<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 May 31, 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 July 9, 1997
------------ ---------------------------
Common Stock 3,191,986
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED MAY 31, 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..................................4-7
Item 2. Management's discussion and analysis
of financial condition and results
of operations.........................................8-9
PART 11. OTHER INFORMATION
Item 1. Legal proceedings.....................................10
SIGNATURES..............................................................11
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,392,676 $ 2,885,517
Investment in marketable securities, at fair value 1,614,178 3,463,596
Accounts receivable - less allowance
for doubtful accounts of $42,000 and $42,000, respectively 7,384,064 8,015,159
Inventories 24,956,114 23,272,516
Prepaid income taxes 70,467 416,685
Prepaid expenses and other current assets 1,841,764 1,043,313
Deferred tax asset 488,000 383,211
------------ ------------
Total current assets 37,747,263 39,479,997
------------ ------------
INVESTMENTS IN MARKETABLE SECURITIES 1,071,644 1,650,512
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$4,948,826 and $4,376,600, respectively 5,300,295 5,132,548
INTANGIBLE ASSETS, net of accumulated amortization
of $7,327,930 and $6,312,075, respectively 2,548,138 3,552,696
INVESTMENT IN COMPARE GENERIKS, INC 500,000 500,000
OTHER ASSETS 3,256,727 2,938,755
------------ ------------
$ 50,424,067 $ 53,254,508
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,610,443 $ 5,750,701
Dividends payable 48,918 45,223
Income taxes payable 317,484 500,611
Current portion of long-term debt 1,216,848 1,328,509
------------ ------------
Total current liabilities 4,193,693 7,625,044
------------ ------------
LONG-TERM DEBT 13,991,375 13,602,768
DEFERRED INCOME TAX LIABILITY 969,000 1,251,117
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 4,083,204 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 27,757,986 27,754,634
Unearned compensation (4,263,045) (4,939,907)
Retained earnings 4,780,723 4,442,741
Treasury stock, at cost; 188,000 and 103,500 shares,
respectively (1,128,184) (635,575)
------------ ------------
27,186,795 26,661,208
------------ ------------
$ 50,424,067 $ 53,254,508
============ ============
</TABLE>
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------------------- --------------------------------
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 21,495,161 $ 21,278,689 $ 11,733,217 $ 11,812,400
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 12,125,444 13,378,505 6,463,608 7,677,530
Selling, general and administrative 8,264,768 6,755,754 4,812,239 3,835,389
------------ ------------ ------------ ------------
20,390,212 20,134,259 11,275,847 11,512,919
------------ ------------ ------------ ------------
OPERATING INCOME 1,104,949 1,144,430 457,370 299,481
------------ ------------ ------------ ------------
OTHER:
Interest income (231,384) (205,889) (95,381) (83,334)
Interest expense 622,026 422,560 324,215 221,259
Dividend Income (25,000) -- (15,000) --
Gain on sale of securities -- (574,954) -- (574,954)
------------ ------------ ------------ ------------
365,642 (358,283) 213,834 (437,029)
------------ ------------ ------------ ------------
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 739,307 1,502,713 243,536 736,510
PROVISION FOR INCOME TAXES 317,000 613,000 110,000 348,000
------------ ------------ ------------ ------------
EARNINGS BEFORE MINORITY
INTEREST 422,307 889,713 133,536 388,510
MINORITY INTEREST IN NET LOSS
(EARNINGS) OF SUBSIDIARY 100,564 (25,272) 48,185 32,937
------------ ------------ ------------ ------------
NET EARNINGS $ 522,871 $ 864,441 $ 181,721 $ 421,447
============ ============ ============ ============
EARNINGS PER SHARE $ .11 $ .21 $ .03 $ .10
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 3,003,986 3,191,986 3,003,986 3,191,986
============ ============ ============ ============
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
May 31, May 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 522,871 $ 679,552
----------- -----------
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 2,394,035 1,958,730
Minority interest in (loss) earnings of subsidiary (100,564) 25,272
Gain on sale of securities -- (574,954)
Deferred income tax (benefit) provision (386,906) 482,141
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 631,095 (892,188)
Inventories (1,683,598) (4,114,600)
Prepaid income taxes 346,218 --
Prepaid expenses and other current assets (798,451) (720,128)
Other assets (275,548) (472,640)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (3,140,258) 1,823,553
Dividends payable 3,695 --
Income taxes payable (183,127) (117,820)
----------- -----------
Total adjustments (3,193,409) (2,602,634)
----------- -----------
Net cash used in operating activities (2,670,538) (1,923,082)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities 2,428,286 4,679,574
Purchase of property, plant and equipment (739,974) (1,603,995)
Acquisition of intangible assets (67,640) (1,448,010)
----------- -----------
Net cash provided by investing activities 1,620,672 1,627,569
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit line 1,000,000 1,500,000
Repayment of debt (723,053) (656,250)
Proceeds from term loan -- 1,500,000
Net increase in stockholder loans (42,424) (5,120)
Net proceeds from sale of securities -- 1,774,954
Purchase of treasury stock (492,609) --
Dividends paid (184,889) --
----------- -----------
Net cash (used in) provided by financing activities (442,975) 4,113,584
----------- -----------
Net (decrease) increase of cash and cash equivalents (1,492,841) 3,818,071
Cash and cash equivalents at beginning of period 2,885,517 928,761
----------- -----------
Cash and cash equivalents at end of period $ 1,392,676 $ 4,746,832
=========== ===========
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 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 six month period ended May 31, 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 six month periods ended May 31,
1997 and May 31, 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:
May 31, 1997 November 30, 1996
------------ -----------------
(Unaudited)
Raw materials $ 9,734,640 $ 5,829,483
Work-in-process 4,743,417 9,211,383
Finished goods 10,478,057 8,231,650
----------- -----------
$24,956,114 $23,272,516
=========== ===========
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 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 six month
periods ended May 31, 1997 and May 31, 1996 totaled $184,889. The Company paid
a cash dividend in April 1997 and April 1996.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
--------------------------- ---------------------------
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 522,871 $ 864,441 $ 181,721 $ 421,447
Dividends 184,889 184,889 94,295 94,295
---------- ---------- ---------- ----------
Earnings available to common
shareholders $ 337,982 $ 679,552 $ 87,426 $ 327,152
---------- ---------- ---------- ----------
Weighted average number of
shares 3,003,986 3,191,986 3,003,986 3,191,986
---------- ---------- ---------- ----------
Earnings per share $ .11 $ .21 $ .03 $ .10
========== ========== ========== ==========
</TABLE>
7. Major Customer:
Sales to a major customer approximated 19% of total sales for the six
month period ended May 31, 1997.
8. Income Taxes:
The tax effects of temporary differences that give rise to the
deferred tax liability at May 31, 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
SIX MONTHS ENDED MAY 31, 1997
(Continued)
9. Long-Term Debt:
<TABLE>
<CAPTION>
May 31, 1997 November 30, 1996
------------ -----------------
(Unaudited)
<S> <C> <C>
Long-term debt consists of the following:
Revolving lines of credit (a) (b) $11,000,000 $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) 2,600,000 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) 1,125,000 1,350,000
Term loan, payable in monthly installments of
$5,800 plus interest at prime; collateralized
by certain equipment 313,200 348,000
Capital lease obligations, expiring in various
years through 2001, payable in monthly
installments approximating $3,750 170,023 196,277
Other -- 37,000
----------- -----------
15,208,223 14,931,277
Less current portion 1,216,848 1,328,509
----------- -----------
$13,991,375 $13,602,768
=========== ===========
</TABLE>
(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 May 31, 1997 was 8 1/2%.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1997
(Continued)
10. Commitments:
In 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). As of May 31, 1997, the Company exceeded the minimum
annual purchase requirement.
In December 1996, the Company amended its "Supply Agreement" (the
"Amended Agreement") with Compare Generiks, Inc. ("CGI"). Under the Amended
Agreement which expires in 2001, the Company will provide CGI certain products
at prices based upon the company's material cost plus a specified mark-up. In
March 1997, the Company entered into a second five year Supply Agreement with
CGI covering the purchase of products in the "Max Brand" and "Heads Up" product
ranges.
In May 1997, the Company entered into an Exclusive Supply Agreement
(the "New Agreement") with a non-affiliated pharmaceutical distributor (the
"distributor") for a three year term. The New Agreement supersedes the
Company's Exclusive Supply and Licensing Agreement with this distributor dated
October 16, 1995. Under the New Agreement, the Company was granted exclusive
supply rights to distribute certain products to the distributor's customers. In
consideration for the supply rights, the Company agreed to pay a royalty fee to
the distributor equal to the difference between (i) the purchase price as
billed to the customers and (ii) an amount equal to the material cost of the
products times a fixed percentage.
7
<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, 1997
approximated $21,495,000 and $11,733,000 respectively, as compared to
$21,279,000 and $11,812,000 in the corresponding period.
Gross profit for the six and three month periods ended May 31, 1997
amounted to approximately $9,370,000 (44% of sales) and $5,270,000 (45% of
sales), respectively as compared to $7,900,000 (37% of sales and $4,135,000
(35% of sales) in the corresponding periods in the prior year. The higher gross
profit is principally attributable to the Company entering into a new exclusive
supply agreement with a major non-affiliated customer.
Selling, general and administrative expenses approximated $8,265,000
and $4,812,000 for the six and three month periods ended May 31, 1997,
respectively. As a percentage of sales, these amounts represent 38% and 41%
respectively, as compared to 32% and 32% in the corresponding periods in the
prior year. The increase is principally attributable to a royalty fee paid in
connection with a new supply agreement with a non-affiliated pharmaceutical
distributor.
In December 1996 the Company amended its Supply Agreement ("Amended
Agreement") with Compare Generiks, Inc., ("CGI"). The Amended Agreement
provides for the Company to supply CGI with certain products at prices based on
the Company's material cost plus a specified mark-up.
In March 1997, the Company entered into a second five year Supply
Agreement with CGI covering the purchase of products in the "Max Brand" and
"Heads Up" product ranges.
In May 1997, the Company entered into an Exclusive Supply Agreement
(the "New Agreement") with a non-affiliated pharmaceutical distributor (the
"distributor") for a three year term. The New Agreement supercedes the
Company's Exclusive Supply and Licensing Agreement with this distributor dated
October 16, 1995. Under the New Agreement, the Company was granted exclusive
rights to distribute certain products to the distributor's customers. The
Company agreed to pay a royalty fee to the distributor equal to the difference
between (i) the purchase price as billed to the customers and (ii) an amount
equal to the material cost of the products times a fixed percentage.
Interest expenses, net of interest income was $391,000 and $229,000
for the six and three month periods ended May 31, 1997, as compared to $217,000
and $138,000 in the corresponding periods in the prior year. The increase is
principally attributable to increased bank borrowings.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSIION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had net working capital of approximately $33,554,000 at
May 31, 1997.
The Company's statement of cash flows reflects cash used in operating
activities of approximately $2,855,000. This use of cash reflects increases in
operating assets, such as inventories ($1,684,000), prepaid expenses and other
current assets ($798,000) and other assets of ($276,000) and decreases in
operating payables such as accounts payable and accrued expenses ($3,140,000)
and income taxes payable ($183,000) offset by a decrease in amounts receivable
($631,000), prepaid income taxes ($346,000) and an adjustment for depreciation
and amortization expense of ($2,394,000).
Net cash provided by investing activities approximated $1,621,000,
principally attributable to the sale and maturity of securities ($2,428,000),
net of acquisition of property, plant and equipment ($740,000) and the
acquisition of intangible assets ($68,000).
The statement also reflects net cash used in financing activities of
approximately $258,000 representing bank borrowings net of repayments
($277,000) offset by the purchase of treasury stock ($493,000) and increase in
shareholder loans of ($42,000).
During the six month period ended May 31, 1997, the Company
repurchased 84,500 shares of its own stock at an average price of $5.83 per
share. As of May 31, 1997, the Company had authorization to repurchase an
additional $172,000 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 May 31, 1997 was 8 1/2%.
The Company expects to meet its cash requirements from operations,
current cash reserves, and existing financial arrangements.
9
<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, 1996.
10
<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 14, 1997 By: /s/ Karine Hollander
----------------------------
Karine Hollander
Chief Financial Officer
11
<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> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,392,676
<SECURITIES> 1,614,178
<RECEIVABLES> 7,426,064
<ALLOWANCES> 42,000
<INVENTORY> 24,956,114
<CURRENT-ASSETS> 37,747,263
<PP&E> 10,249,121
<DEPRECIATION> 4,948,826
<TOTAL-ASSETS> 50,424,067
<CURRENT-LIABILITIES> 4,193,693
<BONDS> 13,991,375
0
7,396
<COMMON> 31,919
<OTHER-SE> 27,147,480
<TOTAL-LIABILITY-AND-EQUITY> 50,424,067
<SALES> 21,495,161
<TOTAL-REVENUES> 21,495,161
<CGS> 12,125,444
<TOTAL-COSTS> 12,125,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622,026
<INCOME-PRETAX> 739,307
<INCOME-TAX> 317,000
<INCOME-CONTINUING> 522,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 522,871
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
