<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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-END> FEB-29-2000
<CASH> 2,339
<SECURITIES> 0
<RECEIVABLES> 13,858
<ALLOWANCES> 54
<INVENTORY> 10,074
<CURRENT-ASSETS> 29,038
<PP&E> 11,701
<DEPRECIATION> 8,343
<TOTAL-ASSETS> 35,674
<CURRENT-LIABILITIES> 4,442
<BONDS> 1,797
0
5
<COMMON> 38
<OTHER-SE> 28,517
<TOTAL-LIABILITY-AND-EQUITY> 35,674
<SALES> 12,367
<TOTAL-REVENUES> 12,367
<CGS> 8,799
<TOTAL-COSTS> 8,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 801
<INCOME-TAX> 103
<INCOME-CONTINUING> 681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 681
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
