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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended November 30, 1998.
[ ] Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from _________________ to_________________.
Commission File No. 0-19121
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PDK LABS INC.
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(Exact name of registrant as specified in its charter)
New York 11-2590436
- --------------------------------- ---------------------------------
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
145 Ricefield Lane
Hauppauge, New York 11788
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (516) 273-2630
Securities registered pursuant to Section 12(b) of the Act: None.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Series A Convertible Preferred Stock,
par value $.01 per share
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(Title of Class)
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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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Issuer's revenues for its most recent fiscal year were $47,295,000.
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, computed by reference to the closing price of
such stock as of March 5, 1999, was approximately $12,988,000.
Number of shares outstanding of the Registrant's common stock, as of
March 5, 1999, was 3,807,153.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
Item 1. BUSINESS
General
PDK Labs Inc. ("PDK" or "Company") manufactures and distributes
over-the-counter ("OTC") non-prescription pharmaceutical products and vitamins.
The Company's line of products primarily consists of non-prescription pain
relievers, decongestants, bronchodialators, and a broad range of vitamins and
nutritional supplements. The Company markets its products through regional
distributors, private label distribution and various licensing and supply
agreements.
The Company only sells OTC products which have been proven to be
generally recognized to be safe and effective for the intended uses. Proposed
rules by the Food and Drug Administration have established, after an expanded
review of all OTC products, those products that will be generally recognized as
safe and effective and non-misbranded. See "Business - Government Regulation."
The Company's non-prescription pharmaceutical products contain active
ingredients which are identical to those contained in non-prescription products
sold under national and regional brand names, private label brands, local or
regional products, and products sold by other national and regional direct mail
marketers. For instance, the Company's acetaminophen products are similar to
Tylenol(R); its antihistamine tablets are similar to Benadryl(R); and its
decongestant products are similar to Actifed(R) and Sudafed(R).
The Company also sells products through its majority owned public
subsidiary, Futurebiotics, Inc. ("Futurebiotics").
On March 3, 1999, an Asset Purchase Agreement (the "Purchase
Agreement") was executed by and among FB Acquisition Corp., a Delaware
corporation ("FB Acquisition"), Nutraceutical Corporation, a Delaware
corporation ("Nutraceutical"), Futurebiotics, Inc., a Delaware corporation
("Futurebiotics") and the Company, pursuant to which FB Acquisition agreed to
acquire, and Futurebiotics agreed to sell (the "Transaction"), substantially all
of the Futurebiotics' assets (the "Assets").
As consideration for the Assets, FB Acquisition has agreed to pay in
cash (i) $3,700,000, (ii) the value of purchased inventory up to $1,500,000, and
(iii) the net book value of accounts receivables 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 receivable differs from
the amount of purchased accounts receivable.
In connection with the Transaction, Futurebiotics anticipates entering
into a Transition Service Agreement at closing which will require Futurebiotics
to provide certain services to FB Acquisition on a temporary basis to facilitate
a smooth transition of the transfer of the Assets to FB Acquisition.
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The closing ("Closing") of the Transaction is subject to the approval
of Futurebiotics stockholders and the satisfaction of other customary
conditions. PDK, the majority stockholder of Futurebiotics has agreed to vote
the shares of Futurebiotics capital stock held by it in favor of the
Transaction. Futurebiotics anticipates Closing the Transaction during the second
calendar quarter of 1999.
Following the Closing, Futurebiotics and the Company 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 by either acquiring a going
concern or certain assets which may be developed into a new business.
Futurebiotics' product line consists of more than 150 items, including
multi-vitamin/mineral formulas, green superfood powders, herbal/mineral tonics
and herbal complexes and specific specialty supplements. Futurebiotics currently
sells its products to health food distributors. In addition, Futurebiotics
currently sells products in several international markets including South
America, Central Europe, Hong Kong, Malaysia, Japan, and Scandinavia.
The Company was incorporated under the laws of the State of New York on
July 6, 1982.
This Form 10-K 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.
Marketing
The Company markets its products to customers through direct
salespersons, manufacturers representatives, and various supply and licensing
agreements. Private label sales accounted for 73% of the Company's total revenue
for the fiscal year ended November 30, 1998. Sales under various supply and
licensing agreements accounted for 69% of the Company's total revenue for the
fiscal year ended November 30, 1998.
The Company supplies a third party under an exclusive supply agreement
with dietary supplements and a broad range of OTC non-prescription
pharmaceutical products. This agreement expires in October 2000 and is
automatically renewable for successive one (1) year terms.
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In addition, the Company has a second exclusive supply and licensing
agreement with this same third party pursuant to which the Company granted an
exclusive license to use the trademarks "Max Brand" and "Heads Up" brands of OTC
pharmaceuticals and the exclusive right to distribute products bearing such
names. This agreement has a five (5) year term which automatically renews for
successive periods of one (1) year. In consideration for the license, the third
party agreed to pay an annual license fee to the Company. The fee is payable at
the option of the third party by either (i) issuance of the publicly traded
common stock or restricted Series B Preferred Stock of the third party or (ii)
the payment of cash. Sales to this customer approximated $22,125,000 for the
fiscal year ended November 30, 1998.
On May 5, 1997, the Company renegotiated an Exclusive Supply Agreement
(the "New Agreement") with a non-affiliated distributor (the "Distributor") for
a three (3) year term. Under the New Agreement, the Company was granted
exclusive supply rights to distribute certain products. In consideration for the
supply rights, the Company agreed to pay a royalty fee based on sales to these
customers. The Company terminated the New Agreement in March 1998. Sales to this
Distributor made pursuant to the New Agreement accounted for 22% of total
revenue for the fiscal year ended November 30, 1998.
The Company markets its various OTC pharmaceuticals and vitamin
products under various brand names to drug store chains, health food stores,
health food store distributors, convenience stores, and other various retailers.
Manufacturing
The Company's manufacturing facility is located in Hauppauge, New York.
Approximately 75% of the sales volume of the Company's products are manufactured
and/or packaged by the Company. The Company has the current capacity to
manufacture 6 billion tablets and/or capsules annually. In addition, the Company
can package 60 million bottles annually. The Company believes that the expanded
capacity of its manufacturing facility is adequate to meet the requirements of
its current and future business.
The Company's manufacturing process is specifically designed to insure
the strictest quality control. All raw materials used in production are
initially held in quarantine. Prior to being placed into production, the
manufacturers certificate of analysis is compared with an assay performed by the
Company in its own in-house laboratory. The Company's FDA approved laboratory
continues its testing to insure quality control throughout the manufacturing and
packaging process.
The manufacture of all of the Company's products is subject to current
Good Manufacturing Practices prescribed by the FDA and by the Company's own
quality control procedures. See "Business - Government Regulation" below. The
Company uses tamper resistant caps on all of its OTC products with an inner seal
that indicates whether the container has been opened prior to sale. In addition,
the Company seal wraps each container for added protection.
The Company's manufacturing facility contains equipment which in one
operation can produce the tablets, package the products, and label the
containers. The Company also has equipment for filling capsules and wrapping
each container with heat sealed plastic wrap.
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Material Suppliers
Substantially all of the Company's products are manufactured from
readily available raw material. In addition to manufacturing many of its own
products, the Company purchases finished goods from suppliers in the United
States. In March and November 1998, the Drug and Enforcement Administration
("DEA") advised the Company that the DEA would not sign a letter of
non-objection requested by the Company relating to the intended importation by
the Company of a List 1 Chemical. Without a non-objection letter, the Company is
unable to import the List 1 Chemical. To date, the Company has been able to
satisfy its needs for the List 1 Chemical through purchases in the domestic
market and currently maintains an adequate supply of the raw materials to
satisfy its needs for the immediate future.
Other than the aforementioned List 1 Chemical, the Company has not
encountered any significant difficulties in purchasing supplies of principal raw
material or finished goods. The Company believes that if any source of a
product's ingredients becomes unavailable, alternative sources of supply are
available at comparable prices and delivery schedules. In the event the Company
were unable to find such alternate sources at a competitive price and on a
timely basis for its principal products, the Company could be materially
adversely affected.
The Company has a supply agreement with Superior Supplements, Inc., a
Delaware corporation ("SSI"), pursuant to which the Company is obligated to
purchase a minimum of $2,500,000 of certain products at specified prices
annually. This supply agreement expires in May 1999 and is automatically
renewable for successive one (1) year periods thereafter. For the fiscal year
ended November 30, 1998, the Company made purchases of approximately $9,505,000
pursuant to this agreement. See "Certain Relationships and Related
Transactions."
In addition, on November 30, 1997, the Company entered into a packaging
agreement with SSI. SSI agreed to package Futurebiotics products for the Company
for a fixed price based on component cost plus a direct labor charge per unit.
The term of the agreement is for two (2) years, renewable for successive one (1)
year periods thereafter. The Company is obligated to purchase 1,000,000 bottles
of Futurebiotics products per annum during the term of the agreement. See
"Certain Relationships and Related Transactions."
Raw materials are available from numerous sources. No supplier accounts
for more than 10% of the Company's raw material purchases.
Product Liability
The Company may potentially be exposed to product liability claims by
consumers. Such claims arise as the result of, among other things, the misuse of
a Company product or the tampering of a product. In the event of a successful
suit against the Company, insufficiency of insurance coverage or inadequacy of
indemnification, there could be a material adverse effect on the Company.
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Competition
The industry in which the Company is engaged is characterized by
intense competition. The Company competes against established pharmaceutical and
consumer product companies that currently market products which have identical
active ingredients or are equivalent or functionally similar to or in
competition with those the Company markets. Moreover, many of the Company's
competitors and their products have national and regional name brand
recognition. In addition, numerous companies are developing or may, in the
future, engage in the development of products competitive with the Company's
products. Examples of the many products which have achieved significant brand
name recognition which are competitive with the Company's products include
Tylenol(R), Advil(R) , Nuprin(R), Benadryl(R), Actifed(R), Sudafed(R),
No-Doz(R), Vivarin(R), and Dexatrim(R). The Company believes it competes
effectively against its competitors on the basis of price and service.
Trademarks
The Company owns numerous trademarks that have been registered with the
United States Patent and Trademark Office ("PTO"). To the Company's knowledge,
the Company has the common law right to use such service marks on its products
and in the marketing of its services. The Company has retained trademark counsel
and presently intends to make appropriate filings and registrations and take all
other actions necessary, to protect all of its intellectual property rights. The
Company views its trademarks and other proprietary rights as valuable assets and
believes they have significant value in the marketing of its products.
Government Regulation
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the United States Food and Drug Administration ("FDA"), the Federal
Trade Commission ("FTC"), the Consumer Product Safety Commission, the United
States Department of Agriculture and the Environmental Protection Agency
("EPA"). These activities may also be regulated by various agencies of the
states and localities in which the Company's products are sold.
In October 1994, the Dietary Supplement Health and Education Law was
signed into law. This new law, which amends the Federal Food, Drug and Cosmetic
Act, defines dietary supplements as a separate and distinct entity, and not as
food additives. Vitamins, minerals, amino acids, herbs and other nutritional
substances are included in the definition. It expressly provides for the use of
third party scientific literature which shall not be regulated as labeling by
the FDA, provided it is not false or misleading. The new law also delayed the
FDA's requirements for extensive product label changes which were to be applied
to products manufactured after July 1, 1995. It provides a set of different
label requirements for ingredient content information, and directs the FDA to
publish new label regulations for supplements with a mandatory effective date,
as extended, of March 23, 1999. It makes no modifications on the requirements
and proscriptions regarding health claims for dietary supplements. The new law
also introduced the concept of good manufacturing practices to the manufacture
of dietary supplements. At this time, it would be premature to predict its
overall impact on the dietary supplement industry.
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Several of the raw materials used by the Company in its manufacturing
process are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation of these chemicals requires the filing of
importation documents with the Federal Drug Enforcement Agency. In addition,
certain foreign countries require a "letter of non-objection" for the export of
List I Chemicals. In March and November 1998, the DEA advised the Company that
the DEA would not sign a letter of non-objection requested by the Company
relating to the intended importation by the Company of a List 1 Chemical.
Without the letter of non-objection the Company is unable to import the List 1
Chemical.
The FDA proposed regulations which remain pending but, if adopted,
would remove ephedrine-containing over-the-counter drug products which are
manufactured and sold by the Company from the over-the-counter market. During
this past year several states have already taken action on an individual state
by state basis, to restrict, in some fashion, the sale of ephedrine,
pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The Drug Enforcement Administration (the "DEA") has been given the
statutory authority to regulate all ephedrine, pseudoephedrine, and PPA
over-the-counter drug products. Previously, the restrictions were limited to
certain ephedrine products. The restrictions on pseudoephedrine and PPA became
effective in October 1997 and DEA registration requirements are now effective.
Registration with the DEA is required for all companies engaged in the
distribution of any products containing ephedrine, pseudoephedrine, or PPA.
There are certain registration exemptions in place for retail stores. The
Company has applied for its own registration with the DEA. That registration
remains pending and the Company continues to operate under an exemption. Should
the DEA ultimately deny the Company's registration, it would no longer be
permitted to manufacture and distribute these products. The Company's customers
who have not applied for such registration or have been rejected, can no longer
market the Company's products containing the three ingredients in question.
The Company was advised recently by DEA that they are investigating the
Company's pending registration. The investigation involves the Company's
purchase and distribution of List 1 Chemicals. To date, the DEA has taken no
formal action on the registration. If the DEA denies the Company's registration,
the Company will have the right to appeal the decision administratively within
the DEA and thereafter, if unsuccessful, in federal court. If the final
determination is to deny the registration, then the Company would no longer be
permitted to manufacture and distribute products that contain List 1 Chemicals.
Sales of products containing List 1 Chemicals were approximately $30,525,000
representing 65% of net sales for the year ended November 30, 1998.
Thus, the DEA, registration, identification, record keeping, and
reporting requirements may adversely affect the Company's sales of these
products.
Employees
As of March 5, 1999, the Company employed 158 full-time persons. The
Company has experienced no work stoppages and considers its employee relations
to be satisfactory. The Company's employees are not represented by a labor
union.
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In addition to other information in this Annual Report on Form 10-K the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.
Competition. Competition in the Company's marketplace is intense. The
Company faces direct competition from a number of national and regional brands
and private label non-prescriptive products. The Company competes against
established pharmaceutical, consumer product and mail order companies which
currently market products which are equivalent or functionally similar to those
the Company markets and which have achieved broad product recognition.
Competitive products which have achieved such recognition include such
well-known brands as Tylenol(R), Benedryl(R), Actifed(R), Sudafed(R),
Dexatrim(R), No~Doz(R), Vivarin(R), Advil(R), and Nuprin(R). Most of the
Company's competitors possess substantially greater financial, technical and
other resources than the Company. Moreover, these companies possess greater
marketing capabilities than the Company, including the resources to implement
extensive advertising campaigns. There can be no assurance that the Company will
continue to compete successfully.
Government Regulation. Manufacturers of pharmaceutical products are,
generally, subject to extensive regulation by the Food and Drug Administration
("FDA") and various other federal and state governmental entities relating to
nearly every aspect of the development, manufacture and commercialization of
such products.
Under the Federal Food, Drug and Cosmetic Act ("FDA Act"), an
over-the-counter nonprescription pharmaceutical product may not be
commercialized or otherwise distributed in the United States without the prior
approval of the FDA upon submission of a new drug application or abbreviated new
drug application, unless the combination of active ingredients of such products
has been determined to be generally recognized as safe and effective for uses
under the conditions prescribed, recommended or suggested in the labeling in
accordance with final monograph rules promulgated by the FDA and the labeling is
in compliance therewith. The Company only markets nonprescription products which
are similar to national and regional brands and the active ingredients in which
have been found to be generally recognized as safe and effective for the
recommended uses by panels of medical experts appointed by the federal
government in the course of its monograph rulemaking proceedings. The scope of
the FDA Act also extends to cosmetic products. Under the FDA Act, however,
cosmetics are not required to obtain premarketing FDA approval. Cosmetics are
defined, in part, as substances or products intended to be applied to the human
body for the purpose of cleansing, beautification, promotion of attractiveness
or alteration of appearance. The beauty aids sold by the Company are believed by
the Company to be within the definitional scope of a cosmetic and, accordingly,
in the opinion of the Company, do not require pre-marketing FDA approval. The
labeling of over-the-counter products as well as advertising relating to such
products is also subject to the review of the Federal Trade Commission ("FTC").
The Company believes it is in full compliance with all FTC labeling and
advertising requirements. However, the extent of potentially adverse or
burdensome government regulations in the nonprescription product area which
might arise in future legislation or administrative action cannot be predicted.
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Several of the raw materials used by the Company in its manufacturing
process are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation of these chemicals requires the filing of
importation documents with the Federal Drug Enforcement Agency. In addition,
certain foreign countries require a "letter of non-objection" for the export of
List I Chemicals. In March and November 1998, the DEA advised the Company that
the DEA would not sign a letter of non-objection requested by the Company
relating to the intended importation by the Company of a List 1 Chemical.
Without the letter of non-objection the Company is unable to import the List 1
Chemical.
The FDA proposed regulations which remain pending but, if adopted,
would remove ephedrine-containing over-the-counter drug products which are
manufactured and sold by the Company from the over-the-counter market. During
this past year several states have already taken action on an individual state
by state basis, to restrict, in some fashion, the sale of ephedrine,
pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The Drug Enforcement Administration (the "DEA") has been given the
statutory authority to regulate all ephedrine, pseudoephedrine, and PPA
over-the-counter drug products. Previously, the restrictions were limited to
certain ephedrine products. The restrictions on pseudoephedrine and PPA became
effective in October 1997 and DEA registration requirements are now effective.
Registration with the DEA is required for all companies engaged in the
distribution of any products containing ephedrine, pseudoephedrine, or PPA.
There are certain registration exemptions in place for retail stores. The
Company has applied for its own registration with the DEA. That registration
remains pending and the Company continues to operate under an exemption. Should
the DEA ultimately deny the Company's registration, it would no longer be
permitted to manufacture and distribute these products. The Company's customers
who have not applied for such registration or have been rejected, can no longer
market the Company's products containing the three ingredients in question.
Thus, the DEA, registration, identification, record keeping, and
reporting requirements may adversely affect the Company's sales of these
products.
The Company was advised recently by DEA that they are investigating the
Company's pending registration. The investigation involves the Company's
purchase and distribution of List 1 chemicals. To date, the DEA has taken no
formal action on the registration. If the DEA denies the Company's registration,
the Company will have the right to appeal the decision administratively within
the DEA and thereafter, if unsuccessful, in federal court. If the final
determination is to deny the registration, then the Company would no longer be
permitted to manufacture and distribute products that contain List 1 Chemicals.
The issuance by any governmental body of materially adverse regulations
in the nonprescription product area which prevented the Company from obtaining
necessary regulatory approval, whether on a timely basis, by virtue of the costs
of compliance or at all, could have a material adverse effect on the business
and financial condition of the Company. In addition, the fact that the Company's
products do not currently require pre-marketing FDA approval does not
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mean that any particular product, under certain circumstances, could not expose
the Company to product liability or other claims.
Product Liability. The Company faces inherent business risks of
exposure to product liability claims in the event that, among other things, a
product is illegally tampered with, misused or its use results in adverse
effects. While the Company takes what it believes are appropriate precautions,
including the use of tamper resistant caps and heat sealed plastic wrapping
around the entire bottle of each of its over-the-counter and vitamin products
and follows the Good Manufacturing Practices prescribed by the FDA, as well as
its own in-house quality control procedures, there can be no assurance that it
will avoid significant liability exposure. While the Company carries product
liability insurance against this risk there can be no assurance that such
coverage will always be available or available at a reasonable cost and, even if
available, adequate to protect it against material adverse effects in the event
of a successful product liability claim.
Dependence on Certain Products. Although the Company distributes in
excess of 100 products, approximately 65% of the Company's revenue in fiscal
1998 was from the sale of products containing List 1 Chemicals. The inability of
the Company to sell such products, for any reason, would have a material adverse
effect upon the business and financial condition of the Company.
Raw Material Supplies. The Company currently purchases all of its raw
materials and supplies in the United States and overseas. The Company has no
long term supply agreements for its raw materials. The Company believes that
alternate sources of supply are available for its raw material at comparable
prices. However, in the event the Company was unable to rely on its current
suppliers and could not arrange sources of supply at competitive prices and on a
timely basis for its principal products, the Company could be materially
adversely effected.
No Cash Dividends. The Company has not paid any cash dividends on its
common stock and, in view of its capital needs, and restrictions on the payment
of dividends under the Company's current loan agreement, does not presently plan
to pay any cash dividends except in accordance with the terms of the Series A
Preferred Stock.
Item 2. PROPERTIES.
The Company leases a 44,000 square foot facility in Hauppauge, New
York. This facility serves as the Company's corporate headquarters and
manufacturing/production center. The annual
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rent is $242,000 and increases up to $286,000 in the final year. The current
lease has two years remaining.
In 1995, the Company leased a second property in Hauppauge, New York.
This 30,000 square foot property serves as the Company's distribution center.
This lease is for a term of five years with an annual rental of $172,500.
In 1997, the Company leased a third property in Hauppauge, New York.
This 26,000 square foot property serves as an additional distribution facility
for the Company. This lease is for a three (3) year term at an annual rental of
$153,400.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, management is not aware of any material
legal proceedings pending against the Company.
On February 4, 1994 the Company was named as a defendant in a
litigation entitled Hillary L. Dufficy v. PDK Labs Inc. in the Superior Court of
the State of Connecticut, alleging a product liability claim pursuant to Section
52-572m of the Connecticut General Statutes. The action seeks unspecified
monetary damages. The Court granted the Company's motion for summary judgment
dismissing the action and plaintiff has appealed the decision . The Company
intends to vigorously defend the lawsuit and has referred the action to its
product liability insurer. See "Business - Product Liability."
On July 29, 1996, the Company served a complaint (the "Complaint")
against a former executive in a litigation entitled PDK Labs Inc. v Perry Krape
in the Supreme Court of the State of New York, County of Suffolk. The Complaint
alleges, in pertinent part, that the former executive breached his employment
agreement with PDK by competing with PDK and soliciting PDK's customers in
violation of the terms of the agreement. The Complaint further alleges that the
executive has defaulted on payments due to PDK pursuant to a promissory note and
that while serving as an officer of PDK made inappropriate investments for PDK's
Profit Sharing Plan and Trusts. By virtue of the foregoing, PDK alleges that the
executive has breached his Employment Agreement and the Amendment, engaged in
unfair competition, breached the terms of the personal guarantee, defaulted upon
the promissory note, converted funds belonging to PDK and breached his fiduciary
duty to the Company.
In his Answer and Counterclaim (the "Counterclaim"), the executive
offers general denials of these allegations and interposes both personal
counterclaims and derivative claims. The executive's personal Counterclaim,
asserts in pertinent part, that the Company and certain officers and directors
have breached their fiduciary duty to him and that the Restrictive Covenant and
agreement is unenforceable and should be deemed a nullity. The derivative claims
were dismissed by the court and the executive has appealed the dismissal. PDK
and the directors deny that they engaged in any improper conduct which would
support the executive's personal Counterclaim. Each intends to vigorously defend
against such claims and PDK intends to proceed with its action against the
executive. In addition, on February 22, 1999, Mr. Krape served a demand on the
Company's board of directors, pursuant to Section 626 of the New York Business
Corporation
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Law, to commence a shareholder's derivative action (the "Demand"). The Demand
requests that the board of directors commence an action for fraud, breach of
fiduciary duty and corporate waste against various individuals and entities
including former and present officers and directors of the Company. The board of
directors is reviewing the Demand.
On or about April 22, 1998, Body Dynamics, Inc. ("BDI") instituted a
litigation entitled Body Dynamics, Inc. v. PDK Labs Inc. and Compare Generiks,
Inc., U.S.D.C. E.D.N.Y. against the Company, alleging, among other things, that
the Company breached two contracts under which BDI was to purchase certain
products from the Company and market, for a fee, certain of the Company's
products. In February 1999, the Company and BDI entered into a settlement under
which the outstanding royalty payable to BDI of $1,350,000 was paid.
Donald Zinman ("Zinman") served and filed a complaint (the "Zinman
Complaint") against PDK and its majority-owned subsidiary, Futurebiotics, Inc.
("Futurebiotics") dated May 16, 1997 in a litigation entitled Zinman v. PDK Labs
Inc. and Futurebiotics, Inc. in the Eastern District of New York. The Zinman
Complaint alleges breach of contract in that PDK failed to pay amounts under an
Amended Consulting Agreement between Zinman and PDK. On November 24, 1998, the
Company settled the lawsuit in its entirety for $450,000.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On October 30, 1998, the Company held its annual meeting of
Shareholders.
(b) At said meeting, the following five individuals were elected by the
following vote to serve as directors until the next annual meeting of
stockholders and until their successors are elected and qualified:
FOR AGAINST
Reginald Spinello 3,216,087 18,243
Karine Hollander 3,215,914 18,416
Thomas Keith 3,216,087 18,243
Ira Helman 3,215,962 18,368
Lawrence D. Simon 3,215,962 18,368
(c) At said meeting 3,210,909 shares of Common Stock were voted in
favor of and 15,659 shares of Common Stock were voted against a proposal to
ratify the appointment of Holtz Rubenstein & Co., LLP to serve as the
independent certified public accountants for the 1998 fiscal year.
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Preferred Stock is regularly quoted and
traded on the NASDAQ system under the symbols PDKL and PDKLP, respectively.
The Company acquired $298,000 worth of its own common stock in fiscal
1998, repurchasing 68,425 shares at an average price of $4.36. In addition, the
Company repurchased 265,000 shares at an average price of $3.54 between December
1, 1998 and March 5, 1999. As of March 5, 1999, the Company had authorization to
repurchase an additional $1,447,000 worth of its own common stock.
The Company acquired $167,000 worth of its own preferred stock in
fiscal 1998, repurchasing 37,544 shares at an average price of $4.44. As of
March 5, 1999, the Company had authorization to repurchase an additional
$333,000 worth of its own preferred stock.
The following table indicates the high and low bid prices for the
Company's Common Stock and Preferred Stock for the period up to November 30,
1998 based upon information supplied by the NASDAQ system. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
Common Stock
High Low
---- ---
1996 Calendar Year
------------------
First Quarter 4 3/4 3 1/2
Second Quarter 3 7/8 3 1/8
Third Quarter 4 7/8 3 1/4
Fourth Quarter 6 3/8 3 7/8
1997 Calendar Year
------------------
First Quarter 7 4 7/8
Second Quarter 6 3/8 3 7/8
Third Quarter 5 1/2 4 3/8
Fourth Quarter 7 4 5/8
1998 Calendar Year
------------------
First Quarter 8 13/16 5 1/2
Second Quarter 6 3/8 3 1/4
Third Quarter 5 3/8 3 1/8
Fourth Quarter 4 1/8 2 15/16
15
<PAGE>
Preferred Stock
High Low
---- ---
1996 Calendar Year
------------------
First Quarter 4 1/2 3 3/4
Second Quarter 5 3/8 4
Third Quarter 5 4
Fourth Quarter 5 3/4 4 1/2
1997 Calendar Year
------------------
First Quarter 6 5/8 5
Second Quarter 6 1/2 4
Third Quarter 8 5 1/4
Fourth Quarter 7 1/2 6 3/4
1998 Calendar Year
------------------
First Quarter 7 7/8 7 1/2
Second Quarter 6 3/8 3 1/2
Third Quarter 5 1/8 3 1/2
Fourth Quarter 5 1/4 3 5/8
16
<PAGE>
On March 5, 1999, the closing price of the Common Stock as reported on
the NASDAQ System was $4.50. On March 5, 1999, the closing price of the
Preferred Stock reported on the NASDAQ System was $5.88. On March 5, 1999, there
were 768 holders of record of Common Stock.
On April 1, 1998, the Company paid a $.25 per share of Preferred Stock
dividend to holders of record on April 15, 1998 payable in cash. On October 1,
1998, the Company paid a $.24 per share of Preferred Stock dividend to holders
of record on October 15, 1998 payable in cash.
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
SUMMARY BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
November 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $46,480 $54,221 $53,255 $41,943 $33,533
Long-Term Obligations,
net of current portion 4,342 15,434 13,603 8,251 4,356
Stockholders' Equity 29,504 28,305 26,661 24,437 22,440
</TABLE>
SUMMARY INCOME STATEMENT DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended November 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $47,295 $39,670 $33,850 $21,257 $13,737
Operating Income 4,011 4,069 2,910 1,346 722
Earnings (Loss) from Continuing Operations 1,396 2,206 1,874 (321) 1,387
(Loss) Earnings from Discontinued Operations (619) (647) (261) 140 387
Net Earnings (Loss) 777 1,559 1,613 (181) 1,774
Net Earnings (Loss) per Common Share
Basic:
Income (Loss) from continuing operations $0.35 $.62 $0.48 ($.30) $.50
Loss Income from discontinued operations ($0.19) ($.21) ($0.08) $.06 $.21
Net earnings (Loss) $0.16 $.41 $0.40 ($.24) $.71
Diluted:
Income (loss) from continuing operations $0.34 $.60 $0.46 ($.30) $.50
Loss Income from discontinued operations ($0.18) ($0.21) ($0.08) $.06 $.21
Net earnings $0.16 $.39 $0.38 ($.24) $.71
Weighted Average Number of Common Shares
Outstanding
Basic 3,327,050 3,095,660 3,156,276 2,259,232 1,797,316
Diluted 3,409,109 3,228,333 3,265,393 2,259,232 1,797,316
</TABLE>
18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Fiscal Year 1998 compared to Fiscal Year 1997
Net sales for fiscal year 1998 were approximately $47,295,000 as
compared to net sales in 1997 of $39,670,000. The increase in sales is
attributable to increased volume in private label sales and the introduction of
new products. Gross profit amounted to $17,396,000 (37% of sales) in 1998 as
compared to $19,627,000 (49% of sales). The decrease in gross profit is
principally attributable to a change in the mix of sales resulting from the
Company operating under an Exclusive Supply Agreement with a non-affiliated
customer in 1997 which was terminated by the Company on March 30, 1998. In
addition, private label sales increased 96% and bulk tablet sales increased 115%
for the fiscal year ended 1998 as compared to fiscal year ended 1997.
Selling, general and administrative expenses were $9,458,000 in 1998
and $8,132,000 in 1997. As a percentage of sales, selling, general and
administrative expenses were 21% in 1998 and 20% in 1997. Royalty expenses
approximated $3,927,000 in 1998 and $7,426,000 in 1997. The decrease in royalty
is attributable to the Company terminating its supply agreement with a
non-affiliated customer on March 30, 1998.
On March 3, 1999, the Company and Futurebiotics entered into an 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 the 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 $619,000
in 1998 and $647,000 in 1997.
As consideration for the Assets, FB Acquisitions Corp. has agreed to
pay in cash (i) $3,700,000, (ii) the value of 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
19
<PAGE>
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 November 30, 1998, 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 up to $100,000 on a pro-rata basis, as liquidated damages. As of
November 30, 1998, the Company ordered approximately 2,355,000 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 has 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 has a second five year supply agreement with CGI covering
the purchases of products in the "Max Brand" and "Heads Up" product ranges which
was amended in April 1998 and November 1998. The payment terms of this agreement
were amended wherein the purchase price of the products were set at a (i) base
price plus (ii) the difference between 93% of the sales price invoiced to CGI
customers and the base price. The amendment also prohibits the Company from
supplying certain products to convenience stores. In consideration for this
agreement, CGI agreed to pay the Company an annual license fee of $500,000. This
fee is payable, at the option of CGI, either in cash or in shares of CGI common
stock. In January 1999, the agreement was further amended to provide CGI the
option to pay the Company its annual license fee in shares of Series B preferred
stock. Total sales to CGI approximated $22,125,000 and $5,485,000 for 1998 and
1997, respectively.
Interest expenses, net of interest income, was approximately $861,000
in 1998, as compared to $756,000 in 1997. The increase is principally
attributable to the Company maintaining lower investment balances.
The provision for income taxes reflects an effective tax rate of 52% in
1998 and 32% in 1997. The 1998 rate reflects the effect of certain permanent
differences.
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 to the availability and
integrity of financial systems and reliability of operational systems. The
20
<PAGE>
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.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales for fiscal year end 1997 were approximately $39,670,000 as
compared to net sales in 1996 of $33,850,000. Gross profit amounted to
$19,627,000 (49% of sales) in 1997 as compared to $12,081,000 (36% of sales) in
1996. The increase in sales and gross profit is principally attributable to the
Company renegotiating an Exclusive Supply Agreement (the "New Agreement") with a
non-affiliated pharmaceutical distributor (the "Distributor") in May 1997. The
New Agreement superseded a prior Exclusive Supply and Licensing Agreement with
the Distributor dated October 16, 1995. Under the New Agreement, the Company was
granted exclusive supply rights to sell certain products directly to the
Distributor's customers. In consideration for the supply rights, the Company
agreed to pay a royalty fee to the Distributor based upon the gross profit
earned on sales to those customers.
Selling, general and administrative expenses were $8,132,000 in 1997
and $9,171,000 in 1996. As a percentage of sales, selling, general and
administrative expenses were 20% in 1997 and 27% in 1996. The overall decrease
as a percentage of sales is primarily attributable to decreased advertising and
marketing costs and an increase in sales resulting from the Company's
renegotiation of its Exclusive Supply Agreement with a non-affiliated
pharmaceutical distributor. Royalty expenses under the renegotiated supply
agreement approximated $7,426,000.
Total sales to CGI under various supply agreements approximated
$5,485,000 and $1,459,000 in 1997 and 1996, respectively.
Interest expenses, net of interest income, was $756,000 in 1997, as
compared to $464,000 in 1996. The increase in interest expense in 1997 is a
result of greater borrowings to finance the purchase of additional machinery and
equipment, make necessary plant modification, and meet working capital needs.
21
<PAGE>
The provision of income taxes reflects an effective tax rate of 32% in
1997 and 39% in 1996.
Management believes that inflation did not have a material effect on
operations or financial condition in 1998, 1997 or 1996. Management also
believes that its business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.
Liquidity and Capital Resources
The Company had working capital of approximately $29,358,000 and
$38,167,000 at November 30, 1998 and 1997.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $6,448,000 which reflects net earnings of
($777,000), decreases in operating assets such as inventories ($2,331,000), and
increases in accounts payable ($1,686,000), accrued expenses ($385,000) and
income taxes payable ($743,000), offset by increases in accounts receivable
($1,232,000) and due from supplier ($508,000). Cash flows from operating
activities also reflect non-cash items including an adjustment for depreciation
and amortization ($3,232,000) and a realized loss on investment of ($404,000),
an adjustment for minority interest in loss of subsidiary (472,000), securities
received to satisfy receivable ($500,000) and an adjustment for deferred income
tax benefit ($601,000).
Net cash provided by investing activities approximately $1,955,000
principally attributable to the sale and maturity of marketable securities
($3,215,000), offset by the purchase of property, plant and equipment
($1,230,000) and an increase of intangible assets ($45,000).
The statement also reflects net cash used in financing activities of
approximately $11,208,000, representing bank repayments net of bank borrowings
($10,508,000) , payment of dividends ($235,000), and the purchase of treasury
stock ($465,000).
The Company reacquired $298,000 of its common stock during fiscal 1998,
repurchasing 68,425 shares at an average price of $4.36. 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 November 30, 1998 the Company had authorization to
repurchase an additional $1,383,000 worth of its own common 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. The Company reacquired $167,000
of its preferred stock during fiscal 1998, repurchasing 37,544 shares at an
average price of $4.44. As of November 30, 1998, the Company had authorization
to repurchase an additional $333,000 worth of its own preferred stock.
22
<PAGE>
The Company and its subsidiary maintain a credit facility 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 with a sublimit of $4,000,000 for
Futurebiotics. 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 $4,830,000 at November 30, 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,
restrictions on borrowings.
The Company expects to meet its cash requirements from operations,
current cash reserves, and existing financial arrangements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 14 of this Annual Report on
Form 10-K.
23
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
The following persons are the current executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Reginald Spinello 46 Chairman of the Board, Chief Executive
Officer and President
Karine Hollander 32 Chief Financial Officer, Secretary and
Director
Thomas A. Keith 39 Director
Ira Helman 66 Director
Lawrence D. Simon 32 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
Outside directors shall receive Ten Thousand Dollars ($10,000) per year
as compensation for their services. Directors who are also officers of the
Company do not receive any compensation for serving on the Board of Directors.
All Directors are reimbursed by the Company for any expenses incurred in
attending Director's meetings.
Background of Executive Officers and Directors
Reginald Spinello has been the Chairman of the Board, Chief Executive
Officer and President since August 21, 1998 and a Director of the Company since
August 1997. Mr. Spinello was the Company's Executive Vice President since
September 1993. Mr. Spinello is also the President and a director of the
Company's subsidiary Futurebiotics, Inc. In addition, he has been a Director of
Superior Supplements, Inc. since May 1, 1996. Superior Supplements, Inc. ("SSI")
is a developer, manufacturer and marketer of dietary supplements in bulk tablet,
capsule and powder form. Prior to joining PDK Labs Inc., Mr. Spinello was
President and Founder of Internal Reinforcements from 1985 to 1991, a specialty
distributor and marketer of natural vitamins and supplements. Mr. Spinello
graduated from Bryant College with a B.S. Degree in Business Administration.
Additionally, he has studied in the field of nutrition and is a non-practicing
nutrition consultant.
25
<PAGE>
Karine Hollander has been the Chief Financial Officer of the Company
and Futurebiotics, Inc. since March 3, 1997. In addition, she has been a
Director of the Company since March 11, 1998. She had been the Comptroller of
PDK Labs Inc. since September 1994. From 1989 until joining the Company, Ms.
Hollander was employed by the accounting firm of Holtz Rubenstein & Co., LLP.
Ms. Hollander received a B.A. degree in Accounting from Dowling College.
Thomas A. Keith has been a Director of the Company since March 11,
1998, and he has been a Director of Futurebiotics, Inc. since December 2, 1998.
In addition, he has been a Director of Compare Generiks, Inc. since May 21, 1997
and the President of Compare Generiks, Inc. since October 31, 1995. Prior to
joining Compare Generiks, Inc., from December 1990 to October 1995, Mr. Keith
was Vice President of Sales & Marketing of the Company Compare Generiks, Inc.
("CGI") is a distributor, marketer and vendor of dietary supplements and
over-the-counter non-prescription pharmaceuticals.
Lawrence D. Simon has been a Director of the Company since March 11,
1998. In addition, he has been the President, Chairman, Chief Financial Officer
and a Director of SSI since May 1, 1996. Mr. Simon is also a Director of
Futurebiotics, Inc. He was the National Sales Director for Futurebiotics, Inc.
from October 1, 1995, until his resignation on April 30, 1996. Prior to joining
Futurebiotics, Inc., Mr. Simon was Regional Sales Manager for the Company (from
April 10, 1992 to September 30, 1995). Prior to PDK Labs Inc., Mr. Simon was
President of LDS Products Inc. (from March 1990 to March of 1991). LDS Products
Inc., is a brokerage corporation specializing in sales to wholesale companies in
Eastern Europe. Prior to LDS Products Inc., Mr. Simon was an Auditor with
Coopers & Lybrand LLP (from December 1988 to March 1990). He is a graduate of
Cleveland State University with a Bachelors Degree in Business Administration.
Ira Helman has served as a Director of the Company since August 1989.
For the past 30 years, Mr. Helman has been an independent investor and financial
consultant as well as a breeder and owner of harness horses. Mr. Helman receive
his B.A. degree from Princeton University and his law degree from Brooklyn Law
School.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely upon its review of the copies
of such reports furnished to the Company during the year ended November 30,
1997, all Section 16(a) filing requirements applicable to its officers and
directors and greater than ten percent beneficial owners were satisfied except
that a report required to be filed upon the appointment of Karine Hollander as
Chief Financial Officer was inadvertently filed after the due date.
26
<PAGE>
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------
Annual Compensation Awards Payouts
--------------------------------- -------- -----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All
Other Stock LTIP Other
Annual Awards Options/ Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($) ($) SARs(#) ($) ($)
- ---------------------------- ---- --------- -------- --------------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Krasnoff, former CEO 1998 $400,000 $400,000 $270,000(1) $318,750(2) -0- $-0- $204,500(3)
1997 $400,000 $300,000 $ -0- $ -0- -0- $-0- $ -0-
1996 $400,000 $250,000 $200,000(1) $ -0- -0- $-0- $ -0-
Reginald Spinello, CEO 1998 $375,000(4) $300,000 $421,000(1) $595,000( 5) -0- $-0- $ -0-
1997 $250,000 $200,000 $ -0- $ -0- -0- $-0- $ -0-
1996 $200,000(6) $150,000 $ -0- $ -0- -0- $-0- $ -0-
Karine Hollander, CFO 1998 $160,000 $75,000 $160,000(1) $ -0- -0- $-0- $ -0-
1997 $110,000 $60,000 $ -0- $ -0- -0- $-0- $ -0-
1996 $ 85,000 $ -0- $ -0- $ -0- -0- $-0- $ -0-
</TABLE>
- --------------------
(1) Represents reimbursements to pay taxes resulting from stock grants.
(2) Represents issuance of 150,000 shares in accordance with August 1998
consulting agreement. Shares were valued at $2.125 per share.
(3) Represents consulting fees paid in accordance with August 1998
agreement and accrued vacation and sick pay in accordance with October
1995 Employment Agreement.
(4) Represents salary of $325,000 paid by the Company and $50,000 paid by
its subsidiary.
(5) Represents issuance of 280,000 shares in accordance with August 1998
employment agreement. Shares were valued at $2.125 per share.
(6) Represents salary of $150,000 paid by the Company and $50,000 paid by
its subsidiary.
Employment Agreements
The Company has an employment agreement with Reginald Spinello, the
Company's Chief Executive Officer and President, which provides for a minimum
salary of $350,000 per year (the "Spinello Agreement"). Mr. Spinello was issued
280,000 shares of Common Stock pursuant to the Spinello Agreement.
On March 3, 1997, the Company's employment agreement with Karine
Hollander, was amended to appoint her as the Company's Chief Financial Officer
at a minimum salary of $110,000 per year (the "Hollander Agreement"). In October
1995, Ms. Hollander was issued 50,000 shares of Common Stock pursuant to the
Hollander Agreement. On November 1, 1997, the Hollander Agreement was amended to
increase Ms. Hollander's salary to $160,000 per year with effect from December
8, 1997, to remove all restrictions on the vesting of Ms. Hollander's shares and
to provide for reimbursement of all taxes incurred by Ms. Hollander with respect
to
27
<PAGE>
her shares. The Hollander Agreement terminates in October 2000 but may be
terminated by the Company, at its sole discretion, on ninety days notice.
28
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of March 5, 1999
with respect to the beneficial ownership of the outstanding Common Stock by
(i) any holder of more than five (5%) percent; (ii) each of the Company's
officers and directors; and (iii) the directors and officers of the Company as a
group:
Amount
and Nature Approximate
Name and Address Beneficial Percent of
of Beneficial Owner Ownership(1) Class
- ------------------- ------------ -----------
Perry D. Krape 205,488 6.4%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Reginald Spinello(2) 672,500 21.1%
PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Michael Krasnoff(3) 350,000 11.0%
PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Thomas Keith 0 0
c/o Compare Generiks, Inc.
60 Davids Drive
Hauppauge, NY 11788
Lawrence Simon 0 0
c/o Superior Supplements, Inc.
270 Oser Avenue
Hauppauge, NY 11788
Karine Hollander(4) 50,000 1.6%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
29
<PAGE>
Ira Helman 0 0
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Dune Holdings, Inc.(3) 200,000 6.3%
132 Dune Road
West Hampton, NY 11978
Heartland Advisors, Inc.(5) 480,000 15.0%
790 North Milwaukee Street
Milwaukee, WI 53202
Directors and Officers 672,500 21.1%
as a Group (five (5) persons)
- ----------
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Instruction (4) to Item 403 of Regulation S-B of the Securities
Exchange Act.
(2) Includes 50,000 shares of common stock owned by Karine Hollander and 100,000
shares of Common Stock owned by Michael Lulkin, which are subject to a ten (10)
year voting trust held by the Company's Chief Executive Officer.
(3) Mr. Krasnoff owns 150,000 shares of Common Stock and possesses a voting
trust for an additional 200,000 shares of common stock owned by Dune Holdings,
Inc., as to which Mr. Krasnoff disclaims any beneficial ownership.
(4) Ms. Hollander's shares of Common Stock as subject to a ten (10) year voting
trust held by the Company's Chief Executive Officer.
(5) Based on Schedule 13G filed by Heartland Advisors, Inc. with the Securities
and Exchange Commission dated January 28, 1999. The Schedule 13G does not
identify any shares with respect to which there is a right to acquire beneficial
ownership. The Schedule 13G indicates that these shares are held by Heartland
Limited Partnership I, a private limited partnership for which Heartland
Advisors, Inc. serves as managing general partner with voting and dispositive
power. As a result, the partnership may be deemed to have the right to receive
or the power to direct the receipt of dividends from, or the proceeds from the
sale of, the securities.
30
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On August 21, 1998, the Company entered into a consulting agreement
with Michael Krasnoff, the Company's former Chief Executive Officer, President,
Chief Financial Officer and Chairman of the Board of Directors. The agreement
provides for Mr. Krasnoff to provide certain consulting services to the Company
for a period of three (3) years at a rate of $2500 for each full day during
which Mr. Krasnoff renders services. The Company also issued to Mr. Krasnoff
150,000 shares of the Company's Common Stock. In connection with the agreement,
Mr. Krasnoff terminated his employment with the Company and relinquished all
rights under the employment agreement, including the surrender of 280,000 shares
of the Company's Common Stock and the relinquishing of all rights under the
change of control provisions. As of November 30, 1998, Mr. Krasnoff owed the
Company the sum of $1,140,000, pursuant to the loan provisions in his
Termination and Payment Agreement. The Loan bears interest at the prime rate
plus 1/2 of 1% per annum. In the event any sums are outstanding upon termination
or expiration of the employment agreement, such sums shall be automatically
converted to a five (5) year loan which shall be fully amortized over sixty (60)
months. Subsequent to November 30, 1998, Mr. Krasnoff repaid $430,000 to the
Company.
Reginald Spinello, a director of the Company and the Company's
Executive Vice President, is also a director of SSI. Reginald Spinello and two
other directors of SSI have more than fifty percent (50%) voting power of the
common stock and the preferred stock of the Company pursuant to a Voting Trust
Agreement. The Company has a supply agreement with Superior Supplements, Inc., a
Delaware corporation ("SSI"), pursuant to which the Company is obligated to
purchase a minimum of $2,500,000 of certain products at specified prices
annually. This supply agreement expires in May 1999 and is automatically
renewable for successive one (1) year periods thereafter. The Company supplies
certain management and personnel to SSI pursuant to a management agreement
between the Company and SSI dated July 21, 1997 which provides for the Company
to supply certain management services to SSI in consideration for the payment by
SSI of a management fee of $10,000 per month. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In addition, on November 30, 1997, the Company entered into a packaging
agreement with SSI. SSI agreed to package Futurebiotics products for the Company
for a fixed price based on component cost plus a direct labor charge per unit.
The term of the agreement is for two (2) years, renewable for successive one (1)
year periods thereafter. The Company is obligated to purchase 1,000,000 bottles
of Futurebiotics products per annum during the term of the agreement.
31
<PAGE>
Thomas Keith, a director of the Company, is also the President and a
Director of CGI. The Company has two (2) supply agreements with CGI. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
General
The Company believes that material affiliated transactions and loans
between the Company and its directors, officers, principal shareholders or any
affiliates thereof have been and will be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.
32
<PAGE>
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 8:
Report of Independent Certified Public Accountants F-1
Consolidated balance sheets as of November 30, 1998 and 1997 F-2
Consolidated statements of operations for the three years ended
November 30, 1998 F-3
Consolidated statements of stockholders' equity for the three
years ended November 30, 1998 F-4
Consolidated statements of cash flows for the three years ended
November 30, 1998 F-5
Notes to consolidated financial statements F-6 - F-17
(a)(2) Financial Statement Schedules.
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or notes thereto.
33
<PAGE>
PDK LABS INC. AND SUBSIDIARY
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1998
CONTENTS
Page
----
Report on Independent Certified Public Accountants F-1
Consolidated balance sheets as of November 30, 1998 and 1997 F-2
Consolidated statements of operations for the
three years ended November 30, 1998 F-3
Consolidated statement of stockholders' equity
for the three years ended November 30, 1998 F-4
Consolidated statements of cash flows for the
three years ended November 30, 1998 F-5
Notes to consolidated financial statements F-6 - F-17
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
PDK Labs Inc. and Subsidiary
Hauppauge, New York
We have audited the consolidated balance sheets of PDK Labs Inc. and Subsidiary
as of November 30, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended November 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PDK Labs Inc. and Subsidiary as
of November 30, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended November 30, 1998, in
conformity with generally accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 12, 1999 (except for Notes 1b and 2,
as to which the date is March 3, 1999)
F-1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
November 30,
------------------------------
ASSETS (Note 8) 1998 1997
------ -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 929 $ 3,734
Investment in marketable securities, at fair value - 2,376
Accounts receivable - less allowance for
doubtful accounts of $54 (Note 14) 9,129 8,927
Inventories (Note 4) 21,552 26,062
Prepaid income taxes (Note 10) - 154
Prepaid expenses and other current assets 1,155 1,427
Due from supplier (Note 12) 1,373 865
Deferred income tax asset (Note 10) 122 609
Net assets of discounted operations (Note 2) 4,294 -
-------- --------
Total current assets 38,554 44,154
INVESTMENT IN MARKETABLE SECURITIES - 836
PROPERTY, PLANT AND EQUIPMENT, net (Note 5) 4,385 4,667
INTANGIBLE ASSETS, net (Note 6) 495 1,447
INVESTMENT IN COMPARE GENERIKS (Note 16) 596 500
OTHER ASSETS (Note 7) 2,450 2,617
-------- --------
$ 46,480 $ 54,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,672 $ 1,986
Accrued expenses and other current liabilities 958 573
Dividends payable (Note 9) 30 30
Royalty payable (Note 15) 1,350 1,600
Income taxes payable (Note 10) 1,255 498
Current portion of long-term debt (Note 8) 1,931 1,300
-------- --------
Total current liabilities 9,196 5,987
-------- --------
LONG-TERM DEBT (Note 8) 4,342 15,434
-------- --------
DEFERRED INCOME TAX LIABILITY (Note 10) 7 740
-------- --------
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,431 3,755
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13)
STOCKHOLDERS' EQUITY: (Notes 9 and 12)
Common stock, $.01 par value; authorized 30,000,000 shares;
3,807,152 and 3,557,153 issued and outstanding, respectively 38 36
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 460,566 and 498,110
issued and outstanding, respectively 5 5
Additional paid-in capital 28,404 27,951
Unrealized loss on marketable securities - (3)
Unearned compensation (3,286) (3,783)
Retained earnings 6,259 5,717
Treasury stock, at cost; 348,425 and 280,000 shares, respectively (1,916) (1,618)
-------- --------
29,504 28,305
-------- --------
$ 46,480 $ 54,221
======== ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES (Notes 13 and 15) $ 47,295 $ 39,670 $ 33,850
--------- -------- --------
COSTS AND EXPENSES:
(Notes 2, 5, 6, 11, 12 and 14)
Cost of sales 29,899 20,043 21,769
Selling, general and administrative 9,458 8,132 9,171
Royalty expense 3,927 7,426 -
--------- -------- --------
43,284 35,601 30,940
--------- -------- --------
OPERATING INCOME 4,011 4,069 2,910
--------- -------- --------
OTHER EXPENSES (INCOME):
Interest income (110) (233) (315)
Interest expense 971 989 779
Other (Note 16) 261 57 (624)
--------- -------- --------
1,122 813 (160)
--------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 2,889 3,256 3,070
PROVISION FOR INCOME TAXES (Note 10) 1,493 1,050 1,196
--------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS 1,396 2,206 1,874
--------- -------- --------
DISCONTINUED OPERATIONS:
Loss from operations, net of tax benefit
of $67, $440 and $178, respectively (1,091) (1,145) (401)
Minority interest in loss from operations 472 498 140
--------- -------- --------
(619) (647) (261)
--------- -------- --------
NET EARNINGS $ 777 $ 1,559 $ 1,613
========= ======== ========
NET EARNINGS (LOSS) PER COMMON
SHARE (Note 9):
Basic:
Income from continuing operations $ .35 $ .62 $ .48
Loss from discontinued operations (.19) (.21) (.08)
------- ------ ------
Net earnings $ .16 $ .41 $ .40
======= ====== ======
Diluted:
Income from continuing operations $ .34 $ .60 $ .46
Loss from discontinued operations (.18) (.21) (.08)
------- ------ ------
Net earnings $ .16 $ .39 $ .38
======= ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 9)
Basic 3,327,050 3,095,660 3,156,276
========= ========= =========
Diluted 3,409,109 3,228,333 3,265,393
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ --------------- Paid-in Unearned
Total Shares Amount Shares Amount Capital Compensation
----- ------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1995 $ 24,437 3,191,986 $32 739,555 $ 7 $27,749 $ (6,243)
Amortization of unearned compensation 1,303 - - - - - 1,303
Acquisition of treasury stock (335) - - - - - -
Amortization of unearned management fee (143) - - - - (143) -
Amortization of subsidiary unearned
management fee 150 - - - - 150 -
Dividends (Note 9) (362) - - - - - -
Net earnings 1,613 - - - - - -
---------- --------- --- --------- --- ------- --------
Balance at November 30, 1996 26,663 3,191,986 32 739,555 7 27,756 (4,940)
Preferred stock conversion (Note 9) - 365,167 4 (241,445) (2) (2) -
Amortization of unearned compensation 1,157 - - - - - 1,157
Acquisition of treasury stock (983) - - - - - -
Amortization of unearned management fee (143) - - - - (143) -
Amortization of subsidiary unearned
management fee 92 - - - - 92 -
Unrealized loss on marketable securities (3) - - - - - -
Tax effect of permanent difference in
valuation of stock compensation (Note 10) 248 - - - - 248 -
Dividends (Note 9) (285) - - - - - -
Net earnings 1,559 - - - - - -
---------- --------- --- --------- --- ------- --------
Balance at November 30, 1997 28,305 3,557,153 36 498,110 5 27,951 (3,783)
Issuance of common stock for services - 530,000 5 - - 1,121 (1,126)
Amortization of unearned compensation 1,163 - - - - - 1,163
Acquisition of treasury stock - common (298) - - - - - -
Acquisition and retirement of
treasury stock - preferred (167) - - (37,544) - (167) -
Amortization of unearned management fee (143) - - - - (143) -
Amortization of subsidiary unearned
management fee 99 - - - - 99 -
Unrealized gain on marketable securities 3 - - - - - -
Forfeiture of stock for services (Note 9) - (280,000) (3) - - (457) 460
Dividends (Note 9) (235) - - - - - -
Net earnings 777 - - - - - -
---------- --------- --- --------- --- ------- --------
Balance at November 30, 1998 $ 29,504 3,807,153 $38 460,566 $ 5 $28,404 $ (3,286)
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on Treasury Stock
Marketable Retained --------------------
Securities Earnings Shares Amount
---------- -------- ------ ------
<S> <C> <C> <C> <C>
Balance at November 30, 1995 $ - $ 3,192 30,000 $ (300)
Amortization of unearned compensation - - - -
Acquisition of treasury stock - - 73,500 (335)
Amortization of unearned management fee - - - -
Amortization of subsidiary unearned
management fee - - - -
Dividends (Note 9) - (362) - -
Net earnings - 1,613 - -
----- ------- -------- --------
Balance at November 30, 1996 - 4,443 103,500 (635)
Preferred stock conversion (Note 9) - - - -
Amortization of unearned compensation - - - -
Acquisition of treasury stock - - 176,500 (983)
Amortization of unearned management fee - - - -
Amortization of subsidiary unearned
management fee - - - -
Unrealized loss on marketable securities (3) - - -
Tax effect of permanent difference in
valuation of stock compensation (Note 10) - - - -
Dividends (Note 9) - (285) - -
Net earnings - 1,559 - -
----- ------- -------- --------
Balance at November 30, 1997 (3) 5,717 280,000 (1,618)
Issuance of common stock for services - - - -
Amortization of unearned compensation - - - -
Acquisition of treasury stock - common - - 68,425 (298)
Acquisition and retirement of
treasury stock - preferred - - - -
Amortization of unearned management fee - - - -
Amortization of subsidiary unearned
management fee - - - -
Unrealized gain on marketable securities 3 - - -
Forfeiture of stock for services (Note 9) - - - -
Dividends (Note 9) - (235) - -
Net earnings - 777 - -
----- ------- -------- --------
Balance at November 30, 1998 $ - $ 6,259 348,425 $ (1,916)
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended November 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 777 $ 1,559 $ 1,613
---------- ---------- ---------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,232 4,753 4,803
Minority interest in loss of subsidiary (472) (498) (140)
Gain on sale of investment in Compare Generiks - - (575)
Loss (gain) on sale of assets 5 (45) -
Deferred income tax benefit (601) (794) (91)
Securities received to satisfy receivable (500) - -
Realized loss on investment 404 - -
Tax effect of permanent difference in
valuation of stock compensation - 248 -
Increase in allowance for doubtful accounts - 12 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,232) (924) (1,688)
Inventories 2,331 (4,834) (10,025)
Prepaid income taxes 154 263 (417)
Prepaid expenses and other current assets 149 (446) 60
Other assets 145 322 1,123
Due from supplier (508) 796 (61)
Increase (decrease) in liabilities:
Accounts payable 1,686 (2,820) 3,131
Accrued expenses 385 306 65
Income taxes payable 743 (2) 383
Royalties payable (250) 1,600 -
---------- ---------- ---------
Total adjustments 5,671 (2,063) (3,432)
---------- ---------- ---------
Net cash provided by (used in) operating activities 6,448 (504) (1,819)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale/maturity of marketable securities 3,215 1,901 2,358
Purchase of property, plant and equipment (1,230) (1,350) (2,440)
Acquisition of intangible assets (45) (125) (2,532)
Net proceeds from sale of assets 15 407 -
Net proceeds from sale of investment
in Compare Generiks - - 1,775
---------- ---------- ---------
Net cash provided by (used in)
investing activities 1,955 833 (839)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit line 4,000 13,500 4,750
Proceeds from term loan 1,100 6,300 1,848
Repayment of debt (15,608) (17,997) (1,285)
Payment of cash dividends (235) (301) (362)
Purchase of treasury stock (465) (983) (336)
---------- ---------- ---------
Net cash (used in) provided by financing activities (11,208) 519 4,615
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (2,805) 848 1,957
Cash and cash equivalents at beginning of year 3,734 2,886 929
---------- ---------- ---------
Cash and cash equivalents at end of year $ 929 $ 3,734 $ 2,886
========== ========== =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1998
(in thousands, except share and per share data)
1. Summary of Significant Accounting Policies:
a. Description of business
The Company manufactures and distributes non-prescription
pharmaceutical products, vitamins and food supplement products, and cosmetics
and beauty aids throughout the United States.
b. Principles of consolidation
The consolidated financial statements include the accounts of PDK Labs
Inc. and its 52% owned subsidiary, Futurebiotics, Inc. ("Futurebiotics"). Upon
consolidation, all significant intercompany accounts and transactions are
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 sheet at
November 30, 1998. The balance sheet at November 30, 1997 has not been restated
to reflect the disposition.
c. 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.
At November 30, 1997, debt securities classified as non-current have
contractual maturities within 1-5 years.
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
e. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.
F-6
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
e. Depreciation and amortization (Cont'd)
Intangible assets are amortized using the straight-line method over
the following periods:
Customer lists 3-7 years
Covenants not to compete 5-7 years
Deferred loan costs Term of related debt
Other 7-10 years
f. Income taxes
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company and its subsidiary file separate tax returns.
g. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
h. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1998.
i. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. Advertising
The Company charges advertising costs to expense as incurred.
Advertising costs amounted to $171, $151 and $369 for the three years ended
1998, respectively.
k. Concentration of credit risk
The Company invests its excess cash in deposits and money market
accounts with major financial institutions and in commercial paper of companies
with strong credit ratings. Generally, the investments mature within ninety days
and therefore, are subject to little risk. The Company has not experienced
losses related to these investments.
The concentration of credit risk in the Company's accounts receivable
is substantially mitigated by the Company's credit evaluation process,
reasonably short collection terms and the geographical dispersion of revenue.
Although the Company generally does not require collateral, reserves for
potential credit losses are maintained and such losses have been within
management's expectations.
F-7
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
l. New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distribution to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers.
Both of these new standards are effective for periods beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
2. 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
approximating $6,000. Accordingly, the operating results of Futurebiotics
operations for the year ended November 30, 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 sheet at November 30, 1998. The balance
sheet at November 30, 1997 has not been restated to reflect the disposition.
Summarized financial information for the discontinued operation is as
follows:
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating revenues $10,304 $11,682 $12,713
Loss before income tax benefit (1,158) (1,585) (579)
Loss from discontinued operations,
net of tax benefit (1,091) (1,145) (401)
</TABLE>
The transaction is subject to the satisfaction of a number of conditions,
including the approval of the stockholders of Futurebiotics.
3. Supplementary Information - Statement of Cash Flows:
Cash paid during the years for:
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest $ 1,094 $ 1,253 $ 922
========= ======== ========
Income taxes $ 1,270 $ 1,306 $ 1,252
========= ======== ========
</TABLE>
F-8
<PAGE>
3. Supplementary Information - Statement of Cash Flows: (Cont'd)
During the years ended 1998 and 1996, the Company incurred capital lease
obligations of approximately $47 and $193, respectively, for the acquisition of
various property and equipment. Further, the Company and its majority-owned
subsidiary issued stock and/or options to various parties in consideration of
services provided (see Note 12).
4. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 4,458 $ 5,069
Work-in-process 9,965 10,884
Finished goods 7,129 10,109
------- -------
$21,552 $26,062
======= =======
</TABLE>
5. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Manufacturing equipment $ 6,476 $ 5,671
Vehicles 246 246
Office equipment and fixtures 2,195 2,368
Leasehold improvements 1,897 1,735
------- -------
10,814 10,020
Less accumulated depreciation and amortization 6,429 5,353
------- -------
$ 4,385 $ 4,667
======= =======
</TABLE>
Depreciation and amortization of plant and equipment for the three years
ended 1998 was $1,262, $1,151 and $854, respectively.
6. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Customer lists $ 1,756 $ 2,409
Covenants not to compete 254 1,099
Deferred loan costs 98 115
Other 9 92
------- -------
2,117 4,015
Less accumulated amortization 1,622 2,568
------- -------
$ 495 $ 1,447
======= =======
</TABLE>
Amortization expense for the years ended 1998, 1997 and 1996 was $425,
$472 and $960, respectively.
F-9
<PAGE>
7. Other Assets:
At November 30, 1998 and 1997, other assets include a loan, bearing
interest at prime plus .5%, and accrued interest to a former officer
approximating $1,140 and $650, respectively. The loan will be converted into a
term loan payable over a specified period. Subsequent to year end, the former
officer repaid $430.
8. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Revolving line of credit $ 400 $10,500
Term loan, payable in monthly installments of $105, plus interest at
prime, through September 2002;
collateralized by the Company's assets 5,728 6,090
Other, consisting principally of capital lease obligations,
expiring in various years through 2001 145 144
------ -------
6,273 16,734
Less current portion 1,931 1,300
------ -------
$4,342 $15,434
====== =======
</TABLE>
The Company and its subsidiary are party to a revolving credit agreement
with a bank which expires in September 2000. The facility provides for aggregate
borrowings of up to $10,000, with sublimits 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 also maintains a term loan facility with a bank which
provides for aggregate borrowings of up to $8,500. The term loan aggregated
$5,728 at November 30, 1998 and is payable in monthly installments of $105 plus
interest at prime through September 1, 2002, when the remaining principal amount
is due.
The credit facilities contain various covenants pertaining to the
maintenance of certain financial ratio restrictions, limitations on dividends,
and restrictions on borrowings. Borrowings are secured by the assets of the
Company and its subsidiary, which are jointly and severally liable for the
unpaid balance under these credit facilities.
The prime rate and the Eurodollar rate at November 30, 1998 were 7.75%
and 5.89%, respectively.
Maturities of long-term debt are as follows:
Years Ending
November 30,
------------
1999 $1,931
2000 1,530
2001 1,511
2002 1,281
2003 20
F-10
<PAGE>
9. Stockholders' Equity:
a. Capitalization
The Company's authorized capital consists of 30,000,000 shares of
common stock and 5,000,000 shares of preferred stock. All stock has a $.01 par
value.
The Board of Directors has the authority to issue preferred stock in
one or more series and to fix the rights, voting rights and other terms. The
Series A Convertible Preferred shares issued and outstanding have no voting
rights and, in the event of liquidation, are entitled to $7.00 per share plus
accrued dividends before any distribution to other stockholders. On July 21,
1997, the Board of Directors authorized an increase in the conversion rate of
the Company's Series A Convertible Preferred Stock from .3 shares of Common
Stock for each share of Preferred Stock to 1.5 shares of the Company's Common
Stock for each share of Preferred Stock. The increase in the conversion rate was
for a period of 45 days and ended on September 3, 1997, at which time the
conversion rate returned to the original rate. During the conversion period,
241,445 shares of Preferred Stock were converted into 365,167 shares of common
stock. Preferred shareholders are entitled to cumulative dividends of $.49 per
share, payable at the election of the Company in cash, common stock, or a
combination thereof. Dividends are payable semi-annually on or about April 15
and October 15 of each year.
b. Treasury stock
The Company's Board of Directors has authorized the Company to
repurchase up to $4,000 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.
The Company acquired 68,425, 176,500 and 73,500 shares of its common
stock at a cost of $298, $983 and $335 in 1998, 1997 and 1996, respectively.
Subsequent to November 30, 1998, the Company acquired an additional 365,000
shares at a cost of $1,338.
During 1998, the Company purchased 37,544 shares of its preferred
stock at an aggregate price of $167. In addition, in August 1998, an executive
resigned and forfeited 280,000 shares of common stock (valued at $460)
previously granted to him under an employment agreement. These preferred and
common shares were retired as of November 30, 1998.
c. Net income per common share and per common and common equivalent share
In the first quarter of fiscal 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings
per share and replaces the presentation of primary earnings per share with basic
earnings per share. It also requires dual presentation of basic and diluted
earnings per share on the face of the consolidated statement of operations for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted EPS computation. The reconciliation of
EPS from continuing operations for the years ended November 30, 1998, 1997 and
1996, are as follows:
F-11
<PAGE>
9. Stockholders' Equity: (Cont'd)
c. Net income per common share and per common and common equivalent share
(Cont'd)
<TABLE>
<CAPTION>
Per
Year Ended November 30, 1998 Income Shares Share
---------------------------- ------ ------- -----
<S> <C> <C> <S>
Earnings from continuing operations $ 1,396 3,327,050
Less: preferred stock dividends (235) -
--------- ---------
Basic EPS 1,161 3,327,050 $ .35
Effect of dilutive securities:
Warrants - 82,059
--------- ---------
Diluted EPS $ 1,161 3,409,109 $ .34
========= =========
Year Ended November 30, 1997
Earnings from continuing operations $ 2,206 3,095,660
Less: preferred stock dividends (285) -
---------- ---------
Basic EPS 1,921 3,095,660 $ .62
Effect of dilutive securities:
Warrants - 132,673
--------- ---------
Diluted EPS $ 1,921 3,228,333 $ .60
========= =========
Year Ended November 30, 1996
----------------------------
Earnings from continuing operations $ 1,874 3,156,276
Less: preferred stock dividends (362) -
--------- ---------
Basic EPS 1,512 3,156,276 $ .48
Effect of dilutive securities:
Warrants - 109,117
--------- ---------
Diluted EPS $ 1,512 3,265,393 $ .46
========= =========
</TABLE>
Options and warrants to acquire 48,000, 68,000 and 422,294 shares of
common stock were not included in the computation of diluted EPS for 1998, 1997
and 1996, respectively, because their exercise prices were greater than the
average market price of the common shares. In addition, the assumed conversion
of the preferred stock and the related reduction to the preferred stock dividend
was not included in the computation as its effect was antidilutive.
Subsequent to November 30, 1998, the Company purchased 365,000 shares
of treasury stock. Treasury stock reduces the weighted average number of shares
outstanding.
d. Stock option plan
The Company's Non-Qualified Stock Option Plan provides for the
granting of options to purchase not more than 23,250 shares of common stock to
employees, directors, and consultants of the Company. Pursuant to the Plan, and
at the Board's discretion, the options expire up to ten years from the date of
grant, and the exercise price will be determined by the Board. At November 30,
1998, no options have been granted under the Plan.
At November 30, 1998, the Company has approximately 138,200 shares of
common stock reserved for future issuances.
F-12
<PAGE>
10. Income Taxes:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended November 30,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,644 $ 1,426 $ 1,270
State 358 107 90
--------- -------- --------
2,002 1,533 1,360
--------- -------- --------
Deferred:
Federal (537) (335) (121)
State 28 (148) (43)
--------- -------- --------
(509) (483) (164)
--------- -------- --------
$ 1,493 $ 1,050 $ 1,196
========= ======== ========
</TABLE>
Net deferred income tax asset (liability) are comprised of the following:
<TABLE>
<CAPTION>
November 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Inventories $ 319 $ 375
Prepaid salaries (215) (56)
Property, plant and equipment 83 (43)
Intangible assets 693 768
Investment in subsidiary (315) (498)
Unearned compensation (622) (1,053)
Tax carryforwards 528 435
Investment in Compare Generiks 154 -
Other - 115
Valuation allowance (510) (175)
------- --------
$ 115 $ (132)
======= ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended November 30,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U. S. Federal statutory income tax rate 34.0% 34.0% 34.0%
State income tax, net of federal tax benefit 8.9 (.8) 1.0
Other 1.0 (4.0) .6
Permanent differences 7.8 3.0 3.4
----- ----- -----
51.7% 32.2% 39.0%
===== ===== =====
</TABLE>
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", the Company recognized a
deferred tax (benefit) provision on its proportionate share of Futurebiotics'
(loss) earnings.
The tax effect of excess deductions for stock-based awards whose
compensation cost recorded for tax purposes exceeds the compensation cost
recorded for financial reporting purposes is recognized as additional paid-in
capital.
F-13
<PAGE>
11. Retirement Plans:
a. The Company has a voluntary, non-contributory defined contribution
profit sharing plan which covers substantially all of its employees.
Contributions to the profit sharing plan are based on a percentage of eligible
compensation up to a maximum of 15%, at the discretion of the Board of
Directors. There was no contribution made in 1998, 1997 or 1996.
b. Qualified employees are eligible to participate in a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
plan is voluntary, and any participant may elect to contribute up to 17% of
earnings. The Company may, at its discretion, contribute up to 3% of an
employee's earnings. The Company contributed $69, $37 and $36 to the Plan for
the years ended 1998, 1997 and 1996, respectively.
12. Commitments and Contingencies:
a. Employment agreements
Pursuant to employment agreements with certain key executives, which
expire at various dates through October 2005, the Company has granted 970,000
shares of common stock which are earned by the executives and charged to
operations ratably over the respective terms of their employment. The shares
have been valued at prices ranging from $1.46 to $2.13 per share, dependent upon
their date of grant (aggregating approximately $1,739). The agreements, as
amended, provide for reimbursement of any tax liability arising from the
officers' stock grant. In 1998, the Company paid tax reimbursements of $580 to
three executives, which is being charged to operations over the lives of their
respective agreements. One agreement also provides for a payment of two times
the officers' aggregate unpaid compensation in the event of a change in control
of the Company (as defined).
The Company's remaining aggregate commitment at November 30, 1998
under such contracts is approximately $3,390.
b. Consulting agreements
In August 1998, the Company entered into a three year consulting
agreement with a former officer which provides for minimum annual compensation
of $480. In addition, the consultant was granted 150,000 shares of common stock.
The value of the shares ($319) is being charged to operations over the term of
the agreement
The Company was a party to a consulting agreement with the former
president/stockholder of Futurebiotics, Ltd. ("Consultant"). This agreement
will be terminated in connection with the sale of Futurebiotics' assets (see
Note 2).
Additionally, included in operations are charges approximating $229 in
each of the years ended 1998, 1997 and 1996, representing the compensatory value
of the Company's common stock issued in connection with consulting agreements
entered into prior to 1996.
c. Lease commitment
The Company is obligated under non-cancellable operating leases for
its manufacturing and office facilities. The leases, as extended, require
minimum future rental payments of $609, $642, $576 in 1999, 2000 and 2001,
respectively and provide for the payment of real estate taxes.
Rent expense, net of rental income, approximated $543, $351 and $451
for 1998, 1997 and 1996, respectively.
F-14
<PAGE>
12. Commitments and Contingencies: (Cont'd)
d. Litigation
On July 29, 1996, the Company served a complaint against a former
executive citing that he, among other things, breached his agreement with PDK by
competing with PDK and soliciting PDK's customers in violation of his separation
agreement.
The former executive has denied the Company's allegations and, through
a counterclaim, asserts that the Company, and certain current and former
officers and directors have breached their fiduciary duty to the Company and its
stockholders. PDK and the officers and directors deny that they engaged in any
improper conduct which would support the former executive's counterclaim. Each
intends to vigorously defend against such claims and PDK intends to proceed with
its action against the former executive. In addition, the complaint also demands
that the board commence a shareholders derivative action for fraud, breach of
fiduciary duty and corporate waste against various individuals and entities.
The Company is involved in various other lawsuits and claims incidental
to its business. In the opinion of management, the ultimate liabilities, if any,
resulting from such lawsuits and claims, will not materially affect the
financial position of the Company.
e. Supply and packaging agreement
The Company is party to multi-year supply and packaging agreements
with Superior Supplements, Inc. ("Superior"), an entity having a common director
with the Company, pursuant to which Superior is supplying and packaging certain
products for PDK. In the event PDK purchases less than $2,500 of product or
orders less than 1,000,000 bottles packaged per annum, Superior will be entitled
to up to $200 in liquidated damages. Purchases under these agreements
approximated $9,505, $4,386 and $1,796 for 1998, 1997 and 1996, respectively.
In connection with these agreements, in 1997 PDK transferred to
Superior, at cost, inventory of approximately $2,045. In addition, PDK sold
Superior machinery and equipment for proceeds of $232, recognizing a gain of
approximately $134.
Additionally, Superior is 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 per month.
13. Government Regulation:
Certain raw materials used by the Company in its manufacturing process
are categorized as List 1 Chemicals by the Chemical Diversion Action of 1988. As
such, the importation of these chemicals requires the filing of importation
documents with the Federal Drug Enforcement Administration ("DEA"). In addition,
certain foreign countries require a "letter of non-objection" for the export of
List 1 Chemicals. In 1998, the DEA advised the Company that the DEA would not
sign a letter of non-objection requested by the Company relating to the intended
importation by the Company of a List 1 Chemical. Without the letter of
non-objection the Company is unable to import the List 1 Chemical. To date, the
Company has been able to meet its purchase requirements through domestic
sources.
The United States Food and Drug Administration ("FDA") proposed
regulations which remain pending but, if adopted, would remove
ephedrine-containing over-the-counter drug products which are manufactured and
sold by the Company from the over-the-counter market. In 1998, several states
have taken action to restrict, in some fashion, the sale of ephedrine,
pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
F-15
<PAGE>
13. Government Regulation: (Cont'd)
The DEA has been given the statutory authority to regulate all ephedrine,
pseudoephedrine, and PPA over-the-counter drug products. Registration with the
DEA is required for all companies engaged in the distribution of any products
containing ephedrine, pseudoephedrine, or PPA. The Company has applied for its
own registration with the DEA. The Company was advised recently by DEA that they
are investigating the Company's pending registration. The investigation involves
the Company's purchase and distribution of List 1 chemicals. To date, the DEA
has taken no formal action on the registration. If the DEA denies the Company's
registration, the Company will have the right to appeal the decision
administratively within the DEA and thereafter, if unsuccessful, in federal
court. If the final determination is to deny the registration, then the Company
would no longer be permitted to manufacture and distribute products that contain
List 1 Chemicals. Sales of products containing List 1 Chemicals approximated
$30,525 for the year ended November 30, 1998.
14. Related Party Transactions:
a. Futurebiotics
Under a 10 year agreement entered into in 1994, the Company, in
exchange for 600,000 shares of Futurebiotics' unregistered common stock, is
providing Futurebiotics' entire line of products at the Company's cost (as
defined). The agreement provides PDK with registration rights for up to 60,000
shares of the stock per year in order to effect transfers of such shares.
In the event that the Company is unable to supply products having a cost
of at least $2,000 during any fiscal year (such shortage being defined as the
"PDK Deficiency") then the Company shall forfeit to Futurebiotics either (i)
fifteen percent (15%) of the PDK Deficiency in cash, or (ii) a portion of the
60,000 shares of stock, determined by multiplying the 60,000 shares of stock by
a percentage which is arrived at by dividing the PDK Deficiency by $2,000.
b. Compare Generiks
The Company holds 500,000 shares of Compare Generiks Inc.'s ("CGI")
Series B Preferred Stock. The Series B Preferred Stock earns cumulative annual
dividends of 12% or $.12 per share, and is redeemable by CGI after one year from
the date of issuance. Dividend income for the years ended November 30, 1998,
1997 and 1996 totalled $60, $60 and $50, respectively.
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 to PDK. This fee is payable, at the option
of CGI, either in cash or in shares of CGI's common or preferred stock. Sales to
CGI approximated $22,125 and $5,485 for the years ended November 30, 1998 and
1997, respectively. Included in accounts receivable at November 30, 1998 and
1997 are $6,801 and $2,030, respectively, due from CGI.
15. Exclusive Supply and Licensing Agreement:
The Company was party to an amended Exclusive Supply Agreement with a
non-affiliated distributor (the "Distributor") under which PDK was granted the
right to sell certain products directly to the Distributor's customers. In
consideration, PDK was obligated to pay the distributor a royalty fee based upon
the gross profit earned on the sale to those customers.
This Agreement was terminated in March 1998, and subsequent to November
30, 1998, the Company and the Distributor entered into a settlement under which
the outstanding royalty payable of $1,350 was paid in February 1999.
F-16
<PAGE>
15. Exclusive Supply and Licensing Agreement: (Cont'd)
Under a prior agreement, the Company had granted the Distributor an
exclusive license to use certain trademarks and a right to distribute products
bearing such names. The Company recognized license fee income of $500 in 1996 in
connection with this Agreement.
Sales to the Distributor approximated 10% and 75% of total revenue in
1997 and 1996, respectively.
16. Other Expense (Income):
Other expense (income) consists of the following:
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loss on impairment of securities (a) $ 404 $ - -
Gain on sale of securities (b) - - (575)
Dividend income (60) (60) (50)
Write-off of terminated deferred loan costs - 181 -
Other (83) (64) 1
----- ---- ------
$ 261 $ 57 $ (624)
===== ==== ======
</TABLE>
(a) The Company was issued shares of CGI common stock in satisfaction of
its annual license fee (see Note 14b). At November 30, 1998, these shares were
written down to their estimated realized value for declines in their market
value which, in the opinion of management, was other than temporary. The Company
recorded a charge to operations of approximately $404 for this impairment.
(b) In March 1996, the Company sold the 500,000 shares of CGI common
stock (Note 14) for net proceeds of approximately $1,775.
17. Fair Value of Financial Instruments:
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Current Assets, Investments in Marketable Securities and Current
Liabilities: The fair value of short-term financial instruments,
including cash and cash equivalents, trade accounts receivable and
payable, certain accrued liabilities, and certain other short-term
financial instruments, approximates their carrying amount in the
financial statements due to the short maturity of such instruments.
Notes Payable and Long-Term Debt: The fair value of the variable rate
term note payable and line of credit approximates their carrying amount
since the currently effective rates reflect market rates.
F-17
<PAGE>
(a)(3) Exhibits. [to be updated]
<TABLE>
<CAPTION>
<S> <C>
3.1 * Restated Certificate of Incorporation
3.2 * Amended and Restated By-Laws of Registrant
4.1 * Warrant Agreement
10.1** Stock Option Plan and form of Stock Option Agreement
10.48+ Amendment of Consulting Agreement by and between K.A.M Group, Inc. and the
Company dated January 19, 1994.
10.49++ Sales and Management Agreement by and between the Company and Futurebiotics
dated April 14, 1994.
10.50++ Amendment of Sales and Management Agreement by and between the Company
and Futurebiotics dated December 8, 1994.
10.54+++ Supply Agreement with Compare Generiks, Inc. dated October 31, 1995.
10.57++++ Supply Agreement with Superior Supplements, Inc. dated May 14, 1996.
10.62+++++ Amendment No. 2 to Employment Agreement with Michael Krasnoff dated as of
May 31, 1997.
10.63+++++ Employment Agreement with Reginald Spinello dated as of October 6, 1995.
10.64+++++ Amendment No. 1 to Employment Agreement with Reginald Spinello dated as of
November 1, 1997.
10.66+++++ Amendment No. 1 to Employment Agreement with Karine Hollander dated as of
March 3, 1997.
10.67+++++ Amendment No. 2 to Employment Agreement with Karine Hollander dated as of
November 1, 1997.
10.69+++++ Exclusive Supply and Licensing Agreement between the Company and Compare
Generiks, Inc. dated March 24, 1997.
10.70+++++ Exclusive Supply Agreement between the Company and Body Dynamics, Inc. dated as of
May 5, 1997.
10.71+++++ Amendment to Supply Agreement between the Company and Superior
Supplements, Inc. dated as of July 21, 1997.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.72+++++ Management Agreement between the Company and Superior Supplements, Inc.
dated as of July 21, 1997.
10.73+++++ Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc. and European
American Bank dated as of August 20, 1997 and certain material exhibits thereto.
10.74+++++ Packaging Agreement between the Company and Superior Supplements, Inc. dated
as of November 30, 1997.
10.75+++++ Assignment and Assumption Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc. and Bank Leumi USA dated January 16, 1998.
10.76+++++ Assignment and Assumption Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc. and National Bank of Canada dated January 16, 1998.
10.77+++++ First Amendment and Waiver to Credit Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc., European American Bank, Bank Leumi USA and National Bank of
Canada dated as of February 18, 1998.
10.78 Asset Purchase Agreement dated as of March 3, 1999 by and among FB Acquisition Corp.,
Nutraceutical International Corporation, Futurebiotics, Inc. and PDK Labs
Inc.
10.79 Second Amendment to Credit Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc. and European American Bank dated as of August 13, 1998.
10.80 Employment Agreement with Reginald Spinello dated August 21, 1998.
10.81 Consulting Agreement with Michael Krasnoff dated August 21, 1998.
10.82 Second Amendment to Supply Agreement between the Company and Compare
Generiks, Inc. dated as of April 1998.
10.83 Third Amendment to Supply Agreement between the Company and Compare
Generiks, Inc. dated as of November 1998.
27.1 Financial Data Schedule
</TABLE>
- -------------------
*Incorporated by Reference to the Company's Registration Statement on Form
S-1, No. 33-46454
**Incorporated by Reference to the Company's Registration Statement on Form
S-18, No. 22-31006 NY.
+Incorporated by Reference to the Company's Form 10-KSB for the year ended
November 30, 1993.
++Incorporated by Reference to the Company's Form 10-KSB for the year ended
November 30, 1994.
+++Incorporated by Reference to the Company's Form 10-KSB for the year ended
November 30, 1995.
II-2
<PAGE>
++++Incorporated by Reference to the Company's Form 10-KSB for the year ended
November 30, 1996.
+++++Incorporated by Reference to the Company's Form 10-K for the year ended
November 30, 1997.
(B) Reports on Form 8-K.
None.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: New York, New York
March 10, 1999
PDK LABS INC.
By:/s/ Reginald Spinello
---------------------------------
Reginald Spinello, Chairman of the
Board, Chief Executive Officer
and President
By:/s/ Karine Hollander
----------------------------------
Karine Hollander, Chief Financial
Officer and Principal Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Reginald Spinello Chairman of the Board, March 10, 1999
- --------------------------- Chief Executive Officer
Reginald Spinello and President
/s/ Karine Hollander Chief Financial Officer March 10, 1999
- --------------------------- and Director
Karine Hollander
/s/ Thomas A. Keith Director March 10, 1999
- ---------------------------
Thomas A. Keith
/s/ Lawrence D. Simon Director March 10, 1999
- ---------------------------
Lawrence D. Simon
/s/ Ira Helman Director March 10, 1999
- ---------------------------
Ira Helman
<PAGE>
Exhibit 10.78
EXECUTION COPY
ASSET PURCHASE AGREEMENT
BY AND AMONG
FB ACQUISITION CORP., A DELAWARE CORPORATION,
NUTRACEUTICAL CORPORATION, A DELAWARE CORPORATION
FUTUREBIOTICS, INC., A DELAWARE CORPORATION
AND
PDK LABS, INC., A NEW YORK CORPORATION
DATED AS OF
MARCH 3, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1
DEFINITIONS.................................................................1
1.1 Definitions.............................................................1
ARTICLE 2
PURCHASE AND SALE OF ASSETS.................................................3
2.1 Purchase and Sale of Assets.............................................3
2.2 Limited Assumption of Liabilities.......................................6
2.3 Closing.................................................................6
2.4 Purchase Price..........................................................7
2.5 Purchase Price Adjustment...............................................7
2.6 Disposition of Escrow Amount............................................8
ARTICLE 3
CONDITIONS TO CLOSING.......................................................8
3.1 Conditions to Seller's Obligations......................................8
3.2 Conditions to Buyer's Obligation.......................................10
ARTICLE 4
COVENANTS PRIOR TO CLOSING.................................................12
4.1 Affirmative Covenants of Seller........................................12
4.2 Negative Covenants.....................................................13
4.3 Stockholder Approval...................................................14
4.4 Financial Statement Deliveries.........................................14
4.5 Affirmative Covenants of Buyer.........................................14
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER...................................15
5.1 Organization and Power; Capitalization; Subsidiaries and Investments...15
5.2 Authorization..........................................................15
5.3 No Breach..............................................................15
5.4 Financial Statements...................................................16
5.5 No Material Adverse Changes............................................17
5.6 Absence of Certain Developments........................................17
5.7 Title and Condition of Properties......................................18
5.8 Contracts and Commitments..............................................19
5.9 Proprietary Rights.....................................................19
5.10 Product Warranty......................................................20
5.11 Government Licenses and Permits.......................................21
5.12 Litigation; Proceedings...............................................21
5.13 Compliance with Laws; FDA Compliance..................................22
5.14 Environmental Matters.................................................23
i
<PAGE>
5.15 Employees and Employee Benefits.......................................24
5.16 Insurance.............................................................25
5.17 Tax Matters...........................................................25
5.18 Customers and Suppliers...............................................26
5.19 Brokerage.............................................................26
5.20 Affiliate Transactions................................................26
5.21 Exclusivity of Representations; Reliance on Representations...........26
5.22 Closing Date..........................................................26
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYER AND GUARANTOR......................27
6.1 Organization and Power.................................................27
6.2 Authorization..........................................................27
No Violation...............................................................27
6.4 Litigation.............................................................28
6.5 Brokerage..............................................................28
6.6 Exclusivity of Representations; Reliance on Representations............28
6.7 Closing Date...........................................................28
6.8 No Material Adverse Change.............................................28
ARTICLE 7
TERMINATION................................................................28
7.1 Termination............................................................28
7.2 Effect of Termination..................................................29
7.3 Waiver of Right to Terminate...........................................30
ARTICLE 8
ADDITIONAL AGREEMENTS; COVENANTS AFTER CLOSING.............................30
8.1 Indemnification........................................................30
8.2 Mutual Assistance and Records..........................................33
8.3 Press Release and Announcements........................................33
8.4 Expenses...............................................................34
8.5 Specific Performance...................................................34
8.6 Arbitration Procedure..................................................34
8.7 Further Transfers......................................................35
8.8 Change of Name.........................................................35
8.9 Transition Assistance..................................................35
8.10 Non-Competition; Non-Solicitation.....................................35
8.11 Communications........................................................36
8.12 Best Efforts To Consummate Closing Transactions.......................36
8.13 Employees and Employee Benefits.......................................36
8.14 Confidentiality.......................................................37
8.15 Taxes; Recording Charges..............................................37
8.16 Collection of Purchased Receivables...................................38
ARTICLE 9
MISCELLANEOUS..............................................................38
9.1 Amendment and Waiver...................................................38
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9.2 Notices................................................................38
9.3 Assignment.............................................................39
9.4 Severability...........................................................39
9.5 No Strict Construction.................................................39
9.6 Captions...............................................................39
9.7 No Third Party Beneficiaries...........................................39
9.8 Complete Agreement.....................................................40
9.9. Counterparts..........................................................40
9.10. Governing Law........................................................40
9.11. Consent to Jurisdiction..............................................40
9.12. Guaranty.............................................................40
9.13. Maintenance of Insurance.............................................40
9.14. Delivery of Schedules................................................40
ARTICLE 10
REPRESENTATIONS AND WARRANTIES OF PDK......................................41
10.1 Organization and Power................................................41
10.2 Authorization.........................................................41
No Breach..................................................................41
10.4 Litigation............................................................42
10.5 Brokerage.............................................................42
10.6 Exclusivity of Representations; Reliance on Representations...........42
10.7 Closing Date..........................................................42
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ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of March 3, 1999, by and among (i) FB Acquisition Corp., a
Delaware corporation ("Buyer") and wholly-owned indirect subsidiary of
Nutraceutical International Corporation, (ii) solely for purposes of Section
9.12 hereof, Nutraceutical Corporation, a Delaware corporation ("Guarantor") and
wholly-owned direct subsidiary of Nutraceutical International Corporation, (iii)
Futurebiotics, Inc., a Delaware corporation ("Seller") and (iv) PDK Labs, Inc.,
a New York corporation and the holder of not less than a majority of the
outstanding equity securities of the Seller ("PDK").
On the terms and subject to the conditions set forth in this
Agreement, Buyer desires to acquire from Seller, and Seller desires to sell to
Buyer, substantially all of the assets and properties of and relating to
Seller's business of developing, producing, packaging, marketing, selling and
distributing Nutritional Supplements, excluding Seller's private label business
(the "Business").
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
"Affiliate" of any particular Person shall mean any other
Person controlling, controlled by or under common control with such Person.
"Affiliated Group" shall mean an affiliated group as defined
in Section 1504 of the Code (or any analogous combined, consolidated or unitary
group defined under state, local or foreign income Tax law) of which Seller is
or has been a member.
"Business Day" means any day other than Saturday or Sunday or
a public holiday under the laws of the State of New York or any other day on
which banking institutions are authorized or obligated to close in the State of
New York as of the date of determination.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied, as promulgated by the relevant United States
accounting authorities.
<PAGE>
"Government Licenses" means all permits, licenses, franchises,
orders, registrations, certificates, variances, approvals and other
authorizations obtained from foreign, federal, state or local governments or
governmental agencies or other similar rights, and all data and records
pertaining thereto.
"Knowledge" shall mean (i) in the case of an individual, to
the best of such Person's knowledge and (ii) in the case of any Person other
than an individual, to the best of such Person's actual knowledge after due
inquiry of all key employees, officers and directors of such Person.
"Liens" shall mean any mortgage, pledge, security interest,
conditional sale or other title retention agreement, encumbrance, lien,
easement, option, debt, charge, claim or restriction of any kind, excluding
liens for taxes not yet due and payable.
"Nutritional Supplements" means vitamins, minerals, herbs and
other nutritional supplements, including, without limitation, products within
the categories of sports nutrition, aroma-therapy, personal care, liquid herbs,
flower essence, essential oils and other products typically found in health food
stores, but excluding OTC products.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated association, corporation,
limited liability company, entity or governmental entity (whether federal,
state, county, city or otherwise and including, without limitation, any
instrumentality, division, agency or department thereof).
"Proprietary Rights" means all of the following owned by,
issued to, or licensed to Seller, or used in the Business, along with all
associated income, royalties, damages and payments due from or payable by any
third party (including, without limitation, damages and payments for past,
present, or future infringements or misappropriations thereof), all other
associated rights (including, without limitation, the right to sue and recover
for past, present, or future infringements or misappropriations thereof), and
any and all corresponding rights that, now or hereafter, may be secured
throughout the world: (i) trademarks, service marks, trade dress, logos,
slogans, trade names and corporate names (including, without limitation, the
name "Futurebiotics" and any derivation of the foregoing) and all registrations
and applications for registration thereof, together with all goodwill associated
therewith; (ii) copyrights and works of authorship, and all registrations and
applications for registration thereof; (iii) computer software (including,
without limitation, data, data bases and related documentation); (iv) trade
secrets, confidential information, and proprietary data and information
(including, without limitation, compilations of data (whether or not copyrighted
or copyrightable), ideas, formulae, compositions, blends, processes, know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, improvements, proposals,
technical data, financial and accounting data, business and marketing plans, and
customer and supplier lists and related information); (v) all other intellectual
property rights; and (vi) all copies and tangible embodiments of the foregoing,
if any (in whatever form or medium), including, without limitation, in the case
of each of the foregoing items (i) through (v), the items set forth on the
"Proprietary Rights Schedule" attached hereto.
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"Purchased Inventory" is defined in Section 2.1(a)(xiii)
hereof.
"Purchased Receivables" is defined in Section 2.1(a)(xii)
hereof.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(irrespective of whether, at the time, stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof.
"Tax" shall mean any federal, state, local or foreign income,
gross receipts, franchise, estimated, alternative minimum, add-on minimum,
sales, use, transfer, real property gains, registration, value added, excise,
natural resources, severance, stamp, occupation, premium, windfall profit,
environmental, customs, duties, real property, personal property, capital stock,
social security, unemployment, disability, payroll, license, employee or other
withholding, or other tax, of any kind whatsoever, including any interest,
penalties or additions to tax or additional amounts in respect of the foregoing;
the foregoing shall include any transferee or secondary liability for a Tax and
any liability assumed by agreement or arising as a result of being (or ceasing
to be) a member of any Affiliated Group or being included (or required to be
included) in any Tax Return relating thereto.
"Tax Return" shall mean any return, declaration, report, claim
for refund, information return or other document (including any related or
supporting schedule, statement or information) filed or required to be filed in
connection with the determination, assessment or collection of any Tax of any
party or the administration of any laws, regulations or administrative
requirements relating to any Tax.
ARTICLE 2
PURCHASE AND SALE OF ASSETS
---------------------------
2.1 Purchase and Sale of Assets.
(a) Purchased Assets. On the terms and subject to the
conditions contained in this Agreement, on the Closing Date, Buyer shall
purchase from Seller, and Seller shall sell, convey, assign, transfer and
deliver to Buyer by appropriate instruments reasonably satisfactory to Buyer and
its counsel, free and clear of all Liens, all of the following assets,
properties, rights, titles and interests of every kind and nature owned,
licensed or leased by Seller or
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otherwise used in the Business (collectively, the "Purchased Assets"), but
excluding all Excluded Assets:
(i) all prepayments and prepaid expenses listed on the
Purchased Assets Schedule;
(ii) all machinery, equipment, tools, dies, jigs, molds,
patterns, furniture, spare parts and supplies, computers and all
related equipment, telephones and all related equipment and all other
tangible personal property listed on the Purchased Assets Schedule;
(iii) all rights existing under all purchase orders to
purchase or sell goods or products, including, without limitation, any
such purchase order listed on the "Contracts Schedule" and under each
other contract listed on the Contracts Schedule and specifically
identified as a contract to be assigned to Buyer (collectively, the
"Assigned Contracts");
(iv) all distribution systems and networks including, without
limitation, the right, from and after the Closing Date, to contact and
do business with any distributor, broker or sales representative that
distributes Seller's products (excluding any rights or obligations
under any Distribution Contracts (as defined in Section 2.1(b)(ix)
below)) and all rights (but not the obligation) to hire Seller's
employees;
(v) all lists and records pertaining to customer accounts
(whether past or current), suppliers, distributors, personnel and
agents and all other books, ledgers, files, documents, correspondence
and business records;
(vi) all claims, deposits, prepayments, warranties,
guarantees, refunds, causes of action, rights of recovery, rights of
set-off and rights of recoupment listed on the Purchased Assets
Schedule, other than those relating exclusively to Excluded Assets or
Excluded Liabilities;
(vii) all Proprietary Rights, including, without limitation,
those listed on the Proprietary Rights Schedule;
(viii) all Government Licenses, including, without limitation,
any foreign product registrations and those Government Licenses listed
on the attached "Licenses Schedule," but excluding any such Government
Licenses which are by their terms not transferable;
(ix) all insurance, warranty and condemnation proceeds
received after the date hereof with respect to damage, non-conformance
of or loss to the Purchased Assets;
(x) all rights to receive mail and other communications
addressed to Seller;
(xi) except as provided in Section 2.1(b)(v) below, all books,
records, ledgers, files, documents, correspondence, lists, studies and
reports and other printed or written materials;
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<PAGE>
(xii) all trade accounts receivable as of the Closing Date
(but excluding any private label accounts receivable), such accounts
receivable to be set forth on a schedule to be jointly prepared by
Seller and Buyer as of the Closing (the "Purchased Receivables"); and
(xiii) a number of units of each item of individual finished
goods inventory set forth on the "Estimated Purchased Inventory
Schedule" attached hereto as of the Closing Date which is (A) no
greater than 110% of the "Estimated Purchase Units" set forth on the
"Estimated Purchased Inventory Schedule" attached hereto and (B) not
less than one month's supply of each such product (as denoted in the
column labeled "Minimum Purchase Units" in the "Estimated Purchased
Inventory Schedule"), determined at PDK's unit costs for such inventory
(which unit costs are set forth on the "Estimated Purchased Inventory
Schedule"); provided that the definitive quantities of such inventory
shall be set forth on a schedule to be jointly prepared by Buyer and
Seller as of the Closing and provided further, that in no event shall
Buyer be obligated to purchase in excess of $1.5 million of inventory
pursuant to this Agreement (the "Purchased Inventory").
(b) Excluded Assets. Notwithstanding the foregoing, the
following assets are expressly excluded from the purchase and sale contemplated
hereby (the "Excluded Assets") and, as such, are not included in the Purchased
Assets:
(i) all cash, cash equivalents and securities;
(ii) all prepaid or deferred Taxes or any other Tax assets;
(iii) all interests in real estate or any leased real
property;
(iv) Seller's rights under or pursuant to this Agreement and
the other agreements contemplated hereby;
(v) Seller's general ledger, accounting records, Tax Returns,
stock and minute books and corporate seal; provided that Buyer shall be
given copies of the general ledger, Tax Returns and accounting records
as such documents exist as of the Closing Date;
(vi) any right to receive mail and other communications
addressed to Seller relating exclusively to the Excluded Assets or the
Excluded Liabilities;
(vii) except as provided in Section 2.1(a)(xii), all accounts
or notes receivable;
(viii) except as provided in Section 2.1(a)(xiii), all
inventories;
(ix) except for the Assigned Contracts, all contracts,
agreements and arrangements of Seller, including, without limitation,
any contract, agreement or arrangement related to the distribution of
Seller's products or services ("Distribution Contracts"); and
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<PAGE>
(x) all assets expressly listed on the "Excluded Assets
Schedule" hereto.
2.2 Limited Assumption of Liabilities.
(a) Limited Assumed Liabilities. Except for any Assigned
Contract which is terminated by the other party thereto due to an improper
assignment by Seller, from and after the Closing, Buyer will assume and agree to
pay, defend, discharge and perform as and when due all liabilities and
obligations of the Seller under the Assigned Contracts first arising after the
Closing Date, to the extent they relate to the Business (the "Assumed
Liabilities").
(b) Excluded Liabilities. Notwithstanding anything to the
contrary contained in this Agreement and regardless of whether such liability is
disclosed herein or on any schedule or exhibit hereto, Buyer will not assume or
be liable for any liabilities or obligations of Seller (i) not described in
Section 2.2(a) hereof or (ii) arising out of or related to any (A) accounts
payable or accrued expenses or any other obligation required to be recorded on a
balance sheet of Seller prepared in accordance with GAAP, (B) Taxes, (C)
indebtedness for borrowed money or deferred purchase price for property
(including, without limitation, pursuant to any capital lease), (D) any amounts
due to Affiliates, (E) any Excluded Asset or (F) breach of contract, breach of
warranty, tort, infringement, violation of law or environmental matter (in each
case, whether known or unknown, whether asserted or unasserted, whether absolute
or contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) (collectively, the "Excluded Liabilities").
(c) Distribution Contracts. With respect to each
Distribution Contract (each of which is to be retained by Seller and as a result
thereof, no liabilities or obligations with respect thereto shall be assumed by
Buyer), as soon as reasonably practicable after the Closing (but in no event
later than 10 Business Days thereafter), the parties shall jointly prepare and
deliver mutually acceptable notices to the third party distributors, brokers and
sales representatives party to such Distribution Contracts notifying such third
parties that (i) the transactions contemplated by this Agreement have been
consummated and, as a result thereof, Seller will no longer be conducting
business pursuant to such Distribution Contracts and (ii) that Buyer may desire
to enter into new contractual arrangements with such third parties at a future
date and, in the meantime, Buyer desires to conduct business with such third
parties on a purchase order basis.
2.3 Closing. Subject to the conditions contained in this
Agreement, the closing of the transactions contemplated by Sections 2.1 and 2.2
hereof (the "Closing") will occur at the offices of Berlack, Israels & Liberman
LLP, 120 West 45th Street, New York, New York, 10036, at 10 a.m. on a Business
Day designated by Buyer which is within five Business Days following the date as
of which the conditions to each party's obligations (as set forth in Article 3
hereof) have been satisfied or at such other time and on such other date as the
parties hereto mutually agree (the "Closing Date"). The Closing shall be
effective as of the opening of business on the Closing Date.
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2.4 Purchase Price.
(a) Subject to adjustment in accordance with Section 2.5
below and the other terms and conditions contained in this Agreement, the total
purchase price (the "Purchase Price") to be paid by the Buyer to the Seller for
the Purchased Assets shall be (i) $3,700,000, (ii) an amount equal to the
aggregate amount of the Purchased Inventory, as determined pursuant to Section
2.1(a)(xiii) (the "Inventory Portion") and (iii) an amount equal to the
aggregate net book value, determined in accordance with GAAP, of the trade
accounts receivable transferred from Seller to Buyer pursuant to Section
2.1(a)(xii) hereof which are aged 90 days or less as of the Closing Date,
provided that in no event will the amount to be paid at the Closing pursuant to
this clause 2.4(a)(iii) exceed $725,000 in the aggregate (the "Receivables
Portion").
(b) The Purchase Price shall be delivered at the Closing by
Buyer hereunder for the Purchased Assets as follows: (i) $3,450,000 (the "Cash
Portion") by wire transfer of immediately available funds to the Seller, to an
account designated by Seller, (ii) $250,000 (the "Escrow Amount") by wire
transfer of immediately available funds to the Escrow Agent pursuant to the
terms and conditions of the escrow agreement (in a form to be mutually agreed to
by Buyer, Seller and the Escrow Agent (the "Escrow Agreement")) to be entered
into as of the Closing by and among Buyer, Seller and Bankers Trust Company, as
escrow agent (the "Escrow Agent"), (ii) the Inventory Portion by wire transfer
of immediately available funds to the Seller, to an account designated by Seller
and (iii) the Receivables Portion by wire transfer of immediately available
funds to the Seller, to an account designated by Seller. At the Closing, Buyer
shall also assume the Assumed Liabilities, by executing and delivering an
Assignment and Assumption Agreement in a form mutually agreeable to Buyer and
Seller.
In addition to any other rights and remedies available to Buyer and without
limiting Buyer's ability to recover for any claims made pursuant to this
Agreement, the Escrow Amount will be available to satisfy any amounts owed by
Seller to Buyer pursuant to this Agreement and the Escrow Amount shall be held
and disbursed in accordance with Section 2.6 hereof.
2.5 Purchase Price Adjustment.
(a) As soon as reasonably practicable following the 120th
day after the Closing Date (the "Collection Date") (but in no event later than
ten (10) days thereafter), Buyer shall prepare and deliver to Seller a written
notice (the "Adjustment Notice") reporting the aggregate amount of cash
collections received by Buyer on account of the Purchased Receivables, as
determined in accordance with GAAP (the "Receivables Proceeds"). The Adjustment
Notice shall also specify accounts and amounts uncollected which comprised
Purchased Receivables. Buyer shall make available to Seller all work papers,
purchase orders, invoices and related data used in connection with the
preparation of the Adjustment Notice.
(b) If the amount of the Receivables Proceeds is less than
the Receivables Portion, Seller shall pay Buyer an amount equal to such
shortfall. Any amounts payable pursuant to this Section 2.5(b) shall be paid, in
immediately available funds, within five Business Days after the amount of such
shortfall, if any, is finally determined pursuant to this Section 2.5, plus
interest at the rate of 8.50% per annum from the Closing Date to the date of
such payment.
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(c) If the amount of the Receivables Proceeds is greater
than the Receivables Portion, Buyer shall pay Seller an amount equal to such
excess. Any amount payable pursuant to this Section 2.5(c) shall be paid, in
immediately available funds, within five Business Days after the amount of such
excess, if any, is finally determined pursuant to this Section 2.5(c).
(d) If Seller has any good faith objections to Buyer's
calculation set forth in the Adjustment Notice, Seller must deliver to Buyer,
within 30 days after delivery of the Adjustment Notice, a detailed statement
describing such objections thereto ("Seller's Statement") or Buyer's calculation
of the price adjustment set forth in the Adjustment Notice will be final,
binding and non-appealable upon each of the parties hereto. Buyer and Seller
shall negotiate in good faith to resolve any such objections, but if they do not
reach a final resolution with 15 days after delivery of Seller's Statement to
Buyer, the parties shall submit such dispute to a mutually agreeable independent
nationally recognized public accounting firm located in New York, New York for
resolution (the "Independent Auditor"), whose costs shall be shared equally by
Buyer and Seller.
(e) The parties shall instruct the Independent Auditor to
resolve all disagreements over the calculation of the price adjustment set forth
in the Adjustment Notice no later than 15 days after submission of the disputes
to the Independent Auditor, whose determination thereof shall be final, binding
and non-appealable upon the parties hereto.
(f) Each party shall afford to the other, and cause its
officers, employees, agents and representatives (including, without limitation,
its independent accountants) to afford, reasonable access to the personnel
(including, without limitation, independent accountants), and financial,
accounting and other data and information (including, without limitation,
workpapers of its independent accountants, whether prepared in contemplation of
this Section 2.5 or otherwise), to the extent relating to the calculation of the
purchase price adjustment as reasonably requested by any party or its
representatives or agents for purposes of evaluating compliance with the terms
and conditions of this Agreement.
2.6 Disposition of Escrow Amount.
The Escrow Amount shall be held and disbursed in accordance
with the terms and conditions of the Escrow Agreement.
ARTICLE 3
CONDITIONS TO CLOSING
---------------------
3.1 Conditions to Seller's Obligations. Except as
otherwise expressly provided herein, the obligation of Seller to consummate the
transactions contemplated by this Agreement is subject to the satisfaction of
the following conditions on or before the Closing Date:
(a) the representations and warranties set forth in Article
6 hereof will be true and correct in all material respects at and as of the
Closing as though then made and as though the Closing Date were substituted for
the date of
8
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this Agreement or, in the case of any representations and warranties made as of
a specified date earlier than the Closing Date, on and as of such earlier date
(in either case, without taking into account any disclosures made by Buyer to
Seller pursuant to Section 6.7 hereof);
(b) Buyer will have performed in all material respects all
the covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
(c) all necessary filings with regulatory authorities will
have been made and all waiting periods will have expired;
(d) Buyer shall have executed and delivered a Transition
Services Agreement with PDK in form and substance to be mutually agreed to by
Buyer and PDK prior to the Closing (the "Transition Services Agreement");
(e) no action or proceeding before any court or government
body will be pending or threatened which, in the reasonable judgment of Seller,
makes it inadvisable or undesirable to consummate the transactions contemplated
by this Agreement by reason of the probability that the action or proceeding
will result in a judgment, decree or order that would prevent the carrying out
of this Agreement or any of the transactions contemplated hereby, declare
unlawful the transactions contemplated hereby or cause such transactions to be
rescinded;
(f) Seller's stockholders shall have approved this Agreement
and the transactions contemplated hereby in accordance with the Delaware General
Corporation Law and any requirement of any securities exchange on which Seller's
securities are listed, it being acknowledged and agreed that nothing contained
in this Section 3.1(f) shall limit or impair any obligation of Seller or PDK
pursuant to Section 4.3 hereof;
(g) on the Closing Date, Buyer shall have delivered to
Seller each of the following:
(i) a certificate from an officer of each of Buyer and
Nutraceutical in a form to be mutually agreed to by Buyer and Seller
prior to the Closing, dated the Closing Date, stating that the
preconditions specified in subsections (a) through (d) hereof,
inclusive, have been satisfied (taking into account any disclosures
made by Buyer to Seller pursuant to Section 4.5(b) or Section 6.7
hereof);
(ii) certified copies of the resolutions duly adopted by
Buyer's and Nutraceutical's board of directors authorizing the
execution, delivery and performance of this Agreement and the other
agreements contemplated hereby, and the consummation of all
transactions contemplated hereby and thereby;
(iii) copies of all necessary governmental and third party
consents, approvals, releases and filings required in order to effect
the transactions contemplated by this Agreement and the other
agreements contemplated hereby;
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(iv) a copy of the Assignment and Assumption Agreement, duly
executed by Buyer, and such other instruments, in form and substance
reasonably satisfactory to counsel for Seller, as are required in order
to evidence the assumption by Buyer of the Assumed Liabilities;
(v) such other documents or instruments as Seller reasonably
requests to effect the transactions contemplated hereby;
(h) Seller will have received from Buyer's counsel,
Kirkland & Ellis, a legal opinion, addressed to Seller and dated as of the
Closing Date, in a form to be agreed to by counsel for Buyer and Seller;
(i) all proceedings to be taken by Buyer in connection with
the consummation of the Closing and the other transactions contemplated hereby
and all certificates, instruments and other documents required to effect the
transactions contemplated hereby reasonably requested by Seller will be
reasonably satisfactory in form and substance to Seller and its counsel.
Any condition specified in this Section 3.1 may be waived by Seller; provided,
that no such waiver will be effective against Seller unless it is set forth in a
writing executed by Seller.
3.2 Conditions to Buyer's Obligation. Except as otherwise
expressly provided in this Agreement, the obligation of Buyer to consummate the
transactions contemplated by this Agreement is subject to the satisfaction of
the following conditions on or before the Closing Date:
(a) the representations and warranties set forth in
Article 5 and Article 10 hereof will be true and correct in all respects at and
as of the Closing as though then made and as though the Closing Date were
substituted for the date of this Agreement or, in the case of any
representations and warranties made as of a specified date earlier than the
Closing Date, on and as of such earlier date (in either case, without taking
into account any disclosures made by Seller or PDK to Buyer pursuant to Section
4.1(e), Section 5.22 or Section 10.7 hereof), except where the failure of such
representations and warranties to be true and correct could not reasonably be
expected to have a Material Adverse Effect (as defined in Section 4.2(a)(ii)),
it being agreed that for purposes of determining such "Material Adverse Effect"
for purposes of this Section 3.2(a), all references to "materiality", "Material
Adverse Effect" and words of similar import contained in the representations and
warranties of Seller and PDK shall be disregarded;
(b) Seller and PDK will have performed in all material
respects all of the covenants and agreements required to be performed by them
under this Agreement prior to the Closing;
(c) all consents and approvals by governmental agencies and
other third parties that are set forth on the attached "Required Consents
Schedule" and releases of all Liens on the Purchased Assets will have been
obtained on terms and conditions reasonably satisfactory to Buyer;
(d) all necessary filings with regulatory authorities will
have been made and all waiting periods will have expired;
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(e) all Government Licenses that are required to own and
operate the Purchased Assets and to carry on the Business as now conducted will
have been transferred to or obtained by (or, if not required at Closing, applied
for by) Buyer on terms and conditions no less favorable to Buyer than they are
to Seller;
(f) PDK shall have executed and delivered a Transition
Services Agreement with Buyer in form and substance to be mutually agreed to by
Buyer and PDK prior to the Closing;
(g) Seller shall have delivered to Buyer, copies of all
assignments and other instruments of transfer and conveyance as Buyer may
reasonably request, in form and substance reasonably acceptable to Buyer, which
are effective to vest in Buyer all right, title and interest in and to all
Proprietary Rights (including any Proprietary Rights licensed from a third
party) and, prior to such conveyance to Buyer, Seller's title to all such
Proprietary Rights shall have been recorded or updated with the appropriate
government office or entity, including, but not limited to, the United States
Patent and Trademark Office and the United States Copyright Office;
(h) no action or proceeding before any court or government
body will be pending or threatened which, in the reasonable judgment of Buyer,
makes it inadvisable or undesirable to consummate the transactions contemplated
by this Agreement by reason of the probability that the action or proceeding
will result in a judgment, decree or order that would prevent the carrying out
of this Agreement or any of the transactions contemplated hereby, declare
unlawful the transactions contemplated hereby or cause such transactions to be
rescinded;
(i) on the Closing Date, Seller and the PDK, as applicable,
shall have delivered to Buyer each of the following:
(i) a certificate from an officer of Seller in a form to be
agreed to by Buyer and Seller prior to the Closing, dated the Closing
Date, stating that the preconditions specified in subsections (a)
through (g) hereof, inclusive, have been satisfied (taking into account
any disclosures made by Seller or PDK to Buyer pursuant to Section
4.1(e), Section 5.22 or Section 10.7 hereof);
(ii) certified copies of the resolutions duly adopted by
Seller's board of directors and shareholders and PDK's board of
directors authorizing the execution, delivery and performance of this
Agreement and the other agreements contemplated hereby, and the
consummation of all transactions contemplated hereby and thereby;
(iii) copies of all necessary governmental and third party
consents, approvals, releases and filings required in order to effect
the transactions contemplated by this Agreement and the other
agreements contemplated hereby;
(iv) a copy of the Bill of Sale, in the form to be agreed to
by Buyer and Seller prior to the Closing, and such other instruments of
sale, transfer, assignment, conveyance and delivery, in form and
substance reasonably satisfactory to counsel for Buyer, as are required
in order to transfer to Buyer good and marketable title to the
Purchased Assets, free and clear of all Liens;
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(v) such other documents or instruments as Buyer reasonably
requests to effect the transactions contemplated hereby;
(j) Buyer will have received from the Seller's counsel,
Berlack, Israels & Liberman, LLP, a legal opinion, addressed to Buyer and dated
as of the Closing Date, in a form to be agreed to by counsel for Buyer and
Seller prior to the Closing Date; and
(k) All proceedings to be taken by Seller in connection with
the consummation of the Closing and the other transactions contemplated hereby
and all certificates, instruments and other documents required to effect the
transactions contemplated hereby reasonably requested by Buyer will be
reasonably satisfactory in form and substance to Buyer and its counsel.
Any condition specified in this Section 3.2 may be waived by Buyer; provided
that no such waiver will be effective unless it is set forth in a writing
executed by Buyer.
ARTICLE 4
COVENANTS PRIOR TO CLOSING
--------------------------
4.1 Affirmative Covenants of Seller. Between the date
hereof and the Closing Date, except as otherwise expressly provided herein,
Seller will:
(a) conduct the Business, including, without limitation, the
cash management customs and practices of the Business (including the collection
of receivables and payment of payables) only in the usual and ordinary course of
business in accordance with past custom and practice;
(b) use best efforts to preserve the present business
relationships with all material customers, suppliers and distributors of the
Business, to the extent such relationships are beneficial to the Business and
promote the smooth transition of such customers, suppliers and distributors from
Seller to Buyer;
(c) permit Buyer and its employees, agents, potential
lenders, investors, environmental consultants and accounting and legal
representatives to have access, upon reasonable notice, to its books, records,
invoices, contracts, leases, key personnel, independent accountants, legal
counsel, property, facilities, equipment and other things reasonably related to
the Business or the Purchased Assets, including, without limitation, key
distributors and/or vendors selected by Buyer and Seller for such purposes, it
being understood and agreed that Seller's covenants contained in this Section
4.1(a) shall not act as a waiver to any attorney-client privilege;
(d) use best efforts to cause all conditions to Buyer's
obligation to close to be satisfied; and
(e) promptly inform Buyer in writing of any variances from
the representations and warranties contained in Article 5 hereof.
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4.2 Negative Covenants.
(a) Between the date hereof and the Closing Date, except as
otherwise provided herein, Seller will not:
(i) except as disclosed on the attached "Developments
Schedule" or permitted under Section 4.2(a)(iii) below, take any action that
would require disclosure under Section 5.6 hereof;
(ii) take any action or omit to take any action (the omission
of which) that has had or will have a material and adverse effect upon the
business, financial condition or operating results of Seller taken as a whole (a
"Material Adverse Effect");
(iii) without the prior written consent of Buyer, (A) enter
into any contract (1) out of the ordinary course of business (it being agreed
and understood that nothing in this clause 4.2(a)(iii)(1) shall limit or
otherwise impair Seller's ability to take any action with respect to any of its
real estate) or (2) restricting in any way the conduct of the Business, (B) make
any loans, (C) increase any officer's or employee's compensation, incentive
arrangements or other benefits, except for increases made in the ordinary course
of business consistent with past custom and practice; or
(iv) enter into any transaction, arrangement or contract
(including, without limitation, any transfer of any of the Purchased Assets or
placing a Lien on any of the Purchased Assets) except on an arm's-length basis
in the ordinary course of business consistent with past custom and practice.
(b) Neither Seller nor PDK, nor any officer, director,
employee, stockholder, agent, representative or affiliate thereof shall (i)
until the earlier of the Closing Date or the date this Agreement is terminated
pursuant to Section 7.1 hereof, discuss or pursue a possible sale,
recapitalization or other disposition of Seller, any securities or substantial
portion of the assets of Seller, or the Business or any portion thereof with any
other party or provide any information to any other party in connection
therewith or (ii) disclose to any other party the terms of this Agreement
(except as may be required by law or the requirement of any securities exchange
on which any party's securities are traded). Neither Seller nor PDK nor any of
their respective affiliates shall, by pursuing the transactions contemplated
hereby, violate the terms of any other agreement or obligation to which any of
them is subject, and each of Seller and PDK shall inform Buyer of and provide
Buyer with information regarding any other offers or expressions of interest for
Seller, any securities or substantial portion of the assets of Seller, or the
Business or any portion thereof. Notwithstanding the foregoing, at any time
prior to obtaining the stockholder approval required in Section 4.3 hereof,
Seller may participate in discussions or negotiations with any third party with
respect to any Acquisition Proposal if Seller's board of directors determines in
good faith, after consultation with counsel, that the failure to participate in
such discussions or negotiations may constitute a breach of its fiduciary duties
under applicable law. For purposes of this Agreement, an "Acquisition Proposal"
means any proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or
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readily marketable securities, more than 50% of the combined voting power of the
shares of Seller's common stock then outstanding or all or substantially all of
the assets of Seller.
4.3 Stockholder Approval. Seller shall, as soon as
reasonably practicable, (i) obtain the necessary stockholder consents or (ii)
shall cause a meeting of its stockholders to be duly called and held for the
purpose of obtaining the approval of Seller's stockholders to this Agreement and
the transactions contemplated hereby. The board of directors of Seller will (i)
unanimously recommend approval of this Agreement and the transactions
contemplated hereby and (ii) use its best efforts to obtain the approval of
Seller's stockholders to this Agreement and the transactions contemplated
hereby. PDK covenants and agrees to approve this Agreement and the transactions
contemplated hereby at any stockholder's meeting called to consider such matters
(or to execute any stockholder consents in lieu of such meeting) and further
agrees that such approval shall not be rescinded or otherwise revoked.
4.4 Financial Statement Deliveries. Seller shall furnish
or shall cause its independent accountants to furnish to Buyer, no later than 45
days after the Closing Date, (i) audited financial statements for Seller for the
year ended 11/30/98, prepared in accordance with GAAP and in a form meeting the
requirements of Regulation S-X of the Securities Act of 1933, as amended and
(ii) unaudited financial statements for Seller for following interim periods:
(A) 12/1/97 through 2/28/98, (B) 3/1/98 through 5/31/98, (C) 6/1/98 through
8/31/98 and (D) 9/1/98 through 11/30/98, prepared in accordance with GAAP and in
a form meeting the requirements of Item 301 of Regulation S-K of the Securities
Act of 1933, as amended. In addition, Seller shall, and shall cause its
independent accountants to, cooperate in Buyer's efforts to prepare unaudited
financial statements for the Seller for the stub period from 12/1/98 through and
including the Closing Date. Seller acknowledges and agrees that time is of the
essence in the performance of the provisions of this Section 4.4.
4.5 Affirmative Covenants of Buyer. Between the date
hereof and the Closing Date, except as otherwise expressly provided herein,
Buyer will:
(a) use best efforts to cause all conditions to Seller's
obligation to close to be satisfied;
(b) promptly inform Seller in writing of any variances from
the representations and warranties contained in Article 6 hereof;
(c) continue to abide, and shall cause its Affiliates to
continue to abide, with the terms and conditions of the confidentiality
agreement previously entered into between Seller and Nutraceutical International
Corporation; and
(d) upon Seller's reasonable request, promptly make available
to Seller, all non-confidential information with respect to Buyer, Nutraceutical
International Corporation or any of its Subsidiaries as may be reasonably
requested by Seller in order to assist Seller in preparing any information
statement or other disclosure document to be disseminated to Seller's
stockholders
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to obtain any stockholder approvals necessary in connection with the
transactions contemplated by this Agreement or the transactions contemplated
hereby.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
As an inducement to Buyer to enter into this Agreement, Seller
hereby represents and warrants to Buyer that:
5.1 Organization and Power; Capitalization; Subsidiaries and
Investments. Seller is a corporation duly organized, validly existing and in
good standing under the laws of the state of Delaware. Seller is qualified to do
business as a foreign corporation and is in good standing in the state of New
York, which is the only jurisdiction in which the ownership of its properties or
the conduct of its business requires Seller to be so qualified. Seller has all
requisite corporate power and authority and all licenses, permits and
authorizations necessary to own and operate the Purchased Assets and to carry on
the Business as now conducted and as presently proposed to be conducted. Seller
has all requisite power and authority to execute and deliver this Agreement and
the other agreements contemplated hereby and to perform its obligations
hereunder and thereunder. The attached "Capitalization Schedule" accurately sets
forth the authorized and outstanding capital stock of Seller and the number of
shares of such capital stock held by PDK. Seller does not own or control
(directly or indirectly) any stock, partnership interest, joint venture
interest, equity participation or other security or interest in any other
Person. The certificate of incorporation and bylaws of Seller that have
previously been furnished to Buyer reflect all amendments thereto and are
correct and complete.
5.2 Authorization. The execution, delivery and performance
by Seller of this Agreement, the other agreements contemplated hereby and each
of the transactions contemplated hereby or thereby have been duly and validly
authorized by Seller and no other corporate act or proceeding on the part of
Seller, its board of directors or stockholders is necessary to authorize the
execution, delivery or performance by Seller of this Agreement or any other
agreement contemplated hereby or the consummation of any of the transactions
contemplated hereby or thereby, except for the approval of the stockholders of
Seller of this Agreement and the transactions contemplated hereby as required by
the Delaware General Corporation Law. This Agreement has been duly executed and
delivered by Seller, and this Agreement constitutes, and the other agreements
contemplated hereby to which Seller is a party, upon execution and delivery by
Seller, will each constitute, a valid and binding obligation of Seller,
enforceable against Seller in accordance with their terms, except to the extent
enforcement thereof may be limited by applicable bankruptcy or insolvency laws
or general equitable principles.
5.3 No Breach. Except as set forth on the attached
"Restrictions Schedule," the execution, delivery and performance by Seller of
this Agreement and the other agreements contemplated hereby and the consummation
of each of the transactions contemplated hereby or thereby do not and will not
(a) violate, conflict with, result in any breach of, constitute a default under,
result in the termination or acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under Seller's
certificate of
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incorporation or bylaws, or any contract, agreement, arrangement, license,
sublicense, franchise, permit, indenture, mortgage, obligation or instrument to
which Seller is a party or by which Seller is bound or affected or to which any
of the Purchased Assets is bound or affected, (b) result in the creation or
imposition of any Lien upon any of the Purchased Assets, (c) require any
authorization, consent, approval, exemption or other action by or notice to any
court, other governmental body or other Person or entity under, the provisions
of any law, statute, rule, regulation, judgment, order or decree or any
contract, agreement, arrangement, license, sublicense, franchise, permit,
indenture, mortgage, obligation or instrument to which Seller is subject, or by
which Seller is bound or affected or to which the Purchased Assets are bound or
affected or (d) violate or require any consent or notice under any law, statute,
regulation, rule, judgment, decree, order, stipulation, injunction, charge or
other restriction of any government, governmental agency or court to which
Seller or any of the Purchased Assets is subject, or by which Seller or the
Purchased Assets is bound or affected. Except as set forth on the attached
"Restrictions Schedule," no permit, consent, approval or authorization of,
declaration to or filing with, or notice to, any governmental authority or any
third party is required in connection with the execution, delivery or
performance by Seller of this Agreement or the other agreements contemplated
hereby, or the consummation by Seller of the transactions contemplated hereby or
thereby.
5.4 Financial Statements.
(a) The attached "Financial Statements Schedule" contains
the following financial statements (the "Financial Statements"):
(i) the audited balance sheets of Seller as of November 30,
1997 (the "1997 Balance Sheet") and November 30, 1996, and the related
statements of operations, stockholders' equity and cash flows for the
three years ended November 30, 1997;
(ii) the unaudited balance sheet of Seller as of August 31,
1998 (the "Latest Balance Sheet") and the related statements of
operations, stockholders' equity and cash flows for the nine-month
period then ended; and
(iii) the audited balance sheet of Seller as of November 30,
1998, and the related statements of operations, stockholders' equity
and cash flows for the year then ended.
Each of the foregoing Financial Statements presents fairly the financial
condition, results of operations and cash flows of Seller in accordance with
GAAP throughout the periods covered thereby.
(b) All Purchased Receivables will be (A) valid obligations
incurred in the ordinary course of business, (B) properly reflected in Seller's
books and records in accordance with GAAP and (C) free of any counterclaim, or a
claim for a charge back, deduction, credit, set-off or other offset, other than
as reflected in the allowance for doubtful accounts therefor. As of the Closing
Date, no Person will have any Lien on any Purchased Receivable or any part
thereof, and no agreement for deduction, free goods or services, discount or
other deferred price or quantity adjustment will have been made by Seller with
respect to any Purchased
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Receivable other than in the ordinary course of business and as reflected in the
allowance for doubtful accounts therefor.
(c) All Purchased Inventory will (A) represent a bona fide
asset, (B) be properly reflected in Seller's books and records in accordance
with GAAP at PDK's cost and (C) be free of any counterclaim, or a claim for a
charge back, deduction, credit, set-off or other offset, other than as reflected
by appropriate inventory reserves. All Purchased Inventory conforms to the
warranties described in Section 5.10.
5.5 No Material Adverse Changes. Except as set forth on
the attached "Developments Schedule," since August 31, 1998, there has been no
Material Adverse Effect.
5.6 Absence of Certain Developments.
(a) Except as set forth in the attached "Developments
Schedule," since August 31, 1998, Seller has conducted the Business only in the
ordinary course of business consistent with past custom and practice (including,
without limitation, with respect to the offering of special sales or incentive
programs or the filling of its distribution channels), has incurred no
liabilities other than in the ordinary course of business consistent with past
custom and practice, and Seller has not:
(i) sold, assigned or transferred any of its assets, except
for sales of inventory in the ordinary course of business consistent
with past custom and practice, or mortgaged, pledged or subjected them
to any material Lien, except for Liens for current property Taxes not
yet due and payable, or canceled without fair consideration any
material debts or claims owing to or held by it;
(ii) sold, assigned, transferred, abandoned or permitted to
lapse any Government Licenses which, individually or in the aggregate,
are material to the Business or any portion thereof, or any of the
Proprietary Rights or other intangible assets, or disclosed any
material proprietary confidential information to any Person, except in
the ordinary course of business consistent with past custom and
practice, or granted any license or sublicense of any rights under or
with respect to any Proprietary Rights;
(iii) conducted its cash management customs and practices
(including, without limitation, the collection of receivables, payment
of payables and maintenance of inventory control and pricing and credit
practices (including, without limitation, extension of credit terms or
sales discount programs)) other than in the usual and ordinary course
of business consistent with past custom and practice;
(iv) made any loans or advances to, or guarantees for the
benefit of, or entered into any transaction with PDK or any of its
other stockholders or any employee, officer or director of Seller or
PDK, except for the transactions contemplated by this Agreement and for
advances consistent with past custom and practice made to Seller's
employees, officers and directors for travel expenses incurred in the
ordinary course of business or entered into any transaction,
arrangement or contract (including, without
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limitation, any transfer of any assets of placing a Lien on any
assets) except on an arms-length basis in the ordinary course of
business consistent with past custom and practice;
(v) suffered any extraordinary loss, damage, destruction or
casualty loss or waived any rights of material value, whether or not
covered by insurance and whether or not in the ordinary course of
business or consistent with past custom and practice;
(vi) received notification, or become aware of facts which
would lead a reasonable person to believe, that any material customer
or supplier will stop or decrease in any material respect the rate of
business done with the Business;
(vii) become subject to any material liabilities, except
current liabilities incurred in the ordinary course of business and
liabilities under contracts entered into in the ordinary course of
business consistent with past custom and practice;
(viii) settled or compromised any litigation involving
equitable relief or involving any money damages in excess of $50,000;
or
(ix) entered into any other material transaction, other than
in the ordinary course of business consistent with past custom and
practice.
(b) No party has accelerated, terminated, modified or
canceled any Assigned Contract.
5.7 Title and Condition of Properties.
(a) Title to Personal Property. Seller owns good and
marketable title, free and clear of all Liens, to all of the personal and
intangible personal property and assets of Seller included within the Purchased
Assets. At the Closing, Seller will convey good and marketable title to the
Purchased Assets, free and clear of all Liens. Except with respect to any real
property interests, the Purchased Assets so conveyed, in conjunction with the
services to be made available pursuant to the Transition Services Agreement,
will include all of those assets (personal, tangible and intangible) necessary
to conduct the Business in substantially the same manner as presently conducted
and all assets used during the twelve months prior to the Closing Date (other
than inventory sold or consumed in the ordinary course of business and worn out
or obsolete fixed assets disposed of in the ordinary course of business) and
will enable Buyer to operate the Business in substantially the same manner as
operated by Seller during the twelve month period prior to the Closing Date.
(b) Condition of Assets. All of the machinery, equipment
and other tangible personal property and assets of Seller included within the
Purchased Assets are in good condition and repair in all respects, ordinary wear
and tear excepted, and are useable in the ordinary course of business.
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5.8 Contracts and Commitments.
(a) Seller is not a party to, bound by or subject to any
contract, agreement or arrangement, whether written or oral, except for (i) this
Agreement and the other agreements contemplated hereby, (ii) any oral contract
for employment at the will of Seller, (iii) any contract or order with the same
party for the purchase or sale of products or services under which the
undelivered balance of such products or services does not exceed $20,000, (iv)
any contract, agreement or arrangement under which it is the lessee of, or holds
or operates, any personal property owned by any other party calling for payments
of less than $20,000 annually and (v) those contracts, agreements and
arrangements described on the attached "Contracts Schedule."
(b) Except as disclosed on the attached "Contracts
Schedule," (i) no Assigned Contract has been breached in any respect or canceled
by the other party that has not been duly cured or reinstated, (ii) Seller has
performed all of its obligations required to be performed by it under each of
the Assigned Contracts and Seller is not in receipt of any written claim of
default under any Assigned Contract, (iii) no event has occurred which with the
passage of time or the giving of notice or both would result in a breach or
default under any Assigned Contract and (iv) to Seller's Knowledge, Seller is
not a party to any Assigned Contract which, individually or in the aggregate,
could have a Material Adverse Effect. Each Assigned Contract is valid, binding
and enforceable and is in full force and effect, except to the extent
enforcement thereof may be limited by applicable bankruptcy or insolvency laws
or general equitable principles.
(c) Buyer has been supplied with a true and correct copy of
all Assigned Contracts, together with all amendments, waivers or other changes
thereto.
5.9 Proprietary Rights.
(a) The attached "Proprietary Rights Schedule" contains a
complete and accurate list of all: (i) patented or registered Proprietary Rights
and pending patent applications and other applications for registration of
Proprietary Rights owned or filed by or on behalf of Seller (including, in each
case, an identification of the registration or filing number, the date of
registration, and the relevant registration authority, as well as the name,
address, telephone and facsimile numbers of the law firm or other group, if any,
which has ongoing responsibility for maintaining the registration current); (ii)
trade names, corporate names and unregistered trademarks and service marks owned
or used by Seller; (iii) material unregistered copyrights and non-confidential
descriptions of material trade secrets and confidential information owned or
used by Seller; (iv) software and databases owned or used by Seller; and (v)
licenses or other rights granted by Seller to any third party with respect to
any Proprietary Rights, and all licenses or other rights granted by any third
party to Seller with respect to any Proprietary Rights, in each case identifying
the subject Proprietary Right.
(b) The Proprietary Rights comprise all of the proprietary
or intellectual property rights necessary for the operation of the Business as
currently conducted. Seller has taken all necessary actions to maintain and
protect the Proprietary Rights which it owns and will continue to maintain and
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protect such Proprietary Rights prior to the Closing so as to not adversely
affect the validity or enforceability of the Proprietary Rights. To Seller's
Knowledge, the owners of any Proprietary Rights licensed to Seller have taken
all necessary actions to maintain and protect the Proprietary Rights which are
subject to such licenses. The Proprietary Rights owned or used by Seller
immediately prior to the Closing hereunder will be available for use on
identical terms and conditions immediately subsequent to the Closing hereunder.
(c) Except as indicated on the attached "Proprietary Rights
Schedule:" (i) Seller owns all right, title and interest in and to, or has a
valid and enforceable license to use, the Proprietary Rights, free and clear of
all Liens; (ii) the loss or expiration of any right in or to the Proprietary
Rights or related group of Proprietary Rights has not and would not reasonably
be expected to have a Material Adverse Effect on the conduct of the Business,
and no such loss or expiration is threatened, pending or reasonably foreseeable;
(iii) there have been no claims made against Seller asserting the invalidity,
misuse or unenforceability of any Proprietary Rights, and there are no grounds
for the same; (iv) the conduct of the Business has not infringed,
misappropriated or otherwise violated, and does not infringe, misappropriate or
otherwise violate the intellectual property rights of any third party, nor would
the continued conduct of the Business as currently conducted infringe,
misappropriate or otherwise violate the intellectual property rights of any
third party; (v) Seller has not received any notices of, and Seller is not aware
of any facts which indicate a likelihood of, any infringement, misappropriation
or other violation by, or any conflict with, any third party, with respect to
the Proprietary Rights (including, without limitation, any demand or request
that Seller cease using any Proprietary Rights or license any rights from any
third party); (vi) Seller is not in breach of any license or other grant of
rights with respect to the Proprietary Rights; and (vii) the transactions
contemplated by this Agreement will not have a Material Adverse Effect on the
right, title and interest in and to the Proprietary Rights.
5.10 Product Warranty. Except as disclosed on the
"Developments Schedule," all products designed, manufactured, merchandised,
serviced, distributed, sold or delivered by Seller at any time prior to the
Closing Date have been in conformity with all applicable contractual commitments
and all express or implied warranties. No liability exists for replacement
thereof or other damages in connection with such sales or deliveries made at any
time prior to the Closing Date. No products heretofore sold by Seller are now
subject to any guarantee or warranty other than Seller's standard terms and
conditions of sale, a copy of which has been previously delivered to Buyer.
Without limiting the generality of the foregoing, Seller represents and warrants
that all Purchased Inventory and all products sold or shipped by Seller on or
prior to the Closing (the Purchased Inventory and such products sold or shipped
on or prior to the Closing collectively referred to herein as the "Products")
(i) are and will be fit for human consumption, and do not and did not contain
any substances or ingredients that may be harmful to any person who consumes the
Products (assuming compliance with any label instructions for the use thereof),
(ii) comply, and have complied with, all applicable laws and regulations
concerning human consumption of such products and required disclosures or
warning labels, (iii) do, and did, conform to applicable labeling,
specifications, drawings, descriptions, samples, (iv) are, and were,
merchantable, of good workmanship and materials, fit for the
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purpose or purposes for which intended, free from defects and in compliance with
law, (v) together with the trademarks and other Proprietary Rights used in
connection therewith, as well as the claims and representations made by Seller
with respect thereto, and the manufacturing processes and structure thereof, do
not, and did not, infringe the intellectual property rights of any other Person
and (vi) together with all claims, representations and other statements with
respect thereto that are made, and have been made, by Seller in labeling,
advertising or other promotion for the Products are truthful, not misleading and
supported by valid substantiating data and Buyer may properly repeat in any
labeling, advertising or other promotion for the Products, any or all of the
claims, representations or other statements about the Products that are made, or
have been made, by Seller in its labeling, advertising or other promotion for
the Products. Without limiting the generality of the foregoing, Seller
represents and warrants that the Products: (i) are and were not adulterated or
misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, 21
U.S.C. ss. 301 et seq. (the "FDC Act") or any corresponding regulations of any
applicable administrative or regulatory body or agency, and conform and have
conformed to the applicable laws of other countries or states with jurisdiction
over Seller or the Products as such acts and such laws are constituted and
effective at the time the Products are delivered to Buyer or were shipped or
delivered by Seller to other purchasers, (ii) are and were formulated,
manufactured, packaged, labeled, advertised, promoted and handled in accordance
with all other applicable requirements of federal, state and local law, (iii)
are and were manufactured in accordance with then current good manufacturing
practices, (iv) are not, and were not, manufactured by any Person debarred under
subsections 335a(a) or 335a(b) of the FDC Act and (v) are not, and were not,
otherwise an article that may not properly be introduced into commerce under the
provisions of the FDC Act or any other federal, state or local law.
5.11 Government Licenses and Permits. To the best of
Seller's Knowledge, the attached "Licenses Schedule" contains a complete listing
and summary description of all Government Licenses used by Seller in the conduct
of the Business. Except as indicated on the attached "Licenses Schedule," Seller
owns or possesses all right, title and interest in and to all of the Government
Licenses that are necessary to own and operate the Purchased Assets and to
conduct the Business as presently conducted, including, without limitation, all
Government Licenses required under any federal, state or local law relating to
public health and safety, employee health and safety, pollution or protection of
the environment. Seller is in compliance with the terms and conditions of such
Government Licenses and Seller has not received any notice that it is in
violation of any of the terms or conditions of such Government Licenses. Seller
has taken all necessary action to maintain such Government Licenses. No loss or
expiration of any such Government License is pending, or to Seller's Knowledge,
threatened or reasonably foreseeable other than expiration in accordance with
the terms thereof. Except as indicated on the attached "Licenses Schedule," all
of the Government Licenses are transferable to Buyer and will be transferred by
the Seller to Buyer on or before the Closing Date.
5.12 Litigation; Proceedings. Except as set forth in the
attached "Litigation Schedule," there are no actions, suits, proceedings,
hearings, orders, investigations, charges, complaints or claims pending or, to
Seller's Knowledge, threatened against or affecting Seller, the Business or the
Purchased Assets (or, to Seller's Knowledge, pending or threatened against or
affecting any of the officers, directors, employees or stockholders of Seller in
their capacities as
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such), or to which Seller, the Business or the Purchased Assets may be bound or
affected, at law or in equity, or before or by any federal, state, municipal,
foreign or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and there is no basis for any of the
foregoing; neither Seller nor the Business is subject to any judgment, order or
decree of any court or governmental agency; Seller has not received any opinion
or memorandum or legal advice from legal counsel to the effect that it is
exposed, from a legal standpoint, to any liability or disadvantage which may be
material to its business, and neither Seller nor the Business is engaged in any
legal action to recover monies due it or for damages sustained by it.
5.13 Compliance with Laws; FDA Compliance. Except as set
forth in the attached "Compliance Schedule:"
(a) Seller is in compliance with, and Seller has not
violated any applicable law, rule or regulation of any federal, state, local or
foreign government or agency thereof. No notice, claim, charge, complaint,
action, suit, proceeding, investigation or hearing has been received by Seller
or filed, commenced or threatened against Seller, alleging a violation of or
liability or potential responsibility under any such law, rule or regulation
which has not heretofore been duly cured and for which there is no remaining
liability.
(b) Seller is not in receipt of notice of, or subject to,
any adverse inspection, finding of deficiency, finding of non-compliance,
compelled or voluntary recall, investigation, penalty, fine, sanction,
assessment, request for corrective or remedial action or other compliance or
enforcement action, in each case relating to Nutritional Products or to the
facilities in which the Nutritional Products are designed, manufactured,
merchandised, serviced, distributed, sold, delivered or handled by Seller, by
the Food and Drug Administration (the "FDA"), the Federal Trade Commission (the
"FTC") or by any other federal, state, local or foreign authority having or
asserting responsibility for the regulation of Nutritional Products ("Other
Authorities").
(c) Seller has obtained all necessary approvals,
registrations and authorizations from, has made all necessary and appropriate
applications and other submissions to, and has prepared and maintained all
records, studies and other documentation needed to satisfy and demonstrate
compliance with the requirements of, the FDA, the FTC and Other Authorities for
its current business activities relating to Nutritional Products.
(d) Seller has not made any false statement in, or omission
from, the applications, approvals, reports or other submissions to the FDA, the
FTC or the Other Authorities or in or from any other records and documentation
prepared or maintained to comply with the requirements of the FDA, the FTC or
Other Authorities relating to Nutritional Products.
(e) To Seller's Knowledge, no third party retained by Seller
or otherwise acting on behalf of Seller has made any false statement in, or
omission from, any report, study, or other documentation prepared in conjunction
with the applications, approvals, reports or records submitted to or prepared
for the FDA, the FTC or Other Authorities relating to Nutritional Products.
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(f) Seller, nor to Seller's Knowledge, any third party or
agent for Seller has made or offered any payment, gratuity or other thing of
value that is prohibited by any law or regulation to personnel of the FDA, the
FTC or Other Authorities in connection with the approval or regulatory status of
Nutritional Products or the facilities in which Nutritional Products are
designed, manufactured, merchandised, serviced, distributed, sold, delivered or
handled by Seller or the Business.
(g) Seller is in compliance with all applicable regulations
and requirements of the FDA, the FTC and Other Authorities relating to
Nutritional Products, including, without limitation, any good manufacturing or
handling practices, requirements for demonstrating and maintaining the safety
and efficacy of the Nutritional Products, export or import requirements,
certificates of export, requirements for investigating customer complaints and
inquiries, labeling requirements and protocols (including, without limitation,
requirements for substantiation of marketing, advertising or labeling claims,
requirements which prohibit "drug" claims or which require that the FDA receive
notice of structure/function claims or pre-market notification of new dietary
ingredients), labeling or registration requirements of any foreign jurisdiction
into which the Nutritional Products are shipped or sold, shipping requirements,
monitoring requirements, packaging or repackaging requirements, laboratory
controls, sterility requirements, inventory controls and storage and warehousing
procedures.
(h) All Nutritional Products included in the inventory being
conveyed to Buyer at Closing comply in all respects with current FDA and FTC
requirements and the requirements of Other Authorities and were handled by
Seller in conformity with current FDA requirements and the requirements of Other
Authorities and in accordance with the best practices of the industry.
(i) Seller has not received any notification, written or
verbal, which remains unresolved as of the date hereof, from the FDA, the FTC,
FDA or FTC personnel or Other Authorities indicating that any Nutritional
Product is unsafe or ineffective for its intended use, or has shipped or sold
(or permitted to be shipped or sold) any products into any jurisdictions without
first having obtained all requisite approvals, registrations and permissions
from the FDA, the FTC and Other Authorities or has made claims with respect to
such Nutritional Products which are "drug" claims or would cause such products
to be deemed misbranded, or which questioned or requested the support or
substantiation for any such claims.
5.14 Environmental Matters.
(a) Seller, and its predecessors and affiliates, has
complied with and is in compliance with all Environmental Laws, including,
without limitation, with respect to all permits, licenses and other
authorizations that are required pursuant to Environmental Laws for the
occupation of its facilities and the operation of its business. "Environmental
Laws" means all federal, state, local and foreign statutes, regulations,
ordinances and other provisions having the force or effect of law, all judicial
and administrative orders and determinations, all contractual obligations and
all common law concerning public health and safety, worker health and safety,
and pollution or protection of the environment, each as amended and as now or
hereafter in effect.
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(b) Neither Seller, nor its predecessors or affiliates has
treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled, or released any substance, including, without limitation,
any hazardous substance, or owned or operated any property or facility (and no
such property or facility is contaminated by any such substance), in a manner
that has given or would give rise to any obligations or liabilities of any kind
or nature pursuant to any Environmental Law or otherwise.
(c) No facts, events or conditions relating to the past or
present facilities, properties or operations of Seller or its predecessors or
affiliates will prevent, hinder or limit continued compliance with Environmental
Laws, give rise to any investigatory, remedial or corrective obligations
pursuant to Environmental Laws, or give rise to any other obligations or
liabilities (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due) pursuant to Environmental Laws.
5.15 Employees and Employee Benefits.
(a) Seller is not a party to any labor or collective
bargaining agreement. Within the last two (2) years, Seller has not experienced
any union organization attempts, general labor disputes or work stoppages or
slowdowns due to labor disagreements. There is no labor strike, general labor
dispute, work stoppage or slowdown pending or, to Seller's Knowledge,
threatened. There is no request for representation pending and no question
concerning representation has been raised.
(b) Except as set forth on the attached "Employee Benefits
Schedule," with respect to current or former employees of Seller, independent
contractors, or the spouses, beneficiaries or dependents thereof, Seller does
not maintain and has not maintained, does not contribute to and has not
contributed to, does not have and has not had any obligation to contribute to,
and does not have and has not had any liability or potential liability with
respect to any (i) qualified defined contribution or defined benefit plans or
arrangements (whether or not terminated) which are employee pension benefit
plans (as defined in Section 3(2) of ERISA) (the "Employee Pension Plans"); (ii)
any ongoing or terminated funded or unfunded employee welfare benefit plans (as
defined in Section 3(1) of ERISA) ("Employee Welfare Plans"); or (iii) any plan,
policy, program or arrangement (whether or not terminated) which provides
nonqualified deferred compensation benefits, bonus benefits or compensation,
incentive benefits or compensation, severance benefits or compensation, "change
of control" (as set forth in Code Section 280G) benefits or compensation or any
program, plan, policy or arrangement which provides any health, life,
disability, accident, vacation, tuition reimbursement or other fringe benefits
("Other Plans"). Seller does not participate in or contribute to and has not
participated in or contributed to any multiemployer plan (as defined in Section
3(37) of ERISA) ("Multiemployer Plan") nor does Seller have any other liability
with respect to any Multiemployer Plan, and Seller has not incurred any current
or potential withdrawal liability as a result of a complete or partial
withdrawal (or potential partial withdrawal) from any Multiemployer Plan. Seller
does not maintain or have any obligation to contribute to (or any other
liability with respect to) any funded or unfunded Employee Welfare Plan,
Multiemployer Plan or Other Plan which provides post-retirement health, accident
or life insurance benefits to current or former
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employees, current or former independent contractors, current or future
retirees, their spouses, dependents or beneficiaries, other than limited medical
benefits required to be provided to former employees, their spouses and other
dependents under Code Section 4980B or similar provision of state law. (Any
Employee Pension Plan, any Employee Welfare Plan, any Other Plan and any
Multiemployer Plan shall be referred to herein collectively as the "Plans").
(c) All Plans (and related trusts and insurance contracts)
comply in form and in operation in all respects with the applicable requirements
of ERISA and the Code and the Employee Pension Plans which are employee pension
benefit plans (as defined in section 3(2) of ERISA) meet the requirements of
"qualified plans" under Section 401(a) of the Code, and each such Employee
Pension Plan has received a favorable determination letter from the Internal
Revenue Service.
(d) Seller has not incurred any liability to the Pension
Benefit Guaranty Corporation (the "PBGC"), the Internal Revenue Service, the
Department of Labor, any other governmental agency, any Multiemployer Plan or
any Person with respect to any Plan currently or previously maintained by
members of the controlled group of companies (as defined in Section 414 of the
Code) that includes Seller (the "Controlled Group") that has not been satisfied
in full, and no condition exists that presents a risk to Seller, or any other
member of the Controlled Group of incurring such a liability, other than
liability for premiums due the PBGC.
5.16 Insurance. The attached "Insurance Schedule" sets
forth an accurate description of each insurance policy to which Seller has been
a party, a named insured or otherwise the beneficiary of coverage at any time
during the past two years. All of such insurance policies are legal, valid,
binding and enforceable and in full force and effect, and Seller is not (and
never has been) in breach or default with respect to its obligations under such
insurance policies.
5.17 Tax Matters.
(a) Seller has timely filed all Tax Returns required to be
filed by it, each such Tax Return has been prepared in compliance with all
applicable laws and regulations, and all such Tax Returns are true and accurate
in all respects. All Taxes due and payable by Seller have been paid. Seller has
delivered to Buyer correct and complete copies of all federal income Tax Returns
filed with respect to Seller for taxable periods ended since the date of
Seller's formation on March 16, 1994, and all examination reports, and
statements of deficiencies assessed against or agreed to by Seller with respect
to such taxable periods.
(b) Except as set forth in the attached "Taxes Schedule:"
(i) no deficiency or proposed adjustment which has not been settled or otherwise
resolved for any amount of Tax has been proposed, asserted or assessed by any
taxing authority against Seller; (ii) there is no action, suit, taxing authority
proceeding or audit now in progress, pending or, to Seller's Knowledge,
threatened against or with respect to Seller with respect to any Tax; (iii)
Seller does not reasonably expect any taxing authority to claim or assess any
additional Taxes
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with respect to Seller for any period; (iv) no claim has ever been made by a
taxing authority in a jurisdiction where Seller does not pay Tax or file Tax
Returns that Seller is or may be subject to Taxes assessed by such jurisdiction;
and (v) Seller has withheld and paid all Taxes required to have been withheld
and paid in connection with amounts paid or owing to any employee, creditor,
independent contractor or other third party.
(c) The attached "Taxes Schedule" contains a list of states
and jurisdictions (whether foreign or domestic) in which Seller is required to
file Tax Returns relating to the Business.
5.18 Customers and Suppliers. Seller has not received any
notice (nor, to Seller's Knowledge, is any such notice forthcoming) that any
material customer or supplier intends to terminate or materially reduce its
business with the Business and no material customer or supplier has terminated
or materially reduced its business with Seller in the last twelve (12) months.
For purposes of this Section 5.18, a material customer or supplier shall be any
of the Business' top ten customers or suppliers, by dollar volume of business
conducted with any such Person during the twelve months immediately preceding
the date of this Agreement.
5.19 Brokerage. There are no claims for brokerage
commissions, finders fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made (or alleged to have been made) by or on behalf of Seller.
5.20 Affiliate Transactions. Except as disclosed on the
"Affiliate Transactions Schedule" attached hereto, neither PDK nor any officer,
director or employee of Seller or PDK (or any of the relatives or Affiliates of
any of the aforementioned Persons) is a party to any agreement, contract,
commitment or transaction with Seller or affecting the Business, or has any
interest in any property, whether real, personal or mixed, or tangible or
intangible, used in or necessary to the Business which will subject Buyer to any
liability or obligation from and after the Closing Date. Except as disclosed on
the attached "Affiliate Transactions Schedule," no officer, director or employee
of Seller or PDK (or any of the relatives or Affiliates of any of the
aforementioned Persons) is an officer or director of any distributor or supplier
of Seller.
5.21 Exclusivity of Representations; Reliance on
Representations. The representations and warranties made by Seller in this
Agreement and any writing delivered in connection herewith at the Closing are in
lieu of and are exclusive of all other representations and warranties,
including, without limitation, any implied warranty of merchantability or of
fitness for a particular purpose and any other implied warranties of Seller.
Seller hereby disclaims any such other or implied representations or warranties.
5.22 Closing Date. All of the representations and
warranties of Seller contained in this Article 5 and elsewhere in this Agreement
and all information delivered in any schedule, attachment or exhibit hereto or
in any certificate delivered by Seller to Buyer are true and correct on the date
of this Agreement and shall be true and correct on the Closing Date, except (i)
with respect to any representations and warranties made as of a specified date
earlier than the Closing Date, which shall be true and correct as of such date
or (ii) to
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the extent that Seller has expressly advised Buyer otherwise in writing prior to
the Closing.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYER AND GUARANTOR
-----------------------------------------------------
As an inducement to Seller and PDK to enter into this
Agreement, Buyer and Guarantor represent and warrant to Seller and PDK that:
6.1 Organization and Power. Each of Buyer and Guarantor is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. As of the Closing, and assuming the accuracy of
the representations and warranties made by Seller in Section 5.1 above, Buyer
will be qualified to do business as a foreign corporation and will be in good
standing in each jurisdiction in which the ownership of its properties or the
conduct of its business requires it to be so qualified. Buyer has all requisite
corporate power and authority necessary to own and operate the Purchased Assets.
Each of Buyer and Guarantor has all requisite corporate power and authority to
execute and deliver this Agreement and the other agreements contemplated hereby
and to perform their respective obligations hereunder and thereunder.
6.2 Authorization. The execution, delivery and performance
by each of Buyer and Guarantor of this Agreement and the other agreements
contemplated hereby to which Buyer and Guarantor is a party and the consummation
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all requisite corporate action, and no other corporate act or
proceeding on the part of Buyer, Guarantor, their respective boards of directors
or stockholders is necessary to authorize the execution, delivery or performance
of this Agreement or the other agreements contemplated hereby and the
consummation of the transactions contemplated hereby or thereby. This Agreement
has been duly executed and delivered by each of Buyer and Guarantor and this
Agreement constitutes, and the other agreements contemplated hereby to which
Buyer is a party upon execution and delivery by Buyer will each constitute, a
valid and binding obligation of Buyer and Guarantor, as the case may be,
enforceable in accordance with their terms, except to the extent enforcement
thereof may be limited by applicable bankruptcy or insolvency laws or general
equitable principles.
6.3 No Violation. The execution, delivery and performance
by each of Buyer and Guarantor of this Agreement and the other agreements
contemplated hereby and the consummation of each of the transactions
contemplated hereby or thereby do not and will not (a) violate, conflict with,
result in any breach of, constitute a default under, result in the termination
or acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice under Buyer's or Guarantor's certificate
of incorporation or bylaws, or any contract, agreement, arrangement, license,
sublicense, franchise, permit, indenture, mortgage, obligation or instrument to
which Buyer or Guarantor is a party or by which Buyer or Guarantor is bound or
affected or to which any of their respective assets are bound or affected, (b)
require any authorization, consent, approval, exemption or other action by or
notice to any court, other governmental body or other Person or entity under,
the provisions of any law, statute, rule, regulation, judgment, order or decree
or any contract, agreement, arrangement,
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license, sublicense, franchise, permit, indenture, mortgage, obligation or
instrument to which Buyer or Guarantor is subject, or by which Buyer or
Guarantor is bound or affected or to which their respective assets are bound or
affected or (c) violate or require any consent or notice under any law, statute,
regulation, rule, judgment, decree, order, stipulation, injunction, charge or
other restriction of any government, governmental agency or court to which Buyer
or Guarantor or any of their respective assets are subject, or by which Buyer or
Guarantor is bound or affected. No permit, consent, approval or authorization
of, or declaration to or filing with, any governmental or regulatory authority
or any other party or person is required in connection with the execution,
delivery or performance of this Agreement by Buyer or Guarantor, or the
consummation by Buyer or Guarantor of the transactions contemplated hereby and
thereby.
6.4 Litigation. There are no actions, suits, proceedings,
orders or investigations pending or, to the best of Buyer's or Guarantor's
Knowledge, threatened against or affecting Buyer or Guarantor, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which would adversely affect Buyer's or Guarantor's performance under
this Agreement, the other agreements contemplated hereby or the consummation of
the transactions contemplated hereby or thereby.
6.5 Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made (or alleged to have been made) by or on behalf of Buyer or
Guarantor.
6.6 Exclusivity of Representations; Reliance on
Representations. The representations and warranties made by Buyer and Guarantor
in this Agreement and any writing delivered in connection herewith at the
Closing are in lieu of and are exclusive of all other representations and
warranties of Buyer or Guarantor. Each of Buyer and Guarantor hereby disclaim
any such other representations or warranties.
6.7 Closing Date. All of the representations and
warranties contained in this Article 6 and elsewhere in this Agreement are true
and correct on the date of this Agreement and will be true and correct on the
Closing Date, except (i) with respect to any representations and warranties made
as of a specified date earlier than the Closing Date, which shall be true and
correct as of such date or (ii) to the extent that Buyer has expressly advised
Seller otherwise in writing prior to the Closing.
6.8 No Material Adverse Change. Since August 31, 1998,
there has been no material adverse change in the business, financial condition
or operating results of Buyer or Nutraceutical.
ARTICLE 7
TERMINATION
-----------
7.1 Termination. This Agreement may be terminated at any
time prior to the Closing only as follows:
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(a) by mutual consent of Buyer and Seller;
(b) by either Buyer or Seller if there has been a
misrepresentation or breach of warranty or breach of covenant on the part of the
other party in the representations and warranties or covenants set forth in this
Agreement which would (i) have a Material Adverse Effect or (ii) a material
adverse effect on the ability of such other party to consummate the transactions
contemplated hereby or if events have occurred which have made it impossible to
satisfy a condition precedent to the terminating party's obligation to
consummate the transactions contemplated hereby, unless such terminating party's
breach of this Agreement has caused the condition to be unsatisfied, which in
either case has not been cured by the non-terminating party after such party has
been afforded a reasonable period (not to exceed ten Business Days) to effect
such cure;
(c) by either Buyer or Seller if the transactions
contemplated hereby have not been consummated by June 30, 1999; provided that a
party will not be entitled to terminate this Agreement pursuant to this
subsection (c) if (i) that party's breach of this Agreement has prevented the
consummation of the transactions contemplated hereby at or prior to such time or
(ii) that party has failed to satisfy any condition set forth in Article 3
hereof that such party was required to satisfy;
(d) by Seller, at any time prior to obtaining the
stockholder approval required pursuant to Section 4.3 hereof, solely to allow
Seller to concurrently enter into a definitive purchase and sale agreement in
respect of an Acquisition Proposal which Seller's board of directors has
determined in the exercise of its fiduciary duties is more favorable to Seller
and its stockholders than the transactions contemplated hereby, it being
understood and agreed that the termination described in this Section 7.1(d)
shall not be effective unless and until Seller shall have paid to Buyer the fee
and other amount described in Section 7.2(b) hereof; provided that no such
termination may be effected until the fifth Business Day following Buyer's
receipt of written notice from Seller's board of directors advising Buyer of
Seller's intention to terminate this Agreement pursuant to this Section 7.1(d),
specifying the material terms and conditions of such Acquisition Proposal and
identifying the Person making such Acquisition Proposal; or
(e) by Buyer, on or prior to the date which is five (5)
Business Days after the delivery to Buyer of the Deferred Schedules pursuant to
Section 9.14, if the Deferred Schedules are not satisfactory to Buyer in its
reasonable discretion.
7.2 Effect of Termination.
(a) In the event of termination of this Agreement as
provided in Section 7.1 hereof, this Agreement will forthwith become void and
there will be no liability hereunder on the part of Seller, PDK, Buyer or
Guarantor, except as arising under the provisions of Sections 7.2(b), 8.4, 8.5,
8.6 and 8.14 hereof (all of which shall survive termination) and except for
liability for any breach of this Agreement prior to the time of such
termination.
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(b) If Seller shall have terminated this Agreement pursuant
to Section 7.1(d) hereof, then Seller shall promptly, but in no event later than
two (2) Business Days after the date of such termination, pay Buyer a
termination fee of $296,250 plus an amount equal to the actual and reasonably
documented out-of-pocket expenses incurred by Buyer directly attributable to the
proposed acquisition of substantially all of the assets of Seller, including,
without limitation, the due diligence review undertaken in connection therewith,
the negotiation and execution of this Agreement and the attempted completion of
the transactions contemplated hereby, which fee and amount shall be payable in
immediately available funds.
7.3 Waiver of Right to Terminate. Each of the parties
hereto shall be deemed to have waived their respective rights to terminate this
Agreement upon consummation of the Closing. No such waiver shall constitute a
waiver of any other rights arising from the non-fulfillment of any condition
precedent set forth in Article 3 hereof or any misrepresentation or breach of
any warranty, covenant or agreement contained herein unless such waiver is made
in writing and then any such written waiver shall only constitute a waiver of
the specific matters set forth therein.
ARTICLE 8
ADDITIONAL AGREEMENTS; COVENANTS AFTER CLOSING
----------------------------------------------
8.1 Indemnification.
(a) Seller and PDK Indemnification. Seller and PDK, jointly
and severally, agree to indemnify Buyer and its affiliates and their respective
officers, directors, employees and representatives (the "Buyer Indemnitees"),
and hold them harmless against any loss, liability, deficiency, damage or
expense (including reasonable legal fees and expenses and including interest and
penalties) (a "Loss") which any Buyer Indemnitee may suffer, sustain or become
subject to, as a result of (i) the breach by Seller or PDK of any
representation, warranty, covenant or agreement made by Seller or PDK contained
in this Agreement or in any writing delivered by Seller or PDK in connection
with this Agreement (without taking into account any disclosures made by Seller
or PDK pursuant to Section 4.1(e), Section 5.22 or Section 10.7 hereof), (ii)
any action, demand, proceeding, investigation or claim by a third party
(including governmental agencies) against or affecting any Buyer Indemnitee, the
Business (as operated by Buyer or its successor in interest) or the Purchased
Assets which, if successful, would give rise to or evidence the existence of or
relate to a breach of any of the representations, warranties, covenants or
agreements of Seller or PDK, (iii) any claims of any brokers or finders claiming
by, through or under Seller or PDK or (iv) the assertion against any Buyer
Indemnitee of any liability or claim against any Buyer Indemnitee relating to
any Excluded Liability.
With respect to any claim or claims for breaches or alleged
breaches of representations and warranties contained in Article 5 hereof (except
for the first two sentences of Section 5.7(a), Section 5.9 and 5.17), neither
Seller nor PDK will be liable with respect to any such breach or alleged breach
unless written notice of a possible claim for indemnification with respect to
such breach or alleged breach is given by Buyer (i) in the case of Seller, on or
before the second anniversary of the Closing Date and (ii) in the case of PDK,
on or before
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the first anniversary of the Closing Date (collectively, the "Survival Date"),
it being understood that so long as such written notice is given on or prior to
the Survival Date, such representations and warranties shall continue to survive
until such matter is resolved. Notwithstanding the foregoing, any breaches or
alleged breaches of the representations and warranties contained in the first
two sentences of Section 5.7(a), Section 5.9 or 5.17 hereof, and any breaches or
alleged breaches of the covenants or agreements contained herein, including,
without limitation, any breach or alleged breach of the covenants or agreements
contained in this Article 8, shall survive the Closing and will not be subject
to any time limitations.
With respect to any claim or claims for breaches or alleged
breaches of representations and warranties contained in Article 5 hereof,
neither Seller nor PDK will have any obligation to indemnify any Buyer
Indemnitee from and against such Losses by reason of all such breaches or
alleged breaches until the Buyer Indemnitees have suffered Losses by reason of
all such breaches and alleged breaches in excess of $50,000, and then only to
the extent that such Losses exceed such amount.
(b) Buyer Indemnification. Buyer agrees to indemnify
Seller and PDK and their respective officers, directors, employees and
representatives (the "Seller Indemnitees") and hold them harmless against any
Loss which any Seller Indemnitee may suffer, sustain or become subject to, as
the result of (i) the breach by Buyer of any representation, warranty, covenant
or agreement made by Buyer contained in this Agreement or in any writing
delivered by Buyer in connection with this Agreement (without taking into
account any disclosures made by Buyer pursuant to Section 6.7 hereof), (ii) any
action, demand, proceeding, investigation or claim by a third party (including
governmental agencies) against or affecting any Seller Indemnitee which, if
successful, would give rise to or evidence the existence of or relate to a
breach of any of the representations, warranties, covenants or agreements of
Buyer, (iii) any claims of any brokers or finders claiming by, through or under
Buyer or (iv) the assertion against any Seller Indemnitee of any liability or
claim against any Seller Indemnitee relating to any Assumed Liability.
With respect to any claim or claims for breaches of
representations and warranties contained in Article 6 hereof, Buyer will not be
liable with respect to any such claim unless written notice of a possible claim
for indemnification with respect to such breach or alleged breach is given by
PDK to Buyer on or before the first anniversary of the Closing Date, it being
understood that so long as such written notice is given on or prior to such
date, such representations and warranties shall continue to survive until such
matter is resolved. Notwithstanding the foregoing, any breaches or alleged
breaches of the covenants or agreements contained herein, including, without
limitation, any breach or alleged breach of the covenants or agreements
contained in this Article 8, shall survive the Closing and will not be subject
to any time limitations.
With respect to claim or claims for breaches or alleged
breaches of representations and warranties contained in Article 6 hereof, Buyer
will not have any obligation to indemnify any Seller Indemnitee from and against
such Losses by reason of all such breaches (or alleged breaches) until the
Seller Indemnitees have suffered Losses by reason of all such breaches (or
alleged breaches) in
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excess of $50,000, and then only to the extent that such Losses exceed such
amount.
(c) Defense of Claims. If a party hereto seeks
indemnification under this Section 8.1, such party (the "Indemnified Party")
shall give written notice to the other party (the "Indemnifying Party") of the
facts and circumstances giving rise to the claim. In that regard, if any suit,
action, claim, liability or obligation (a "Proceeding") shall be brought or
asserted by any third party which, if adversely determined, would entitle the
Indemnified Party to indemnity pursuant to this Section 8.1, the Indemnified
Party shall within 30 days notify the Indemnifying Party of the same in writing,
specifying in detail the basis of such claim and the facts pertaining thereto;
provided that the failure to so notify an Indemnifying Party shall not relieve
the Indemnifying Party of its obligations hereunder except to the extent such
failure shall have harmed the Indemnifying Party. The Indemnifying Party, if it
so elects, shall assume and control the defense of such Proceeding (and shall
consult with the Indemnified Party with respect thereto), including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of expenses; provided, however, that in the event any Proceeding shall
be brought or asserted by any third party which, if adversely determined, would
not entitle the Indemnified Party to full indemnity pursuant to Section 8.1, the
Indemnified Party may elect to participate in a joint defense of such Proceeding
(a "Joint Defense Proceeding") for which the expenses of such joint defense will
be shared equally by such parties and the employment of counsel shall be
reasonably satisfactory to both parties. If the Indemnifying Party elects to
assume and control the defense of a Proceeding, it will provide notice thereof
within 30 days after the Indemnified Party has given notice of the matter and if
such Proceeding is not a Joint Defense Proceeding, the Indemnified Party shall
have the right to employ counsel separate from counsel employed by the
Indemnifying Party in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel employed by the Indemnified Party
shall be at the expense of the Indemnified Party unless (i) the employment
thereof has been specifically authorized by the Indemnifying Party in writing or
(ii) the Indemnifying Party has failed to assume the defense and employ counsel.
The Indemnifying Party shall not be liable for any settlement of any Proceeding,
the defense of which it has elected to assume, which settlement is effected
without the written consent of the Indemnifying Party; provided that no
settlement of a Joint Defense Proceeding may be effected without the written
consent of both parties. If there shall be a settlement to which the
Indemnifying Party consents or a final judgment for the plaintiff in any
Proceeding, the defense of which the Indemnifying Party has elected to assume,
the Indemnifying Party shall indemnify the Indemnified Party with respect to the
settlement or judgment. If the Indemnifying Party elects to assume and control
the defense or in the event of a Joint Defense Proceeding, the Indemnified Party
shall take all reasonable efforts necessary to assist the Indemnifying Party in
such defense.
(d) Payments. Any payment pursuant to a claim for
indemnification shall be made not later than 30 days after receipt by the
Indemnifying Party of written notice from the Indemnified Party stating the
amount of the claim, unless the claim is subject to defense as provided in
Section 8.1(c) or is a dispute, claim or controversy which is the subject of an
unresolved arbitration proceeding pursuant to Section 8.6, in which case payment
shall be made not later than 30 days after the amount of the claim is finally
determined. Any payment required
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under this Section which is not made when due shall bear interest at the rate of
8.50% per annum.
(e) Adjustments. Amounts paid as indemnification shall be
treated as adjustments to the Purchase Price.
(f) Maximum Liability. Seller will not be liable for any
Losses of Buyer resulting from any breach or alleged breach of any of the
representations or warranties contained in Article 5 or elsewhere in this
Agreement in an amount in excess of the sum of $3,700,000 plus the Inventory
Portion. PDK will not be liable for any Losses of Buyer resulting from any
breach or alleged breach of any representations or warranties contained in
Article 5 or elsewhere in this Agreement in excess of $2,000,000.
8.2 Mutual Assistance and Records. Each of the parties
hereto agrees that they will mutually cooperate in the expeditious filing of all
notices, reports and other filings with any governmental authority required to
be submitted jointly by Buyer and Seller in connection with the execution and
delivery of this Agreement, the other agreements contemplated hereby and the
consummation of the transactions contemplated hereby or thereby. Subsequent to
the Closing, Seller and Buyer at their own cost, will assist each other
(including by the retention of records and the provision of access to relevant
records) in the preparation of their respective Tax Returns and the filing and
execution of Tax elections, if required, as well as in the defense of any audits
or litigation that may ensue as a result of the filing thereof, to the extent
that such assistance is reasonably requested. The Purchase Price shall be
allocated among the Purchased Assets in accordance with the methodology
described on Schedule 8.2 hereof. Each of the parties hereto covenants and
agrees to prepare and timely file all applicable Tax Returns and information
reports in accordance with the allocations developed by Buyer based on the
methodology set forth on Schedule 8.2, which allocations are intended to comply
with Section 1060 of the Code. Each of the parties hereto agrees that Seller may
retain copies of any records purchased by Buyer hereunder, subject to the
provisions of Section 8.14 hereof. Buyer shall maintain the records purchased
hereunder and Seller shall maintain the books and records retained hereunder for
the lesser of seven (7) years or the standard retention policy of the holder;
provided that no such records shall be destroyed unless the holder provides the
other party hereunder with at least ninety (90) days prior written notice. Upon
receipt of notice of destruction, the nonholder shall have the option, at its
sole cost and expense, to take possession of the records set for destruction, in
which case the nonholder shall assume all further cost of storage and
destruction of such records. Each of the parties hereto shall be afforded access
to and the right to copy such records in the hands of the other party during
normal business hours, at the expense of the person requesting access.
8.3 Press Release and Announcements. Unless required by
law or the rule or regulation of any securities exchange upon which any party's
securities are traded (in which case each party hereto shall consult with each
other party prior to any such disclosure as to the form and content of such
disclosure), after the date hereof, no press releases, announcements to the
employees, customers or suppliers of Seller or other releases of information
related to this Agreement or the transactions contemplated hereby will be issued
or released by any party without the consent of each other party. From and after
the Closing Date, Buyer
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may issue any such releases of information without the consent of any other
party hereto.
8.4 Expenses. Except as otherwise set forth in this
Agreement, each party hereto shall be solely responsible for and shall bear its
own costs and expenses incident to its obligations under and in respect of this
Agreement and the transactions contemplated hereby, including, but not limited
to, any such costs and expenses incurred by any party in connection with the
negotiation, preparation and performance of and compliance with the terms of
this Agreement (including, without limitation, the fees and disbursements of
counsel and other advisors).
8.5 Specific Performance. Each of the parties hereto
acknowledges and agrees that Buyer would be damaged irreparably in the event any
of the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached. Accordingly, each of the parties
hereto agrees that Buyer shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement and to enforce specifically
this Agreement and the terms and provisions hereof in any action instituted in
any court in the United States or in any state having jurisdiction over the
parties and the matter in addition to any other remedy to which they may be
entitled pursuant hereto.
8.6 Arbitration Procedure.
(a) Each of the parties hereto agrees that they will attempt
to settle any dispute, claim or controversy arising out of this Agreement
through good faith negotiations in the spirit of mutual cooperation between
senior business executives with authority to resolve the controversy.
(b) Any dispute, claim or controversy that cannot be
resolved by the parties through good faith negotiations within 30 days of the
notification to the other party of the commencement of the dispute resolution
procedures of this Section 8.6 will then, upon the written request of any party
hereto, be resolved by binding arbitration conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by a sole
arbitrator. Such arbitrator shall be mutually agreeable to the parties. If the
parties cannot mutually agree upon the selection of an arbitrator, the
arbitrator shall be selected in accordance with the rules of the then effective
Commercial Arbitration Rules of the American Arbitration Association. To the
extent not governed by such rules, such arbitrator shall be directed by the
parties to set a schedule for determination of such dispute, claim or
controversy that is reasonable under the circumstances. Such arbitrator shall be
directed by the parties to determine the dispute in accordance with this
Agreement and the substantive rules of law (but not the rules of procedure or
evidence) that would be applied by a federal court required to apply the
internal law (and not the law of conflicts) of the State of New York. The
arbitration will be conducted in the English language in Chicago, Illinois.
Judgment upon the award rendered by the arbitrator may be entered by any court
having jurisdiction.
(c) Nothing contained in this Section 8.6 shall prevent any
party hereto from resorting to judicial process if injunctive or other equitable
relief from a court is necessary to prevent injury to such party or its
affiliates. The use of arbitration procedures will not be construed under the
doctrine of laches,
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waiver or estoppel to affect adversely the rights of any party hereto to assert
any claim or defense.
8.7 Further Transfers. Seller shall, and PDK shall and
shall cause its Affiliates to, execute and deliver such further instruments of
conveyance and transfer and take such additional action as Buyer may reasonably
request to effect, consummate, confirm or evidence the transfer to Buyer of the
Purchased Assets. Seller shall, and PDK shall and shall cause Seller to, execute
such documents as may be necessary to assist Buyer in preserving or perfecting
its rights in the Purchased Assets. Buyer shall execute and deliver such further
instruments and take such additional actions as Seller may reasonably request to
effect or consummate the assumption by Buyer of the Assumed Liabilities.
8.8 Change of Name. As of the Closing, Seller will change
its name to a name substantially dissimilar to "Futurebiotics, Inc." and
thereafter shall not use any name or title similar to such name.
8.9 Transition Assistance. Neither Seller nor PDK will in
any manner take any action which is designed, intended or might be reasonably
anticipated to have the effect of discouraging customers, suppliers, lessors,
licensors and other business associates from maintaining the same business
relationships with Buyer and its Affiliates after the date of this Agreement as
were maintained with the Seller and its Affiliates prior to the date of this
Agreement.
8.10 Non-Competition; Non-Solicitation. As condition
precedent to Buyer to enter into and perform its obligations under this
Agreement, each of Seller and PDK agrees, on behalf of itself and its
Affiliates, that:
(a) For a period of three (3) years after the Closing Date
(the "Non-Competition Period"), it shall not, without the prior written consent
of Buyer, anywhere in the United States of America, directly or indirectly,
either for itself or for any other Person, own, operate, manage, control, engage
in, participate in, invest in, permit its name to be used by, act as consultant
or advisor to, render services for (alone or in association with any Person) or
otherwise assist in any manner, any Person that engages in or owns, invests in,
operates, manages or controls any venture or enterprise which directly or
indirectly engages or proposes to engage in the merchandising, distribution or
sale of (i) a "broad line" of branded Nutritional Supplements, other than into
Mass Trade Channels or (ii) any of the proprietary products and/or formulations
listed on Schedule 8.10(a). Nothing herein shall prohibit Seller or PDK from (i)
being a passive owner of not more than 5% of the outstanding stock of any class
of securities of a publicly traded corporation engaged in such business, so long
as it has no active participation in the business of such corporation, (ii)
performing any services for Buyer or its Affiliates, (iii) performing any
private label manufacturing for any Person in compliance with this Section 8.10
or (iv) merchandising, distributing or selling any of the products listed on
Schedule 8.10(b) for the customers listed thereon. For purposes hereof: (i) a
"broad line" of branded Nutritional Supplements shall mean a line of ten or more
products and (ii) "Mass Trade Channels" shall mean any of the national chain or
large regional chain grocery stores, drugstores, discount or convenience stores
which (A) are not primarily involved in the sale or distribution of natural
products or natural
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foods, including, without limitation, Nutritional Supplements and (B) neither
such Person nor its Affiliates currently carry the Futurebiotics brand.
(b) During the Non-Competition Period, it will not directly
or indirectly offer employment to or hire (in any capacity) any former employee
of Seller who is hired by Buyer.
(c) If, at the time of enforcement of this Section 8.10, a
court shall hold that the duration, scope, geographic area or other restrictions
stated herein are unreasonable under circumstances then existing, the parties
agree that the maximum duration, scope, geographic area or other restrictions
deemed reasonable under such circumstances by such court shall be substituted
for the stated duration, scope, geographic area or other restrictions.
(d) Each of Seller and PDK recognizes and affirms that in
the event of breach by it of any of the provisions of this Section 8.10, money
damages would be inadequate and Buyer would have no adequate remedy at law.
Accordingly, each of Seller and PDK agrees that Buyer shall have the right, in
addition to any other rights and remedies existing in its favor, to enforce its
rights and Seller's and PDK's obligations under this Section 8.10 not only by an
action or actions for damages, but also by an action or actions for specific
performance, injunctive and/or other equitable relief in order to enforce or
prevent any violations (whether anticipatory, continuing or future) of the
provisions of this Section 8.10 (including, without limitation, the extension of
the Non-Competition Period by a period equal to (i) the length of the violation
of this Section 8.10 plus (ii) the length of any court proceedings necessary to
stop such violation). In the event of a breach or violation by Seller or PDK of
any of the provisions of this Section 8.10, the running of the Non-Competition
Period (but not of Seller's and PDK's obligations under this Section 8.10) shall
be tolled with respect to Seller and PDK during the continuance of any actual
breach or violation.
8.11 Communications. All mail and other communications
directed to Seller and received by Seller or PDK at any time after the Closing
Date (other than relating exclusively to the Excluded Assets or the Excluded
Liabilities) shall be promptly turned over to Buyer by such party. All mail and
other communications relating exclusively to the Excluded Assets or Excluded
Liabilities received by Buyer at any time after the Closing shall be promptly
turned over to Seller by Buyer.
8.12 Best Efforts To Consummate Closing Transactions. On
the terms and subject to the conditions contained in this Agreement, each of the
parties hereto agrees to use best efforts to take, or to cause to be taken, all
reasonable actions, and to do, or to cause to be done, all things, necessary,
proper or advisable under applicable laws and regulations to consummate, as soon
as reasonably practicable, the Closing, including but not limited to the
satisfaction of all conditions thereto set forth herein.
8.13 Employees and Employee Benefits. The parties
acknowledge and agree that, from and after the Closing, Buyer shall have the
right (but not the obligation) to interview any of Seller's employees and to
elect which employees (if any) which Buyer shall have the sole and exclusive
right to (i) offer employment to and hire and (ii) set all terms and conditions
of employment that
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any Person so hired by Buyer shall receive. Seller will be responsible for, and
will pay and hold Buyer harmless in respect of, all salary, wages, commissions
and other compensation, withholding, payroll and other Taxes, benefits and other
amounts which are or become payable to or in respect of any employee of Seller
by reason of his or her employment by Seller. Buyer will not assume any Plan of
Seller and Buyer will not assume any obligation of Seller to any Person under
any Plan. Upon the resignation of any employee from Seller's employ to accept an
offer of employment made to any such person by Buyer, Seller shall satisfy any
remaining liability or obligation to such person for accrued but unused vacation
pay and holiday or sick pay and any other employee benefits to which such person
is entitled.
8.14 Confidentiality. After the Closing Date, Seller and
PDK shall, and shall cause each of their Affiliates to, (i) continue to maintain
the confidentiality of all information, documents and materials relating to the
Business or relating to Buyer, Nutraceutical International Corporation or any of
its Subsidiaries which has been disclosed to any of them (including, without
limitation, the terms of this Agreement and the other agreements contemplated
hereby), except to the extent disclosure of any such information is required by
law or the rule or regulation of any securities exchange, is made in connection
with any investigation or inquiry by the FDA, the FTC or Other Authorities, or
authorized by Buyer or reasonably occurs in connection with disputes over the
terms of this Agreement and (ii) except with respect to this Agreement and the
other agreements contemplated hereby, Seller, PDK and their Affiliates shall
immediately return all such information, documents and materials to Buyer. After
the Closing, Buyer shall, and shall cause each of its Affiliate to, (i) continue
to maintain the confidentiality of all information, documents and materials
relating to Seller (other than to the extent relating to the Business) or PDK
which has been disclosed to any of them, except to the extent disclosure of any
such information is required by law or the rule or regulation of any securities
exchange, is made in connection with any investigation or inquiry by the FDA,
the FTC or Other Authorities, or authorized by Seller or reasonably occurs in
connection with disputes over the terms of this Agreement and (ii) except with
respect to this Agreement and the other agreements contemplated hereby,
immediately return all such information, documents and materials to Seller. In
the event that any party reasonably believes after consultation with counsel
that it is required by law to disclose any confidential information described in
this Section 8.14 the disclosing party will (a) provide the other party with
prompt notice before such disclosure in order that any party may attempt to
obtain a protective order or other assurance that confidential treatment will be
accorded such confidential information and (b) cooperate with the other party in
attempting to obtain such order or assurance. The preceding sentence shall not
apply to any disclosures made by Buyer to the FDA, the FTC or Other Authorities
in response to or in connection with any investigation or inquiry to the extent
that Buyer reasonably determines that notifying Seller or PDK would prejudice
Buyer or would be contrary to law. The provisions of this Section 8.14 shall not
apply to any information, documents or materials which are, as shown by
appropriate written evidence, in the public domain or, as shown by appropriate
written evidence, shall come into the public domain, other than by reason of
breach by the applicable party bound hereunder or its Affiliates.
8.15 Taxes; Recording Charges. All transfer, documentary,
sales, use, stamp, registration, conveyance and similar transfer Taxes arising
out of the sale
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of the Purchased Assets or otherwise incurred in connection with this Agreement
or the consummation of the transactions contemplated hereby and all charges for
or in connection with the recording of any document or instrument contemplated
hereby shall be borne equally by Buyer and Seller. Seller shall file all
necessary Tax Returns and other documentation in connection with the Taxes
encompassed in this Section 8.15.
8.16 Collection of Purchased Receivables. From and after
the Closing Date, Buyer shall use commercially reasonable efforts, consistent
with Buyer's collection efforts with respect to its other accounts receivables,
to collect all of the Purchased Receivables in accordance with their terms, it
being understood and agreed that nothing in this Section 8.16 shall require
Buyer to institute a lawsuit, engage a collection agency or take any other
extraordinary means to collect any of the Purchased Receivables.
ARTICLE 9
MISCELLANEOUS
-------------
9.1 Amendment and Waiver. This Agreement may be amended,
and any provision of this Agreement may be waived; provided that any such
amendment or waiver will be binding on any party hereto only if such amendment
or waiver is set forth in a writing executed by such party. No course of dealing
between or among any persons having any interest in this Agreement will be
deemed effective to modify, amend or discharge any part of this Agreement or any
rights or obligations of any person under or by reason of this Agreement. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute, a waiver of any other provisions, whether or not similar, nor shall
any waiver constitute a continuing waiver.
9.2 Notices. All notices, demands and other communications
to be given or delivered to any party hereto under or by reason of the
provisions of this Agreement will be in writing and will be deemed to have been
given when personally delivered, sent by reputable overnight courier or
transmitted by facsimile or telecopy, to the addresses indicated below (unless
another address is so specified in writing):
Notices to Seller or PDK:
-------------------------
Futurebiotics, Inc.
PDK Labs, Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Attention: Reginald Spinello
Facsimile Number: (516) 273-1165
with a copy to:
Berlack Israels & Liberman LLP
120 West 45th Street, 28th Floor
New York, New York 10022
Attention: Steven F. Wasserman, Esq.
Facsimile Number: (212) 704-0196
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Notices to Buyer or Guarantor:
------------------------------
FB Acquisition Corp.
Nutraceutical Corporation
c/o Nutraceutical International Corporation
1400 Kearns Boulevard, 2nd Floor
Park City, Utah 84060
Attention: Frank W. Gay II
Facsimile Number: (435) 655-6080
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: James L. Learner, Esq.
Gary M. Holihan, Esq.
Facsimile Number: (312) 861-2200
9.3 Assignment. This Agreement and each of the provisions
hereof shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and permitted assigns. Except for (i) any
assignment by Buyer to any other wholly-owned Subsidiary of Nutraceutical
International Corporation or (ii) any assignment by Buyer or any of its
permitted assignees for collateral security purposes to any of their third party
financing sources, neither this Agreement nor any of the rights, benefits or
obligations set forth herein may be assigned by any party hereto, without the
prior written consent of each of the other parties hereto.
9.4 Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
of this Agreement.
9.5 No Strict Construction. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction will be applied
against any Person. The use of the word "including" in this Agreement or in any
of the agreements contemplated hereby shall be by way of example rather than by
limitation.
9.6 Captions. The captions used in this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
shall not be deemed to limit, characterize or in any way affect any provision of
this Agreement, and all provisions of this Agreement shall be enforced and
construed as if no caption had been used in this Agreement.
9.7 No Third Party Beneficiaries. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give to any
person, firm or corporation, other than the parties hereto and their respective
successors and permitted assigns, any rights or remedies under or by reason of
this
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Agreement, such third parties specifically including, without limitation,
employees or creditors of Seller.
9.8 Complete Agreement. This Agreement contains the
complete agreement between the parties hereto with respect to the subject matter
hereof and supersedes any prior understandings, agreements or representations by
or between the parties, written or oral, which may have related to the subject
matter hereof in any way.
9.9 Counterparts. This Agreement may be executed in one or
more counterparts (any one or more of which may be by facsimile), all of which
taken together shall constitute one and the same agreement.
9.10 Governing Law. This Agreement shall be governed by
and construed in accordance with the domestic laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
York.
9.11 Consent to Jurisdiction. Subject to the provisions of
Section 8.6 hereof, each of the parties hereto (i) consents to submit itself to
the co-exclusive personal jurisdiction of any federal court located in the State
of New York or any New York state court in the event of any dispute arising out
of this Agreement or any of the transactions contemplated by this Agreement and
(ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court.
9.12 Guaranty. Subject to the terms and conditions of this
Agreement, Guarantor hereby guarantees Buyer's obligation to pay the purchase
price set forth in Section 2.4; provided that, from and after the occurrence of
the Closing and the payment of the Purchase Price, Guarantor shall have no
further liability or obligation pursuant to this Agreement.
9.13 Maintenance of Insurance. Seller and PDK each hereby
covenant and agree that they shall cause Seller to remain a named insured or
otherwise as beneficiary of products liability insurance coverage (whether
through the purchase of a "tail" insurance policy or otherwise) of not less than
$10 million of aggregate insurance coverage during the one year period
immediately following the Closing Date.
9.14 Delivery of Schedules. Except for the Excluded Assets
Schedule, the Estimated Purchased Inventory Schedule, the Proprietary Products
and Formulations Schedule and the Excluded Products Schedule (which are attached
hereto and made a part hereof) and any schedules to be delivered at the Closing
(i.e., the Purchased Receivables Schedule, the Purchased Inventories Schedule
and the Purchase Price Allocation Schedule), Seller shall prepare in good faith
and deliver to Buyer all of the remaining Schedules to this Agreement (the
"Deferred Schedules"), on or prior to March 10, 1999. Seller shall use its best
efforts to describe in reasonable detail the facts, events and occurrences
required to be disclosed on the Deferred Schedules. Seller acknowledges and
agrees that the Deferred Schedules shall not contain the words "know,"
"knowledge," "material," "materiality" or derivations of such words. The parties
will use reasonable efforts to resolve in good faith any disputes regarding the
information and/or
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level of detail disclosed on the Deferred Schedules. Notwithstanding any
provision in this Agreement or any schedule or exhibit hereto to the contrary,
Seller's obligation to consummate the transactions contemplated by this
Agreement shall not be conditioned upon the waiver or amendment of any
instrument governing any indebtedness for borrowed money or any security
interest granted in connection therewith. In furtherance of the foregoing, on or
prior to the Closing Date, Seller hereby covenants and agrees to obtain the
release of any Liens encumbering any of the Purchased Assets pursuant to the
terms of any instrument governing any such indebtedness for borrowed money or
any security interest granted in connection therewith, including any such item
listed on Schedule 5.3 hereof.
ARTICLE 10
REPRESENTATIONS AND WARRANTIES OF PDK
-------------------------------------
As an inducement to Buyer to enter into this Agreement, PDK
hereby represents and warrants to Buyer that:
10.1 Organization and Power. PDK is a corporation duly
organized, validly existing and in good standing under the laws of the state of
New York. PDK has all requisite power and authority to execute and deliver this
Agreement and the other agreements contemplated hereby and to perform its
obligations hereunder and thereunder. Except for Seller and Compare Genetics,
PDK does not own or control (directly or indirectly) any stock, partnership
interest, joint venture interest, equity participation or other security or
interest in any other Person who participates in any manner in the business of
merchandising, distributing or selling branded Nutritional Supplements.
10.2 Authorization. The execution, delivery and
performance by PDK of this Agreement, the other agreements contemplated hereby
and each of the transactions contemplated hereby or thereby have been duly and
validly authorized by PDK and no other corporate act or proceeding on the part
of PDK, its board of directors or stockholders is necessary to authorize the
execution, delivery or performance by PDK of this Agreement or any other
agreement contemplated hereby or the consummation of any of the transactions
contemplated hereby or thereby. This Agreement has been duly executed and
delivered by PDK, and this Agreement constitutes, and the other agreements
contemplated hereby to which PDK is a party, upon execution and delivery by PDK,
will each constitute, a valid and binding obligation of PDK, enforceable against
PDK in accordance with their terms, except to the extent enforcement thereof may
be limited by applicable bankruptcy or insolvency laws or general equitable
principles.
10.3 No Breach. The execution, delivery and performance by
PDK of this Agreement and the other agreements contemplated hereby and the
consummation of each of the transactions contemplated hereby or thereby do not
and will not (a) violate, conflict with, result in any breach of, constitute a
default under, result in the termination or acceleration of, create in any party
the right to accelerate, terminate, modify or cancel, or require any notice
under PDK's certificate of incorporation or bylaws, or any contract, agreement,
arrangement, license, sublicense, franchise, permit, indenture, mortgage,
obligation or instrument to which PDK is a party or by which PDK is bound or
affected or to which any of its assets are bound or affected, (b) require any
authorization,
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consent, approval, exemption or other action by or notice to any court, other
governmental body or other Person or entity under, the provisions of any law,
statute, rule, regulation, judgment, order or decree or any contract, agreement,
arrangement, license, sublicense, franchise, permit, indenture, mortgage,
obligation or instrument to which PDK is subject, or by which PDK is bound or
affected or to which its assets are bound or affected or (c) violate or require
any consent or notice under any law, statute, regulation, rule, judgment,
decree, order, stipulation, injunction, charge or other restriction of any
government, governmental agency or court to which PDK or any of its assets are
subject, or by which PDK is bound or affected. No permit, consent, approval or
authorization of, declaration to or filing with, or notice to, any governmental
authority or any third party is required in connection with the execution,
delivery or performance by PDK of this Agreement or the other agreements
contemplated hereby, or the consummation by PDK of the transactions contemplated
hereby or thereby.
10.4 Litigation. There are no actions, suits, proceedings,
orders or investigations pending or, to the best of PDK's Knowledge, threatened
against or affecting PDK, at law or in equity, or before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, which would adversely affect
PDK's performance under this Agreement, the other agreements contemplated hereby
or the consummation of the transactions contemplated hereby or thereby.
10.5 Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made (or alleged to have been made) by or on behalf of PDK.
10.6 Exclusivity of Representations; Reliance on
Representations. The representations and warranties made by PDK in this
Agreement and any writing delivered in connection herewith at the Closing are in
lieu of and are exclusive of all other representations and warranties,
including, without limitation, any implied warranty of merchantability or of
fitness for a particular purpose and any other implied warranties of PDK. PDK
hereby disclaims any such other or implied representations or warranties.
10.7 Closing Date. All of the representations and
warranties of PDK contained in this Article 10 are true and correct on the date
of this Agreement and shall be true and correct on the Closing Date, except (i)
with respect to any representations and warranties made as of a specified date
earlier than the Closing Date, which shall be true and correct as of such date
or (ii) to the extent that PDK has expressly advised Buyer otherwise in writing
prior to the Closing.
* * * * *
42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
FB ACQUISITION CORP.
By:
Its:
FUTUREBIOTICS, INC.
By:
Its:
PDK LABS, INC.
By:
Its:
Solely for purposes of Section 9.12 hereof:
NUTRACEUTICAL CORPORATION
By:
Its:
43
<PAGE>
LIST OF DISCLOSURE SCHEDULES
----------------------------
Excluded Assets Schedule 2.1
Purchased Receivables Schedule 2.1
Estimated Purchased Inventory Schedule 2.1
Purchased Inventories Schedule 2.1
Required Consents Schedule 3.2
Capitalization Schedule 5.1
Restrictions Schedule 5.3
Financial Statements Schedule 5.4
Developments Schedule 5.5
Contracts Schedule 5.8
Proprietary Rights Schedule 5.9
Licenses Schedule. 5.11
Litigation Schedule 5.12
Compliance Schedule 5.13
Employee Benefits Schedule 5.15
Insurance Schedule 5.16
Taxes Schedule 5.17
Affiliate Transactions Schedule 5.20
Purchase Price Allocation Schedule 8.2
Proprietary Products and Formulations Schedule 8.10(a)
Excluded Products Schedule 8.10(b)
44
<PAGE>
Exhibit 10.79
SECOND AMENDMENT
SECOND AMENDMENT dated as of August 13, 1998, (the "Amendment"), with
respect to the Credit Agreement dated as of August 20, 1997 (such agreement as
it has been amended prior to the date hereof, the "Credit Agreement"), by and
among PDK LABS INC. and FUTUREBIOTICS, INC., as Co-Borrowers (the
"Co-Borrowers"), and EUROPEAN AMERICAN BANK, a New York banking corporation
("EAB"), as Agent and as a Bank and the Banks party hereto.
RECITALS
The Co-Borrowers have requested and the Banks have agreed, subject to
the terms and conditions of this Amendment, to waive and amend certain
provisions of the Credit Agreement as herein set forth. Capitalized terms used
herein and not defined herein shall have the meanings given to them in the
Credit Agreement.
Accordingly, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
I. Amendments.
Section 1.1. Section 1.1 of the Credit Agreement is hereby amended by
inserting the following definitions therein immediately prior to the definition
of "Debt":
"Consulting Agreement" means a consulting agreement to be
executed by and between PDK and Michael Krasnoff having a term of not less than
three (3) years pursuant to which Mr. Krasnoff shall provide consulting services
to PDK in the areas of marketing, finance, administration and mergers and
acquisitions at least sixteen (16) Business Days per month and which shall
include a non-compete agreement which will prohibit Mr. Krasnoff from being
employed by or from providing consulting services to any competitor of PDK,
which agreement shall be reasonably satisfactory to the Banks.
Section 1.2. The definition of the term "Revolving Credit Commitment"
contained in Section 1.1 of the Credit Agreement is hereby amended by deleting
the chart therefrom and by substituting the following in its place:
<PAGE>
Bank Commitment
---- ----------
EAB $5,300,000
National Bank of Canada $2,350,000
Bank Leumi USA $2,350,000
Section 1.3. The definition of the term "Revolving Credit Note"
contained in Section 1.1 of the Credit Agreement is hereby amended by inserting
the following phrase at the end thereof: ", or any note issued in substitution
or replacement thereof."
Section 1.4. The definition of the term "Term Note" contained in
Section 1.1 of the Credit Agreement is hereby amended by inserting the following
phrase at the end thereof: ", or any note issued in substitution or replacement
thereof."
Section 1.5. Article 6 of the Credit Agreement is hereby amended by
inserting the following in a new Section 6.20 at the end thereof:
Section 6.20. Year 2000. Any reprogramming or other corrective
modifications required to permit the proper functioning, in and
following the year 2000, of (i) Co-Borrower's and their
Subsidiaries' computer systems and (ii) equipment containing
embedded microchips (including systems and equipment supplied by
others or with which the Co-Borrowers' or their Subsidiaries'
systems interface) and the testing of all such systems and
equipment, as so reprogrammed, will be completed by January 1,
1999. The cost to the Co-Borrowers and their Subsidiaries of
such reprogramming, modifications and testing and of the
reasonably foreseeable consequences of year 2000 to the
undersigned and its subsidiaries (including, without limitation,
reprogramming errors and the failure of others' systems or
equipment) will not result in the occurrence of an Event of
Default or result in a Material Adverse Change. Except for such
of the reprogramming and modifications referred to in the
preceding sentence as may be necessary, the computer and
management information systems of the Co-Borrowers and their
Subsidiaries are, and with ordinary course upgrading and
maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Co-Borrowers to conduct their business.
Section 1.6. Section 8.11 of the Credit Agreement is hereby amended and
restated to provide in its entirety as follows:
<PAGE>
"Fail to maintain Michael B. Krasnoff (i) in a reasonably active
full time capacity as the President of PDK and as an officer to
Futurebiotics, responsible for the day to day operations of each
of the Co-Borrowers or (ii) as a consultant to PDK and
Futurebiotics pursuant to the terms of the Consulting
Agreement."
II. Conditions. The amendments provided for pursuant to Section I
hereof shall become effective only upon satisfaction of the following conditions
precedent:
(a) The Agent shall have received each of the following, in form
and substance satisfactory to the Agent and its counsel.
(i) This Amendment and amended and restated Revolving
Credit Notes executed by the Co-Borrowers in favor of
each Bank;
(ii) a certificate of the Secretary of Compare Generiks,
Inc. (the "New Guarantor") dated the date of this
Amendment, attesting to all corporate action taken by
such entity, including resolutions of its Board of
Directors authorizing the execution, delivery and
performance of its Guarantee and each other document
to be delivered pursuant to this Agreement, together
with certified copies of the certificate or articles
of incorporation and the by-laws of the New Guarantor;
and, such certificate shall state that the resolutions
and corporate documents thereby certified have not
been amended, modified, revoked or rescinded as of the
date of such certificate;
(iii) a certificate of the Secretary of the New Guarantor,
dated the Closing Date, certifying the names and true
signatures of the officers of such entity authorized
to sign the Facility Documents and the other documents
to be delivered by such entity under this Agreement;
(iv) a certificate of a duly authorized officer of each of
the Co-Borrowers, dated the date of this Agreement,
stating that the representations and warranties in
Article 6 are true and correct on such date as though
made on and as of such date and that no event has
occurred and is continuing which constitutes a Default
or Event of Default;
(v) a Guarantor Security Agreement duly executed by the
New Guarantor, together with (A) fully completed and
executed financing statements on Form UCC-1, in proper
form for filing duly filed under the Uniform
Commercial Code in all jurisdictions necessary or, in
the reasonable discretion of the Agent, desirable to
<PAGE>
perfect the security interests to be granted hereunder
and under the Guarantor Security Agreement and (B) UCC
search results identifying all of the financing
statements on file with respect to the New Guarantor
in all jurisdictions referred to under clause (A)
hereof, indicating that no party claims an interest in
any of the Collateral;
(vi) a favorable opinion of counsel for the New Guarantor
dated the Closing Date, in form and substance
satisfactory to the Agent and its counsel;
(vii) satisfactory evidence that the New Guarantor is duly
organized, validly existing and in good standing under
the laws of their respective jurisdictions of
incorporation and each other jurisdiction where
qualification is necessary; and
(viii) such other documents, instruments, agreements,
approvals, opinions and evidence as the Agent may
reasonably require.
III. Miscellaneous.
(a) This Amendment shall be governed by and construed in
accordance with the laws of the State of New York.
(b) All terms used herein shall have the same meaning as in the
Credit Agreement, as amended hereby, unless specifically defined herein.
(c) This Amendment shall constitute a Facility Document.
(d) As expressly amended hereby, the Credit Agreement remains
in full force and effect in accordance with the terms thereof. The Credit
Agreement is ratified and confirmed in all respects by the Co-Borrowers. The
amendments herein are limited specifically to the matters set forth above and
for the specific instance and purposes for which given and do not constitute
directly or by implication an amendment or waiver of any other provisions of the
Credit Agreement or a waiver of any Event of Default or event which upon notice,
lapse of time or both would constitute an Event of Default which may occur or
may have occurred under the Credit Agreement or any other Facility Document.
(e) The Co-Borrowers hereby represent and warrant that (i) the
representations and warranties by the Co-Borrowers and each Guarantor pursuant
to the Credit Agreement and each other Facility Document are true and correct on
the date hereof, and (ii) after giving effect to this Amendment, no Event of
Default or event which upon notice, lapse of
<PAGE>
time or both would constitute an Event of Default exists under the Credit
Agreement or any other Facility Document.
(f) This Amendment may be executed in one or more counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one Amendment.
IN WITNESS WHEREOF, the Co-Borrowers, the Agent and the Banks have
caused this Amendment and Waiver to be duly executed by their duly authorized
officers as of the day and year first above written.
PDK LABS INC.
By: ________________________
Title:
FUTUREBIOTICS, INC.
By: ________________________
Title:
EUROPEAN AMERICAN BANK,
as Agent and as a Bank
By: ________________________
Title:
BANK LEUMI USA, as a Bank
By: ________________________
Title:
NATIONAL BANK OF CANADA, as a Bank
By: ________________________
Title:
<PAGE>
Exhibit 10.80
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of August 21, 1998, by and between PDK
LABS INC., a New York corporation with offices at 145 Ricefield Lane, Hauppauge,
NY 11788 (the "Corporation"), and Reginald Spinello, an individual residing at
62 Buckeye Road, Glen Cove, New York 11542 (the "Executive").
W I T N E S S E T H
WHEREAS, as of October 6, 1995, the Executive and the Corporation
entered into a seven (7) year Executive Employment Agreement; and
WHEREAS, the Executive's leadership and services have constituted a
major factor in the growth and development of the Corporation; and
WHEREAS, the Corporation desires to continue to employ and retain the
unique experience, ability and services and to promote the Executive to its
principal executive officer from the effective date hereof and to prevent any
other competitive business from securing his services, in utilizing his
experience, background and know-how.
NOW, THEREFORE, the parties mutually agree as follows:
1. Employment. The Corporation employs the Executive and the Executive
hereby accepts continued employment in a principal executive capacity and
Chairman through August 20, 2005 (the "Executive Employment").
2. Duties. The Executive shall serve as the President and Chief
Executive Officer of the Corporation and shall properly perform such duties as
may be assigned to him from time to time by the Board of Directors of the
Corporation. If requested by the Corporation, the Executive shall serve on any
committee of the Corporation's Board of Directors without
1
<PAGE>
additional compensation. There shall be no diminution or change in the
Executive's status or title without his express written consent. During the term
of this Agreement, the Executive shall devote substantially all of his business
time to the performance of his duties hereunder unless otherwise authorized by
the Board of Directors.
3. Compensation of the Executive.
3.1 Salary. During the period of Executive Employment, the
Corporation shall pay to the Executive a salary (the "Executive Salary") the
amount of which shall be fixed by the Board of Directors of the Corporation,
from time to time, during such period, provided that in no event shall the
Executive's Salary be at a rate less than three hundred fifty thousand
($350,000) dollars per year. Such compensation shall be paid to the Executive
with the same frequency as other executives of the Corporation are compensated.
In addition to all other remuneration provided for in the Agreement, the
Executive shall be entitled to a cost of living adjustment (as hereinafter set
forth) and other fringe benefits to which executives of the Corporation are
entitled.
As promptly as practical at the end of each year during the term of
this Executive Employment Agreement, the Corporation shall compute the increase,
if any, in the cost of living, using as the basis of such computation the
"Revised Consumers Price Index-Cities" hereinafter called the "Index," published
by the Bureau of Labor Statistics of the United States Department of Labor.
3.2 Bonus. In addition to the annual salary set forth in Section 3.1
above, the Executive shall be entitled to such bonus compensation (in cash,
capital stock or other property) as the Board of Directors of the Corporation
may determine from time to time in its sole discretion.
2
<PAGE>
3.3 Expenses. In addition to those expenses expressly set forth
herein, the Corporation shall pay or reimburse the Executive for all reasonable
out-of-pocket expenses actually incurred or paid by the Executive in connection
with performing his duties hereunder as President and as Chief Executive Officer
of the Corporation, of which no more than $100,000 shall be non-accountable. The
Corporation shall, at the direction of the Executive, either reimburse the
Executive for, or directly pay the costs of, membership dues for any one (1)
social or recreational club or organization that the Executive chooses to join.
Additionally, the Corporation shall, at the direction of the Executive, either
reimburse the Executive for, or directly pay the costs of, membership dues for
any professional organizations that the Executive chooses to join. The
Corporation shall also reimburse the Executive for any disability insurance
premiums actually paid by the Executive during the Term hereof.
3.4 Automobile Allowance. With respect to Executive's use of an
automobile in connection with the performance of his duties hereunder,
Corporation shall, at the direction of Executive, either reimburse Executive
for, or directly pay the costs of, the use of an automobile during the Term of
this Agreement and all usual expenditures in connection therewith; i.e., fuel,
insurance, parking, customary maintenance and repairs, etc. The type of
automobile shall be selected by Executive.
3.5 Benefits. the Executive shall be entitled to participate in such
pension, profit sharing, group insurance, option plans, hospitalization, and
group health and benefit plans and all other benefits and plans as the
Corporation provides to its senior executives.
3.6 Equity Participation.
(a) Upon the execution hereof, the Corporation hereby issues to
Executive, Two Hundred and Eighty Thousand (280,000) shares of the Corporations
Common Stock, par
3
<PAGE>
value $.01 per value, provided however, that commencing upon the date hereof
through ________ __, 2005 for each three (3) month period (or any part thereof)
that Executive is not employed by Corporation pursuant to the terms of this
Agreement for any reason whatsoever, unless otherwise agreed in writing by the
parties, Executive shall automatically forfeit Ten Thousand (10,000) shares of
Common Stock. Notwithstanding the foregoing, in the event that (i) Corporation
shall file a Registration Statement with the Securities and Exchange Commission
on Form S-1 (or any other appropriate form) during the Term hereof and (ii) the
underwriter with respect to the Registration Statement (or Corporation, if there
is not an underwriter) has agreed to register any or all shares of Common Stock
granted to Executive hereunder, then none of such shares which are so registered
will be subject to forfeiture thereafter and only those shares, if any, that
remain unregistered shall be subject to the provisions of forfeiture (on a
prorated basis) set forth in the immediately preceding sentence.
(b) Corporation expressly agrees to pay on Executive's behalf or
reimburse Executive for any federal, state and local taxes of any nature
whatsoever (including but not limited to any income or capital gains taxes) that
Executive actually incurs with respect to his receipt of any of the securities,
or the proceeds therefrom, granted to Executive pursuant to this Section 3.6.
3.7 Change of Control.
(a) In the event that there occurs a "Change of Control" (as defined
below) during the term of this Agreement and as a result thereof the Executive
resigns or this Agreement is terminated, the Corporation expressly agrees that
upon such resignation or termination, the Corporation shall pay to the Executive
a sum equal to two times the entire compensation that the
4
<PAGE>
Executive would have been entitled to through ________ __, 2005. As used herein,
the term "Change of Control" shall mean, subject to Section 3.7(b) hereof,
either
(i) a sale of securities representing voting control of the Corporation
or a sale of all or substantially all of the assets of the
Corporation,
(ii) any merger, joint venture of other business combination where the
Corporation is either (x) not the surviving entity or, (y) becomes
the subsidiary of another entity, or
(iii) the acquisition of more than twenty percent (20%) of the outstanding
voting securities of the Corporation by any entity(ies) or person(s)
exclusive of the Executive or any holder of the Company's securities
on the date hereof who presently owns more than 20%, either acting
alone or as a "group," as that term is defined for purposes of
Section 13(d) of the Securities Exchange Act of 1934, as amended.
(iv) the nomination of individuals for election to the board of directors
which elections will result in one-third of the directors of the
Company consisting of individuals who have not been directors of the
Company for at least two years.
(v) a tender offer for shares of the Corporation's common stock is made,
which tender is not approved by the Company's Board of Directors and
a majority of the Corporation's outstanding stock is tendered
thereunder.
(b) Notwithstanding anything set forth herein to the contrary, in
the event that the Executive, as a member of the Corporation's Board of
Directors, votes in favor of any of the transactions described in either Section
3.7(i) or 3.7(ii) above, then in such event, there shall not be deemed to have
occurred a "Change of Control" for the purposes of this Agreement.
5
<PAGE>
(c) In the event that any payment (or portion thereof) to Executive
under this Section 3.7 is determined to constitute an "excess parachute
payment," under Sections 280G and 4999 of the Internal Revenue Code of 1986, as
amended, the following calculations shall be made:
(i) the after-tax value to Executive of the payments under this Section
3.7 without any reduction; and
(ii) the after-tax value to Executive of the payments under this Section
3.7 as reduced to the maximum amount (the "Maximum Amount") which
may be paid to Executive without any portion of the payments
constituting an "excess parachute payment".
If, after applying the agreed upon calculations set forth above, it
is determined that the after-tax value determined under clause (i)
above is greater than the after-tax value determined under clause
(ii) above, the payments to Executive under this Section 3.7 shall
be reduced to the Maximum Amount.
4. Disability.
4.1 Death and Total Disability. In the event of the death or total
disability, the Executive, during the period of his Executive Employment, his
Executive Salary shall continue to be paid to the Executive, or his Estate as
the case may be, at the same rate that it was on the date of such disability. If
the Executive shall receive any disability payments from any insurance policy
paid for by the Corporation, the payments to the Executive during any period of
disability shall be reduced by the amount of disability payments received by the
Executive under any such insurance policy or policies. For the purposes of this
Agreement, disability shall mean
6
<PAGE>
mental or physical illness or condition rendering the Executive incapable of
performing his normal duties with the Corporation.
5. Vacations. the Executive shall be entitled to a vacation of four (4)
weeks per year, during which period his salary shall be paid in full. The
Executive shall take his vacation at such time or times as the Executive and the
Corporation shall determine is mutually convenient.
6. Disclosure of Confidential Information. The Executive recognizes
that he has had and will continue to have access to secret and confidential
information regarding the Corporation, including but not limited to its customer
list, products, know-how, and business plans. The Executive acknowledges that
such information is of great value to the Corporation, is the sole property of
the Corporation, and has been and will be acquired by him in confidence. In
consideration of the obligations undertaken by the Corporation herein, the
Executive will not, at any time, during or after his employment hereunder,
reveal, divulge or make known to any person, any information acquired by the
Executive during the course of his employment, which is treated as confidential
by the Corporation, including but not limited to its customer list, and not
otherwise in the public domain the provisions of this Section 6 shall survive
the Executive's employment hereunder.
7. Covenant Not To Compete.
(a) Executive recognizes that the services to be performed by him
hereunder are special, unique and extraordinary. The parties confirm that it is
reasonably necessary for the protection of the Corporation that the Executive
agree, and accordingly, the Executive does hereby agree, that he shall not,
directly or indirectly, at any time during the "Restricted Period" within the
"Restricted Area" (as those terms are defined in Section 8(e) below):
7
<PAGE>
(i) except as provided in Subsection (c) below, engage in the business
of retail or mail order sale of vitamins either on his own behalf or
as an officer, director, stockholder, partner, consultant,
associate, employee, owner, agent, creditor, independent contractor,
or co-venturer of any third party; or
(ii) employ or engage, or cause or authorize, directly or indirectly, to
be employed or engaged, for or on behalf of himself or any third
party, any employee or agent of the Corporation.
(b) Executive hereby agrees that he will not, directly or
indirectly, for or on behalf of himself or any third party, at any time during
the Term and during the Restricted Period solicit any customers of the
Corporation.
(c) If any of the restrictions contained in this Section shall be
deemed to be unenforceable by reason of the extent, duration or geographical
scope thereof, or otherwise, then the court making such determination shall have
the right to reduce such extent, duration, geographical scope, or other
provisions hereof, and in its reduced form this Section shall then be
enforceable in the manner contemplated hereby.
(d) This Section 7 shall not be construed to prevent the Executive
from owning, directly and indirectly, in the aggregate, an amount not exceeding
five percent (5%) of the issued and outstanding voting securities of any class
of any corporation whose voting capital stock is traded on a national securities
exchange or in the over-the-counter market.
(e) The term "Restricted Period," as used in this Section 7, shall
mean the period of the Executive's actual employment hereunder plus: (i) twelve
(12) months after the date the Executive is actually no longer employed by the
Corporation in the event this Agreement expires or the Executive's termination
For Cause; (ii) twelve (12) months after the date the
8
<PAGE>
Executive is actually no longer employed by the Corporation in the event that
this Agreement is terminated by the Corporation for any reason whatsoever except
For Cause, or if the Executive resigns for any reason during the Term, except
for his resignation pursuant to Section 3.8 hereof; and, (iii) twenty-four (24)
months after the date the Executive is actually no longer employed by the
Corporation in the event that the Executive resigns pursuant to Section 3.8
hereof. The term "Restricted Area" as used in this Section 7 shall mean the
seventy-five (75) mile radius from the Corporation's principal executive
offices.
(f) The provisions of this Section 7 shall survive the termination
of the Executive's employment hereunder and until the end of the Restricted
Period as provided in Section 7(e) hereof.
8. Miscellaneous.
8.1 Assignments. Neither the Executive nor the Corporation may
assign or delegate any of their rights or duties under this Agreement without
the express written consent of the other.
8.2 Entire Agreement. This Agreement constitutes and embodies the
full and complete understanding and agreement of the parties with respect to the
Executive's employment by the Corporation, supersedes all prior understandings
and agreements, whether oral or written, between the Executive and the
Corporation, including, but not limited to, the Prior Employment Agreement, and
shall not be amended, modified or changed except by an instrument in writing
executed by the party to be charged. The invalidity or partial invalidity of one
or more provisions of this Agreement shall not invalidate any other provision of
this Agreement. No waiver by either party of any provision or condition to be
performed shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same time or any prior or subsequent time.
9
<PAGE>
8.3 Binding Effect. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their respective
successors, heirs, beneficiaries and permitted assigns.
8.4 Headings. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.5 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, or by private
overnight mail service (e.g. Federal Express) to the party at the address set
forth above or to such other address as either party may hereafter give notice
of in accordance with the provisions hereof. Notices shall be deemed given on
the sooner of the date actually received or the third business day after
sending.
8.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without giving effect to
such State's conflicts of laws provisions and each of the parties hereto
irrevocably consents to the jurisdiction and venue of the federal and state
courts located in the State of New York, County of Suffolk.
10
<PAGE>
8.7 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one of the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
PDK LABS INC.
By:__________________________
_____________________________
Reginald Spinello
<PAGE>
Exhibit 10.81
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of August 21, 1998, by and between PDK
Labs Inc., a New York corporation, with offices at 145 Ricefield Lane,
Hauppauge, New York 11788 (the "Company" or "PDK"), and Michael B. Krasnoff, an
individual residing at 5 Laurel Wood Court, Rye, New York 10580 (the
"Consultant" or "Krasnoff").
W I T N E S S E T H :
WHEREAS, the Consultant was employed by the Company as President, Chief
Executive Officer and Chief Financial Officer of the Company pursuant to the
terms of that certain Employment Agreement dated as of October 6, 1995 (the
"Employment Agreement");
WHEREAS, pursuant to Section 3.7 of the Employment Agreement, in the
event of a "Change of Control" (as defined therein) the Consultant is entitled
to payment of a sum equal to two times the entire compensation that the
Consultant would have been entitled to through December 31, 2005 (the "Change of
Control Payment");
WHEREAS, the definition of "Change of Control" includes, inter alia,
the acquisition of more than ten percent (10%) of the outstanding voting
securities of the Company by any entity(ies) or person(s), exclusive of the
Consultant or any holder of the Company's securities on the date of the
Employment Agreement who then owned more than 10%, either acting alone or as a
"group," as that term is defined for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended;
WHEREAS, on December 10, 1997 and as amended on February 6, 1998,
Heartland Advisors, Inc. filed a Schedule 13G reporting that Heartland Limited
Partnership I, a private limited partnership for which Heartland Advisors, Inc.
serves a managing general partner with voting and dispositive power,
beneficially owns more than ten percent (10%) of the Company's Common Stock (the
"Change of Control Events");
WHEREAS, the Consultant wishes to terminate his Employment Agreement
with the Company;
WHEREAS, Section 8.11 of the Credit Agreement by and between the
Company and European American Bank, a New York banking corporation ("EAB") dated
as of August 20, 1997 (the "Credit Agreement") requires that Krasnoff be
employed in a reasonably full time capacity as the President of the Company,
responsible for the day-to-day operation of the Company;
WHEREAS, EAB has agreed with the Company to waive and amend certain
provisions of the Company's loan agreements subject to certain terms and
conditions (the "Amendment");
WHEREAS, among the terms and conditions of the Amendment is a
requirement that the Company maintain the Consultant (i) in a reasonably active
full time capacity as the
<PAGE>
President of the Company responsible for the day to day operations of the
Company, or (ii) as a Consultant to the Company pursuant to the terms of a
consulting agreement;
WHEREAS, the Company and the Consultant desire to terminate the
Employment Agreement and secure the services of the Consultant and the
Consultant desires to render services to the Company, upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties mutually agree as follows:
Section 1. Consulting Services. The Company hereby engages Consultant
and the Consultant hereby accepts such engagement, as a consultant to the
Company, subject to the terms and conditions set forth in this Agreement. The
Consultant shall:
1. assist the Company with developing and implementing its
marketing objectives;
2. assist the Company in identifying, selecting and
developing relationships with banking and financial
institutions;
3. assist the Company in negotiating and finalizing
agreements with potential customers and suppliers;
4. assist the Company in developing new sales and
distribution channels and new product lines; and.
5. advise the Company in the areas of finance,
administration and mergers and acquisitions.
The Consultant shall work not less than an average of sixteen (16) days
per month and shall undertake such duties as are requested of him by the Chief
Executive Officer and as set forth above.
Section 2. Term of Agreement.
The term of this Agreement shall be for a period of three (3)
years commencing on the date hereof and ending on August 21, 2001 (the "Term"),
subject to earlier termination by the parties pursuant to Section 4.
Section 3. Payments to Consultant.
(a) In full consideration for the services to be provided by Consultant
to the Company hereunder and in consideration for the Consultant's agreement to
terminate the Employment Agreement, the Company shall (i) pay to the Consultant
the sum of Two Thousand Five Hundred Dollars ($2,500.00) for each full day
during which the Consultant renders services pursuant to
2
<PAGE>
this Agreement (the "Cash Payments") and (ii) issue upon the execution hereof to
the Consultant, 150,000 shares of the Company's Common Stock, par value $.01 per
share. During the Term, the Company shall make the Cash Payments in quarterly
payments to the Consultant in advance on the first day of each quarter
commencing on September 1, 1998.
(b) Notwithstanding anything contained in this Agreement, Krasnoff (a)
shall remain vested in all pension benefits, if any, to which he was vested
prior to the date of his execution of this Agreement, (b) shall remain entitled
to health insurance benefits until the earlier of (i) August __, 2001, or (ii)
the end of the month in which Krasnoff becomes eligible for health insurance
coverage under another employer's plan and (c) Krasnoff shall remain entitled to
the automobile allowance described in Section 3.4 of the Employment Agreement
for the term hereof, such allowance not to exceed $2,000/mo.
Section 4. Termination of Employment Agreement; Settlement and Release.
(a) The parties agree that (i) the Employment Agreement is hereby
terminated effective immediately prior to the execution of this Agreement, (ii)
the Consultant shall relinquish all rights as a "Executive" under the Employment
Agreement and (iii) performance by the Company of its obligations hereunder
shall be deemed to be full satisfaction of the Company's obligations to the
Consultant pursuant to the Employment Agreement and with respect to payment of
the Change of Control Payment.
(b) Except for the Company's obligation to indemnify Krasnoff pursuant
to the Company's Certificate of Incorporation, as amended, the Company's By-Laws
and to the fullest extent permitted by the Business Corporation Law of the State
of New York, Krasnoff waives and hereby releases and discharges PDK from all
liability to him arising out of or relating to the Employment Agreement with
PDK, and from any and all liability of whatever kind or nature arising from any
acts or omissions of PDK, known or unknown, asserted or unasserted, which
occurred up to the date of this Agreement, including but not limited to all
liability for any acts that may have violated his rights under any contract,
tort, or other common law, any federal, state, or local fair employment
practices or civil rights law, regulation, or ordinance, any employee relations
state, executive order, law, regulation, or ordinance, any unemployment or
workers compensation law, or any other duty or obligation of any kind, including
but not limited to rights created by Title VII of the Civil Rights Act of 1964,
as amended, and all other laws prohibiting discrimination of whatever kind or
nature; (b) all liability, asserted or unasserted, known or unknown, suspected
or unsuspected, which was or may have been alleged against or imputed to PDK by
Krasnoff or anyone acting on his behalf up to the date of this Agreement; (c)
all asserted and unasserted rights to and claims for wages, commissions,
monetary and equitable relief, employment or re-employment with PDK in any
position, and compensatory, punitive, or liquidated damages; and (d) all
asserted and unasserted rights to and claims for attorneys' fees and costs
pursuant to any statute, regulation, or judicial precedent that shifts to the
employer responsibility for payment of attorneys' fees, costs and disbursements
in litigation of any kind or nature arising from the employment relationship.
(c) PDK waives and hereby releases and discharges Krasnoff from all
liability to it arising out of or relating to Krasnoff's continuing obligations
under the Employment Agreement and hereby terminates the Employment Agreement
effective immediately.
3
<PAGE>
(d) Krasnoff and PDK shall not in the future initiate or cause to be
initiated any judicial or administrative charge, complaint, action, or
proceeding relating to claims released under paragraphs 4(a) and 4(b) of this
Agreement. In the event that any such judicial or administrative charge,
complaint, action, or proceeding is presently pending, or if in the future any
such proceeding is commenced it is agreed that the party bringing the action
will withdraw it, with prejudice, to the extent they have the power to do so,
and except to the extent required or compelled by law, legal process, or
subpoena, shall refrain from participating, testifying or producing documents or
information therein and shall refrain from obtaining or accepting any relief or
recovery therefrom, and if either party receives such relief or recovery they
shall promptly pay it over to the other party.
(e) Krasnoff acknowledges that he has been paid all salary and
attendant benefits due him from PDK in consideration for the services he
rendered while employed by PDK, including but not limited to, vacation pay,
severance pay, holiday pay, expense reimbursement, reimbursement of relocation
expenses, bonuses, payments pursuant to any and all contracts to which he is or
was a party, and any and all monetary of other benefits that are or were due him
pursuant to policies of PDK in effect during his employment.
Section 5. Termination.
The Company may terminate the engagement of the Consultant and all of
the Company's obligations under this Agreement at any time for Cause (as
hereinafter defined) by giving the Consultant notice of such termination, with
reasonable specificity of the details thereof. "Cause" shall mean after the date
hereof (i) the Consultant's misconduct which could reasonably be expected to
have a material adverse effect on the business and affairs of the Company, (ii)
the Consultant's disregard of lawful instructions of the Company's President or
Chief Operating Officer relating to Consultant's neglect of duties or failure to
act, which, in each case, could reasonably be expected to have a material
adverse effect on the business and affairs of the Company, (iii) the commission
by the Consultant of an act constituting common law fraud, or a felony, or
criminal act against the Company or any affiliate thereof or any of the assets
of any of them, (iv) the Consultant's abuse of alcohol or other drugs or
controlled substances, or conviction of a crime involving moral turpitude, (v)
the Consultant's material breach of any of the agreements contained herein or
(vi) the Consultant's death or Disability (as hereinafter defined); provided
however, that if the Consultant terminates this Agreement as a result of a
material breach by the Company of this Agreement, such termination shall not be
considered "Cause" hereunder. "Disability" shall mean the Consultant is
incapable of performing the services required hereunder as a result of a mental
or physical disability for a period of one-hundred eighty (180) consecutive days
or for a period of two hundred seventy (270) days during any three hundred sixty
(360) day period.
A termination pursuant to this Section 5(i), (ii), (iii), (iv) (other
than as a result of a conviction of a crime involving moral turpitude) or (v)
shall take effect 60 days after the giving of the notice contemplated hereby
unless the Consultant shall, during such 60-day period, remedy to the reasonable
satisfaction of the Board of Directors of the Company the misconduct, disregard,
abuse or material breach specified in such notice. A termination pursuant to
Section 5(iv) (as a result of a conviction of a crime involving moral turpitude)
or (vi) shall take effect
4
<PAGE>
immediately upon the giving of the notice contemplated hereby. The effective
date of termination shall hereinafter be referred to as the "Termination Date".
Section 6. Effect of Termination of Agreement.
Upon the termination of Consultant for Cause, neither the Consultant
nor the Consultant's beneficiaries or estate shall have any further rights to
compensation under this Agreement or any claims against the Company arising out
of this Agreement, except the right to receive (i) the unpaid portion of the
Consulting Fee provided for in Section 3, earned through the Termination Date
(the "Unpaid Fee Amount"), and (ii) reimbursement for any expenses for which the
Consultant shall not have theretofore been reimbursed (the "Expense
Reimbursement Amount"); provided however, that in the event that Consultant is
terminated pursuant to Section 5(vi), then in addition to the foregoing, the
Consultant shall be entitled to the Consulting Fee for the three (3) years
following the Termination Date.
Section 7. Disclosure of Confidential Information.
Consultant recognizes that he has had and will continue to have access
to secret and confidential information regarding the Company, including but not
limited to its customer list, products, know-how, and business plans. Consultant
acknowledges that such information is of great value to the Company, is the sole
property of the Company, and has been and will be acquired by him in confidence.
In consideration of the obligations undertaken by the Company herein, Consultant
will not, at any time, during or after his engagement hereunder, reveal, divulge
or make known to any person, any information acquired by Consultant during the
Term, which is treated as confidential by the Company, including but not limited
to its customer list, and marketing and strategic plans, not otherwise in the
public domain, except as may be required in performance of Consultant's duties.
The provisions of this Section 7 shall survive Consultant's engagement
hereunder.
Section 8. Covenant Not To Compete.
(a) Consultant recognizes that the services to be performed by him
hereunder are special and unique. The parties confirm that it is reasonably
necessary for the protection of Company that Consultant agrees, and,
accordingly, Consultant does hereby agree, that he shall not, directly or
indirectly, at any time during the Term:
(i) except as provided in Subsection (c) below, be engaged in the
sale, licensing, distribution or marketing of pharmaceutical
products, nutritional supplements or vitamins (the "Products")
or provide technical assistance, advice or counseling
regarding the Products worldwide either on his own behalf or
as an officer, director, stockholder, partner, consultant,
associate, employee, owner, agent, creditor, independent
contractor, or co-venturer of any third party; or
5
<PAGE>
(ii) employ or engage, or cause or authorize, directly or
indirectly, to be employed or engaged, for or on behalf of
himself or any third party, any employee or agent of Company
or any affiliate thereof.
(b) If any of the restrictions contained in this Section 8 shall be
deemed to be unenforceable by reason of the extent, duration or geographical
scope thereof, or otherwise, then the court making such determination shall have
the right to reduce such extent, duration, geographical scope, or other
provisions hereof, and in its reduced form this Section shall then be
enforceable in the manner contemplated hereby.
(c) This Section 8 shall not be construed to prevent Consultant from
(i) owning, directly or indirectly, in the aggregate, an amount not exceeding
two percent (2%) of the issued and outstanding voting securities of any class of
any company whose voting capital stock is traded on a national securities
exchange or on the over-the-counter market other than securities of the Company
or (ii) from owning shares of Common Stock of the Company or exercising options
to acquire Common Stock of the Company owned by Consultant on the date of this
Agreement or granted to Consultant pursuant to the terms hereof.
Section 9. Miscellaneous.
9.1 Injunctive Relief. Consultant acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Consultant agrees that any breach or threatened
breach by him of Sections 7 or 8 of this Agreement shall entitle Company, in
addition to all other legal remedies available to it, to apply to any court of
competent jurisdiction to seek to enjoin such breach or threatened breach. The
parties understand and intend that each restriction agreed to by Consultant
hereinabove shall be construed as separable and divisible from every other
restriction, that the unenforceability of any restriction shall not limit the
enforceability, in whole or in part, of any other restriction, and that one or
more or all of such restrictions may be enforced in whole or in part as the
circumstances warrant. In the event that any restriction in this Agreement is
more restrictive than permitted by law in the jurisdiction in which Company
seeks enforcement thereof, such restriction shall be limited to the extent
permitted by law.
9.2 Assignments. Neither Consultant nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written consent of the other party.
9.3 Entire Agreement. This Agreement constitutes and embodies the full
and complete understanding and agreement of the parties with respect to
Consultant's engagement by the Company, supersedes all prior understandings and
agreements, including, without limitation the Employment Agreement, whether oral
or written, between the Consultant and the Company, and shall not be amended,
modified or changed except by an instrument in writing executed by the party to
be charged. The invalidity or partial invalidity of one or more provisions of
this Agreement shall not invalidate any other provision of this Agreement. No
waiver by either party of any provision or condition to be performed shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
time or any prior or subsequent time.
6
<PAGE>
9.4 Binding Effect. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their respective
successors, heirs, beneficiaries and permitted assigns.
9.5 Headings. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.6 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, or by private
overnight mail service (e.g. Federal Express) to the party at the address set
forth on the books and records of the Company or to such other address as either
party may hereafter give notice of in accordance with the provisions hereof.
Notices shall be deemed given on the sooner of the date actually received or the
third business day after sending.
9.7 Governing Law; Arbitration. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to such State's conflicts of laws provisions and the parties irrevocably
agree to submit any controversy or claim arising out of or relating to this
Agreement to a court of competent jurisdiction located in the State of New York.
The parties agree that any proceedings arising out of, relating to, or brought
for the purpose of enforcing this Agreement, or remedying any breach thereof
shall be instituted in the courts of the State of New York, and in no other
jurisdiction.
9.8 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one of the same instrument.
9.9 Independent Contractor. Consultant's engagement pursuant to this
Agreement shall be as independent consultant and not as an employee, officer or
other agent of the Company. Neither party to this Agreement shall represent or
hold itself out to be the employer or employee of the other. Consultant further
acknowledges that the compensation provided herein is a gross amount of
compensation and that the Company will not withhold from such compensation any
amounts respective income taxes, social security payments or any other payroll
taxes. All such income taxes and payments shall be made or provided for by
Consultant and the Company shall have no responsibility or duties regarding such
matters.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
PDK LABS INC.
By: __________________________________
Name: Reginald Spinello
Title: Chief Executive President
By: __________________________________
MICHAEL B. KRASNOFF
8
<PAGE>
Exhibit 10.82
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of April 1, 1998 by and between PDK Labs
Inc., a New York corporation, with offices at 145 Ricefield Lane, Hauppauge, NY
11788 ("PDK") and Compare Generiks, Inc., a Delaware corporation, with offices
at 300 Oser Avenue, Hauppauge, NY 11788 ("CGI").
WHEREAS, PDK and CGI have heretofore entered into an Exclusive Supply
and Licensing Agreement, dated as of March 24, 1997 (the "Agreement");
WHEREAS, Section 2(d) of the Agreement requires CGI to pay invoices
within sixty (60) days of the date of shipment of the related Products (as
defined in the Agreement);
WHEREAS, the Agreement contains a provision permitting PDK to suspend
its obligations to perform under the Agreement in the event of an Event of Force
Majeure (as defined in the Agreement);
WHEREAS, the Agreement contains a provision (the "Payment Provision")
providing for the payment by CGI to PDK of an amount equal to PDK's Material
Cost (as defined in the Agreement) plus fifty percent (50%) for the Products (as
defined in the Agreement);
WHEREAS, CGI is in default of the provisions of Section 2(d) of the
Agreement requiring CGI to pay invoices within sixty (60) days from the date of
shipment of the related Products and, in addition, an Event of Force Majeure (as
defined in the Agreement) has occurred and, in consideration for PDK agreeing to
waive (a) the breach by CGI of the provisions contained in Section 2(d) of the
Agreement, and (b) its right to suspend performance of its obligations under the
Agreement, the parties hereto desire to (i) amend the Payment Provision to
provide for the payment by CGI to PDK of a higher amount, and (ii) amend the
Agreement to reflect PDK's
<PAGE>
agreement not to sell any products containing either ephedrine or
pseudoephedrine to convenience stores or to any suppliers of convenience stores
during the Term (as defined in the Agreement).
The terms which are not defined herein shall have the respective
meanings ascribed to them in the Agreement.
NOW, THEREFORE, for valid and good consideration, the parties hereto
agree as follows:
1. The first sentence of Section 2(a) of the Agreement shall be deleted
in its entirety and shall be replaced with the following four sentences:
"(a) In consideration for the waiver by PDK of (i) its rights with
respect to the continuing breach by CGI of the payment provisions of Section
2(d) of this Agreement, and (ii) the right to suspend performance of its
obligations under this Agreement as a result of the occurrence of an Event of
Force Majeure (as defined in Section 5 below), CGI agrees to pay PDK $1.20 per
bottle of Products shipped to CGI (the "Basic Payment"), except as otherwise
provided herein at paragraphs 2 and 6; provided that said waiver shall not
constitute a waiver of PDK's right to terminate this Agreement and the License
hereunder or to exercise any rights available to PDK upon reoccurrence or
continuance of such acts or events. In addition to the Basic Payment CGI shall
also pay PDK the difference between 93% of the sales price as invoiced to the
customer of each bottle and $1.20 per bottle (the "Excess Payment"). The Excess
Payment is payable monthly, in arrears, within fifteen (15) days of the end of
the month in which CGI received payment for the related Products.
2. The following paragraph shall be added to Section 6 of the Agreement
as paragraph (b) thereof:
2
<PAGE>
"(b) In consideration for the amendment by the parties hereto to the
provisions of Section 2(a) above, PDK hereby agrees and acknowledges that from
and after the date of this Amendment Agreement PDK shall not sell, manufacture,
market or distribute any products containing ephedrine or pseudoephedrine to
convenience stores or to any suppliers of convenience stores during the Term."
3. Except as hereinabove amended, all of the terms and provisions of
the Agreement shall remain in full force and effect.
4. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York, without regard to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
as of the day and year first above written.
PDK LABS INC.
By: /s/ Michael Krasnoff
-------------------------------
Michael Krasnoff, President
COMPARE GENERIKS, INC.
By: /s/ Thomas A. Keith
-------------------------------
Thomas A. Keith, President
<PAGE>
Exhibit 10.83
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of November 1, 1998 by and between PDK
Labs Inc., a New York corporation, with offices at 145 Ricefield Lane,
Hauppauge, New York 11788 ("PDK") and Compare Generiks, Inc., a Delaware
corporation, with offices at 300 Oser Avenue, Hauppauge, New York 11788 ("CGI").
WHEREAS, PDK and CGI have heretofore entered into an Exclusive Supply
and Licensing Agreement, dated as of March 24, 1997 (the "Agreement"); as
amended April 1, 1998;
WHEREAS, Section 2(d) of the Agreement requires CGI to pay invoices
within sixty (60) days of the date of shipment of the related Products (as
defined in the Agreement);
WHEREAS, the Agreement contains a provision permitting PDK to suspend
its obligations to perform under the Agreement in the event of an Event of Force
Majeure (as defined in the Agreement);
WHEREAS, CGI is in default of the provisions of Section 2(d) of the
Agreement requiring CGI to pay invoices within sixty (60) days from the date of
shipment of the related Products and, in addition, an Event of Force Majeure (as
defined in the Agreement) has occurred and, in consideration for PDK agreeing to
waive (a) the breach by CGI of provisions contained in Section 2(d) of the
Agreement, and (b) its right to suspend performance of its obligations under the
Agreement, the parties hereto desire to (i) amend the Payment Provision to
provide for the payment by CGI to PDK of a higher amount, and (ii) amend the
Agreement to reflect PDK's agreement not to sell any products containing either
ephedrine or pseudoephedrine to convenience stores or to any suppliers of
convenience stores during the Term (as defined in the Agreement).
The terms which are not defined herein shall have the respective
meanings ascribed to them in the Agreement.
<PAGE>
NOW, THEREFORE, for valid and good consideration, the parties hereto
agree as follows:
1) The sentence of Section 2(a) of the Agreement shall be deleted
in its entirety and shall be replaced with the following four
sentences:
"(a) In consideration for the waiver by PDK of (i) its rights
with respect to the continuing breach by CGI of the payment
provisions of Section 2(d) of this Agreement, and (ii) the
right to suspend performance of its obligations under this
Agreement as a result of the occurrence of an Event of Force
Majeure (as defined in Section 5 below), CGI agrees to pay PDK
$1.50 per bottle of Products shipped to CGI (the "Basic
Payment"), except as otherwise provided herein a paragraphs 2
and 6; provided that said waiver shall not constitute a waiver
of PDK's right to terminate this Agreement and the License
hereunder or to exercise any rights available to PDK upon
reoccurrence or continuance of such acts or events. In
addition to the Basic Payment, CGI shall also pay PDK the
difference between 93% of the sales price as invoiced to the
customer of each bottle and $1.50 per bottle (the AExcess
Payment@). The Excess Payment is payable monthly, in arrears,
within 15 days of the end of the month in which CGI received
payment for the related Products."
2) The following paragraph shall be added to Section 6 of the
Agreement as paragraph (b) thereof:
"(b) In consideration for the amendment by the parties hereto
the provisions of Section 2(a) above, PDK hereby agrees and
acknowledges that from and after the date of this Amendment
Agreement PDK shall not sell, manufacture, market or
distribute any products containing ephedrine or
pseudoephedrine to convenience stores or to any suppliers of
convenience stores during the Term."
<PAGE>
3) Except as herein above amended, all of the terms and
provisions of the Agreement shall remain in full force and
effect.
4) This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without
regard to principles of conflicts of law.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
as of the day and year first above written.
PDK LABS INC.
By: ______________________________
Reginald Spinello, President
COMPARE GENERIKS, INC.
By: ______________________________
Thomas A. Keith, President
<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> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 929
<SECURITIES> 0
<RECEIVABLES> 9,183
<ALLOWANCES> 54
<INVENTORY> 21,552
<CURRENT-ASSETS> 38,554
<PP&E> 10,814
<DEPRECIATION> 6,429
<TOTAL-ASSETS> 46,480
<CURRENT-LIABILITIES> 9,196
<BONDS> 4,342
<COMMON> 38
0
5
<OTHER-SE> 29,461
<TOTAL-LIABILITY-AND-EQUITY> 46,480
<SALES> 47,295
<TOTAL-REVENUES> 47,295
<CGS> 29,899
<TOTAL-COSTS> 29,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 971
<INCOME-PRETAX> 2,899
<INCOME-TAX> 1,493
<INCOME-CONTINUING> 1,396
<DISCONTINUED> (619)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 777
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
