<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, 1999
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 Number)
incorporation of organization)
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 5, 1999
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
TABLE OF CONTENTS
Page to Page
------------
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Balance sheets............................................................ 1
Statements of earnings ................................................... 2
Statements of cash flows.................................................. 3
Notes to financial statements............................................. 4-9
Item 2.
Management's discussion and analysis
of financial condition and results of
operations.............................................. 10-14
PART 11. OTHER INFORMATION
Item 1. Legal proceedings....................................... 15
SIGNATURES................................................................ 16
<PAGE>
<TABLE>
<CAPTION>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
February 28, November 30,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 163 $ 929
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 9,487 9,129
Inventories (Note 5) 19,133 21,552
Prepaid expenses and other current assets 771 1,155
Due from supplier 1,835 1,373
Deferred tax asset (Note 7) 196 122
Net assets of discontinued operations (Note 4) 4,231 4,294
--------- ---------
Total current assets 35,816 38,554
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$6,750 and $6,429 respectively 4,181 4,385
INTANGIBLE ASSETS, net of accumulated amortization
of $1,693 and $1,622, respectively 409 495
INVESTMENT IN COMPARE GENERIKS, INC. 596 596
OTHER ASSETS 2,424 2,450
--------- ---------
$ 43,426 $ 46,480
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 4,229 4,630
Dividends payable (Note 6) 94 30
Income taxes payable (Note 7) 807 1,255
Royalty payable -- 1,350
Current portion of long-term debt (Note 8) 1,530 1,931
--------- ---------
Total current liabilities 6,660 9,196
--------- ---------
LONG-TERM DEBT (Note 8) 3,961 4,342
DEFERRED INCOME TAX LIABILITY (Note 7) 254 7
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,421 3,431
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: (Note 6)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,807,153 and 3,807,153 issued and outstanding, respectively 38 38
Series A convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 460,566 issued and outstanding 5 5
Additional paid-in capital 28,393 28,404
Unearned compensation (3,032) (3,286)
Retained earnings 6,557 6,259
Treasury stock, at cost; 608,425 and 348,425 shares, respectively (2,831) (1,916)
--------- ---------
29,130 29,504
--------- ---------
$ 43,426 $ 46,480
========= =========
</TABLE>
1
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<TABLE>
<CAPTION>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share and per share data)
Three Months Ended
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
NET SALES (Note 9) $ 10,191 $ 11,544
COSTS AND EXPENSES: (Note 10)
Cost of sales 7,795 6,468
Selling, general and administrative 1,369 4,229
------------ ------------
9,164 10,697
------------ ------------
OPERATING INCOME 1,027 847
OTHER EXPENSES (INCOME):
Interest income (5) (47)
Interest expense 135 289
Other (18) (26)
------------ ------------
112 216
------------ ------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 915 631
PROVISION FOR INCOME TAXES 480 200
------------ ------------
EARNINGS FROM CONTINUING OPERATIONS 435 431
------------ ------------
DISCONTINUED OPERATIONS: (Note 4)
Loss from operations, net of tax benefit
of $111 and $102, respectively (115) (210)
Minority interest in loss from operations 41 87
------------ ------------
(74) (123)
------------ ------------
NET EARNINGS $ 361 $ 308
============ ============
NET EARNINGS (LOSS) PER COMMON SHARE (Note 6 )
BASIC:
Income from continuing operations $ .11 $ .11
Loss from discontinued operations (.02) (.04)
------------ ------------
Net earnings $ .09 $ .07
============ ============
DILUTED:
Income from continuing operations $ .11 $ .11
Loss from discontinued operations (.02) (.04)
------------ ------------
$ .09 $ .07
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (Note 6)
BASIC 3,270,139 3,273,353
============ ============
DILUTED 3,270,139 3,434,108
============ ============
</TABLE>
2
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<TABLE>
<CAPTION>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share and per share data)
Three Months Ended
February 28, February 28,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 361 $ 308
------- -------
Adjustments to reconcile net earnings to net cash provided by/
(used in) operating activities:
Depreciation and amortization 730 777
Minority interest in loss of subsidiary (41) (87)
Deferred income tax benefit 172 (235)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (378) (582)
Inventories 2,609 (288)
Prepaid expenses and other current assets 350 (1,539)
Due from supplier (462) (127)
Other assets (134) (332)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (401) (850)
Royalties Payable (1,350) --
Income taxes payable (448) (212)
------- -------
Total adjustments 647 (3,475)
------- -------
Net cash provided by/(used in) operating activities 1,008 (3,167)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities -- 1,982
Purchase of property, plant and equipment (117) (561)
------- -------
Net cash (used in)/provided by investing activities (117) 1,421
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable -- 4,000
Repayment of debt (782) (4,359)
Proceeds from term loan -- 1,100
Net decrease (increase) in stockholder loans 40 (171)
Purchase of treasury stock (915) (74)
------- -------
Net cash (used in)/provided by financing activities (1,657) 496
------- -------
Net decrease of cash and cash equivalents (766) (1,250)
Cash and cash equivalents at beginning of period 929 3,734
------- -------
Cash and cash equivalents at end of period $ 163 $ 2,484
======= =======
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
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 February 28, 1999 and the
results of operations and statements of cash flows for the three month periods
ended February 28, 1999 and 1998. The balance sheet as of November 30, 1998 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, 1998. The results of operations and cash
flows for the three month period ended February 28, 1999 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.
On March 3, 1999, Futurebiotics entered into an agreement to sell
substantially all of its operating assets to an unrelated company. Accordingly,
the operating results of the Futurebiotics operations have been segregated from
continuing operations and reported as a separate line item on the statements of
operations for all periods presented. Net assets to be disposed of, at their
book value, have been separately classified in the accompanying balance sheets
at February 28, 1999 and November 30, 1998.
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, consist primarily of trade accounts receivable.
4. Discontinued Operations:
On March 3, 1999, Futurebiotics entered into an agreement to sell
substantially all of its operating assets to an unrelated company for proceeds
of approximately $6,000,000. Accordingly, the operating results of Futurebiotics
operations for the three months ended February 28, 1999 and 1998 have been
segregated from continuing operations and reported as a separate line item on
the statement of operations.
The Company has restated its prior financial statements to present the
operating results of the Futurebiotics operations as a discontinued operation.
Net assets to be disposed of, at their book value, have been separately
classified in the accompanying balance sheets at February 28, 1999 and November
30, 1998.
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
Summarized financial information for the discontinued operation is as
follows:
Three Months Ended
February 28,
1999 1998
---- ----
(in thousands) (in thousands)
(unaudited) (unaudited)
Operating revenues $ 1,748 $ 2,344
Loss before income tax benefit (226) (312)
Loss from discontinued operations,
net of tax benefit (115) (210)
The transaction is subject to the satisfaction of a number of conditions,
including the approval of the stockholders of Futurebiotics.
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, November 30,
1999 1998
------- -------
(in thousands) (in thousands)
(unaudited)
Raw materials $ 5,165 $ 4,458
Work-in-process 8,801 9,965
Finished goods 5,167 7,129
------- -------
$19,133 $21,552
------- =======
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
6. Stockholders' Equity:
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. Certain options were not included in the computation due to their
exercise price exceeding the average market price of the common shares. Treasury
shares have been excluded from the weighted average number of shares. The
assumed conversion of the preferred stock and the related reduction to the
preferred stock was not included in the computation as the effect was
antidilutive. EPS on continuing operations was calculated for the three months
ended February 28, 1999 and February 28, 1998 as follows:
Per
Three Months Ended February 28, 1999 Income Shares Share
- ------------------------------------ ------ ------ -----
(in thousands)
(unaudited)
Earnings from continuing operations $ 435 3,270,139
Less: preferred stock dividends (64) --
----- ---------
Basic EPS 371 3,270,139 0.11
Effect of dilutive securities -- --
----- ---------
Diluted EPS $ 371 3,270,139 0.11
===== =========
Three Months Ended February 28, 1998
Earnings from continuing operations $ 431 3,273,353
Less: preferred stock dividends (64) --
----- ---------
Basic EPS 367 3,273,353 0.11
Effect of dilutive securities:
Warrants -- 160,755
----- ---------
Diluted EPS $ 367 3,434,108 0.11
===== =========
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
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 each of the three month
periods ended February 28, 1999 and February 28, 1998 approximated $64.
As of February 28, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $3,000,000 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 February 28, 1999, the Company had
authorization to repurchase an additional $470,000 worth of its own stock. On
March 4, 1999 the Company's Board of Directors authorized the Company to
repurchase an additional $1,000,000 worth of its own common stock.
In addition, the Company's Board of Directors authorized the Company to
repurchase up to $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. As of February 28, 1999, the Company had authorization to
repurchase an additional $333,000 worth of its own preferred stock.
7. Income Taxes:
The tax effects of temporary differences that give rise to the deferred tax
asset/liability at February 28, 1999 consist principally of the Company's
investment in subsidiary, unearned compensation and depreciation and
amortization.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
8. Long-Term Debt:
February 28, November 30,
1999 1998
(in thousands) (in thousands)
(unaudited)
Long-term debt consists of the following:
Revolving lines of credit (a) (c) $ -- $ 400
Term loan, payable in monthly installments
of $105, plus interest at prime, through
September 2002; collateralized by the
Company's assets (b) (c) 4,515 4,830
Term loan, payable in monthly installments
of $18, plus interest at prime,
through December 2002; collateralized by the
Company's assets (b) (c) 843 898
Capital lease obligations, expiring in various
years through 2001 133 145
------ ------
5,491 6,273
Less current portion 1,530 1,931
------ ------
$3,961 $4,342
====== ======
(a) Revolving Credit Line
The Company and its subsidiary, as amended, maintain a revolving credit
agreement (the "Agreement") with a bank which extends through September 2000.
The Agreement provides for aggregate borrowings of up to $10,000,000 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.
(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 $5,358,333 at February 28, 1999 is payable in monthly
installments of $123,333 plus interest at prime through 2002 when the remaining
principal is due.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1999
(Continued)
(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 February 28, 1999 was 7.75%.
9. Major Customer:
Sales to a major customer approximated 67% of total sales for the three
month period ended February 28, 1999.
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 February 28, 1999, 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
February 28, 1999, the Company ordered approximately 246,000 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.
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the
Company supplies certain of CGI's products at prices based upon PDK's material
cost plus a specified mark-up. In consideration for these agreements, CGI agreed
to pay an annual license fee of $500,000 to PDK. This fee is payable, at the
option of CGI, either in cash, shares of CGI's common or Series B preferred
stock. Total sales to CGI approximated $6,875,000 and $171,000 for the three
month period ended February 28, 1999 and 1998, respectively.
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the three months ended February 28, 1999 and 1998
approximated $10,191,000 and $11,544,000, respectively. Gross profit amounted to
$2,396,000 (24% of sales) for the three months ended February 28, 1999 and
$5,076,000 (44% of sales) for the corresponding period in 1998. The decrease in
gross profit is principally attributable to a change in the mix of sales.
Selling, general and administrative expenses were $1,369,000 for the three
months ended February 28, 1999 and $4,229,000 for the corresponding period in
1998. As a percentage of sales, selling, general and administrative expenses
were 13% and 37% respectively. The decrease is primarily attributable to a
decrease in royalty expense. The Company terminated its supply agreement with a
non-affiliated customer on March 30, 1998. Royalty expense related to this
agreement was $0 and $2,129,000 for the three months ended February 28, 1999 and
1998, respectively.
On March 3, 1999, the Company and Futurebiotics entered into a binding
Asset Purchase Agreement with Nutraceutical Corporation ("Nutraceutical") and FB
Acquisition Corp., a wholly-owned subsidiary of Nutraceutical pursuant to which
FB Acquisition Corp. agreed to acquire and Futurebiotics agreed to sell, (the
"Transaction") substantially all of Futurebiotics assets (the "Assets").
Accordingly, the operating results of the Futurebiotics' operations have
been segregated from continuing operations and reported as discontinued
operations, reflecting a loss, net of taxes and minority interest, of $74,000
and $123,000 for the three month periods ending February 28, 1999 and 1998,
respectively.
10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As consideration for the Assets, FB Acquisitions Corp. has agreed to pay in
cash (i) $3,700,000, (ii) the value of the purchased inventory up to $1,500,000,
and (iii) the net book value of accounts receivable up to a maximum of $725,000.
The purchase price is subject to adjustment in the event that the proceeds
actually received from collecting the purchased accounts receivables differ from
the amount of purchased accounts receivable.
The closing ("Closing") of the Transaction is subject to the approval of
Futurebiotics, stockholders and the satisfaction of other customary conditions.
The Company as the majority stockholder of Futurebiotics has agreed to vote its
shares of Futurebiotics capital stock held thereby in favor of the Transaction.
Futurebiotics anticipates Closing the Transaction during the second calendar
quarter of 1999.
Following the Closing, the Company and Futurebiotics shall be restricted
from engaging in merchandising, distribution or sale of (i) a broad line of
branded nutritional supplements, other than to mass merchandisers, or (ii) any
of Futurebiotics proprietary products and/or formulations. As a result,
Futurebiotics intends to commence a new business.
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 February 28, 1999, the Company
exceeded its minimum annual purchase requirement.
The Company is also party to a packing agreement with Superior which
provides for Superior to package certain products of 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
February 28, 1999, the Company ordered approximately 246,000 bottles of packaged
product.
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 is party to supply agreements with Compare Generiks, Inc.,
("CGI"). Under the agreements which expire through 2001, the Company provides
CGI certain products at prices based upon the Company's material cost plus a
specified mark-up.
11
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In consideration for these agreements, CGI agreed to pay the Company an
annual license fee of $500,000, payable at the option of CGI, either in cash or
in shares of CGI stock. Total sales to CGI approximated $6,875,000 and $171,000
for the three month period ended February 28, 1999 and 1998, respectively.
Interest expenses, net of interest income, was approximately $130,000 for
the three months ended February 28, 1999 as compared to $242,000 for the three
months ended February 28, 1998. The decrease is a result of lower interest rates
coupled with the Company maintaining lower debt balances.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the 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 as to the availability and
integrity of financial systems and reliability of operational systems. The
Company is developing a plan to ensure that its systems are compliant with the
requirements to process transactions in the Year 2000. The plan consists of four
phases: assessment, remediation, testing and implementation, and encompasses
internal information technology (IT) systems and non-IT systems, as well as
third party exposures. The Company has completed the assessment of its IT
systems and non-IT systems and is in the process of making remedial changes to
its existing software. In addition, the Company has requested from a majority of
its principal suppliers and vendors written statements regarding their plan for
meeting Year 2000 requirements. To date, the Company has not received adequate
response to such requests.
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner and that the costs of
implementing this program will not materially affect the financial position of
the Company. The Company has not yet completed all necessary phases of the Year
2000 program. In the event that the Company does not complete any additional
phases, the Company could experience business interruptions. In addition,
disruptions in the economy generally resulting from the Year 2000 issues could
also materially adversely affect the Company. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
Liquidity and Capital Resources
The Company had working capital of approximately $29,156,000 at February
28, 1999.
12
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's statement of cash flows reflects cash provided by operating
activities of approximately $1,008,000 which reflects net earnings of $361,000,
decreases in operating assets such as inventories ($2,609,000), prepaid expenses
and other current assets ($350,000), and an adjustment for depreciation and
amortization ($730,000), offset by increases in operating assets such as
accounts receivable ($378,000), due from supplier ($462,000), and decreases in
accounts payable and accrued expenses ($401,000), royalties payable
($1,350,000), and income taxes payable ($448,000).
Net cash used in investing activities approximated $117,000, attributable
to the purchase of property, plant and equipment.
The statement also reflects cash used in financing activities of
approximately $1,657,000 representing bank loan repayments of ($782,000), and
the purchase of treasury stock ($915,000), offset by a decrease in stockholder
loan of ($40,000).
During the three month period ending February 28, 1999, the Company
repurchased 260,000 shares of its own common stock at an average price of $3.52
per share. As of February 28, 1999, the Company had authorization to repurchase
an additional $470,000 worth of its own common stock and $333,000 worth of its
own preferred stock.
In March 1999, the Board of Directors authorized the Company to repurchase
up to an additional $1,000,000 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 times, and at such prices, as management believes
appropriate.
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 $10,000,000 for the Company and $4,000,000 for its
subsidiary. Borrowings under the Revolving Agreement bear interest at the bank's
prime rate plus 1.75% at the Company's option.
13
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 $5,358,333 at February 28, 1999 is payable in monthly installments
of $123,333 plus interest at prime through 2002 when the remaining principal is
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.
14
<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, 1998.
15
<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: April 13, 1999 By: /s/ Karine Hollander
------------------------
Karine Hollander
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 163
<SECURITIES> 0
<RECEIVABLES> 9,541
<ALLOWANCES> 54
<INVENTORY> 19,133
<CURRENT-ASSETS> 35,816
<PP&E> 10,931
<DEPRECIATION> 6,750
<TOTAL-ASSETS> 43,426
<CURRENT-LIABILITIES> 6,660
<BONDS> 3,961
0
5
<COMMON> 38
<OTHER-SE> 29,087
<TOTAL-LIABILITY-AND-EQUITY> 43,426
<SALES> 10,191
<TOTAL-REVENUES> 10,191
<CGS> 7,795
<TOTAL-COSTS> 7,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> 915
<INCOME-TAX> 480
<INCOME-CONTINUING> 435
<DISCONTINUED> (74)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
