<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 28, 1997
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 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 April 4, 1997
----- ----------------------------
Common Stock 3,191,986
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997
TABLE OF CONTENTS
Page to Page
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Balance sheets ......................................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
SIGNATURES....................................................10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, November 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 3,334,807 $ 2,885,517
Investment in marketable securities, at fair value .......... 816,990 3,463,596
Accounts receivable - less allowance
for doubtful accounts of $42,000 and $42,000, respectively 7,217,308 8,015,159
Inventories ................................................. 23,823,603 23,272,516
Prepaid income taxes ........................................ 364,065 416,685
Prepaid expenses and other current assets ................... 1,862,418 1,043,313
Deferred tax asset .......................................... 450,293 383,211
------------ ------------
Total current assets ......................................... 37,869,484 39,479,997
------------ ------------
INVESTMENTS IN MARKETABLE SECURITIES .......................... 1,074,227 1,650,512
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$4,652,734 and $4,376,600, respectively .................... 5,338,237 5,132,548
INTANGIBLE ASSETS, net of accumulated amortization
of $6,896,588 and $6,312,075, respectively .................. 3,035,823 3,552,696
INVESTMENT IN COMPARE GENERIKS, INC ........................... 500,000 500,000
OTHER ASSETS .................................................. 3,359,356 2,938,755
------------ ------------
$ 51,177,127 $ 53,254,508
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ....................... $ 1,958,886 $ 5,750,701
Dividends payable ........................................... 135,817 45,223
Income taxes payable ........................................ 400,283 500,611
Current portion of long-term debt ........................... 1,219,546 1,328,509
------------ ------------
Total current liabilities ................................... 3,714,532 7,625,044
------------ ------------
LONG-TERM DEBT ................................................ 15,294,306 13,602,768
DEFERRED INCOME TAX LIABILITY ................................. 1,138,342 1,251,117
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY ................... 4,096,689 4,114,371
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 30,000,000
shares; 3,191,986 issued and outstanding ................. 31,919 31,919
Preferred stock, $.01 par value; authorized
5,000,000 shares; 739,555 issued and outstanding ......... 7,396 7,396
Additional paid-in capital .................................. 27,791,999 27,754,634
Unearned compensation ....................................... (4,637,164) (4,939,907)
Retained earnings ........................................... 4,693,297 4,442,741
Treasury stock, at cost; 155,500 and 103,500 shares,
respectively ............................................. (954,189) (635,575)
------------ ------------
26,933,258 26,661,208
------------ ------------
$ 51,177,127 $ 53,254,508
============ ============
</TABLE>
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
February 28, February 29,
1997 1996
----- ----
NET SALES ............................ $ 9,761,944 $ 9,466,289
----------- -----------
COSTS AND EXPENSES:
Cost of sales ..................... 5,661,836 5,700,975
Selling, general and administrative 3,452,529 2,920,365
----------- -----------
9,114,365 8,621,340
----------- -----------
OPERATING INCOME ..................... 647,579 844,949
----------- -----------
OTHER:
Interest income ................... (136,003) (122,555)
Interest expense .................. 297,811 201,301
Dividend income ................... (10,000) --
----------- -----------
151,808 78,746
----------- -----------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES AND MINORITY
INTEREST ........................... 495,771 766,203
PROVISION FOR INCOME TAXES ........... 207,000 265,000
----------- -----------
EARNINGS BEFORE MINORITY INTEREST .... 288,771 501,203
MINORITY INTEREST IN NET (LOSS)
EARNINGS OF SUBSIDIARY ............ (52,379) 58,209
----------- -----------
NET EARNINGS ......................... $ 341,150 $ 442,994
=========== ===========
EARNINGS PER SHARE ................... $ .08 $ .11
----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ......... 3,036,486 3,191,986
=========== ===========
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ......................................... $ 341,150 $ 442,994
----------- -----------
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization .................... 1,235,452 746,700
Minority interest in (loss) earnings of subsidiary (52,379) 58,209
Deferred income tax (benefit) provision .......... (179,857) 327,210
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ........................ 797,851 (2,022,905)
Inventories ................................ (551,087) (1,325,876)
Prepaid income taxes ....................... 52,620 --
Prepaid expenses and other current assets .. (819,105) (1,197,562)
Other assets ............................... (420,601) (459,577)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses .... (3,791,815) 171,710
Income taxes payable ..................... (100,328) (117,820)
----------- -----------
Total adjustments ........................ (3,829,249) (3,819,911)
----------- -----------
Net cash used in operating activities ............... (3,488,099) (3,376,917)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities ..... 3,222,891 3,858,109
Purchase of property, plant and equipment ............ (481,823) (494,784)
Acquisition of intangible assets ..................... (67,640) (238,487)
----------- -----------
Net cash provided by investing activities ............ 2,673,428 3,124,838
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt .................................... (417,425) (290,913)
Net proceeds of notes payable ........................ 2,000,000 2,000,000
Purchase of treasury stock ........................... (318,614) --
----------- -----------
Net cash provided by financing activities ............ 1,263,961 1,709,087
----------- -----------
Net increase of cash and cash equivalents ............. 449,290 1,457,008
Cash and cash equivalents at beginning of period ...... 2,885,517 928,761
----------- -----------
Cash and cash equivalents at end of period ............ $3,334,807 $ 2,385,769
=========== ===========
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1997
1. Basis of Presentation:
The interim condensed consolidated financial statements furnished
reflect all adjustments which are, in the opinion of management, necessary
to present a fair statement of the financial position, results of
operations and statements of cash flows for the three month period ended
February 28, 1997. The balance sheet as of November 30, 1996 has been
derived from the audited balance sheet as of that date. This report should
be read in conjunction with the Company's annual report filed on Form
10-KSB for the fiscal year ended November 30, 1996. The results of
operations for the three month periods ended February 28, 1997 and February
29, 1996 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 corporate bonds rated at least "A-1" or the
equivalent thereof by Standard & Poors Corporation.
4. Investment in Marketable Securities:
Investments in debt and equity securities are designated as
trading, held-to-maturity, or available for sale. Management considers the
Company's marketable securities, consisting principally of corporate bonds
rated at least "A-1" or the equivalent thereof by Standard & Poors
Corporation, to be available-for-sale. Available-for-sale securities are
reported at amounts which approximate fair value.
5. Inventories:
Inventories have been estimated by using the gross profit method
for the interim periods. The components of the inventories are as follows:
February 28, 1997 November 30, 1996
(Unaudited)
Raw materials $ 8,468,866 $ 5,829,483
Work-in-process 3,573,540 9,211,383
Finished goods 11,781,197 8,231,650
----------- -----------
$23,823,603 $23,272,516
=========== ===========
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1997
(Continued)
6. 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 anti-dilutive.
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
three month periods ended February 28, 1997 and February 29, 1996
approximated $90,594.
Three Months Ended
February 28, February 29,
1997 1996
---------- ----------
(Unaudited) (Unaudited)
Net earnings .................................. $ 341,150 $ 442,994
Dividends ..................................... 90,594 90,594
---------- ----------
Earnings available to common
shareholders ............................... $ 250,556 $ 352,400
---------- ----------
Weighted average number of
shares ..................................... 3,036,986 3,191,986
---------- ----------
Earnings per share ............................ $ .08 $ .11
---------- ----------
7. Major Customer:
Sales to a major customer approximated 52% of total sales for the
three month period ended February 28, 1997.
8. Income Taxes:
The tax effects of temporary differences that give rise to the
deferred tax liability at February 28, 1997 consist principally of the
Company's investment in subsidiary, depreciation and amortization.
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1997
(Continued)
9. Long-Term Debt:
February 28, November 30,
1997 1996
(Unaudited)
Long-term debt consists of the following:
Revolving lines of credit (a) (b) ................. $12,000,000 $10,000,000
Term loan, payable in quarterly installments
of $200,000, plus interest at prime, through
August 2000; collateralized by the Company's
assets (b) ..................................... 2,800,000 3,000,000
Term loan, payable in quarterly principal
installments of $75,000, plus interest at prime,
through February 2001; collateralized by the
Company's assets (b) ........................... 1,200,000 1,350,000
Term loan, payable in monthly installments of
$5,800 plus interest at prime; collateralized
by certain equipment ........................... 330,600 348,000
Capital lease obligations, expiring in various
years through 2001, payable in monthly
installments approximating $3,750 .............. 183,252 196,277
Other ............................................. -- 37,000
----------- -----------
16,513,852 14,931,277
Less current portion .............................. 1,219,546 1,328,509
----------- -----------
$15,294,306 $13,602,768
=========== ===========
(a) The Company and its subsidiary as co-borrowers maintain a
revolving credit agreement with a bank. The agreement provides for
aggregate borrowings of up to $15,000,000, with a sublimit of $11,000,000
for the Company and $4,000,000 for its subsidiary. Interest is charged
monthly on the outstanding balance at prime. Unpaid interest and principal
is due on September 29, 1999. This loan agreement is secured by all the
assets of the Company and its subsidiary. The Company and its subsidiary
are jointly and severally liable for the unpaid balance of this credit
line.
(b) The revolving line of credit and term loan agreement, as
amended, contain various covenants pertaining to the maintenance of certain
financial ratio restrictions, limitations on dividends, and restrictions on
borrowings.
The prime rate at February 28, 1997 was 8 1/4%.
10. 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 February 28, 1997, the Company exceeded the minimal
annual purchase requirement.
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 three month periods ended February 28, 1997 and
February 29, 1996 approximated $9,762,000 and $9,466,000, respectively.
Gross profit amounted to approximately $4,100,000 or 42% of net
sales for the three month period ended February 28, 1997 as compared to
$3,765,000 or 40% of net sales for the corresponding period in 1996. The
Company has maintained its sales and gross profit levels under an exclusive
supply and licensing agreement with a major non-affiliated customer. Sales
to this customer approximated 52% of sales for the three month period ended
February 28, 1997.
Selling, general and administrative expenses approximated
$3,453,000 and $2,920,000 for the three months ended February 28, 1997 and
February 29, 1996 (35% and 31%, respectively, as a percentage of sales).
The increase is attributable to expanded advertising and promotion of the
Futurebiotics product line, including amortization of promotional costs
incurred in connection with an aggressive sales program designed to obtain
shelf space at selected retailers for a contract period of not less than
one year. The increase in amortization is principally attributable to
additional contracts with customers being signed in the first six months of
fiscal year end 1996 and the cost of this promotion being charged to
operations on a straight line basis which is not necessarily proportional
to sales generated under the program. Futurebiotics ceased signing on any
new customers under this program as of May 31, 1996.
Interest expenses, net of interest income, approximated $162,000
and $79,000 for the three month periods ended February 28, 1997 and
February 29, 1996. This increase reflects increased bank borrowings.
Liquidity and Capital Resources
The Company had net working capital of approximately $34,155,000
at February 28, 1997.
The Company's statement of cash flows reflects cash used in
operations of approximately $3,488,000. This use of cash reflects increases
in operating assets, such as inventories ($551,000), prepaid expenses and
other current assets ($819,000) and other assets of ($420,000) and
decreases in operating payables such as accounts payable and accrued
expenses ($3,792,000) offset by a decrease in accounts receivable
($798,000) and in adjustment for depreciation and amortization expense of
($1,235,000).
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net cash provided by investing activities approximated $2,673,000,
principally attributable to the sale and maturity of securities
($3,223,000), net of the acquisition of property, plant and equipment
($482,000) and acquisition of intangible assets ($68,000).
The statement also reflects net cash provided by financing
activities of approximately $1,264,000 representing bank borrowings net of
repayments ($1,583,000) offset by the purchase of treasury stock
($319,000).
During the three month period ended February 28, 1997, the Company
repurchased 52,000 shares of its own stock at an average price of $6.13 per
shares. As of February 28, 1997, the Company had authorization to
repurchase an additional $346,000 worth of its own stock.
The Company and its subsidiary as co-borrowers maintain a
revolving credit agreement with a bank. The agreement provides for
aggregate borrowings of up to $15,000,000, with a sublimit of $11,000,000
for the Company and $4,000,000 for its subsidiary. Interest is charged
monthly on the outstanding balance at prime. Unpaid interest and principal
is due on September 29, 1999. This loan agreement is secured by all the
assets of the Company and its subsidiary. The Company and its subsidiary
are jointly and severally liable for the unpaid balance of this credit
line. The revolving line of credit and term loan agreement, as amended,
contain various covenants pertaining to the maintenance of certain
financial ratio restrictions, limitations on dividends, and restrictions on
borrowings. The prime rate at February 28, 1997 was 8 1/4%.
The Company expects to meet its cash requirements from operations,
current cash reserves, and existing financial arrangements.
8
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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, 1996.
9
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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: April 10, 1997 By: /s/ Karine Hollander
-----------------------
Karine Hollander
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> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> FEB-28-1997
<CASH> 3,334,807
<SECURITIES> 816,990
<RECEIVABLES> 7,259,308
<ALLOWANCES> 42,000
<INVENTORY> 23,823,603
<CURRENT-ASSETS> 37,869,484
<PP&E> 9,990,971
<DEPRECIATION> 4,652,734
<TOTAL-ASSETS> 51,177,127
<CURRENT-LIABILITIES> 3,714,532
<BONDS> 15,294,306
0
7,396
<COMMON> 31,919
<OTHER-SE> 26,893,943
<TOTAL-LIABILITY-AND-EQUITY> 51,177,127
<SALES> 9,761,944
<TOTAL-REVENUES> 9,761,944
<CGS> 5,661,836
<TOTAL-COSTS> 5,661,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,811
<INCOME-PRETAX> 495,771
<INCOME-TAX> 207,000
<INCOME-CONTINUING> 341,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,150
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
