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 May 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: 33-31006
PDK LABS INC.
(Exact name of Registrant as specified in its charter)
New York 11-2590436
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
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 July 1, 1996
Common Stock 3,191,986
<PAGE>
PDK LABS INC.
FORM 10-QSB
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED MAY 31, 1996
TABLE OF CONTENTS
Page to Page
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Balance sheet........................................... 1
Statements of earnings.................................. 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
SIGNATURES....................................................... 10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
MAY 31, 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,746,832
Investment in marketable securities, at
fair value 1,422,969
Accounts receivable - less allowance
for doubtful accounts of $42,000 7,219,553
Inventories 17,361,745
Prepaid expenses and other current assets 1,796,502
Deferred tax asset 59,147
-----------
Total current assets 32,606,748
-----------
INVESTMENTS IN MARKETABLE SECURITIES 1,369,775
PROPERTY, PLANT AND EQUIPMENT, net 4,650,702
INTANGIBLE ASSETS, net 3,845,871
INVESTMENT IN COMPARE GENERIKS, INC. 500,000
OTHER ASSETS 4,505,126
-----------
25,561,584
-----------
47,478,222
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 4,377,714
Dividends payable 45,223
Current portion of long-term debt 1,308,337
-----------
Total current liabilities 5,731,274
-----------
LONG-TERM DEBT 10,475,000
DEFERRED INCOME TAXES 1,500,480
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 4,209,884
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 3,191,966 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 27,676,550
Unearned compensation (5,726,150)
Retained earnings 3,871,869
Treasury stock, at cost; 300,000 shares (300,000)
-----------
25,561,584
-----------
$47,478,222
===========
-1-
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31, May 31,
1996 1995 1996 1995
---- ---- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $21,278,689 $12,611,229 $11,812,400 $7,036,711
----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales 13,378,505 6,688,034 7,677,530 3,766,186
Selling, general and administrative 6,755,754 5,056,167 3,835,389 2,953,908
----------- ----------- ----------- ----------
20,134,259 11,744,201 11,512,919 6,720,094
----------- ----------- ----------- ----------
OPERATING INCOME 1,144,430 867,028 299,481 316,617
----------- ----------- ----------- ----------
OTHER:
Interest income (205,889) (273,750) (83,334) (145,079)
Interest expense 422,560 271,671 221,259 128,776
Minority Interest in earnings of
subsidiary 25,272 117,975 (32,937) 33,587
Gain on sale of securities (574,954) - (574,954) -
Gain on sale of subsidiary stock - (219,531) - 21,700
----------- ----------- ----------- ----------
(333,011) (103,635) (469,966) 38,984
----------- ----------- ----------- ----------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES 1,477,441 970,663 769,447 277,633
PROVISION FOR INCOME TAXES 613,000 527,000 348,000 171,000
----------- ----------- ----------- ----------
NET EARNINGS $ 864,441 $ 443,663 $ 421,447 $ 106,633
=========== =========== =========== ==========
EARNINGS PER SHARE $ .21 $ .12 $ .10 $ -
=========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,191,986 2,111,614 3,191,986 2,112,692
=========== =========== =========== ==========
</TABLE>
-2-
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
May 31,
1996 1995
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 679,552 $ 443,663
---------- ----------
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 1,958,730 1,439,773
Minority interests in earnings of subsidiary 25,272 117,975
Gain on sale of securities (574,954) (219,531)
Deferred income tax provision 482,141 299,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (892,188) (637,245)
Inventories (4,114,600) (1,851,236)
Prepaid expenses and other current
assets (720,128) (1,941,450)
Other assets (472,640) (238,074)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,823,553 (463,228)
Income taxes payable (117,820) (166,515)
---------- ----------
Total adjustments (2,602,634) (3,660,531)
---------- ----------
Net cash used in operating activities (1,923,082) (3,216,868)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in investments 4,679,574 (4,671,113)
Purchase of property, plant and equipment (1,603,995) (293,480)
Acquisition of intangible assets (1,448,010) (1,020,880)
---------- ----------
Net cash provided by (used in) investing
activities 1,627,569 (5,985,473)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit line 1,500,000 2,500,000
Repayment of debt (656,250) (193,946)
Proceeds from term loan 1,500,000 -
Net decrease in stockholder loans (5,120) 16,388
Net proceeds from sale of securities 1,774,954 2,177,000
Payments of unearned compensation - (200,000)
---------- ----------
Net cash provided by financing activities 4,113,584 4,299,442
---------- ----------
Net increase (decrease) in cash and cash
equivalents 3,818,071 (4,902,899)
Cash and cash equivalents at beginning
of period 928,761 9,320,200
---------- ----------
Cash and cash equivalents at end of period $4,746,832 $4,417,301
========== ==========
-3-
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 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 six and
three month periods ended May 31, 1996 and May 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 six month periods ended May 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 May 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
SIX MONTHS ENDED MAY 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 per common share were computed by dividing net earnings 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 six month periods
ended May 31, 1996 and May 31, 1995 approximated $184,889.
The Company paid a cash dividend in April 1996 and a common stock dividend in
April 1995.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31, May 31,
1996 1995 1996 1995
------ ----- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 864,441 $ 443,663 $ 421,447 $ 106,633
Dividends 184,889 184,889 94,295 94,295
---------- ---------- ---------- ----------
Earnings available to common
shareholders 679,552 258,774 327,152 12,338
---------- ---------- ---------- ----------
Weighted average number of
shares 3,191,986 2,111,614 3,191,986 2,112,692
---------- ---------- ---------- ----------
Earnings per share $ .21 $ .12 $ .10 $ .00
========== ========== ========== ==========
</TABLE>
8. Major Customer:
Sales to a major customer approximated 51% of total sales for the six
month period ended May 31, 1996.
-5-
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1996
(Continued)
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 May 31, 1996 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 July 6, 1995, the Company amended its revolving credit agreement
with its bank. The amended agreement provides for borrowings up to $7,000,000
and expires May 31, 1998. Borrowings under this agreement bear interest at the
prime rate 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.
-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 six and three month periods ended May 31, 1996
approximated $21,279,000 and $11,812,000, respectively, representing increases
of 69% and 68% 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 six and three month periods ended May 31, 1996
amounted to approximately $7,900,000 (37% of sales) and $4,135,000 (35% of
sales), respectively as compared to $5,923,000 (47% of sales) and $3,271,000
(46% 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 more competitive pricing.
Selling, general and administrative expenses approximated $6,756,000
and $3,835,000 for the six and three month periods ended May 31, 1996,
respectively. As a percentage of sales, these amounts represent 32% and 33%
respectively, as compared to 40% and 42% in the corresponding periods in the
prior year. The overall decrease as a percentage of sales in the six month
periods is primarily attributable to the Company entering into an exclusive
supply and license agreement with a major customer allowing the 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 $217,000 and $138,000 for
the six and three month periods ended May 31, 1996. Interest income net of
interest expense was $2,000 and $16,000 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 $26,875,000 at
May 31, 1996.
The Company's statement of cash flows reflects cash used in operating
activities of approximately $1,923,000 which reflects increases in operating
assets and payables such as accounts receivable ($892,000), inventories
($4,115,000), and prepaid expenses and other current assets ($720,000) offset by
an increase in accounts payable and accrued expenses ($1,824,000) and an
adjustment for amortization expense ($1,959,000).
-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 ($1,628,000) is principally
attributable to the sale of marketable securities ($4,680,000) offset by the
purchase of property, plant and equipment ($1,604,000) and the acquisition of
intangible assets ($1,448,000).
The cash flow statement also reflects cash provided by financing
activities ($4,114,000) representing proceeds from the sale of securities
($1,775,000), bank borrowings ($3,000,000) offset by repayments ($656,000).
The Company intends to meet its cash requirements from operations,
current cash reserves, and 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.
-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: July 9, 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
consolidated financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 4,746,832
<SECURITIES> 2,792,744
<RECEIVABLES> 7,261,553
<ALLOWANCES> 42,000
<INVENTORY> 17,361,745
<CURRENT-ASSETS> 32,606,748
<PP&E> 8,502,847
<DEPRECIATION> 3,852,145
<TOTAL-ASSETS> 47,478,222
<CURRENT-LIABILITIES> 5,731,274
<BONDS> 10,475,000
0
7,396
<COMMON> 31,919
<OTHER-SE> 25,522,269
<TOTAL-LIABILITY-AND-EQUITY> 47,478,222
<SALES> 21,278,689
<TOTAL-REVENUES> 21,278,689
<CGS> 13,378,505
<TOTAL-COSTS> 20,134,259
<OTHER-EXPENSES> 25,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422,560
<INCOME-PRETAX> 1,477,441
<INCOME-TAX> 613,000
<INCOME-CONTINUING> 864,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 864,441
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
