<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, 1998
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 15, 1998
----- ----------------------------
Common Stock 3,557,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED MAY 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page to Page
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<S> <C>
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.............................................................................4-8
Item 2.
Management's discussion and analysis
of financial condition and results of
operations............................................................................. 9-11
PART 11. OTHER INFORMATION
Item 1. Legal proceedings.......................................................................12
Item 6. Exhibits and reports on Form 8-K........................................................12
SIGNATURES................................................................................................13
</TABLE>
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, November 30,
------- ------------
1998 1997
---- ----
(Unaudited)
-----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,036,167 $ 3,733,652
Investment in marketable securities, at fair value (Note 4) 339,000 2,375,570
Accounts receivable - less allowance
for doubtful accounts of $54,000, respectively 9,315,523 8,927,236
Inventories (Note 5) 25,962,454 26,061,702
Prepaid income taxes 21,662 153,617
Prepaid expenses and other current assets 2,962,882 1,428,020
Due from supplier - 864,758
Deferred tax asset (Note 7) 1,096,500 608,630
------------ -------------
Total current assets 40,734,188 44,153,185
INVESTMENTS IN MARKETABLE SECURITIES (Note 4) - 836,114
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$5,960,282 and $5,353,453, respectively 5,017,745 4,667,439
INTANGIBLE ASSETS, net of accumulated amortization
of $3,497,212 and $2,567,509, respectively 1,157,312 1,447,237
INVESTMENT IN COMPARE GENERIKS, INC. 500,000 500,000
OTHER ASSETS 3,127,507 2,617,488
------------ -----------
$50,536,752 $54,221,463
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,509,199 $ 4,159,670
Dividends payable (Note 6) 31,134 29,885
Income taxes payable (Note 7) 368,960 498,735
Current portion of long-term debt (Note 8) 1,521,250 1,300,338
------------ -----------
Total current liabilities 6,430,543 5,988,628
------------ -----------
LONG-TERM DEBT (Note 8) 10,674,471 15,433,614
DEFERRED INCOME TAX LIABILITY (Note 7) 804,000 739,656
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,670,546 3,754,670
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: (Note 6)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,557,153 issued and outstanding 35,572 35,572
Preferred stock, $.01 par value; authorized
5,000,000 shares; 498,110 issued and outstanding 4,981 4,981
Additional paid-in capital 27,954,041 27,950,622
Unrealized loss in marketable securities (5,554) (1,633)
Unearned compensation (3,297,713) (3,782,811)
Retained earnings 5,958,581 5,716,648
Treasury stock, at cost; 289,000 and 280,000 shares,
respectively (1,692,716) (1,618,484)
------------ -----------
28,957,192 28,304,895
------------ -----------
$50,536,752 $54,221,463
============ ===========
</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,
------- ------- ------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $28,007,346 $21,495,161 $14,118,244 $11,733,217
COSTS AND EXPENSES:
Cost of sales 16,590,663 12,125,444 8,746,091 6,463,608
Selling, general and administrative 10,602,746 8,264,768 5,117,275 4,812,239
---------- ----------- ----------- -----------
27,193,409 20,390,212 13,863,366 11,275,847
----------- ----------- ----------- ----------
OPERATING INCOME 813,937 1,104,949 254,878 457,370
------------- ------------ ------------ -----------
OTHER:
Interest income (119,778) (231,384) (45,873) (95,381)
Interest expense 665,127 622,026 318,626 324,215
Dividend Income (30,800) (25,000) (15,615) (15,000)
Other (income)/expense (17,179) - 486 -
------------- ------------ ------------ -----------
497,370 365,642 257,624 213,834
------------- ------------ ------------ -----------
EARNINGS/(LOSS) BEFORE PROVISION
FOR INCOME TAXES 316,567 739,307 (2,746) 243,536
PROVISION FOR INCOME
TAXES 102,500 317,000 4,000 110,000
------------- ------------ ------------ -----------
EARNINGS BEFORE MINORITY
INTEREST 214,067 422,307 (6,746) 133,536
MINORITY INTEREST IN NET LOSS
OF SUBSIDIARY (153,642) (100,564) (66,483) (48,185)
------------- ------------ ------------ -----------
NET EARNINGS $ 367,709 $ 522,871 $ 59,737 $ 181,721
============= ============== ============= ===========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
BASIC $ .08 $ .11 $ - $ .03
------------- ------------ ------------ -----------
DILUTIVE $ .07 $ .11 $ - $ .03
------------- ------------ ------------ -----------
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
BASIC 3,270,653 3,003,986 3,268,153 3,003,986
============= ============== ============= ===========
DILUTIVE 3,417,594 3,140,819 3,268,153 3,143,926
============= ============== ============= ===========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 31, May 31,
------- -------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 367,709 $ 522,871
----------- -----------
Adjustments to reconcile net earnings to net cash provided by/
(used in) operating activities:
Depreciation and amortization 1,508,946 2,394,035
Minority interest in (loss) of subsidiary (153,642) (100,564)
Deferred income tax benefit (423,526) (386,906)
Loss on sale of equipment 4,525 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (269,981) 631,095
Inventories 99,248 (1,683,598)
Prepaid income taxes 131,955 346,218
Prepaid expenses and other current assets (1,653,168) (798,451)
Due from supplier 864,758 -
Other assets (321,583) (275,548)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 349,529 (3,140,258)
Dividends payable 1,249 3,695
Income taxes payable (129,775) (183,127)
----------- -----------
Total adjustments 8,535 (3,193,409)
----------- -----------
Net cash provided by/(used in) operating activities 376,244 (2,670,538)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities 2,868,763 2,428,286
Purchase of equipment (1,030,817) (739,974)
Proceeds from sale of property, plant and equipment 15,000 -
Acquisition of intangible assets - (67,640)
----------- -----------
Net cash provided by investing activities 1,852,946 1,620,672
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable 4,000,000 1,000,000
Repayment of debt (9,638,231) (723,053)
Proceeds from term loan 1,100,000 -
Net increase in stockholder loans (188,436) (42,424)
Purchase of treasury stock (74,232) (492,609)
Dividends paid (125,776) (184,889)
----------- -----------
Net cash used in financing activities (4,926,675) (442,975)
----------- -----------
Net decrease of cash and cash equivalents (2,697,485) (1,492,841)
Cash and cash equivalents at beginning of period 3,733,652 2,885,517
----------- -----------
Cash and cash equivalents at end of period $ 1,036,167 $ 1,392,676
=========== ===========
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1998
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, as of May 31, 1998 and the results of
operations and statements of cash flows for the six month periods ended May 31,
1998 and 1997. The balance sheet as of November 30, 1997 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-K for the fiscal
year ended November 30, 1997. The results of operations and cash flows for the
six month period ended May 31, 1998 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 or Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No. 105, consist primarily of trade accounts receivable and marketable
securities. Investments in marketable securities consist primarily of
government-backed debt securities and are held by high quality financial
institutions, which mitigates the risk associated with this concentration.
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 government and
government-backed debt securities, to be available-for-sale. Available-for-sale
securities are reported at amounts which approximate fair value. 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.
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, 1998 November 30, 1997
------------ -----------------
(Unaudited)
-----------
Raw materials $ 7,529,111 $ 5,068,408
Work-in-process 8,411,835 10,883,990
Finished goods 10,021,508 10,109,304
------------ ------------
$25,962,454 $ 26,061,702
============ ============
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1998
(Continued)
6. Stockholders' Equity:
The Company has adopted Financial Accounting Standards Board
("FASB") Statement No. 128, "Earnings Per Share." Basic earnings per common
share is computed by dividing the net earnings after dividends on preferred
shares by the weighted average number of shares of common stock outstanding
during the period. Dilutive earnings per share gives effect to stock options
which are considered to be dilutive common stock equivalents. Treasury shares
have been excluded from the weighted average number of shares. Earnings per
share was retroactively restated to reflect FASB No. 128 for the six and three
months ended May 31, 1997.
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, 1998 and May 31, 1997 totaled $125,776 and $184,889,
respectively. The Company paid a cash dividend in April, 1998 and April, 1997.
In July 1997, the Company's Board of Directors authorized the Company
to repurchase up to an additional $1,000,000 worth of its own common stock, par
value $.01, in the public market. The Company's management has been afforded
the discretion to purchase the shares at such time or times, and at such
prices, as management believes appropriate. As of May 31, 1998, the Company had
authorization to repurchase an additional $607,000 worth of its own stock.
<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
------------------------ --------------------------
May 31, May 31,
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings/(Loss) $ 367,709 $ 522,871 $ 59,737 $181,721
Less: Preferred Stock Dividends (125,776) (184,889) (62,265) (94,295)
---------- ---------- --------- ---------
Earnings Available to Common
Shareholders $ 241,933 $ 337,982 $ (2,528) $ 87,426
---------- ---------- --------- ---------
Basic Earnings Per Share $ .08 $ .11 $ - $ .03
========== ========== ========= =========
Fully Diluted Earnings Per Share $ .07 $ .11 $ - $ .03
========== ========== ========= =========
Weighted Average Number
of Shares:
BASIC 3,270,653 3,003,986 3,268,153 3,003,986
========== ========== ========= =========
DILUTIVE 3,417,594 3,140,819 3,268,153 3,143,926
========== ========== ========= =========
</TABLE>
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1998
(Continued)
7. Income Taxes:
The tax effects of temporary differences that give rise to the deferred
tax asset/liability at May 31, 1998 consist principally of the Company's
investment in subsidiary, depreciation and amortization.
8. Long-Term Debt:
<TABLE>
<CAPTION>
May 31, 1998 November 30, 1997
------------ -----------------
(Unaudited)
-----------
Long-term debt consists of the following:
<S> <C> <C>
Revolving lines of credit (a) (c) $ 5,600,000 $10,500,000
Term loan, payable in monthly installments
of $105,000, plus interest at prime, through
September 2002; collateralized by the
Company's assets (b) (c) 5,460,000 6,090,000
Term loan, payable in monthly installments
of $18,333, plus interest at prime,
through December 2002; collateralized by the
Company's assets (b) (c) 1,008,333 -
Capital lease obligations, expiring in various
years through 2001 127,388 143,952
-------------- --------------
12,195,721 16,733,952
Less current portion 1,521,250 1,300,338
------------- -------------
$10,674,471 $15,433,614
=========== ===========
</TABLE>
(a) Revolving Credit Line
The Company and its subsidiary maintain a revolving credit agreement
(the "Agreement") with a bank which extends through September 2000. The
Agreement provides for aggregate borrowings of up to $15,000,000 for the
Company and $4,000,000 for its subsidiary. Interest is charged monthly on the
outstanding balance at either the bank's prime rate or the Eurodollar rate plus
1.75%, at the Company's option. The Company and its subsidiary are jointly and
severally liable for the unpaid balance of this credit line.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1998
(Continued)
(b) Term Loan Facility
The Company maintains a term loan facility with a bank which provides
for aggregate borrowings of up to $8,500,000 for the Company and its
subsidiary. The term loan aggregating $5,460,000 at May 31, 1998 is payable in
monthly installments of $105,000 plus interest at prime through September 1,
2002 when the remaining principal is due.
On December 12, 1997, the Company borrowed an additional $1,100,000 on
its term loan facility which is payable in 60 installments of $18,333, plus
interest at prime. Payments commenced on January 1, 1998 and will continue
through December 1, 2002 when the remaining principal and interest are due.
(c) The revolving line of credit and term loan facility 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, 1998 was 8 1/2%.
9. Major Customer:
Sales to major customers approximated 12% of total sales for the six
month period ended May 31, 1998.
10. Commitments:
The Company is party to multi-year supply and packaging agreements with
Superior Supplements, Inc. ("Superior"), which provide for Superior to supply
and package certain products for PDK. In the event that PDK purchases less than
$2,500,000 of product or orders less than 1,000,000 bottles packaged per annum,
Superior will be entitled to up to $200,000 on a pro-rata basis, as liquidated
damages. As of May 31, 1998, the Company exceeded its minimum annual purchase
requirement and ordered approximately 1,938,000 bottles of products packaged.
Additionally, Superior is also obligated to PDK under a management
agreement which provides for PDK to provide Superior with certain management
services in consideration for a management fee of $10,000 per month.
The Company maintains a supply agreement with Compare Generiks, Inc.
("CGI"). Under the agreement which expires in 2001, the Company provides CGI
certain products at prices based upon the Company's material cost plus a
specified mark-up. The Company also maintains a second five year supply
agreement with CGI covering the purchase of products in the "Max Brand" and
"Heads Up" product ranges.
In April 1998, the Company amended its Supply Agreement with CGI
covering the purchases of products in the "Max Brand" and "Heads Up" product
ranges. The amendment contains changes to the payment provisions on these
products.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 1998
(Continued)
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
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. On March 30, 1998, the Company terminated
its Agreement with this distributor.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the three and six month periods ended May 31, 1998
approximated $28,007,000 and $14,118,000 respectively, as compared to
$21,495,000 and $11,733,000 in the corresponding period. The increase in sales
is attributable to the Company operating under a renegotiated Exclusive Supply
Agreement with a non-affiliated pharmaceutical distributor for a period of four
months during the six months ended May 31, 1998 as compared to a period of one
month during the six months ended May 31, 1997. On March 30, 1998, the Company
terminated its agreement with this distributor. In addition, the Company has
experienced an increase in private label sales during the six months ended May
31, 1998.
Gross profit amounted to approximately $11,417,000 (41% of sales) and
$5,372,000 (38% of sales) respectively, as compared to $9,370,000 (44% of
sales) and $5,270,000 (45% of sales) in the corresponding periods in the prior
year. The overall decrease as a percentage of sales is principally attributable
to a change in the mix of sales, as well as changes being implemented to the
Company's price structure.
Selling, general and administrative expenses approximated $10,603,000
and $5,117,000 for the six and three month periods ended May 31, 1998,
respectively. As a percentage of sales, these amounts represent 38% and 36%
respectively, as compared to 38% and 41% in the corresponding periods in the
prior year. The decrease in the three month period ended May 31, 1998 is
attributable to a decrease in promotional costs associated with a marketing
program which was discontinued.
The Company is party to multi-year supply and packaging agreements (the
"Agreement") with Superior Supplements, Inc. ("Superior"), which provide for
Superior to supply and package certain products for PDK. In the event that PDK
purchases less than $2,500,000 of product or orders less than 1,000,000 bottles
packaged per annum, Superior will be entitled to up to $200,000 on a pro-rata
basis, as liquidated damages. As of May 31, 1998, the Company exceeded its
minimum annual purchase requirement and ordered approximately 1,938,000 bottles
of products packaged.
Additionally, Superior is also obligated to PDK under a management
agreement which provides for PDK to provide Superior with certain management
services in consideration for a management fee of $10,000 per month.
The Company maintains a supply agreement with Compare Generiks, Inc.
("CGI"). Under the agreement which expires in 2001, the Company provides CGI
certain products at prices based upon the Company's material cost plus a
specified mark-up. The Company also maintains a second five year supply
agreement with CGI covering the purchases of products in the "Max Brand" and
"Heads Up" product ranges.
In April 1998, the Company amended its supply agreement with CGI
covering the purchases of products in the "Max Brand" and "Heads Up" product
ranges. The amendment contains payment provisions on these products.
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest expenses, net of interest income, was approximately $545,000
and $273,000 for the six and three month periods ended May 31, 1998 as compared
to $391,000 and $229,000 in the corresponding periods in the prior year. The
increase is principally attributable to the Company maintaining lower
investment balances.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the availability
and integrity of financial systems and reliability of operational systems. The
Company has engaged computer consultants and is establishing processes for
evaluating and managing the risks and costs associated with this problem. In
the opinion of management, the costs of addressing this problem will not
materially affect the financial position of the Company.
Liquidity and Capital Resources
The Company had working capital of approximately $ 34,304,000 at May
31, 1998.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $376,000 which reflects net earnings of
($368,000), decreases in operating assets such as inventories ($99,000),
prepaid income taxes ($132,000), due from supplier ($865,000), an increase in
accounts payable of ($350,000) and an adjustment for depreciation and
amortization of ($1,509,000), offset by increases in operating assets such as
accounts receivable ($270,000), prepaid expenses and other current assets
($1,653,000), other assets ($322,000), a decrease in income taxes payable
($130,000) and an adjustment for deferred income tax benefit of ($424,000).
Net cash provided by investing activities approximated ($1,853,000)
principally attributable to the sale and maturity of securities ($2,869,000),
proceeds from sale of equipment ($15,000), offset by the purchase of property,
plant and equipment ($1,031,000).
The statement also reflects net cash used in financing activities of
approximately ($4,927,000) primarily represented by bank repayments net
of bank borrowings ($4,538,000).
During the six month period ending May 31, 1998, the Company repurchased
9,000 shares of its own stock at an average price of $8.25 per share. On July
18, 1997, the Company's Board of Directors authorized the Company to repurchase
up to an additional $1,000,000 worth of its own Common stock, par value $.01,
in the public market. As of May 31, 1998, the Company had authorization to
repurchase an additional $607,000 worth of its own stock.
10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company and its subsidiary maintain credit facilities with a bank
which provide for borrowings under a revolving credit agreement (the "Revolving
Agreement") and a term loan (the "Term Agreement").
The Revolving Agreement, which expires in September 2000, 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. Borrowings under the Revolving
Agreement bear interest at the bank's prime rate or Eurodollar rate plus 1.75%,
at the Company's option.
The Term Agreement provides for aggregate borrowings of up to $8,500,000
for the Company and its subsidiary on a combined basis. The term loan,
aggregating $5,460,000 at May 31, 1998, is payable in monthly installments of
$105,000, plus interest at prime through September 1, 2002 when the remaining
principal is due.
On December 12, 1997 the Company borrowed an additional $1,100,000 on
its term loan facility which is payable in 60 installments of $18,333 plus
interest at prime. Payments commenced on January 1, 1998 and will continue
through December 1, 2002 when the remaining principal and interest are due.
The Company and its subsidiary are jointly and severally liable for the
unpaid balance under these credit facilities. Borrowings are secured by the
assets of the Company and its subsidiary.
The Credit facilities contain various covenants pertaining to the
maintenance of certain financial ratio restrictions, limitations on dividends,
and restrictions on borrowings.
The Company expects to meet its cash requirements from operations,
current cash reserves, and existing financial arrangements.
11
<PAGE>
Part II - OTHER INFORMATION
Item 1.- Legal Proceedings
Reference is made to Item 3 in the Company's Form 10-K for the year ended
November 30, 1997.
On or about April 22, 1998, Body Dynmics, Inc. ("BDI") instituted a litigation
entitled Body Dynamics, Inc. v. PDK Labs Inc. and Compare Generiks, Inc.,
U.S.D.C. E.D.N.Y. against the Company, alleging, among other things, that the
Company breached two contracts under which BDI was to purchase certain products
from the Company and market, for a fee, certain of the Company's products. The
complaint is somewhat imprecise with respect to the damages BDI seeks from the
Company; the only specific demands against the Company are in the aggregate
amount of $1,800,000. The Company has answered the complaint and has asserted
substantive counterclaims. The Company believes it has adequate defenses, and it
intends to vigorously defend against BDI's claims. There has been no discovery
taken in this action.
Item 6.- Exhibits and Reports on Form 8-K
(A) Exhibits as required by Item 601 of Regulation S-K:
None required.
(B) Report on Form 8-K:
During the three months ended May 31, 1998, the Company filed a report on
Form 8-K with respect to Item 5.
12
<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 17, 1998 By: /s/ Karine Hollander
-------------------------------
Karine Hollander
Chief Financial Officer
13
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,036,167
<SECURITIES> 339,000
<RECEIVABLES> 9,369,523
<ALLOWANCES> 54,000
<INVENTORY> 25,962,454
<CURRENT-ASSETS> 40,734,188
<PP&E> 10,978,027
<DEPRECIATION> 5,960,282
<TOTAL-ASSETS> 50,536,752
<CURRENT-LIABILITIES> 6,430,543
<BONDS> 10,674,471
0
4,981
<COMMON> 35,572
<OTHER-SE> 28,916,639
<TOTAL-LIABILITY-AND-EQUITY> 50,536,752
<SALES> 28,007,346
<TOTAL-REVENUES> 28,007,346
<CGS> 16,590,663
<TOTAL-COSTS> 16,590,663
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 665,127
<INCOME-PRETAX> 316,567
<INCOME-TAX> 102,500
<INCOME-CONTINUING> 367,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 367,709
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
