and
continue through February 2001 when the remaining principal amount is
due.
b. Revolving Credit Agreement
On September 15, 1996, the Company entered into a Revolving
Credit Agreement with its bank. The agreement provides for aggregate
borrowings of up to $15,000,000 with a sub-limit of $11,000,000 for
the Company and $4,000,000 for its subsidiary and expires September
1999. This agreement replaces the existing revolving credit facility.
Borrowings under this agreement bear interest at the prime rate or 2%
above the Eurodollar rate (at the Company's option) and are
collateralized by all of the Company's assets.
11. Commitment:
On May 14, 1996, the Company entered into a Non-Exclusive
Supply Agreement with a vendor. Pursuant to this agreement, PDK is
required to make minimum annual purchases of $2,500,000 or pay the sum
of $100,000 (pro-rated based on purchases) at a price equal to 115% of
the vendors material cost. As of August 31, 1996, the Company made
purchases of approximately $1,433,000 under this agreement.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the nine and three month periods ended August
31, 1996 approximated $33,214,000 and $11,936,000, respectively,
representing increases of 60% and 47% over the corresponding periods
in 1995. The increase is principally attributable to increased sales
volume resulting from an exclusive supply and licensing agreement with
a major customer, continued expansion of advertising and marketing
efforts of the Futurebiotics product line, and the introduction of new
products.
Gross profit for the nine and three month periods ended
August 31, 1996 amounted to approximately $11,877,000 (36% of sales)
and $3,977,000 (33% of sales), respectively as compared to $9,514,000
(46% of sales) and $3,790,000 (47% of sales) in the corresponding
periods in the prior year. The decrease in the gross margin is
principally attributable to an increase in wholesale sales which yield
lower gross profit margins as well as competitive pricing.
Selling, general and administrative expenses approximated
$10,655,000 and $3,899,000 for the nine and three month periods ended
August 31, 1996, respectively. As a percentage of sales, these amounts
represent 32% and 33% respectively, as compared to 40% in each of the
corresponding periods in the prior year. The overall decrease as a
percentage of sales is primarily attributable to the Company entering
into an exclusive supply and license agreement with a major customer
to use certain trademarks. As a result of this agreement, the Company
manufactures and sells products under these trademarks with minimal
sales and marketing expenses.
Interest expense, net of interest income was $329,000 and
$112,000 for the nine and three month periods ended August 31, 1996.
Interest income net of interest expense was $41,000 and $39,000 for
the corresponding periods in 1995. This reflects increased bank
borrowings and lower investment balances.
Liquidity and Capital Resources
The Company had net working capital of approximately
$26,968,000 at August 31, 1996.
The Company's statement of cash flows reflects cash used in
operations of approximately $2,438,000. This use of cash reflects
increases in operating assets, such as accounts receivable
($1,437,000), inventories ($6,348,000), and prepaid expenses and other
current assets ($548,000) offset by an increase in accounts payable
and accrued expenses ($2,882,000) and an adjustment for amortization
expense ($2,916,000).
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash provided by investing activities ($1,206,000) is
principally attributable to the sale of marketable securities
($5,474,000) offset by the purchase of property, plant and equipment
($2,130,000) and the acquisition of intangible assets ($2,138,000).
The cash flow statement also reflects cash provided by
financing activities ($4,990,000) representing proceeds from the sale
of securities ($1,775,000), bank borrowings ($4,250,000) offset by
repayments ($1,023,000).
In September 1996, the Company entered into a Revolving
Credit Agreement with a bank. The agreement provides for borrowings up
to $15,000,000 with sublimits for PDK Labs Inc. of $11,000,000 and
$4,000,000 for its subsidiary. The agreement replaces the existing
revolving credit facility and expires September 1999.
The Company intends to meet its cash requirements from
operations, current cash reserves, and its existing financial
arrangements.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Reference is made to Item 3 in the Company's Form 10-KSB for
the year ended November 30, 1995.
On July 29, 1996, the Company served a complaint (the
"Complaint") against a former executive. The Complaint alleges, in
pertinent part, that the former executive breached his employment
agreement with PDK by competing with PDK and soliciting PDK's
customers in violation of the terms of the agreement. The complaint
further alleges that the executive has defaulted on payments due to
PDK pursuant to a promissory note and that while serving as an Officer
of PDK made inappropriate investments for PDK's Profit Sharing Plan
and Trusts. By virtue of the foregoing, PDK alleges that the executive
has breached his Employment Agreement and the Amendment, engaged in
unfair competition breached the terms of the personal guarantee,
defaulted upon the promissory note, converted funds belonging to PDK
and breached his fiduciary duty to the Company.
In his Answer and Counterclaim (the "Counterclaim"), the
executive offers general denials of these allegations and interposes
both personal counterclaims and claims. The executive's counterclaims,
assert in pertinent part, that the company and certain officers and
directors have breached their fiduciary duty to him and that the
Restrictive Covenant and agreement is unenforceable and should be
deemed a nullity. PDK, and the directors deny that they engaged in any
improper conduct which would support the executive's counterclaims.
Each intends to vigorously defend against such claims and PDK intends
to proceed with its action against the executive.
Item 4. - Submission of Matters to a Vote of Security-Holders
On July 19, 1996, the Company held its annual meeting of
stockholders. The following directors were re-elected to the Company's
board of directors:
Michael Krasnoff
Stanley Krasnoff
Ira Helman
Hartley T. Bernstein
Robin Marks-Kauffman
In addition, the stockholders ratified the appointment of
Holtz Rubenstein & Co. LLP as the Company's certified public
accountants.
9
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PDK LABS INC.
Dated: October 10, 1996 By: /s/ Michael B. Krasnoff
______________________________________
Michael B. Krasnoff
President and Chief
Executive Officer
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 4,687,113
<SECURITIES> 0
<RECEIVABLES> 7,806,806
<ALLOWANCES> (42,000)
<INVENTORY> 19,595,003
<CURRENT-ASSETS> 33,786,158
<PP&E> 9,209,181
<DEPRECIATION> 4,110,171
<TOTAL-ASSETS> 49,554,205
<CURRENT-LIABILITIES> 6,817,798
<BONDS> 11,600,975
0
7,396
<COMMON> 31,919
<OTHER-SE> 25,630,826
<TOTAL-LIABILITY-AND-EQUITY> 49,554,205
<SALES> 33,214,488
<TOTAL-REVENUES> 33,214,488
<CGS> 21,337,619
<TOTAL-COSTS> 21,337,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659,872
<INCOME-PRETAX> 1,535,915
<INCOME-TAX> 757,000
<INCOME-CONTINUING> 778,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 778,915
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
