<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 August 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 October 7, 1998
------------ ------------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
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............................................4-8
Item 2. Management's discussion and analysis
of financial condition and results of
operations............................................ 9-11
PART II. OTHER INFORMATION
Item 1. Legal proceedings.......................................12
Item 2. Changes in Securities and use of proceeds...............12
Item 6. Exhibits and reports on Form 8-K........................12
SIGNATURES................................................................13
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
---------- ------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 861,043 $ 3,733,652
Investment in marketable securities, at fair value (Note 4) 139,217 2,375,570
Accounts receivable - less allowance
for doubtful accounts of $54,000, respectively 11,180,425 8,927,236
Inventories (Note 5) 23,456,314 26,061,702
Prepaid income taxes 21,662 153,617
Prepaid expenses and other current assets 2,347,806 1,428,020
Due from supplier -- 864,758
Deferred tax asset (Note 7) 1,010,000 608,630
------------ ------------
Total current assets 39,016,467 44,153,185
INVESTMENTS IN MARKETABLE SECURITIES (Note 4) -- 836,114
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$6,281,940 and $5,353,453, respectively 4,664,025 4,667,439
INTANGIBLE ASSETS, net of accumulated amortization
of $2,639,761 and $2,567,509, respectively 1,028,264 1,447,237
INVESTMENT IN COMPARE GENERIKS, INC 500,000 500,000
OTHER ASSETS 3,180,030 2,617,488
------------ ------------
$ 48,388,786 $ 54,221,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,246,344 $ 4,159,670
Dividends payable (Note 6) 93,399 29,885
Income taxes payable (Note 7) 220,477 498,735
Current portion of long-term debt (Note 8) 1,530,067 1,300,338
------------ ------------
Total current liabilities 8,090,287 5,988,628
------------ ------------
LONG-TERM DEBT (Note 8) 6,426,886 15,433,614
DEFERRED INCOME TAX LIABILITY (Note 7) 647,000 739,656
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,692,545 3,754,670
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: (Note 6)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,807,153 and 3,557,153 issued and outstanding, respectively 38,072 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 28,619,461 27,950,622
Unrealized gain/(loss) in marketable securities 738 (1,633)
Unearned compensation (3,721,038) (3,782,811)
Retained earnings 6,289,911 5,716,648
Treasury stock, at cost; 290,707 and 280,000 shares,
respectively (1,700,057) (1,618,484)
------------ ------------
29,532,068 28,304,895
------------ ------------
$ 48,388,786 $ 54,221,463
============ ============
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
-------------------------- --------------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $44,416,579 $35,075,377 $16,409,233 $13,580,216
COSTS AND EXPENSES:
Cost of sales 29,182,246 19,322,573 12,591,583 7,197,129
Selling, general and administrative 13,737,512 14,092,452 3,134,766 5,827,684
----------- ----------- ---------- ----------
42,919,758 33,415,025 15,726,349 13,024,813
----------- ----------- ---------- ----------
OPERATING INCOME 1,496,821 1,660,352 682,884 555,403
----------- ----------- ----------- -----------
OTHER:
Interest income (170,679) (314,950) (50,901) (83,566)
Interest expense 915,964 986,344 250,837 364,318
Dividend income (45,800) (45,000) (15,000) (20,000)
Loan cost expense -- 231,774 -- 231,774
Other (income)/expense (38,244) -- (21,065) --
----------- ----------- ----------- -----------
661,241 858,168 163,871 492,526
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 835,580 802,184 519,013 62,877
PROVISION/(BENEFIT) FOR INCOME
TAXES 241,000 246,000 138,500 (71,000)
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY
INTEREST 594,580 556,184 380,513 133,877
MINORITY INTEREST IN NET LOSS
OF SUBSIDIARY 166,724 292,712 13,082 192,148
----------- ----------- ----------- -----------
NET EARNINGS $ 761,304 $ 848,896 $ 393,595 $ 326,025
=========== =========== =========== ===========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
BASIC $ .17 $ .21 $ .10 $ .10
----------- ----------- ----------- -----------
DILUTIVE $ .17 $ .20 $ .10 $ .09
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
BASIC 3,278,522 2,941,093 3,294,867 2,974,934
=========== =========== =========== ===========
DILUTIVE 3,278,522 3,074,324 3,294,867 3,100,226
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
August 31, August 31,
---------- ----------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 761,304 $ 848,896
------------ ------------
Adjustments to reconcile net earnings to net cash provided by/
(used in) operating activities:
Depreciation and amortization 2,239,337 3,408,966
Loan cost expense -- 231,774
Minority interest in loss of subsidiary (166,724) (292,712)
Deferred income tax benefit (494,026) (737,884)
Loss on sale of equipment 4,525 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,253,189) 580,436
Inventories 2,605,388 (3,023,285)
Prepaid income taxes 131,955 263,068
Prepaid expenses and other current assets (919,786) (492,136)
Due from supplier 864,758 --
Other assets (562,542) (97,288)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,086,674 (3,005,717)
Income taxes payable (278,258) 26,128
------------ ------------
Total adjustments 3,258,112 (3,138,650)
------------ ------------
Net cash provided by/(used in) operating activities 4,019,416 (2,289,754)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities 3,074,838 2,984,020
Purchase of equipment (998,764) (882,473)
Proceeds from sale of property, plant and equipment 15,000 --
Acquisition of intangible assets -- (91,658)
Disposal of property, plant and equipment -- 2,904
------------ ------------
Net cash provided by investing activities 2,091,074 2,012,793
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable 4,047,560 11,800,000
Repayment of debt (13,924,559) (16,774,701)
Proceeds from term loan 1,100,000 6,300,000
Purchase of treasury stock (81,573) (907,679)
Dividends paid (124,527) (181,194)
------------ ------------
Net cash (used in)/provided by financing activities (8,983,099) 236,426
------------ ------------
Net decrease of cash and cash equivalents (2,872,609) (40,535)
Cash and cash equivalents at beginning of period 3,733,652 2,885,517
------------ ------------
Cash and cash equivalents at end of period $ 861,043 $ 2,844,982
============ ============
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 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 August 31, 1998 and the
results of operations and statements of cash flows for the nine month periods
ended August 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 nine month period ended August 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.
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:
August 31, 1998 November 30, 1997
--------------- -----------------
(Unaudited)
Raw materials $ 7,067,768 $ 5,068,408
Work-in-process 7,506,020 10,883,990
Finished goods 8,882,526 10,109,304
---------- -----------
$23,456,314 $26,061,702
=========== ===========
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 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 nine and three months
ended August 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 nine month
periods ended August 31, 1998 and August 31, 1997 totaled $188,041 and
$225,630, respectively. The Company paid a cash dividend in April 1998 and
April 1997.
In July 1997 and August 1998, Company's Board of Directors authorized the
Company to repurchase up to an additional $1,000,000 and $1,000,000,
respectively 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 August 31, 1998, the Company had authorization to
repurchase an additional $1,600,000 worth of its own stock.
<TABLE>
<CAPTION>
For The Nine Months Ended For The Three Months Ended
------------------------- --------------------------
August 31, August 31,
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings $ 761,304 $ 848,896 $ 393,595 $ 326,025
Less: Preferred Stock Dividends 188,041 225,630 62,265 40,741
---------- ---------- ---------- ----------
Earnings Available to Common
Shareholders $ 573,263 $ 623,266 $ 331,330 $ 285,284
---------- ---------- ---------- ----------
Basic Earnings Per Share $ .17 $ .21 $ .10 $ .10
========== ========== ========== ==========
Fully Diluted Earnings Per Share $ .17 $ .20 $ .10 $ .09
========== ========== ========== ==========
Weighted Average Number
of Shares:
BASIC 3,278,522 2,941,093 3,294,867 2,974,934
========== ========== ========== ==========
DILUTIVE 3,278,522 3,074,324 3,294,867 3,100,226
========== ========== ========== ==========
</TABLE>
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1998
(Continued)
In August 1998, the Company amended its various agreements with certain key
individuals. Pursuant to these amended agreements, 530,000 shares of
unregistered common stock were granted to key individuals. The value of the
stock grants will be charged to operations ratably over the terms of the
agreements which expire at various dates through August 2005.
7. Income Taxes:
The tax effects of temporary differences that give rise to the deferred
tax asset/liability at August 31, 1998 consist principally of the Company's
investment in subsidiary, depreciation and amortization.
8. Long-Term Debt:
August 31, November 30,
---------- ------------
1998 1997
---- ----
(Unaudited)
Long-term debt consists of the following:
Revolving lines of credit (a) (c) $ 1,700,000 $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) 5,144,998 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) 953,335 --
Capital lease obligations, expiring in various
years through 2001 158,620 143,952
----------- -----------
7,956,953 16,733,952
Less current portion 1,530,067 1,300,338
----------- -----------
$ 6,426,886 $15,433,614
=========== ===========
(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
NINE MONTHS ENDED AUGUST 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 $5,145,000 at August 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 August 31, 1998 was 8 1/2%.
9. Major Customer:
Sales to two major customers approximated 34% and 10% of total sales for
the nine month period ended August 31, 1998.
10. Commitments:
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less
than $2,500,000 of product per annum, Superior will be entitled to up to
$100,000 on a pro-rata basis as liquidated damages. As of August 31, 1998, the
Company exceeded its minimum annual purchase requirement.
The Company also is party to a packaging agreement with Superior which
provides for Superior to package certain products for PDK. In the event that
the Company orders less than 1,000,000 bottles packaged per annum, Superior
will be entitled to up to $100,000 on a pro-rata basis, as liquidated damages.
As of August 31, 1998, the Company ordered approximately 2,070,000 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.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1998
(Continued)
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.
In May 1997, the Company entered into an exclusive supply agreement (the
"New Agreement") with a non-affiliated pharmaceutical distributor (the
"distributor"). 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.
11. Subsequent Event:
In September 1998, the Company's Board of Directors authorized the Company
to repurchase up to an additional $500,000 worth of its own preferred 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.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the nine and three month periods ended August 31, 1998
approximated $44,417,000 and $16,409,000 respectively, as compared to
$35,075,000 and $13,580,000 in the corresponding period. The increase in sales
is attributable to increased volume in private label sales and the introduction
of new products.
Gross profit amounted to approximately $15,234,000 (34% of sales) and
$3,818,000 (23% of sales), respectively as compared to $15,753,000 (45% of
sales) and $6,383,000 (47% of sales) in the corresponding periods in the prior
year. The overall decrease in gross profit as a percentage of sales is
principally attributable to a change in the mix of sales. Private label sales
increased 116% and bulk tablet sales increased 192% for the nine month period
ended August 31, 1998, as compared to the corresponding period in the prior
year.
Selling, general and administrative expenses approximated $13,738,000 and
$3,135,000 for the nine and three month periods ended August 31, 1998,
respectively. As a percentage of sales these amounts represent 31% and 19%
respectively, as compared to 40% and 43% in the corresponding periods in the
prior year. The decrease is attributable to a decrease in promotional costs
associated with a marketing program which was discontinued as well as a decrease
in the royalty fee being paid in connection with a supply agreement with a major
non-affiliated customer which was terminated on March 30, 1998.
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis as liquidated damages. As of August 31, 1998, the Company
exceeded its minimum annual purchase requirement.
The Company also is party to a packaging agreement with Superior which
provides for Superior to package certain products for PDK. In the event that the
Company orders less than 1,000,000 bottles packaged per annum, Superior will be
entitled to up to $100,000 on a pro-rata basis, as liquidated damages. As of
August 31, 1998, the Company ordered approximately 2,070,000 bottles of product
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 $745,000 and
$200,000 for the nine and three month periods ended August 31, 1998 as compared
to $671,000 and $281,000 in the corresponding periods in the prior year. The
increase for the nine months ended August 31, 1998 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 $30,926,000 at August 31,
1998.
The Company's statement of cash flows reflects cash provided by operating
activities of approximately $4,019,416 which reflects net earnings of
($761,000), decreases in operating assets such as inventories ($2,605,000),
prepaid income taxes ($132,000), due from supplier ($865,000), an increase in
accounts payable of ($2,087,000) and an adjustment for depreciation and
amortization of ($2,239,000), offset by increases in operating assets such as
accounts receivable ($2,253,000), prepaid expenses and other current assets
($920,000), other assets ($563,000), and a decrease in income taxes payable
($278,000) and an adjustment for deferred income tax benefit of ($494,000).
Net cash provided by investing activities approximated ($2,091,000)
principally attributable to the sale and maturity of marketable securities
($3,075,000), proceeds from sale of property, plant and equipment ($15,000),
offset by the purchase of property, plant and equipment ($999,000).
The statement also reflects net cash used in financing activities of
approximately ($8,983,000) representing bank repayments net of bank borrowings
($8,777,000), payment of dividends ($124,527), and the purchase of treasury
stock ($82,000).
During the nine month period ending August 31, 1998, the Company
repurchased 10,707 shares of its own stock at an average price of $7.62 per
share. On August 20, 1998, 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 August 31, 1998, the Company
had authorization to repurchase an additional $1,600,000 worth of its own stock.
In September 1998, the Company's Board of Directors authorized the Company
to repurchase up to an additional $500,000 worth of its own preferred 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.
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 $5,145,000 at August 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 and to the Company's Form 10-Q for the quarter ended May 31,
1998.
Item 2. - Changes in Securities and Use of Proceeds
In August 1998, the Company amended its various agreements with certain key
individuals. Pursuant to these amended agreements, 530,000 shares of
unregistered common stock were granted to key individuals. The value of the
stock grants will be charged to operations ratably over the terms of the
agreements which expire at various dates through August 2005.
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:
On August 21, 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.
Date: October 13, 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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 861,043
<SECURITIES> 139,217
<RECEIVABLES> 11,234,425
<ALLOWANCES> 54,000
<INVENTORY> 23,456,314
<CURRENT-ASSETS> 39,016,467
<PP&E> 10,945,965
<DEPRECIATION> 6,281,940
<TOTAL-ASSETS> 48,388,786
<CURRENT-LIABILITIES> 8,090,287
<BONDS> 6,426,886
0
4,981
<COMMON> 38,072
<OTHER-SE> 29,489,015
<TOTAL-LIABILITY-AND-EQUITY> 48,388,786
<SALES> 44,416,579
<TOTAL-REVENUES> 44,416,579
<CGS> 29,182,246
<TOTAL-COSTS> 29,182,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 915,964
<INCOME-PRETAX> 835,580
<INCOME-TAX> 241,000
<INCOME-CONTINUING> 761,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 761,304
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
