<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended November 30, 1999.
-----------------
[_] Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from ______________ to ___________________.
Commission File No. 0-24530
FUTUREBIOTICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3205937
- --------------------------------- ---------------------------------
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
145 Ricefield Lane
Hauppauge, New York 11788
- --------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (516) 273-2630
Securities registered pursuant to Section 12(b) of the Act: None.
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
----------------------------------------
(Title of Class)
Units consisting of two (2) shares of common stock, par value $.0001 per share
and two (2) Class A Redeemable Common Stock Purchase Warrants
-------------------------------------------------------------
(Title of Class)
Class A Redeemable Common Stock Purchase Warrants
-------------------------------------------------
(Title of Class)
<PAGE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the 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 $7,305,000.
The aggregate market value of the 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 $658,000.
Number of shares outstanding of the issuer's common stock, as of
February 22, 2000, was 1,350,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
----
<PAGE>
PART I
Item 1. BUSINESS.
General
Futurebiotics, Inc., a Delaware corporation (the "Company"), was formed
on March 16, 1994. The Company is engaged in the distribution, marketing and
sale of vitamins, minerals, herbal formulations and specialty nutritional
supplements, which it markets principally to health food stores through regional
distributors.
The Company's primary 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.
All of the Company's products are supplied by its parent company, PDK Labs Inc.
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 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.
Recent Developments
On March 3, 1999, the Company entered into an asset purchase agreement
with a third party to sell substantially all of the Company's assets. In July
1999, the third party exercised its option to terminate the agreement.
Management is no longer pursuing the sale of these assets.
Products and Product Development
The Company develops products for its own Futurebiotics line. Its
products include vitamins, minerals, herbs and specialty combinations. Each
product category contains numerous different dosage sizes and various and unique
combinations of ingredients. These product groups include nutrition products for
men, advanced women's formulas, super green foods, weight loss/management
products and vegetarian multiple vitamins.
2
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The Company introduces new products in response to anticipated consumer
trends. Product concepts are generally developed by the Company's management,
key employees and consultants.
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.
Competition
The market for vitamins, dietary supplements, herbal-based products and
nutritional supplements is highly competitive in each of the Company's existing
and anticipated product lines and methods of distribution. Numerous
manufacturers and distributors compete with the Company for customers throughout
the United States and internationally in the packaged vitamin, mineral and
nutritional supplement industry selling products to retailers, such as mass
merchandisers, drug store chains, independent drug stores and health food
stores. Many of the Company's competitors are substantially larger and more
experienced than the Company, have longer operating histories and have
materially greater financial and other resources than the Company. Many of these
competitors are private companies, and therefore, the Company cannot compare its
revenues with respect to the sales volume of each competitor. The Company's
significant competitors include Nature's Bounty, Twin Labs, and Solgar. There
can be no assurance that the Company will be able to compete successfully with
its more established and better capitalized competitors.
Although certain of the Company's competitors are substantially larger
than the Company and have greater financial resources, the Company believes that
it competes favorably with other vitamin and nutritional supplement companies
because of its access to products, competitive pricing, quality of products,
sales support and diverse product line.
3
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Marketing and Advertising
The Company markets its products through in-store demonstrations, point
of purchase displays, and promotional literature. Advertising is through
consumer and trade magazines, newspapers, in-store flyers, radio and
distributors catalogs. The Company also mails a five color catalog directly to
retail stores.
Trademarks and Patents
The Company owns various trademarks which 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 servicemarks on its products
and in the marketing of its services. The Company has retained trademark counsel
and presently intends to make all appropriate filings and registrations and take
all other actions necessary, to protect all of its intellectual property rights.
Conflicts of Interests
As of November 30, 1999, PDK owned seventy eight and five tenths
(78.5%) percent of the Company's outstanding shares of Common Stock and one
hundred (100%) percent of its Preferred Stock. At present, PDK supplies all of
the Company's products, as well as certain management and administrative
facilities and personnel. It is anticipated that PDK will continue to supply a
significant percentage of the Company's products, at or near present levels, as
well as administrative and support services, and that the Company will continue
to operate its executive offices and distribution at facilities leased and
managed by PDK. In addition, four (4) members of PDK's Board of Directors,
Reginald Spinello, Karine Hollander, Thomas Keith and Lawrence Simon, are also
members of the Company's Board of Directors. Reginald Spinello, a Director and
the President and Chief Executive Officer of the Company, is PDK's President and
Chief Executive Officer. Because of PDK's ownership interest in the Company, the
identity of certain management and PDK's role as a significant supplier to the
Company, certain conflicts of interest may occur between the Company and PDK.
Product Liability Insurance
The Company, like other distributors of products that are ingested,
faces inherent risk of exposure to product liability claims if, among other
things, the use of its products results in an injury. With respect to product
liability coverage, the Company currently has a product liability insurance
policy. There is no assurance that any judgment against the Company will not
exceed liability coverage. A judgment significantly in excess of the amount of
insurance coverage would have a material adverse effect on the Company.
Employees
As of February 22, 2000, the Company employs a total of 8 employees on
a full time basis. The Company utilizes PDK for a majority of its administrative
functions.
4
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Item 2. PROPERTIES.
The Company's corporate, sales, and advertising offices are located at
the offices of PDK Labs Inc., 145 Ricefield Lane, Hauppauge, New York 11788,
(telephone number (516) 273-6300).
The lease is for 5,000 square feet for an initial one (1) year term
with yearly options to renew with escalations of five (5%) percent annually. The
initial annual rental is $50,000. The lease terminates in October, 2000.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, management is not aware of any material
legal proceedings pending against the Company.
Although the Company is not a party to the following legal proceedings,
PDK has been named in the following litigations:
On July 29, 1996, PDK served a complaint (the "Complaint") against a
former executive in 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 PDK.
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 PDK'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
5
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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 PDK. 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, 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.
Futurebiotics has not been named as a party in the former executive's
Counterclaim.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On October 15, 1999, the Company held its annual meeting of
Shareholders.
(b) At said meeting, the following five individuals were elected by the
following vote to serve as directors until the next annual meeting of
stockholders and until their successors are elected and qualified:
FOR AGAINST
--- -------
Reginald Spinello 1,724,802 8,736
Karine Hollander 1,724,802 8,736
Thomas Keith 1,724,802 8,736
Theresa Giove 1,724,802 8,736
Lawrence D. Simon 1,724,802 8,736
(c) At said meeting 1,728,617 votes in favor of and 3,911 votes against
a proposal to ratify the appointment of Holtz Rubenstein & Co., LLP to serve as
the independent certified public accountants for the 2000 fiscal year.
6
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is regularly quoted and traded on the NASDAQ SmallCap
system under the symbol VITK.
The Company acquired $1,469,000 worth of its own common stock in fiscal
1999, repurchasing 458,083 shares at an average price of $3.21. In addition, the
Company repurchased 19,198 shares at an average price of $4.34 between December
1, 1999 and February 22, 2000. As of February 22, 2000, the Company had
authorization to repurchase an additional $447,000 worth of its own common
stock.
The following table indicates the high and low prices for the Company's
Common Stock and Class A Warrants 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
- ------------
1997 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 3 3/4
Second Quarter 2 3/8 1 5/8
Third Quarter 3 3/4 2 1/8
Fourth Quarter 4 1/4 3 3/8
1998 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 4 1/2 3 1/2
Second Quarter 7 7/8 1 1/4
Third Quarter 3 1/2 1 1/4
Fourth Quarter 16 3/4
7
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1999 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 4 1/2 2
Second Quarter 3 1/4 2 7/8
Third Quarter 3 1/32 1 7/16
Fourth Quarter 9 1/4 1 1/2
Class A Warrants
- ----------------
1997 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 1/32 1/32
Second Quarter 1/32 1/32
Third Quarter 1/32 1/32
Fourth Quarter 1/32 1/32
1998 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 1/64 1/64
Second Quarter 1/64 1/64
Third Quarter 1/64 1/64
Fourth Quarter 1/64 1/64
1999 Calendar Year Quoted Price
- ------------------ ------------
High Low
---- ---
First Quarter 3/32 3/32
Second Quarter Did not Trade
8
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Third Quarter Did not Trade
Fourth Quarter Did not Trade
On February 22, 2000, the closing price of the Common Stock as reported
on NASDAQ National was $3.81. On February 22, 2000, there were 152 holders of
record of Common Stock.
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 $4,431 $7,340 $10,975 $11,764 $10,142
Long-Term Obligations 0 0 3,000 3,000 1,250
Stockholders' Equity $4,360 7,126 7,798 8,545 8,547
</TABLE>
SUMMARY INCOME STATEMENT DATA
(in thousand, except share and per data)
<TABLE>
<CAPTION>
Year ended November 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $7,305 $10,304 $11,682 $12,713 $10,647
Operating (Loss) Income (1,486) (914) (1,206) (372) 516
Net (Loss) Income (1,685) (980) (1,034) (290) 442
Net (Loss) Income Per Common Stock ($1.26) ($0.73) ($0.77) ($0.21) $0.33
Average Number of Common Shares
Outstanding 1,340,677 1,350,000 1,350,000 1,350,000 1,327,643
</TABLE>
9
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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 $7,305,000 as
compared to net sales in 1998 of $10,304,000. The decline in sales is a result
of unfavorable market conditions and weak distribution resulting from increased
competition in the Company's specialty items. In addition, the Company has
realized an increase in products returned from customers related to the
discontinuance of items. Gross profit amounted to approximately $2,678,000 (37%
of sales) in 1999 as compared with $3,775,000 (37% of sales) in 1998.
Selling, general and administrative expenses were $4,164,000 (57% of
sales) in 1999 and $4,689,000 (46% of sales) in 1998. The Company has reduced
staff and engaged the use of commissioned brokers to further assist with its
marketing efforts to reach favorable sales levels.
The Company recorded a tax provision of $199,000, related principally
to an increase in the valuation allowance against the deferred tax asset
generated by net operating loss carry forwards.
On March 3, 1999, the Company entered into an asset purchase agreement
with a third party to sell substantially all of the Company's assets. In July
1999, the third party exercised its option to terminate the agreement.
Management is no longer pursuing the sale of these assets.
The Company has satisfactorily implemented a plan to ensure that its
systems are compliant with the requirement to process transactions in the Year
2000. To date, the Company has not experienced any adverse effects related to
the Year 2000.
Fiscal Year 1998 compared to Fiscal Year 1997
Net sales for the fiscal year 1998 were approximately $10,304,000 as
compared to net sales in 1997 of $11,682,000. The decrease in sales is
attributable to (i) an overall reduction in sales volume of products such as
shark cartilage, trace minerals and A to Z vitamins and (ii) a reduction in the
average sales prices on products due to competitive pricing and item close outs.
Gross profit amounted to approximately $3,775,000 (37% of sales) in 1998 as
compared with $5,883,000 (50% of sales) in 1997. The decrease in gross profit
percentage is attributable to changes in the Company's price structure and a
change in the mix of sales. In addition, the Company has designed new bold color
coded labels and has changed from plastic to glass bottles for its products.
These changes are intended to enhance and create a more uniform presence for the
product line as compared to the original labels which were diversified in style
throughout the product line. As a result of these changes, certain product was
sold at close out prices which had an impact on the overall gross profit
percentage.
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Selling, general and administrative expenses were $4,689,000 (46% of
sales) in 1998, and $7,089,000 (61% of sales) in 1997. The decrease is primarily
attributable to a charge for promotional costs of approximately $1,507,000 in
1997 related to marketing program; with select retail stores and distributors in
order to obtain premium shelf space. Costs associated with these distribution
rights were charged ratably over the terms of the agreements. All promotional
costs were fully amortized in 1997. In addition, the Company realized a
reduction in sales force salaries and expenses in 1998 due to the Company
consolidating sales territories and reaching more customers through
telemarketing efforts. Telemarketing enables the Company to effectively reach a
greater number of customers and also results in fewer expenses related to
salespeople calling on customers in person.
Management believes that inflation did not have a material effect on
operations or financial condition in 1999, 1998, or 1997. 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 $3,809,000 and
$6,322,000 at November 30, 1999 and 1998, respectively.
The Company's statement of cash flows reflects cash provided by
operations of approximately $1,382,000, which reflects a net loss of
approximately ($1,685,000) and an increase in accounts receivable ($108,000),
offset by decreases in inventories ($687,000), due from parent ($1,432,000),
other assets ($168,000), an adjustment for depreciation and amortization
($582,000) and an adjustment for deferred tax provision ($184,000).
The statement also reflects cash used in financing activities of
approximately $1,469,000 representing the purchase of treasury stock.
The Company reacquired 458,083 shares of its common stock at an average
price of $3.21 during fiscal 1999. In September 1999, the Company's Board of
Directors authorized the Company to repurchase up to $2,000,000 worth of its own
common stock, par value $.0001 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 20, 1999, the
Company had authorization to repurchase an additional $447,000 worth of its own
common stock.
On July 21, 1999 the Company and its parent terminated their revolving
credit and term loan facilities with a bank.
The Company expects to meet is cash requirements from operations and
current cash reserves.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
11
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See financial statements following Item 14 of this Annual Report on
Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 Held
---- --- -------------
Reginald Spinello 47 President, Chief Executive Officer and Director
Karine Hollander 33 Chief Financial Officer, Director
Thomas Keith 40 Director
Theresa Giove 41 Director
Lawrence D. Simon 33 Director
- ---------
Background of Executive Officers and Directors
Reginald Spinello hs been the President and a Director of the Company
since its formation and Chief Executive Officer since December 2, 1997. 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. In
addition, he is the Chief Executive Officer, President and Chairman of the Board
of Directors of PDK Labs Inc., a position he has held since August 1998 and a
Director of PDK Labs Inc. since August 5, 1997. Mr. Spinello joined PDK Labs
Inc. in September 1991 as Vice President of Operations. Prior to joining PDK
Labs Inc., Mr. Spinello was President and Founder of Internal Reinforcements
from 1985 to 1991, a specialty distributor and marketer of natural vitamins and
supplements. Mr. Spinello graduated from Bryant College with a B.S. Degree in
Business Administration. Additionally, he has studied in the field of nutrition
and is a non-practicing nutrition consultant.
Karine Hollander has been a Director of the Company since September
1998 and has been the Chief Financial Officer of the Company and PDK Labs Inc.
since March 3, 1997. In
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addition, she has been a Director of PDK Labs Inc. 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 December 2,
1997, and he has been a Director of PDK Labs Inc. since March 11, 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 PDK Labs Inc. Compare Generiks, Inc.
("CGI") is a distributor, marketer and vendor of dietary supplements and
over-the-counter non-prescription pharmaceuticals.
Theresa Giove has been a Director of the Company since September 1998.
In addition, she has been a Director of CGI since December 1, 1997 and has been
engaged in the practice of psychotherapy since 1990. From 1989 to 1991, she was
a Director of the Adolescent Wellness Center at North Shore University Hospital.
She was on the faculty at Adelphi University where she was a professor in the
Graduate Social Work Department until May 1998. Ms. Giove has a B.S. degree from
New York Institute of Technology and a M.B.A. degree in Professional Studies,
Clinical Counseling from New York Institute of Technology. She also received a
M.B.A. degree in Social Work from Adelphi University. She was awarded her Ph.D.
in Social Psychology from Union Institute in 1998.
Lawrence D. Simon has been a Director of the Company since September
1998. He has been a Director of PDK Labs Inc. since March 11, 1998. In addition,
he has been the President, Chairman, Chief Financial Officer and a Director of
SSI since May 1, 1996. He was the National Sales Director for the Company from
October 1, 1995, until his resignation on April 30, 1996. Prior to joining the
Company, Mr. Simon was Regional Sales Manager for PDK Labs Inc. (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.
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.
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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,
1999, all Section 16(a) filing requirements applicable to its officers and
directors and greater than ten percent beneficial owners were satisfied.
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> <C>
Reginald Spinello, CEO 1999 $330,000 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
1998 $ 50,000 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
1997 $ -0-(1) $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
Karine Hollander, CFO 1999 $ 38,000 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
1998 $ -0- $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
Alan Novich, Former Chairman 1998 $ 56,000 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
1997 $225,000 $100,000 $ -0- $ -0 -0- -0- $ -0- $ -0-
</TABLE>
(1) During the year ended November 30, 1997, Mr. Spinello's compensation
was covered under the Sales and Management Agreement with PDK Labs Inc.
Stock Option Plans
Incentive Option and Stock Appreciation Rights Plan -- The Directors of
the Company have adopted and the stockholders of the Company have approved the
adoption of the Company's 1994 Incentive Stock Option and Stock Appreciation
Rights Plan ("Incentive Option Plan"). The purpose of the Incentive Option Plan
is to enable the Company to encourage key employees and Directors to contribute
to the success of the Company by granting such employees and Directors incentive
stock options ("ISOs"), as well as non-qualified options and stock appreciation
rights ("SARs").
The Incentive Option Plan will be administered by the Board of
Directors or a committee appointed by the Board of Directors (the "Committee")
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, non-qualified
14
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options or SARs (in tandem with an option or freestanding) or a combination
thereof, and the number of shares to be subject to such options and SARs.
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the Board of Directors or
the Committee not less than the fair market value of the Common Stock on the
date the option is granted. Non-qualified options and freestanding SARs may be
granted with any exercise price. SARs granted in tandem with an option have the
same exercise price as the related option.
The total number of shares with respect to which options and SARs may
be granted under the Incentive Option Plan is 41,668. ISO's may not be granted
to an individual to the extent that in the calendar year in which such ISO's
first become exercisable the shares subject to such ISOs have a fair market
value on the date of grant in excess of $100,000. No option or SAR may be
granted under the Incentive Option Plan after March 14, 2004 and no option or
SAR may be outstanding for more than ten years after its grant. Additionally, no
option or SAR can be granted for more than five (5) years to a shareholder
owning 10% or more of the Company's outstanding Common Stock.
Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash or in shares of Common
Stock, or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. SARs may be settled, in the Board of Directors' discretion, in
cash, Common Stock, or in a combination of cash and Common Stock. The exercise
of SARs cancels the corresponding number of shares subject to the related
option, if any, and the exercise of an option cancels any associated SARs.
Subject to certain exceptions, options and SARs may be exercised any time up to
three months after termination of the holder's employment.
The Incentive Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
or SARs under the Incentive Option Plan or materially increase the benefits of
participants.
To date no options or SARs have been granted under the Incentive Option
Plan. No determinations have been made regarding the persons to whom options or
SARs will be granted in the future, the number of shares which will be subject
to such options or SARs or the exercise prices to be fixed with respect to any
option or SAR.
Non-Qualified Option Plan -- The Directors and stockholders of the
Company adopted the 1994 Non-Qualified Stock Option Plan (the "Non-Qualified
Option Plan"). The purpose of the Non-Qualified Option Plan is to enable the
Company to encourage key employees, Directors, consultants, distributors,
professionals and independent contractors to contribute to the success of the
Company by granting such employees, Directors, consultants, distributors,
professionals and independent contractors non-qualified options. The
Non-Qualified Option Plan will be
15
<PAGE>
administered by the Board of Directors or the Committee in the same manner as
the Incentive Option Plan.
The Non-Qualified Option Plan provides for the granting of
non-qualified options at such exercise price as may be determined by the Board
of Directors, in its discretion. The total number of shares with respect to
which options may be granted under the Non-Qualified Option Plan is 333,333.
Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash or in shares of Common
Stock (based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment.
The Non-Qualified Option Plan may be terminated or amended at any time
by the Board of Directors, except that, without stockholder approval, the
Non-Qualified Option Plan may not be amended to increase the number of shares
subject to the Non-Qualified Option Plan, change the class of persons eligible
to receive options under the Non-Qualified Option Plan or materially increase
the benefits of participants.
16
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 22,
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 Class
------------------- --------- -----------
PDK Labs, Inc. (2) 700,000 80.2%
Reginald Spinello (3) 0 0
Thomas Keith (3) 0 0
Lawrence Simon (3) 0 0
Karine Hollander (3) 0 0
Theresa Giove (3) 0 0
Directors and Officers 0 0
as a Group (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) Does not include 8,335,000 shares of Preferred Stock held by PDK Labs Inc.
Each share of Preferred Stock has one-tenth of a vote.
(3) The address for all listed beneficial owners is 145 Ricefield Lane,
Hauppauge, New York 11788.
17
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PDK provides the Company with certain management services, including
bookkeeping, order processing, computer services and shipping and further
provides all of the products marketed by the Company pursuant to a Sales and
Management Agreement between the Company and PDK, as amended. In 1999, the
Company recorded a charge of $143,000 for management and administrative services
provided by PDK. The Company pays PDK its costs for the Products, which is
defined as actual material costs, plus an amount representing PDK's actual
direct labor costs plus factory overhead, as determined in accordance with
generally accepted accounting principles. During fiscal year 1998, the Company
paid $5,232,000 to PDK for these products.
General
The Company believes that material affiliated transactions 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.
18
<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
Balance sheets as of November 30, 1999 and 1998 F-2
Statements of operations for the three years ended
November 30, 1999 F-3
Statement of stockholders' equity for the three years ended
November 30, 1999 F-4
Statements of cash flows for the three years ended
November 30, 1999 F-5
Notes to financial statements F-6 - F-13
(a)(2) Financial Statement Schedules.
19
<PAGE>
FUTUREBIOTICS, INC.
REPORT ON AUDITS OF FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1999
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance sheets as of November 30, 1999 and 1998 F-2
Statements of operations for the three years ended November 30, 1999 F-3
Statement of stockholders' equity for the three years ended November 30, 1999 F-4
Statements of cash flows for the three years ended November 30, 1999 F-5
Notes to financial statements F-6 - F-14
</TABLE>
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Futurebiotics, Inc.
Hauppauge, New York
We have audited the balance sheets of Futurebiotics, Inc. as of November 30,
1999 and 1998 and the related 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 Futurebiotics, Inc. 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>
FUTUREBIOTICS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
November 30,
--------------------
ASSETS 1999 1998
------ ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 94 $ 181
Accounts receivable, less allowance for
doubtful accounts of $12 (Note 9) 1,138 1,030
Inventories 1,492 2,179
Due from parent 1,101 2,533
Prepaid expenses and other current assets 55 145
Deferred income tax asset (Note 11) - 326
------- -------
Total current assets 3,880 6,394
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 135 194
INTANGIBLE ASSETS, net (Note 4) 303 438
OTHER ASSETS 113 314
------- -------
$ 4,431 $ 7,340
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 46 $ 61
Accrued expenses 25 11
------- -------
Total current liabilities 71 72
------- -------
DEFERRED INCOME TAX LIABILITY (Note 11) - 142
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY: (Note 6)
Common stock, $.0001 par value; authorized 40,000,000
shares; 1,350,000 issued and outstanding - -
Preferred stock, $.0001 par value; authorized, issued and
outstanding 8,335,000 shares 1 1
Additional paid-in capital 9,395 9,395
Unearned compensation (840) (1,228)
(Deficit) (2,727) (1,042)
Treasury stock at cost; 458,083 and 0 shares, respectively (1,469) -
------- -------
4,360 7,126
------- -------
$ 4,431 $ 7,340
======= =======
</TABLE>
See notes to financial statements
F-2
<PAGE>
FUTUREBIOTICS, INC.
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 SALES (Note 8 and 9) $ 7,305 $ 10,304 $ 11,682
----------- ----------- -----------
COSTS AND EXPENSES:
(Notes 2, 3, 4, 7 and 10)
Cost of sales 4,627 6,529 5,799
Selling, general and administrative 4,164 4,689 7,089
----------- ----------- -----------
8,791 11,218 12,888
----------- ----------- -----------
OPERATING LOSS (1,486) (914) (1,206)
----------- ----------- -----------
OTHER EXPENSES (INCOME):
Interest income - (51) (115)
Interest expense - 123 264
Other - (9) 49
----------- ----------- -----------
- 63 198
----------- ----------- -----------
LOSS BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (1,486) (977) (1,404)
PROVISION (BENEFIT) FOR
INCOME TAXES (Note 11) 199 3 (370)
----------- ----------- -----------
NET LOSS $ (1,685) $ (980) $ (1,034)
=========== =========== ===========
BASIC LOSS PER SHARE (Note 6) $ (1.26) $ (.73) $ (.77)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(Note 6) 1,340,677 1,350,000 1,350,000
=========== =========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
FUTUREBIOTICS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
(See Note 6)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------ ----------------------- Additional
Par Par Paid-in Unearned
Shares Value Shares Value Capital Compensation
------ ----- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1996 1,350,000 $ - 8,335,000 $ 1 $ 9,395 $ (1,823)
Amortization of unearned
compensation - - - - - 288
Unrealized loss on marketable
securities - - - - - -
Net loss for the year ended
November 30, 1997 - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1997 1,350,000 - 8,335,000 1 9,395 (1,535)
Amortization of unearned
compensation - - - - - 307
Unrealized loss on marketable
securities - - - - - -
Net loss for the year ended
November 30, 1998 - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1998 1,350,000 - 8,335,000 1 9,395 (1,228)
Amortization of unearned
compensation - - - - - 388
Purchase of treasury stock - - - - - -
Net loss for the year ended
November 30, 1999 - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1999 1,350,000 $ - 8,335,000 $ 1 $ 9,395 $ (840)
========= ========= ========= ========= ========= =========
<CAPTION>
Unrealized
Loss on Retained Treasury Stock
Marketable Earnings -----------------------
Securities (Deficit) Shares Amount Total
---------- --------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1996 $ - $ 972 - $ - $ 8,545
Amortization of unearned
compensation - - - - 288
Unrealized loss on marketable
securities (1) - - - (1)
Net loss for the year ended
November 30, 1997 - (1,034) - - (1,034)
--------- --------- --------- --------- ---------
Balance at November 30, 1997 (1) (62) - - 7,798
Amortization of unearned
compensation - - - - 307
Unrealized loss on marketable
securities 1 - - - 1
Net loss for the year ended
November 30, 1998 - (980) - - (980)
--------- --------- --------- --------- ---------
Balance at November 30, 1998 - (1,042) - - 7,126
Amortization of unearned
compensation - - - - 388
Purchase of treasury stock - - 458,083 (1,469) (1,469)
Net loss for the year ended
November 30, 1999 - (1,685) - - (1,685)
--------- --------- --------- --------- ---------
Balance at November 30, 1999 $ - $ (2,727) 458,083 $ (1,469) $ (4,360)
========= ========= ========= ========= =========
</TABLE>
See notes to financial statements
F-4
<PAGE>
FUTUREBIOTICS, INC.
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 loss $(1,685) $ (980) $(1,034)
------- ------- -------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 582 524 1,873
Deferred tax provision (benefit) 184 (4) (223)
Increase in allowance for doubtful accounts - - 12
Loss on sale of property and equipment - 4 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (108) 227 181
Inventories 687 1,109 (27)
Due from parent 1,432 (145) (1,917)
Prepaid income taxes - 139 263
Prepaid expenses and other current assets 68 305 2
Other assets 223 190 134
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (1) (56) 42
------- ------- -------
Total adjustments 3,067 2,293 340
------- ------- -------
Net cash provided by (used in)
operating activities 1,382 1,313 (694)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (39) (15)
Proceeds from sale of property and equipment - 15 -
Acquisition of intangible assets - (10) -
Proceeds from sale/maturity of
marketable securities - 1,288 839
------- ------- -------
Net cash provided by investing activities - 1,254 824
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - - 3,000
Repayments of long-term debt - (3,000) (3,000)
Purchase of treasury stock (1,469) - -
------- ------- -------
Net cash used in financing activities (1,469) (3,000) -
------- ------- -------
Net (decrease) increase in cash and cash equivalents (87) (433) 130
Cash and cash equivalents, beginning of year 181 614 484
------- ------- -------
Cash and cash equivalents, end of year $ 94 $ 181 $ 614
======= ======= =======
</TABLE>
See notes to financial statements
F-5
<PAGE>
FUTUREBIOTICS, INC.
NOTES TO 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
Futurebiotics, Inc. (the "Company") is engaged in the distribution,
marketing and sales of vitamins, minerals, herbal formulations and specialty
nutritional supplements. At November 30, 1999, the Company's parent, PDK Labs
Inc. ("PDK"), owned 78% of the Company's outstanding stock.
b. Reclassification
In March 1999, the Company entered into an agreement to sell
substantially all of its operating assets to an unrelated third party, and the
November 30, 1998 balance sheet classified certain assets as "held for disposal"
current assets. In July 1999, the sales agreement was terminated, and
accordingly the November 30, 1998 balance sheet has been reclassified to reflect
such assets as non-current assets.
Certain other reclassifications have been made to the prior years'
financial statements to conform with the reclassification used in 1999.
c. Investment in marketable securities
Investments in debt and equity securities are designated as trading,
held-to-maturity or available-for-sale. Available-for-sale securities are
reported at amounts which approximate fair value. Temporary declines in the
market value of any available-for-sale security below cost are charged against
stockholders' equity, meanwhile declines deemed other than temporary are charged
to earnings resulting in the establishment of a new cost basis for the security.
d. Inventories
Inventories, consisting principally of finished goods, 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.
F-6
<PAGE>
e. Depreciation and amortization (Cont'd)
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.
Intangible assets are amortized using the straight-line method over
the following periods:
Covenants not to compete 9 years
Goodwill 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.
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. 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. Wholesale distributors
of nutritional supplements account for a substantial portion of trade
receivables. The risk associated with this concentration is limited due to the
large number of distributors and their geographic dispersion.
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.
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.
F-7
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
j. Advertising
The Company charges advertising costs to expense as incurred.
Advertising costs amounted to $622, $1,086 and $1,088 for the years ended
November 30, 1999, 1998 and 1997, respectively.
k. 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 amounts are
recorded directly as an adjustment to stockholders' equity. Comprehensive loss
was equivalent to net loss for all periods presented.
l. 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 establishes
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 Public 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
November 30, 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.
F-8
<PAGE>
2. Sales and Management Agreement:
Under a 10 year agreement entered into in 1994, PDK, in exchange for
600,000 shares of unregistered common stock, is providing the Company with its
entire line of products at PDK's cost. The agreement provides PDK with
registration rights for up to 60,000 shares of the stock per year in order to
effect transfers of such shares. Purchases from PDK approximated $5,299, $7,395,
and $5,750 for the years ended November 30, 1999, 1998 and 1997, respectively.
The Agreement, as amended, further provides that in the event that PDK is
unable to supply products having a cost of at least $2,000 during any fiscal
year (such shortage being defined as the "PDK Deficiency") then PDK shall
forfeit to the Company either (i) fifteen percent (15%) of the PDK Deficiency in
cash, or (ii) a portion of the 60,000 shares of stock, determined by multiplying
the 60,000 shares of stock by a percentage which is arrived at by dividing the
PDK Deficiency by $2,000.
3. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
November 30,
------------------
1999 1998
----- -----
Equipment $ 34 $ 34
Office equipment and fixtures 368 368
Leasehold improvements 8 8
----- -----
410 410
Less accumulated depreciation and amortization 275 216
----- -----
$ 135 $ 194
===== =====
Depreciation and amortization of property, plant and equipment for the
years ended 1999, 1998 and 1997 approximated $59, $83, and $71, respectively.
4. Intangible Assets:
Intangible assets consist of the following:
November 30,
------------------
1999 1998
----- -----
Covenants not to compete $ 845 $ 845
Goodwill 300 300
Other 25 34
------- -------
1,170 1,179
Less accumulated amortization 867 741
------- -------
$ 303 $ 438
======= =======
Amortization expense for the years ended 1999, 1998 and 1997 approximated
$135, $124, and $1,512, respectively.
5. Bank Credit Facilities:
During 1999, the Company and its parent terminated their credit
facilities with a bank.
F-9
<PAGE>
6. Stockholders' Equity:
a. Capitalization
The Company's authorized capital consists of 40,000,000 shares of
common stock and 8,335,000 shares of preferred stock. All stock has a $.0001 par
value. Each share of common and preferred has one vote per share in all matters.
The preferred shares have priority over the Company's common stock in respect to
dividend rights and liquidation preferences.
b. Net (loss) income per common share and per common equivalent share
The Company computes net (loss) 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 (loss) income per share is computed by
dividing the net (loss) income for the period by the weighted average number of
common shares outstanding during the period. The weighted average number of
common share outstanding excludes treasury shares from the date of their
acquisition. Basic and diluted loss per share were equivalent for all periods
presented.
c. Treasury stock
The Company's Board of Directors has authorized the Company to
repurchase up to $2,000,000 of its own Common Stock 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 458,083 shares of its common stock, at a cost of
$1,469, during the fiscal year ended November 30, 1999. Subsequent to November
30, 1999, an additional 19,198 shares, at a cost of $83, were purchased.
At November 30, 1999, the Company has approximately 380,000 shares of
common stock reserved for future issuance.
d. Stock option plan
The Company has adopted a Non-qualified Option Plan (the "Plan")
covering 333,333 shares of common stock of the Company. Options under the Plan
are granted at terms set by the Board of Directors at the time of issuance.
Options may be exercised at any time up to three months after termination.
The Company has also adopted an Incentive Option and Stock
Appreciation Rights Plan (the "1994 Plan") covering 41,668 shares of the
Company's common stock. Incentive stock options under the 1994 Plan are granted
at an exercise price (not less than the fair market value) at the date of grant.
Non-qualified options and freestanding stock appreciation rights may also be
granted with any exercise price.
To date, no options or stock appreciation rights have been granted
under either plan.
F-10
<PAGE>
7. Commitments and Contingencies:
a. Consulting agreements
In 1995 the Company entered into two separate seven year consulting
agreements. As consideration for these services, the Company issued 60,000
shares of common stock to each of the consultants and a consulting fee of $210
to one consultant. Consideration paid, including the value of the common stock
granted ($843), is being charged to operations ratably over the estimated useful
lives of the consulting agreements. Amounts charged to operations under these
agreements approximated $275, $150, and $150 for each of the years ended
November 30, 1999, 1998 and 1997, respectively.
b. Lease commitment
The Company leases warehouse and office space from PDK under an
agreement which provides for monthly lease payments approximating $4. Rent
expense approximated $50, for each of the years ended November 30, 1999, 1998
and 1997.
c. Litigation
On July 29, 1996, PDK served a complaint against a former executive
citing that, among other things, he 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 PDK's allegations and, through a
counterclaim, asserts that PDK and certain current and former officers and
directors have breached their fiduciary duty to PDK 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. In addition, the complaint also demands that PDK's
board commence a shareholders derivative action for fraud, breach of fiduciary
duty, and corporate waste against various individuals and entities.
On February 22, 1999, the former executive served a demand on PDK'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 PDK should
not assert any of the listed claims. Thereafter, the former executive initiated
a new derivative action. No relief is sought against PDK, as all claims are
asserted on PDK's behalf. Nevertheless, PDK has concluded that the claims are
without merit and it will seek the dismissal of the lawsuit.
Futurebiotics has not been named as a party in the former executive's
counterclaim.
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-11
<PAGE>
8. Major Customer Information:
Sales to no single customer exceeded 10% of total sales for the years
ended 1999 and 1998. Sales to one customer approximated 13% of total sales for
the year ended 1997.
9. Royalty Agreement:
On November 19, 1998, the Company entered into an agreement whereby it
transferred certain private label customers to a third party (the "transferee").
As consideration for these customers, the transferee is obligated to pay the
Company 10% of all revenue derived from these customers for a three year period.
Royalties under this agreement approximated $68 during 1999, which are included
in accounts receivable as of November 30, 1999.
10. Retirement Plan:
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. Contributions on the part of the Company approximated $10,
$18, and $25 for the years ended November 30, 1999, 1998 and 1997, respectively.
11. Income Taxes:
The provision (benefit) for income taxes consists of the following:
Years Ended November 30,
------------------------------------------
1999 1998 1997
------ ------ -----
Current:
Federal $ - $ - $(147)
State 15 7 -
------ ------ -----
15 7 (147)
------ ------ -----
Deferred:
Federal 151 (4) (195)
State 33 - (28)
------ ------ -----
184 (4) (223)
------ ------ -----
$ 199 $ 3 $(370)
====== ====== =====
F-12
<PAGE>
11. Income Taxes: (Cont'd)
Net deferred income tax asset (liability) are comprised of the following:
November 30,
-----------------------------
1999 1998
------- -------
Inventories $ 53 $ 144
Property, plant and equipment (24) (35)
Tax carryforwards 1,031 528
Unearned compensation (47) (142)
Intangibles 204 199
Valuation allowance (1,217) (510)
------- -------
$ - $ 184
======== =======
The valuation allowance on the tax loss carryforwards at November 30,
1998 gave consideration to the anticipated gain on the sale of the Company's net
operating assets.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
% of
Pre-Tax Earnings (Loss)
-----------------------------------------------
Years Ended November 30,
-----------------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate 34.0 % 34.0 % 34.0 %
State income tax, net of federal tax benefit - 3.6 4.5
Valuation allowance (47.6) (34.3) (12.5)
Permanent differences (1.3) (4.9) -
Other 1.5 1.3 .3
----- ----- -----
(13.4)% (.3)% 26.3 %
===== ===== =====
</TABLE>
12. Supplemental Information - Statement of Cash Flows:
Cash paid during the years for:
Years Ended November 30,
---------------------------------------
1999 1998 1997
---- ---- ----
Interest $ - $ 123 $ 265
===== ===== =====
Income taxes $ 7 $ 7 $ -
===== ===== =====
F-13
<PAGE>
13. 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.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Current Assets and 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.
F-14
<PAGE>
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.
(a)(3) Exhibits.
<TABLE>
<S> <C>
3.01* Certificate of Incorporation of the Company.
3.02* By-Laws of the Company.
3.03* Amendment to Certificate of Incorporation.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Specimen Certificate for Class A Redeemable Common Stock Purchase Warrant.
4.03* Form of Warrant Agreement by and among the Company, the Underwriter and
Continental Stock Transfer & Trust Company.
4.04* Form of Underwriter's Unit Purchase Option.
10.01* Employment Agreement between the Company and Alan Novich.
10.02* Form of Sales and Management Agreement between PDK Labs Inc. and the Company
10.03* 1994 Incentive Stock Option and Stock Appreciation Rights Plan.
10.04* 1994 Non-Qualified Stock Option Plan.
10.05* Sales and Management Agreement by and between PDK Labs Inc. and the Company.
10.06* Form of Consulting Agreement with Underwriter.
10.07* Revolving Credit Agreement between PDK Labs Inc. and Manufacturers Hanover Trust
Company, dated February 25, 1992
10.08* Security Agreement between PDK Labs Inc. and Manufacturers Hanover Trust
Company, dated February 25, 1992
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
10.09* Short Form Term Loan Agreement among PDK Labs Inc. and Chemical Bank,
dated November 30, 1992
10.10** Amendment of Sales and Management between PDK Labs Inc. and the Company
dated December 8, 1994
10.11** Consulting Agreement by and between the Company and Lidco, Ltd. dated
January 3, 1995
10.12** Consulting Agreement by and between the Company and K.A.M. Group dated
January 3, 1995
10.13*** Amendment No. 1 to Employment Agreement between Alan Novich and the Company
dated as of December 1, 1995.
10.14*** Revolving Credit Agreement between PDK Labs Inc., Futurebiotics, Inc.,
PDI Labs Inc., and The Chase Manhattan Bank dated September 25, 1996.
10.15*** First Amendment and Waiver to Revolving Credit Agreement between PDK Labs Inc.,
Futurebiotics, Inc., PDI Labs Inc., and The Chase Manhattan Bank dated February 26,
1997.
10.16++++ 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.
10.17++++ Assignment and Assumption Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc. and Bank Leumi USA dated January 16, 1998.
10.18++++ Assignment and Assumption Agreement by and among PDK Labs Inc.,
Futurebiotics, Inc. and National Bank of Canada dated January 16, 1998.
10.19++++ 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.
10.20**** Asset Purchase Agreement dated as of March 3, 1999 by and among FB Acquisition
Corp., Nutraceutical International Corporation, Futurebiotics, Inc and PDK Labs Inc.
10.21*** Second Amendment to Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc.
and European American Bank dated as of August 13, 1998.
10.22*** Asset Purchase Agreement by and among Futurebiotics, Inc. and Superior Supplements,
Inc. dated November 19, 1998.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
10.23 Termination of Credit Agreement by and among PDK Labs, Inc., Futurebiotics, Inc. and
European American Bank, National Bank of Canada and Bank Leumi USA dated July 21, 1999.
27.0 Financial Data Schedule
</TABLE>
- ----------------
* Incorporated by Reference to the Company's Registration Statement on
Form SB-2, No. 33-78022
** 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, 1996.
++++ Incorporated by Reference to the Company's Form 10-K for the year ended
November 30, 1998.
**** Incorporated by Reference to the Company's Form 8-K dated March 10,
1999.
*** Incorporated by Reference to the Company's Form 10-K for the year ended
November 30, 1999.
(B) Reports on Form 8-K.
None.
22
<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 25, 2000
FUTUREBIOTICS, INC.
By: /s/ Reginald Spinello
-------------------------------------------
President and Chief Executive Officer
By: /s/ Karine Hollander
-------------------------------------------
Chief Financial Officer and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Reginald Spinello President, Chief February 25, 2000
- ------------------------- Executive Officer
Reginald Spinello and Director
/s/ Theresa Giove Director February 25, 2000
- -------------------------
Theresa Giove
/s/ Thomas Keith Director February 25, 2000
- -------------------------
Thomas Keith
/s/ Lawrence D. Simon Director February 25, 2000
- -----------------------------
Lawrence D. Simon
/s/ Karine Hollander Director February 25, 2000
- -----------------------------
Karine Hollander
</TABLE>
23
<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:
<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
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 1,150
<ALLOWANCES> 12
<INVENTORY> 1,492
<CURRENT-ASSETS> 3,880
<PP&E> 410
<DEPRECIATION> 275
<TOTAL-ASSETS> 4,431
<CURRENT-LIABILITIES> 71
<BONDS> 0
0
1
<COMMON> 0
<OTHER-SE> 4,359
<TOTAL-LIABILITY-AND-EQUITY> 4,431
<SALES> 7,305
<TOTAL-REVENUES> 7,305
<CGS> 4,627
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,486)
<INCOME-TAX> 199
<INCOME-CONTINUING> (1,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,685)
<EPS-BASIC> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
