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SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
[X] Filed by Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
PDK LABS INC.
(Name of Registrant As Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
common stock, $.01 par value
preferred stock, $.01 par value
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2) Aggregate number of securities to which transaction applies:
2,300,007 shares of common stock
244,566 shares of preferred stock
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:(1)
$5.00 per share of common stock cash Merger consideration
$8.00 per share of preferred stock cash Merger consideration
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4) Proposed maximum aggregate value of transaction:
$9,094,063, based on 1,427,507 shares of common stock and 244,566
shares of preferred stock outstanding on August 3, 2000.
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(5) Set forth the amount on which the filing fee is calculated and state
how it was determined.
$1,818.81
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and date of its filing.
1) Amount Previously Paid:
2,363.46
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2) Form, Schedule or Registration Statement No.:
N/A
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3) Filing Party:
N/A
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4) Date Filed:
N/A
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PDK LABS INC.
_________ ___, 2000
To Our Shareholders:
I am writing to you in my capacity as both a private investor in PDK
Labs Inc. (referred to as "PDK") and the chief executive officer and president
of PDK. In my capacity as CEO, I am cordially inviting you to attend a Special
Meeting of shareholders (referred to as the "Special Meeting") of PDK to be held
on __________ __, 2000 at 10:00 a.m., local time, at _________________. The
purpose of the Special Meeting is to consider and vote upon a Merger (referred
to as the "Merger") that, if approved and subsequently completed, will result in
our public shareholders receiving $5.00 in cash, without interest, for each
share of Common Stock of PDK (referred to as the "Common Stock") and $8.00 in
cash (plus accrued and unpaid dividends), for each share of Preferred Stock of
PDK (referred to as the "Preferred Stock") held by them. PDK will then become a
privately-owned company. If approved by the shareholders, the Merger would be
accomplished under an Agreement and Plan of Merger (referred to as the "Merger
Agreement") that provides for PDK Acquisition Corp., a newly formed New York
corporation (referred to as "PDK Acquisition"), to merge with and into PDK. PDK
would be the surviving corporation in the Merger.
In my capacity as a private investor, I organized a group of PDK's
management including Karine Hollander, Raveendra Nandigam, and myself, (the
"Management Group") who collectively own all of the equity interest in PDK
Acquisition. Immediately prior to the completion of the Merger, the Management
Group will contribute cash or arrange for financing and contribute an aggregate
872,500 shares of Common Stock (representing approximately 38% of the
outstanding shares of Common Stock) owned by the Management Group to PDK
Acquisition.
A Special Committee of PDK's Board of directors (referred to as the
"Special Committee"), consisting of Ira Helman, was organized to investigate,
consider, negotiate and evaluate the Management Group's proposal and potential
alternative transactions available to PDK. The Special Committee recommended to
the PDK board of directors (the "Board") that the Merger be approved. In
connection with its evaluation of the fairness to our public shareholders of the
Merger and other available transactions, the Special Committee engaged JWGenesis
Capital Markets, Inc. ("JWGenesis") to act as its financial advisor. JWGenesis
has rendered its written opinion that, as of August 3, 2000, based upon and
subject to the assumptions, limitations and qualifications included in its
opinion, the cash Merger consideration of $5.00 per share of Common Stock and
$8.00 per share (plus accrued and unpaid dividends of Preferred Stock to be
received in the Merger is fair from a financial point of view to our public
shareholders.
JWGenesis' written opinion, dated August 3, 2000, is attached as
Appendix C to the accompanying proxy statement and you should read it carefully.
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The Special Committee and the other members of the Board believe that
the terms of the Merger are fair to, and in the best interests of, the public
shareholders and unanimously recommend that the shareholders approve the Merger.
Since Karine Hollander and I have a personal conflict of interest in
recommending this Merger to you, we abstained from voting at the Board meeting
at which this recommendation was made.
The affirmative vote of holders of at least 66 2/3% of the outstanding
shares of Common Stock entitled to vote at the Special Meeting is required to
approve the Merger. The Management Group holds 872,500 shares of Common Stock
and has the right to vote an additional 100,000 shares of Common Stock, which in
the aggregate represents approximately 42.3% of the outstanding shares of Common
Stock. The Management Group intends to vote these shares in favor of the Merger.
The holders of the Preferred Stock are not entitled to vote at the Special
Meeting. Accordingly, if holders of 545,505 shares, which represents
approximately 24.0 % of the outstanding shares of Common Stock, also vote in
favor of the Merger, the Merger will be approved.
The accompanying proxy statement provides you with a summary of the
proposed Merger and additional information about the parties involved and their
interests. Please give all this information your careful attention. Whether or
not you plan to attend, it is important that your shares of Common Stock are
represented at the Special Meeting. A FAILURE TO VOTE WILL EFFECTIVELY COUNT AS
A VOTE AGAINST THE MERGER. Accordingly, please promptly complete, sign and date
the enclosed proxy and return it in the envelope provided.
/s/ Reginald Spinello
Reginald Spinello
President and Chief Executive Officer
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PDK LABS INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on __________, 2000
To Our Shareholders:
Notice is hereby given that a Special Meeting of shareholders of PDK
Labs Inc. ("PDK" or the "Company") will be held on __________________, 2000 at
10:00 a.m., local time, at ____________________, for the following purposes:
1. To consider and vote on a proposal to adopt and
approve the plan of Merger (the "Merger") included in
an Agreement and Plan of Merger, dated as of August
3, 2000 (the "Merger Agreement"), under which PDK
Acquisition Corp., ("PDK Acquisition") a newly formed
company owned by Reginald Spinello, PDK's President
and Chief Executive Officer, Karine Hollander, PDK's
Chief Financial Officer, and Raveendra Nandigam,
PDK's Vice President of Operations will merge with
and into PDK and under which each PDK shareholder
(other than PDK Acquisition) will become entitled to
receive $5.00 in cash for each outstanding share of
PDK Common Stock and $8.00 per share (plus accrued
and unpaid dividends) for each outstanding share of
PDK Preferred Stock. A copy of this Merger Agreement
is attached to the accompanying proxy statement as
Appendix A and is described in the proxy statement.
2. To consider and vote upon a motion to adjourn the
meeting in order to solicit additional proxies.
3. To consider and act upon such other matters as may
properly come before the Special Meeting or any
adjournment or adjournments thereof.
If the Merger is approved by the PDK stockholders at the meeting and
effected by PDK, any stockholder who (i) files with PDK, before the vote on the
adoption of the Merger, a written objection to the proposed Merger that includes
notice of his election to dissent, his name and address, the number of shares of
PDK Common Stock and PDK Preferred Stock held, and a demand for payment of the
fair value of his shares if the Merger is effected; (ii) does not vote his
shares in favor of the Merger; and (iii) otherwise complies with the terms of
Section 623 of New York Business Corporation Law, will have the right to receive
payment of the fair value of his or her shares in lieu of receiving $5.00 in
cash for each outstanding share of PDK Common Stock and $8.00 per share (plus
accrued and unpaid dividends) for each outstanding share of Preferred Stock. PDK
and any such stockholder shall in such cases have the rights and duties and
shall follow the procedure set forth in Section 623 of New York Business
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Corporation Law. See "The Special Meeting - Rights of Objecting Shareholders" in
the accompanying Proxy Statement for a more complete description of the rights
of dissenting stockholders.
The Board of directors has determined that only holders of PDK Common
Stock of record at the close of business on ___________, 2000 will be entitled
to notice of, and to vote at, the Special Meeting, including any adjournment.
By Order of the Board of Directors,
/s/ Karine Hollander
Chief Financial Officer and Secretary
YOUR VOTE IS IMPORTANT
Whether or not you are able to attend the meeting, please date, sign
and return the accompanying proxy card promptly in the enclosed envelope, which
requires no postage if mailed in the United States. Please do not send in any
certificates for your shares of Common Stock and/or Preferred Stock at this
time. If the Merger is approved, instructions regarding the exchange of your
shares for the cash Merger consideration will follow.
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PDK LABS INC.
145 Ricefield Lane
Hauppauge, New York 11788
PRELIMINARY PROXY STATEMENT
We are providing this proxy statement and accompanying proxy card to
our shareholders, in connection with the solicitation by our Board of directors
(the "Board") of proxies to be used at the Special Meeting of shareholders to be
held on _______ ___, 2000 at 10:00 a.m., local time, at ___________, including
at any adjournment of the Special Meeting (the "Special Meeting"). We began
mailing these materials and the accompanying letter to shareholders and the
notice of the meeting to our shareholders on or about ____________ ___, 2000.
Neither the Securities and Exchange Commission (referred to as the
"Commission") nor any state securities agency has approved or disapproved the
Merger or passed upon the fairness or merits of the Merger or the accuracy or
adequacy of the information contained in these documents. Any representation to
the contrary is unlawful.
SUMMARY TERM SHEET
The following question-and-answer summary contains the most material
terms of our proposed Merger with PDK Acquisition Corp. ("PDK Acquisition").
This summary may not contain all the information that you should consider before
voting on the proposed Merger. You should read the entire proxy statement and
all of its appendices before voting on the proposed Merger.
WHAT WILL HAPPEN IN THE MERGER?
In the Merger, PDK will merge with and into PDK Acquisition, and PDK
will be the surviving corporation. As a result of the Merger, PDK will become a
privately held company owned principally by Reginald Spinello, Karine Hollander
and Raveendra Nandigam (referred to herein as the "Management Group"). For more
information concerning the terms and provisions of the Merger and Merger
Agreement, see "Description of the Merger Agreement."
WHAT WILL I RECEIVE IN THE MERGER?
Each holder of common stock of PDK (the "Common Stock") (other than PDK
Acquisition and any public shareholder who properly perfects his or her
appraisal rights under New York law) will receive $5.00 in cash, without
interest, for each share of PDK's Common Stock and each holder of Preferred
Stock of PDK (the "Preferred Stock") (other than any public shareholder who
properly perfects his or her appraisal rights under New York law) will receive
$8.00 in cash, plus accrued and unpaid dividends, for each share of PDK's
Preferred Stock that they own. The acquisition price represents a 38% and a 39%
premium, respectively to the closing price of PDK Common Stock and PDK Preferred
Stock on the date the Management Group made their first offer to buy the
Company.
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For further information concerning the negotiation of the Merger consideration,
see "Special Factors - Background of the Merger."
WHAT AM I BEING ASKED TO VOTE UPON?
You are being asked to approve the Merger and Merger Agreement, which
provides for the acquisition of PDK by the Management Group as indicated above.
PDK's Board and Special Committee (the "Special Committee") has approved the
Merger and Merger Agreement and the other transactions contemplated thereby and
recommends that you vote "FOR" approval of the Merger and the Merger Agreement.
WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE TO
APPROVE THE MERGER?
The Board has determined that the merger is fair to, and in the best
interests of PDK and its shareholders. The Board and the Special Committee have
unanimously approved the Merger and Merger Agreement, with Reginald Spinello and
Karine Hollander abstaining. The Board voted unanimously to recommend that you
vote "FOR" approval of the Merger and the Merger Agreement, again with Reginald
Spinello and Karine Hollander abstaining. See "Special Factors - Recommendation
of the Special Committee and the Board of Directors." The Board and the Special
Committee considered options available to the Company to increase shareholder
value and are recommending the Merger because the Board and the Special
Committee believe that the Merger is a more desirable alternative for you than
PDK's continuing to operate as a public company. In reaching this conclusion,
the Board and the Special Committee considered, among other factors:
o the current illiquidity of PDK's capital stock and
the likelihood of that illiquidity continuing in the
future; and
o the opportunity, through the Merger, for the
Company's public shareholders to achieve immediate
liquidity with respect to the Company's capital stock
at a price that the Board and the Special Committee
believe is fair to the Company's public shareholders.
To review the background and reasons for the Merger and the factors
considered by the Special Committee and the Board in approving and recommending
the Merger in greater detail, see "Special Factors--Recommendation of the
Special Committee and the Board of Directors."
WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
Under PDK's articles of incorporation and New York law, the affirmative
vote of holders of two-thirds (2/3) of the outstanding shares of PDK's Common
Stock is required to approve the Merger and the Merger Agreement. The Management
Group currently owns approximately 38% of the outstanding
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shares of PDK Common Stock, and has a voting proxy to an additional 4% of the
outstanding shares of Common Stock, all of which shares they will vote in favor
of the Merger Agreement. Accordingly, if holders of an additional 545,505 shares
of PDK Common Stock, representing approximately 24% of the outstanding shares of
PDK Common Stock, also vote in favor of the Merger and the Merger Agreement, the
Merger and the Merger Agreement will be approved. See "The Special Meeting" and
"Information Regarding PDK - Stock Ownership."
WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
If you oppose the Merger you may vote against it at the Special
Meeting. You also have statutory appraisal rights for a court-ordered valuation
of your shares. Accordingly, if the Merger is approved by the shareholders and
is completed you may implement your statutory appraisal rights. See "The Special
Meeting - Rights of Objecting Shareholders."
WHY IS THE MANAGEMENT GROUP OF PDK ACQUIRING PDK?
The Management Group believes that due to PDK's small size and the lack
of equity research coverage for both PDK Common Stock and Preferred Stock, it is
and will continue to be difficult for PDK to attract new investor interest and
for PDK shareholders to get a fair price when selling their shares in the
market. While the Management Group believes these factors do and would continue
to limit the ability of PDK shareholders, including them, to receive a fair
price in selling their shares in the market, the Management Group also believes
that PDK is a valuable company with the opportunity to increase its revenues and
net income in the future.
WHY WAS THE SPECIAL COMMITTEE FORMED AND WHO MAKES UP THAT COMMITTEE?
The Board established the Special Committee, consisting of Mr. Ira
Helman one of the Board's independent directors, to consider the Management
Group's acquisition proposal as well as other available options and to review,
evaluate and negotiate the terms of the Merger Agreement. The Board formed the
Special Committee primarily because it recognized that a Merger transaction
would present a conflict of interest for certain members of the Board since the
members of the Board would be negotiating against themselves with the view
toward increasing the price the Management Group would pay to acquire PDK. In
addition, unlike PDK's shareholders generally, these members of the Board would
have a continuing interest in PDK following the proposed acquisition. The
Special Committee independently selected and retained legal and financial
advisors who had no prior relationship with PDK or the Management Group, to
assist it in its deliberations generally and in the negotiation of the Merger
Agreement, in particular. The financial advisor has given its opinion that the
consideration to be received by PDK's stockholders is fair from a financial
point of view. For more information concerning the Special Committee, its
activities, see "Special Factors - Background of the Merger" and " - Opinion of
PDK's Financial Advisor."
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IF THE MERGER IS COMPLETED, WHEN CAN I EXPECT TO RECEIVE THE MERGER
CONSIDERATION FOR MY SHARES?
Promptly after the Merger is completed, we will send you detailed
instructions regarding the surrender of your stock certificates. You should not
send your stock certificates to PDK or anyone else until you receive these
instructions. We will arrange for payment of the Merger consideration to be sent
to you as promptly as practicable following our receipt of your stock
certificates and other required documents. For further information concerning
procedures for delivery of your shares and receipt of the Merger consideration,
see "The Special Meeting - Payment of Merger Consideration and Surrender of
Stock Certificates" and "The Merger - Conversion of Securities."
WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
If the Merger is approved by the shareholders we expect to complete the
Merger immediately following the Special Meeting.
WHO CAN VOTE ON THE MERGER?
All stockholders of record of the Common Stock as of the close of
business on ________ __, 2000, including the Management Group, will be entitled
to notice of and to vote, either in person or by proxy at, the Special Meeting.
Holders of PDK Preferred Stock are not permitted to vote.
DISADVANTAGES TO THE MERGER
If the Merger is consummated you will be precluded from having the
opportunity to participate in the future growth prospects of PDK. In addition,
the Management Group will have the opportunity to benefit from any increases in
the value of PDK following the Merger and therefore may receive a substantial
economic benefit from the transaction.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
The receipt of the Merger consideration by you will be a taxable
transaction for federal income tax purposes. To review the tax consequences to
you in greater detail, see "Federal Income Tax Consequences." Your tax
consequences will depend on your personal situation. You should consult your tax
advisors for a full understanding of the tax consequences of the Merger to you.
WHAT DO I NEED TO DO NOW?
Just indicate on your proxy card how you want to vote, and sign, date
and mail it in the enclosed envelope as soon as possible so that your shares
will be counted at the Special Meeting. As indicated
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above, approval of the Merger and the Merger Agreement requires the affirmative
vote of holders of two-thirds of the outstanding shares of PDK Common Stock.
Accordingly, a failure to vote or a vote to "ABSTAIN," as permitted on the proxy
card, will have the same effect as a vote "AGAINST" the Merger. You may also
attend the Special Meeting and vote your shares in person, rather than voting by
proxy.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares, only if you provide instructions on
how to vote. You should instruct your broker how to vote your shares, following
the directions your broker provides to you for doing so. If you do not provide
instructions to your broker, your shares will not be voted and they will have
the effect of votes "AGAINST" the Merger and the Merger Agreement" See "The
Special Meeting - Required Vote; Voting Procedures."
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. A shareholder giving a proxy has the power to revoke it at any
time before the vote is taken at the Special Meeting by:
submitting to the Secretary of PDK a signed, written instrument
revoking the proxy; submitting a duly executed proxy bearing a later
date; or
voting in person at the Special Meeting.
Any of these actions will have the automatic effect of revoking any prior proxy
card that you have sent in. See "The Special Meeting - Voting and Revocation of
Proxies."
WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
Under New York law, only the specific matters included in a notice of
the meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a Special Meeting. The Company does not
expect to ask you to vote on any other matters at the Special Meeting. However,
if a motion is made to take some other action, you may also be asked to vote on
such action at the Special Meeting. If you send your proxy card to the Board for
use at the Special Meeting and do not revoke that proxy by means indicated
above, Reginald Spinello and Karine Hollander will have authority to vote your
shares in their discretion with regard to any such other motion or action that
may arise. See "The Special Meeting - Other Matters to be Considered at the
Special Meeting."
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WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would
like to ask any additional questions about the Merger, you should contact:
PDK Labs Inc.
Attention: Corporate Secretary
145 Ricefield Lane
Hauppauge, NY 11788
Telephone: (631) 273-2630
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"). As a result, the Company
files reports, proxy statements and other information with the Commission. You
can review and copy these reports, proxy statements and other information at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington D.C. 20549 and at the following Regional
Offices of the Commission: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You can also obtain copies of these material at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza,
Washington, D.C. 20549. You can call the Commission's Public Reference Section
at (800) SEC-0330 to obtain information. You can also access copies of these
materials at the Commission's web site on the internet at http://www.sec.gov.
The Company will also send you copies of these documents on request and without
charge.
PDK, the Management Group and PDK Acquisition have jointly filed a
Schedule 13E-3 with the Commission with respect to the Merger. This proxy
statement does not contain all of the information contained in the Schedule
13E-3, some of which is omitted as permitted by the Commission's rules.
Statements made in this proxy statement, while complete in all material
respects, are qualified by reference to documents filed as exhibits to the
Schedule 13E-3. The Schedule 13E-3, including exhibits, is available for
inspection and copying at the Commission as described above.
FORWARD-LOOKING INFORMATION
The following cautionary statement identifies important factors that
could cause PDK's actual results to differ materially from those projected in
forward-looking statements included in this proxy statement, including
statements incorporated by reference into this proxy statement. Except for the
historical information, the matters discussed in this proxy statement may be
deemed forward-looking statements. Forward-looking statements are statements
that include projections, predictions, expectations or beliefs about future
events or results or otherwise are not statements of historical fact. Such
statements are often characterized by the use of qualifying words (and their
derivatives) such as "expect," "believe," "plan," "project," or other statements
concerning our opinions or judgment about future events. Some of the factors
that could cause actual results to differ materially include, but are not
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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.
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THE SPECIAL MEETING
TIME, PLACE AND DATE; PROXY SOLICITATION
The Special Meeting will be held on _______ __, 2000 at 10:00 a.m.,
local time, at __________________. The Company will pay all expenses incurred in
connection with solicitation of the enclosed proxy. The Company's officers,
directors and regular employees may solicit proxies by telephone or personal
call, but they will receive no additional compensation for doing so. The Company
has requested brokers and nominees who hold stock in their names to furnish this
proxy material to their customers and to request authority for the execution of
the proxy. The Company will reimburse these brokers and nominees for their
related reasonable out-of-pocket expenses. In addition, the Company has engaged
_________ to solicit proxies from these institutions. The Company has agreed to
pay ___________, a fee of approximately $_______, plus expenses, for its
services.
RECORD DATE AND QUORUM REQUIREMENT
The Common Stock is the only outstanding security of PDK entitled to
vote at the Special Meeting. The Board has fixed the close of business on
___________ ____, 2000 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Special Meeting, including at any
adjournment thereof. Each holder of record of the Common Stock at the close of
business on the record date is entitled to one vote for each share then held on
each matter submitted to a vote of shareholders. At the close of business on the
record date, 2,300,007 shares of PDK Common Stock were issued and outstanding,
excluding treasury shares held by the Company, held by 964 holders of record.
To conduct any business at the Special Meeting, holders of a majority
of the outstanding shares must be present in person or represented by proxy at
the beginning of the meeting. Proxies marked as abstentions are counted as
shareholders represented by proxy at the Special Meeting for purposes of this
quorum requirement.
REQUIRED VOTE; VOTING PROCEDURES
Approval of the Merger Agreement, which is attached as Appendix A
hereto, will require the affirmative vote of the holders of two-thirds (2/3) of
the outstanding shares of PDK Common Stock entitled to vote at the Special
Meeting. A FAILURE TO VOTE OR A VOTE TO ABSTAIN WILL HAVE THE SAME LEGAL EFFECT
AS A VOTE CAST AGAINST APPROVAL.
If you hold your shares through a broker, your broker will vote your
shares, with regard to the proposals, only if you provide instructions on how to
vote. You should instruct your broker how to vote your shares, following the
directions your broker provides to you for doing so. If you do not provide
instructions to your broker, your shares will not be voted and they will have
the effect of votes "AGAINST" the Merger and the Merger Agreement.
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before the vote is taken at the Special Meeting by:
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submitting to the Secretary of PDK a written instrument
revoking the proxy;
submitting a duly executed proxy bearing a later date; or
voting in person at the Special Meeting.
Subject to revocation, all shares represented by each properly executed proxy
received by the Secretary of PDK will be voted in accordance with the
instructions indicated on the proxy, and if no instructions are indicated, will
be voted to approve the proposals.
The shares represented by the accompanying proxy card and entitled to
vote will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the Special Meeting.
EFFECTIVE TIME
The Merger will be effective following shareholder approval of the
Merger Agreement when articles of Merger are filed with the Secretary of State
of the State of New York. The time the Merger becomes effective is referred to
as the "Effective Time." If the Merger is approved by the shareholders at the
Special Meeting, we currently expect to complete the Merger and file articles of
Merger as soon as practicable after the Special Meeting, subject to the
satisfaction or waiver of the terms and conditions included in the Merger
Agreement. See "The Merger -- Conditions."
PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
If the Merger is completed, we will send you detailed instructions
regarding the surrender of your stock certificates. You should not send your
stock certificates to PDK or anyone else until you receive these instructions.
We will send payment of the Merger consideration to you as promptly as
practicable following our receipt of your stock certificates and other required
documents. For further information concerning procedures for delivery of your
shares and receipt of the Merger consideration, see "The Merger - Conversion of
Securities."
RIGHTS OF OBJECTING SHAREHOLDERS
If you oppose the Merger you may vote against it at the Special
Meeting. Even if you vote against the Merger, if holders of two-thirds of the
outstanding shares of PDK's Common Stock vote to approve the Merger and Merger
Agreement, the Merger will be completed and your shares of PDK Common Stock will
be converted into the right to receive the $5.00 per share in cash without
interest, of PDK Common Stock and your shares of PDK Preferred stock will be
converted into the right to receive $8.00 per share in cash (plus accrued and
unpaid dividends), as the Merger consideration.
Because PDK is incorporated in New York, New York law governs its
internal affairs, as well as any rights you may have if you object to the
Merger. New York, like many states, generally provides
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a statutory remedy to shareholders who object to a Merger. This remedy, commonly
called "appraisal rights," entitles shareholders who object to a Merger and who
follow required procedures to ask a court to determine the fair value of their
shares and requires payment of that amount instead of the Merger consideration.
The New York statute establishing appraisal rights provides that
appraisal rights are the exclusive remedy available to shareholders that have
those rights, except that those shareholders may challenge a Merger if the
Merger is unlawful or fraudulent.
Pursuant to Section 910 of New York Business Corporation Law, holders
of PDK Common Stock and Preferred Stock at the close of business on the record
date have the right to dissent from the Merger and, if the Merger Agreement is
approved and the Merger is consummated, receive payment of the fair value of
their PDK Common Stock and Preferred Stock by complying with the requirements of
Section 623 of New York Business Corporation Law (the full text of which is set
forth as Appendix B to this Proxy Statement). Section 623 requires that any such
shareholder who wishes to exercise such appraisal rights must not vote in favor
of the adoption of the Merger or the Merger Agreement, and must file with PDK,
before shareholders vote on the Merger or the Merger Agreement, a written
objection including a notice of election to dissent, his name and residence
address, the number of shares as to which he dissents (shareholders may not
dissent as to less than all of their shares) and a demand for payment for his
shares if the Merger is effected. Such objection is not required from any
shareholder to whom PDK did not give proper notice of the Special meeting.
Within 10 days after the vote of shareholders authorizing the Merger, PDK must
give written notice of such authorization to each dissenting shareholder who
filed written objection or from whom written objection was not required. Any
shareholder from whom written objection was not required and who elects to
dissent from the Merger must file with PDK, within 20 days after the giving of
such notice to him, a written notice of such election, stating his name and
residence address, the number of shares as to which he dissents and a demand for
payment of the fair value for his shares. At the time of filing the notice of
election to dissent or within one month thereafter, the shareholder must submit
the certificates representing his shares to PDK or its transfer agent for
notation thereon of the election to dissent, after which such certificates will
be returned to the shareholder. Failure to submit the certificates for such
notation may result in the loss of appraisal rights. Within 15 days after the
expiration of the period within which shareholders may file their notices of
election to dissent or within 15 days after consummation of the Merger,
whichever is later (but not later than 90 days after the shareholders' vote
authorizing the Merger Agreement), PDK must make a written offer (which if the
Merger has not been consummated, may be conditioned upon such consummation) to
each shareholder who has filed such notice of election to pay for his shares at
a specified price which PDK considers to be their fair value. If PDK fails to
make the offer within such 15-day period, or if any dissenting shareholder fails
to agree to it within 30 days after it is made, PDK shall institute a judicial
proceeding within 20 days after the expiration of the applicable period to
determine the rights of dissenting shareholders and to fix the fair market value
of their shares of PDK Common Stock. If PDK fails to institute such proceeding,
a dissenting shareholder may institute the same. A negative vote on the Merger
Agreement does not constitute a "written objection" required to be filed by a
dissenting shareholder.
The foregoing summary does not purport to be a complete statement of
the provisions of Section 623 of New York Business Corporation Law, and is
qualified in its entirety by reference to a copy of
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Section 623 of the New York Business Corporation Law which is attached as
Appendix B.
If you object to the Merger and wish to examine your rights further,
you should consult your legal counsel at your expense. Neither PDK, PDK
Acquisition, nor the Management Group has made any provision to reimburse you
for any of your legal expenses or for any expenses for any appraisal services
you may obtain in separately evaluating the Merger. Your right to examine PDK's
corporate records is described in "Information Regarding PDK - Incorporation of
Documents by Reference."
OTHER MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Under New York law, only the specific matters included in a notice of
the meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a Special Meeting. We do not expect to ask
you to vote on any other matters at the Special Meeting. However, if a motion is
made to take some other action, you may also be asked to vote on such action at
the Special Meeting. If you send your proxy card to us for use at the Special
Meeting and do not revoke that proxy by the means indicated above, we will have
authority to vote your shares in our discretion with regard to any such other
motion or action that may arise.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
During the last calendar quarter of Fiscal 1999, Reginald Spinello,
PDK's Chairman of the Board, had several conversations with members of the
Company's management regarding whether PDK should remain a public company, Mr.
Spinello's conversations were with Karine Hollander, Reveendra Nandigam, Donna
Ellis, Vice President of Computers, Thomas Keith, Director and Lawrence Simons,
Director. Mr. Spinello discussed with these individuals whether PDK should
consider becoming a private company due to its small size, lack of growth, and
the illiquidity of its shares. Mr. Spinello further discussed the
under-performance of the Common Stock and Preferred Stock and the best way to
maximize the value of the shareholders' investment. Finally, Mr. Spinello
discussed the costs associated with being a public company.
At a meeting of the Board in 1999, Mr. Spinello informed the board of
directors of his conversations with various members of management regarding the
possibility of making PDK a private company. Mr. Spinello also indicated to the
other directors that the end of PDK's then current fiscal year, November 30,
1999, would be an appropriate time to review PDK's performance. If by that time,
PDK's financial results, operating prospects and share price had not improved,
the Board would need to explore more vigorously possible alternatives to enhance
shareholder value. At this meeting Mr. Spinello indicated to the directors that
if the Board were to consider alternatives to PDK remaining a public company he
would like to explore the feasibility of taking PDK private.
In January 2000, members of the Management Group reviewed PDK's
financial results and the Company's stock prices. At this time Mr. Spinello
decided to explore the possibility of putting together a group to take PDK
private.
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On January 6, 2000, members of the Management Group met with
representatives of Foothill Financial ("Foothill") regarding receiving possible
financing in connection with taking the Company private. There was a general
discussion regarding the availability of financing and the structuring of
possible transactions. Foothill commenced a due diligence review of PDK.
On February 7, 2000, members of the Management Group had initial
contact with representatives of CIT Financial Group ("CIT") regarding receiving
possible financing in connection with taking the Company private. There was
general discussion regarding the availability of financing, the types of
potential financing and the structuring of possible transactions. There was also
discussion regarding the Company's business and its prospects for the future.
On April 7, 2000, at a Special Meeting of the Board called by Mr.
Spinello, Mr. Spinello again informed the Board of his desire to continue to
examine a possible acquisition of PDK and requested the Board to permit him to
provide possible financing sources with non-public information, including
projections.
On April 7, 2000, at a Special Meeting of the Board, Mr. Spinello
advised the Board that a group including Mr. Spinello and Ms. Hollander were
prepared to make an offer to purchase all of the outstanding equity securities
of PDK in a range of $4.50 to $5.00 per share of Common Stock and $6.00 to $8.00
per share of Preferred Stock (plus accrued and unpaid dividends). After
discussion of the actions that needed to be taken to review the offer from the
Management Group, the Board resolved to establish a Special Committee consisting
of director Ira Helman, who was the only disinterested director, to review,
analyze and make recommendations to the Board regarding the management offer.
The Board delegated to the Special Committee broad authority to consider any
proposal made by Mr. Spinello or any other person with respect to acquiring PDK,
to retain independent legal counsel and financial advisor, and to explore other
available strategic alternatives to maximize shareholder value. The Board formed
the Special Committee primarily because it believed that the exploration by the
management group of a possible acquisition of PDK would present conflicts of
interest for them as officers and directors of PDK since, unlike the other PDK
shareholders, they would have a continuing interest in PDK following the
completion of such a transaction. The Board selected Mr. Helman as the one
person Special Committee because he was not employed by PDK and would neither be
employed nor own an equity interest in PDK following the completion of any
transaction with the Management Group or any other likely acquiror. Immediately
following the Board meeting, Mr. Helman proceeded to retain independent legal
counsel and an independent financial advisor to assist the Special Committee in
its work.
Following the April 7, 2000, Board meeting, the Special Committee began
the process of retaining independent legal and financial advisors. On April 26,
2000 the Special Committee retained Bryan Cave LLP as its counsel. In addition,
the Special Committee and its counsel contacted and interviewed two investment
banking firms to discuss their interest in serving as financial advisor to the
Special Committee. One of the investment banking firms contacted, JWGenesis
Capital Markets, Inc., ("JWGenesis") had been referred to the Special Committee
by counsel to the Management Group. Prior to its selection by the Special
Committee, JWGenesis had performed some due diligence investigations of PDK and,
during the course of such due diligence, had discussions with management of PDK
between April 19, 2000 and May 5, 2000. The Management Group had no other
relationship with
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JWGenesis other than to request that they commence some due diligence of the
Company and JWGenesis did not act nor was it engaged to act at any time as an
advisor to the Management Group, nor was JWGenesis compensated in any manner by
the Management Group. Based upon discussions with representatives of JWGenesis,
the Special Committee determined that JWGenesis' prior work on the project would
not preclude it from continuing with the assignment and on May 22, 2000, the
Special Committee advised JWGenesis that it had been selected. The Special
Committee based its decision on the fact that JWGenesis never provided any
advice to the Management Group and that JWGenesis' only involvement with PDK as
of that date was to perform some preliminary due diligence of the Company.
JWGenesis has never performed any investment banking services for either PDK or
any member of the Management Group. On June 2, 2000, JWGenesis executed an
engagement letter with the Special Committee on behalf of PDK and commenced work
for the Special Committee on June 5, 2000.
In May, 2000, members of the Management Group had an initial meeting
with CIT and CIT commenced a due diligence review of PDK. The discussions
regarded certain due diligence questions and the possibility of providing
financing for a transaction.
On May 9, 2000, members of the Management Group, met with
representatives of GE Capital Corp. ("GE Capital"). At the meeting,
representatives of GE Capital presented their ideas and there was discussion
regarding possible transactions to enhance shareholder value, including the
possible acquisition by the management of PDK. GE Capital also presented a
preliminary oral assessment of the availability of financing to fund an
acquisition by management.
On June 8, 2000, Mr. Spinello met with representatives of GE Capital to
further discuss the feasibility of a potential acquisition by a management
group, including refining its preliminary assessment of the availability of
adequate financing to fund an acquisition. At that meeting, GE Capital provided
Mr. Spinello with its preliminary assessment of the availability of financing to
support an acquisition of PDK, describing possible financing structures that
would involve debt financing. Members of the Management Group subsequently met
with GE Capital on June 19, 2000. At a subsequent meeting on July 11, 2000 GE
Capital advised Mr. Spinello that, as a preliminary assessment, based on its
experience in arranging financing for other customers, financing would be
available to support an acquisition of PDK by the Management Group.
From early June 2000 through July 24, 2000, representatives of
JWGenesis gathered from various sources extensive information regarding PDK, its
products, operations, prospects, customers, competitors and other relevant
information. As part of this process JWGenesis representatives met several times
with Mr. Spinello and other PDK employees. Mr. Spinello also provided to
JWGenesis copies of what he stated were all of the other materials he had
provided to Foothill, CIT and GE Capital.
On June 20, 2000, JWGenesis presented to the Special Committee a list
of 47 companies identified by JWGenesis that it intended to contact regarding a
possible transaction with PDK and an executive summary to be sent to such
companies. The Special Committee approved the contact list and executive summary
and on June 22, 2000 JWGenesis began contacting these companies regarding their
interest in a transaction with PDK. At about the same time, JWGenesis contacted
the Management Group and invited them to submit a formal offer. On June 27,
2000, JWGenesis advised the Special Committee and its counsel that one of the
companies contacted expressed an interest in receiving
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additional information regarding PDK and a confidentiality agreement was
executed with this company.
On June 28, 2000, JWGenesis informed the Special Committee that such
interested party would consider a transaction only with the consent and
assistance of management. On June 30, 2000, management informed JWGenesis and
the Special Committee that they were not interested in continuing their
employment with PDK if it was acquired by another bidder. On July 7, 2000,
JWGenesis presented to the Special Committee the preliminary results of the
marketing effort undertaken by JWGenesis and confirmed that out of all of the
companies contacted to that date, that there was only one potentially interested
party, but that such party would consider a transaction only with the consent
and assistance of management.
On July 13, 2000, Mr. Spinello presented to the Board a written offer
on behalf of a newly formed entity controlled by the Management Group to enter
into a Merger transaction with PDK the result of which is that each share of
Common Stock held by the public shareholders would be converted into the right
to receive $4.00 per share in cash and that each share of Preferred Stock held
by the public shareholders would be converted into the right to receive $7.00
per share in cash.
On July 13 2000, counsel to the Management Group distributed to the
Special Committee, PDK and their respective legal counsel a form of Merger
Agreement.
On July 17, 2000, the Special Committee met telephonically with its
legal advisor and its financial advisor. At that meeting, JWGenesis presented
its overview of its analysis of the Merger consideration and its valuation of
PDK. JWGenesis discussed the various methods it was using to provide a valuation
of PDK. JWGenesis advised the Special Committee that it had not completed its
analysis and as a result it would not be prepared to render an opinion that the
$4.00 per share consideration for Common Stock initially offered by the
Management Group was fair to the public shareholders from a financial point of
view. However, JWGenesis advised the Special Committee that its preliminary
analysis indicated that the $4.00 per share of Common Stock price was too low
and would not be fair consideration from a financial point of view.
On July 17 and 18, 2000, Mr. Helman and Mr. Spinello had a series of
telephone conversations discussing the price per share, which resulted in the
Management Group increasing its offer first to $4.25 per share, then to $4.50
per share and then to $4.75 per share.
On July 19, 2000, Mr. Helman told Mr. Spinello that he would recommend
the Management Group's proposal to the Board if they increased their price to
$5.00 per share of PDK Common Stock and $8.00 per share of PDK Preferred Stock.
The Management Group agreed to increase its offer to $5.00 per share of PDK
Common Stock and $8.00 per share of PDK Preferred Stock. The Special Committee
requested that JWGenesis render to the Special Committee and the Board an
opinion as to the fairness of the Management Group's offer.
On July 19, 2000, the Special Committee considered the revised offer
with its financial advisor and concluded that the revised offer was fair to the
public shareholders.
On July 19, 2000, PDK issued a press release announcing its receipt of
the Management Group's
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acquisition proposal and indicating that the Special Committee had been formed
to consider the proposal as well as other strategic alternatives to maximize
shareholder value. The press release also noted that the Special Committee had
retained JWGenesis as its financial adviser.
At a meeting of the Board held on July 26, 2000, JWGenesis presented
its oral opinion that the proposed Merger consideration of $5.00 per share in
cash for each share of Common Stock held by the public shareholders and $8.00
per share plus accrued dividends in cash for each share of Preferred Stock held
by the public shareholders was fair from a financial point of view. The Special
Committee reported to the Board that it had concluded, and so advised and
recommended to the Board, that the terms of the Merger be approved and that the
Board declare its advisability.
At a meeting of the Board on August 3, 2000, the Board determined that
the terms of the Merger Agreement were fair to and in the best interests of PDK
and the public shareholders. The Merger Agreement was executed, on August 3,
2000.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
As discussed above under " - Background of the Merger," the Special
Committee and the Board of directors (other than Mr. Spinello and Ms. Hollander,
who abstained) unanimously determined that the Merger Agreement and the Merger
are fair to and in the best interests of the public shareholders. The Special
Committee and the Board recommend that you vote "FOR" the approval of the Merger
Agreement and the Merger.
In reaching the determination that the Merger Agreement and the Merger
are fair to and in the best interests of the public shareholders, the Special
Committee and the Board consulted with their financial and legal advisors, drew
on their knowledge of the Company's business, operations, properties, assets,
financial condition, operating results, historical public share trading prices
and prospects and considered the following factors, each of which, in the
opinion of the Special Committee and the Board, supported the determination:
o the belief of the Special Committee and the Board
that the Merger was a better alternative for the
public shareholders than continuing to operate PDK as
a public company. The Special Committee concluded
that, based on PDK's limited trading volume,
institutional sponsorship and public float, its small
market capitalization, and the lack of research
attention that it received from market analysts,
PDK's continuing status as a public company would
limit the ability of PDK's shareholders to obtain a
fair price in selling their shares in the market. See
"- Background of the Merger" and "Projections."
o the fact that the $5.00 per share of Common Stock and
$8.00 per share (plus accrued and unpaid dividends)
of Preferred Stock Merger consideration represented a
significant premium to recent historical trading
prices of the PDK Common Stock. The Special Committee
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and the Board recognized that the Merger
consideration represented a 38% premium and a 39%
premium to the closing price of PDK Common Stock and
Preferred Stock respectively on the day of the
Management Group's initial offer. See "Information
Regarding PDK - Market Prices of Common Stock and
Preferred Stock and Preferred Stock and Dividends."
o the financial advisor's opinion to the Special
Committee and the Board to the effect that the Merger
consideration is fair to PDK's shareholders from a
financial point of view. JWGenesis analyzed the going
concern value of PDK, discounted cash flow, leveraged
buyout, liquidation and premiums paid analyses. It is
the Company's understanding that typically, financial
advisors utilize two other analyses, a Market
Multiples Analysis, based upon comparable
publicly-traded companies, and an Acquisition
Multiples Analysis, based upon acquisitions of
comparable companies during recent years. In
searching for companies which JWGenesis would deem
comparable to PDK, however, JWGenesis was unable to
determine the existence of any other publicly-traded
company which is so highly reliant upon the sale of a
product which is subject to significant regulatory
uncertainty. Nor could they identify any acquisition
of a company during the past three years which was in
a situation they were able to deem similar to PDK's.
For this reason, JWGenesis did not employ these two
analyses in its evaluation of the Company. Regarding
analyzing the net book value of the assets of an
entity, JWGenesis does not believe that a Net Book
Value Analysis generally is a meaningful method to
derive the value of an operating business because the
net book value of a company usually is not the prime
factor in its ability to generate future sales and
profits. It is a more useful analysis for entities
with no or low current and projected returns on
assets, those facing liquidation or those
participating in certain industries such as financial
services. Therefore, JWGenesis believes that the Net
Book Value Analysis is a much less relevant approach
to valuing a business than approaches that rely upon
historical and projected operating results. JWGenesis
also analyzed the repurchase of a block of 500,000
shares of the Company's Common Stock from a
sophisticated unaffiliated institutional investor
which occurred on September 30, 1999, at a price of
$5.00 per share of Common Stock. The Special
Committee noted that in certain circumstances based
on certain assumptions the per share value
calculations resulting from JWGenesis' analyses were
in excess of the Merger consideration; however, for
the reasons stated above JWGenesis concluded that
these methodologies were not the best indicators of
fair value for PDK. As part of its determination with
respect to the fairness of the consideration to be
received by the
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public shareholders pursuant to the Merger agreement,
the Special Committee adopted the conclusions, and
the analysis underlying each conclusion of JWGenesis,
based upon the view of the Special Committee as to
the reasonableness of such analysis. As additional
confirmation, the Special Committee looked to see
that the median and mean values are very close, as
they are in this valuation. The Special Committee
considered it significant that JWGenesis'
calculations assumed that PDK would be operated by a
management team with the perceived ability to achieve
the financial results in the Management Group
projections. Given management's unwillingness to
remain with PDK if it were purchased by another
party, the Special Committee considered the leveraged
buyout analysis to be the most relevant methodology.
The Special Committee noted that the Merger
consideration was near the high end of the range of
values calculated by JWGenesis using the leveraged
buyout method. See " - Opinion of PDK's Financial
Advisor."
o the negotiations between the Special Committee and
the Management Group, which resulted in their offer
price for PDK Common Stock and PDK Preferred Stock
being increased by more than 25% and 14%
respectively. The Special Committee and the Board
considered the fact that these negotiations were
conducted over a period of during which time the
Special Committee received and rejected proposals or
inquiries from the Management Group at $4.00, $4.25,
$4.50 and $4.75 per share of PDK Common Stock and
$7.00 per share of PDK Preferred Stock. At the time
the Merger Agreement was executed, the Special
Committee and the Board believed that the $5.00 per
share of PDK Common Stock and $8.00 per share (plus
accrued and unpaid dividends) of PDK Preferred Stock
Merger consideration was the highest price the
Management Group could or would be likely to offer.
The Special Committee determined that the fact that
the Common Stock traded as high as 53/16 per share in
the last quarter of 1999 was not a disqualifying
factor in the Management Group's offer since that
price was based upon the very limited trading volume
of shares of Common Stock. During the 12 months ended
July 31, 2000, PDK's common stock closed at or above
the merger price only 13 out of the 215 days it
traded. In addition, less than 2.0% of the shares
traded at or above the merger price. The average
price at which the shares traded during these 12
months was $4.07. See " - Background of the Merger."
o the requirement that the Merger be approved by the
holders of two-thirds (2/3) of the outstanding shares
of PDK Common Stock, which allows for an informed
vote by the public shareholders on the merits of the
transaction without requiring a tender of shares or
other
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potentially coercive transaction structure, and which
implicitly requires (because the Management Group has
the right to vote approximately 42% of the
outstanding shares) that, for the Merger to be
approved, holders of approximately 24.0% of the
outstanding shares, in addition to the Management
Group, must vote to approve the transaction. See "The
Merger - Conditions."
In concluding that the Merger is fair to and in the best interests of
the public shareholders, the Special Committee and the Board also considered the
following factors, each of which the Special Committee and the Board considered
to be a negative factor:
o the fact that consummation of the Merger would
preclude the public shareholders from having the
opportunity to participate in the future growth
prospects of PDK. In addition, the Special Committee
and the Board recognized that the Management Group
will have the opportunity to benefit from any
increases in the value of PDK following the Merger as
a result of their increased equity interest in PDK
and therefore may receive a substantial economic
benefit from the transaction. See "-Purpose and
Reasons of the Management Group for the Merger" and
"Effects of the Merger."
o the potential conflicts of interest of the Management
Group resulting from the foregoing benefits that may
be realized by them. In addition, the Special
Committee and the Board considered the potential
conflicts of interest of Lawrence Simon and Thomas
Keith resulting from their positions with unrelated
companies that are significantly reliant on PDK. Mr.
Simon is President and Chairman of Superior
Supplements, Inc. and Mr. Keith is President of
Compare Generiks, Inc. Both Superior Supplements,
Inc. and Compare Generiks, Inc. are significantly
reliant upon the operations of PDK in connection with
the operations of their businesses. See "Directors
and Executive Officers". The Special Committee and
the Board believe, however, that the procedures
followed in the process of considering the Management
Group offer, and negotiating the terms of the Merger
Agreement addressed these conflicts and were fair to
the public shareholders. See " - Background of the
Merger" and " - Conflicts of Interest."
The foregoing discussion of the information and factors considered by
the Special Committee and the Board is not meant to be exhaustive, but includes
all material factors considered by the Special Committee and the Board as part
of the determination that the Merger and the Merger Agreement are fair to, and
in the best interests of, PDK and the public shareholders and the recommendation
that the shareholders approve the Merger and the Merger Agreement. While each of
the Board and the Special Committee adopted the analysis and conclusions of
JWGenesis as described in "Opinion of PDK's Financial Advisor," they also
considered all of the factors listed above in making the determination that
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the Merger and the Merger Agreement are fair to, and in the best interests of,
PDK and the public shareholders. Based on the factors described above, including
the appointment of the Special Committee, its engagement of JWGenesis and
separate legal counsel to negotiate on its behalf, and the Management Group's
unwillingness to continue their employment if PDK was sold to another bidder,
the Board and the Special Committee also believe that the Merger is procedurally
fair to the public shareholders. The Special Committee and the Board did not
assign relative weights or quantifiable values to those positive and negative
factors. Rather, both the Special Committee and the Board of directors viewed
its position and recommendations as being based on the totality of the
information presented to and considered by it. However, in the opinion of the
Special Committee and the Board of directors, the positive factors set forth
above outweighed the negative factors set forth above.
OPINION OF PDK'S FINANCIAL ADVISOR
The Special Committee retained JWGenesis to act as its financial
advisor and, as requested by the Special Committee, to (i) assist in identifying
and analyzing PDK's strategic alternatives, and (ii) review and analyze any
proposals for any sale or business combination of PDK, including any proposal
from the Management Group. In its engagement letter, JWGenesis also agreed that,
if requested by the Special Committee, it would render an opinion as to the
fairness of such a transaction, from a financial point of view, to PDK's public
shareholders. Prior to being engaged as the financial advisor to the Special
Committee, JWGenesis had no prior professional relationship with PDK.
At the request of the Special Committee, on July 21, 2000 JWGenesis
rendered its oral opinion to the Special Committee and the Board to the effect
that, as of that date and subject to the assumptions made, matters considered
and limits of the review undertaken by JWGenesis described in its opinion, the
Merger consideration to be received by PDK's common and preferred stockholders
pursuant to the Merger was fair from a financial point of view to such
stockholders. JWGenesis subsequently confirmed this opinion in writing by letter
dated August 3, 2000.
The full text of JWGenesis' written opinion is attached as Appendix C
to this proxy statement. We refer you to JWGenesis' opinion, and you should
consider it as a part of this proxy statement since we are incorporating it by
this reference. The following description of JWGenesis' opinion is only a
summary of it, and you should read the full opinion for a complete understanding
of the opinion's assumptions, considerations and limitations.
You should be aware that the JWGenesis opinion only addressed the
fairness from a financial point of view of the Merger consideration. The opinion
does not address the merits of the Board's decision to approve the Merger. The
opinion is not a recommendation to you that you vote for or against the Merger
or that you take any other action regarding the Merger.
In preparing its opinion, JWGenesis, among other things:
a) reviewed the financial terms of the Agreement;
b) reviewed and analyzed certain business and financial information
with respect to PDK, including financial forecasts, prepared by the Company,
including members of the Management Group
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(the Special Committee has advised JWGenesis that it has no reason to believe
that management has changed its position with respect to such information;
additionally, management has advised us that it has not changed its position
with respect to such information);
c) held discussions with certain members of the management of the
Company concerning its business, operations and prospects and visited the
Company's facility;
d) reviewed the Company's Annual Reports on Forms 10-K for the four
fiscal years ended November 30, 1999 and the Company's Quarterly Report on Form
10-Q for the period ended May 31, 2000;
e) reviewed the price and public trading history of the Company's
common stock and preferred stock; and
f) reviewed certain publicly available information provided to us by
the Company regarding the industry in which the Company competes.
JWGenesis did not independently verify any of the information it
obtained for purposes of its opinion. Instead, JWGenesis assumed the accuracy
and completeness of all such information. JWGenesis relied upon the Company's
management's assurances that information concerning the Company's prospects
reflected the best currently available judgments and estimates of management as
to the Company's likely future financial performance. To be conservative,
JWGenesis lowered management's projected operating costs by amounts equal to
estimated cost savings JWGenesis believed could be achieved as a private
company. As to all legal matters, JWGenesis relied on the advice of counsel to
the Special Committee and has assumed that the Merger will be consummated in
accordance with the terms of the Merger Agreement. JWGenesis did not make an
independent inspection, evaluation or appraisal of the assets or liabilities of
PDK, nor did anyone furnish JWGenesis' with any such evaluation or appraisal.
The JWGenesis opinion is based on market, economic, and other conditions as they
existed and could be evaluated at the time the opinion was given.
No limitations were imposed by PDK, the Special Committee or the Board
on the scope of JWGenesis' investigation or the procedures JWGenesis followed in
rendering its opinion.
In addressing the fairness, from a financial point of view, of the
Merger consideration to be received by the unaffiliated shareholders of PDK,
JWGenesis employed a variety of generally recognized valuation methodologies and
performed those which it believed were most appropriate for developing its
opinion. The preparation of a fairness opinion involves various determinations
of the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore such an
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, JWGenesis did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
about the significance and relevance of each analysis and factor. Such analysis
resulted in the calculation of ranges of implied per share values for PDK Common
Stock and Preferred Stock, including implied values that were greater
20
<PAGE>
than the Merger consideration, but JWGenesis did not consider that any
particular implied value, whether less than or greater than the Merger
consideration, was determinative of fairness.
JWGenesis believes that its analyses must be considered as a whole and
that selecting portions of its analyses, without considering all factors and
analyses, would create an incomplete view of the process underlying its opinion.
In performing its analyses, JWGenesis made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of PDK. The analyses
performed by JWGenesis do not purport to be an appraisal and are not necessarily
indicative of actual values, trading values or actual future results that might
be achieved, all of which may be significantly more or less favorable than
suggested by JWGenesis' analyses.
In connection with its analyses, JWGenesis utilized estimates and
forecasts of our future operating results contained in or derived from the
Management Group's projections. Analyses based on forecasts of future results
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than the forecasts. The analyses are
inherently subject to uncertainty, being based on numerous factors or events
beyond the control of PDK. Therefore, future results or actual values may be
materially different from these forecasts or assumptions. The JWGenesis opinion
was one of many factors taken into consideration by the Special Committee and
the Board in making their determination to approve the Merger Agreement.
Consequently, the analyses described below should not be viewed as determinative
of the opinion of either the Special Committee or the Board with respect to the
value of PDK or whether the Special Committee or the Board would have been
willing to agree to different terms for the Merger.
Management Projections are detailed in the following chart:
Company Projections
--------------------------------------------------------------------------------
(000s) For the fiscal years ending November 30,
-----------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
Net sales .................... $49,867 $52,750 $52,750 $52,750 $52,750
Cost of sales ................ 33,049 35,750 35,750 35,750 35,750
------- ------- ------- ------- -------
Gross profit ................. 16,818 17,000 17,000 17,000 17,000
Operating expenses ........... 11,382 13,015 11,690 11,465 11,590
------- ------- ------- ------- -------
EBITDA ....................... 5,436 3,985 5,310 5,535 5,410
Depreciation and amort ....... 2,400 1,800 1,300 900 600
------- ------- ------- ------- -------
EBIT ......................... 3,036 2,185 4,010 4,635 4,810
Interest expense ............. 594 0 0 0 0
Interest income .............. 84 251 3561 506 655
------- ------- ------- ------- -------
21
<PAGE>
Pretax income ................ 2,526 2,436 4,366 5,141 5,465
Income taxes ................. 1,010 975 1,746 2,056 2,186
------- ------- ------- ------- -------
Net income ................... $ 1,516 $ 1,462 $ 2,619 $ 3,084 $ 3,279
======= ======= ======= ======= =======
The following is a brief summary of the material analyses performed by
JWGenesis in connection with rendering the JWGenesis opinion to the Special
Committee and the Board. For purposes of the financial analyses from which these
per share values are derived, JWGenesis assumed that PDK would be operated by a
management team with the perceived ability to achieve the financial results of
the projections. The following analyses reflect substantially the same
methodologies used by JWGenesis in its preliminary oral presentation to the
Special Committee on July 26, 2000, and updated and confirmed in written form to
reflect financial information and market data that was available as of and on
August 3, 2000:
For its evaluations, JWGenesis calculated a range of values for PDK
using five approaches: (i) a discounted cash flow analysis; (ii) a leveraged
buyout analysis; (iii) a liquidation analysis; (iv) a premiums paid analysis and
(v) an analysis of the Company's recent repurchase of a large block of its
Common Stock from an institutional investor. In certain cases, investment banks
sometimes utilize two other analyses, a market multiples analysis, based upon
comparable publicly-traded companies, and an acquisition multiples analysis,
based upon acquisitions of comparable companies during recent years. JWGenesis
determined that these two other analyses were not feasible in this circumstance,
because JWGenesis was unable to identify any other publicly-traded company (or
any company acquired during the past three years) that is subject to the high
level of risk associated with the relative near-term possibility that the
federal government could interrupt or end the company's main business functions.
In the discounted cash flow analysis, JWGenesis analyzed cash flows
derived from projections for PDK that were developed by the Company's management
team and reviewed by JWGenesis. In making this analysis, JWGenesis adjusted
these cash flow projections by lowering management's projected operating costs
by amounts equal to estimated cost savings JWGenesis believe could be achieved
as a private company. JWGenesis discounted the cash flows using a range of
discount rates based upon its estimation of an investor's expected rate of
return for a risk capital investment in the Company. JWGenesis developed the
range of discount rates by establishing a midpoint rate of return of 40%, which
was lower than all of the rates of return stated by the 24 financial acquirers
with whom JWGenesis discussed the transaction, and then establishing the high-
and low-points of the range as 500 basis points higher and lower, respectively
than the mid-point. JWGenesis believed this method results in a lower discount
rate than would be applied by an independent leverage buyout firm and thus would
result in a higher valuation for the shares.
In the last year of the analysis, JWGenesis derived a hypothetical
terminal value for the business on an unleveraged basis by applying a range of
exit multiples. The exit multiples are based on the average EBITDA multiples
paid in 28 acquisitions of manufacturing and distribution companies during the
12 months ended June 23, 2000 with transaction values less than or equal to $100
million, as calculated by Portfolio Management Data and reported in The Daily
Deal on June 28, 2000. JWGenesis developed the range by increasing and
decreasing the calculated median EBITDA multiple by 1.0
22
<PAGE>
multiple allowing JWGenesis to calculate a range of prices which an acquirer
could pay for the common stock.
23
<PAGE>
The Discounted Cash Flow Analysis is detailed in the following chart:
<TABLE>
<CAPTION>
Free Cash Flow
(000s) For the years ending November 30,
------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBIT $3,036 $2,185 $4,010 $4,635 $4,810
Less: Income taxes (1,010) (975) (1,746) (2,056) (2,186)
------ ------ ------ ------ ------
Delevered net income 2,026 1,210 2,264 2,579 2,624
Plus: D&A 2,400 1,800 1,300 900 600
Less: Capital expenditures (500) (500) (200) (200) (200)
Change in working capital 62 (1,274) 0 0 0
--- ------ -- -- --
Free cash flow $3,988 $1,237 $3,364 $3,279 $3,024
====== ====== ====== ====== ======
</TABLE>
Terminal Value Based on EBITDA Exit Multiple in 2004 (1)
2004 Terminal
EBITDA Value
-------------- -------------
4.43 x $5,410 $23,966
5.43 x 5,410 29,376
6.43 x 5,410 34,786
Total Free Cash Flow (equal to annual free cash flow plus the terminal value in
2004) EBITDA Exit Multiple 4.43 5.43 6.43
------------- ----------- -----------
2000 $3,988 $3,988 $3,988
2001 1,237 1,237 1,237
2002 3,364 3,364 3,364
2003 3,279 3,279 3,279
2004 26,990 32,400 37,810
Present Value of Total Free Cash Flow
Discount rate 45.0% 40.0% 35.0%
-------- -------- --------
Enterprise value $ 9,395 $ 11,583 $ 14,419
Plus: Cash 4,433 4,433 4,433
Less: Debt (2,371) (2,371) (2,371)
-------- -------- --------
Equity value $ 11,457 $ 13,645 $ 16,481
======== ======== ========
Value of Common Stock
Equity value $ 11,457 $ 13,645 $ 16,481
Less: value of Pref. (2) 3,685 3,685 3,685
-------- -------- --------
Value of Common $ 7,772 $ 9,961 $ 12,797
======== ======== ========
Number of Common shs 2,338 2,338 2,338
Price per share $ 3.32 $ 4.26 $ 5.47
24
<PAGE>
Notes:
------
(1) Range derived from the average EBITDA multiple paid in 28 acquisitions of
manufacturing and distribution companies during the 12 months ended 6/23/00,
as reported in The Daily Deal on June 28, 2000, plus and minus one multiple.
(2) Assumed at $8.00 per preferred share.
In the leveraged buyout analysis, JWGenesis estimated the amount a
financial buyer would expect to pay for PDK, assuming the maximum amount of debt
and equity financing to the extent equity investment returns of 35% to 45% can
be obtained. JWGenesis' analysis was based on operating projections and general
assumptions developed by the Company's management and reviewed by JWGenesis. In
making this analysis, JWGenesis adjusted the Company's projections by lowering
management's projected operating costs by amounts equal to estimated cost
savings JWGenesis believe could be achieved as a private company. JWGenesis
developed the range of discount rates by establishing a midpoint rate of return
of 40%, which was lower than all of the rates of return stated by the 24
financial acquirers with whom JWGenesis discussed the transaction, and then
establishing the high- and low-points of the range as 500 basis points higher
and lower, respectively than the mid-point. JWGenesis believed this method
results in a lower discount rate than would be applied by an independent
leverage buyout firm and thus would result in a higher valuation for the shares.
In the analysis, the amount of equity assumed invested was limited to
amounts which would return 35% to 45% on equity annually after granting an
assumed 10.0% equity position to management. The sum of the debt and equity,
less estimated fees to consummate such a transaction, provides an implied price
which an acquirer could pay for all of the common and preferred stock of the
Company.
The Leverage Buyout Analysis is detailed in the following charts:
Maximum Valuation - 35% Annual Investor Return
--------------------------------------------------------------------------------
Transaction Structure
(000s)
<TABLE>
<CAPTION>
------------- ---------------
Sources Uses
------------- ---------------
<S> <C> <S> <C>
Senior debt $7,648 Purchase stock $16,730
Excess cash 2,062 Repay net debt 0
Common stock 8,021 Fees and expenses 1,000
------------ ------------
Total sources $17,730 Total uses $17,730
============ ============
<S> <C> <C> <C>
Implied Equity Value: $16,730 # of shares: Price per:
------------ ----------
Less: Value of Preferred: 3,685 461 $8.00
------------
Equals: Implied Common Value: $13,046 2,338 $5.58
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock Returns 2000 2001 2002 2003 2004
-------------------------------------------------------------------
EBITDA $5,436 $3,985 $5,310 $5,535 $5,410
Multiple (1) 5.43 5.43 5.43 5.43 5.43
-------------------------------------------------------------------
TEV 29,517 21,639 28,833 30,055 29,376
Less debt (2,058) (761) 0 0 0
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Plus cash 50 50 2,826 6,364 9,707
-------------------------------------------------------------------
Equity value 27,509 20,928 31,659 36,419 39,084
less management options (2) (3,106)
-------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
IRR = 35.0% ($8,021) $0 $0 $0 $0 $35,977
--------------------------------------------------------------------------------
</TABLE>
Notes:
(1) The average EBITDA multiple paid in 28 acquisitions of manufacturing and
distribution companies during the 12 months ended 6/23/00, as reported in
The Daily Deal on June 28, 2000.
(2) Equal to 10% of increase in equity value.
Median Valuation - 40% Annual Investor Return
--------------------------------------------------------------------------------
Transaction Structure
(000s)
<TABLE>
<CAPTION>
------------- ---------------
Sources Uses
------------- ---------------
<S> <C> <C> <C>
Senior debt $7,648 Purchase stock $15,374
Excess cash 2,062 Repay net debt 0
Common stock 6,665 Fees and expenses 1,000
------------ ------------
Total sources $16,374 Total uses $16,374
============ ============
<S> <C> <C> <C>
Implied Equity Value: $15,374 # of shares: Price per:
------------ ----------
Less: Value of Preferred: 3,685 461 $8.00
------------
Equals: Implied Common Value: $11,690 2,338 $5.00
</TABLE>
<TABLE>
<CAPTION>
Common Stock Returns
2000 2001 2002 2003 2004
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA $5,436 $3,985 $5,310 $5,535 $5,410
Multiple (1) 5.43 5.43 5.43 5.43 5.43
-------------------------------------------------------------------
TEV 29,517 21,639 28,833 30,055 29,376
Less debt (2,058) (761) 0 0 0
Plus cash 50 50 2,826 6,364 9,707
-------------------------------------------------------------------
Equity value 27,509 20,928 31,659 36,419 39,084
less management options (2) 0 0 0 0 (3,242)
-------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
IRR = 40.0% ($6,665) $0 $0 $0 $0 $35,842
--------------------------------------------------------------------------------
</TABLE>
Notes:
------
(1) The average EBITDA multiple paid in 28 acquisitions of manufacturing and
distribution companies during the 12 months ended 6/23/00, as reported in
The Daily Deal on June 28, 2000.
(2) Equal to 10% of increase in equity value.
26
<PAGE>
Minimum Valuation - 45% Annual Return
--------------------------------------------------------------------------------
Transaction Structure
(000s)
<TABLE>
<CAPTION>
------------- ---------------
Sources Uses
------------- ---------------
<S> <C> <C> <C>
Senior debt $7,648 Purchase stock $14,276
Excess cash 2,062 Repay net debt 0
Common stock 5,566 Fees and expenses 1,000
------------ ------------
Total sources $15,276 Total uses $15,276
============ ============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Implied Equity Value: $14,276 # of shares: Price per:
------------ ----------
Less: Value of Preferred: 3,685 461 $8.00
-------------
Equals: Implied Common Value: $10,591 2,338 $4.53
</TABLE>
Common Stock Returns
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA $5,436 $3,985 $5,310 $5,535 $5,410
Multiple (1) 5.43 5.43 5.43 5.43 5.43
-------------------------------------------------------------------
TEV 29,517 21,639 28,833 30,055 29,376
Less debt (2,058) (761) 0 0 0
Plus cash 50 50 2,826 6,364 9,707
-------------------------------------------------------------------
Equity value 27,509 20,928 31,659 36,419 39,084
less management options (2) 0 0 0 0 (3,352)
-------------------------------------------------------------------
IRR = 45.0% ($5,566) $0 $0 $0 $0 $35,732
--------------------------------------------------------------------------------
</TABLE>
Notes:
(1) The average EBITDA multiple paid in 28 acquisitions of manufacturing and
distribution companies during the 12 months ended 6/23/00, as reported in
The Daily Deal on June 28, 2000.
(2) Equal to 10% of increase in equity value.
27
<PAGE>
Notes:
(1) The average EBITDA multiple paid in 28 acquisitions of manufacturing and
distribution companies during the 12 months ended 6/23/00, as reported in
The Daily Deal on June 28, 2000.
(2) Equal to 10% of increase in equity value.
In the liquidation analysis, JWGenesis estimated the proceeds from an
orderly liquidation, given the stated value of the Company's assets and
liabilities at May 31, 2000. JWGenesis assumed that a liquidator could raise
100% of the stated value of the Company's cash and securities, 75% of accounts
receivable and equipment and vehicles and 50% of inventory, prepaid expenses,
amounts due from suppliers and other assets. In making this analysis, JWGenesis
did not write-off the inventories of List 1 Chemicals and products derived from
List 1 Chemicals, even though these inventory items could be subject to
impairment as a result of action by the federal government. JWGenesis also
assumed the claims against the estate, consisting of accounts payable, dividends
payable on the Company's preferred stock, bank debt and the minority interest
would be paid in full. Assuming a $7.00 liquidation payment to the holders of
the Company's preferred stock (the contractual liquidation preference) yields
the value attributable to the common stock. In this analysis, cash available to
the Preferred and Common Stockholders was approximately 4.7 times the cash
required to pay the contractual liquidation preference on the Preferred Stock..
28
<PAGE>
The Liquidations Analysis is detailed in the following chart:
<TABLE>
<CAPTION>
(000s) Percent
As of recovered Cash
Assets 5/31/00 in liquid. recovery
------------------------------------------------------------- ---------- ---------
<S> <C> <C> <C>
Cash and securities $4,433 100% $4,433
Accounts receivable 9,597 75% 7,198
Inventory 8,943 50% 4,472
Prepaid expenses 2,460 75% 1,845
Due from supplier 1,192 75% 894
Deferred tax asset 87 0% 0
Manufacturing equipment (net) 2,048 75% 1,536
Vehicles (net) 75 75% 57
Office equip. and fixtures (net) 798 0% 0
Leasehold improvements (net) 617 0% 0
Other assets 2,451 75% 1,838
---------
---------
Estimated proceeds from liquidation $22,272
=========
<CAPTION>
Claims
-------------------------------------------------
<S> <C> <C> <C>
Accounts payable $1,325 100% $1,325
Dividends payable 31 100% 31
Debt 2,371 100% 2,371
Minority interest 843 100% 843
--------- ---------
Estimated claims in liquidation $4,570
Administrative overhead (1) 2,559
---------
Total Consideration (distributions to shareholders) $15,143
=========
<CAPTION>
Price per
share # of shares
--------- -----------
<S> <C> <C> <C>
Preferred shareholders (2) $7.00 461 $3,224
Common shareholders $5.10 2,338 $11,919
</TABLE>
Notes:
-------------------------------------------------
(1) Assumed to be 40% of the Company's projected operating expenses
(less estimated cost savings) for six months plus $500K of professionals
expenses.
(2) Contractual liquidation preference
The premiums paid analysis compares the market price of a company's
common stock prior to the announcement of a transaction with the price after the
announcement. Based on an efficient market theory, the pre-announcement price
reflects the market's perception about the value of a company as a going
concern, while the proposed acquisition price reflects the value of the
consideration being offered by the other party to the transaction. Because of
day-to-day market fluctuations, particularly
29
<PAGE>
for a small capitalization stock, and transaction information leaks, in addition
to analyzing the closing price of PDK's common stock immediately before the
announcement, JWGenesis also analyzed the stock's closing price one week before
the announcement of the transaction. This allowed JWGenesis to calculate a range
of prices for the Company's common stock.
The Premiums Paid Analysis is detailed in the following chart:
For all transactions announced and closed from 7/1/99 through 6/30/00,
with equity values less than $100 million and enterprise values less
than $250 million (1):
<TABLE>
<CAPTION>
Median Median
premium of premium of
announced announced
tender price tender price
over closing over closing
price one price one
day prior to week prior to
announcement announcement
------------------ ------------------
<S> <C> <C>
Premium 22.7% 31.8%
PDK closing price, 7/18/00 (2): $3.63
------------------
PDK closing price, 7/11/00 (3): $3.63
------------------
Implied common stock valuation $4.45 to $4.78
Median common stock valuation $4.61
</TABLE>
Notes:
(1) Equity value is equal to market capitalization (number of shares outstanding
multiplied by the per share price). Enterprise value is equal to market
capitalization plus net debt.
(2) Closing price on 7/12/00, the last day PDKL traded prior to 7/19/00.
(3) Closing price on 7/10/00, the last day PDKL traded prior to 7/12/00.
In its fifth analysis, JWGenesis reviewed the Company's recent
repurchase of its common stock from a sophisticated institutional investor.
Heartland Advisors, Inc. ("Heartland"), based in Milwaukee, Wisconsin, was
formed in 1982 and manages more than $2.4 billion (as of June 30, 2000) for
institutions, individual clients and investor accounts. On September 30, 1999,
the Company repurchased 380,000 shares of its common stock from the Heartland
Value Fund (the "Fund") and 100,000 shares of its common stock from William J.
Nasgovitzat, Heartland's founder and president, at $5.00 per share of Common
Stock.
In its analysis of PDK's repurchase of common shares from Heartland
Advisors, JWGenesis compared PDK's operating performance during the 12 months
ended September 30, 1999 (the last 12 months of operations prior to Heartland
selling their common stock to the Company) with the operating performance of the
Company during the 12 months ended May 31, 2000. JWGenesis compared certain
30
<PAGE>
measures of operating performance such as sales, gross profit, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), earnings before
interest and taxes ("EBIT"), pretax income and net income in each period to
determine if the Company's performance had improved, remained largely unchanged
or declined since Heartland negotiated the value at which the Company
repurchased its shares. JWGenesis calculated the percentage decrease or increase
for each measure of operating performance and the median and mean of the changes
of all of the measures of operating performance. JWGenesis then multiplied the
resultant median change by the price at which Heartland sold its shares, the
product of which JWGenesis used as a proxy current value.
The Heartland Repurchase Analysis is detailed in the following chart:
<TABLE>
<CAPTION>
(000s) For the 12 months ended
-----------------------------
8/30/99 5/31/00 Change
------------- ------------- -----------
<S> <C> <C> <C>
Net sales $54,982 $52,961 -3.7%
Cost of sales 34,306 33,811
------- -------
Gross profit 20,676 19,150 -7.4%
Operating expenses 12,899 12,614
------- -------
EBITDA 7,777 6,536 -16.0%
Depreciation 3,261 3,078
------- -------
EBIT 4,516 3,458 -23.4%
Interest and other exp 816 242
------- -------
Pretax income 3,700 3,216 -13.1%
Income taxes 2,346 1,698
------- -------
Net income $ 1,354 $ 1,518 12.1%
======= =======
Median change: -10.2%
Mean change: -8.6%
Heartland repurchase price: $5.00
Median change in operating performance: -10.2%
-----
Implied value at 5/31/00: $4.49
=====
</TABLE>
Because the liquidation analysis demonstrated cash available to the
preferred and common stockholders of about 4.7 times the cash required to pay
the liquidation preference on the preferred stock, JWGenesis determined that it
could not render an opinion of fairness on the preferred at a price less than
the preferred holders are contractually entitled to in a winding down of the
Company. To calculated its ranges of fairness for the Consideration on a per
share basis, JWGenesis assumed and $8.00 price for the preferred stock in each
of its analyses except the liquidation analysis (since the contractual
liquidation preference on the preferred stock is $7.00 per preferred share).
JWGenesis' median valuation for PDK's equity and its common stock resultant from
all of the valuation ranges of all of the analyses was $14,468,802 and $4.67,
respectively. The $1.00 premium which is being offered for the preferred stock
results in $460,566 being paid to the holders of the preferred stock that, in
its
31
<PAGE>
absence, would have been paid to the common shareholders. This amount is equal
to less than $0.20 per common share.
JWGenesis did not ascribe different weightings to each analysis because
in every analysis except the leveraged buyout analysis described above, the
consideration exceeded the median values for PDK's equity JWGenesis calculated.
In that case, the median value exceeded the consideration by $70,139 or less
than 0.5% of the consideration. On a per share basis, the consideration offered
for the Company's common stock exceeds the median values for PDK's common stock
JWGenesis calculated in all of the analyses herein, except the leveraged buyout
analysis and the liquidation analysis. In those cases, the median values
exceeded the per share consideration by $0.03 and $0.10, respectively, or less
than 2.0% of the per share consideration.
As previously stated, the $1.00 premium which is being offered for the
preferred stock results in $460,566 being paid to the holders of the preferred
stock that, in its absence, would have added $0.20 per share to the
Consideration being offered to the common shareholders. Adding the $0.20 to
JWGenesis' median valuation of $4.67 is less than the Consideration being
offered by the PDK Acquisition.
Pursuant to its engagement letter with JWGenesis dated June 2, 2000,
the Special Committee of PDK agreed to pay to JWGenesis an aggregate fee of
approximately $150,000 for its services in connection with the Merger, all of
which has been paid. The engagement letter also provides that PDK will reimburse
JWGenesis for its reasonable travel, legal and other out-of-pocket expenses
incurred in connection with JWGenesis' role thereunder and will indemnify
JWGenesis and its affiliates from and against certain liabilities. These
liabilities include liabilities under the federal securities laws in connection
with the engagement of JWGenesis by the Special Committee.
The Special Committee retained JWGenesis on the basis of its experience
with Mergers and acquisitions, financings and advising Boards of directors and
shareholders regarding strategic alternatives. JWGenesis is regularly engaged in
the valuation of businesses and their securities in connection with Mergers,
acquisitions and private placements of securities
CONFLICTS OF INTEREST
In considering the recommendations of the Special Committee and the
Board with respect to the Merger, shareholders should be aware that the
Management Group, which consists of two members of the Company's Board, will own
100% of the outstanding equity of PDK upon completion of the Merger. The Special
Committee and the Board were aware of this conflict of interest and considered
it among other factors described under " - The Recommendation of the Special
Committee and the Board of Directors."
The Merger Agreement requires that PDK provide indemnification to its
current and former directors and officers against liabilities (including
reasonable attorneys' fees) relating to actions or omissions arising out of
their being a director, officer, employee or agent of PDK at or prior to the
time the Merger is completed (including the transactions contemplated by the
Merger Agreement). In addition, PDK is obligated for a period of six years from
the time the Merger is completed to continue
32
<PAGE>
in effect directors' and officers' liability insurance with respect to matters
occurring prior to the time the Merger is completed, which insurance must
contain terms and conditions no less advantageous than are contained in PDK's
current directors' and officers' liability insurance policy. If, however, PDK's
premiums for this insurance increase, PDK is not obligated to expend annually
more than 300% of the current cost of this coverage, during the three years
after the merger is completed and more than 200% of the current cost of this
coverage during the following three years.
Mr. Helman received fees totaling $20,000 for his service on the
Special Committee.
PURPOSE AND REASONS OF MANAGEMENT GROUP FOR THE MERGER
The Management Group's purpose for engaging in the transactions
contemplated by the Merger Agreement is to acquire ownership of PDK as a
privately held company. They believe that due to PDK's small size and the lack
of equity research coverage for PDK stock (a factor they believe is in large
measure beyond PDK's control), it is and will continue to be difficult for PDK
to attract new investor interest and for PDK shareholders to get a fair price
when selling their shares in the market. In addition, trading volume in PDK
stock has historically been low. While they believe these factors do and would
continue to limit the ability of PDK shareholders, including them, to receive a
fair price in selling their shares in the market, they also believe that PDK is
a valuable company with the opportunity to increase its revenues and net income
in the future. The Management Group also believes that the expenses and
regulatory compliance requirements of being a public company are significant for
a company the size of PDK and that eliminating those regulatory compliance
requirement expenses would enhance PDK's long-term success. They believe that
the Merger offers PDK's public shareholders the opportunity to obtain a fair
value for their shares, respectively, with their final offer of $5.00 per share
of Common Stock and $8.00 per share of Preferred Stock representing a 38% and
39% premium to the closing price of PDK Common Stock and PDK Preferred Stock on
the date they made their first offer to buy PDK.
The Management Group owns 872,500 shares of PDK Common Stock.
Immediately prior to completion of the Merger, the Management Group intends to
contribute their 872,500 shares of PDK Common Stock to PDK Acquisition. This
represents an indirect investment by the Management Group of approximately
$3,362,500 in PDK Acquisition (based on the $5.00 per share to be received by
other shareholders in the Merger). If the Merger and financing are completed,
the Management Group will own 100% of PDK's outstanding equity interests.
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<PAGE>
POSITIONS OF THE MANAGEMENT GROUP AND PDK ACQUISITION AS TO FAIRNESS OF THE
MERGER
The Management Group has considered the analyses and findings of the
Special Committee and the Board (described in detail in "Special Factors --
Recommendation of the Board of Directors and the Special Committee") with
respect to the fairness of the Merger to PDK's public shareholders. As of the
date of this proxy statement, they adopt the analyses and findings of the
Special Committee and the Board with respect to the fairness of the Merger and
believe that the Merger is both procedurally and substantively fair to PDK's
public shareholders. In addition, the Management Group intends to vote the
shares of PDK Common Stock or which it has the right to vote, in favor of the
Merger and Merger Agreement. In adopting the analysis and findings of the
Special Committee and the Board, the Management Group notes that the ability of
PDK to effect the alternative transactions considered by the Special Committee
was affected by management's decision not to agree to continue to work for PDK
if it was acquired by another bidder.
As members of the Board, Mr. Spinello and Ms. Hollander abstained in
voting on approval of the Merger Agreement and the recommendation to the
shareholders that they vote to approve the Merger, but expressed their support
for both actions.
PDK Acquisition believes that the Merger is both procedurally and
substantively fair to PDK's public shareholders and adopted the analysis of the
Management Group.
CONDUCT OF PDK'S BUSINESS AFTER THE MERGER
The Management Group is continuing to evaluate PDK's business, assets,
practices, operations, properties, corporate structure, capitalization,
management and personnel and discuss what changes, if any, will be desirable.
Subject to the foregoing, the Management Group expects that the day-to-day
business and operations of PDK will be conducted substantially as they currently
are being conducted by PDK. The Management Group does not currently intend to
dispose of any assets of PDK, other than in the ordinary course of business.
Additionally, it does not currently contemplate any material change in the
composition of PDK's current management.
EFFECTS OF THE MERGER
As a result of the Merger, the public shareholders of PDK will be
entitled to receive $5.00 per share in cash, without interest, of PDK Common
Stock and $8.00 per share in cash (plus accrued and unpaid dividends), of PDK
Preferred Stock. This represents a 38% and 39% premium, respectively, over the
closing price per share of PDK Common Stock and PDK Preferred Stock on the day
the Management Group made its first offer to acquire PDK. As a detrimental
consequence of the Merger, public shareholders will no longer have an
opportunity to continue their equity interest in PDK as an ongoing corporation
and therefore will not share in the future earnings and potential growth of PDK.
Upon completion of the Merger, PDK Common Stock and PDK Preferred Stock will no
longer be traded on the NASDAQ Smallcap Stock Market, price quotations will no
longer be available and the registration of PDK Common Stock under the Exchange
Act will be terminated. The termination of registration of the Common Stock and
PDK Preferred Stock under the Exchange Act will eliminate the
34
<PAGE>
requirement to provide information to the Securities and Exchange Commission and
will make most of the provisions of the Exchange Act, such as the short-swing
profit recovery provisions of Section 16(b) and the requirement of furnishing a
proxy or information statement in connection with shareholders' meetings, no
longer applicable. The cost savings to PDK as a result of the termination of its
obligation to prepare public company reports is estimated to be $400,000 to
$500,000 per year.
It is anticipated that the Management Group will own 100% of the equity
interests in PDK as the surviving corporation of the Merger. An investment in
PDK following the Merger involves substantial risk resulting from the limited
liquidity of any such investment and the substantially increased leverage
associated with funding the Merger. Nonetheless, if PDK is able to successfully
implement its business strategy, the Management Group believes the value of its
investment will be considerably greater than the value it would be investing at
the time of the Merger. See "Forward-Looking Information."
The receipt of cash pursuant to the Merger will be a taxable
transaction. See "Federal Income Tax Consequences."
THE MERGER
The Merger Agreement provides that, subject to conditions listed in the
Merger Agreement, PDK Acquisition, a newly-formed New York corporation, will
merge with and into PDK, and that following the Merger, the separate existence
of PDK Acquisition will cease and PDK will continue as the surviving
corporation.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this proxy statement and is
incorporated therein by reference. The discussion in this proxy statement of the
Merger and the summary description of the principal terms of the Merger
Agreement, while complete in all material respects, are subject to and qualified
in their entirety by reference to the Merger Agreement.
COMBINATION OF CORPORATIONS
The name of the surviving corporation after the completion of the
Merger will continue to be "PDK Labs Inc.". In addition, upon completion of the
Merger, the separate corporate existence of PDK Acquisition will cease and PDK
will be the surviving corporation of the Merger, with all assets and liabilities
of PDK and PDK Acquisition that existed immediately prior to the Merger.
The articles of incorporation of PDK will be amended and restated to
conform to the articles of incorporation of PDK Acquisition as in effect
immediately prior to the Effective Time. These articles of incorporation will be
changed, however, to provide that the number of authorized shares of Common
Stock of the surviving corporation will be 100.
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<PAGE>
The bylaws of PDK Acquisition, as in effect immediately prior to the
Effective Time, will be the bylaws of the surviving corporation until amended in
accordance with applicable law, the articles of incorporation of the surviving
corporation and its initial bylaws.
The directors of PDK Acquisition, immediately prior to the Effective
Time will be the initial directors of the surviving corporation, and Messrs.
Helman, Keith and Simon will cease to be directors of PDK.
CONVERSION OF SECURITIES
At the Effective Time, subject to the terms, conditions and procedures
included in the Merger Agreement, each share of PDK Common Stock and PDK
Preferred Stock issued and outstanding immediately prior to the Effective Time
(other than shares held by PDK Acquisition) will, by virtue of the Merger, be
converted into the right to receive an amount equal to $5.00 and $8.00
respectively in cash (plus accrued and unpaid dividends). Except for the right
to receive this per share cash Merger consideration, from and after the
Effective Time, all shares (other than shares held by PDK Acquisition), by
virtue of the Merger and without any action on the part of any holder of PDK
Common Stock or PDK Preferred Stock, will no longer be outstanding and will be
canceled and retired and will cease to exist. Each holder of a certificate
formerly representing shares of PDK Common Stock (other than shares held by PDK
Acquisition) and PDK Preferred Stock will, after the Effective Time, cease to
have any rights with respect to the shares of PDK Common Stock and PDK Preferred
Stock represented by the certificate other than the right to receive the $5.00
per share of PDK Common Stock and $8.00 per share (plus accrued and unpaid
dividends) of PDK Preferred Stock cash Merger consideration upon surrender of
the certificate.
At the Effective Time, PDK Acquisition will deposit with a bank or
trust company designated by PDK Acquisition and reasonably satisfactory to PDK
(the agreed-upon bank or trust company is referred to as the "Paying Agent") an
amount equal to the total cash Merger consideration to be paid to the
shareholders of PDK. All such funds will be held in trust for the benefit of
PDK's shareholders.
Each holder of certificates representing shares of PDK Common Stock and
PDK Preferred Stock will surrender their certificates to the Paying Agent in
exchange for the $5.00 per share of Common Stock and $8.00 per share (plus
accrued and unpaid dividends) of Preferred Stock cash Merger consideration.
No interest will be paid or accrue on the amount payable to any holder
of PDK Common Stock and/or PDK Preferred Stock. For payment to be made to a
person other than the registered holder of the certificate surrendered, the
registered holder of the certificate must properly endorse the certificate,
which must otherwise be in proper form for transfer, all as determined by the
Paying Agent. Further, the person requesting payment will be required to pay any
transfer or other taxes required or the holder may establish to the satisfaction
of the Paying Agent that these taxes have been paid or that no taxes are due.
Six months following the Effective Time, PDK will be entitled to instruct the
Paying Agent to deliver to it any funds (including any accrued interest) that
have not been disbursed to holders of certificates formerly representing shares
of Common Stock. After that, holders who have not surrendered their share
certificates may look to PDK only as general creditors with respect to their
cash
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<PAGE>
Merger consideration. Neither the Paying Agent nor any party to the Merger
Agreement will be liable to any holder of certificates formerly representing
shares of PDK Common Stock or PDK Preferred Stock for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Except as described in this paragraph, PDK will pay all charges and
expenses, including those of the Paying Agent, in connection with the exchange
of shares for the cash Merger consideration.
Each share of PDK Acquisition's Common Stock issued and outstanding
immediately prior to the Merger will be converted at the Effective Time into one
share of Common Stock of PDK, as the surviving corporation of the Merger.
TRANSFER OF SHARES
No transfers of shares of PDK Common Stock or PDK Preferred Stock will
be made on the stock transfer books at or after the Effective Time. If, after
the Effective Time, certificates representing shares of PDK Common Stock or PDK
Preferred Stock are presented to PDK, these shares will be canceled and
exchanged for the cash Merger consideration.
CONDITIONS
Each party's obligation to effect the Merger is subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived (other than the first listed
condition) at the appropriate party's discretion, to the extent permitted by
applicable law:
o the Merger Agreement must be approved in the manner
required by applicable law by the holders of 66 2/3%
of the outstanding shares of PDK Common Stock
entitled to vote on the Merger; and
o No governmental authority or other person or entity
shall have enacted, issued or entered any law or
regulation which in effect has the effect of making
the consummation of the Merger unlawful or preventing
the transactions contemplated by the Merger or with
respect to any litigation in connection with the
Merger, results in an award of damages that would
materially and adversely affect PDK.
o The opinion of PDK's Financial Advisor shall not have
been withdrawn prior to the Effective times.
The obligations of PDK Acquisition and the Management Group to effect
the Merger are subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, unless waived by PDK Acquisition:
o the representations and warranties of PDK in the
Merger Agreement must be true and correct in all
material respects (except that any representation and
warranty that is qualified as to materiality by
reference to "Material Adverse Effect" or any similar
term must be true and correct) as of the date of
execution of the Merger Agreement
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<PAGE>
and as of the Effective Time (except for those
representations and warranties that are made as of a
specific date);
o PDK must have performed in all material respects all
obligations required to be performed by it under the
Merger Agreement at or prior to the Effective Time;
and
o No change, condition, event or development shall have
occurred that has a Material Adverse Effect on the
operations of PDK
After approval of the Merger Agreement by the shareholders of PDK, no
amendment may be made that reduces the amount or changes the form of the cash
Merger consideration to be received by the shareholders of PDK, unless such
amendment is approved by the shareholders.
REPRESENTATIONS AND WARRANTIES
PDK made representations and warranties in the Merger Agreement
regarding, among other things: its organization and good standing; authority to
enter into the Merger; its capitalization; requisite governmental and other
consents and approvals; compliance with all applicable laws.
The Management Group and PDK Acquisition have made representations and
warranties in the Merger Agreement regarding, among other things: PDK
Acquisition's organization and good standing; authority to enter the
transaction; PDK Acquisition's capitalization; compliance with all applicable
laws; requisite governmental and other consents and approvals.
The representations and warranties of the parties in the Merger
Agreement will expire upon consummation of the Merger, and upon such expiration
none of such parties or their respective officers, directors or principals will
have any liability whatsoever with respect to any of these representations or
warranties.
COVENANTS
In the Merger Agreement, PDK has agreed that prior to the Effective
Time, unless otherwise agreed to in writing by PDK Acquisition or as otherwise
contemplated by the Merger Agreement, PDK and each of its subsidiaries will
conduct business only in the ordinary course substantially consistent with past
practice and will not:
o amend its articles of incorporation or bylaws;
o declare, set aside or pay any dividend or make any
other distribution in respect of any of its shares of
common stock;
o issue, grant, sell, pledge, or transfer any shares of
its capital stock, stock options, warrants,
securities or rights to acquire any such shares,
securities or rights of PDK, or propose or agree to
do any of
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<PAGE>
the foregoing or make any other changes in its equity
capital structure;
o split, combine or reclassify any of the capital stock
of PDK or issue other securities in respect of or in
substitution for its existing capital stock; Each
party also has agreed to provide prompt notice to the
other upon obtaining knowledge of:
o material litigation, claims, actions, proceedings,
tax audits or other investigations affecting such
party or any of its properties or assets, that if
adversely resolved could have a material adverse
effect or could prevent, hinder or materially delay
the ability to complete the Merger or the other
transactions contemplated by the Merger Agreement;
o notices of default under agreements and instruments
where the default would have a material adverse
effect; and
o notice from a third party claiming that its consent
is required in connection with the transactions
contemplated by the Merger Agreement.
In addition, the Management Group agreed that, prior to the completion
of the Merger, they would not do or fail to do, or cause any person to do or
fail to do, any act that would cause PDK to breach any of its representations
and warranties included in the Merger Agreement.
NONSOLICITATION COVENANT
Under the terms of the Merger Agreement, PDK has agreed not to permit
any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, solicit, initiate or encourage any "Acquisition
Proposal" or participate in any discussions or negotiations with, or encourage
any effort or attempt by, any third party to facilitate an "Acquisition
Proposal." Under the Merger Agreement, an "Acquisition Proposal" is defined to
mean any offer or proposal by any person or group concerning any tender or
exchange offer, proposal for a Merger, share exchange, recapitalization,
consolidation or other business combination involving PDK or any of its
subsidiaries or divisions, or any proposal or offer to acquire in any manner,
directly or indirectly, a significant equity interest in, or a substantial
portion of the assets of, PDK or any of its subsidiaries, other than pursuant to
the transactions contemplated by the Merger Agreement. Further, the Merger
Agreement provides that all of PDK's representatives will be instructed to cease
the foregoing activities. However, PDK may, subject to obtaining a
confidentiality agreement, furnish information to and participate in discussions
and negotiations with a party who has made an unsolicited written Acquisition
Proposal after the date of the Merger Agreement if either PDK's Board of
directors or its Special Committee has determined in good faith, based upon the
reasonably concluded advice of (i) JWGenesis that such Acquisition Proposal is
reasonably likely to lead to a transaction that is materially more favorable to
PDK's stockholders than the Merger and (ii) (outside
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<PAGE>
counsel, that failing to take such action would violate PDK's Board of
directors' fiduciary duties under applicable law. PDK is obligated to inform PDK
Acquisition immediately of any Acquisition Proposal, provide PDK Acquisition
notice of its terms and conditions, and keep PDK Acquisition advised of all
material developments.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that the current and former directors and
officers of PDK and any of its subsidiaries (including the members of the
Special Committee) will be indemnified by PDK, to the fullest extent permitted
by applicable law, against any costs, expenses, judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation, and will be advanced reasonable costs and expenses (including
attorneys' fees), in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to the approval and consummation of
the transactions contemplated by the Merger Agreement. In addition, PDK is
required to maintain in effect, for a period of six years after the Effective
Time, PDK's policies of directors' and officers' liability insurance (provided
that PDK may substitute for policies of at least the same amounts and comparable
coverage). However, in no event will PDK be required to pay premiums for
insurance in excess of 300% of the premiums currently paid by PDK.
EXPENSES
The parties have agreed to pay their own costs and expenses in
connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement. PDK has agreed to bear the cost incurred in the printing,
filing with the Commission and mailing to shareholders this proxy statement and
other materials in connection with the Special Meeting.
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the Merger Agreement may be
terminated
(i) by the mutual consent of the Boards of directors of
PDK and PDK Acquisition.
(ii) if a court or other governmental entity issues an
order or takes any action enjoining, restraining or
prohibiting the Merger and such order or action
becomes final and nonappealable.
Any party may terminate the Merger Agreement prior to the Effective
Time by written notice to the other parties if:
the conditions precedent to closing have not occurred by
December 31, 2000 unless the failure to close results from the
party's breach of any representation, warranty or covenant;
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<PAGE>
approval of the shareholders of PDK necessary to complete the
Merger has not been obtained;
In addition, PDK Acquisition may terminate the Merger Agreement prior
to the Effective Time by written notice to PDK if:
PDK breaches any representation, warranty or covenant in the
Merger Agreement in any material respect and fails to cure
the breach within 15 days after written notice;
PDK may terminate the Merger Agreement prior to the Effective Time by
written notice to PDK Acquisition if:
PDK Acquisition or the Management Group breaches any
representation, warranty or covenant in the Merger Agreement
in any material respect and fails to cure the breach within 15
days after written notice;
Subject to the provisions of applicable law, the Merger Agreement may
be modified or amended, and provisions waived, by written agreement of the
parties. However, after approval of the Merger Agreement by the shareholders of
PDK, no amendment or waiver of a provision may be made which reduces the amount
or changes the form of the cash Merger consideration to be received by the
shareholders, unless such amendment or waiver of a provision is approved by the
shareholders.
TERMINATION FEE
In the event that the Merger Agreement is terminated and PDK
Acquisition is not in material breach of its material covenants and agreements
in the Merger Agreement or its representations and warrants contained in the
Merger Agreement, then PDK shall reimburse PDK Acquisition for all out-of-pocket
expenses and fees up to $1 million.
REGULATORY APPROVALS/THIRD PARTY CONSENTS
PDK is not aware of any license or regulatory permit that is material
to the business of PDK and that is likely to be adversely affected by the Merger
or of any approval or other action by any state, federal or foreign government
or governmental agency that would be required prior to effecting the Merger.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase business combination for
accounting purposes.
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FEES AND EXPENSES
Assuming the Merger is consummated, PDK will pay costs and fees in
connection with the Merger, financing and the related transactions, which are
estimated to be as follows:
Expense or Fee Estimated Amount
-------------- ----------------
Financial advisory fees and expenses $150,000
Loan commitment fees............................... 50,000
Legal fees ........................................ 100,000
Disbursement agent's fees.......................... 5,000
Accounting fees.................................... 25,000
Printing and mailing expenses...................... 25,000
Solicitation expenses.............................. 15,000
Commission filing fees............................. 2,500
Miscellaneous...................................... 77,500
-------
Total......................................... $450,000
=======
For a description of PDK's obligation, even in some cases if the Merger
is not consummated, to pay or reimburse PDK Acquisition for expenses incurred by
PDK Acquisition in connection with the Merger, see "The Merger -- Expenses" and
" --Termination Fee." See "Special Factors -- Opinion of PDK's Financial
Advisor" for a description of the fees to be paid to JWGenesis in connection
with its engagement. For a description of fees paid to the member of the Special
Committee, see "Special Factors -- Conflicts of Interest."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of PDK Common Stock and PDK Preferred Stock. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the holders of PDK Common Stock and PDK Preferred Stock as
described in this proxy statement. Special tax consequences not described below
may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts as to the United States and holders who acquired their stock
through the exercise of an employee stock option or otherwise as compensation.
The receipt of the $5.00 per share of Common Stock and $8.00 per share
(plus accrued and unpaid dividends) of Preferred Stock cash Merger consideration
in the Merger by holders of PDK
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Common Stock will be a taxable transaction for federal income tax purposes. Each
holder's gain or loss per share will be equal to the difference between $5.00
and $8.00 and the holder's basis per share in the Common Stock and Preferred
Stock. This gain or loss generally will be a capital gain or loss. In the case
of individuals, trusts and estates, this capital gain will be subject to a
maximum federal income tax rate of 20% for shares of Common Stock and Preferred
Stock held for more than 12 months prior to the date of disposition. For shares
held less than 12 months the gain or loss will be a short-tem capital gain or
loss. As a general rule, short-term capital gains are taxed at ordinary income
rates.
A holder of PDK Common Stock and Preferred Stock may be subject to
backup withholding at the rate of 31% with respect to the Merger consideration
received, unless the holder (a) is a corporation or comes within other exempt
categories and, when required, demonstrates this fact or (b) provides a correct
taxpayer identification number ("TIN"), certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholdings rules. To prevent the possibility of backup federal
income tax withholding on payments made to certain holders with respect to
shares of Common Stock under the Merger, each holder must provide the disbursing
agent with his correct TIN by completing a Form W-9 or Substitute Form W-9. A
holder of PDK Common Stock and Preferred Stock who does not provide PDK with his
or her correct TIN may be subject to penalties imposed by the Internal Revenue
Service (the "IRS"), as well as backup withholding. Any amount withheld under
these rules will be creditable against the holder's federal income tax
liability. PDK (or its agent) will report to the holders of Common Stock and
Preferred Stock and the IRS the amount of any "reportable payments," as defined
in Section 3406 of the Code, and the amount of tax, if any, that is withheld.
The foregoing tax discussion is included for general information only
and is based upon present law. Each holder of Common Stock and Preferred Stock
should consult his or her own tax advisor as to the specific tax consequences of
the Merger to that holder, including the application and effect of federal,
state, local and other tax laws and the possible effect of changes in such tax
laws.
INFORMATION REGARDING PDK
PDK manufactures and distributes over-the-counter 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.
PDK was organized as a New York corporation in 1971. Our principal
executive offices are located at 145 Ricefield Lane, Hauppauge, New York 11788.
Our telephone number is 631-273-2630.
We have attached a copy of our Annual Report on Form 10-K for the
fiscal year ended November 30, 1999 as Appendix D to this proxy statement and
our Quarterly Reports on Form 10-Q for the periods ended February 29, 2000 and
May 31, 2000 as Appendix E and F. These documents contain more detailed
information about us.
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INCORPORATION OF DOCUMENTS BY REFERENCE
We are incorporating by reference the following documents that we have
previously filed with the Commission, copies of which are attached as appendices
to this proxy statement:
Our Annual Report on Form 10-K for the fiscal year ended
November 30, 1999; and
Our Quarterly Reports on Form 10-Q for the fiscal quarter
ended February 29, 2000 and May 31, 2000.
In addition, we are incorporating by reference all documents we file in
response to the requirements of Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement and before the date of the
Special Meeting. Accordingly, those documents will be considered a part of this
proxy statement from the date they are filed.
If you would like copies of these documents, please contact Reginald
Spinello at PDK Labs Inc., 145 Ricefield Lane, Hauppauge, NY 11788 or by
telephone at (631) 273-2630. We will send these documents to you by first-class
mail within one business day after receiving your request.
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SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
<TABLE>
<CAPTION>
November 30,
May 31, 2000 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Assets $34,264 $36,700 $46,473 $54,221 $53,255 $41,943
Long - Term Obligations, net 1,622 1,967 4,342 15,434 13,603 8,251
of current portion
Stockholders' Equity 29,317 27,772 29,504 28,305 26,661 24,437
</TABLE>
SUMMARY INCOME STATEMENT DATA
( in thousands, except share and per share data )
<TABLE>
<CAPTION>
Years Ended November 30,
Six Months Ended
May 31, 2000 May 31, 1999 1999 1998 1997 1996 1995
---- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $24,706 $25,824 $54,706 $57,599 $51,352 $46,563 $31,904
Operating Income 1,522 1,845 3,778 2,916 2,682 2,356 1,681
Net Earnings (Loss) 1,053 921 2,137 777 1,559 1,613 (180)
Net Earnings ( Loss ) per
Common Share:
Basic $0.41 $0.26 $0.66 $0.16 $0.41 $0.48 ($0.24)
Diluted $0.41 $0.26 $0.66 $0.16 $0.39 $0.46 ($0.24)
Weighted Average Number
of Common
Shares Outstanding:
Basic 2,320,007 3,151,119 2,881,979 3,327,050 3,095,660 3,156,276 2,559,232
Diluted 2,320,007 3,151,119 2,881,979 3,409,109 3,228,333 3,265,393 2,559,232
</TABLE>
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DIRECTORS AND EXECUTIVE OFFICERS
The following persons are the current executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Reginald Spinello 47 Chairman of the Board, Chief Executive
Officer and President
Karine Hollander 33 Chief Financial Officer, Secretary and
Director
Thomas A. Keith 40 Director
Ira Helman 67 Director
Lawrence D. Simon 33 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.
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.
46
<PAGE>
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 received
his B.A. degree from Princeton University and his law degree from Brooklyn Law
School.
STOCK OWNERSHIP
The following table sets forth certain information, as of September 19,
2000 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:
<TABLE>
<CAPTION>
Amount
and Nature Approximate
Name and Address Beneficial Percent of
of Beneficial Owner Ownership(1) Class
------------------- ------------------ -----------
<S> <C> <C>
Perry D. Krape 205,488 8.9%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Reginald Spinello(2) 872,500 38.00%
145 Ricefield Lane
Hauppauge, NY 11788
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C>
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(3) 50,000 2.2%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Ira Helman 0 0
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
PDK Acquisition Corp. 200,000 8.7%
145 Ricefield Lance
Hauppauge, NY 11788
Directors and Officers 872,500 38.0%
as a Group (five (5) persons)
</TABLE>
(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. Includes 200,000 shares of Common Stock owned by
PDK Acquisition.
(3) Ms. Hollander's shares of Common Stock are subject to a ten (10) year
voting trust held by the Company's Chief Executive Officer. Does not
include 200,000 shares of Common Stock owned by PDK Acquisition.
RECENT STOCK PURCHASES
We started a share repurchase program in October 1996 and suspended the
program in December 1999. The following table includes the amount of Common
Stock we repurchased, the range
48
<PAGE>
of prices per share we paid and the average purchase price per share we paid
during each quarterly period presented below.
<TABLE>
<CAPTION>
Fiscal Years Ended or Ending November,
Number of Shares Range of Prices Average Price
---------------- --------------- -------------
Number of Shares Range of Prices Average Price
---------------- --------------- -------------
<S> <C> <C> <C>
1998
First Quarter 9,000 8.19 8.19
Second Quarter - - -
Third Quarter 2,507 3.25 - 4.75 3.94
Fourth Quarter 56,918 3.50 - 3.75 3.65
1999
First Quarter 260,000 3.13 - 4.25 3.48
Second Quarter 215,900 3.69 - 4.75 4.26
Third Quarter 94,534 3.56 - 4.63 3.95
Fourth Quarter 550,325 3.44 - 5.25 4.93
2000
First Quarter* 19,554 4.75 - 5.13 4.92
</TABLE>
* Through December 1999
MARKET PRICES OF COMMON STOCK PREFERRED STOCK AND DIVIDENDS
The following table indicates the high and low prices for the Company's
Common Stock and Preferred Stock for the period up to June 30, 2000 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
---- ---
1997 Calendar Year
First Quarter 7 4 7/8
49
<PAGE>
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
1999 Calendar Year
First Quarter 5 3
Second Quarter 4 3
Third Quarter 4 3/4 2 1/2
Fourth Quarter 5 3/16 3 7/8
2000 Calendar Year
First Quarter 4 9/16 3 5/8
Second Quarter 3 3/4 3
Preferred Stock
---------------
High Low
---- ---
1997 Calendar Year
First Quarter 6 5/8 5
Second Quarter 6 1/2 4
50
<PAGE>
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
1999 Calendar Year
First Quarter 5 7/8 4 3/8
Second Quarter 6 3 5/8
Third Quarter 5 1/2 3 3/4
Fourth Quarter 6 4 3/4
2000 Calendar Year
First Quarter 6 5/16 5
Second Quarter 6 5/16 5 3/4
On August 2, 2000, the closing price of the Common Stock as reported on
the NASDAQ System was $4.375. On August 2, 2000, the closing price of the
Preferred Stock reported on the NASDAQ System was $5.75. On August 2, 2000,
there were 964 holders of record of Common Stock.
On April 14, 2000, the Company paid a $.25 per share of Preferred Stock
dividend to holders of record on April 12, 1999 payable in cash. On October 15,
1999, the Company paid a $.24 per share of Preferred Stock dividend to holders
of record on October 12, 1999 payable in cash.
PDK has never paid any cash dividends on its Common Stock. Under the
Merger Agreement, PDK has agreed not to pay any dividends on the Common Stock
prior to the completion of the Merger.
51
<PAGE>
INFORMATION REGARDING PDK ACQUISITION AND THE MANAGEMENT GROUP
PDK Acquisition is a recently incorporated New York corporation
organized by the Management Group for the purpose of effecting the Merger. Their
principal executive offices are located at 145 Ricefield Lane, Hauppauge, NY
11788. Their telephone number is (631)273-2630. Reginald Spinello, Karine
Hollander and Raveendra Nandigam are the sole shareholders and directors of PDK
Acquisition. Prior to the completion of the Merger, the Management Group will
contribute all of the outstanding Common stock of PDK it holds to PDK
Acquisition.
Neither PDK Acquisition, nor the Management Group is required to file
reports with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act.
Neither PDK Acquisition, nor any executive officer, director or person
controlling PDK Acquisition, or any of their or his or her respective affiliates
has during the last five years been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or been a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting activities subject
to, federal or state securities laws or finding any violation of such laws.
All information contained in this proxy statement concerning the
Management Group, PDK Acquisition is based upon statements and representations
made by them or their representatives to us or our representatives.
INDEPENDENT AUDITORS
The consolidated balance sheets as of November 30, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended November 30, 1999,
included in our Annual Report on Form 10-K attached as Appendix D to this proxy
statement have been audited by Holtz Rubenstein, independent auditors, as stated
in their report. A representative of Holtz Rubenstein will be at the Special
Meeting to answer appropriate questions from shareholders and will have the
opportunity to make a statement if so desired.
SHAREHOLDER PROPOSALS
Our annual meeting of shareholders is normally held in October of each
year.
If the proposal to approve the Merger is not approved at the Special
Meeting, the annual meeting of shareholders will be held in October 2000.
Proposals of shareholders intended to be presented at the annual meeting of
shareholders must be submitted, by registered or certified mail, to the
attention of the PDK's Secretary at our principal executive offices by _______,
2000 in order to be considered for inclusion in our proxy statement and form of
proxy for the annual meeting. In addition, if a proposal is submitted after that
date, proxies will have the authority to vote in their discretion on the
proposal. If the Merger is completed, the annual meeting of shareholders may be
scheduled for another date after the Effective Time.
52
<PAGE>
OTHER MATTERS
We know of no other business to be presented at the Special Meeting. If
other matters do properly come before the Special Meeting, or any adjournment or
adjournments thereof, the individuals named in the proxy have the discretion to
vote on these other matters according to their best judgment unless the
authority to do so is withheld as marked by a shareholder on the proxy.
53
<PAGE>
APPENDIX A
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AMENDED
AGREEMENT AND PLAN OF MERGER
Between
PDK ACQUISITION CORP.
and
PDK LABS, INC.
Dated as of
September 12, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THIS AMENDED AGREEMENT AND PLAN OF MERGER, dated as of July ,
2000 (this "Agreement") between PDK Acquisition Corp., a New York corporation
("Purchaser"), and PDK Labs, Inc., a New York corporation (the "Company").
WHEREAS, prior to organizing Purchaser, the shareholders of
Purchaser (the "Continuing Shareholders") owned, in the aggregate, 672,500
shares of Common Stock, par value $.01 per share (the "Common Stock"), and 0
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock," and
together with the Common Stock, the "Shares"), of the Company, representing
approximately 28.8% of the shares of Common Stock outstanding (excluding
treasury stock) and the right to vote 33.0% of the shares of common stock
outstanding (excluding treasury shares). As the Preferred Stock is convertible
into Common Stock at a ratio of 0.3-1, the Continuing Shareholders owned, in the
aggregate, 30.5% of the Shares of the Company on a fully diluted basis; and
WHEREAS, the Continuing Shareholders have transferred all of
their Shares to the Purchaser in exchange for all the issued and outstanding
shares of capital stock of the Purchaser; and
WHEREAS, it is proposed that the Continuing Shareholders,
through their ownership of Purchaser, acquire the remaining issued and
outstanding Shares; and
WHEREAS, it is proposed that Purchaser be merged with and into
the Company (the "Merger") upon the terms and subject to the conditions set
forth in this Agreement and in the certificate of merger (the "Certificate of
Merger"), in substantially the form attached hereto as Exhibit A, and in
accordance with New York Law (as hereafter defined); and
WHEREAS, JW Genesis Capital Markets, Inc. ("Bank") has
delivered to the Special Committee of Independent Directors (the "Special
Committee") of the Board of Directors of the Company (the "Board"), for the
Special Committee's consideration, its written opinion that, subject to the
various assumptions and limitations set forth therein as of the date of such
opinion, the cash consideration to be received in the Merger by the stockholders
of the Company other than Purchaser or it affiliates is fair to such
stockholders from a financial point of view; and
WHEREAS, the Special Committee, at a meeting duly called and
held on July [ ], 2000, has (A) unanimously determined that (x) $5.00 is a fair
price for a share of Common Stock and (y) $8.00 plus accrued and unpaid
dividends thereon through the Effective Time is a fair price for a share of
Preferred Stock, (B) determined that this Agreement and the transactions
contemplated by this Agreement (the "Transactions") are fair to the stockholders
of the Company (other than Purchaser and its affiliates), and (C) on the basis
of the foregoing and the opinion of Bank, unanimously recommended that the Board
approve and authorize the Merger and this Agreement; and
WHEREAS, the Board, at a meeting duly called and held on ,
2000, has (A) approved and adopted this Agreement and the Transactions,
including the Merger in accordance with the New York Business Corporations Law
("New York Law") and upon the terms and
<PAGE>
subject to the conditions set forth in this Agreement, and (B) resolved to
recommend that the stockholders of the Company approve and adopt this Agreement
and the Merger.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements herein contained, and intending to be legally
bound hereby, Purchaser and the Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with New York Law, at the Effective
Time (as hereinafter defined) Purchaser shall be merged with and into the
Company. As a result of the Merger, the separate corporate existence of
Purchaser shall cease and the Company shall continue as the surviving
corporation of the Merger (the "Surviving Corporation"). Notwithstanding
anything to the contrary contained in this Section 1.01, Purchaser may elect
instead, at any time prior to the fifth business day immediately preceding the
date on which the Proxy Statement (as hereinafter defined) is mailed initially
to the Company's stockholders, to merge the Company into Purchaser or another
corporation controlled by, controlling or under common control with Purchaser.
In such event, the parties agree to execute an appropriate amendment to this
Agreement in order to reflect the foregoing and to provide, as the case may be,
that Purchaser or such other corporation controlled by Purchaser shall be the
Surviving Corporation.
SECTION 1.02 Effective Time; Closing. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
V, the parties hereto shall cause the Merger to be consummated by filing this
Agreement or a certificate of merger (in either case, the "Certificate of
Merger") with the Secretary of State of the State of New York, in such form as
is required by, and executed in accordance with the relevant provisions of, New
York Law (the date and time of such filing being the "Effective Time"). Prior to
such filing, a closing shall be held at the offices of Morrison Cohen Singer &
Weinstein, LLP, 750 Lexington Avenue, New York, New York, 10022, or such other
place as the parties shall agree, for the purpose of confirming the satisfaction
or waiver, as the case may be, of the conditions set forth in Article V.
SECTION 1.03 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of New York Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
the Company and Purchaser shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the
Company and Purchaser shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.04 Certificate of Incorporation; By-laws. (a) Unless otherwise
determined by Purchaser prior to the Effective Time, at the Effective Time the
Certificate of Incorporation of the Company shall be amended and restated as set
forth in Exhibit 1.04 hereto
<PAGE>
and such Certificate of Incorporation, as amended and restated, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) Unless otherwise determined by Purchaser prior to the Effective
Time, the By-laws of the Company, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-laws.
SECTION 1.05 Directors and Officers. The directors of Purchaser immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
SECTION 1.06 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Purchaser, the Company or the
holders of any of the following securities:
(a) Each share of Common Stock issued and outstanding immediately prior
to the Effective Time (other than any shares of Common Stock to be canceled
pursuant to Section 1.06(c) and any Dissenting Shares (as hereinafter defined))
shall be canceled and shall be converted automatically into the right to receive
an amount equal to $5.00 in cash (the "Common Stock Merger Consideration")
payable, without interest, to the holder of such share of Common Stock, upon
surrender, in the manner provided in Section 1.09, of the certificate that
formerly evidenced such share of Common Stock;
(b) Each share of Preferred Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be cancelled pursuant to
Section 1.06(c) and any Dissenting Shares) shall be cancelled and shall be
converted automatically into the right to receive an amount equal to $8.00 plus
accrued and unpaid dividends thereon through the Effective Time, in cash (the
"Preferred Stock Merger Consideration" and, together with the Common Stock
Merger Consideration, the "Merger Consideration") payable, without interest, to
the holder of such share of Preferred Stock upon surrender, in the manner
provided in Section 1.09, of the certificate that formerly evidenced such share
of Preferred Stock.
(c) Each Share held in the treasury of the Company and each Share owned
by Purchaser, any Affiliate of Purchaser or any direct or indirect subsidiary of
the Company, immediately prior to the Effective Time shall be canceled without
any conversion thereof and no payment or distribution shall be made with respect
thereto; and
(d) Each share of Common Stock, par value $.01 per share, of Purchaser
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
<PAGE>
SECTION 1.07 Stock Options. Each stock option (a "Company Stock Option")
outstanding, whether or not exercisable and whether or not vested, at the
Effective Time under the PDK Labs, Inc. Non-Qualified Stock Option Plan, as
amended (the "Company Stock Option Plan"), shall be canceled by the Company
immediately prior to the Effective Time, and each holder of a canceled Company
Stock Option shall be entitled to receive at the Effective Time or as soon as
practicable thereafter from the Surviving Corporation in consideration for the
cancellation of such Company Stock Option an amount (the "Option Spread") equal
to the product of (i) the number of Shares previously subject to such Company
Stock Option and (ii) the excess, if any, of the Common Stock Merger
Consideration over the exercise price per share of Company Common Stock
previously subject to such Company Stock Option. The Option Spread, after
reduction for applicable tax withholding, if any, shall be paid in cash without
interest.
SECTION 1.08 Dissenting Shares. Notwithstanding any provision of this
Agreement to the contrary, Shares that are outstanding immediately prior to the
Effective Time and which are held by stockholders who shall have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such Shares in accordance with Section 623 of
New York Law (collectively, the "Dissenting Shares") shall not be converted into
or represent the right to receive the Merger Consideration. Such stockholders
shall be entitled to receive payment of the appraised value of such Shares held
by them in accordance with the provisions of such Section 623, except that all
Dissenting Shares held by stockholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
Shares under such Section 623 shall thereupon be deemed to have been converted
into and to have become exchangeable for, as of the Effective Time, the right to
receive the Merger Consideration, without any interest thereon, upon surrender,
in the manner provided in Section 1.09, of the certificate or certificates that
formerly evidenced such Shares.
SECTION 1.09 Surrender of Shares; Stock Transfer Books. (a) Prior to the
Effective Time, Purchaser shall designate a bank or trust company to act as
agent (the "Paying Agent") for the holders of Shares in connection with the
Merger to receive the funds to which holders of Shares shall become entitled
pursuant to Sections 1.06(a) and (b). At the Effective Time, Purchaser shall
cause to be deposited with the Paying Agent in immediately available funds the
aggregate amount of the Merger Consideration. Such funds shall be invested by
the Paying Agent as directed by the Surviving Corporation, provided that such
investments shall be in obligations of or guaranteed by the United States of
America or of any agency thereof and backed by the full faith and credit of the
United States of America, in commercial paper obligations rated A-1 or P-1 or
better by Moody's Investors Services, Inc. or Standard & Poor's Corporation,
respectively, or in deposit accounts, certificates of deposit or banker's
acceptances of, repurchase or reverse repurchase agreements with, or Eurodollar
time deposits purchased from, commercial banks with capital surplus and
undivided profits aggregating in excess of $50 million (based on the most recent
financial statements of such bank which are then publicly available at the SEC
or otherwise).
(b) Promptly after the Effective Time, the Surviving Corporation shall
cause to be mailed to each person who was, at the Effective Time, a holder of
record of Shares entitled to receive Common Stock Merger Consideration and/or
Preferred Stock Merger Consideration
<PAGE>
pursuant to Section 1.06(a) or (b), as applicable, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates evidencing such Shares (the "Certificates")
shall pass, only upon proper delivery of the Certificates to the Paying Agent)
and instructions for use in effecting the surrender of the Certificates pursuant
to such letter of transmittal. Upon surrender to the Paying Agent of a
Certificate, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, and such other
documents as may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the Common Stock
Merger Consideration and/or Preferred Stock Merger Consideration, as the case
may be, for each Share formerly evidenced by such Certificate, and such
Certificate shall then be canceled. No interest shall accrue or be paid on the
Common Stock Merger Consideration or the Preferred Stock Merger Consideration
payable upon the surrender of any Certificate for the benefit of the holder of
such Certificate. If payment of the Common Stock Merger Consideration and/or
Preferred Stock Merger Consideration, as the case may be, is to be made to a
person other than the person in whose name the surrendered Certificate is
registered on the stock transfer books of the Company, it shall be a condition
of payment that the Certificate so surrendered shall be endorsed properly or
otherwise be in proper form for transfer and that the person requesting such
payment shall have paid all transfer and other taxes required by reason of the
payment of the Common Stock Merger Consideration and/or Preferred Stock Merger
Consideration, as the case may be, to a person other than the registered holder
of the Certificate surrendered or shall have established to the satisfaction of
the Surviving Corporation that such taxes either have been paid or are not
applicable.
(c) At any time following the sixth month after the Effective Time, the
Surviving Corporation shall be entitled to require the Paying Agent to deliver
to it any funds which had been made available to the Paying Agent and not
disbursed to holders of Shares (including, without limitation, all interest and
other income received by the Paying Agent in respect of all funds made available
to it), and thereafter such holders shall be entitled to look to the Surviving
Corporation (subject to abandoned property, escheat and other similar laws) only
as general creditors thereof with respect to any Merger Consideration that may
be payable upon due surrender of the Certificates held by them. Notwithstanding
the foregoing, neither the Surviving Corporation nor the Paying Agent shall be
liable to any holder of a Share for any Merger Consideration delivered in
respect of such Share to a public official pursuant to any abandoned property,
escheat or other similar law.
(d) At the close of business on the day of the Effective Time, the
stock transfer books of the Company shall be closed and thereafter there shall
be no further registration of transfers of Shares on the records of the Company.
From and after the Effective Time, the holders of Shares outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
Shares except as otherwise provided herein or by applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser that:
<PAGE>
SECTION 2.01 Organization and Qualification; Subsidiaries. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of New York and has the requisite power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power, authority and
governmental approvals would not, individually or in the aggregate, have a
Material Adverse Effect (as defined below). The Company is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that would not, individually or in the aggregate, have a
Material Adverse Effect. When used in connection with the Company, the term
"Material Adverse Effect" means any change or effect that, when taken together
with all other adverse changes and effects that are within the scope of the
representations and warranties made by the Company in this Agreement and which
are not individually or in the aggregate deemed to have a Material Adverse
Effect, is or is reasonably likely to be materially adverse to the business,
operations, properties, condition (financial or otherwise), assets or
liabilities (including, without limitation, contingent liabilities) or prospects
of the Company. Except as set forth on Schedule 2.01, the Company does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
SECTION 2.02 Authority Relative to this Agreement. The Company has all
necessary power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the Transactions. The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the Transactions have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the Transactions
(other than, with respect to the Merger, the approval and adoption of this
Agreement by the holders of two-thirds of the then outstanding shares, and the
filing and recordation of appropriate merger documents as required by New York
Law). This Agreement has been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and delivery by
Purchaser, constitutes a legal, valid and binding obligation of the Company. The
Board of Directors has approved the Merger and the Transactions in accordance
with the provisions of Section 902 of the New York Law.
SECTION 2.03 Capitalization. The authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), and 5,000,0000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"). As of the date hereof, (i) [2,337,969] shares of Common
Stock and [447,466] shares of Preferred Stock are issued and outstanding, all of
which are validly issued, fully paid and nonassessable, (ii) 1,469,184 shares of
Common Stock are held in the treasury of the Company, (iii) [ ] shares of
Preferred Stock were held in the treasury of the Company, and [(iv) shares of
Common Stock are reserved for future issuances pursuant to employee stock
options or stock incentive rights granted pursuant to the Company's Stock Option
Plan]. Except as set forth in this Section 2.03, there are no options, warrants
or other rights, agreements, arrangements or
<PAGE>
commitments of any character relating to the issued or unissued capital stock of
the Company or obligating the Company to issue or sell any shares of capital
stock of, or other equity interests in, the Company. All Shares subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable.
SECTION 2.04 No Conflict; Required Filings and Consents. (a) The execution
and delivery of this Agreement by the Company does not, and the performance of
this Agreement by the Company will not, (i) conflict with or violate the
Certificate of Incorporation or By-laws or equivalent organizational documents
of the Company, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to the Company by which any property or asset of
the Company is bound or affected, or (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Company pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except for
applicable requirements, if any, of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), state securities or "blue sky" laws ("Blue Sky
Laws") and state takeover laws, the pre-merger notification requirements of the
HSR Act, and filing and recordation of appropriate merger documents as required
by New York Law and (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of Merger, or otherwise prevent the Company from
performing its obligation under this Agreement, and would not, individually or
in the aggregate, have a Material Adverse Effect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Company that:
SECTION 3.01 Corporate Organization. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has the requisite power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power, authority and
governmental approvals would not, individually or in the aggregate, have a
material adverse effect on the business or operations of Purchaser.
SECTION 3.02 Capitalization. As of the date hereof, shares of Purchaser's
Common Stock, par value $.01 per share, are issued and outstanding, all of which
<PAGE>
have been issued to the Continuing Shareholders in consideration of the
respective transfer to Purchaser by each such Continuing Shareholder of all of
his or her Shares.
SECTION 3.03 Authority Relative to this Agreement. Purchaser has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the Transactions. The
execution and delivery of this Agreement by Purchaser and the consummation by
Purchaser of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Purchaser are necessary to authorize this Agreement or to consummate the
Transactions (other than, with respect to the Merger, the filing and recordation
of appropriate merger documents as required by New York Law). This Agreement has
been duly and validly executed and delivered by Purchaser and, assuming the due
authorization, execution and delivery by the Company, constitutes a legal, valid
and binding obligation of Purchaser, enforceable against Purchaser in accordance
with its terms.
SECTION 3.04 No Conflict; Required Filings and Consents. (a) The execution
and delivery of this Agreement by Purchaser do not, and the performance of this
Agreement by Purchaser will not, (i) conflict with or violate the Certificate of
Incorporation or By-laws of Purchaser, (ii) conflict with or violate any law,
rule, regulation, order, judgment or decree applicable to Purchaser or by which
any of its property or assets is bound or affected, or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of Purchaser
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Purchaser
is a party or by which Purchaser or any property or asset of Purchaser is bound
or affected, except for any such conflicts, violations, breaches, defaults or
other occurrences which would not, individually or in the aggregate, have a
material adverse effect on the business or operations of Purchaser.
(b) The execution and delivery of this Agreement by Purchaser do not,
and the performance of this Agreement by Purchaser will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Exchange Act, Blue Sky Laws and
state takeover laws, the HSR Act, and filing and recordation of appropriate
merger documents as required by New York Law and (ii) where failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent Purchaser from performing its obligations under this
Agreement.
SECTION 3.05 No Current Intent to Sell Business. Purchaser has no current
intention to sell, transfer or otherwise dispose of the business of the Company
or any material part thereof following the consummation of the Merger, but there
can be no assurance that the Surviving Corporation will not determine to cause
such a transfer in the future.
<PAGE>
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.01 Stockholders' Meeting. The Company, acting through the Board,
shall, in accordance with applicable law and the Company's Certificate of
Incorporation and By-laws, duly call, give notice of, convene and hold an annual
or special meeting of its stockholders as soon as practicable for the purpose of
considering and approving this Agreement and the Merger (the "Special Meeting").
In connection with the Special Meeting, the Board shall recommend that the
shareholders of the Company vote to approve this Agreement and the Merger unless
the Special Committee has determined at any time prior to the Special Meeting in
good faith, after consultation with and based upon the reasonably concluded
advice of (i) Bank that this Agreement or the Merger is no longer in the best
interest of the shareholders of the Company and (ii) counsel to the Special
Committee that the modification or withdrawal of its recommendation is required
to satisfy the fiduciary duties of the Board under applicable law.
SECTION 4.02 Proxy Materials and Schedule 13E-3. (a) In connection with the
Special Meeting, the Company shall prepare and file a preliminary proxy
statement relating to the transactions contemplated by this Agreement and the
Merger (the "Preliminary Proxy Statement") with the United States Securities and
Exchange Commission (the "SEC") and shall use its reasonable best efforts to
respond to the comments of the SEC and to cause a definitive proxy statement to
be mailed to the Company's shareholders (the "Definitive Proxy Statement") all
as soon as reasonably practicable; provided, that prior to the filing of each of
the Preliminary Proxy Statement and the Definitive Proxy Statement, the Company
shall consult with Purchaser with respect to such filings and shall afford
Purchaser reasonable opportunity to comment thereon. Purchaser shall provide the
Company with any information for inclusion in the Preliminary Proxy Statement
and the Definitive Proxy Statement that may be required under applicable law and
is reasonably requested by the Company.
(b) The Company and Purchaser shall, and shall cause any other Person
that may be deemed to be an affiliate of the Company to, prepare and file
concurrently with the filing of the Preliminary Proxy Statement a Statement on
Schedule 13E-3 ("Schedule 13E-3") with the SEC. If at any time prior to the
Special Meeting any event should occur that is required by applicable law to be
set forth in an amendment of, or supplement to, the Schedule 13E-3, the Company
and Purchaser shall, and shall cause such Person to, file such amendments or
supplements.
SECTION 4.03 Directors' and Officers' Indemnification and Insurance. (a)
The Certificate of Incorporation of the Surviving Corporation shall contain
provisions no less favorable with respect to indemnification than are set forth
in Article [Eighth] of the Certificate of Incorporation of the Company, which
provisions shall not be amended, repealed or otherwise modified for a period of
ten years from the Effective Time in any manner that would affect adversely the
rights thereunder of individuals who at the Effective Time were directors,
officers, employees, fiduciaries or agents of the Company, unless such
modification shall be required by law.
<PAGE>
(b) The Company shall, to the fullest extent permitted under applicable
law and regardless of whether the Merger becomes effective, indemnify and hold
harmless, and, after the Effective Time, the Surviving Corporation shall, to the
fullest extent permitted under applicable law, indemnify and hold harmless, each
present and former director, officer, employee, fiduciary and agent of the
Company (collectively, the "Indemnified Parties") against all costs and expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), whether civil, criminal, administrative or investigative, arising out of
or pertaining to any action or omission in their capacity as an officer,
director, employee, fiduciary or agent, whether occurring before or after the
Effective Time, for a period of ten years after the date hereof. In the event of
any such claim, action, suit, proceeding or investigation, (i) the Company or
the Surviving Corporation, as the case may be, shall pay the reasonable fees and
expenses of counsel selected by the Indemnified Parties, which counsel shall be
reasonably satisfactory to the Company or the Surviving Corporation, promptly
after statements therefor are received and (ii) the Company and the Surviving
Corporation shall cooperate in the defense of any such matter; provided,
however, that neither the Company nor the Surviving Corporation shall be liable
for any settlement effected without its written consent (which consent shall not
be unreasonably withheld); and provided, further, that neither the Company nor
the surviving Corporation shall be obligated pursuant to this Section 4.03(b) to
pay the fees and expenses of more than one counsel for all Indemnified Parties
in any single action except to the extent that two or more of such Indemnified
Parties shall have conflicting interests in the outcome of such action; and
provided, further, that, in the event that any claim for indemnification is
asserted or made within such ten-year period, all rights to indemnification in
respect of such claim shall continue until the disposition of such claim.
(c) The Surviving Corporation shall use its best efforts to maintain in
effect for six years from the Effective Time, if available, the current
directors' and officers' liability insurance policies maintained by the Company
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage containing terms and conditions which are not materially
less favorable) with respect to matters occurring prior to the Effective Time;
provided, however, that in no event shall the Surviving Corporation be required
to expend pursuant to this Section 4.03(c): (i) for period beginning at the
Effective Time and ending three years thereafter, more than an amount per year
equal to 300% of current annual premiums (the "Current Annual Premiums") paid by
the Company for such insurance (which premiums the Company represents and
warrants to be approximately $[ ] in the aggregate), and (ii) for the period
beginning on the third anniversary of the Effective Time and ending three years
thereafter, more than an amount per year equal to 200% of the Current Annual
Premiums..
SECTION 4.04 Further Action; Reasonable Best Efforts. Upon the terms and
subject to the conditions hereof, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
Transactions, including, without limitation, using its reasonable best efforts
to obtain all licenses, permits (including, without limitation, Environmental
Permits), consents, approvals, authorizations, qualifications and orders of
governmental authorities and parties to contracts with the Company as are
necessary for the consummation of the Transactions and to
<PAGE>
fulfill the conditions to the Offer and the Merger. In case at any time after
the Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement shall use their reasonable best efforts to take all such action.
SECTION 4.05 New York Real Estate Gains Tax. Either Purchaser or the
Surviving Corporation shall pay the New York State Tax on Gain Derived from
Certain Real Property Transfers and the New York City Real Property Transfer Tax
and any similar tax in any other jurisdiction, if any (and any penalties or
interest with respect to such taxes), payable in connection with the Merger or
the acquisition of a controlling interest in the Company by Purchaser, and shall
indemnify and hold harmless the stockholders of the Company from and against any
liability with respect to such taxes (including any penalties, interest and
professional fees). The Company and Purchaser shall cooperate in the preparation
and filing of any required returns with respect to such taxes (including returns
on behalf of the stockholders of the Company).
SECTION 4.06 NASDAQ Listing. Until the Effective Time, the Company shall
use all commercially reasonable efforts to maintain the listing of the Common
Stock on the NASDAQ system; maintain the registration of such securities under
the Securities Exchange Act of 1934, as amended; and comply with the rules and
regulations of the SEC.
SECTION 4.07 Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, prior to the Effective Time or earlier
termination of this Agreement as provided herein, unless Purchaser shall
otherwise agree in writing and except as contemplated by this Agreement:
(a) The Company shall, and shall cause each of its subsidiaries to, act
and carry on its respective business in the ordinary course of business
substantially consistent with past practice and use its respective reasonable
best efforts to preserve substantially intact its current material business
organizations, keep available the services of its current officers and employees
(except for terminations of employees in the ordinary course of business) and
preserve its material relationships with others having significant business
dealings with it;
(b) The Company shall not (i) amend its certificate of incorporation or
bylaws, or (ii) declare, set aside or pay any dividend or other distribution or
payment in cash, stock or property in respect of any of its shares of capital
stock;
(c) Neither the Company nor any of its subsidiaries shall (i) issue,
grant, sell, pledge or transfer or agree or propose to issue, grant, sell,
pledge or transfer any shares of capital stock, stock options, warrants,
securities or rights of any kind or rights to acquire any such shares,
securities or rights of the Company, any of its subsidiaries or any successor
thereto, or (ii) enter into or modify any contract, agreement, commitment or
arrangement with respect to any of the foregoing; and
(d) Neither the Company nor any of its subsidiaries shall split,
combine or reclassify any capital stock of the Company or any subsidiary or
issue or authorize the issuance
<PAGE>
of any other securities in respect of, in lieu of or substitution for shares of
capital stock of the Company or any subsidiary.
SECTION 4.08 Notification of Certain Matters. Each of the parties hereto
shall, promptly upon obtaining knowledge of any of the following occurring
subsequent to the date of this Agreement and prior to the Effective Time, notify
all other parties to this Agreement of: (a) any material claims, actions,
proceedings, tax audits or investigations commenced or, to its knowledge,
threatened in writing, involving or affecting such party or any of its
subsidiaries or any of their properties or assets, that if adversely resolved
could have a Material Adverse Effect on such party or could prevent, hinder or
materially delay the ability of such party to consummate the Merger or the
transactions contemplated by this Agreement, (b) any notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by such party or any of its
subsidiaries, under any agreement, lease, indenture or instrument to which such
party or any of its subsidiaries is a party or is subject where such a default
could have a Material Adverse Effect on such party, or (c) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement. As used in this Section 4.09, with respect to the Company, the term
"Material Adverse Effect" shall have the meaning given to it in Section 2.01,
and, with respect to Purchaser, the term "Material Adverse Effect" shall mean
any effect that is materially adverse to the business, assets, prospects,
operations, properties, financial condition or results of operations of
Purchaser and its subsidiaries taken as a whole.
SECTION 4.09 Access to The Company's Books and Records. Upon reasonable
notice, the Company shall afford Purchaser and its representatives and
representatives of all prospective sources of Financing reasonable access during
normal business hours to the properties, books, records and personnel of The
Company and its subsidiaries and such additional information concerning the
business and properties of The Company and its subsidiaries as Purchaser and its
representatives may reasonably request.
SECTION 4.10 Acquisition Proposals. Any offer or proposal by any Person or
group concerning any tender or exchange offer, proposal for a merger, share
exchange, recapitalization, consolidation or other business combination
involving the Company or any of its subsidiaries or divisions, or any proposal
or offer to acquire in any manner, directly or indirectly, a significant equity
interest in, or a substantial portion of the assets of, the Company or any of
its subsidiaries, other than pursuant to the transactions contemplated by this
Agreement, is hereby defined as an "Acquisition Proposal". The Company shall
not, nor shall it permit any of its officers, directors, affiliates,
representatives or agents to, directly or indirectly, (a) take any action to
solicit, initiate or encourage any Acquisition Proposal, or (b) participate in
any discussions or negotiations with or encourage any effort or attempt by any
other Person or take any other action to facilitate an Acquisition Proposal.
From and after the date hereof, the Company, its subsidiaries and all officers,
directors, employees of, and all investment bankers, attorneys and other
advisors and representatives of, the Company and its subsidiaries shall cease
doing any of the foregoing. Notwithstanding the foregoing, the Company or any
such Persons may, directly or indirectly, subject to a confidentiality agreement
containing customary terms, furnish to any party information and access in
response to a request for information or access made incident to an
<PAGE>
Acquisition Proposal made after the date hereof and may participate in
discussions and negotiate with such party concerning any written Acquisition
Proposal made after the date hereof (provided that neither the Company nor any
such Person, after the date hereof, solicited, initiated or encouraged such
Acquisition Proposal), if the Committee shall have determined in good faith
based upon the reasonably concluded advice of (i) Bank that such Acquisition
Proposal is reasonably likely to lead to a transaction that is materially more
favorable to the Company's stockholders and (ii) counsel to the Special
Committee that the taking of such action is necessary to discharge the Company's
board of directors' fiduciary duties under applicable law. During the term of
this Agreement, the board of directors of the Company shall notify Purchaser
immediately if any Acquisition Proposal is made and shall in such notice
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such Acquisition Proposal and shall keep Purchaser promptly
advised of all material developments that could culminate in the board of
directors withdrawing, modifying or amending its recommendation of the Merger
and the other transactions contemplated by this Agreement. During the term of
this Agreement, the Company shall not waive or modify any provisions contained
in any confidentiality agreement entered into relating to a possible acquisition
(whether by merger, stock purchase, asset purchase or otherwise) or
recapitalization of the Company unless the Committee shall have determined in
good faith based on reasonably concluded advice of counsel to the Special
Committee that the taking of such action is necessary to discharge the Company's
board of directors' fiduciary duties under applicable law. Notwithstanding the
foregoing, the Company may make the disclosure contemplated by Rule 14e-2(a)
under the Exchange Act to the extent that such disclosure is required to be
taken and made by such Rule; provided, that the Company may only recommend a
tender offer giving rise to such obligation as contemplated by such Rule if the
Committee has made the good faith determination described in the third preceding
sentence.
ARTICLE V
CONDITIONS TO THE MERGER
SECTION 5.01 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement and the Transactions shall
have been approved and adopted by the affirmative vote of the stockholders of
the Company to the extent required by New York Law and the Certificate of
Incorporation of the Company;
(b) No Order. No United States or state governmental authority or other
agency or commission or United States or state court of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of making the consummation of the Merger unlawful or preventing, prohibiting
consummation of the Transactions or, with respect to any litigation in
connection with the Merger, result in an award of damages that could have a
Material Adverse Effect; and
<PAGE>
(c) Fairness Opinion. The Fairness Opinion of Bank referenced in the
recitals to this Agreement shall not have been withdrawn at or prior to the
Effective Time.
SECTION 5.02 Conditions to Obligations of Purchaser to Effect the Merger.
The obligations of Purchaser to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions, unless waived by Purchaser:
(a) The representations and warranties of the Company set forth in
Article II hereof shall be true and correct in all material respects (except
that any such representation and warranty that is qualified as to materiality by
reference to "Material Adverse Effect" or any similar term shall be true and
correct) as of the date of this Agreement and as of the Effective Time as though
all of such representations were made on and as of the Effective Time by the
Company, and Purchaser shall have received a certificate of the Company signed
by the Chief Financial Officer or a Vice President of the Company to that
effect, provided that such signatory or signatories shall not have any personal
liability in connection therewith;
(b) The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement prior to the
Effective Time and Purchaser shall have received a certificate of the Company
signed by the Chief Financial Officer or a Vice President of the Company to that
effect, provided that such signatory or signatories shall not have any personal
liability in connection therewith; and
(c) No change, condition, event or development shall have occurred that
has a Material Adverse Effect.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.01 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement and the Transactions by the
stockholders of the Company:
(a) By mutual written consent duly authorized by the Board of Directors
of Purchaser and the Board of Directors of the Company; or
(b) If any court of competent jurisdiction in the United States or
other United States governmental authority shall have issued an order, decree,
ruling or taken any other action restraining, enjoining or otherwise prohibiting
or delaying the Merger and such order, decree, ruling or other action shall have
become final and nonappealable; provided, however that each of the parties shall
have used reasonable best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible any injunction or other order
that may be entered; or
(c) By Purchaser if the Board or any committee thereof shall have
withdrawn or modified in a manner adverse to Purchaser its approval or
recommendation of this Agreement,
<PAGE>
the Merger or any other Transaction or shall have recommended another merger,
consolidation, business combination with, or acquisition of, the Company or its
assets or a tender offer for Shares, or shall have resolved to do any of the
foregoing;
(d) By the Company, upon approval of the Board, if the Board shall have
withdrawn or modified in a manner adverse to Purchaser its approval or
recommendation of this Agreement, the Merger or any other Transaction or shall
have recommended another merger, consolidation, business combination with, or
acquisition of, the Company or its assets or a tender offer for Shares, or shall
have resolved to do any of the foregoing;
(e) By Purchaser (i) in the event the Company has breached any
representation, warranty, or covenant contained in this Agreement in any
material respect, Purchaser has notified the Company of the breach and such
breach cannot be or has not been cured within 15 days after the giving of such
notice, or (ii) if the Closing shall not have occurred on or before ______, 2000
and any condition precedent in Article V hereof shall not have been met or
fulfilled (unless the failure results primarily from Purchaser breaching any
representation, warranty or covenant contained in this Agreement);
(f) By the Company (i) in the event Purchaser has breached any
representation, warranty, or covenant contained in this Agreement in any
material respect, the Company has notified Purchaser of the breach and such
breach cannot be or has not been cured within 15 days after the giving of such
notice, or (ii) if the Closing shall not have occurred on or before ______, 2000
and any condition precedent in Article V hereof shall not have been met or
fulfilled (unless the failure results primarily from the Company breaching any
representation, warranty, or covenant contained in this Agreement); or
(g) By the Company or Purchaser if upon a vote at the Special Meeting,
any approval of the shareholders of the Company necessary to consummate the
Merger and the transactions contemplated hereby shall not have been obtained.
SECTION 6.02 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 6.01, this Agreement shall forthwith become void,
and there shall be no liability on the part of any party hereto, except (i) as
set forth in Sections 6.03 and 7.01 and (ii) nothing herein shall relieve any
party from liability for any willful breach hereof.
SECTION 6.03 Fees and Expenses. (a) If this Agreement is terminated
pursuant to of Section 6.01 (c), (d) or (e)(i) and Purchaser is not in material
breach of its material covenants and agreements contained in this Agreement or
its representations and warranties contained in this Agreement, the Company
shall reimburse Purchaser (and its stockholders and Affiliates) not later than
one business day after submission of statements therefor for all out-of-pocket
expenses and fees up to $1 million in the aggregate (including, without
limitation, fees and expenses payable to all banks, investment banking firms,
other financial institutions and other persons and their respective agents and
counsel, for arranging, committing to provide or providing any financing for the
Transactions or structuring the Transactions and all fees of counsel,
accountants, experts and consultants to Purchaser and its respective
stockholders and Affiliates, and all printing and advertising expenses) actually
incurred or accrued by it or on its behalf in
<PAGE>
connection with the Transactions, including, without limitation, the financing
thereof, and actually incurred or accrued by banks, investment banking firms,
other financial institutions and other persons and assumed by Purchaser (or its
stockholders or Affiliates) in connection with the negotiation, preparation,
execution and performance of this Agreement, the structuring and financing of
the Transactions and any financing commitments or agreements relating thereto
(all (the foregoing being referred to herein collectively as the "Expenses").
(b) If this Agreement is terminated pursuant to of Section 6.01(f)(ii),
but only if such failure results solely from the failure of the condition
precedent set forth in Section 5.02 (d), and if the Company is not in material
breach of its material covenants and agreements contained in this Agreement or
its representations and warranties contained in this Agreement, the Purchaser
shall reimburse the Company not later than one business day after submission of
statements therefor for all out-of-pocket expenses and fees up to $250,000 in
the aggregate, actually incurred or accrued by the Company or on its behalf in
connection with the Transactions.
(c) Except as set forth in this Section 6.03, all cost Except as set
forth in this Section 6.03, all costs and expenses incurred in connection with
this Agreement and the Transactions shall be paid by the party incurring such
expenses, whether or not any Transaction is consummated.
(d) In the event that the Company shall fail to pay any Expenses when
due, the term "Expenses" shall be deemed to include the costs and expenses
actually incurred or accrued by Purchaser (and its stockholders and Affiliates)
(including, without limitation, fees and expenses of counsel) in connection with
the collection under and enforcement of this Section 6.03, together with
interest on such unpaid Expenses, commencing on the date that such Expenses
became due, at a rate equal to the rate of interest publicly announced by The
Chase Manhattan Bank, from time to time, in the City of New York, as such bank's
Base Rate plus 2%.
SECTION 6.04 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of the Board of Directors of Purchaser and the
Board of Directors of the Company at any time prior to the Effective Time;
provided, however, that, after the approval and adoption of this Agreement and
the Transactions by the stockholders of the Company, no amendment may be made
which would reduce the amount or change the type of consideration into which
each Share shall be converted upon consummation of the Merger. This Agreement
may not be amended except by an instrument in writing signed by the parties
hereto.
SECTION 6.05 Waiver. At any time prior to the Effective Time, any party
hereto may (i) extend the time for the performance of any obligation or other
act of any other party hereto, (ii) waive any inaccuracy in the representations
and warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained herein. Any
such extension or waiver shall be valid if (a) it is the result of action taken
by or on behalf of the Board of Directors of Purchaser, if Purchaser is the
party granting the extension or waiver, or the Board of Directors of the
Company, if the Company if the party granting the extension or waiver, and (b)
it is set forth in an instrument in writing signed by the party or parties to be
bound thereby.
<PAGE>
SECTION 6.06 Special Committee. Any action permitted or required to be
taken under this Agreement by the Board, including without limitation any
termination of this Agreement pursuant to Section 6.01 hereof, any amendment of
this Agreement pursuant to Section 6.04 or any waiver pursuant to Section 6.05,
and any consent, approval or determination permitted or required to be made or
given by the Company pursuant to this Agreement, shall be made, taken or given,
as the case may be, only with the concurrence, or at the direction, of the
Special Committee, as the Special Committee may determine, from time to time, in
its sole discretion.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01 Non-Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement shall terminate
at the Effective Time or upon the termination of this Agreement pursuant to
Section 6.01, as the case may be, except that the agreements set forth in
Article I shall survive the Effective Time indefinitely and those set forth in
Section 6.03 shall survive termination indefinitely.
SECTION 7.02 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 7.02):
if to Purchaser:
PDK Acquisition Corp.
145 Ricefield Lane
Hauppauge, New York 11788
Telecopier No:
Attention: Reginald Spinello
with a copy to:
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: Robert H. Cohen
if to the Company:
PDK Labs, Inc.
145 Ricefield Lane
<PAGE>
Hauppauge, New York 11788
Telecopier No:
Attention: Corporate Secretary
with a copy to:
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Telecopier No.: (212) 704-0196
Attention: Steven F. Wasserman
SECTION 7.03 Certain Definitions. For purposes of this Agreement, the term:
(a) "Affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with, such specified person;
(b) "beneficially own" or any variation thereon with respect to a
person holding Shares means that such person shall be deemed to be the
beneficial owner of such Shares (i) which such person or any of its Affiliates
or associates (as such term is defined in Rule 12b-2 promulgated under the
Exchange Act) beneficially owns, directly or indirectly, (ii) which such person
or any of its Affiliates or associates has, directly or indirectly, (A) the
right to acquire (whether such right is exercisable immediately or subject only
to the passage of time), pursuant to any agreement, arrangement or understanding
or upon the exercise of consideration rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote pursuant to any agreement,
arrangement or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other persons with whom such person or any of its Affiliates
or associates or person with whom such person or any of its Affiliates or
associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any Shares;
(c) "business day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of New York;
(d) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "person" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the
<PAGE>
Exchange Act), trust, association or entity or government, political
subdivision, agency or instrumentality of a government; and
(f) "subsidiary" or "subsidiaries" of the Company, the Surviving
Corporation, or any other person means an Affiliate controlled by such person,
directly or indirectly, through one or more intermediaries.
SECTION 7.04 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the Transactions is not affected in any manner materially adverse to any party.
Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
Transactions be consummated as originally contemplated to the fullest extent
possible.
SECTION 7.05 Entire Agreement; Assignment. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof. This
Agreement shall not be assigned by operation of law or otherwise, except that
Purchaser may assign all or any of its rights and obligations hereunder to any
Affiliate of Purchaser provided that no such assignment shall relieve the
assigning party of its obligations hereunder if such assignee does not perform
such obligations.
SECTION 7.06 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 7.07 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 7.08 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts executed in and to be performed in that State. All actions and
proceedings arising out of or relating to this Agreement shall be heard and
determined in any New York state or federal court sitting in the City of New
York.
SECTION 7.09 Headings. The descriptive headings contained in this Agreement
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
<PAGE>
SECTION 7.10 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
PDK ACQUISITION CORP.
Attest:
By: s/Reginald Spinello
----------------------------- --------------------------------
Title: President
PDK LABS, INC.
Attest:
By: s/Reginald Spinello
------------------------------ --------------------------------
Title: Chairman
<PAGE>
APPENDIX B
<PAGE>
New York Business Corporation Law Section 623
623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this chapter
to receive payment for his shares if the proposed corporate action referred to
therein is taken shall file with the corporation, before the meeting of
shareholders at which the action is submitted to a vote, or at such meeting but
before the vote, written objection to the action. The objection shall include a
notice of his election to dissent, his name and residence address, the number
and classes of shares as to which he dissents and a demand for payment of the
fair value of his shares if the action is taken. Such objection is not required
from any shareholder to whom the corporation did not give notice of such meeting
in accordance with this chapter or where the proposed action is authorized by
written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term as
used in this section means the date on which the shareholders' vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent shall file
with the corporation a written notice of such election, stating his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares. Any shareholder who elects
to dissent from a merger under section 905 (Merger of subsidiary corporation) or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations) or from a share exchange under paragraph (g) of section 913 (Share
exchanges) shall file a written notice of such election to dissent within twenty
days after the giving to him of a copy of the plan of merger or exchange or an
outline of the material features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to which
he has a right to dissent, held by him of record, that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner, as to which such nominee or fiduciary
has a right to dissent, held of record by such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph
<PAGE>
(g), the time for withdrawing a notice of election shall be extended until sixty
days from the date an offer is made. Upon expiration of such time, withdrawal of
a notice of election shall require the written consent of the corporation. In
order to be effective, withdrawal of a notice of election must be accompanied by
the return to the corporation of any advance payment made to the shareholder as
provided in paragraph (g). If a notice of election is withdrawn, or the
corporate action is rescinded, or a court shall determine that the shareholder
is not entitled to receive payment for his shares, or the shareholder shall
otherwise lose his dissenters' rights, he shall not have the right to receive
payment for his shares and he shall be reinstated to all his rights as a
shareholder as of the consummation of the corporate action, including any
intervening preemptive rights and the right to payment of any intervening
dividend or other distribution or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the corporation, the fair value thereof in cash as determined
by the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in the
interim.
(f) At the time of filing the notice of election to dissent or within one month
thereafter the shareholder of shares represented by certificates shall submit
the certificates representing his shares to the corporation, or to its transfer
agent, which shall forthwith note conspicuously thereon that a notice of
election has been filed and shall return the certificates to the shareholder or
other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made
<PAGE>
by the corporation promptly upon submission of his certificates. If the
corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates [fig 1] for any such
shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of whichever
is applicable of the two periods last mentioned, institute a special proceeding
in the supreme court in the judicial district in which the office of the
corporation is located to determine the rights of dissenting shareholders and to
fix the fair value of their shares. If, in the case of merger or consolidation,
the surviving or new corporation is a foreign corporation without an office in
this state, such proceeding shall be brought in the county where the office of
the domestic corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such period of
twenty days, any dissenting shareholder may institute such proceeding for the
same purpose not later than thirty days after the expiration of such twenty day
period. If such proceeding is not instituted within such thirty day period, all
dissenter's rights shall be lost unless the supreme court, for good cause shown,
shall otherwise direct.
<PAGE>
(3) All dissenting shareholders, excepting those who, as provided in paragraph
(g), have agreed with the corporation upon the price to be paid for their
shares, shall be made parties to such proceeding, which shall have the effect of
an action quasi in rem against their shares. The corporation shall serve a copy
of the petition in such proceeding upon each dissenting shareholder who is a
resident of this state in the manner provided by law for the service of a
summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to whom
the corporation requests the court to make such determination, is entitled to
receive payment for his shares. If the corporation does not request any such
determination or if the court finds that any dissenting shareholder is so
entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the corporation
in favor of each dissenting shareholder who is a party to the proceeding and is
entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such rate as the
court finds to be equitable, from the date the corporate action was consummated
to the date of payment. In determining the rate of interest, the court shall
consider all relevant factors, including the rate of interest which the
corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed by
it. Notwithstanding the foregoing, the court may, in its discretion, apportion
and assess all or any part of the costs, expenses and fees incurred by the
corporation against any or all of the dissenting shareholders who are parties to
the proceeding, including any who have withdrawn their notices of election as
provided in paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting
<PAGE>
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates [fig 1] for any such shares represented
by certificates. (i) Shares acquired by the corporation upon the payment of the
agreed value therefor or of the amount due under the final order, as provided in
this section, shall become treasury shares or be cancelled as provided in
section 515 (Reacquired shares), except that, in the case of a merger or
consolidation, they may be held and disposed of as the plan of merger or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section at a
time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under subparagraph (1)
or (2) by written notice filed with the corporation within thirty days after the
corporation has given him written notice that payment for his shares cannot be
made because of the restrictions of this paragraph. If the dissenting
shareholder fails to exercise such option as provided, the corporation shall
exercise the option by written notice given to him within twenty days after the
expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
<PAGE>
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in the
manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided in
subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
<PAGE>
APPENDIX C
<PAGE>
August 3, 2000
The Special Committee of the Board of Directors (the "Special Committee")
PDK Labs, Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Gentlemen:
We understand that PDK Labs, Inc., a New York corporation, ("PDK" or
the "Company") proposes to enter into an Agreement and Plan of Merger (the
"Agreement") by and between PDK and PDK Acquisition Corp., a special acquisition
corporation formed by certain members of PDK's senior management team ("Newco"),
pursuant to which Newco will merge with and into the Company and, upon the
effectiveness of such merger, each issued and outstanding share of the Company's
common stock (other than shares held by Newco) will be converted into the right
to receive $5.00 in cash and each issued and outstanding share of the Company's
preferred stock (other than shares held by Newco) will be converted into the
right to receive $8.00 plus accrued dividends in cash (the "Transaction"). For
the purposes of this letter, the Agreement will constitute only the draft
delivered to us dated August 3, 2000, which draft the Special Committee's legal
counsel has advised us will be furnished to PDK's Board of Directors for
approval, and which included no schedules or exhibits. The terms of the
Transaction are more fully described in the Agreement.
You have requested our opinion as to whether or not the consideration
to be received by the Company's shareholders other than Newco (the "Public
Shareholders") in the Transaction pursuant to the Agreement (the
"Consideration") is fair, from a financial point of view, to the Public
Shareholders as of the date hereof. In arriving at the opinion set forth herein,
we have, among other things:
a) reviewed the financial terms of the Agreement;
b) reviewed and analyzed certain business and financial information with
respect to PDK, including financial forecasts, prepared by the Company
(the Special Committee has advised us that it has no reason to believe
that management has changed its position with respect to such
information; additionally, management has advised us that it has not
changed its position with respect to such information);
c) held discussions with certain members of the management of the Company
concerning its business, operations and prospects and visited the
Company's facility;
d) reviewed the Company's Annual Reports on Forms 10-K for the four
fiscal years ended November 30, 1999 and the Company's Quarterly
Report on Form 10-Q for the period ended May 31, 2000;
e) reviewed the price and public trading history of the Company's common
stock and preferred stock; and
f) reviewed certain publicly available information provided to us by the
Company regarding the industry in which the Company competes.
<PAGE>
The Special Committee of the Board of Directors
PDK Labs, Inc.
August 3, 2000
Page 2
In connection with our opinion, we have assumed and relied upon the
accuracy and completeness of all financial and other information supplied or
otherwise made available by the Company. We have neither attempted independently
to verify nor have we assumed any responsibility for verification of such
information. We have not made or obtained or assumed any responsibility for
making or obtaining independent evaluations or appraisals of PDK or its assets
or liabilities (contingent or otherwise), nor have we been furnished with any
such evaluations or appraisals. With respect to the financial forecasts referred
to above, we have assumed, upon the advice of the Company, that they have been
reasonably prepared on bases reflecting the best available good faith estimate
and judgment of the management of the Company as to the future financial
performance of the Company, and that the Company will perform substantially in
accordance with such forecasts. We assume no responsibility for and express no
view as to such forecasts or the assumptions on which they are based. We have
assumed that the Transaction will be consummated on the terms described in the
Agreement without any waiver of or modification to any of the material terms and
conditions relating to PDK.
As part of our engagement, we were authorized to, and did, solicit
third party indications of interest in acquiring all or part of PDK. We
identified 47 potential financial and strategic (industry) acquirers (the
"Acquirers") whom we contacted. To those who were interested, we sent a
"no-names" two-page executive summary of the Company, its operations, its
prospects and its finances. With one exception, all of the Acquirers advised us
after reviewing such executive summary that they were not interested in
proceeding with a further evaluation of the Company for the purpose of a
transaction. The one party which expressed interest signed a confidentiality
agreement and was informed of the Company's name. Upon its review of PDK's
public filings, the party declined to proceed unless PDK's management requested
such party's involvement, and PDK's management advised us that it would make no
such request.
Because we did not receive any indications of value from any of the
Acquirers, we were not asked to consider, and our opinion does not address, the
consideration the Company might receive from third party purchasers, the
relative merits of the Transaction as compared to any alternative business
strategies that might exist for the Company or the effect of any other
transaction in which PDK might engage. In certain cases, investment banks
sometimes utilize two other analyses, a market multiples analysis, based upon
comparable publicly-traded companies, and an acquisition multiples analysis,
based upon acquisitions of comparable companies during recent years. We
determined that these two other analyses were not feasible in this circumstance,
because we were unable to identify any other publicly-traded company (or any
company acquired during the past three years) subject to the high level of risk
associated with the relative near-term possibility that the federal government
could interrupt or end the Company's main business functions. Our conclusions
are based solely on information available to us on or before the date hereof and
reflect economic, market and other conditions as of such date.
This opinion has been prepared for the benefit and use of the Special
Committee and the Board of Directors in connection with its consideration of the
Transaction. This opinion does not constitute a recommendation to any
shareholder as to whether or not such investor should vote for or against the
<PAGE>
The Special Committee of the Board of Directors
PDK Labs, Inc.
August 3, 2000
Page 3
Transaction. We have acted as financial advisor to the Special Committee in
connection with the Transaction and will receive a fee for our services that
will be paid in part upon the delivery of this opinion, but which is not
contingent upon the consummation of the Transaction. PDK has agreed to indemnify
JWGenesis Capital Markets, Inc. for certain liabilities that may arise in
connection with the rendering of this opinion.
In rendering this opinion, we have not been engaged to act as an agent
or fiduciary of the Company's shareholders or any other third party, and the
Special Committee and the Board of Directors have expressly waived to the
fullest extent permitted by law any duties or liabilities we may otherwise be
deemed to have had in this regard.
This opinion speaks as of its date only, and we have no obligation to
update this opinion to take into account new facts and circumstances.
On the basis of, and subject to, the foregoing, it is our opinion as of
the date hereof that the Consideration is fair, from a financial point of view,
to the Public Shareholders.
Very truly yours,
JWGenesis Capital Markets, Inc.
<PAGE>
APPENDIX D
<PAGE>
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, 1999.
[ ] 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
--------
PDK LABS INC.
------------------------------------------------------
(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
--------------------- ----------
(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.
-----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Series A Convertible Preferred Stock, par value $.01 per share
--------------------------------------------------------------
(Title of Class)
<PAGE>
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 $54,706,000.
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 February 22, 2000, was approximately $6,485,000.
Number of shares outstanding of the Registrant's common stock, as of
February 22, 2000, was 3,807,153.
DOCUMENTS INCORPORATED BY REFERENCE: None.
2
<PAGE>
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"). 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.
On March 3, 1999, the Company and Futurebiotics entered into an 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.
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
3
<PAGE>
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 68% of the Company's total revenue for the
fiscal year ended November 30, 1999. Sales under various supply and licensing
agreements accounted for 68% of the Company's total revenue for the fiscal year
ended November 30, 1999.
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.
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 $36,580,000 for the
fiscal year ended November 30, 1999.
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 85% 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
4
<PAGE>
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.
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. 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. See "Government
Regulation"
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 was renewed through May 2000. For the fiscal
year ended November 30, 1999, the Company made purchases of approximately
$4,512,000 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 was for two (2) years and expired on November 30,
1999. 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.
5
<PAGE>
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. On March 17, 1999, the FDA
published final regulations which will require the re-labeling of the OTC drug
products. The regulation, which became effective April 16, 1999, requires that
companies begin phase-in of the new label format commencing May 2001. There is
no reason to expect that compliance with this regulation will affect the Company
any differently than any other industry member.
6
<PAGE>
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. 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. The
Company is not able to engage in any importation activities until such time as
the DEA approves its registration. Should the DEA ultimately deny the Company's
registration, it would no longer be permitted to manufacture and distribute
these products, though it would have the option of seeking legal redress
challenging the validity of any such action by the DEA. 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 has been advised by the 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 $29,731,000
representing 54% of net sales for the year ended November 30, 1999.
Thus, the DEA, registration, identification, record keeping, and reporting
requirements may adversely affect the Company's sales of these products.
7
<PAGE>
Employees
As of February 22, 2000, the Company employed 166 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.
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 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.
8
<PAGE>
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. 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. The
Company is not able to engage in any importation activities until such time as
the DEA approves its registration Should the DEA ultimately deny the Company's
registration, it would no longer be permitted to manufacture and distribute
these products, though it would have the option of seeking legal redress
challenging the validity of any such activity by the DEA. 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 has been advised by the 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
9
<PAGE>
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 54% of the Company's revenue in fiscal 1999 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, does not presently plan to pay
any cash dividends except in accordance with the terms of the Series A Preferred
Stock.
Dependence on Key Personnel. The Company is substantially dependent on the
continued services of Reginald Spinello, the Company's Chief Executive Officer,
and Michael Krasnoff, a consultant to the Company. The Company has entered into
an employment agreement with Mr. Spinello and a consulting agreement with Mr.
Krasnoff . Should either Mr. Spinello or Mr. Kransoff not be able to continue
with the Company, its prospects would be adversely affected and, as a result,
the loss of either Mr. Spinello or Mr. Kransoff would materially adversely
affect the Company's operations. The Company currently does not maintain key
personnel life insurance for any of its employees. See "Management."
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
10
<PAGE>
rent is $286,000 and increases up to $315,000 in the final year. The current
lease has three 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 was for a term of five years with an annual rental of $172,500. The lease
was terminated on January 15, 2000.
In 1997, the Company leased another 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
$175,500.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, management is not aware of any material legal
proceedings pending against the Company.
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 a 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.
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 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. After a detailed
investigation conducted by special counsel, a disinterested subcommittee of the
board of directors determined that the Company should not assert any of the
listed claims.
11
<PAGE>
Thereafter, Mr. Krape initiated a new derivative action entitled Perry Krape v.
PDK Labs Inc., et. al., in the United States District Court for the Eastern
District of New York. No relief is sought against the Company, as all claims are
asserted on the Company's behalf. Nevertheless, the Company has concluded that
the claims are without merit, and it will seek the dismissal of the lawsuit.
12
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On October 29, 1999, 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 1,653,206 142,685
Karine Hollander 1,653,006 142,885
Thomas Keith 1,653,056 142,835
Ira Helman 1,653,006 142,885
Lawrence D. Simon 1,653,006 142,885
(c) At said meeting 1,666,825 shares of Common Stock were voted in favor of
and 118,706 shares of Common Stock were voted against and 10,260 shares of
Common Stock voted to abstain to a proposal to ratify the appointment of Holtz
Rubenstein & Co., LLP to serve as the independent certified public accountants
for the 2000 fiscal year.
13
<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 $4,941,000 worth of its own common stock in fiscal
1999, repurchasing 1,120,759 shares at an average price of $4.41. In addition,
the Company repurchased 19,544 shares at an average price of $5.02 between
December 1, 1999 and February 22, 2000. As of February 22, 2000, the Company had
authorization to repurchase an additional $344,000 worth of its own common
stock.
The Company acquired $66,000 worth of its own preferred stock in fiscal
1999, repurchasing 13,100 shares at an average price of $5.04. In addition, the
Company repurchased 1,000 shares at an average price of $6.10 between December
1, 1999 and February 15, 2000. As of February 22, 2000, the Company had
authorization to repurchase an additional $261,000 worth of its own preferred
stock.
The following table indicates the high and low prices for the Company's
Common Stock and Preferred Stock for the period up to December 31, 1999 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
---- ---
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
14
<PAGE>
Third Quarter 5-3/8 3-1/8
Fourth Quarter 4-1/8 2-15/16
1999 Calendar Year
------------------
First Quarter 5 3
Second Quarter 4 3
Third Quarter 4-3/4 2-1/2
Fourth Quarter 5-3/16 3-7/8
Preferred Stock
High Low
---- ---
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
1999 Calendar Year
------------------
First Quarter 5-7/8 4-3/8
15
<PAGE>
Second Quarter 6 3-5/8
Third Quarter 5-1/2 3-3/4
Fourth Quarter 6 4-3/4
On February 22, 2000, the closing price of the Common Stock as reported on
the NASDAQ System was $3.94. On February 22, 2000, the closing price of the
Preferred Stock reported on the NASDAQ System was $6.06. On February 22, 2000,
there were 986 holders of record of Common Stock.
On April 15, 1999, the Company paid a $.25 per share of Preferred Stock
dividend to holders of record on April 12, 1999 payable in cash. On October 15,
1999, the Company paid a $.24 per share of Preferred Stock dividend to holders
of record on October 12, 1999 payable in cash.
16
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
SUMMARY BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
November 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $36,700 $46,473 $54,221 $53,255 $41,943
Long-Term Obligations, net of current 1,967 4,342 15,434 13,603 8,251
portion
Stockholders' Equity 27,772 29,504 28,305 26,661 24,437
</TABLE>
SUMMARY INCOME STATEMENT DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended November 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $54,706 $57,599 $51,352 $46,563 $31,904
Operating Income 3,778 2,916 2,682 2,356 1,681
Net Earnings (Loss) 2,137 777 1,559 1,613 (180)
Net Earnings (Loss) per Common Share:
Basic $0.66 $0.16 $0.41 $0.48 ($0.24)
Diluted $0.66 $0.16 $0.39 $0.46 ($0.24)
Weighted Average Number of Common
Shares Outstanding:
Basic 2,881,979 3,327,050 3,095,660 3,156,276 2,559,232
Diluted 2,881,979 3,409,109 3,228,333 3,265,393 2,559,232
</TABLE>
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Fiscal Year 1999 compared to Fiscal Year 1998
Net sales for the fiscal year 1999 were approximately $54,706,000 as
compared to net sales in 1998 of $57,599,000. The decrease in sales is
principally attributable to a decrease in sales by the Futurebiotics segment.
Gross profit amounted to $15,904,000 (29% of sales) in 1999 as compared to
$21,171,000 (37% of sales) in 1998. The decrease in gross profit is attributable
to (i) a change in the mix of sales, (ii) the company maintaining competitive
pricing and (iii) increased costs related to compliance with new government
regulations such as the requirement of new label formats on OTC drug products.
Selling, general and administrative expenses were $12,126,000 in 1999 and
$18,255,000 in 1998. As a percentage of sales, selling, general and
administrative expenses were 22% in 1999 and 32% 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 $3,927,000 for 1999 and 1998,
respectively.
On March 3, 1999, the Company and Futurebiotics entered into an 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 no longer pursuing the sale of these assets.
Accordingly, the operating results of Futurebiotics' operations have been
included in the Company's consolidated financial statements for the years ended
1999, 1998 and 1997.
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. In
consideration for this agreement, 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 common stock or Series B preferred stock. Total sales to CGI
approximated $36,580,000 and $22,125,000 for 1999 and 1998, respectively.
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, 1999, the Company
exceeded its minimum purchase requirement.
18
<PAGE>
The Company also operated under a packaging agreement with Superior, which
provides for Superior to package Futurebiotics products for the Company for a
fixed price based on component costs plus a labor charge per unit. The agreement
expired on November 30, 1999.
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.
Interest expense, net of interest income, was approximately $353,000 in
1999, as compared to $933,000 in 1998. The decrease is attributable to the
Company's repayment of debt.
The provision for income taxes reflects an effective tax rate of 60% in
1999 and 82% in 1998. The rates reflect the Company's inability to utilize
certain tax benefits generated by its subsidiary.
The Company has satisfactorily implemented a plan to ensure that its
systems are compliant with the requirements to process transactions in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
Results of Operations
Fiscal Year 1998 compared to Fiscal Year 1997
Net sales for fiscal year 1998 were approximately $57,599,000 as compared
to net sales in 1997 of $51,352,000. The increase in sales is primarily
attributable to increased volume in private label sales and the introduction of
new products. Gross profit amounted to $21,171,000 (37% of sales) in 1998 as
compared to $25,510,000 (50% 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 $18,255,000 in 1998 and
$22,828,000 in 1997. As a percentage of sales, selling, general and
administrative expenses were 32% in 1998 and 44% in 1997. The decrease is
attributable to a decrease in Futurebiotics selling expenses and a decrease in
royalty expenses. Royalty expenses approximated $3,927,000 in 1998 and
$7,426,000 in 1997. The decrease in royalty expense is attributable to the
Company terminating its supply agreement with a non-affiliated customer on March
30, 1998.
Total sales to CGI under various supply agreements approximated $22,125,000
and $5,485,000 for 1998 and 1997, respectively.
19
<PAGE>
Interest expenses, net of interest income, was approximately $933,000 in
1998, as compared to $905,000 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 82% in
1998 and 37% in 1997. The 1998 rate reflects the Company's inability to utilize
certain tax benefits generated by its subsidiary and the effect of certain
permanent differences.
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 $24,376,000 and
$28,561,000 at November 30, 1999 and 1998, respectively.
The Company's statement of cash flows reflects cash provided by operating
activities of approximately $12,195,000 which reflects net earnings of
$2,137,000, decreases in operating assets such as inventories ($11,025,000), due
from supplier ($773,000), prepaid expenses and other current assets ($470,000),
and other assets ($541,000), offset by increases in accounts receivable
($3,096,000), decreases in accounts payable ($919,000), and decreases in
royalties payable ($1,350,000). Cash flows from operations also reflect non-cash
items including an adjustment for depreciation and amortization ($3,310,000), a
realized loss on investment ($104,000), an adjustment for minority interest in
loss of subsidiary ($811,000), securities received to satisfy receivable
($500,000) and an adjustment for deferred income tax provision ($163,000).
Net cash used in investing activities approximated $309,000 attributable to
the purchase of property, plant and equipment.
The statement also reflects cash used in financing activities of
approximately $9,869,000 representing loan repayments net of borrowings
($3,653,000), payment of dividends ($227,000) and the purchase of treasury stock
($5,989,000).
The Company reacquired $4,941,000 of its common stock during fiscal 1999,
repurchasing 1,120,759 shares at an average price of $4.41. During 1999, the
Company's Board of Directors authorized the Company to repurchase up to an
additional $4,000,000 worth of it 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. As of November 30, 1999, the Company had authorization to
repurchase an additional $442,000 worth of its own common stock.
20
<PAGE>
The Company also reacquired $66,000 of its preferred stock during
fiscal 1999, repurchasing 13,100 shares at an average price of $5.04. As of
November 30, 1999, the Company had authorization to repurchase an additional
$267,000 worth of its own preferred stock.
On July 21, 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
which is payable in 48 installments of $68,000 including interest. Payments
commenced on August 1, 1999 and will continue through July 1, 2003. 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 14 of this Annual Report on Form
10-K.
21
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<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.
Name Age Position
---- --- --------
Reginald Spinello 47 Chairman of the Board, Chief Executive
Officer and President
Karine Hollander 33 Chief Financial Officer, Secretary and
Director
Thomas A. Keith 40 Director
Ira Helman 67 Director
Lawrence D. Simon 33 Director
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.
23
<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 received
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
24
<PAGE>
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.
25
<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
Other Stock LTIP All
Annual Awards Options/ Payouts Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) SARs(#) ($) ($) Compensation
--------------------------- ---- --------- ------- ---------------- ---------- -------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reginald Spinello, CEO 1999 $818,000(1) $300,000 $ -0- $ -0- -0- $ -0- $ -0-
1998 $375,000(2) $300,000 $421,000(3) $595,000(4) -0- $ -0- $ -0-
1997 $250,000 $200,000 $ -0- $ -0- -0- $ -0- $ -0-
Karine Hollander, CFO 1999 $198,000(5) $112,000 $ -0- $ -0- -0- $ -0- $ -0-
1998 $160,000 $ 75,000 $160,000(3) $ -0- -0- $ -0- $ -0-
1997 $110,000 $ 60,000 $ -0- $ -0- -0- $ -0- $ -0-
Michael Krasnoff, former CEO
1998 $400,000 $400,000 $270,000(3) $318,750(6) -0- $ -0- $204,500(7)
1997 $400,000 $300,000 $ -0- $ -0- -0- $ -0- $ -0-
</TABLE>
----------------
(1) Represents salary of $488,000 paid by the Company and $330,000 paid by its
subsidiary.
(2) Represents salary of $325,000 paid by the Company and $50,000 paid by its
subsidiary.
(3) Represents reimbursements to pay taxes resulting from stock grants.
(4) Represents issuance of 280,000 shares in accordance with August 1998
employment agreement. Shares were valued at $2.125 per share.
(5) Represents salary of $160,000 paid by the Company and $38,000 paid by its
subsidiary.
(6) Represents issuance of 150,000 shares in accordance with August 1998
consulting agreement. Shares were valued at $2.125 per share.
(7) Represents consulting fees paid in accordance with August 1998 agreement
and accrued vacation and sick pay in accordance with October 1995
Employment Agreement.
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
26
<PAGE>
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 her shares.
The Hollander Agreement terminates in October 2000 but may be terminated by the
Company, at its sole discretion, on ninety days notice.
27
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 15, 2000
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 8.9%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Reginald Spinello(2) 672,500 29.0%
145 Ricefield Lane
Hauppauge, NY 11788
Michael Krasnoff(3) 200,000 8.6%
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 2.2%
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
28
<PAGE>
Ira Helman 0 0
c/o PDK Labs Inc.
145 Ricefield Lane
Hauppauge, NY 11788
Dune Holdings, Inc.(3) 200,000 8.6%
132 Dune Road
West Hampton, NY 11978
Directors and Officers 672,500 29.0%
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) Includes 200,000 shares of common stock owned by Dune Holdings, Inc.,
over which Mr. Krasnoff possesses a voting trust and as to which Mr.
Krasnoff disclaims any beneficial ownership.
(4) Ms. Hollander's shares of Common Stock are subject to a ten (10) year
voting trust held by the Company's Chief Executive Officer.
29
<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, 1999, Mr. Krasnoff owed the Company the
sum of $623,000, 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.
Reginald Spinello, a director of the Company and the Company's Executive
Vice President, was also a director of SSI. Reginald Spinello and two other
directors of SSI had 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 2000 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 agreement expired on November 30, 1999.
Thomas Keith, a director of the Company, is also the President and a
director of CGI and a director of SSI. The Company has two (2) supply agreement
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.
30
<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, 1999 and 1998 F-2
Consolidated statements of operations for the three years ended
November 30, 1999 F-3
Consolidated statements of stockholders' equity for the three
years ended November 30, 1999 F-4
Consolidated statements of cash flows for the three years ended
November 30, 1999 F-5
Notes to consolidated financial statements F-6-F-18
(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.
31
<PAGE>
PDK LABS INC. AND SUBSIDIARY
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1999
CONTENTS
Page
----
Report on Independent Certified Public Accountants F-1
Consolidated balance sheets as of November 30, 1999 and 1998 F-2
Consolidated statements of operations for the
three years ended November 30, 1999 F-3
Consolidated statement of stockholders' equity
for the three years ended November 30, 1999 F-4
Consolidated statements of cash flows for the
three years ended November 30, 1999 F-5
Notes to consolidated financial statements F-6 - F-18
<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, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended November 30, 1999. 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, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended November 30, 1999, in
conformity with generally accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 11, 2000
F-1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
November 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,946 $ 929
Accounts receivable - less allowance for
doubtful accounts of $54 (Note 13) 13,255 10,159
Inventories (Note 3) 12,706 23,731
Prepaid expenses and other current assets 808 1,278
Due from supplier (Note 11) 600 1,373
Deferred income tax asset (Note 9) 57 287
-------- --------
Total current assets 30,372 37,757
PROPERTY, PLANT AND EQUIPMENT, net (Notes 4 and 7) 3,539 4,579
INTANGIBLE ASSETS, net (Note 5) 354 933
INVESTMENT IN COMPARE GENERIKS (Note 13) 992 596
DEFERRED INCOME TAX ASSET (Note 9) -- 136
OTHER ASSETS (Note 6) 1,443 2,472
-------- --------
$ 36,700 $ 46,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,753 $ 3,672
Accrued expenses and other current liabilities 1,033 958
Dividends payable (Note 8) 29 30
Royalty payable (Note 14) -- 1,350
Income taxes payable (Note 9) 1,528 1,255
Current portion of long-term debt (Note 7) 653 1,931
-------- --------
Total current liabilities 5,996 9,196
-------- --------
LONG-TERM DEBT (Note 7) 1,967 4,342
-------- --------
DEFERRED INCOME TAX LIABILITY (Note 9) 27 --
-------- --------
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 938 3,431
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 12)
STOCKHOLDERS' EQUITY: (Notes 8 and 11)
Common stock, $.01 par value; authorized 30,000,000 shares;
3,807,153 issued and outstanding 38 38
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 460,566
issued and outstanding 5 5
Additional paid-in capital 28,633 28,404
Unearned compensation (2,150) (3,286)
Retained earnings 8,170 6,259
Treasury stock, at cost (common: 1,469,184 shares and
348,425 shares, respectively; preferred: 13,100 shares
and 0, respectively) (6,924) (1,916)
-------- --------
27,772 29,504
-------- --------
$ 36,700 $ 46,473
======== ========
</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,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET REVENUES (Notes 11, 12 and 13) $ 54,706 $ 57,599 $ 51,352
----------- ----------- -----------
COSTS AND EXPENSES:
(Notes 4, 5, 10, 11 and 14)
Cost of sales 38,802 36,428 25,842
Selling, general and administrative 12,126 14,328 15,402
Royalty expense -- 3,927 7,426
----------- ----------- -----------
50,928 54,683 48,670
----------- ----------- -----------
OPERATING INCOME 3,778 2,916 2,682
----------- ----------- -----------
OTHER EXPENSES (INCOME):
Interest income (46) (161) (348)
Interest expense 399 1,094 1,253
Other (Note 15) 72 252 106
----------- ----------- -----------
425 1,185 1,011
----------- ----------- -----------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES AND MINORITY INTEREST 3,353 1,731 1,671
PROVISION FOR INCOME TAXES (Note 9) 2,027 1,426 610
----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST 1,326 305 1,061
MINORITY INTEREST IN NET LOSS
OF SUBSIDIARY 811 472 498
----------- ----------- -----------
NET EARNINGS $ 2,137 $ 777 $ 1,559
=========== =========== ===========
NET EARNINGS PER COMMON SHARE
(Note 8):
Basic $ 0.66 $ 0.16 $ 0.41
=========== =========== ===========
Diluted $ 0.66 $ 0.16 $ 0.39
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (Note 8)
Basic 2,881,979 3,327,050 3,095,660
=========== =========== ===========
Diluted 2,881,979 3,409,109 3,228,333
=========== =========== ===========
</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 Unearned
------------------- ------------------ Paid-in Compen-
Total Shares Amount Shares Amount Capital sation
------- --------- ------ --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1996 $26,663 3,191,986 $ 32 739,555 $ 7 $ 27,756 $(4,940)
Preferred stock conversion (Note 8) -- 365,167 4 (241,445) (2) (2) --
Amortization of unearned compensation 1,157 -- -- -- -- -- 1,157
Acquisition of treasury stock-common (983) -- -- -- -- -- --
Amortization of unearned management fee (143) -- -- -- -- (143) --
Amortization of subsidiary unearned
compensation 92 -- -- -- -- 92 --
Unrealized loss on marketable securities (3) -- -- -- -- -- --
Tax effect of permanent difference in
valuation of stock compensation (Note 9) 248 -- -- -- -- 248 --
Dividends (Note 8) (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
compensation 99 -- -- -- -- 99 --
Unrealized gain on marketable securities 3 -- -- -- -- -- --
Forfeiture of stock for services (Note 8) -- (280,000) (3) -- -- (457) 460
Dividends (Note 8) (235) -- -- -- -- -- --
Net earnings 777 -- -- -- -- -- --
------- ---------- ---- -------- --- -------- -------
Balance at November 30, 1998 29,504 3,807,153 38 460,566 5 28,404 (3,286)
Amortization of unearned compensation 1,136 -- -- -- -- -- 1,136
Acquisition of treasury stock - common (4,942) -- -- -- -- -- --
Acquisition of treasury stock - preferred (66) -- -- -- -- -- --
Amortization of unearned management fee (143) -- -- -- -- (143) --
Amortization of subsidiary unearned
compensation 125 -- -- -- -- 125 --
Increase in investment in subsidiary
resulting from treasury stock acquisition 247 -- -- -- -- 247 --
Dividends (Note 8) (226) -- -- -- -- -- --
Net earnings 2,137 -- -- -- -- -- --
------- ---------- ---- -------- --- -------- -------
Balance at November 30, 1999 $27,772 3,807,153 $ 38 460,566 $ 5 $ 28,633 $(2,150)
======= ========= ==== ======= === ======== =======
<CAPTION>
Treasury Stock
Unrealized ---------------------------------
Loss on Shares
Marketable Retained --------------------
Securities Earnings Common Preferred Amount
---------- -------- ------- --------- --------
<S> <C> <C> <C> <C>
Balance at November 30, 1996 $-- $ 4,443 103,500 -- $ (635)
Preferred stock conversion (Note 8) -- -- -- -- --
Amortization of unearned compensation -- -- -- -- --
Acquisition of treasury stock-common -- -- 176,500 -- (983)
Amortization of unearned management fee -- -- -- -- --
Amortization of subsidiary unearned
compensation -- -- -- -- --
Unrealized loss on marketable securities (3) -- -- -- --
Tax effect of permanent difference in
valuation of stock compensation (Note 9) -- -- -- -- --
Dividends (Note 8) -- (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
compensation -- -- -- -- --
Unrealized gain on marketable securities 3 -- -- -- --
Forfeiture of stock for services (Note 8) -- -- -- -- --
Dividends (Note 8) -- (235) -- -- --
Net earnings -- 777 -- -- --
--- ------- --------- ------- -------
Balance at November 30, 1998 -- 6,259 348,425 -- (1,916)
Amortization of unearned compensation -- -- -- -- --
Acquisition of treasury stock - common -- -- 1,120,759 -- (4,942)
Acquisition of treasury stock - preferred -- -- -- 13,100 (66)
Amortization of unearned management fee -- -- -- -- --
Amortization of subsidiary unearned
compensation -- -- -- -- --
Increase in investment in subsidiary
resulting from treasury stock acquisition -- -- -- -- --
Dividends (Note 8) -- (226) -- -- --
Net earnings -- 2,137 -- -- --
--- ------- --------- ------- -------
Balance at November 30, 1999 $-- $ 8,170 1,469,184 13,100 $(6,924)
=== ======= ========= ====== =======
</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,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,137 $ 777 $ 1,559
-------- -------- --------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,310 3,232 4,753
Minority interest in loss of subsidiary (811) (472) (498)
Loss (gain) on sale of assets -- 5 (45)
Deferred income tax provision (benefit) 163 (601) (794)
Non-cash revenue (500) (500) --
Realized loss on investment 104 404 --
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 (3,096) (1,232) (924)
Inventories 11,025 2,331 (4,834)
Prepaid income taxes -- 154 263
Prepaid expenses and other current assets 470 149 (446)
Other assets 541 145 322
Due from supplier 773 (508) 796
Increase (decrease) in liabilities:
Accounts payable (919) 1,686 (2,820)
Accrued expenses 75 385 306
Income taxes payable 273 743 (2)
Royalties payable (1,350) (250) 1,600
-------- -------- --------
Total adjustments 10,058 5,671 (2,063)
-------- -------- --------
Net cash provided by (used in) operating activities 12,195 6,448 (504)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale/maturity of marketable securities -- 3,215 1,901
Purchase of property, plant and equipment (309) (1,230) (1,350)
Acquisition of intangible assets -- (45) (125)
Net proceeds from sale of assets -- 15 407
-------- -------- --------
Net cash (used in) provided by
investing activities (309) 1,955 833
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit line -- 4,000 13,500
Proceeds from debt 2,728 1,100 6,300
Repayment of debt (6,381) (15,608) (17,997)
Payment of cash dividends (227) (235) (301)
Acquisition of treasury stock (4,520) (465) (983)
Acquisition of subsidiary treasury stock (1,469) -- --
-------- -------- --------
Net cash (used in) provided by financing activities (9,869) (11,208) 519
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,017 (2,805) 848
Cash and cash equivalents at beginning of year 929 3,734 2,886
-------- -------- --------
Cash and cash equivalents at end of year $ 2,946 $ 929 $ 3,734
======== ======== ========
</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, 1999
(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 majority owned subsidiary, Futurebiotics, Inc. ("Futurebiotics").
Upon consolidation, all significant intercompany accounts and transactions are
eliminated.
PDK's interest in Futurebiotics increased from 52% at November 30, 1998
to 78% at November 30, 1999 as a result of Futurebiotics acquisition of treasury
stock.
In March 1999, Futurebiotics entered into an agreement to sell
substantially all of its operating assets to an unrelated company, and
accordingly prior year financial statements reported the results of
Futurebiotics operations as a discontinued operation in accordance with
Accounting Principles Board Opinion No. 30. No loss was recorded on the
anticipated disposal.
In July 1999, the sales agreement was terminated, and management is no
longer seeking a disposition of Futurebiotics. Accordingly, the financial
statements for all prior periods presented have been reclassified to recognize
Furturebiotics' operating net assets and operation as continuing operations.
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.
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:
Goodwill 10 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 1999.
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 $726, $1,257 and $1,239 for the three years ended
1999, 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. Comprehensive income (loss)
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amount are
recorded directly as an adjustment to stockholders' equity. The Company's other
comprehensive income is comprised of net unrealized gain (loss) on marketable
securities. The Company's comprehensive income approximated net income for all
periods presented.
m. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the Company's fiscal year 2000. This statement established
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS 133 will not have a material
effect on the financial statements.
In March 1998, the American Institute of Certified Pubic Accountants
("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that entities
capitalize certain costs related to internal-use software once certain criteria
have been met. The Company is required to implement SOP 98-1 for the year ending
August 31, 2000. Adoption of SOP 98-1 is expected to have no material impact on
the Company's financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on the Company's results of operations, financial
position or cash flows.
2. Supplementary Information - Statement of Cash Flows:
Cash paid during the years for:
Years Ended November 30,
----------------------------------------
1999 1998 1997
------ ------ ------
Interest $ 386 $1,094 $1,253
====== ====== ======
Income taxes $2,145 $1,270 $1,306
====== ====== ======
During the year ended November 30, 1999, the Company reacquired 118,421
shares of its common stock, valued at $488, as partial repayment of a loan to a
former officer.
During the year ended 1998, the Company incurred capital lease obligations
of approximately $47, 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 11).
F-8
<PAGE>
3. Inventories:
Inventories consist of the following:
November 30,
---------------------------
1999 1998
------- -------
Raw materials $ 2,736 $ 4,458
Work-in-process 6,053 9,965
Finished goods 3,917 9,308
------- -------
$12,706 $23,731
======= =======
4. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
November 30,
----------------------
1999 1998
------- -------
Manufacturing equipment $ 6,674 $ 6,511
Vehicles 246 246
Office equipment and fixtures 2,601 2,563
Leasehold improvements 2,012 1,904
------- -------
11,533 11,224
Less accumulated depreciation and amortization 7,994 6,645
------- -------
$ 3,539 $ 4,579
======= =======
Depreciation and amortization of plant and equipment for the years ended
1999, 1998 and 1997 was $1,349, $1,291 and $1,222, respectively.
5. Intangible Assets:
Intangible assets consist of the following:
November 30,
---------------------------
1999 1998
------- -------
Customer lists $ -- $ 1,756
Goodwill 300 300
Covenants not to compete 845 1,099
Deferred loan costs 50 107
Other 30 34
------- -------
1,225 3,296
Less accumulated amortization 871 2,363
------- -------
$ 354 $ 933
======= =======
Amortization expense for the years ended 1999, 1998 and 1997 was $574, $559
and $1,984, respectively.
6. Other Assets:
At November 30, 1999 and 1998, other assets include a loan, bearing
interest at prime plus .5%, and accrued interest to a former officer
approximating $624 and $1,140, respectively.
F-9
<PAGE>
7. Long-Term Debt:
Long-term debt consists of the following:
November 30,
-----------------
1999 1998
------ ------
Term loan, payable in monthly installments of $68
consisting of principal and interest of 9.68%
per annum through July 2003; collateralized by
machinery and equipment (a) $2,526 $ --
Revolving line of credit -- 400
Term loan, bank (a) -- 5,728
Other, consisting principally of capital lease
obligations, expiring in various years through 2001 94 145
------ ------
2,620 6,273
Less current portion 653 1,931
------ ------
$1,967 $4,342
====== ======
(a) In July 1999, the Company entered into a $2,728 term loan agreement
with an institutional lender. Proceeds of the loan were used to repay the
outstanding balance on the Company's existing term indebtedness with a bank.
Additionally, in 1999 the Company terminated a revolving credit facility with
the bank.
Maturities of long-term debt are as follows:
Years Ending
November 30,
------------
2000 $653
2001 696
2002 743
2003 528
8. 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.
F-10
<PAGE>
8. Stockholders' Equity: (Cont'd)
b. Treasury stock
The Company's Board of Directors has authorized the Company to
repurchase up to $7,000 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 1,120,759, 68,425 and 176,500 shares of its common
stock at a cost of $4,941, $298 and $983 in 1999, 1998 and 1997, respectively.
During 1999, the Company purchased 13,100 shares of its preferred stock
at an aggregate price of $66.
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 equivalent share
The Company computes net income per share in accordance with the
provisions of Statement of Financial Standard ("SFAS") No. 128, "Earnings Per
Share". Under SFAS No. 128 basic net income per share is computed by dividing
the net income for the period by the weighted average number of common shares
outstanding during the period. The weighted average number of common shares
outstanding excludes treasury shares from the date of their acquisition. The
reconciliation of income from continuing operations for the years ended November
30, 1999, 1998 and 1997 are as follows:
Per
Year Ended November 30, 1999 Income Shares Share
---------------------------- ------ --------- ----
Net earnings $2,137 2,881,979
Less: preferred stock dividends (226) --
------ ---------
Basic EPS 1,911 2,881,979 $.66
Effect of dilutive securities:
Warrants -- --
------ ---------
Diluted EPS $1,911 2,881,979 $.66
------ ---------
Year Ended November 30, 1998
Net earnings $ 777 3,327,050
Less: preferred stock dividends (235) --
------ ---------
Basic EPS 542 3,327,050 $.16
Effect of dilutive securities:
Warrants -- 82,059
------ ---------
Diluted EPS $ 542 3,409,109 $.16
------ ---------
Year Ended November 30, 1997
Net earnings $1,559 3,095,660
Less: preferred stock dividends (285) --
------ ---------
Basic EPS 1,274 3,095,660 $.41
Effect of dilutive securities:
Warrants -- 132,673
------ ---------
Diluted EPS $1,274 3,228,333 $.39
------ ---------
F-11
<PAGE>
8. Stockholders' Equity: (Cont'd)
c. Net income per common share and per common and common equivalent share
(Cont'd)
Options and warrants to acquire 48,000 and 68,000 shares of common stock
were not included in the computation of diluted EPS for 1998 and 1997,
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.
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, 1999, no
options have been granted under the Plan.
At November 30, 1999, the Company has approximately 138,200 shares of
common stock reserved for future issuances.
9. Income Taxes:
The provision (benefit) for income taxes consists of the following:
Years Ended November 30,
-------------------------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $ 1,503 $ 1,644 $ 1,279
State 361 365 107
------- ------- -------
1,864 2,009 1,386
------- ------- -------
Deferred:
Federal 136 (541) (530)
State 27 28 (176)
------- ------- -------
163 (513) (706)
------- ------- -------
$ 2,027 $ 1,496 $ 680
======= ======= =======
Net deferred income tax asset (liability) are comprised of the following:
November 30,
-------------------------
1999 1998
------- -------
Inventories $ 223 $ 463
Prepaid salaries (153) (215)
Property, plant and equipment 192 48
Intangible assets 204 892
Investment in subsidiary (165) (315)
Unearned compensation (325) (622)
Tax carryforwards 1,031 528
Investment in Compare Generiks 200 154
Other 40 -
Valuation allowance (1,217) (510)
------- -------
$ 30 $ 423
======= =======
F-12
<PAGE>
9. Income Taxes: (Cont'd)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
Years Ended November 30,
--------------------------
1999 1998 1997
---- ---- ----
U.S. Federal statutory income tax rate 34.0% 34.0% 34.0%
State income tax, net of federal tax benefit 6.5 13.6 (5.9)
Valuation allowance 21.1 19.4 10.5
Permanent differences 1.4 16.0 5.8
Other (2.5) (.6) (7.9)
---- ---- ----
60.5% 82.4% 36.5%
==== ==== ====
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.
10. 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 1999, 1998 or 1997.
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 $86, $87 and $62 to the Plan for
the years ended 1999, 1998 and 1997, respectively.
11. 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 1999 and 1998, the Company paid tax reimbursements of
$79 and $580, respectively to certain 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, 1999 under
such contracts is approximately $2,738.
F-13
<PAGE>
1l. Commitments and Contingencies: (Cont'd)
b. Consulting agreements
In August 1998, the Company entered into 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.
In addition, the Company is a party to a consulting agreement with the
former owner of Futurebiotics, Ltd. ("Consultant"). Under the terms of the 1994
agreement, as amended, the Consultant received 500,000 shares of the Company's
common stock. The value of the shares ($3,000) is being charged to operations
over the period services are provided.
Additionally, included in operations are charges approximating $323,
$349, and $229 for the years ended November 30, 1999, 1998 and 1997,
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 $428, $302 and $289 in 2000, 2001 and 2002,
respectively, and provide for the payment of real estate taxes.
Rent expense, net of rental income, approximated $537, $543 and $351 for
1999, 1998 and 1997, respectively.
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.
On February 22, 1999, the former executive served a demand on the
Company's board of directors, to commence a shareholder's derivative action (the
"Demand"). After a detailed investigation conducted by special counsel, a
disinterested subcommittee of the board of directors determined that the Company
should not assert any of the listed claims. Thereafter, the former executive
initiated a new derivative action. No relief is sought against the Company, as
all claims are asserted on the Company's behalf. Nevertheless, the Company has
concluded that the claims are without merit, and it will seek the dismissal of
the lawsuit.
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.
F-14
<PAGE>
11. Commitments and Contingencies: (Cont'd)
e. Supply and packaging agreement
The Company is party to 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. Superior will
be entitled to up to $200 in liquidated damages. Purchases under these
agreements approximated $4,512, $9,505 and $4,386 for 1999, 1998 and 1997,
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.
On November 19, 1998, Futurebiotics entered into an agreement whereby it
transferred certain private label customers to Superior. As consideration for
these customers, Superior is obligated to pay Futurebiotics 10% of all revenue
derived from these customers for a three year period. Royalties under this
agreement approximated $68 during 1999.
12. 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. 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. Several states have taken action to restrict,
in some fashion, the sale of ephedrine, pseudoephedrine, and/or
phenylpropanolamine ("PPA") containing products.
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 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
$29,731 for the year ended November 30, 1999.
F-15
<PAGE>
13. Related Party Transactions:
The Company holds 1,024,845 shares of Compare Generiks, Inc.'s ("CGI")
common stock and 900,000 shares CGI's Series B Preferred Stock. The Series B
Preferred Stock earns cumulative annual dividends of 12% or $.12 per share, and
is redeemable at the option of CGI. Dividend income for the years ended November
30, 1999, 1998 and 1997 totalled $86, $60 and $60, respectively.
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the
Company supplies certain of CGI's products at prices based upon cost plus a
specified mark-up. In consideration, 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 $36,580,
$22,125, and $5,485 for the years ended November 30, 1999, 1998, and 1997,
respectively. Included in accounts receivable at November 30, 1999 and 1998 are
$9,215 and $6,801, respectively, due from CGI.
14. Exclusive Supply and Licensing Agreement:
The Company was party to an amended Exclusive Supply Agreement with a
non-affiliated distributor (the "Distributor"). This Agreement was terminated in
March 1998, and the Company and the Distributor entered into a settlement under
which the outstanding royalty payable of $1,350 was paid in February 1999.
Sales to the Distributor approximated 10% of total revenue in 1998.
15. Other Expense (Income):
Other expense (income) consists of the following:
Years Ended November 30,
---------------------------
1999 1998 1997
----- ----- -----
Loss on impairment of securities (a) $ 104 $ 404 $ --
Dividend income (86) (60) (60)
Write-off of terminated deferred loan costs 56 -- 232
Other (2) (92) (66)
----- ----- ----
$ 72 $ 252 $106
===== ===== ====
(a) The Company was issued shares of CGI common stock in satisfaction of
its annual license fee (see Note 13). These shares have been written down to
their estimated realized value for declines in their market value which, in the
opinion of management, was other than temporary.
16. 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.
F-16
<PAGE>
16. Fair Value of Financial Instruments: (Cont'd)
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 term note payable
approximates its carrying amount since the currently effective rates
reflect market rates.
17. Business Segments:
The Company currently has two reportable business segments. PDK
manufacturers and distributes non-prescription pharmaceutical products.
Futurebiotics distributes, markets and sells vitamins, minerals, herbal
formulations and specialty nutritional supplements.
The Company's revenues are derived primarily from activities within the
United States, and all long-lived assets are located within the United States.
PDK Futurebiotics Total
------- ------------- -------
Year ended November 30, 1999:
Revenues from external customers $47,401 $ 7,305 $54,706
Intersegment revenues 5,299 -- 5,299
Interest income 46 -- 46
Interest expense 399 -- 399
Depreciation & amortization 2,728 582 3,310
Segment profit (loss) 4,839 (1,486) 3,353
Segment assets 32,269 4,431 36,700
Expenditures for segment assets 309 -- 309
Year ended November 30, 1998:
Revenues from external customers $47,295 $ 10,304 $57,599
Intersegment revenues 7,395 -- 7,395
Interest income 110 51 161
Interest expense 971 123 1,094
Depreciation & amortization 2,708 524 3,232
Segment profit (loss) 2,708 (977) 1,731
Segment assets 39,133 7,340 46,473
Expenditures for segment assets 1,191 39 1,230
Year ended November 30, 1997:
Revenues from external customers $39,670 $ 11,682 $51,352
Intersegment revenues 5,750 -- 5,750
Interest income 233 151 348
Interest expense 989 264 1,253
Depreciation & amortization 2,880 1,873 4,753
Segment profit (loss) 3,075 (1,404) 1,671
Expenditures for segment assets 1,335 15 1,350
F-17
<PAGE>
17. Business Segments: (Cont'd)
Reconciliation of Segment Information to Consolidated Amounts:
November 30,
----------------------
1999 1998
------- -------
Assets:
Total assets for reportable segments $39,021 $47,635
Elimination of intercompany balances
and investments (2,321) (1,162)
------- -------
Total consolidated assets $36,700 $46,473
======= =======
F-18
<PAGE>
(a)(3) Exhibits.
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.
32
<PAGE>
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*** First Amendment to Supply Agreement between the Company and
Compare Generiks, Inc. dated as of April 1998.
10.83*** Second Amendment to Supply Agreement between the Company and
Compare Generiks, Inc. dated as of November 1998.
10.84**** Third Amendment to Supply Agreement between the Company and Compare
Generiks, Inc. dated January 1999.
10.85 Fourth Amendment to Supply Agreement between the Company and
Compare Generiks, Inc. dated May 1999.
10.86 Termination of Credit Agreement by and among PDK Labs, Inc.
Futurebiotics, Inc. and European American Bank, National Bank of
Canada and Bank of Leumi USA dated July 21, 1999.
33
<PAGE>
10.87 Promissory Note by and between PDK Labs, Inc. and General Electric
Capital Corporation dated July 21, 1999.
10.88 Master Security Agreement by and between PDK Lab, Inc. and General
Electric Capital Corporation dated July 21, 1999.
27.1 Financial Data Schedule
-------------------
* 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.
** Incorporation by Reference to the Company's Form 10-K for the year ended
November 30, 1999.
+ 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.
++++ 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.
**** Incorporated by Reference to Compare Generiks, Inc. Form 10-KSB for the
year ended March 31, 1999.
(B) Reports on Form 8-K.
None.
34
<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
February 25th, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Reginald Spinello Chairman of the Board, February 25th, 2000
--------------------------- Chief Executive Officer
Reginald Spinello and President
/s/ Karine Hollander Chief Financial Officer February 25th, 2000
--------------------------- and Director
Karine Hollander
/s/ Thomas A. Keith Director February 25th, 2000
---------------------------
Thomas A. Keith
/s/ Lawrence D. Simon Director February 25th, 2000
---------------------------
Lawrence D. Simon
/s/ Ira Helman Director February 25th, 2000
---------------------------
Ira Helman
</TABLE>
<PAGE>
APPENDIX E
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 29, 2000
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)
(631) 273-2630
--------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------
Class Outstanding at April 7, 2000
------------ -------------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000
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................................................4-8
Item 2
Management's discussion and analysis
of financial condition and results of
operations.......................................................9-11
PART 11 - OTHER INFORMATION
Item 1 Legal proceedings...................................................12
SIGNATURES....................................................................13
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
February 29, November 30,
------------ -----------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,339 $ 2,946
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 13,804 13,255
Inventories (Note 4) 10,074 12,706
Prepaid expenses and other current assets 2,121 808
Due from supplier 624 600
Deferred tax asset (Note 6) 76 57
-------- --------
Total current assets 29,038 30,372
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$8,343 and $7,944, respectively 3,358 3,539
INTANGIBLE ASSETS, net of accumulated amortization
of $883 and $871, respectively 342 354
INVESTMENT IN COMPARE GENERIKS, INC. 992 992
DEFERRED TAX ASSETS (Note 6) 267 --
OTHER ASSETS 1,677 1,443
-------- --------
$ 35,674 $ 36,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,355 $ 3,786
Dividends payable (Note 5) 86 29
Income taxes payable (Note 6) 336 1,528
Current portion of long-term debt (Note 7) 665 653
-------- --------
Total current liabilities 4,442 5,996
-------- --------
LONG-TERM DEBT (Note 7) 1,797 1,967
-------- --------
DEFERRED INCOME TAX LIABILITY (NOTE 6) -- 27
INTEREST OF MINORITY HOLDERS IN SUBSIDIARY 875 938
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: (Note 5)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,807,153 and 3,807,153 issued and outstanding,
respectively 38 38
Series A convertible preferred stock, $.01 par value ;
authorized 5,000,000 shares; 460,566 issued and outstanding 5 5
Additional paid-in capital 28,642 28,633
Unearned compensation (1,890) (2,150)
Retained earnings 8,793 8,170
Treasury stock, at cost; (common: 1,488,738
shares and 1,469,184 shares,
respectively; preferred: 14,100
shares and 13,100 shares, respectively). (7,028) (6,924)
-------- --------
28,560 27,772
-------- --------
$ 35,674 $ 36,700
======== ========
</TABLE>
1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES (Note 8) $12,367 $11,939
COSTS AND EXPENSES: (Note 9)
Cost of sales 8,799 8,786
Selling, general and administrative 2,757 2,352
----------- -----------
11,556 11,138
OPERATING INCOME 811 801
OTHER EXPENSES (INCOME):
Interest income (26) (5)
Interest expense 64 135
Other (28) (18)
----------- -----------
10 112
----------- -----------
EARNINGS BEFORE PROVISION FOR
INCOME TAXES AND MINORITY INTEREST 801 689
PROVISION FOR INCOME TAXES 103 369
----------- -----------
EARNINGS BEFORE MINORITY INTEREST 698 320
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY (17) 41
----------- -----------
NET EARNINGS $ 681 $ 361
=========== ===========
NET EARNINGS PER COMMON SHARE (Note 5) $ .27 $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (Note 5) 2,321,766 3,270,139
=========== ===========
</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>
Three Months Ended
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $681 $361
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 633 730
Minority interest in income (loss) of subsidiary 17 (41)
Deferred income tax (benefit)/provision (313) 172
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (549) (378)
Inventories 2,632 2,609
Prepaid expenses and other current assets (1,313) 350
Due from supplier (24) (462)
Other assets 21 (134)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (431) (401)
Royalties Payable -- (1,350)
Income taxes payable (1,192) (448)
------- -------
Total adjustments (519) 647
------- -------
Net cash provided by operating activities 162 1,008
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (168) (117)
------- -------
Net cash used in investing activities (168) (117)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (158) (782)
Net (increase) decrease in stockholders loans (255) 40
Purchase of treasury stock (104) (915)
Purchase of subsidiary treasury stock (84) --
------- -------
Net cash used in financing activities (601) (1,657)
------- -------
Net decrease of cash and cash equivalents (607) (766)
Cash and cash equivalents at beginning of period 2,946 929
------- -------
Cash and cash equivalents at end of period $2,339 $163
======= =======
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
1. Basis of Presentation:
The interim condensed consolidated financial statements furnished reflect
all adjustments which are, in the opinion of management, necessary to present a
fair statement of the financial position, as of February 29, 2000 and the
results of operations and statements of cash flows for the three month periods
ended February 29, 2000 and February 28, 1999. The balance sheet as of November
30, 1999 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, 1999. The results of operations
and cash flows for the three month period ended February 29, 2000 are not
necessarily indicative of the results to be expected for the full year.
2. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of PDK Labs Inc. ("PDK") and its subsidiary, Futurebiotics, Inc.
("Futurebiotics") (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
3. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No. 105, consist primarily of trade accounts receivable.
4. Inventories:
Inventories have been estimated by using the gross profit method for
the interim periods. The components of the inventories are as follows:
February 29, November 30,
2000 1999
----------------- ------------
in thousands) (In thousands)
(unaudited)
Raw materials $ 3,828 $ 2,736
Work-in-process 3,223 6,053
Finished goods 3,023 3,917
--------- --------
$10,074 $12,706
========= ========
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
(Continued)
5. 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 was calculated for the three months ended February 29, 2000
and February 28, 1999 as follows:
<TABLE>
<CAPTION>
Per
Three Months Ended February 29, 2000 Income Shares Share
------------------------------------ ------ ------ -----
(in thousands)
(unaudited)
<S> <C> <C> <C>
Net earnings $681 2,321,766
Less: preferred stock dividends (58) -
---- ------------
Basic EPS 623 2,321,766 $.27
Three Months Ended February 28, 1999
------------------------------------
Net earnings $361 3,270,139
Less: preferred stock dividends (64) -
----- -----------
Basic EPS 297 3,270,139 $.09
</TABLE>
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
(Continued)
Preferred stockholders are entitled to cumulative annual dividends of
$.49 per share, payable at the election of the Company in cash, common stock, or
a combination thereof. Such dividends are payable semi-annually on or about
April 15 and October 15 of each year. Dividends earned for each of the three
month periods ended February 29, 2000 and February 28, 1999 approximated $58,000
and $64,000, respectively.
The Company's Board of Directors has authorized the Company's management
to repurchase up to $7,000,000 worth of its own common stock, par value $.01, in
the public market at such time or times, and at such prices, as management
believes appropriate. As of February 29, 2000, the Company had authorization to
repurchase an additional $344,000 worth of its own stock.
In addition, the Company's Board of Directors authorized the management
to repurchase up to $500,000 worth of its own preferred stock, par value $ .01
in the public market. As of February 29, 2000, the Company had authorization to
repurchase an additional $261,000 worth of its own preferred stock.
6. Income Taxes:
Effective December 17, 1999, the Company and its subsidiary will file a
consolidated federal income tax return. The Company and its subsidiary each
report current and deferred income tax expense (benefit) under an allocation
method that results in a profitable company recognizing a tax provision as if
the individual company filed a separate return and loss companies recognizing
benefits to the extent their losses contribute to reduce consolidated taxes. In
addition, during the quarter ended February 29, 2000 the change in the valuation
allowance ($197,000) of the subsidiary's deferred tax asset resulting from its
ability to file a consolidated return with the Company was recorded as a tax
benefit on the books of the subsidiary.
The consolidated current and deferred tax assets and liabilities are
recorded on the books of the Company, and the net tax-related balances due
to/from the subsidiary are included in the intercompany balance.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
(Continued)
7. Long-Term Debt:
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
------------------- -----------
(in thousands) (in thousands)
(unaudited)
<S> <C> <C>
Long-term debt consists of the following:
Term loan, payable in monthly installments
of $68, including interest at 9.68%, through
July 2003; collateralized by the
Company's machinery & equipment $2,381 $2,526
Capital lease obligations, expiring in various
years through 2001 81 94
--------- ---------
2,462 2,620
Less current portion 665 653
-------- --------
$1,797 $1,967
======== ========
</TABLE>
8. Major Customer:
---------------
Sales to a major customer approximated 53% and 58% of total sales for
the three month period ended February 29, 2000 and February 28, 1999,
respectively.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
(Continued)
9. Commitments:
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis as liquidated damages. As of February 29, 2000, the Company
exceeded its minimum annual purchase requirement.
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 ("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 $6,525,000 and
$6,875,000 for the three month period ended February 29, 2000 and February 28,
1999, respectively.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward- looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the three months ended February 29, 2000 and February 28,
1999 approximated $12,367,000 and $11,939,000, respectively. Gross profit
amounted to $3,568,000 (29% of sales) for the three months ended February 29,
2000 and $3,153,000 (26% of sales) for the corresponding period in 1999. The
increase in gross profit is principally attributable to price increases for the
Max Brand product line.
Selling, general and administrative expenses were $2,757,000 for the
three months ended February 29, 2000 and $2,352,000 for the corresponding period
in 1999. As a percentage of sales, selling, general and administrative expenses
were 22% and 20% respectively.
The Company is party to supply agreements with 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 common stock or Series B preferred stock. Total sales to CGI
approximated $6,525,000 and $6,875,000 for the three month period ended February
29, 2000 and February 28, 1999, respectively.
The Company is operating under a supply agreement with Superior, which
provides for the Company to purchase certain products at specified prices.
In the event that PDK purchases less than $2,500,000 of product per annum,
Superior will be entitled to up to $100,000 on a pro-rata basis, as liquidated
damages. As of February 29, 2000, the Company exceeded its minimum annual
purchase requirement.
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Interest expense, net of interest income, was approximately $38,000 for
the three months ended February 29, 2000 as compared to $130,000 for the three
months ended February 28, 1999. The decrease is a result of the Company
maintaining lower debt balances.
The Company has satisfactorily implemented a plan to ensure that its
systems are compliant with the requirements to process transactions in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
Liquidity and Capital Resources
The Company had working capital of approximately $24,596,000 at February
29, 2000.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $162,000 which reflects net earnings of
$681,000, decreases in operating assets such as inventories ($2,632,000), and an
adjustment for depreciation and amortization ($633,000), offset by (i) increases
in operating assets such as accounts receivable ($549,000), prepaid expenses and
other current assets ($1,313,000), (ii) decreases in accounts payable and
accrued expenses ($431,000),and income taxes payable ($1,192,000), and (iii) an
adjustment for deferred income tax benefit ($313,000).
Net cash used in investing activities approximated $168,000,
attributable to the purchase of property, plant and equipment.
The statement also reflects cash used in financing activities of
approximately $601,000 representing bank loan repayments of ($158,000), the
purchase of treasury stock ($188,000), and an increase in stockholders loans of
($255,000).
During the three month period ending February 29, 2000, the Company
repurchased 19,554 shares of its own common stock at an average price of $5.02
per share and 1,000 shares of its own preferred stock at an average price of
$6.10. As of February 29, 2000, the Company had authorization to repurchase an
additional $344,000 worth of its own common stock and $261,000 worth of its own
preferred stock.
The term loan aggregating $2,381,000 at February 29, 2000 is payable in
monthly installments of $68,000 including interest through July 2003. The term
loan is collateralized by the Company's machinery and equipment.
The Company expects to meets its cash requirements from operations, and
current cash reserves.
10
<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, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDK LABS INC.
Dated: April 14, 2000 By: /s/ Karine Hollander
------------------------------
Karine Hollander
Chief Financial Officer
12
<PAGE>
APPENDIX F
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended May 31, 2000
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)
<TABLE>
<S> <C>
New York 11-2590436
----------------------------------------- -------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
</TABLE>
145 Ricefield Lane
Hauppauge, New York
-------------------
(Address of principal executive offices)
11788
-----
(Zip Code)
(631) 273-2630
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
-------- ---------
Class Outstanding at July 10, 2000
------------------- ----------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED MAY 31, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page to Page
------------
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
<S> <C>
Balance sheets............................................................................................ 1
Statements of earnings ................................................................................... 2
Statements of cash flows.................................................................................. 3
Notes to financial statements............................................................................. 4-7
Item 2.
Management's discussion and analysis
of financial condition and results of
operations............................................................................. 8-10
PART 11. OTHER INFORMATION
Item 1. Legal proceedings...................................................................... 11
SIGNATURES............................................................................................... 12
</TABLE>
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31, November 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,026 $ 2,946
Investments on marketable securities 3,407 --
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 9,597 13,255
Inventories (Note 4) 8,943 12,706
Prepaid expenses and other current assets 2,460 808
Due from supplier 1,192 600
Deferred tax asset (Note 6) 87 57
-------- --------
Total current assets 26,712 30,372
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$8,704 and $7,944, respectively 3,288 3,539
INTANGIBLE ASSETS, net of accumulated amortization
of $937 and $871, respectively 326 354
INVESTMENT IN COMPARE GENERIKS, INC 1,352 992
DEFERRED TAX ASSET 135 --
OTHER ASSETS 2,451 1,443
-------- --------
$ 34,264 $ 36,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,325 $ 3,786
Dividends payable (Note 5) 31 29
Income taxes payable (Note 6 ) 377 1,528
Current portion of long-term debt (Note 7) 749 653
-------- --------
Total current liabilities 2,482 5,996
-------- --------
LONG-TERM DEBT (Note 7) 1,622 1,967
DEFERRED INCOME TAX LIABILITY (Note 6) -- 27
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 843 938
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: (Note 5)
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; 446,466 and 460,566 issued and outstanding,
respectively, 5 5
Additional paid-in capital 28,574 28,633
Unrealized gain on investment in Compare Generiks, Inc. 216 --
Unearned compensation (1,671) (2,150)
Retained earnings 9,111 8,170
Treasury stock, at cost: (common: 1,487,146 shares and 1,469,184
shares, respectively; preferred: 0 and 13,100 shares, respectively) (6,956) (6,924)
-------- --------
29,317 27,772
-------- --------
$ 34,264 $ 36,700
======== ========
</TABLE>
8 1
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
----------
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
NET SALES (Note 8) $ 24,076 $ 25,824 $ 11,709 $ 13,885
COSTS AND EXPENSES: (Note 9)
Cost of sales 16,944 18,857 8,145 10,071
Selling, general and administrative 5,610 5,122 2,853 2,770
------------- ------------- ------------- -----------
22,554 23,979 10,998 12,841
OPERATING INCOME 1,522 1,845 711 1,044
OTHER EXPENSES (INCOME):
Interest income (26) (5) -- --
Interest expense 125 238 61 103
Other (87) (38) (59) (20)
------------- ------------- ------------- -----------
12 195 2 83
------------- ------------- ------------- -----------
EARNINGS BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 1,510 1,650 709 961
PROVISION FOR INCOME TAXES 471 800 368 431
------------- ------------- ------------- -----------
EARNINGS BEFORE MINORITY INTEREST 1,039 850 341 530
MINORITY INTEREST IN LOSS OF SUBSIDIARY 14 71 31 30
------------- ------------- ------------- -----------
NET EARNINGS $ 1,053 $ 921 $ 372 $ 560
============= ============= ============= ===========
NET EARNINGS PER COMMON SHARE (Note 5 ) $ .41 $ .26 $ .14 $ .17
============= ============= ============= ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: (Note 5) 2,320,007 3,151,119 2,318,415 3,039,327
============= ============= ============= ===========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
----------
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
May 31, May 31,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,053 $ 921
------- -------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,242 1,474
Minority interest in loss of subsidiary (14) (71)
Deferred income tax (provision) benefit (192) 51
Unrealized gain on investment (144) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,658 620
Inventories 3,763 4,369
Prepaid income taxes -- (6)
Prepaid expenses and other current assets (1,652) (151)
Due from supplier (592) (251)
Other assets (176) 134
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (2,461) (342)
Royalties payable -- (1,350)
Dividends payable -- (2)
Income taxes payable (1,151) (96)
------- -------
Total adjustments 2,281 4,379
------- -------
Net cash provided by operating activities 3,334 5,300
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (458) (157)
Purchase of marketable securities (3,407) --
------- -------
Net cash used in investing activities (3,865) (157)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (249) (2,946)
Net (increase) decrease in stockholder loans (832) 482
Purchase of treasury stock (104) (1,841)
Purchase of subsidiary stock (92) --
Dividends paid (112) (113)
------- -------
Net cash used in financing activities (1,389) (4,418)
------- -------
Net (decrease) increase of cash and cash equivalents (1,920) 725
Cash and cash equivalents at beginning of period 2,946 929
------- -------
Cash and cash equivalents at end of period $ 1,026 $ 1,654
======= =======
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2000
1. Basis of Presentation:
The interim condensed consolidated financial statements furnished reflect
all adjustments which are, in the opinion of management, necessary to present a
fair statement of the financial position, as of May 31, 2000 and the results of
operations and statements of cash flows for the six month periods ended May 31,
2000 and 1999. The balance sheet as of November 30, 1999 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, 1999. The results of operations and cash flows for the
six month period ended May 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
2. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of PDK Labs Inc. ("PDK") and its subsidiary, Futurebiotics, Inc.
("Futurebiotics") (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
3. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No. 105, consist primarily of trade accounts receivable.
4. Inventories:
Inventories have been estimated by using the gross profit method for
the interim periods. The components of the inventories are as follows:
May 31, November 30,
2000 1999
---- ----
(in thousands) (in thousands)
Raw material $ 2,729 $ 2,736
Work-in-process 2,860 6,053
Finished good 3,354 3,917
------- -------
$ 8,943 $12,706
======= =======
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2000
(Continued)
5. 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. Treasury shares have been excluded from the weighted average number
of shares. The assumed conversion of the preferred stock and the related
reduction to the preferred stock was not included in the computation as the
effect was antidilutive. EPS on continuing operations was calculated for the six
months ended May 31, 2000 and May 31, 1999 as follows:
<TABLE>
<CAPTION>
Per
Income Shares Share
------ ------ -----
(in thousands)
(unaudited)
<S> <C> <C> <C>
Six Months Ended May 31, 2000
Net earnings $ 1,053 2,320,007
Less: preferred stock dividends (112) --
--------- ---------
Basic EPS $ 941 2,320,007 $.41
========= =========
Six Months Ended May 31, 1999
Net earnings $ 921 3,151,119
Less: preferred stock dividends (113) --
--------- ---------
Basic EPS $ 808 3,151,119 $.26
========= =========
Three Months Ended May 31, 2000
Net earnings $ 372 2,318,415
Less: preferred stock dividends (54) --
--------- ---------
Basic EPS $ 318 2,318,415 $.14
========= =========
Three Months Ended May 31, 1999
Net earnings $ 560 3,039,327
Less: preferred stock dividends (49) --
--------- ---------
Basic EPS $ 511 3,039,327 $.17
========= =========
</TABLE>
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2000
(Continued)
Preferred stockholders are entitled to cumulative annual dividends of
$.49 per share, payable at the election of the Company in cash, common stock, or
a combination thereof. Such dividends are payable semi-annually on or about
April 15 and October 15 of each year. Dividends earned for each of the six month
periods ended May 31, 2000 and May 31,1999 approximated $112,000 and $113,000,
respectively.
As of May 31, 2000, the Company's Board of Directors authorized the
Company to repurchase up to $7,000,000 worth of its own common stock, par value
$.01, in the public market. The Company's management has been afforded the
discretion to purchase the shares at such time or times, and at such prices, as
management believes appropriate. As of May 31, 2000, the Company had
authorization to repurchase an additional $344,000 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. As of May 31, 2000, the Company had authorization to
repurchase an additional $261,000 worth of its own preferred stock.
6. Income Taxes:
Effective December 17, 1999, the Company and its subsidiary will file a
consolidated federal income tax return. The Company and its subsidiary each
report current and deferred income tax expense (benefit) under an allocation
method that results in a profitable company recognizing a tax provision as if
the individual company filed a separate return and loss companies recognizing
benefits to the extent their losses contribute to reduce consolidated taxes. In
addition, during the six months ended May 31, 2000 the change in the valuation
allowance ($197,000) of the subsidiary's deferred tax asset resulting from its
ability to file a consolidated return with the Company was recorded as a tax
benefit on the books of the subsidiary.
The consolidated current and deferred tax assets and liabilities are
recorded on the books of the Company, and the net tax-related balances due
to/from the subsidiary are included in the intercompany balance.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2000
(Continued)
7. Long-Term Debt:
<TABLE>
<CAPTION>
May 31, November 30,
2000 1999
(in thousands) (in thousands)
(unaudited)
<S> <C> <C>
Long-term debt consists of the following:
Term loan, payable in monthly installments
of $68, including interest at 9.68%, through
July 2003; collateralized by the
Company's machinery and equipment $ 2,232 $ 2,526
Capital lease obligations, expiring in various
years through 2001 139 94
--------- ----------
2,371 2,620
Less current portion 749 653
--------- ---------
$ 1,622 $ 1,967
========= =========
</TABLE>
8. Major Customer:
--------------
Sales to a major customer approximated 49% and 54% of total sales for
the six month period ended May 31, 2000 and May 31, 1999, respectively.
9. Commitments:
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis as liquidated damages. As of May 31, 2000, the Company
purchased approximately $680,000 of product.
Additionally, Superior is also obligated to PDK under a management
agreement which provides for PDK to provide Superior with certain management
services in consideration for a management fee of $10,000 per month.
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the
Company supplies certain of CGI's products at prices based upon PDK's material
cost plus a specified mark-up. In consideration for these agreements, CGI agreed
to pay an annual license fee of $500,000 to PDK. This fee is payable, at the
option of CGI, either in cash, shares of CGI's common or Series B preferred
stock. Total sales to CGI approximated $11,826,000 and $13,823,000 for the six
month period ended May 31, 2000 and 1999, respectively.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward- looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the six and three month periods ended May 31, 2000
approximated $24,076,000 and $11,709,000 respectively, as compared to
$25,824,000 and $13,885,000 in the corresponding period in 1999. Gross profit
amounted to $7,132,000 (30% of sales) and $3,564,000 (30% of sales) for the six
and three month periods ended May 31, 2000 and $6,967,000 (27 % of sales) and
$3,814,000 (27% of sales) for the corresponding period in 1999. The increase in
gross profit is principally attributable to price increases in the Max Brand
product line.
Selling, general and administrative expenses were $5,610,000 (23% of
sales) and $2,853,000 (24% of sales) for the six and three month periods ended
May 31, 2000, respectively, as compared to $5,122,000 (20% of sales) and
$2,770,000 (20% of sales) for the corresponding periods in 1999.
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 $11,826,000 and
$13,823,000 for the six month period ended May 31, 2000 and 1999, respectively.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company is operating under a supply agreement with Superior
Supplements, Inc. ("Superior"), which provides for the Company to purchase
certain products at specified prices. In the event that PDK purchases less than
$2,500,000 of product per annum, Superior will be entitled to up to $100,000 on
a pro-rata basis, as liquidated damages. As of May 31, 2000, the Company
purchased approximately $680,000 of 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.
Interest expense, net of interest income, was approximately $99,000
and $61,000 for the six and three month periods ended May 31, 2000 as compared
to $233,000 and $103,000 in the corresponding periods in the prior year. The
decrease is a result of lower interest rates coupled with the Company
maintaining lower debt balances.
The Company has satisfactorily implemented a plan to ensure that its
systems are compliant with the requirements to process transactions in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
Liquidity and Capital Resources
The Company had working capital of approximately $24,230,000 at May
31, 2000.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $3,334,000 which reflects net earnings of
$1,053,000, decreases in operating assets such as accounts receivable
($3,658,000), inventories ($3,763,000), and an adjustment for depreciation and
amortization ($1,242,000), offset by (i) increases in operating assets such as
prepaid expenses and other current assets ($1,652,000), and (ii) decreases in
accounts payable and accrued expenses ($2,461,000), and income taxes payable
($1,151,000).
Net cash used in investing activities approximated $3,865,000,
attributable to the purchase of property, plant and equipment ($458,000) and
marketable securities ($3,407,000).
The statement also reflects cash used in financing activities of
approximately $1,389,000 representing bank loan repayments of ($249,000), the
purchase of treasury stock ($196,000), and an increase in stockholder loan of
($832,000).
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
During the six month period ending May 31, 2000, the Company
repurchased 19,554 shares of its own common stock at an average price of $5.02
per share and 1,000 shares of its own preferred stock at an average price of
$6.10. As of May 31, 2000, the Company had authorization to repurchase an
additional $344,000 worth of its own common stock and $261,000 worth of its own
preferred stock.
The term loan aggregating $2,232,000 at May 31, 2000 is payable in
monthly installments of $68,000 including interest through July 2003. The term
loan is collateralized by the Company's machinery and equipment.
The Company expects to meet its cash requirement from operations and
current cash reserves.
10
<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, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDK LABS INC.
Dated: July 10, 2000 By: /s/ Karine Hollander
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Karine Hollander
Chief Financial Officer
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PDK LABS INC
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Reginald Spinello and Karine Hollander
as proxies (the "Proxies"), each with power of substitution and resubstitution,
to vote all shares of Common Stock, $.01 par value per share, of PDK Labs Inc.
(the "Company") held of record by the undersigned on ______, 2000 at the Special
Meeting of Stockholders to be held at the __________________ on ____, 2000 at
_____ Eastern Daylight Savings Time, or at any adjournments thereof, as directed
below, and in their discretion on all other matters coming before the meeting or
any adjournments thereof.
Please mark boxes / / in blue or black ink.
1. To consider and vote on a proposal to adopt and approve the plan of
Merger (the "Merger") included in an Agreement and Plan of Merger, dated as of
August 3, 2000 (the "Merger Agreement"), under which PDK Acquisition
Corporation, ("PDK Acquisition") a newly formed company owned by Reginald
Spinello, PDK's President and Chief Executive Officer, Karine Hollander, PDK's
Chief Financial Officer, and Raveendra Nandigam, PDK's Vice President of
Operations will merge with and into PDK and under which each PDK shareholder
(other than PDK Acquisition) will become entitled to receive $5.00 in cash for
each outstanding share of PDK Common Stock and $8.00 per share for each
outstanding share of PDK Preferred Stock.
FOR / / AGAINST / / ABSTAIN / /
2. To consider and vote upon a motion to adjourn the meeting in order to
solicit additional proxies.
3. To consider and transact such other business as may properly come
before the Special Meeting or any adjournments thereof.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
When properly executed, this Proxy will be voted as directed. If no
direction is made, this Proxy will be voted "AGAINST" Proposal 1 and "FOR"
Proposal 2.
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Please mark, date, sign and return this Proxy promptly in the enclosed envelope.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: , 2000
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Signature
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Print Name(s)
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Signature, if held jointly
