<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, 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 July 1, 1999
------------ ---------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
-------------
FORM 10-Q
---------
QUARTERLY REPORT
----------------
FOR THE SIX MONTHS ENDED MAY 31, 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............................................. 4-10
Item 2.
Management's discussion and analysis
of financial condition and results of
operations.............................................. 11-14
PART 11. OTHER INFORMATION
-----------------
Item 1. Legal proceedings........................................ 15
SIGNATURES................................................................. 16
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31, November 30,
------- ------------
1999 1998
---- ----
(unaudited)
-----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,654 $ 929
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 7,912 9,129
Inventories (Note 5) 17,507 21,552
Prepaid expenses and other current assets 988 1,155
Due from supplier 1,624 1,373
Deferred tax asset (Note 7) 328 122
Net assets of discontinued operations (Note 4) 4,367 4,294
- ----- -----
Total current assets 34,380 38,554
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$7,077 and $6,750, respectively 3,895 4,385
INTANGIBLE ASSETS, net of accumulated amortization
of $1,763 and $1,693, respectively 335 495
INVESTMENT IN COMPARE GENERIKS, INC. 1,096 596
OTHER ASSETS 1,759 2,450
----- -----
$ 41,465 $ 46,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 4,310 4,630
Dividends payable (Note 6) 28 30
Income taxes payable (Note 7) 1,159 1,255
Royalty payable -- 1,350
Current portion of long-term debt (Note 8) 1,536 1,931
----- -----
Total current liabilities 7,033 9,196
----- -----
LONG-TERM DEBT (Note 8) 1,791 4,342
DEFERRED INCOME TAX LIABILITY (Note 7) 262 7
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,422 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 28,379 28,404
Unearned compensation (2,775) (3,286)
Retained earnings 7,067 6,259
Treasury stock, at cost; 824,325 and 608,425 shares, respectively (3,757) (1,916)
------ ------
28,957 29,504
------ ------
$ 41,465 $ 46,480
======== ========
</TABLE>
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
----------------------------------------------
(Unaudited)
-----------
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
May 31, May 31, May 31, May 31,
------- ------- ------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES (Note 9) $ 21,804 $ 22,902 $ 11,613 $ 11,358
COSTS AND EXPENSES: (Note 10)
Cost of sales 16,504 13,560 8,709 7,092
Selling, general and administrative 3,070 8,041 1,701 3,812
----------- ----------- ----------- -----------
19,574 21,601 10,410 10,904
OPERATING INCOME 2,230 1,301 1,203 454
OTHER EXPENSES (INCOME):
Interest income (5) (83) -- (36)
Interest expense 238 566 103 277
Other (38) (43) (20) (17)
----------- ----------- ----------- -----------
195 440 83 224
----------- ----------- ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 2,035 861 1,120 230
PROVISION FOR INCOME TAXES 981 272 501 72
----------- ----------- ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS 1,054 589 619 158
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS: (Note 4)
Loss from operations, net of tax benefit
of $181, $170, and $80, $66, respectively (204) (375) (89) (165)
Minority interest in loss from operations 71 154 30 67
----------- ----------- ----------- -----------
(133) (221) (59) (98)
----------- ----------- ----------- -----------
NET EARNINGS $ 921 $ 368 $ 560 $ 60
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE (Note 6)
BASIC:
Income from continuing operations $ .30 $ .14 $ .19 $ .03
Loss from discontinued operations (.04) (.07) (.02) (.03)
----------- ----------- ----------- -----------
Net earnings $ .26 $ .07 $ .17 $ --
=========== =========== =========== ===========
DILUTED:
Income from continuing operations $ .30 $ .14 $ .19 $ .03
Loss from discontinued operations (.04) (.07) (.02) (.03)
----------- ----------- ----------- -----------
$ .26 $ .07 $ .17 $ --
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (Note 6)
BASIC 3,151,119 3,270,653 3,039,327 3,268,153
=========== =========== =========== ===========
DILUTED 3,151,119 3,417,881 3,039,327 3,397,022
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 31, May 31,
------- -------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 921 $ 368
------- -------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,474 1,509
Minority interest in loss of subsidiary (71) (154)
Deferred income tax benefit 51 (424)
Loss on sale of equipment -- 4
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 620 (270)
Inventories 4,369 99
Prepaid income taxes (6) 132
Prepaid expenses and other current assets (151) (1,653)
Due from supplier (251) 865
Other assets 134 (321)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (342) 350
Royalties payable (1,350) --
Dividends payable (2) 1
Income taxes payable (96) (130)
------- -------
Total adjustments 4,379 8
------- -------
Net cash provided by operating activities 5,300 376
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investments in marketable securities -- 2,869
Purchase of property, plant and equipment (157) (1,031)
Proceeds from sale of property, plant and equipment -- 15
------- -------
Net cash (used in)/provided by investing activities (157) 1,853
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable -- 4,000
Repayment of debt (2,946) (9,638)
Proceeds from term loan -- 1,100
Net decrease (increase) in stockholder loans 482 (188)
Purchase of treasury stock (1,841) (74)
Dividends paid (113) (126)
------- -------
Net cash (used in) financing activities (4,418) (4,926)
------- -------
Net increase/(decrease) of cash and cash equivalents 725 (2,697)
Cash and cash equivalents at beginning of period 929 3,733
------- -------
Cash and cash equivalents at end of period $ 1,654 $ 1,036
======= =======
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 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 May 31, 1999 and the
results of operations and statements of cash flows for the six month periods
ended May 31, 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 six month period ended May 31,1999 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.
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. 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 May 31, 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:
------------------------
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 May 31, 1999 and November 30,
1998.
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. Accordingly, the operating results of
Futurebiotics operations for the six and three months ended May 31, 1999 and
1998 have been segregated from continuing operations and reported as a separate
line item on the statement of operations. In July 1999, the third party
exercised its option to terminate the agreement. Management is pursuing the sale
of assets, and does not anticipate a loss on the sale.
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 1999
-----------------------------
(Continued)
Summarized financial information for the discontinued operation is as
follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
May 31, May 31,
------- ------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands) (in thousands) (in thousands)
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues $ 4,020 $ 5,105 $ 2,272 $ 2,761
Loss before income tax benefit (385) (545) (159) (233)
Loss from discontinued operations,
net of tax benefit (204) (375) (89) (165)
</TABLE>
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, November 30,
------- ------------
1999 1998
---- ----
(in thousands) (in thousands)
Raw material $ 4,900 $ 4,458
Work-in-process 8,232 9,965
Finished good 4,375 7,129
-------------- --------------
$ 17,507 $ 21,552
============== ==============
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 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 six months
ended May 31, 1999 and May 31, 1998 as follows:
<TABLE>
<CAPTION>
Per
Six Months Ended May 31, 1999 Income Shares Share
- ----------------------------- ------ ------ -----
(in thousands)
(unaudited)
<S> <C> <C> <C>
Earnings from continuing operations $ 1,054 3,151,119
Less: preferred stock dividends (113) -
-------- ---------
Basic EPS 941 3,151,119 $.30
Effect of dilutive securities - -
-------- ---------
Diluted EPS $ 941 3,151,119 $.30
======== =========
Six Months Ended May 31, 1998
- -----------------------------
Earnings from continuing operations $ 589 3,270,653
Less: preferred stock dividends (126) -
-------- ----------
Basic EPS 463 3,270,653 $.14
Effect of dilutive securities:
Warrants - 147,228
--------- ----------
Diluted EPS $ 463 3,417,881 $.14
========= =========
</TABLE>
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 1999
-----------------------------
(Continued)
<TABLE>
<CAPTION>
Per
Three Months Ended May 31, 1999 Income Shares Share
- ------------------------------- ------ ------ -----
(in thousands)
(unaudited)
<S> <C> <C> <C>
Earnings from continuing operations $ 619 3,039,327
Less: preferred stock dividends (49) -
-------- ---------
Basic EPS 570 3,039,327 $.19
Effect of dilutive securities - -
-------- ---------
Diluted EPS $ 570 3,039,327 $.19
======== =========
Three Months Ended May 31, 1998
- -------------------------------
Earnings from continuing operations $ 158 3,268,153
Less: preferred stock dividends (62) -
-------- ---------
Basic EPS 96 3,268,153 $.03
Effect of dilutive securities:
Warrants - 128,869
-------- ---------
Diluted EPS $ 96 3,397,022 $.03
======== =========
</TABLE>
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 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 six month
periods ended May 31,1999 and May 31,1998 approximated $113,000 and $126,000,
respectively.
As of May 31, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $4,000,000 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, 1999, the Company had
authorization to repurchase an additional $543,000 worth of its own 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 May 31, 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 May 31, 1999 consist principally of the Company's
investment in subsidiary, unearned compensation and depreciation and
amortization.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 1999
-----------------------------
(Continued)
8. Long-Term Debt:
---------------
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
(in thousands) (in thousands)
(unaudited)
<S> <C> <C>
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) 3,207 4,830
Term loan - 898
Capital lease obligations, expiring in various
years through 2001 120 145
--------- ---------
3,327 6,273
Less current portion 1,536 1,931
--------- ---------
$ 1,791 $ 4,342
========= =========
</TABLE>
(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 $3,206,667 at May 31, 1999 is payable in monthly
installments of $105,000 plus interest at prime through 2002 when the remaining
principal is due.
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED MAY 31, 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 May 31, 1999 was 7.75%.
9. Major Customer:
---------------
Sales to a major customer approximated 64% of total sales for the six
month period ended May 31, 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 May 31, 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 May
31, 1999, the Company ordered approximately 870,000 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.
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 $13,883,000 and $3,635,000 for the six
month period ended May 31, 1999 and 1998, respectively.
10
<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 six and three month periods ended May 31, 1999
approximated $21,804,000 and $11,613,000, respectively, as compared to
$22,902,000 and $11,358,000 in the corresponding period in 1998. Gross profit
amounted to $5,300,000 (24% of sales) and $2,904,000 (25% of sales) for the six
and three month periods ended May 31, 1999 and $9,342,000 (41% of sales) and
$4,266,000 (38% 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 $3,070,000 (14% of
sales) and $1,701,000 (15% of sales) for the six and three month periods ended
May 31, 1999 respectively, as compared to $8,041,000 (35% of sales) and
$3,812,000 (34% of sales) for the corresponding periods in 1998. 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 $3,528,000 for the six months ended
May 31, 1999 and 1998, respectively.
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. 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 ($133,000) and ($59,000) for the six and three month
periods ending May 31, 1999 and 1998, respectively as compared to ($221,000) and
($98,000) for the corresponding period in 1998.
On March 3, 1999, the Company and Futurebiotics entered into a asset
purchase agreement with a third party to sell substantially all of Futurebiotics
assets. In July 1999, the third party exercised its option to terminate the
agreement. Management is pursuing the sale of these assets, and does not
anticipate a loss on the sale.
11
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
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 May 31, 1999, the Company
exceeded its minimum annual purchase requirement.
The Company is also party to a packaging 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 May
31, 1999, the Company ordered approximately 870,000 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.
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 $13,823,000 and
$3,635,000 for the six month period ended May 31, 1999 and 1998, respectively.
Interest expenses, net of interest income, was approximately $233,000
and $103,000 for the six and three month periods ended May 31, 1999 as compared
to $483,000 and $241,000 in the corresponding periods in the prior year. 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
12
<PAGE>
PDK LABS INC. AND SUBSIDIARY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Continued)
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 has satisfactorily tested 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 have a material adverse affect on 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 $27,347,000 at May 31,
1999.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $5,300,000 which reflects net earnings of
$921,000, decreases in operating assets such as accounts receivable ($620,000),
inventories ($4,369,000), other assets ($134,000) and an adjustment for
depreciation and amortization ($1,474,000), offset by (i) increases in operating
assets such as prepaid expenses and other current assets ($151,000), due from
supplier ($251,000), and (ii) decreases in accounts payable and accrued expenses
($342,000), royalties payable ($1,350,000), and income taxes payable ($96,000).
Net cash used in investing activities approximated $157,000,
attributable to the purchase of property, plant and equipment.
The statement also reflects cash used in financing activities of
approximately $4,418,000 representing bank loan repayments of ($2,946,000), and
the purchase of treasury stock ($1,841,000), offset by a decrease in stockholder
loan of ($482,000).
During the six month period ending May 31, 1999, the Company
repurchased 475,900 shares of its own common stock at an average price of $3.87
per share. As of May 31, 1999, the Company had authorization to repurchase an
additional $543,000 worth of its own common stock and $333,000 worth of its own
preferred stock.
In March, 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.
13
<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 $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.
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 $3,206,667 at May 31, 1999 is payable in monthly installments of
$105,000 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: July 14, 1999 By: /s/ Karine Hollander
---------------------------
Karine Hollander
Chief Financial Officer
16
<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-30-1999
<PERIOD-END> MAY-31-1999
<CASH> 1,654
<SECURITIES> 0
<RECEIVABLES> 7,966
<ALLOWANCES> 54
<INVENTORY> 17,507
<CURRENT-ASSETS> 34,380
<PP&E> 10,972
<DEPRECIATION> 7,077
<TOTAL-ASSETS> 41,465
<CURRENT-LIABILITIES> 7,033
<BONDS> 1,791
0
5
<COMMON> 38
<OTHER-SE> 28,914
<TOTAL-LIABILITY-AND-EQUITY> 41,465
<SALES> 21,804
<TOTAL-REVENUES> 21,804
<CGS> 16,504
<TOTAL-COSTS> 16,504
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> 2,035
<INCOME-TAX> 981
<INCOME-CONTINUING> 1,054
<DISCONTINUED> (133)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921
<EPS-BASIC> .26
<EPS-DILUTED> .26
</TABLE>
