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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.
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(Exact name of Registrant as specified in its charter)
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<S> <C>
New York 11-2590436
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
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145 Ricefield Lane
Hauppauge, New York
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(Address of principal executive offices)
11788
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(Zip Code)
(631) 273-2630
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(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
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Class Outstanding at July 10, 2000
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Common Stock 3,807,153
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PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED MAY 31, 2000
TABLE OF CONTENTS
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Page to Page
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PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
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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
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PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
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<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
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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 $871, respectively 326 354
INVESTMENT IN COMPARE GENERIKS, INC 1,352 992
DEFERRED TAX ASSET 135 --
OTHER ASSETS 2,451 1,443
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$ 34,264 $ 36,700
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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
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Total current liabilities 2,482 5,996
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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, $.01 par value ; authorized
5,000,000 shares; 446,466 and 460,566 issued and outstanding,
respectively, 5 5
Additional paid-in capital 28,574 28,633
Unrealized gain on investment in Compare Generiks, Inc. 216 --
Unearned compensation (1,671) (2,150)
Retained earnings 9,111 8,170
Treasury stock, at cost: (common: 1,487,146 shares and 1,469,184
shares, respectively; preferred: 0 and 13,100 shares, respectively) (6,956) (6,924)
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29,317 27,772
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$ 34,264 $ 36,700
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1
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PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
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(in thousands, except share and per share data)
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Six Months Ended Three Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
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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)
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12 195 2 83
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EARNINGS BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 1,510 1,650 709 961
PROVISION FOR INCOME TAXES 471 800 368 431
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EARNINGS BEFORE MINORITY INTEREST 1,039 850 341 530
MINORITY INTEREST IN LOSS OF SUBSIDIARY 14 71 31 30
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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
============= ============= ============= ===========
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2
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PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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(in thousands, except share and per share data)
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Six Months Ended
May 31, May 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,053 $ 921
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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)
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Total adjustments 2,281 4,379
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Net cash provided by operating activities 3,334 5,300
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (458) (157)
Purchase of marketable securities (3,407) --
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Net cash used in investing activities (3,865) (157)
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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)
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Net cash used in financing activities (1,389) (4,418)
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Net (decrease) increase of cash and cash equivalents (1,920) 725
Cash and cash equivalents at beginning of period 2,946 929
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Cash and cash equivalents at end of period $ 1,026 $ 1,654
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3
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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
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$ 8,943 $12,706
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4
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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:
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Per
Income Shares Share
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(in thousands)
(unaudited)
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Six Months Ended May 31, 2000
Net earnings $ 1,053 2,320,007
Less: preferred stock dividends (112) --
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Basic EPS $ 941 2,320,007 $.41
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Six Months Ended May 31, 1999
Net earnings $ 921 3,151,119
Less: preferred stock dividends (113) --
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Basic EPS $ 808 3,151,119 $.26
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Three Months Ended May 31, 2000
Net earnings $ 372 2,318,415
Less: preferred stock dividends (54) --
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Basic EPS $ 318 2,318,415 $.14
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Three Months Ended May 31, 1999
Net earnings $ 560 3,039,327
Less: preferred stock dividends (49) --
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Basic EPS $ 511 3,039,327 $.17
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5
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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
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PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2000
(Continued)
7. Long-Term Debt:
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May 31, November 30,
2000 1999
(in thousands) (in thousands)
(unaudited)
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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
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2,371 2,620
Less current portion 749 653
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$ 1,622 $ 1,967
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8. Major Customer:
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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
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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
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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
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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
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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
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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
----------------------------------
Karine Hollander
Chief Financial Officer
12
