<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19121
PDK LABS INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 11-2590436
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
145 Ricefield Lane
Hauppauge, New York
----------------------------------------
(Address of principal executive offices)
11788
----------
(Zip Code)
(516) 273-2630
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Class Outstanding at October 7, 1999
------------ ------------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED AUGUST 31, 1999
TABLE OF CONTENTS
Page to Page
------------
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Balance sheets................................................................ 1
Statements of earnings ....................................................... 2
Statements of cash flows...................................................... 3
Notes to financial statements.............................................. 4-10
Item 2.
Management's discussion and analysis
of financial condition and results of
operations....................................................... 11-14
PART 11. OTHER INFORMATION
Item 1. Legal proceedings................................................... 15
SIGNATURES................................................................... 16
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
--------- ---------
(unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,414 $ 929
Investment in marketable securities, at fair value 998 --
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 9,838 9,129
Inventories (Note 5) 13,137 21,552
Prepaid expenses and other current assets 776 1,155
Due from supplier 1,712 1,373
Deferred tax asset (Note 7) 131 122
Net assets of discontinued operations (Note 4) 3,974 4,294
-------- --------
Total current assets 33,980 38,554
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$7,408 and $6,750, respectively 3,622 4,385
INTANGIBLE ASSETS, net of accumulated amortization
of $1810 and $1,693, respectively 256 495
INVESTMENT IN COMPARE GENERIKS, INC 1,096 596
DEFERRED TAX ASSET 41 --
OTHER ASSETS 1,676 2,450
-------- --------
$ 40,671 $ 46,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,112 $ 4,630
Dividends payable (Note 6) 83 30
Income taxes payable (Note 7) 1,202 1,255
Royalty payable -- 1,350
Current portion of long-term debt (Note 8) 641 1,931
-------- --------
Total current liabilities 6,038 9,196
-------- --------
LONG-TERM DEBT (Note 8) 2,137 4,342
DEFERRED INCOME TAX LIABILITY (Note 7) -- 7
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 3,211 3,431
STOCKHOLDERS' EQUITY: (Note 6)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,807,153 and 3,807,153 issued and outstanding, respectively 38 38
Series A convertible preferred stock, $.01 par value ; authorized
5,000,000 shares; 460,566 and 498,110 issued and outstanding, respectively 5 5
Additional paid-in capital 28,368 28,404
Unearned compensation (2,520) (3,286)
Retained earnings 7,560 6,259
Treasury stock, at cost; 918,859 and 348,425 shares, respectively (4,166) (1,916)
-------- --------
29,285 29,504
-------- --------
$ 40,671 $ 46,480
======== ========
</TABLE>
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------ ------------------------
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES (Note 9 and 10) $ 34,144 $ 36,761 $ 12,340 $ 13,859
COSTS AND EXPENSES: (Note 10)
Cost of sales 25,799 24,660 9,295 11,100
Selling, general and administrative 4,844 10,020 1,774 1,978
-------- -------- -------- --------
30,643 34,680 11,069 13,078
OPERATING INCOME 3,501 2,081 1,271 781
OTHER EXPENSES (INCOME):
Interest income (20) (120) (15) (37)
Interest expense 314 795 76 230
Other (62) (74) (24) (32)
-------- -------- -------- --------
232 601 37 161
-------- -------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 3,269 1,480 1,234 620
PROVISION FOR INCOME TAXES 1,375 455 394 183
-------- -------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS 1,894 1,025 840 437
-------- -------- -------- --------
DISCONTINUED OPERATIONS: (Note 4)
Loss from operations, net of tax benefit/(provision)
of $175, $214, and $(6), $45, respectively (740) (431) (536) (56)
Minority interest in loss from operations 315 167 244 13
-------- -------- -------- --------
(425) (264) (292) (43)
-------- -------- -------- --------
NET EARNINGS $ 1,469 $ 761 $ 548 $ 394
======== ======== ======== ========
NET EARNINGS (LOSS) PER COMMON SHARE (Note 6 )
BASIC:
Income from continuing operations $ .56 $ .25 $ .27 $ .11
Loss from discontinued operations (.14) (.08) (.10) (.01)
-------- -------- -------- --------
Net earnings $ .42 $ .17 $ .17 $ .10
======== ======== ======== ========
DILUTED:
Income from continuing operations $ .56 $ .25 $ .27 $ .11
Loss from discontinued operations (.14) (.08) (.10) (.01)
-------- -------- -------- --------
Net earnings $ .42 $ .17 $ .17 $ .10
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (Note 6)
BASIC 3,085,777 3,278,522 2,956,565 3,294,867
========= ========= ========= =========
DILUTED 3,085,777 3,410,985 2,956,565 3,379,895
========= ========= ========= =========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
August 31, August 31,
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,469 $ 761
-------- --------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,190 2,239
Minority interest in loss of subsidiary (315) (167)
Deferred income tax benefit (55) (494)
Loss on sale of equipment -- 5
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,173) (2,253)
Inventories 8,675 2,605
Prepaid income taxes (9) 132
Prepaid expenses and other current assets 280 (920)
Due from supplier (339) 865
Other assets 238 (563)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (518) 2,087
Royalties payable (1,350) --
Income taxes payable (53) (278)
-------- --------
Total adjustments 7,571 3,258
-------- --------
Net cash provided by operating activities 9,040 4,019
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (7,495) (475)
Maturity of marketable securities 6,497 3,550
Purchase of property, plant and equipment (214) (999)
Proceeds from sale of property, plant and equipment -- 15
-------- --------
Net cash (used in)/provided by investing activities (1,212) 2.091
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable 2,728 4,048
Repayment of debt (6,223) (13,924)
Proceeds from term loan -- 1,100
Net decrease in stockholder loans 517 --
Purchase of treasury stock (2,250) (82)
Dividends paid (115) (125)
-------- --------
Net cash (used in) financing activities (5,343) (8,983)
-------- --------
Net increase/(decrease) of cash and cash equivalents 2,485 (2,873)
Cash and cash equivalents at beginning of period 929 3,734
-------- --------
Cash and cash equivalents at end of period $ 3,414 $ 861
======== ========
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
1. Basis of Presentation:
The interim condensed consolidated financial statements furnished reflect
all adjustments which are, in the opinion of management, necessary to present a
fair statement of the financial position, as of August 31, 1999 and the results
of operations and statements of cash flows for the nine month periods ended
August 31, 1999 and 1998. The balance sheet as of November 30, 1998 has been
derived from the audited balance sheet as of that date. This report should be
read in conjunction with the Company's annual report filed on Form 10-K for the
fiscal year ended November 30, 1998. The results of operations and cash flows
for the nine month period ended August 31,1999 are not necessarily indicative of
the results to be expected for the full year.
2. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of PDK Labs Inc. ("PDK") and its subsidiary, Futurebiotics, Inc.
("Futurebiotics") (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. Accordingly, the operating results of the
Futurebiotics operations have been segregated from continuing operations and
reported as a separate line item on the statements of operations for all periods
presented. Net assets to be disposed of, at their book value, have been
separately classified in the accompanying balance sheets at August 31, 1999 and
November 30, 1998.
3. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No. 105, consist primarily of trade accounts receivable and investments in
marketable securities.
4. Discontinued Operations:
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. Accordingly, the operating results of
Futurebiotics operations for the nine and three months ended August 31, 1999 and
1998 have been segregated from continuing operations and reported as a separate
line item on the statement of operations. In July 1999, the third party
exercised its option to terminate the agreement. Management is pursuing the sale
of assets and does not anticipate a loss on the sale.
The Company has restated its prior financial statements to present the
operating results of the Futurebiotics operations as a discontinued operation.
Net assets to be disposed of, at their book value, have been separately
classified in the accompanying balance sheets at August 31, 1999 and November
30, 1998.
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
Summarized financial information for the discontinued operation is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(in thousands) (in thousands) (in thousands) (in thousands)
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues $5,484 $7,656 $1,464 $2,550
Loss before income tax benefit (915) (645) (530) (101)
Loss from discontinued operations,
net of tax benefit/provision (740) (431) (536) (56)
</TABLE>
5. Inventories:
Inventories have been estimated by using the gross profit method for
the interim periods. The components of the inventories are as follows:
August 31, November 30,
1999 1998
-------------- --------------
(in thousands) (in thousands)
Raw material $ 3,020 $ 4,458
Work-in-process 8,276 9,965
Finished goods 1,841 7,129
------- -------
$13,137 $21,552
======= =======
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
6. Stockholders' Equity:
Basic earnings per common share is computed by dividing the net earnings
after dividends on preferred shares by the weighted average number of shares of
common stock outstanding during the period. Dilutive earnings per share gives
effect to stock options which are considered to be dilutive common stock
equivalents. Certain options were not included in the computation due to their
exercise price exceeding the average market price of the common shares. Treasury
shares have been excluded from the weighted average number of shares. The
assumed conversion of the preferred stock and the related reduction to the
preferred stock was not included in the computation as the effect was
antidilutive. EPS on continuing operations was calculated for the nine months
ended August 31, 1999 and August 31, 1998 as follows:
Per
Nine Months Ended August 31, 1999 Income Shares Share
- --------------------------------- ---------- --------- -----
(in thousands)
(unaudited)
Earnings from continuing operations $ 1,894 3,085,777
---------- ---------
Less: preferred stock dividends (168) --
--------- ---------
Basic EPS 1,726 3,085,777 $.56
Effect of dilutive securities -- --
--------- ---------
Diluted EPS $ 1,726 3,085,777 $.56
========= =========
Nine Months Ended August 31, 1998
- ---------------------------------
Earnings from continuing operations $ 1,025 3,278,522
Less: preferred stock dividends (188) --
--------- ---------
Basic EPS 837 3,278,522 $.25
Effect of dilutive securities:
Warrants -- 132,463
--------- ---------
Diluted EPS $ 837 3,410,985 $.25
========= =========
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
Per
Three Months Ended August 31, 1999 Income Shares Share
- ---------------------------------- ------------ ---------- -----
(in thousands)
(unaudited)
Earnings from continuing operations $ 840 2,956,565
Less: preferred stock dividends (55) --
----- ---------
Basic EPS 785 2,956,565 $.27
Effect of dilutive securities -- --
----- ---------
Diluted EPS $ 785 2,956,565 $.27
===== =========
Three Months Ended August 31, 1998
- ----------------------------------
Earnings from continuing operations $ 437 3,294,867
Less: preferred stock dividends (62) --
----- ---------
Basic EPS 375 3,294,867 $.11
Effect of dilutive securities:
Warrants -- 85,028
----- ---------
Diluted EPS $ 375 3,379,895 $.11
===== =========
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
Preferred stockholders are entitled to cumulative annual dividends of
$.49 per share, payable at the election of the Company in cash, common stock, or
a combination thereof. Such dividends are payable semi-annually on or about
April 15 and October 15 of each year. Dividends earned for each of the nine
month periods ended August 31,1999 and August 31,1998 approximated $168,000 and
$188,000, respectively.
As of August 31, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $5,000,000 worth of its own common stock, par value
$.01, in the public market. The Company's management has been afforded the
discretion to purchase the shares at such time or times, and at such prices, as
management believes appropriate. As of August 31, 1999, the Company had
authorization to repurchase an additional $1,160,000 worth of its own stock.
In addition, the Company's Board of Directors authorized the Company to
repurchase up to $500,000 worth of its own preferred stock, par value $ .01 in
the public market. The Company's management has been afforded the discretion to
purchase the shares at such time or times, and at such prices, as management
believes appropriate. As of August 31, 1999, the Company had authorization to
repurchase an additional $306,000 worth of its own preferred stock.
7. Income Taxes:
The tax effects of temporary differences that give rise to the deferred
tax asset/liability at August 31, 1999 consist principally of the Company's
investment in subsidiary, unearned compensation and depreciation and
amortization.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
8. Long-Term Debt:
August 31, November 30,
1999 1998
-------------- --------------
(in thousands) (in thousands)
(unaudited)
Long-term debt consists of the following:
Revolving lines of credit (a) $ -- $ 400
Term loans (a) -- 5,728
Term loan (b) 2,669 --
Capital lease obligations, expiring in various
years through 2001 109 145
------ ------
2,778 6,273
Less current portion 641 1,931
------ ------
$2,137 $4,342
====== ======
(a) Revolving Credit Line and Term Loan Facility
On July 22, 1999, the Company and its subsidiary terminated the revolving
credit and term loan facilities with its bank.
(b) Term Loan
Only July 22, 1999, the Company entered into a term loan agreement with a
financing company. The loan is payable in monthly installments of $68,000,
including interest at a fixed rate of 9.68%, through July 2003. The loan is
collateralized by the Company's machinery and equipment.
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 1999
(Continued)
9. Major Customer:
Sales to a major customer approximated 67% and 41% of total sales for
the nine month periods ended August 31, 1999 and 1998, respectively.
10. Commitments:
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis as liquidated damages. As of August 31, 1999, the Company
purchased approximately $1,364,000 of product.
The Company also is party to a packaging agreement with Superior which
expires November 30, 1999 and provides for Superior to package certain products
for PDK. In the event that the Company orders less than 1,000,000 bottles
packaged per annum, Superior will be entitled to up to $100,000 on a pro-rata
basis, as liquidated damages. As of August 31, 1999, the Company ordered
approximately 1,073,000 bottles of packaged product.
Additionally, Superior is also obligated to PDK under a management
agreement which provides for PDK to provide Superior with certain management
services in consideration for a management fee of $10,000 per month.
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the
Company supplies certain of Compare Generiks, Inc.'s ("CGI") products at prices
based upon PDK's material cost plus a specified mark-up. In consideration for
these agreements, CGI agreed to pay an annual license fee of $500,000 to PDK.
This fee is payable, at the option of CGI, either in cash, shares of CGI's
common or Series B preferred stock. Total sales to CGI approximated $22,865,000
and $15,114,000 for the nine month period ended August 31, 1999 and 1998,
respectively.
11. Subsequent Event:
The Board of Directors authorized the Company to purchase up to an
additional $2,000,000 of the Company's common stock. In September 1999, the
Company purchased an aggregate of 500,600 shares of its common stock.
10
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the nine and three month periods ended August 31, 1999
approximated $34,144,000 and $12,340,000, respectively, as compared to
$36,761,000 and $13,859,000 in the corresponding period in 1998. Gross profit
amounted to $8,345,000 (24% of sales) and $3,045,000 (25% of sales) for the nine
and three month periods ended August 31, 1999 and $12,101,000 (33% of sales) and
$2,759,000 (20% of sales) for the corresponding period in 1998. The decrease in
gross profit is principally attributable to a change in the mix of sales.
Selling, general and administrative expenses were $4,844,000 (14% of
sales) and $1,774,000 (14% of sales) for the nine and three month periods ended
August 31, 1999 respectively, as compared to $10,020,000 (27% of sales) and
$1,978,000 (14% of sales) for the corresponding periods in 1998. The decrease is
primarily attributable to a decrease in royalty expense. The Company terminated
its supply agreement with a non-affiliated customer on March 30, 1998. Royalty
expense related to this agreement was $0 and $3,528,000 for the nine months
ended August 31, 1999 and 1998, respectively.
In March 1999, the Company formalized its plan to offer for sale the
operating assets of Futurebiotics. Accordingly, the operating results of the
Futurebiotics' operations have been segregated from continuing operations and
reported as discontinued operations, reflecting a loss, net of taxes and
minority interest of ($425,000) and ($292,000) for the nine and three month
periods ending August 31, 1999 and 1998, respectively as compared to ($264,000)
and ($43,000) for the corresponding period in 1998.
On March 3, 1999, the Company and Futurebiotics entered into a asset
purchase agreement with a third party to sell substantially all of Futurebiotics
assets. In July 1999, the third party exercised its option to terminate the
agreement. Management is pursuing the sale of these assets, and does not
anticipate a loss on the sale.
11
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis, as liquidated damages. As of August 31, 1999, the Company
purchased approximately $1,364,000 of product.
The Company is also party to a packaging agreement with Superior which
expires November 30, 1999 and provides for Superior to package certain products
of PDK. In the event that the Company orders less than 1,000,000 bottles
packaged per annum, Superior will be entitled to up to $100,000 on a pro-rata
basis as liquidated damages. As of August 31, 1999, the Company ordered
approximately 1,073,000 bottles of packaged product.
Additionally, Superior is also obligated to PDK under a management
agreement which provides for PDK to provide Superior with certain management
services in consideration for a management fee of $10,000 per month.
The Company is party to supply agreements with Compare Generiks, Inc.,
("CGI"). Under the agreements which expire through 2001, the Company provides
CGI certain products at prices based upon the Company's material cost plus a
specified mark-up.
In consideration for these agreements, CGI agreed to pay the Company an
annual license fee of $500,000, payable at the option of CGI, either in cash or
in shares of CGI stock. Total sales to CGI approximated $22,865,000 and
$15,114,000 for the nine month periods ended August 31, 1999 and 1998,
respectively.
Interest expenses, net of interest income, was approximately $294,000
and $61,000 for the nine and three month periods ended August 31, 1999 as
compared to $675,000 and $193,000 in the corresponding periods in the prior
year. The decrease is due to the Company maintaining lower debt balances.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk as to the availability and
integrity of financial systems and reliability of operational systems. The
Company has developed 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 has satisfactorily tested and implemented
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.
12
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Management of the Company believes that it is working on an effective
program to resolve the Year 2000 issue in a timely manner and that the costs of
implementing this program will not materially affect the financial position of
the Company. The Company has not yet completed all necessary phases of the Year
2000 program. In the event that the Company does not complete any additional
phases, the Company could experience business interruptions. In addition,
disruptions in the economy generally resulting from the Year 2000 issues could
also have a material adverse affect on the Company. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Liquidity and Capital Resources
The Company had working capital of approximately $27,942,000 at August
31, 1999.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $9,040,000 which reflects net earnings of
$1,469,000, decreases in operating assets such as inventories ($8,675,000),
prepaid expenses and other current assets ($280,000) other assets ($238,000) and
an adjustment for depreciation and amortization ($2,190,000), offset by (i)
increases in operating assets such as accounts receivable ($1,173,000), due from
supplier ($339,000), and (ii) decreases in accounts payable and accrued expenses
($518,000) and royalties payable ($1,350,000).
Net cash used in investing activities approximated ($1,212,000)
attributable to the purchases of marketable securities ($7,495,000) and
property, plant and equipment ($214,000) offset by the maturity of marketable
securities ($6,497,000).
The statement also reflects cash used in financing activities of
approximately $5,343,000 representing loan repayments net of borrowings of
$3,495 ,000, and the purchase of treasury stock ($2,250,000), offset by a
decrease in stockholder loan of $517,000.
During the nine month period ending August 31, 1999, the Company
repurchased 570,434 shares of its own common stock at an average price of $3.90
per share. As of August 31, 1999, the Company had authorization to repurchase an
additional $1,160,000 worth of its own common stock and $306,000 worth of its
own preferred stock.
In March and July, the Board of Directors authorized the Company to
repurchase up to an additional $1,000,000 of its own common stock, par value
$.01, in the public market. The Company's management has been afforded the
discretion to purchase the shares at such times, and at such prices, as
management believes appropriate.
In September 1999, The Board of Directors authorized the Company to
purchase up to an additional $2,000,000 of the Company's common stock. The
Company purchased an aggregate of 500,600 shares of its common stock during
September 1999.
13
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On July 22, 1999, the Company and its subsidiary terminated the
revolving credit and term loan facilities with its bank.
The Company entered into a term loan agreement with a financing company.
The term loan is collateralized by the Company's machinery and equipment.
The Company expects to meet its cash requirements from operations and
current cash reserves.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Reference is made to Item 3 in the Company's Form 10-K for the year
ended November 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDK LABS INC.
Dated: October 13, 1999 By: /s/ Karine Hollander
-----------------------
Karine Hollander
Chief Financial Officer
16
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<ARTICLE> 5
<LEGEND>
The schedule contains financial information extracted from the financial
statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 3,414
<SECURITIES> 998
<RECEIVABLES> 9,892
<ALLOWANCES> 54
<INVENTORY> 13,137
<CURRENT-ASSETS> 33,980
<PP&E> 11,030
<DEPRECIATION> 7,408
<TOTAL-ASSETS> 40,671
<CURRENT-LIABILITIES> 6,038
<BONDS> 2,137
0
5
<COMMON> 38
<OTHER-SE> 29,242
<TOTAL-LIABILITY-AND-EQUITY> 40,671
<SALES> 34,144
<TOTAL-REVENUES> 34,144
<CGS> 25,799
<TOTAL-COSTS> 25,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 314
<INCOME-PRETAX> 3,269
<INCOME-TAX> 1,375
<INCOME-CONTINUING> 1,894
<DISCONTINUED> (425)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,469
<EPS-BASIC> .42
<EPS-DILUTED> .42
</TABLE>
