<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19121
PDK LABS INC.
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(Exact name of Registrant as specified in its charter)
New York 11-2590436
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
145 Ricefield Lane
Hauppauge, New York
----------------------------------------
(Address of principal executive offices)
11788
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(Zip Code)
(631) 273-2630
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
-------- --------
Class Outstanding at October 10, 2000
------------ -------------------------------
Common Stock 3,807,153
<PAGE>
PDK LABS INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED AUGUST 31, 2000
TABLE OF CONTENTS
Page to Page
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Balance sheets............................................................. 1
Statements of earnings .................................................... 2
Statements of cash flows................................................... 3
Notes to financial statements.............................................. 4-7
Item 2.
Management's discussion and analysis
of financial condition and results of
operations..................................................... 8-10
PART 11. OTHER INFORMATION
Item 1. Legal proceedings..............................................11-12
SIGNATURES................................................................. 13
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 213 $ 2,946
Investment in marketable securities, at fair value 5,999 --
Accounts receivable - less allowance
for doubtful accounts of $54, respectively 12,296 13,255
Inventories (Note 4) 6,776 12,706
Prepaid expenses and other current assets 1,986 808
Due from supplier 822 600
Deferred tax asset (Note 6) -- 57
-------- --------
Total current assets 28,092 30,372
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization of
$9,032 and $7,944, respectively 3,059 3,539
INTANGIBLE ASSETS, net of accumulated amortization
of $976 and $871, respectively 286 354
INVESTMENT IN COMPARE GENERIKS, INC 1,352 992
DEFERRED TAX ASSET (Note 6) 276 --
OTHER ASSETS 1,924 1,443
-------- --------
$ 34,989 $ 36,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,689 $ 3,786
Dividends payable (Note 5) 80 29
Income taxes payable (Note 6) 375 1,528
Current portion of long-term debt (Note 7) 719 653
Deferred income tax liability (Note 6) 150 --
-------- --------
Total current liabilities 3,013 5,996
LONG-TERM DEBT (Note 7) 1,446 1,967
DEFERRED INCOME TAX LIABILITY (Note 6) -- 27
INTERESTS OF MINORITY HOLDERS IN SUBSIDIARY 718 938
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY: (Note 5)
Common stock, $.01 par value; authorized 30,000,000
shares; 3,807,153 and 3,807,153 issued and outstanding, respectively 38 38
Series A convertible preferred stock, $.01 par value ; authorized
5,000,000 shares; 460,566 and 498,110 issued and outstanding, respectively 5 5
Additional paid-in capital 28,630 28,633
Unrealized gain on investment in Compare Generiks, Inc. 216 --
Unearned compensation (1,476) (2,150)
Retained earnings 9,427 8,170
Treasury stock, at cost: (common: 1,488,738 and
1,469,184 shares, respectively; preferred:
0 and 13,100 shares, respectively) (7,028) (6,924)
-------- --------
29,812 27,772
-------- --------
$ 34,989 $ 36,700
======== ========
</TABLE>
1
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PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES (Note 8 and 9) $ 36,282 $ 39,628 $ 12,206 $ 13,804
COSTS AND EXPENSES: (Note 9)
Cost of sales 25,008 29,034 8,064 10,177
Selling, general and administrative 9,123 8,008 3,513 2,886
----------- ----------- ----------- -----------
34,131 37,042 11,577 13,063
OPERATING INCOME 2,151 2,586 629 741
OTHER EXPENSES (INCOME):
Interest income (40) (20) (14) (15)
Interest expense 179 314 54 76
Other (222) (62) (135) (24)
----------- ----------- ----------- -----------
(83) 232 (95) 37
EARNINGS BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 2,234 2,354 724 704
PROVISION FOR INCOME TAXES 834 1,200 363 400
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST 1,400 1,154 361 304
MINORITY INTEREST IN LOSS OF SUBSIDIARY 20 315 6 244
----------- ----------- ----------- -----------
NET EARNINGS $ 1,420 $ 1,469 $ 367 $ 548
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE (Note 5) $ .54 $ .42 $ .13 $ .17
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 5) 2,318,415 3,085,777 2,318,415 2,956,565
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,420 $ 1,469
------- -------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,816 2,190
Minority interest in loss of subsidiary (20) (315)
Deferred income tax benefit (96) (55)
Unrealized gain on investment (144) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 959 (1,173)
Inventories 5,930 8,675
Prepaid income taxes -- (9)
Prepaid expenses and other current assets (1,178) 280
Due from supplier (222) (339)
Other assets (149) 238
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (2,097) (518)
Royalties payable -- (1,350)
Income taxes payable (1,153) (53)
Dividend payable 51 --
------- -------
Total adjustments 3,697 7,571
------- -------
Net cash provided by operating activities 5,117 9,040
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,999) (7,495)
Maturity of marketable securities -- 6,497
Purchase of property, plant and equipment (558) (214)
------- -------
Net cash used in investing activities (6,557) (1,212)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable -- 2,728
Repayment of debt (455) (6,223)
Purchase of deferred loan costs (39) --
Net increase in stockholder loans (332) 517
Purchase of treasury stock (104) (2,250)
Purchase of subsidiary stock (200) --
Dividends paid (163) (115)
------- -------
Net cash used in financing activities (1,293) (5,343)
------- -------
Net(decrease)/increase of cash and cash equivalents (2,733) 2,485
Cash and cash equivalents at beginning of period 2,946 929
------- -------
Cash and cash equivalents at end of period $ 213 $ 3,414
======= =======
</TABLE>
3
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 2000
1. Basis of Presentation:
The interim condensed consolidated financial statements furnished
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the financial position, as of August 31, 2000 and
the results of operations and statements of cash flows for the nine month
periods ended August 31, 2000 and 1999. The balance sheet as of November 30,
1999 has been derived from the audited balance sheet as of that date. This
report should be read in conjunction with the Company's annual report filed on
Form 10-K for the fiscal year ended November 30, 1999. The results of operations
and cash flows for the nine month period ended August 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
2. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of PDK Labs Inc. ("PDK") and its subsidiary, Futurebiotics, Inc.
("Futurebiotics") (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
3. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Accounting Standards
No. 105, consist primarily of trade accounts receivable and investments in
marketable securities.
4. Inventories:
Inventories have been estimated by using the gross profit method for
the interim periods. The components of the inventories are as follows:
August 31, November 30,
2000 1999
(in thousands) (in thousands)
Raw material $ 2,042 $ 2,736
Work-in-process 2,522 6,053
Finished goods 2,212 3,917
------- -------
$ 6,776 $12,706
======= =======
4
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 2000
(Continued)
5. Stockholders' Equity:
Basic earnings per common share is computed by dividing the net
earnings after dividends on preferred shares by the weighted average number of
shares of common stock outstanding during the period. Treasury shares have been
excluded from the weighted average number of shares. The assumed conversion of
the preferred stock and the related reduction to the preferred stock was not
included in the computation as the effect was antidilutive. EPS on continuing
operations was calculated for the nine months ended August 31, 2000 and
August 31, 1999 as follows:
Per
Nine Months Ended August 31, 2000 Income Shares Share
--------------------------------- ------ ------ -----
(in thousands)
(unaudited)
Net earnings $ 1,420 2,318,415
Less: preferred stock dividends (163) --
--------- ---------
Basic EPS $ 1,257 2,318,415 $.54
========= =========
Nine Months Ended August 31, 1999
---------------------------------
Net earnings $ 1,469 3,085,777
Less: preferred stock dividends (168) --
--------- ---------
Basic EPS $ 1,301 3,085,777 $.42
========= =========
Three Months Ended August 31, 2000
---------------------------------
Earnings from continuing operations $ 367 2,318,415
Less: preferred stock dividends (51) --
--------- ---------
Basic EPS $ 316 2,318,415 $.13
========= =========
Three Months Ended August 31, 1999
---------------------------------
Earnings from continuing operations $ 548 2,956,565
Less: preferred stock dividends (55) --
--------- ---------
Basic EPS $ 493 2,956,565 $.17
========= =========
5
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 2000
(Continued)
Preferred stockholders are entitled to cumulative annual dividends of
$.49 per share, payable at the election of the Company in cash, common stock, or
a combination thereof. Such dividends are payable semi-annually on or about
April 15 and October 15 of each year. Dividends earned for each of the nine
month periods ended August 31, 2000 and August 31, 1999 approximated $163,000
and $168,000, respectively.
6. Income Taxes:
Effective December 17, 1999, the Company and its subsidiary will file a
consolidated federal income tax return. The Company and its subsidiary each
report current and deferred income tax expense (benefit) under an allocation
method that results in a profitable company recognizing a tax provision as if
the individual company filed a separate return and loss companies recognizing
benefits to the extent their losses contribute to reduce consolidated taxes. In
addition, during the nine months ended August 31, 2000 the change in the
valuation allowance ($197,000) of the subsidiary's deferred tax asset resulting
from its ability to file a consolidated return with the Company was recorded as
a tax benefit on the books of the subsidiary.
The consolidated current and deferred tax assets and liabilities are
recorded on the books of the Company, and the net tax-related balances due
to/from the subsidiary are included in the intercompany balance.
6
<PAGE>
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED AUGUST 31, 2000
(Continued)
7. Long-Term Debt:
August 31, November 30,
2000 1999
(in thousands) (in thousands)
(unaudited)
Long-term debt consists of the following:
Term loan, payable in monthly installments
of $68, including interest at 9.68%, through
July 2003; collateralized by the
Company's machinery and equipment $2,079 $2,526
Capital lease obligations, expiring in various
years through 2001 86 94
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2,165 2,620
Less current portion 719 653
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$1,446 $1,967
====== ======
8. Major Customer:
Sales to a major customer approximated 51% and 58% of total sales for
the nine month periods ended August 31, 2000 and 1999, respectively.
9. Commitments:
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the
Company supplies certain of Compare Generiks, Inc.'s ("CGI") products at prices
based upon PDK's material cost plus a specified mark-up. In consideration for
these agreements, CGI agreed to pay an annual license fee of $500,000 to PDK.
This fee is payable, at the option of CGI, either in cash, shares of CGI's
common or Series B preferred stock. Total sales to CGI approximated $18,497,000
and $22,865,000 for the nine month period ended August 31, 2000 and 1999,
respectively.
7
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; uncertainties relating to global economic
conditions; market acceptance of competing products; the availability and cost
of raw materials, the Company's ability to successfully maintain or increase
market share in its core business while expanding its product base into other
markets; the strength of its distribution channels; and the Company's ability to
manage fixed and variable expense growth relative to revenue growth.
Results of Operations
Net sales for the nine and three month periods ended August 31, 2000
approximated $36,282,000 and $12,206,000, respectively, as compared to
$39,628,000 and $13,804,000 in the corresponding period in 1999. Gross profit
amounted to $11,274,000 (31% of sales) and $4,142,000 (34% of sales) for the
nine and three month periods ended August 31, 2000 and $10,594,000 (27% of
sales) and $3,267,000 (26% of sales) for the corresponding period in 1999. The
increase in gross profit is principally attributable to price increases in the
Max Brand product line.
Selling, general and administrative expenses were $9,123,000 (25% of
sales) and $3,513,000 (29% of sales) for the nine and three month periods ended
August 31, 2000 respectively, as compared to $8,008,000 (20% of sales) and
$2,886,000 (21% of sales) for the corresponding periods in 1999.
8
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is party to supply agreements with Compare Generiks, Inc.,
("CGI"). Under the agreements which expire through 2001, the Company provides
CGI certain products at prices based upon the Company's material cost plus a
specified mark-up.
In consideration for these agreements, CGI agreed to pay the Company an
annual license fee of $500,000, payable at the option of CGI, either in cash or
in shares of CGI stock. Total sales to CGI approximated $18,497,000 and
$22,865,000 for the nine month periods ended August 31, 2000 and 1999
respectively.
Interest expenses, was approximately $179,000 and $54,000 for the nine
and three month periods ended August 31, 2000 compared to $314,000 and $76,000
in the corresponding periods in the prior year. The decrease is due to the
Company maintaining lower debt balances.
The Company has satisfactorily implemented a plan to ensure that its
systems are compliant with the requirements to process transaction in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
Liquidity and Capital Resources
The Company had working capital of approximately $25,079,000 at
August 31, 2000.
The Company's statement of cash flows reflects cash provided by
operating activities of approximately $5,117,000 which reflects net earnings of
$1,420,000, decreases in operating assets such as accounts receivable
($959,000), inventories ($5,930,000), and an adjustment for depreciation and
amortization ($1,816,000), offset by (i) increases in operating assets such as
prepaid expenses and other current assets ($1,178,000), and (ii) decreases in
accounts payable and accrued expenses ($2,097,000), and income taxes payable
($1,153,000).
9
<PAGE>
PDK LABS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net cash used in investing activities approximated $6,557,000,
attributable to the purchase of property, plant and equipment ($558,000) and
marketable securities ($5,999,000).
The statement also reflects cash used in financing activities of
approximately $1,293,000 representing bank loan repayments of ($455,000), the
purchase of treasury stock ($304,000), and an net increase in stockholder loan
of ($332,000).
The term loan aggregating at August 31, 2000 is payable in monthly
installments of approximately $68,000 including interest through July 2003. The
term loan is collateralized by the Company's machinery and equipment.
The Company expects to meet its cash requirements from operations and
current cash reserves.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
On or about July 24, 2000, the Company was served with a Class Action
Complaint in a litigation entitled Holt v. PDK Labs Inc., et al., that was filed
in the Supreme Court of the State of New York. The Complaint arises out of the
previously announced proposal by PDK Acquisition Corp. ("Acquisition") to merge
with and into the Company (the "Proposal"). The plaintiff, who purports to be a
holder of the Company's common stock and to represent all holders of the
Company's common and preferred stock, alleges, among other things, that the
consideration offered by Acquisition for the Company's common and preferred
stock is "inadequate." The Complaint does not challenge the adequacy of any of
the Company's or Acquisition's disclosures in connection with the Proposal; it
seeks injunctive relief and damages in an unspecified amount. The Company and
all other defendants have answered the Complaint and denied all substantive
allegations. The Company believes that the lawsuit is without merit and intends
to vigorously defend against the claims asserted therein.
On or about October 4, 2000, the Company, Acquisition, and various
individuals, including the Management Group, were served with a Class Action
Complaint in a litigation entitled Krape v. PDK Labs Inc., et al., that was
filed in the United States District Court for the Eastern District of New York.
This Complaint challenges the adequacy of the disclosure in the proxy materials
disseminated in connection with the Proposal. Specifically, the plaintiff, an
alleged holder of 8.9% of the Company's outstanding common stock, who purports
to represent all holders of the Company's common stock, principally alleges that
the Company and Acquisition failed to disclose: (1) the fact that this plaintiff
has asserted so-called "derivative" claims on behalf of the Company in two
separate lawsuits; (2) the possibility that the derivative claims might be
terminated if the merger is consummated; and (3) the possibility that the
Company's shareholders might somehow suffer losses, and/or the Management Group
might benefit, if the derivative actions are terminated. Based on these
allegations, the plaintiff has requested damages and has filed a motion seeking
to enjoin the shareholder vote on the merger, which is scheduled for November 8,
2000.
The Company believes that the new Krape lawsuit is without merit and
intends to vigorously defend against the claims and the motion for an
injunction. Plaintiff's initial premise is false because the derivative actions
are disclosed in the relevant materials disseminated to shareholders. Those
derivative actions sought damages on behalf of - not from - PDK, and/or the
cancellation of a significant number of shares issued by the Company to certain
officers and consultants in past years. The Company has previously pointed out
that the Supreme Court of the State of New York already has dismissed
plaintiff's derivative claims as legally insufficient. A federal court currently
is considering a similar motion to dismiss.
Based upon its own analysis, as confirmed by the New York Supreme Court
and a special committee of the board of directors and its independent counsel,
the Company believes that the derivative claims are completely without legal or
factual merit and were asserted years too late. In particular, the Company
believes that there is no merit to Krape's allegation that stock compensation
was awarded to various employees and consultants, including members of the
Management Group, for "no consideration." In fact, services were exchanged for
the compensation.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings - (cont'd)
The Company believes that its prior disclosures satisfy all legal
requirements. The Company further believes that, if the merger is consummated,
Krape will lose his ability to prosecute derivative claims and that the
remaining derivative action will be terminated as a matter of law.
To the extent that the derivative actions are terminated, the
individuals sued in those actions, including the Management Group and principals
of Acquisition, will, or course, no longer face the possibility, no matter how
remote of exposure on the claims. Nevertheless, for the reasons previously
stated the company believes that the dismissal of the derivative actions is at
best of marginal benefit to the individual defendants in that action, including
members of the Management Group, principally because of the meritless nature of
the claims therein. Nor does the Company believe that any shareholder will
suffer a loss as a result of the likely ultimate dismissal of the derivative
claims. The Company has pointed out in pleadings filed with the federal court
that even Krape's own counsel had proposed to resolve all of Krape's disputes
with the Company in a fashion that would have ascribed no value whatsoever to
the derivative claims. Moreover, inasmuch as the action seeks to cancel the
shares held by Acquisition and/or its principals and those persons are not
receiving any consideration in the merger, the Company's shareholders would not
receive any additional consideration if these shares are cancelled. Put
differently, the outcome of the derivative claims will not effect the $5 price
that has been offered for the shares owned by holders outside of the Management
Group.
Reference is made to Item 3 in the Company's Form 10-K for the year
ended November 30, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDK LABS INC.
Date: October 11, 2000 By: /s/ Karine Hollander
-------------------------------
Karine Hollander
Chief Financial Officer
13
