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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended November 30, 1999.
[ ] Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from to .
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Commission File No. 0-19121
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PDK LABS INC.
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(Exact name of registrant as specified in its charter)
New York 11-2590436
- --------------------------------- ---------------------------------
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
145 Ricefield Lane
Hauppauge, New York 11788
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (516) 273-2630
Securities registered pursuant to Section 12(b) of the Act: None.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Series A Convertible Preferred Stock, par value $.01 per share
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(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Issuer's revenues for its most recent fiscal year were $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.
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PART I
Item 1. BUSINESS
General
PDK Labs Inc. ("PDK" or "Company") manufactures and distributes
over-the-counter ("OTC") non-prescription pharmaceutical products and vitamins.
The Company's line of products primarily consists of non-prescription pain
relievers, decongestants, bronchodialators, and a broad range of vitamins and
nutritional supplements. The Company markets its products through regional
distributors, private label distribution and various licensing and supply
agreements.
The Company only sells OTC products which have been proven to be generally
recognized to be safe and effective for the intended uses. Proposed rules by the
Food and Drug Administration have established, after an expanded review of all
OTC products, those products that will be generally recognized as safe and
effective and non-misbranded. See "Business - Government Regulation."
The Company's non-prescription pharmaceutical products contain active
ingredients which are identical to those contained in non-prescription products
sold under national and regional brand names, private label brands, local or
regional products, and products sold by other national and regional direct mail
marketers. For instance, the Company's acetaminophen products are similar to
Tylenol(R); its antihistamine tablets are similar to Benadryl(R); and its
decongestant products are similar to Actifed(R) and Sudafed(R).
The Company also sells products through its majority owned public
subsidiary, Futurebiotics, Inc. ("Futurebiotics"). 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
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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
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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.
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Competition
The industry in which the Company is engaged is characterized by intense
competition. The Company competes against established pharmaceutical and
consumer product companies that currently market products which have identical
active ingredients or are equivalent or functionally similar to or in
competition with those the Company markets. Moreover, many of the Company's
competitors and their products have national and regional name brand
recognition. In addition, numerous companies are developing or may, in the
future, engage in the development of products competitive with the Company's
products. Examples of the many products which have achieved significant brand
name recognition which are competitive with the Company's products include
Tylenol(R), Advil(R) , Nuprin(R), Benadryl(R), Actifed(R), Sudafed(R),
No-Doz(R), Vivarin(R), and Dexatrim(R). The Company believes it competes
effectively against its competitors on the basis of price and service.
Trademarks
The Company owns numerous trademarks that have been registered with the
United States Patent and Trademark Office ("PTO"). To the Company's knowledge,
the Company has the common law right to use such service marks on its products
and in the marketing of its services. The Company has retained trademark counsel
and presently intends to make appropriate filings and registrations and take all
other actions necessary, to protect all of its intellectual property rights. The
Company views its trademarks and other proprietary rights as valuable assets and
believes they have significant value in the marketing of its products.
Government Regulation
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the United States Food and Drug Administration ("FDA"), the Federal
Trade Commission ("FTC"), the Consumer Product Safety Commission, the United
States Department of Agriculture and the Environmental Protection Agency
("EPA"). These activities may also be regulated by various agencies of the
states and localities in which the Company's products are sold.
In October 1994, the Dietary Supplement Health and Education Law was signed
into law. This new law, which amends the Federal Food, Drug and Cosmetic Act,
defines dietary supplements as a separate and distinct entity, and not as food
additives. Vitamins, minerals, amino acids, herbs and other nutritional
substances are included in the definition. It expressly provides for the use of
third party scientific literature which shall not be regulated as labeling by
the FDA, provided it is not false or misleading. 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.
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Several of the raw materials used by the Company in its manufacturing
process are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation of these chemicals requires the filing of
importation documents with the Federal Drug Enforcement Agency. In addition,
certain foreign countries require a "letter of non-objection" for the export of
List I Chemicals. 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.
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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.
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Several of the raw materials used by the Company in its manufacturing
process are categorized as List I Chemicals by the Chemical Diversion Act of
1988. As such, the importation of these chemicals requires the filing of
importation documents with the Federal Drug Enforcement Agency. In addition,
certain foreign countries require a "letter of non-objection" for the export of
List I Chemicals. 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
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mean that any particular product, under certain circumstances, could not expose
the Company to product liability or other claims.
Product Liability. The Company faces inherent business risks of exposure to
product liability claims in the event that, among other things, a product is
illegally tampered with, misused or its use results in adverse effects. While
the Company takes what it believes are appropriate precautions, including the
use of tamper resistant caps and heat sealed plastic wrapping around the entire
bottle of each of its over-the-counter and vitamin products and follows the Good
Manufacturing Practices prescribed by the FDA, as well as its own in-house
quality control procedures, there can be no assurance that it will avoid
significant liability exposure. While the Company carries product liability
insurance against this risk there can be no assurance that such coverage will
always be available or available at a reasonable cost and, even if available,
adequate to protect it against material adverse effects in the event of a
successful product liability claim.
Dependence on Certain Products. Although the Company distributes in excess
of 100 products, approximately 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
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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.
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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.
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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
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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.
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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
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1997 Calendar Year
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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
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First Quarter 8-13/16 5-1/2
Second Quarter 6-3/8 3-1/4
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Third Quarter 5-3/8 3-1/8
Fourth Quarter 4-1/8 2-15/16
1999 Calendar Year
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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
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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
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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
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First Quarter 5-7/8 4-3/8
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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>
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of May 1, 1999 by and between PDK Labs Inc.,
a New York corporation, with offices at 145 Ricefield Lane, Hauppauge, New York
11788 ("PDK") and Compare Generiks, Inc., a Delaware corporation, with offices
at 60 Davids Drive, Hauppauge, New York 11788 ("CGI").
WHEREAS, PDK and CGI have heretofore entered into an Exclusive Supply and
Licensing Agreement, dated as of March 24, 1997 (the "Agreement"); as amended
April 1, 1998, November 1, 1998, and January 4, 1999.
WHEREAS, Section 2(d) of the Agreement requires CGI to pay invoices within
sixty (60) days of the date of shipment of the related Products (as defined in
the Agreement);
WHEREAS, the Agreement contains a provision permitting PDK to suspend its
obligations to perform under the Agreement in the event of an Event of Force
Majeure (as defined in the Agreement);
WHEREAS, CGI is in default of the provisions of Section 2(d) of the
Agreement requiring CGI to pay invoices within sixty (60) days from the date of
shipment of the related Products and, in addition, an Event of Force Majeure (as
defined in the Agreement) has occurred and, in consideration for PDK agreeing to
waive (a) the breach by CGI of provisions contained in Section 2(d) of the
Agreement, and (b) its right to suspend performance of its obligations under the
Agreement, the parties hereto desire to (i) amend the Payment Provision to
provide for the payment by CGI to PDK of a higher amount.
The terms which are not defined herein shall have the respective meanings
ascribed to them in the Agreement.
NOW, THEREFORE, for valid and good consideration, the parties hereto agree
as follows:
1) The sentence of Section 2(a) of the Agreement shall be deleted in
its entirety and shall be replaced with the following:
<PAGE>
"(a) In consideration for the waiver by PDK of (i) its rights with
respect to the continuing breach by CGI of the payment provisions of
Section 2(d) of this Agreement, and (ii) the right to suspend performance
of its obligations under this Agreement as a result of the occurrence of an
Event of Force Majeure (as defined in Section 5 below), CGI agrees to pay
PDK $1.85 per bottle of Products shipped to CGI (the "Basic Payment"),
provided that said waiver shall not constitute a waiver of PDK's right to
terminate this Agreement and the License hereunder or to exercise any
rights available to PDK upon reoccurrence or continuance of such acts or
events. In addition to the Basic Payment, CGI shall also pay PDK the
difference between 93% of the sales price as invoiced to the customer of
each bottle and $1.85 per bottle (the "Excess Payment"). The Excess Payment
is payable monthly, in arrears, within 15 days of the end of the month in
which CGI received payment for the related Products."
2) Except as herein above amended, all of the terms and provisions of
the Agreement shall remain in full force and effect.
3) This Amendment shall be governed by and construed in accordance
with the laws of the State of New York, without regard to principles of
conflicts of law.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement as
of the day and year first above written.
PDK LABS INC.
By:
-------------------------------------
Reginald Spinello, President
COMPARE GENERIKS, INC.
By:
-------------------------------------
Thomas A. Keith, President
<PAGE>
EUROPEAN AMERICAN BANK, as Agent
July 21, 1999
PDK LABS INC.
145 Ricefield Lane
Hauppauge, New York 11788
Re: PDK Labs Inc. ("PDK") and Futurebiotics, Inc.
(collectively, the "Co-Borrowers")
Gentlemen:
The undersigned, European American Bank ("EAB"), as agent (in such
capacity, the "Agent") for itself, Bank Leumi USA ("Bank Leumi") and National
Bank of Canada ("NBC", and, collectively with EAB and Bank Leumi, the "Banks"),
has been advised by the Co-Borrowers that G.E. Capital Corp. (the "New Lender")
will be engaging in financing of the Co-Borrowers. It is the understanding of
the Banks that a portion of the proceeds of said financing will be used to repay
the total indebtedness of the Co-Borrowers to the Banks.
Based on the Banks' books and records, the total amount of "Obligations"
(as defined in that certain Credit Agreement, dated as of August 20, 1997, among
the Co-Borrowers, the Agent and the Banks (as amended or modified, the
"Agreement") due the Banks, in the aggregate, if paid on July 21, 1999, after
giving effect to confirmed collections of receivables through July 21, 1999 is
$2,732,504.24 (the "Payoff Amount") (allocable to the Banks and to the Agent's
attorney, as set forth below) which amount includes (i) all principal, interest,
fees, costs, expenses and liquidated damages due to the Banks as of such date in
the amount of $2,728,304.24 and (ii) legal fees and expenses of Farrell Fritz,
P.C., attorney for the Agent as of such date, in the amount of $4,200.00;
provided, however, that if the Payoff Amount is not received by the Banks by
2:00 p.m. on July 21, 1999, per diem interest of $707.09 per day (other than
with respect to the payment to Farrell Fritz) shall be due until payment is so
received. The Payoff Amount (plus any applicable per diem interest) should be
wire transferred to PDK's checking account at EAB, whereupon EAB is authorized
to debit such account for an amount equal to the Payoff Amount.
In consideration of the payment in full of the Co-Borrowers's indebtedness
to the Banks and the termination of the Commitments of the Banks, as set forth
above, and the agreements of the Co-Borrowers contained herein, each Bank hereby
(i) acknowledges and agrees that payment of the Payoff Amount, if paid on July
21, 1999 in immediately available funds, will constitute payment in full of all
of the Co-Borrowers's indebtedness and obligations to the Banks, except as set
forth herein, (ii) represents that it has no other credit arrangements with,
loans outstanding to, guaranties by, or interests or liens against the
Co-Borrowers or the Co-Borrowers' personal
<PAGE>
property, (iii) releases, effective upon receipt of the Payoff Amount, all
security interests and liens which the Co-Borrowers may have granted to the
Agent for the ratable benefit of the Lenders, (iv) agrees that it will, at the
Co-Borrowers' or New Lender's expense, terminate all of its agreements with the
Co-Borrowers, and (v) agrees that the Co-Borrowers have no further liabilities
or obligations thereunder, except for those which by the terms of the Agreement
survive the termination thereof and except as set forth herein.
The Agent further agrees, at the Co-Borrowers' or the New Lender's expense,
to deliver to the Co-Borrowers, upon payment in full of the Payoff Amount, such
termination statements, releases, cancellations, discharges or other agreements
as may be reasonably requested by the Co-Borrowers or the New Lender in
connection with the release of the security interests and liens in favor of the
Agent, for the ratable benefit of the Banks (collectively, the "Termination
Documents"); provided, however, that the Co-Borrowers or the New Lender shall
supply the Agent with the forms of any such Termination Documents (except for
the UCC-3 Termination Statements to be prepared by the Agent) to be executed by
the Agent.
Notwithstanding anything to the contrary contained herein, the Agent and
the Banks hereby reserve all of their rights with respect to any and all checks
or similar instruments for payment of money heretofore received by them in
connection with their arrangements with the Co-Borrowers, and all of their
rights to any monies due or to become due under said checks or similar
instruments and/or all of their claims thereon.
This letter may be executed in one or more counterparts, each of which
shall be deemed an original and all of which, taken together, shall constitute
one and the same agreement.
EUROPEAN AMERICAN BANK, as a
Bank and as Agent
By:
-------------------------------------
Name:
Title:
NATIONAL BANK OF CANADA, as a Bank
By:
-------------------------------------
Name:
Title:
BANK LEUMI USA, as a Bank
By:
-------------------------------------
Name:
Title:
<PAGE>
Acknowledged and Agreed to
this __ day of July, 1999
PDK LABS INC.
By:
----------------------------------
Name:
Title:
FUTUREBIOTICS, INC.
By:
----------------------------------
Name:
Title:
<PAGE>
PROMISSORY NOTE
--------------------
(Date)
145 Ricefield Lane, Hauppauge, SUFFOLK County, NY 11788
-------------------------------------------------------
(Address of Maker)
FOR VALUE RECEIVED, PDK Labs Inc. ("Maker") promises, jointly and severally if
more than one, to pay to the order of General Electric Capital Corporation or
any subsequent holder hereof (each, a "Payee") at its office located at 44 Old
Ridgebury Road, Danbury, CT 06810 or at such other place as Payee or the holder
hereof may designate, the principal sum of Two Million Seven Hundred Twenty
Eight Thousand Three Hundred Four and 24/100 Dollars ($2,728,304.24), with
interest on the unpaid principal balance, from the date hereof through and
including the dates of payment, at a fixed interest rate of Nine and 68/100
percent (9.68%) per annum, to be paid in lawful money of the United States, in
Forty Eight (48) consecutive monthly installments of principal and interest as
follows:
Periodic
Installment Amount
Forty Seven (47) installments of Sixty Eight Thousand Four Hundred Eleven
and 40/100 Dollars ($68,411.40)
each ("Periodic Installment") and a final installment which shall be in the
amount of the total outstanding principal and interest. The first Periodic
Installment shall be due and payable on August 1, 1999 and the following
Periodic Installments and the final installment shall be due and payable on the
same day of each succeeding month (each, a "Payment Date"). Such installments
have been calculated on the basis of a 360 day year of twelve 30-day months.
Each payment may, at the option of the Payee, be calculated and applied on an
assumption that such payment would be made on its due date.
The acceptance by Payee of any payment which is less than payment in full of all
amounts due and owing at such time shall not constitute a waiver of Payee's
right to receive payment in full at such time or at any prior or subsequent
time.
The Maker hereby expressly authorizes the Payee to insert the date value is
actually given in the blank space on the face hereof and on all related
documents pertaining hereto.
This Note may be secured by a security agreement, chattel mortgage, pledge
agreement or like instrument (each of which is hereinafter called a "Security
Agreement").
Time is of the essence hereof. If any installment or any other sum due under
this Note or any Security Agreement is not received within ten (10) days after
its due date, the Maker agrees to pay, in addition to the amount of each such
installment or other sum, a late payment charge of five percent (5%) of the
amount of said installment or other sum, but not exceeding any lawful maximum.
If (i) Maker fails to make payment of any amount due hereunder within ten (10)
days after the same becomes due and payable; or (ii) Maker is in default under,
or fails to perform under any term or condition contained in any Security
Agreement, then the entire principal sum remaining unpaid, together with all
accrued interest thereon and any other sum payable under this Note or any
Security Agreement, at the election of Payee, shall immediately become due and
payable, with interest thereon at the lesser of eighteen percent (18%) per annum
or the highest rate not prohibited by applicable law from the date of such
accelerated maturity until paid (both before and after any judgment).
The Maker may prepay in full, but not in part, its entire indebtedness hereunder
upon payment of the entire indebtedness plus an additional sum as a premium
equal to the following percentages of the original principal balance for the
indicated period:
Prior to the first annual anniversary date of this Note: Four percent (4%)
Thereafter and prior to the second annual anniversary
date of this Note: Three percent (3%)
Thereafter and prior to the third annual anniversary
date of this Note: Two percent (2%)
Thereafter and prior to the fourth annual anniversary
date of this Note: One percent (1%)
and zero percent (0%) thereafter, plus all other sums due hereunder or under
any Security Agreement.
It is the intention of the parties hereto to comply with the applicable usury
laws; accordingly, it is agreed that, notwithstanding any provision to the
contrary in this Note or any Security Agreement, in no event shall this Note or
any Security Agreement require the payment or permit the collection of interest
in excess of the maximum amount permitted by applicable law. If any such excess
interest is contracted for, charged or received under this Note or any Security
Agreement, or if all of the principal balance shall be prepaid, so that under
any of such circumstances the amount of interest contracted for, charged or
received under this Note or any Security Agreement on the principal balance
shall exceed the maximum amount of interest permitted by applicable law, then in
such event (a) the provisions of this paragraph shall govern and control, (b)
neither Maker nor any other person or entity now or hereafter liable for the
payment hereof shall be obligated to pay the amount of such interest to the
extent that it is in excess of the maximum amount of interest permitted by
applicable law, (c) any such excess which may have been collected shall be
either applied as a credit against the then unpaid principal balance or refunded
to Maker, at the option of the Payee, and (d) the effective rate of interest
shall be automatically reduced to the maximum lawful contract rate allowed under
applicable law as now or hereafter construed by the courts having jurisdiction
thereof. It is further agreed that without limitation of the foregoing, all
calculations of the rate of interest contracted for, charged or received under
this Note or any Security Agreement which are made for the purpose of
determining whether such rate exceeds the maximum lawful contract rate, shall be
made, to the extent permitted by applicable law, by amortizing, prorating,
allocating and spreading in equal parts during the period of the full stated
term of the indebtedness evidenced hereby, all interest at any time contracted
for, charged or received from Maker or otherwise by Payee in connection with
such indebtedness; provided, however, that if any applicable state law is
amended or the law of the United States of America preempts any applicable state
law, so that it becomes lawful for the Payee to receive a greater interest per
annum rate than is presently allowed, the Maker agrees that, on the effective
date of such amendment or preemption, as the case may be, the lawful maximum
hereunder shall be increased to the maximum interest per annum rate allowed by
the amended state law or the law of the United States of America.
The Maker and all sureties, endorsers, guarantors or any others (each such
person, other than the Maker, an "Obligor") who may at any time become liable
for the payment hereof jointly and severally consent hereby to any and all
extensions of time, renewals, waivers or modifications of, and all substitutions
or releases of, security or of any party primarily or secondarily liable on this
Note or any Security Agreement or any term and provision of either, which may be
made, granted or consented to by Payee, and agree that suit may be brought and
maintained against any one or more of them, at the election of Payee without
joinder of any other as a party thereto, and that Payee shall not be required
first to foreclose, proceed against, or exhaust any security hereof in order to
enforce payment of this Note. The Maker and each Obligor hereby waives
presentment, demand for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, and all other notices in connection herewith, as
well as filing of suit (if permitted by law) and diligence in collecting this
Note or enforcing any of the security hereof, and agrees to pay (if permitted by
law) all expenses incurred in collection, including Payee's actual attorneys'
fees. Maker and each Obligor agrees that fees not in excess of twenty percent
(20%) of the
<PAGE>
amount then due shall be deemed reasonable.
THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS
NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE. THE
SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES
THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY
CLAIMS.) THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR
TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED
TRANSACTION. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
This Note and any Security Agreement constitute the entire agreement of the
Maker and Payee with respect to the subject matter hereof and supercedes all
prior understandings, agreements and representations, express or implied.
No variation or modification of this Note, or any waiver of any of its
provisions or conditions, shall be valid unless in writing and signed by an
authorized representative of Maker and Payee. Any such waiver, consent,
modification or change shall be effective only in the specific instance and for
the specific purpose given.
Any provision in this Note or any Security Agreement which is in conflict with
any statute, law or applicable rule shall be deemed omitted, modified or altered
to conform thereto.
PDK Labs Inc.
By: (L.S.)
---------------------------------
(Signature)
- ------------------------------------
Print name (and title, if applicable)
112590436
- ------------------------------------
(Federal tax identification number)
<PAGE>
MASTER SECURITY AGREEMENT
dated as of ____________________ ("AGREEMENT")
THIS AGREEMENT is between GENERAL ELECTRIC CAPITAL CORPORATION (together
with its successors and assigns, if any, "SECURED PARTY"), and PDK LABS INC.
("DEBTOR"). Secured Party has an office at 44 OLD RIDGEBURY ROAD, DANBURY, CT
06810. Debtor is a corporation organized and existing under the laws of the
state of New York. Debtor's mailing address and chief place of business is 145
RICEFIELD LANE, HAUPPAUGE, NY 11788.
1. CREATION OF SECURITY INTEREST.
Debtor grants to Secured Party, its successors and assigns, a security
interest in and against all property listed on any collateral schedule now or in
the future annexed to or made a part of this Agreement ("COLLATERAL SCHEDULE"),
and in and against all additions, attachments, accessories and accessions to
such property, all substitutions, replacements or exchanges therefor, and all
insurance and/or other proceeds thereof (all such property is individually and
collectively called the "COLLATERAL"). This security interest is given to secure
the payment and performance of all debts, obligations and liabilities of any
kind whatsoever of Debtor to Secured Party, now existing or arising in the
future, including but not limited to the payment and performance of certain
Promissory Notes from time to time identified on any Collateral Schedule
(collectively "NOTES" and each a "NOTE"), and any renewals, extensions and
modifications of such debts, obligations and liabilities (such Notes, debts,
obligations and liabilities are called the "INDEBTEDNESS"). Notwithstanding
anything to the contrary contained in this Agreement, to the extent that Secured
Party asserts a purchase money security interest in any items of Collateral
("PMSI COLLATERAL"): (i) the PMSI Collateral shall secure only that portion of
the Indebtedness which has been advanced by Secured Party to enable Debtor to
purchase, or acquire rights in or the use of such PMSI Collateral (the "PMSI
INDEBTEDNESS"), and (ii) no other Collateral shall secure the PMSI Indebtedness.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR.
Debtor represents, warrants and covenants as of the date of this Agreement
and as of the date of each Collateral Schedule that:
(a) Debtor is, and will remain, duly organized, existing and in good
standing under the laws of the State set forth in the preamble of this
Agreement, has its chief executive offices at the location specified in the
preamble, and is, and will remain, duly qualified and licensed in every
jurisdiction wherever necessary to carry on its business and operations;
(b) Debtor has adequate power and capacity to enter into, and to perform
its obligations under this Agreement, each Note and any other documents
evidencing, or given in connection with, any of the Indebtedness (all of the
foregoing are called the "DEBT DOCUMENTS");
(c) This Agreement and the other Debt Documents have been duly authorized,
executed and delivered by Debtor and constitute legal, valid and binding
agreements enforceable in accordance with their terms, except to the extent that
the enforcement of remedies may be limited under applicable bankruptcy and
insolvency laws;
(d) No approval, consent or withholding of objections is required from any
governmental authority or instrumentality with respect to the entry into, or
performance by Debtor of any of the Debt Documents, except any already obtained;
(e) The entry into, and performance by, Debtor of the Debt Documents will
not (i) violate any of the organizational documents of Debtor or any judgment,
order, law or regulation applicable to Debtor, or (ii) result in any breach of
or constitute a default under any contract to which Debtor is a party, or result
in the creation of any lien, claim or encumbrance on any of Debtor's property
(except for liens in favor of Secured Party) pursuant to any indenture,
mortgage, deed of trust, bank loan, credit agreement, or other agreement or
instrument to which Debtor is a party;
(f) There are no suits or proceedings pending in court or before any
commission, board or other administrative agency against or affecting Debtor
which could, in the aggregate, have a material adverse effect on Debtor, its
business or operations, or its ability to perform its obligations under the Debt
Documents, nor does Debtor have reason to believe that any such suits or
proceedings are threatened;
(g) All financial statements delivered to Secured Party in connection with
the Indebtedness have been prepared in accordance with generally accepted
accounting principles, and since the date of the most recent financial
statement, there has been no material adverse change in Debtors financial
condition;
(h) The Collateral is not, and will not be, used by Debtor for personal,
family or household purposes;
(i) The Collateral is, and will remain, in good condition and repair and
Debtor will not be negligent in its care and use;
<PAGE>
(j) Debtor is, and will remain, the sole and lawful owner, and in
possession of, the Collateral, and has the sole right and lawful authority to
grant the security interest described in this Agreement; and
(k) The Collateral is, and will remain, free and clear of all liens, claims
and encumbrances of any kind whatsoever, except for (i) liens in favor of
Secured Party, (ii) liens for taxes not yet due or for taxes being contested in
good faith and which do not involve, in the judgment of Secured Party, any risk
of the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate
materialmen's, mechanic's, repairmen's and similar liens arising by operation of
law in the normal course of business for amounts which are not delinquent (all
of such liens are called "PERMITTED LIENS").
3. COLLATERAL.
(a) Until the declaration of any default, Debtor shall remain in possession
of the Collateral; except that Secured Party shall have the right to possess (i)
any chattel paper or instrument that constitutes a part of the Collateral, and
(ii) any other Collateral in which Secured Party's security interest may be
perfected only by possession. Secured Party may inspect any of the Collateral
during normal business hours after giving Debtor reasonable prior notice. If
Secured Party asks, Debtor will promptly notify Secured Party in writing of the
location of any Collateral.
(b) Debtor shall (i) use the Collateral only in its trade or business, (ii)
maintain all of the Collateral in good operating order and repair, normal wear
and tear excepted, (iii) use and maintain the Collateral only in compliance with
manufacturers recommendations and all applicable laws, and (iv) keep all of the
Collateral free and clear of all liens, claims and encumbrances (except for
Permitted Liens).
(c) Debtor shall not, without the prior written consent of Secured Party,
(i) part with possession of any of the Collateral (except to Secured Party or
for maintenance and repair), (ii) remove any of the Collateral from the
continental United States, or (iii) sell, rent, lease, mortgage, grant a
security interest in or otherwise transfer or encumber (except for Permitted
Liens) any of the Collateral.
(d) Debtor shall pay promptly when due all taxes, license fees, assessments
and public and private charges levied or assessed on any of the Collateral, on
its use, or on this Agreement or any of the other Debt Documents. At its option,
Secured Party may discharge taxes, liens, security interests or other
encumbrances at any time levied or placed on the Collateral and may pay for the
maintenance, insurance and preservation of the Collateral and effect compliance
with the terms of this Agreement or any of the other Debt Documents. Debtor
agrees to reimburse Secured Party, on demand, all costs and expenses incurred by
Secured Party in connection with such payment or performance and agrees that
such reimbursement obligation shall constitute Indebtedness.
(e) Debtor shall, at all times, keep accurate and complete records of the
Collateral, and Secured Party shall have the right to inspect and make copies of
all of Debtor's books and records relating to the Collateral during normal
business hours, after giving Debtor reasonable prior notice.
(f) Debtor agrees and acknowledges that any third person who may at any
time possess all or any portion of the Collateral shall be deemed to hold, and
shall hold, the Collateral as the agent of, and as pledge holder for, Secured
Party. Secured Party may at any time give notice to any third person described
in the preceding sentence that such third person is holding the Collateral as
the agent of, and as pledge holder for, the Secured Party.
4. INSURANCE.
(a) Debtor shall at all times bear the entire risk of any loss, theft,
damage to, or destruction of, any of the Collateral from any cause whatsoever.
(b) Debtor agrees to keep the Collateral insured against loss or damage by
fire and extended coverage perils, theft, burglary, and for any or all
Collateral which are vehicles, for risk of loss by collision, and if requested
by Secured Party, against such other risks as Secured Party may reasonably
require. The insurance coverage shall be in an amount no less than the full
replacement value of the Collateral, and deductible amounts, insurers and
policies shall be acceptable to Secured Party. Debtor shall deliver to Secured
Party policies or certificates of insurance evidencing such coverage. Each
policy shall name Secured Party as a loss payee, shall provide for coverage to
Secured Party regardless of the breach by Debtor of any warranty or
representation made therein, shall not be subject to co-insurance, and shall
provide that coverage may not be canceled or altered by the insurer except upon
thirty (30) days prior written notice to Secured Party. Debtor appoints Secured
Party as its attorney-in-fact to make proof of loss, claim for insurance and
adjustments with insurers, and to receive payment of and execute or endorse all
documents, checks or drafts in connection with insurance payments. Secured Party
shall not act as Debtors attorney-in-fact unless Debtor is in default. Proceeds
of insurance shall be applied, at the option of Secured Party, to repair or
replace the Collateral or to reduce any of the Indebtedness.
5. REPORTS.
(a) Debtor shall promptly notify Secured Party of (i) any change in the
name of Debtor, (ii) any relocation of its chief executive offices, (iii) any
relocation of any of the Collateral, (iv) any of the Collateral being lost,
stolen, missing, destroyed, materially damaged or worn out, or (v) any lien,
claim or encumbrance other than Permitted Liens attaching to or being made
against any of the Collateral.
<PAGE>
(b) Debtor will deliver to Secured Party Debtors complete financial
statements, certified by a recognized firm of certified public accountants,
within ninety (90) days of the close of each fiscal year of Debtor. If Secured
Party requests, Debtor will deliver to Secured Party copies of Debtors quarterly
financial reports certified by Debtors chief financial officer, within ninety
(90) days after the close of each of Debtors fiscal quarter. Debtor will deliver
to Secured Party copies of all Forms 10-K and 10-Q, if any, within 30 days after
the dates on which they are filed with the Securities and Exchange Commission.
6. FURTHER ASSURANCES.
(a) Debtor shall, upon request of Secured Party, furnish to Secured Party
such further information, execute and deliver to Secured Party such documents
and instruments (including, without limitation, Uniform Commercial Code
financing statements) and shall do such other acts and things as Secured Party
may at any time reasonably request relating to the perfection or protection of
the security interest created by this Agreement or for the purpose of carrying
out the intent of this Agreement. Without limiting the foregoing, Debtor shall
cooperate and do all acts deemed necessary or advisable by Secured Party to
continue in Secured Party a perfected first security interest in the Collateral,
and shall obtain and furnish to Secured Party any subordinations, releases,
landlord, lessor, or mortgagee waivers, and similar documents as may be from
time to time requested by, and in form and substance satisfactory to, Secured
Party.
(b) Debtor irrevocably grants to Secured Party the power to sign Debtor's
name and generally to act on behalf of Debtor to execute and file applications
for title, transfers of title, financing statements, notices of lien and other
documents pertaining to any or all of the Collateral; this power is coupled with
Secured Party's interest in the Collateral. Debtor shall, if any certificate of
title be required or permitted by law for any of the Collateral, obtain and
promptly deliver to Secured Party such certificate showing the lien of this
Agreement with respect to the Collateral.
(c) Debtor shall indemnify and defend the Secured Party, its successors and
assigns, and their respective directors, officers and employees, from and
against all claims, actions and suits (including, without limitation, related
attorneys' fees) of any kind whatsoever arising, directly or indirectly, in
connection with any of the Collateral.
7. DEFAULT AND REMEDIES.
(a) Debtor shall be in default under this Agreement and each of the other
Debt Documents if:
(i) Debtor breaches its obligation to pay when due any installment or
other amount due or coming due under any of the Debt Documents;
(ii) Debtor, without the prior written consent of Secured Party,
attempts to or does sell, rent, lease, mortgage, grant a security interest in,
or otherwise transfer or encumber (except for Permitted Liens) any of the
Collateral;
(iii) Debtor breaches any of its insurance obligations under Section 4;
(iv) Debtor breaches any of its other obligations under any of the Debt
Documents and fails to cure that breach within thirty (30) days after written
notice from Secured Party;
(v) Any warranty, representation or statement made by Debtor in any of
the Debt Documents or otherwise in connection with any of the Indebtedness shall
be false or misleading in any material respect;
(vi) Any of the Collateral is subjected to attachment, execution, levy,
seizure or confiscation in any legal proceeding or otherwise, or if any legal or
administrative proceeding is commenced against Debtor or any of the Collateral,
which in the good faith judgment of Secured Party subjects any of the Collateral
to a material risk of attachment, execution, levy, seizure or confiscation and
no bond is posted or protective order obtained to negate such risk;
(vii) Debtor breaches or is in default under any other agreement
between Debtor and Secured Party;
(viii) Debtor or any guarantor or other obligor for any of the
Indebtedness (collectively "GUARANTOR") dissolves, terminates its existence,
becomes insolvent or ceases to do business as a going concern. Notwitstanding
the proceeding, the sale of all the assets of the Guarantor will not be
considered an event of default;
(ix) If Debtor or any Guarantor is a natural person, Debtor or any such
Guarantor dies or becomes incompetent;
(x) A receiver is appointed for all or of any part of the property of
Debtor or any Guarantor, or Debtor or any Guarantor makes any assignment for the
benefit of creditors; or
<PAGE>
(xi) Debtor or any Guarantor files a petition under any bankruptcy,
insolvency or similar law, or any such petition is filed against Debtor or any
Guarantor and is not dismissed within forty-five (45) days.
(b) If Debtor is in default, the Secured Party, at its option, may declare
any or all of the Indebtedness to be immediately due and payable, without demand
or notice to Debtor or any Guarantor. The accelerated obligations and
liabilities shall bear interest (both before and after any judgment) until paid
in full at the lower of fifteen percent (15%) per annum or the maximum rate not
prohibited by applicable law.
(c) After default, Secured Party shall have all of the rights and remedies
of a Secured Party under the Uniform Commercial Code, and under any other
applicable law. Without limiting the foregoing, Secured Party shall have the
right to (i) notify any account debtor of Debtor or any obligor on any
instrument which constitutes part of the Collateral to make payment to the
Secured Party, (ii) with or without legal process, enter any premises where the
Collateral may be and take possession of and remove the Collateral from the
premises or store it on the premises, (iii) sell the Collateral at public or
private sale, in whole or in part, and have the right to bid and purchase at
said sale, or (iv) lease or otherwise dispose of all or part of the Collateral,
applying proceeds from such disposition to the obligations then in default. If
requested by Secured Party, Debtor shall promptly assemble the Collateral and
make it available to Secured Party at a place to be designated by Secured Party
which is reasonably convenient to both parties. Secured Party may also render
any or all of the Collateral unusable at the Debtor's premises and may dispose
of such Collateral on such premisess. Any notice that Secured Party is required
to give to Debtor under the Uniform Commercial Code of the time and place of any
public sale or the time after which any private sale or other intended
disposition of the Collateral is to be made shall be deemed to constitute
reasonable notice if such notice is given to the last known address of Debtor
and/or their attorneyat least ten (10) days prior to such action.
(d) Proceeds from any sale or lease or other disposition shall be applied:
first, to all reasonable costs of repossession, storage, and disposition
including without limitation attorneys', appraisers', and auctioneers' fees;
second, to discharge the obligations then in default; third, to discharge any
other Indebtedness of Debtor to Secured Party, whether as obligor, endorser,
guarantor, surety or indemnitor; fourth, to expenses incurred in paying or
settling liens and claims against the Collateral; and lastly, to Debtor, if
there exists any surplus. Debtor shall remain fully liable for any deficiency.
(e) Debtor agrees to pay all reasonable attorneys' fees and other costs
incurred by Secured Party in connection with the enforcement, assertion, defense
or preservation of Secured Party's rights and remedies under this Agreement, or
if prohibited by law, such lesser sum as may be permitted. Debtor further agrees
that such fees and costs shall constitute Indebtedness.
(f) Secured Party's rights and remedies under this Agreement or otherwise
arising are cumulative and may be exercised singularly or concurrently. Neither
the failure nor any delay on the part of the Secured Party to exercise any
right, power or privilege under this Agreement shall operate as a waiver, nor
shall any single or partial exercise of any right, power or privilege preclude
any other or further exercise of that or any other right, power or privilege.
SECURED PARTY SHALL NOT BE DEEMED TO HAVE WAIVED ANY OF ITS RIGHTS UNDER THIS
AGREEMENT OR UNDER ANY OTHER AGREEMENT, INSTRUMENT OR PAPER SIGNED BY DEBTOR
UNLESS SUCH WAIVER IS EXPRESSED IN WRITING AND SIGNED BY SECURED PARTY. A waiver
on any one occasion shall not be construed as a bar to or waiver of any right or
remedy on any future occasion.
(g) DEBTOR AND SECURED PARTY UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF THE INDEBTEDNESS SECURED
HEREBY, ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY RELATING TO THE SUBJECT
MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP
THAT IS BEING ESTABLISHED BETWEEN DEBTOR AND SECURED PARTY. THE SCOPE OF THIS
WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE
FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER
DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
8. MISCELLANEOUS.
(a) This Agreement, any Note and/or any of the other Debt Documents may be
assigned, in whole or in part, by Secured Party without notice to Debtor, and
Debtor agrees not to assert against any such assignee, or assignee's assigns,
any defense, set-off, recoupment claim or counterclaim which Debtor has or may
at any time have against Secured Party for any reason whatsoever. Debtor may
assert any claim it has against Secured Party in a separate legal action against
Secured Party. Debtor agrees that if Debtor receives written notice of an
assignment from Secured Party, Debtor will pay all amounts payable under any
assigned Debt Documents to such assignee or as instructed by Secured Party.
Debtor also agrees to confirm in writing receipt of the notice of assignment as
may be reasonably requested by assignee.
(b) All notices to be given in connection with this Agreement shall be in
writing, shall be addressed to the parties at their respective addresses set
forth in this Agreement (unless and until a different address may be specified
in a written notice to the other party), and shall be deemed given (i) on the
date of receipt if delivered in hand or by facsimile transmission, (ii) on the
next business day after being sent by express mail, and (iii) on the fourth
business day after being sent by regular, registered or certified mail. As used
herein, the term "business day" shall mean and include any day other than
Saturdays, Sundays, or other days on
<PAGE>
which commercial banks in New York, New York are required or authorized to be
closed.
(c) Secured Party may correct patent errors and fill in all blanks in this
Agreement or in any Collateral Schedule consistent with the agreement of the
parties.
(d) Time is of the essence of this Agreement. This Agreement shall be
binding, jointly and severally, upon all parties described as the "Debtor" and
their respective heirs, executors, representatives, successors and assigns, and
shall inure to the benefit of Secured Party, its successors and assigns.
(e) This Agreement and its Collateral Schedules constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersede all prior understandings (whether written, verbal or
implied) with respect to such subject matter. THIS AGREEMENT AND ITS COLLATERAL
SCHEDULES SHALL NOT BE CHANGED OR TERMINATED ORALLY OR BY COURSE OF CONDUCT, BUT
ONLY BY A WRITING SIGNED BY BOTH PARTIES. Section headings contained in this
Agreement have been included for convenience only, and shall not affect the
construction or interpretation of this Agreement.
(f) This Agreement shall continue in full force and effect until all of the
Indebtedness has been indefeasibly paid in full to Secured Party. The surrender,
upon payment or otherwise, of any Note or any of the other documents evidencing
any of the Indebtedness shall not affect the right of Secured Party to retain
the Collateral for such other Indebtedness as may then exist. This Agreement
shall automatically be reinstated if Secured Party is ever required to return or
restore the payment of all or any portion of the Indebtedness (all as though
such payment had never been made).
(g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT.
IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound
hereby, have duly executed this Agreement in one or more counterparts, each of
which shall be deemed to be an original, as of the day and year first aforesaid.
SECURED PARTY: DEBTOR:
GENERAL ELECTRIC CAPITAL CORPORATION PDK LABS INC.
By:___________________________________ By: _________________________________
Name:_________________________________ Name:________________________________
Title:________________________________ Title:_______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-1-1998
<PERIOD-END> NOV-30-1999
<CASH> 2,946
<SECURITIES> 0
<RECEIVABLES> 13,309
<ALLOWANCES> 54
<INVENTORY> 12,706
<CURRENT-ASSETS> 30,372
<PP&E> 11,533
<DEPRECIATION> 7,994
<TOTAL-ASSETS> 36,700
<CURRENT-LIABILITIES> 5,996
<BONDS> 1,967
0
5
<COMMON> 38
<OTHER-SE> 27,729
<TOTAL-LIABILITY-AND-EQUITY> 36,700
<SALES> 54,706
<TOTAL-REVENUES> 54,706
<CGS> 38,802
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 399
<INCOME-PRETAX> 3,353
<INCOME-TAX> 2,027
<INCOME-CONTINUING> 2,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,137
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
</TABLE>
