Item 1. BUSINESS
General
PDK Labs Inc. ("PDK" or "Company") manufactures and distributes over-the-counter ("OTC") non-prescription pharmaceutical products and vitamins. The Company's line of products primarily consists of non-prescription pain relievers, decongestants, bronchodialators, and a broad range of vitamins and nutritional supplements. The Company markets its products through regional distributors, private label distribution and various licensing and supply agreements.
The Company only sells OTC products which have been proven to be generally recognized to be safe and effective for the intended uses. Proposed rules by the Food and Drug Administration have established, after an expanded review of all OTC products, those products that will be generally recognized as safe and effective and non-misbranded. See "Business - Government Regulation."
The Company's non-prescription pharmaceutical products contain active ingredients which are identical to those contained in non-prescription products sold under national and regional brand names, private label brands, local or regional products, and products sold by other national and regional direct mail marketers. For instance, the Company's acetaminophen products are similar to Tylenol(R); its antihistamine tablets are similar to Benadryl(R); and its decongestant products are similar to Actifed(R) and Sudafed(R).
The Company also sells products through its majority owned public subsidiary, Futurebiotics, Inc. ("Futurebiotics"). Futurebiotics' product line consists of more than 150 items, including multi-vitamin/mineral formulas, green superfood powders, herbal/mineral tonics and herbal complexes and specific specialty supplements. Futurebiotics currently sells its products to health food distributors. In addition, Futurebiotics currently sells products in several international markets including South America, Central Europe, Hong Kong, Malaysia, Japan, and Scandinavia.
On March 3, 1999, the Company and Futurebiotics entered into an asset purchase agreement with a third party to sell substantially all of Futurebiotics' assets. In July 1999, the third party exercised its option to terminate the agreement.
The Company was incorporated under the laws of the State of New York on July 6, 1982.
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made that are not historical facts are forward-looking and, accordingly, involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Although such forward-looking statements have been based on reasonable assumptions, there is no assurance that the expected results will be achieved. Some of the factors that could cause actual results to differ materially include, but are not limited to: the effects of regulatory decisions; changes in law
and other governmental actions and initiatives; uncertainties relating to global economic conditions; market acceptance of competing products; the availability and cost of raw materials, the Company's ability to successfully maintain or increase market share in its core business while expanding its product base into other markets; the strength of its distribution channels; and the Company's ability to manage fixed and variable expense growth relative to revenue growth.
Marketing
The Company markets its products to customers through direct salespersons, manufacturers representatives, and various supply and licensing agreements. Private label sales accounted for 68% of the Company's total revenue for the fiscal year ended November 30, 1999. Sales under various supply and licensing agreements accounted for 68% of the Company's total revenue for the fiscal year ended November 30, 1999.
The Company supplies a third party under an exclusive supply agreement with dietary supplements and a broad range of OTC non-prescription pharmaceutical products. This agreement expires in October 2000 and is automatically renewable for successive one (1) year terms.
In addition, the Company has a second exclusive supply and licensing agreement with this same third party pursuant to which the Company granted an exclusive license to use the trademarks "Max Brand" and "Heads Up" brands of OTC pharmaceuticals and the exclusive right to distribute products bearing such names. This agreement has a five (5) year term which automatically renews for successive periods of one (1) year. In consideration for the license, the third party agreed to pay an annual license fee to the Company. The fee is payable at the option of the third party by either (i) issuance of the publicly traded common stock or restricted Series B Preferred Stock of the third party or (ii) the payment of cash. Sales to this customer approximated $36,580,000 for the fiscal year ended November 30, 1999.
The Company markets its various OTC pharmaceuticals and vitamin products under various brand names to drug store chains, health food stores, health food store distributors, convenience stores, and other various retailers.
Manufacturing
The Company's manufacturing facility is located in Hauppauge, New York. Approximately 85% of the sales volume of the Company's products are manufactured and/or packaged by the Company. The Company has the current capacity to manufacture 6 billion tablets and/or capsules annually. In addition, the Company can package 60 million bottles annually. The Company believes that the expanded capacity of its manufacturing facility is adequate to meet the requirements of its current and future business.
The Company's manufacturing process is specifically designed to insure the strictest quality control. All raw materials used in production are initially held in quarantine. Prior to being placed into production, the manufacturers certificate of analysis is compared with an assay performed by
the Company in its own in-house laboratory. The Company's FDA approved laboratory continues its testing to insure quality control throughout the manufacturing and packaging process.
The manufacture of all of the Company's products is subject to current Good Manufacturing Practices prescribed by the FDA and by the Company's own quality control procedures. See "Business - Government Regulation" below. The Company uses tamper resistant caps on all of its OTC products with an inner seal that indicates whether the container has been opened prior to sale. In addition, the Company seal wraps each container for added protection.
The Company's manufacturing facility contains equipment which in one operation can produce the tablets, package the products, and label the containers. The Company also has equipment for filling capsules and wrapping each container with heat sealed plastic wrap.
Material Suppliers
Substantially all of the Company's products are manufactured from readily available raw material. In addition to manufacturing many of its own products, the Company purchases finished goods from suppliers in the United States. The Company believes that if any source of a product's ingredients becomes unavailable, alternative sources of supply are available at comparable prices and delivery schedules. In the event the Company were unable to find such alternate sources at a competitive price and on a timely basis for its principal products, the Company could be materially adversely affected. See "Government Regulation"
The Company has a supply agreement with Superior Supplements, Inc., a Delaware corporation ("SSI"), pursuant to which the Company is obligated to purchase a minimum of $2,500,000 of certain products at specified prices annually. This supply agreement was renewed through May 2000. For the fiscal year ended November 30, 1999, the Company made purchases of approximately $4,512,000 pursuant to this agreement. See "Certain Relationships and Related Transactions."
In addition, on November 30, 1997, the Company entered into a packaging agreement with SSI. SSI agreed to package Futurebiotics products for the Company for a fixed price based on component cost plus a direct labor charge per unit. The term of the agreement was for two (2) years and expired on November 30, 1999. See "Certain Relationships and Related Transactions."
Raw materials are available from numerous sources. No supplier accounts for more than 10% of the Company's raw material purchases.
Product Liability
The Company may potentially be exposed to product liability claims by consumers. Such claims arise as the result of, among other things, the misuse of a Company product or the tampering of a product. In the event of a successful suit against the Company, insufficiency of insurance coverage or inadequacy of indemnification, there could be a material adverse effect on the Company.
Competition
The industry in which the Company is engaged is characterized by intense competition. The Company competes against established pharmaceutical and consumer product companies that currently market products which have identical active ingredients or are equivalent or functionally similar to or in competition with those the Company markets. Moreover, many of the Company's competitors and their products have national and regional name brand recognition. In addition, numerous companies are developing or may, in the future, engage in the development of products competitive with the Company's products. Examples of the many products which have achieved significant brand name recognition which are competitive with the Company's products include Tylenol(R), Advil(R) , Nuprin(R), Benadryl(R), Actifed(R), Sudafed(R), No-Doz(R), Vivarin(R), and Dexatrim(R). The Company believes it competes effectively against its competitors on the basis of price and service.
Trademarks
The Company owns numerous trademarks that have been registered with the United States Patent and Trademark Office ("PTO"). To the Company's knowledge, the Company has the common law right to use such service marks on its products and in the marketing of its services. The Company has retained trademark counsel and presently intends to make appropriate filings and registrations and take all other actions necessary, to protect all of its intellectual property rights. The Company views its trademarks and other proprietary rights as valuable assets and believes they have significant value in the marketing of its products.
Government Regulation
The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the United States Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the United States Department of Agriculture and the Environmental Protection Agency ("EPA"). These activities may also be regulated by various agencies of the states and localities in which the Company's products are sold.
In October 1994, the Dietary Supplement Health and Education Law was signed into law. This new law, which amends the Federal Food, Drug and Cosmetic Act, defines dietary supplements as a separate and distinct entity, and not as food additives. Vitamins, minerals, amino acids, herbs and other nutritional substances are included in the definition. It expressly provides for the use of third party scientific literature which shall not be regulated as labeling by the FDA, provided it is not false or misleading. On March 17, 1999, the FDA published final regulations which will require the re-labeling of the OTC drug products. The regulation, which became effective April 16, 1999, requires that companies begin phase-in of the new label format commencing May 2001. There is no reason to expect that compliance with this regulation will affect the Company any differently than any other industry member.
Several of the raw materials used by the Company in its manufacturing process are categorized as List I Chemicals by the Chemical Diversion Act of 1988. As such, the importation of these chemicals requires the filing of importation documents with the Federal Drug Enforcement Agency. In addition, certain foreign countries require a "letter of non-objection" for the export of List I Chemicals. Without the letter of non-objection the Company is unable to import the List 1 Chemical.
The FDA proposed regulations which remain pending but, if adopted, would remove ephedrine-containing over-the-counter drug products which are manufactured and sold by the Company from the over-the-counter market. During this past year several states have already taken action on an individual state by state basis, to restrict, in some fashion, the sale of ephedrine, pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The Drug Enforcement Administration (the "DEA") has been given the statutory authority to regulate all ephedrine, pseudoephedrine, and PPA over-the-counter drug products. Previously, the restrictions were limited to certain ephedrine products. The restrictions on pseudoephedrine and PPA became effective in October 1997 and DEA registration requirements are now effective. Registration with the DEA is required for all companies engaged in the distribution of any products containing ephedrine, pseudoephedrine, or PPA. There are certain registration exemptions in place for retail stores. The Company has applied for its own registration with the DEA. That registration remains pending and the Company continues to operate under an exemption. The Company is not able to engage in any importation activities until such time as the DEA approves its registration. Should the DEA ultimately deny the Company's registration, it would no longer be permitted to manufacture and distribute these products, though it would have the option of seeking legal redress challenging the validity of any such action by the DEA. The Company's customers who have not applied for such registration or have been rejected, can no longer market the Company's products containing the three ingredients in question.
The Company has been advised by the DEA that they are investigating the Company's pending registration. The investigation involves the Company's purchase and distribution of List 1 Chemicals. To date, the DEA has taken no formal action on the registration. If the DEA denies the Company's registration, the Company will have the right to appeal the decision administratively within the DEA and thereafter, if unsuccessful, in federal court. If the final determination is to deny the registration, then the Company would no longer be permitted to manufacture and distribute products that contain List 1 Chemicals. Sales of products containing List 1 Chemicals were approximately $29,731,000 representing 54% of net sales for the year ended November 30, 1999.
Thus, the DEA, registration, identification, record keeping, and reporting requirements may adversely affect the Company's sales of these products.
Employees
As of February 22, 2000, the Company employed 166 full-time persons. The Company has experienced no work stoppages and considers its employee relations to be satisfactory. The Company's employees are not represented by a labor union.
In addition to other information in this Annual Report on Form 10-K the following important factors should be carefully considered in evaluating the Company and its business because such factors currently have a significant impact on the Company's business, prospects, financial condition and results of operations.
Competition. Competition in the Company's marketplace is intense. The Company faces direct competition from a number of national and regional brands and private label non-prescriptive products. The Company competes against established pharmaceutical, consumer product and mail order companies which currently market products which are equivalent or functionally similar to those the Company markets and which have achieved broad product recognition. Competitive products which have achieved such recognition include such well-known brands as Tylenol(R), Benedryl(R), Actifed(R), Sudafed(R), Dexatrim(R), No~Doz(R), Vivarin(R), Advil(R), and Nuprin(R). Most of the Company's competitors possess substantially greater financial, technical and other resources than the Company. Moreover, these companies possess greater marketing capabilities than the Company, including the resources to implement extensive advertising campaigns. There can be no assurance that the Company will continue to compete successfully.
Government Regulation. Manufacturers of pharmaceutical products are, generally, subject to extensive regulation by the Food and Drug Administration ("FDA") and various other federal and state governmental entities relating to nearly every aspect of the development, manufacture and commercialization of such products.
Under the Federal Food, Drug and Cosmetic Act ("FDA Act"), an over-the-counter nonprescription pharmaceutical product may not be commercialized or otherwise distributed in the United States without the prior approval of the FDA upon submission of a new drug application or abbreviated new drug application, unless the combination of active ingredients of such products has been determined to be generally recognized as safe and effective for uses under the conditions prescribed, recommended or suggested in the labeling in accordance with final monograph rules promulgated by the FDA and the labeling is in compliance therewith. The Company only markets nonprescription products which are similar to national and regional brands and the active ingredients in which have been found to be generally recognized as safe and effective for the recommended uses by panels of medical experts appointed by the federal government in the course of its monograph rulemaking proceedings. The labeling of over-the-counter products as well as advertising relating to such products is also subject to the review of the Federal Trade Commission ("FTC"). The Company believes it is in full compliance with all FTC labeling and advertising requirements. However, the extent of potentially adverse or burdensome government regulations in the nonprescription product area which might arise in future legislation or administrative action cannot be predicted.
Several of the raw materials used by the Company in its manufacturing process are categorized as List I Chemicals by the Chemical Diversion Act of 1988. As such, the importation of these chemicals requires the filing of importation documents with the Federal Drug Enforcement Agency. In addition, certain foreign countries require a "letter of non-objection" for the export of List I Chemicals. Without the letter of non-objection the Company is unable to import the List 1 Chemical.
The FDA proposed regulations which remain pending but, if adopted, would remove ephedrine-containing over-the-counter drug products which are manufactured and sold by the Company from the over-the-counter market. During this past year several states have already taken action on an individual state by state basis, to restrict, in some fashion, the sale of ephedrine, pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The Drug Enforcement Administration (the "DEA") has been given the statutory authority to regulate all ephedrine, pseudoephedrine, and PPA over-the-counter drug products. Previously, the restrictions were limited to certain ephedrine products. The restrictions on pseudoephedrine and PPA became effective in October 1997 and DEA registration requirements are now effective. Registration with the DEA is required for all companies engaged in the distribution of any products containing ephedrine, pseudoephedrine, or PPA. There are certain registration exemptions in place for retail stores. The Company has applied for its own registration with the DEA. That registration remains pending and the Company continues to operate under an exemption. The Company is not able to engage in any importation activities until such time as the DEA approves its registration Should the DEA ultimately deny the Company's registration, it would no longer be permitted to manufacture and distribute these products, though it would have the option of seeking legal redress challenging the validity of any such activity by the DEA. The Company's customers who have not applied for such registration or have been rejected, can no longer market the Company's products containing the three ingredients in question.
Thus, the DEA, registration, identification, record keeping, and reporting requirements may adversely affect the Company's sales of these products.
The Company has been advised by the DEA that they are investigating the Company's pending registration. The investigation involves the Company's purchase and distribution of List 1 chemicals. To date, the DEA has taken no formal action on the registration. If the DEA denies the Company's registration, the Company will have the right to appeal the decision administratively within the DEA and thereafter, if unsuccessful, in federal court. If the final determination is to deny the registration, then the Company would no longer be permitted to manufacture and distribute products that contain List 1 Chemicals.
The issuance by any governmental body of materially adverse regulations in the nonprescription product area which prevented the Company from obtaining necessary regulatory approval, whether on a timely basis, by virtue of the costs of compliance or at all, could have a material adverse effect on the business and financial condition of the Company. In addition, the fact that the Company's products do not currently require pre-marketing FDA approval does not
mean that any particular product, under certain circumstances, could not expose the Company to product liability or other claims.
Product Liability. The Company faces inherent business risks of exposure to product liability claims in the event that, among other things, a product is illegally tampered with, misused or its use results in adverse effects. While the Company takes what it believes are appropriate precautions, including the use of tamper resistant caps and heat sealed plastic wrapping around the entire bottle of each of its over-the-counter and vitamin products and follows the Good Manufacturing Practices prescribed by the FDA, as well as its own in-house quality control procedures, there can be no assurance that it will avoid significant liability exposure. While the Company carries product liability insurance against this risk there can be no assurance that such coverage will always be available or available at a reasonable cost and, even if available, adequate to protect it against material adverse effects in the event of a successful product liability claim.
Dependence on Certain Products. Although the Company distributes in excess of 100 products, approximately 54% of the Company's revenue in fiscal 1999 was from the sale of products containing List 1 Chemicals. The inability of the Company to sell such products, for any reason, would have a material adverse effect upon the business and financial condition of the Company.
Raw Material Supplies. The Company currently purchases all of its raw materials and supplies in the United States and overseas. The Company has no long term supply agreements for its raw materials. The Company believes that alternate sources of supply are available for its raw material at comparable prices. However, in the event the Company was unable to rely on its current suppliers and could not arrange sources of supply at competitive prices and on a timely basis for its principal products, the Company could be materially adversely effected.
No Cash Dividends. The Company has not paid any cash dividends on its common stock and, in view of its capital needs, does not presently plan to pay any cash dividends except in accordance with the terms of the Series A Preferred Stock.
Dependence on Key Personnel. The Company is substantially dependent on the continued services of Reginald Spinello, the Company's Chief Executive Officer, and Michael Krasnoff, a consultant to the Company. The Company has entered into an employment agreement with Mr. Spinello and a consulting agreement with Mr. Krasnoff . Should either Mr. Spinello or Mr. Kransoff not be able to continue with the Company, its prospects would be adversely affected and, as a result, the loss of either Mr. Spinello or Mr. Kransoff would materially adversely affect the Company's operations. The Company currently does not maintain key personnel life insurance for any of its employees. See "Management."
Item 2.
Item 2. PROPERTIES.
The Company leases a 44,000 square foot facility in Hauppauge, New York. This facility serves as the Company's corporate headquarters and manufacturing/production center. The annual
rent is $286,000 and increases up to $315,000 in the final year. The current lease has three years remaining.
In 1995, the Company leased a second property in Hauppauge, New York. This 30,000 square foot property serves as the Company's distribution center. This lease was for a term of five years with an annual rental of $172,500. The lease was terminated on January 15, 2000.
In 1997, the Company leased another property in Hauppauge, New York. This 26,000 square foot property serves as an additional distribution facility for the Company. This lease is for a three (3) year term at an annual rental of $175,500.
Item 3.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, management is not aware of any material legal proceedings pending against the Company.
On July 29, 1996, the Company served a complaint (the "Complaint") against a former executive in a litigation entitled PDK Labs Inc. v Perry Krape in the Supreme Court of the State of New York, County of Suffolk. The Complaint alleges, in pertinent part, that the former executive breached his employment agreement with PDK by competing with PDK and soliciting PDK's customers in violation of the terms of the agreement. The Complaint further alleges that the executive has defaulted on payments due to PDK pursuant to a promissory note and that while serving as an officer of PDK made inappropriate investments for PDK's Profit Sharing Plan and Trusts. By virtue of the foregoing, PDK alleges that the executive has breached his Employment Agreement and the Amendment, engaged in unfair competition, breached the terms of a personal guarantee, defaulted upon the promissory note, converted funds belonging to PDK and breached his fiduciary duty to the Company.
In his Answer and Counterclaim (the "Counterclaim"), the executive offers general denials of these allegations and interposes both personal counterclaims and derivative claims. The executive's personal Counterclaim asserts, in pertinent part, that the Company and certain officers and directors have breached their fiduciary duty to him and that the Restrictive Covenant and agreement is unenforceable and should be deemed a nullity. The derivative claims were dismissed by the court and the executive has appealed the dismissal. PDK and the directors deny that they engaged in any improper conduct which would support the executive's personal Counterclaim. Each intends to vigorously defend against such claims and PDK intends to proceed with its action against the executive.
On February 22, 1999, Mr. Krape served a demand on the Company's board of directors, pursuant to Section 626 of the New York Business Corporation Law, to commence a shareholder's derivative action (the "Demand"). The Demand requests that the board of directors commence an action for fraud, breach of fiduciary duty and corporate waste against various individuals and entities including former and present officers and directors of the Company. After a detailed investigation conducted by special counsel, a disinterested subcommittee of the board of directors determined that the Company should not assert any of the listed claims.
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.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On October 29, 1999, the Company held its annual meeting of Shareholders.
(b) At said meeting, the following five individuals were elected by the following vote to serve as directors until the next annual meeting of stockholders and until their successors are elected and qualified:
FOR AGAINST --------- ------- Reginald Spinello 1,653,206 142,685 Karine Hollander 1,653,006 142,885 Thomas Keith 1,653,056 142,835 Ira Helman 1,653,006 142,885 Lawrence D. Simon 1,653,006 142,885
(c) At said meeting 1,666,825 shares of Common Stock were voted in favor of and 118,706 shares of Common Stock were voted against and 10,260 shares of Common Stock voted to abstain to a proposal to ratify the appointment of Holtz Rubenstein & Co., LLP to serve as the independent certified public accountants for the 2000 fiscal year.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Preferred Stock is regularly quoted and traded on the NASDAQ system under the symbols PDKL and PDKLP, respectively.
The Company acquired $4,941,000 worth of its own common stock in fiscal 1999, repurchasing 1,120,759 shares at an average price of $4.41. In addition, the Company repurchased 19,544 shares at an average price of $5.02 between December 1, 1999 and February 22, 2000. As of February 22, 2000, the Company had authorization to repurchase an additional $344,000 worth of its own common stock.
The Company acquired $66,000 worth of its own preferred stock in fiscal 1999, repurchasing 13,100 shares at an average price of $5.04. In addition, the Company repurchased 1,000 shares at an average price of $6.10 between December 1, 1999 and February 15, 2000. As of February 22, 2000, the Company had authorization to repurchase an additional $261,000 worth of its own preferred stock.
The following table indicates the high and low prices for the Company's Common Stock and Preferred Stock for the period up to December 31, 1999 based upon information supplied by the NASDAQ system. Prices represent quotations between dealers without adjustments for retail markups, markdowns or commissions, and may not represent actual transactions.
Common Stock
High Low ---- --- 1997 Calendar Year ------------------ First Quarter 7 4-7/8 Second Quarter 6-3/8 3-7/8 Third Quarter 5-1/2 4-3/8 Fourth Quarter 7 4-5/8
1998 Calendar Year ------------------ First Quarter 8-13/16 5-1/2 Second Quarter 6-3/8 3-1/4
Third Quarter 5-3/8 3-1/8 Fourth Quarter 4-1/8 2-15/16
1999 Calendar Year ------------------ First Quarter 5 3 Second Quarter 4 3 Third Quarter 4-3/4 2-1/2 Fourth Quarter 5-3/16 3-7/8
Preferred Stock
High Low ---- --- 1997 Calendar Year ------------------ First Quarter 6-5/8 5 Second Quarter 6-1/2 4 Third Quarter 8 5-1/4 Fourth Quarter 7-1/2 6-3/4
1998 Calendar Year ------------------ First Quarter 7-7/8 7-1/2 Second Quarter 6-3/8 3-1/2 Third Quarter 5-1/8 3-1/2 Fourth Quarter 5-1/4 3-5/8
1999 Calendar Year ------------------ First Quarter 5-7/8 4-3/8
Second Quarter 6 3-5/8 Third Quarter 5-1/2 3-3/4 Fourth Quarter 6 4-3/4
On February 22, 2000, the closing price of the Common Stock as reported on the NASDAQ System was $3.94. On February 22, 2000, the closing price of the Preferred Stock reported on the NASDAQ System was $6.06. On February 22, 2000, there were 986 holders of record of Common Stock.
On April 15, 1999, the Company paid a $.25 per share of Preferred Stock dividend to holders of record on April 12, 1999 payable in cash. On October 15, 1999, the Company paid a $.24 per share of Preferred Stock dividend to holders of record on October 12, 1999 payable in cash.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
SUMMARY BALANCE SHEET DATA (in thousands)
SUMMARY INCOME STATEMENT DATA (in thousands, except share and per share data)
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Fiscal Year 1999 compared to Fiscal Year 1998
Net sales for the fiscal year 1999 were approximately $54,706,000 as compared to net sales in 1998 of $57,599,000. The decrease in sales is principally attributable to a decrease in sales by the Futurebiotics segment. Gross profit amounted to $15,904,000 (29% of sales) in 1999 as compared to $21,171,000 (37% of sales) in 1998. The decrease in gross profit is attributable to (i) a change in the mix of sales, (ii) the company maintaining competitive pricing and (iii) increased costs related to compliance with new government regulations such as the requirement of new label formats on OTC drug products.
Selling, general and administrative expenses were $12,126,000 in 1999 and $18,255,000 in 1998. As a percentage of sales, selling, general and administrative expenses were 22% in 1999 and 32% in 1998. The decrease is primarily attributable to a decrease in royalty expense. The Company terminated its supply agreement with a non-affiliated customer on March 30, 1998. Royalty expense related to this agreement was $0 and $3,927,000 for 1999 and 1998, respectively.
On March 3, 1999, the Company and Futurebiotics entered into an asset purchase agreement with a third party to sell substantially all of Futurebiotics assets. In July 1999, the third party exercised its option to terminate the agreement. Management is no longer pursuing the sale of these assets. Accordingly, the operating results of Futurebiotics' operations have been included in the Company's consolidated financial statements for the years ended 1999, 1998 and 1997.
The Company has a supply agreement with Compare Generiks, Inc, ("CGI"). Under the agreement which expires in 2001, the Company provides CGI certain products at prices based upon the Company's material cost plus a specified mark-up.
The Company has a second five year supply agreement with CGI covering the purchases of products in the "Max Brand" and "Heads Up" product ranges. In consideration for this agreement, CGI agreed to pay the Company an annual license fee of $500,000, payable at the option of CGI, either in cash or in shares of CGI common stock or Series B preferred stock. Total sales to CGI approximated $36,580,000 and $22,125,000 for 1999 and 1998, respectively.
The Company is operating under a supply agreement with Superior Supplements, Inc. ("Superior"), which provides for the Company to purchase certain products at specified prices. In the event that PDK purchases less than $2,500,000 of product per annum, Superior will be entitled to up to $100,000 on a pro-rata basis, as liquidated damages. As of November 30, 1999, the Company exceeded its minimum purchase requirement.
The Company also operated under a packaging agreement with Superior, which provides for Superior to package Futurebiotics products for the Company for a fixed price based on component costs plus a labor charge per unit. The agreement expired on November 30, 1999.
Additionally, Superior is also obligated to PDK under a management agreement which provides for PDK to provide Superior with certain management services in consideration for a management fee of $10,000 per month.
Interest expense, net of interest income, was approximately $353,000 in 1999, as compared to $933,000 in 1998. The decrease is attributable to the Company's repayment of debt.
The provision for income taxes reflects an effective tax rate of 60% in 1999 and 82% in 1998. The rates reflect the Company's inability to utilize certain tax benefits generated by its subsidiary.
The Company has satisfactorily implemented a plan to ensure that its systems are compliant with the requirements to process transactions in the Year 2000. To date, the Company has not experienced any adverse effects related to the Year 2000.
Results of Operations
Fiscal Year 1998 compared to Fiscal Year 1997
Net sales for fiscal year 1998 were approximately $57,599,000 as compared to net sales in 1997 of $51,352,000. The increase in sales is primarily attributable to increased volume in private label sales and the introduction of new products. Gross profit amounted to $21,171,000 (37% of sales) in 1998 as compared to $25,510,000 (50% of sales). The decrease in gross profit is principally attributable to a change in the mix of sales resulting from the Company operating under an Exclusive Supply Agreement with a non-affiliated customer in 1997 which was terminated by the Company on March 30, 1998. In addition, private label sales increased 96% and bulk tablet sales increased 115% for the fiscal year ended 1998 as compared to fiscal year ended 1997.
Selling, general and administrative expenses were $18,255,000 in 1998 and $22,828,000 in 1997. As a percentage of sales, selling, general and administrative expenses were 32% in 1998 and 44% in 1997. The decrease is attributable to a decrease in Futurebiotics selling expenses and a decrease in royalty expenses. Royalty expenses approximated $3,927,000 in 1998 and $7,426,000 in 1997. The decrease in royalty expense is attributable to the Company terminating its supply agreement with a non-affiliated customer on March 30, 1998.
Total sales to CGI under various supply agreements approximated $22,125,000 and $5,485,000 for 1998 and 1997, respectively.
Interest expenses, net of interest income, was approximately $933,000 in 1998, as compared to $905,000 in 1997. The increase is principally attributable to the Company maintaining lower investment balances.
The provision for income taxes reflects an effective tax rate of 82% in 1998 and 37% in 1997. The 1998 rate reflects the Company's inability to utilize certain tax benefits generated by its subsidiary and the effect of certain permanent differences.
Management believes that inflation did not have a material effect on operations or financial condition in 1998, 1997 or 1996. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any given quarter.
Liquidity and Capital Resources
The Company had working capital of approximately $24,376,000 and $28,561,000 at November 30, 1999 and 1998, respectively.
The Company's statement of cash flows reflects cash provided by operating activities of approximately $12,195,000 which reflects net earnings of $2,137,000, decreases in operating assets such as inventories ($11,025,000), due from supplier ($773,000), prepaid expenses and other current assets ($470,000), and other assets ($541,000), offset by increases in accounts receivable ($3,096,000), decreases in accounts payable ($919,000), and decreases in royalties payable ($1,350,000). Cash flows from operations also reflect non-cash items including an adjustment for depreciation and amortization ($3,310,000), a realized loss on investment ($104,000), an adjustment for minority interest in loss of subsidiary ($811,000), securities received to satisfy receivable ($500,000) and an adjustment for deferred income tax provision ($163,000).
Net cash used in investing activities approximated $309,000 attributable to the purchase of property, plant and equipment.
The statement also reflects cash used in financing activities of approximately $9,869,000 representing loan repayments net of borrowings ($3,653,000), payment of dividends ($227,000) and the purchase of treasury stock ($5,989,000).
The Company reacquired $4,941,000 of its common stock during fiscal 1999, repurchasing 1,120,759 shares at an average price of $4.41. During 1999, the Company's Board of Directors authorized the Company to repurchase up to an additional $4,000,000 worth of it own common stock, par value $.01 in the public market. The Company's management has been afforded the discretion to purchase the shares at such times, and at such prices, as management believes appropriate. As of November 30, 1999, the Company had authorization to repurchase an additional $442,000 worth of its own common stock.
The Company also reacquired $66,000 of its preferred stock during fiscal 1999, repurchasing 13,100 shares at an average price of $5.04. As of November 30, 1999, the Company had authorization to repurchase an additional $267,000 worth of its own preferred stock.
On July 21, 1999, the Company and its subsidiary terminated the revolving credit and term loan facilities with its bank.
The Company entered into a term loan agreement with a financing company which is payable in 48 installments of $68,000 including interest. Payments commenced on August 1, 1999 and will continue through July 1, 2003. The term loan is collateralized by the Company's machinery and equipment.
The Company expects to meet its cash requirements from operations and current cash reserves.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 14 of this Annual Report on Form 10-K.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
The following persons are the current executive officers and directors.
Name Age Position - ---- --- -------- Reginald Spinello 47 Chairman of the Board, Chief Executive Officer and President
Karine Hollander 33 Chief Financial Officer, Secretary and Director
Thomas A. Keith 40 Director
Ira Helman 67 Director
Lawrence D. Simon 33 Director
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the Board of Directors and, subject to existing employment agreements, serve at the discretion of the Board.
Outside directors shall receive Ten Thousand Dollars ($10,000) per year as compensation for their services. Directors who are also officers of the Company do not receive any compensation for serving on the Board of Directors. All Directors are reimbursed by the Company for any expenses incurred in attending Director's meetings.
Background of Executive Officers and Directors
Reginald Spinello has been the Chairman of the Board, Chief Executive Officer and President since August 21, 1998 and a Director of the Company since August 1997. Mr. Spinello was the Company's Executive Vice President since September 1993. Mr. Spinello is also the President and a director of the Company's subsidiary Futurebiotics, Inc. In addition, he has been a Director of Superior Supplements, Inc. since May 1, 1996. Superior Supplements, Inc. ("SSI") is a developer, manufacturer and marketer of dietary supplements in bulk tablet, capsule and powder form. Prior to joining PDK Labs Inc., Mr. Spinello was President and Founder of Internal Reinforcements from 1985 to 1991, a specialty distributor and marketer of natural vitamins and supplements. Mr. Spinello graduated from Bryant College with a B.S. Degree in Business Administration. Additionally, he has studied in the field of nutrition and is a non-practicing nutrition consultant.
Karine Hollander has been the Chief Financial Officer of the Company and Futurebiotics, Inc. since March 3, 1997. In addition, she has been a Director of the Company since March 11, 1998. She had been the Comptroller of PDK Labs Inc. since September 1994. From 1989 until joining the Company, Ms. Hollander was employed by the accounting firm of Holtz Rubenstein & Co., LLP. Ms. Hollander received a B.A. degree in Accounting from Dowling College.
Thomas A. Keith has been a Director of the Company since March 11, 1998, and he has been a Director of Futurebiotics, Inc. since December 2, 1998. In addition, he has been a Director of Compare Generiks, Inc. since May 21, 1997 and the President of Compare Generiks, Inc. since October 31, 1995. Prior to joining Compare Generiks, Inc., from December 1990 to October 1995, Mr. Keith was Vice President of Sales & Marketing of the Company. Compare Generiks, Inc. ("CGI") is a distributor, marketer and vendor of dietary supplements and over-the-counter non-prescription pharmaceuticals.
Lawrence D. Simon has been a Director of the Company since March 11, 1998. In addition, he has been the President, Chairman, Chief Financial Officer and a Director of SSI since May 1, 1996. Mr. Simon is also a Director of Futurebiotics, Inc. He was the National Sales Director for Futurebiotics, Inc. from October 1, 1995, until his resignation on April 30, 1996. Prior to joining Futurebiotics, Inc., Mr. Simon was Regional Sales Manager for the Company (from April 10, 1992 to September 30, 1995). Prior to PDK Labs Inc., Mr. Simon was President of LDS Products Inc. (from March 1990 to March of 1991). LDS Products Inc., is a brokerage corporation specializing in sales to wholesale companies in Eastern Europe. Prior to LDS Products Inc., Mr. Simon was an Auditor with Coopers & Lybrand LLP (from December 1988 to March 1990). He is a graduate of Cleveland State University with a Bachelors Degree in Business Administration.
Ira Helman has served as a Director of the Company since August 1989. For the past 30 years, Mr. Helman has been an independent investor and financial consultant as well as a breeder and owner of harness horses. Mr. Helman received his B.A. degree from Princeton University and his law degree from Brooklyn Law School.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon its review of the copies of such reports furnished to the Company during the year ended November 30, 1997, all Section 16(a) filing requirements applicable to its officers and directors and greater than ten percent beneficial
owners were satisfied except that a report required to be filed upon the appointment of Karine Hollander as Chief Financial Officer was inadvertently filed after the due date.
Item 11.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
- ---------------- (1) Represents salary of $488,000 paid by the Company and $330,000 paid by its subsidiary. (2) Represents salary of $325,000 paid by the Company and $50,000 paid by its subsidiary. (3) Represents reimbursements to pay taxes resulting from stock grants. (4) Represents issuance of 280,000 shares in accordance with August 1998 employment agreement. Shares were valued at $2.125 per share. (5) Represents salary of $160,000 paid by the Company and $38,000 paid by its subsidiary. (6) Represents issuance of 150,000 shares in accordance with August 1998 consulting agreement. Shares were valued at $2.125 per share. (7) Represents consulting fees paid in accordance with August 1998 agreement and accrued vacation and sick pay in accordance with October 1995 Employment Agreement.
Employment Agreements
The Company has an employment agreement with Reginald Spinello, the Company's Chief Executive Officer and President, which provides for a minimum salary of $350,000 per year (the "Spinello Agreement"). Mr. Spinello was issued 280,000 shares of Common Stock pursuant to the Spinello Agreement.
On March 3, 1997, the Company's employment agreement with Karine Hollander, was amended to appoint her as the Company's Chief Financial Officer at a minimum salary of $110,000
per year (the "Hollander Agreement"). In October 1995, Ms. Hollander was issued 50,000 shares of Common Stock pursuant to the Hollander Agreement. On November 1, 1997, the Hollander Agreement was amended to increase Ms. Hollander's salary to $160,000 per year with effect from December 8, 1997, to remove all restrictions on the vesting of Ms. Hollander's shares and to provide for reimbursement of all taxes incurred by Ms. Hollander with respect to her shares. The Hollander Agreement terminates in October 2000 but may be terminated by the Company, at its sole discretion, on ninety days notice.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 15, 2000 with respect to the beneficial ownership of the outstanding Common Stock by (i) any holder of more than five (5%) percent; (ii) each of the Company's officers and directors; and (iii) the directors and officers of the Company as a group:
Amount and Nature Approximate Name and Address Beneficial Percent of of Beneficial Owner Ownership(1) Class - ------------------ ------------ -----------
Perry D. Krape 205,488 8.9% c/o PDK Labs Inc. 145 Ricefield Lane Hauppauge, NY 11788
Reginald Spinello(2) 672,500 29.0% 145 Ricefield Lane Hauppauge, NY 11788
Michael Krasnoff(3) 200,000 8.6% PDK Labs Inc. 145 Ricefield Lane Hauppauge, NY 11788
Thomas Keith 0 0 c/o Compare Generiks, Inc. 60 Davids Drive Hauppauge, NY 11788
Lawrence Simon 0 0 c/o Superior Supplements, Inc. 270 Oser Avenue Hauppauge, NY 11788
Karine Hollander(4) 50,000 2.2% c/o PDK Labs Inc. 145 Ricefield Lane Hauppauge, NY 11788
Ira Helman 0 0 c/o PDK Labs Inc. 145 Ricefield Lane Hauppauge, NY 11788
Dune Holdings, Inc.(3) 200,000 8.6% 132 Dune Road West Hampton, NY 11978
Directors and Officers 672,500 29.0% as a Group (five (5) persons)
- ----------------- (1) Beneficial ownership as reported in the table above has been determined in accordance with Instruction (4) to Item 403 of Regulation S-B of the Securities Exchange Act.
(2) Includes 50,000 shares of common stock owned by Karine Hollander and 100,000 shares of Common Stock owned by Michael Lulkin, which are subject to a ten (10) year voting trust held by the Company's Chief Executive Officer.
(3) Includes 200,000 shares of common stock owned by Dune Holdings, Inc., over which Mr. Krasnoff possesses a voting trust and as to which Mr. Krasnoff disclaims any beneficial ownership.
(4) Ms. Hollander's shares of Common Stock are subject to a ten (10) year voting trust held by the Company's Chief Executive Officer.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On August 21, 1998, the Company entered into a consulting agreement with Michael Krasnoff, the Company's former Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board of Directors. The agreement provides for Mr. Krasnoff to provide certain consulting services to the Company for a period of three (3) years at a rate of $2500 for each full day during which Mr. Krasnoff renders services. The Company also issued to Mr. Krasnoff 150,000 shares of the Company's Common Stock. In connection with the agreement, Mr. Krasnoff terminated his employment with the Company and relinquished all rights under the employment agreement, including the surrender of 280,000 shares of the Company's Common Stock and the relinquishing of all rights under the change of control provisions. As of November 30, 1999, Mr. Krasnoff owed the Company the sum of $623,000, pursuant to the loan provisions in his Termination and Payment Agreement. The Loan bears interest at the prime rate plus 1/2 of 1% per annum.
Reginald Spinello, a director of the Company and the Company's Executive Vice President, was also a director of SSI. Reginald Spinello and two other directors of SSI had more than fifty percent (50%) voting power of the common stock and the preferred stock of the Company pursuant to a Voting Trust Agreement. The Company has a supply agreement with Superior Supplements, Inc., a Delaware corporation ("SSI"), pursuant to which the Company is obligated to purchase a minimum of $2,500,000 of certain products at specified prices annually. This supply agreement expires in May 2000 and is automatically renewable for successive one (1) year periods thereafter. The Company supplies certain management and personnel to SSI pursuant to a management agreement between the Company and SSI dated July 21, 1997 which provides for the Company to supply certain management services to SSI in consideration for the payment by SSI of a management fee of $10,000 per month. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
In addition, on November 30, 1997, the Company entered into a packaging agreement with SSI. SSI agreed to package Futurebiotics products for the Company for a fixed price based on component cost plus a direct labor charge per unit. The agreement expired on November 30, 1999.
Thomas Keith, a director of the Company, is also the President and a director of CGI and a director of SSI. The Company has two (2) supply agreement with CGI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
General
The Company believes that material affiliated transactions and loans between the Company and its directors, officers, principal shareholders or any affiliates thereof have been and will be in the future on terms no less favorable than could be obtained from unaffiliated third parties.
PART IV
Item 14.
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
Consolidated balance sheets as of November 30, 1999 and 1998
Consolidated statements of operations for the three years ended November 30, 1999
Consolidated statements of stockholders' equity for the three years ended November 30, 1999
Consolidated statements of cash flows for the three years ended November 30, 1999
Notes to consolidated financial statements -F-18
(a)(2) Financial Statement Schedules.
Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.
PDK LABS INC. AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1999
CONTENTS
Page ---- Report on Independent Certified Public Accountants
Consolidated balance sheets as of November 30, 1999 and 1998
Consolidated statements of operations for the three years ended November 30, 1999
Consolidated statement of stockholders' equity for the three years ended November 30, 1999
Consolidated statements of cash flows for the three years ended November 30, 1999
Notes to consolidated financial statements -
Independent Auditors' Report
Board of Directors and Stockholders PDK Labs Inc. and Subsidiary Hauppauge, New York
We have audited the consolidated balance sheets of PDK Labs Inc. and Subsidiary as of November 30, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PDK Labs Inc. and Subsidiary as of November 30, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended November 30, 1999, in conformity with generally accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York February 11, 2000
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
See notes to consolidated financial statements
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
See notes to consolidated financial statements
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share and per share data)
See notes to consolidated financial statements
PDK LABS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See notes to consolidated financial statements
PDK LABS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED NOVEMBER 30, 1999 (in thousands, except share and per share data)
1. Summary of Significant Accounting Policies:
a. Description of business
The Company manufactures and distributes non-prescription pharmaceutical products, vitamins and food supplement products, and cosmetics and beauty aids throughout the United States.
b. Principles of consolidation
The consolidated financial statements include the accounts of PDK Labs Inc. and its majority owned subsidiary, Futurebiotics, Inc. ("Futurebiotics"). Upon consolidation, all significant intercompany accounts and transactions are eliminated.
PDK's interest in Futurebiotics increased from 52% at November 30, 1998 to 78% at November 30, 1999 as a result of Futurebiotics acquisition of treasury stock.
In March 1999, Futurebiotics entered into an agreement to sell substantially all of its operating assets to an unrelated company, and accordingly prior year financial statements reported the results of Futurebiotics operations as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. No loss was recorded on the anticipated disposal.
In July 1999, the sales agreement was terminated, and management is no longer seeking a disposition of Futurebiotics. Accordingly, the financial statements for all prior periods presented have been reclassified to recognize Furturebiotics' operating net assets and operation as continuing operations.
c. Investment in marketable securities
Investments in debt and equity securities are designated as trading, held-to-maturity or available for sale. Management considers the Company's marketable securities, consisting principally of government and government-backed debt securities, to be available-for-sale. Available-for-sale securities are reported at amounts which approximate fair value. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market.
e. Depreciation and amortization
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed using the straight-line method over the estimated useful lives of the related assets or the remaining term of the lease, whichever is shorter. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations.
1. Summary of Significant Accounting Policies: (Cont'd)
e. Depreciation and amortization (Cont'd)
Intangible assets are amortized using the straight-line method over the following periods:
Goodwill 10 years Covenants not to compete 5-7 years Deferred loan costs Term of related debt Other 7-10 years
f. Income taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company and its subsidiary file separate tax returns.
g. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
h. Reclassifications
Certain reclassifications have been made to the prior years' financial statements to conform with the classifications used in 1999.
i. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
j. Advertising
The Company charges advertising costs to expense as incurred. Advertising costs amounted to $726, $1,257 and $1,239 for the three years ended 1999, respectively.
k. Concentration of credit risk
The Company invests its excess cash in deposits and money market accounts with major financial institutions and in commercial paper of companies with strong credit ratings. Generally, the investments mature within ninety days and therefore, are subject to little risk. The Company has not experienced losses related to these investments.
The concentration of credit risk in the Company's accounts receivable is substantially mitigated by the Company's credit evaluation process, reasonably short collection terms and the geographical dispersion of revenue. Although the Company generally does not require collateral, reserves for potential credit losses are maintained and such losses have been within management's expectations.
1. Summary of Significant Accounting Policies: (Cont'd)
l. Comprehensive income (loss)
Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amount are recorded directly as an adjustment to stockholders' equity. The Company's other comprehensive income is comprised of net unrealized gain (loss) on marketable securities. The Company's comprehensive income approximated net income for all periods presented.
m. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company's fiscal year 2000. This statement established accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company believes the adoption of SFAS 133 will not have a material effect on the financial statements.
In March 1998, the American Institute of Certified Pubic Accountants ("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company is required to implement SOP 98-1 for the year ending August 31, 2000. Adoption of SOP 98-1 is expected to have no material impact on the Company's financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. As the Company has expensed these costs historically, the adoption of this standard is not expected to have a significant impact on the Company's results of operations, financial position or cash flows.
2. Supplementary Information - Statement of Cash Flows:
Cash paid during the years for:
Years Ended November 30, ---------------------------------------- 1999 1998 1997 ------ ------ ------ Interest $ 386 $1,094 $1,253 ====== ====== ====== Income taxes $2,145 $1,270 $1,306 ====== ====== ======
During the year ended November 30, 1999, the Company reacquired 118,421 shares of its common stock, valued at $488, as partial repayment of a loan to a former officer.
During the year ended 1998, the Company incurred capital lease obligations of approximately $47, for the acquisition of various property and equipment. Further, the Company and its majority-owned subsidiary issued stock and/or options to various parties in consideration of services provided (see Note 11).
3. Inventories:
Inventories consist of the following:
November 30, --------------------------- 1999 1998 ------- ------- Raw materials $ 2,736 $ 4,458 Work-in-process 6,053 9,965 Finished goods 3,917 9,308 ------- ------- $12,706 $23,731 ======= =======
4. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
November 30, ---------------------- 1999 1998 ------- ------- Manufacturing equipment $ 6,674 $ 6,511 Vehicles 246 246 Office equipment and fixtures 2,601 2,563 Leasehold improvements 2,012 1,904 ------- ------- 11,533 11,224 Less accumulated depreciation and amortization 7,994 6,645 ------- ------- $ 3,539 $ 4,579 ======= =======
Depreciation and amortization of plant and equipment for the years ended 1999, 1998 and 1997 was $1,349, $1,291 and $1,222, respectively.
5. Intangible Assets:
Intangible assets consist of the following:
November 30, --------------------------- 1999 1998 ------- ------- Customer lists $ -- $ 1,756 Goodwill 300 300 Covenants not to compete 845 1,099 Deferred loan costs 50 107 Other 30 34 ------- ------- 1,225 3,296 Less accumulated amortization 871 2,363 ------- ------- $ 354 $ 933 ======= =======
Amortization expense for the years ended 1999, 1998 and 1997 was $574, $559 and $1,984, respectively.
6. Other Assets:
At November 30, 1999 and 1998, other assets include a loan, bearing interest at prime plus .5%, and accrued interest to a former officer approximating $624 and $1,140, respectively.
7. Long-Term Debt:
Long-term debt consists of the following:
November 30, ----------------- 1999 1998 ------ ------ Term loan, payable in monthly installments of $68 consisting of principal and interest of 9.68% per annum through July 2003; collateralized by machinery and equipment (a) $2,526 $ --
Revolving line of credit -- 400
Term loan, bank (a) -- 5,728
Other, consisting principally of capital lease obligations, expiring in various years through 2001 94 145 ------ ------ 2,620 6,273 Less current portion 653 1,931 ------ ------ $1,967 $4,342 ====== ======
(a) In July 1999, the Company entered into a $2,728 term loan agreement with an institutional lender. Proceeds of the loan were used to repay the outstanding balance on the Company's existing term indebtedness with a bank. Additionally, in 1999 the Company terminated a revolving credit facility with the bank.
Maturities of long-term debt are as follows:
Years Ending November 30, ------------ 2000 $653 2001 696 2002 743 2003 528
8. Stockholders' Equity:
a. Capitalization
The Company's authorized capital consists of 30,000,000 shares of common stock and 5,000,000 shares of preferred stock. All stock has a $.01 par value.
The Board of Directors has the authority to issue preferred stock in one or more series and to fix the rights, voting rights and other terms. The Series A Convertible Preferred shares issued and outstanding have no voting rights and, in the event of liquidation, are entitled to $7.00 per share plus accrued dividends before any distribution to other stockholders. On July 21, 1997, the Board of Directors authorized an increase in the conversion rate of the Company's Series A Convertible Preferred Stock from .3 shares of Common Stock for each share of Preferred Stock to 1.5 shares of the Company's Common Stock for each share of Preferred Stock. The increase in the conversion rate was for a period of 45 days and ended on September 3, 1997, at which time the conversion rate returned to the original rate. During the conversion period, 241,445 shares of Preferred Stock were converted into 365,167 shares of common stock. Preferred shareholders are entitled to cumulative dividends of $.49 per share, payable at the election of the Company in cash, common stock, or a combination thereof. Dividends are payable semi-annually on or about April 15 and October 15 of each year.
8. Stockholders' Equity: (Cont'd)
b. Treasury stock
The Company's Board of Directors has authorized the Company to repurchase up to $7,000 worth of its own Common Stock, par value $.01, in the public market. The Company's management has been afforded the discretion to purchase the shares at such time or times, and at such prices, as management believes appropriate.
The Company acquired 1,120,759, 68,425 and 176,500 shares of its common stock at a cost of $4,941, $298 and $983 in 1999, 1998 and 1997, respectively.
During 1999, the Company purchased 13,100 shares of its preferred stock at an aggregate price of $66.
During 1998, the Company purchased 37,544 shares of its preferred stock at an aggregate price of $167. In addition, in August 1998, an executive resigned and forfeited 280,000 shares of common stock (valued at $460) previously granted to him under an employment agreement. These preferred and common shares were retired as of November 30, 1998.
c. Net income per common share and per common equivalent share
The Company computes net income per share in accordance with the provisions of Statement of Financial Standard ("SFAS") No. 128, "Earnings Per Share". Under SFAS No. 128 basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding excludes treasury shares from the date of their acquisition. The reconciliation of income from continuing operations for the years ended November 30, 1999, 1998 and 1997 are as follows:
Per Year Ended November 30, 1999 Income Shares Share ---------------------------- ------ --------- ---- Net earnings $2,137 2,881,979 Less: preferred stock dividends (226) -- ------ --------- Basic EPS 1,911 2,881,979 $.66
Effect of dilutive securities: Warrants -- -- ------ --------- Diluted EPS $1,911 2,881,979 $.66 ------ --------- Year Ended November 30, 1998 Net earnings $ 777 3,327,050 Less: preferred stock dividends (235) -- ------ --------- Basic EPS 542 3,327,050 $.16 Effect of dilutive securities: Warrants -- 82,059 ------ --------- Diluted EPS $ 542 3,409,109 $.16 ------ --------- Year Ended November 30, 1997 Net earnings $1,559 3,095,660 Less: preferred stock dividends (285) -- ------ --------- Basic EPS 1,274 3,095,660 $.41 Effect of dilutive securities: Warrants -- 132,673 ------ --------- Diluted EPS $1,274 3,228,333 $.39 ------ ---------
8. Stockholders' Equity: (Cont'd)
c. Net income per common share and per common and common equivalent share (Cont'd)
Options and warrants to acquire 48,000 and 68,000 shares of common stock were not included in the computation of diluted EPS for 1998 and 1997, respectively, because their exercise prices were greater than the average market price of the common shares. In addition, the assumed conversion of the preferred stock and the related reduction to the preferred stock dividend was not included in the computation as its effect was antidilutive.
d. Stock option plan
The Company's Non-Qualified Stock Option Plan provides for the granting of options to purchase not more than 23,250 shares of common stock to employees, directors, and consultants of the Company. Pursuant to the Plan, and at the Board's discretion, the options expire up to ten years from the date of grant, and the exercise price will be determined by the Board. At November 30, 1999, no options have been granted under the Plan.
At November 30, 1999, the Company has approximately 138,200 shares of common stock reserved for future issuances.
9. Income Taxes:
The provision (benefit) for income taxes consists of the following:
Years Ended November 30, ------------------------------------------- 1999 1998 1997 ------- ------- ------- Current: Federal $ 1,503 $ 1,644 $ 1,279 State 361 365 107 ------- ------- ------- 1,864 2,009 1,386 ------- ------- ------- Deferred: Federal 136 (541) (530) State 27 28 (176) ------- ------- ------- 163 (513) (706) ------- ------- ------- $ 2,027 $ 1,496 $ 680 ======= ======= =======
Net deferred income tax asset (liability) are comprised of the following:
November 30, ------------------------- 1999 1998 ------- ------- Inventories $ 223 $ 463 Prepaid salaries (153) (215) Property, plant and equipment 192 48 Intangible assets 204 892 Investment in subsidiary (165) (315) Unearned compensation (325) (622) Tax carryforwards 1,031 528 Investment in Compare Generiks 200 154 Other 40 - Valuation allowance (1,217) (510) ------- ------- $ 30 $ 423 ======= =======
9. Income Taxes: (Cont'd)
A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
Years Ended November 30, -------------------------- 1999 1998 1997 ---- ---- ---- U.S. Federal statutory income tax rate 34.0% 34.0% 34.0% State income tax, net of federal tax benefit 6.5 13.6 (5.9) Valuation allowance 21.1 19.4 10.5 Permanent differences 1.4 16.0 5.8 Other (2.5) (.6) (7.9) ---- ---- ---- 60.5% 82.4% 36.5% ==== ==== ====
In accordance with the provisions of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes", the Company recognized a deferred tax (benefit) provision on its proportionate share of Futurebiotics' (loss) earnings.
The tax effect of excess deductions for stock-based awards whose compensation cost recorded for tax purposes exceeds the compensation cost recorded for financial reporting purposes is recognized as additional paid-in capital.
10. Retirement Plans:
a. The Company has a voluntary, non-contributory defined contribution profit sharing plan which covers substantially all of its employees. Contributions to the profit sharing plan are based on a percentage of eligible compensation up to a maximum of 15%, at the discretion of the Board of Directors. There was no contribution made in 1999, 1998 or 1997.
b. Qualified employees are eligible to participate in a salary reduction plan under Section 401(k) of the Internal Revenue Code. Participation in the plan is voluntary, and any participant may elect to contribute up to 17% of earnings. The Company may, at its discretion, contribute up to 3% of an employee's earnings. The Company contributed $86, $87 and $62 to the Plan for the years ended 1999, 1998 and 1997, respectively.
11. Commitments and Contingencies:
a. Employment agreements
Pursuant to employment agreements with certain key executives, which expire at various dates through October 2005, the Company has granted 970,000 shares of common stock which are earned by the executives and charged to operations ratably over the respective terms of their employment. The shares have been valued at prices ranging from $1.46 to $2.13 per share, dependent upon their date of grant (aggregating approximately $1,739). The agreements, as amended, provide for reimbursement of any tax liability arising from the officers' stock grant. In 1999 and 1998, the Company paid tax reimbursements of $79 and $580, respectively to certain executives, which is being charged to operations over the lives of their respective agreements. One agreement also provides for a payment of two times the officers' aggregate unpaid compensation in the event of a change in control of the Company (as defined).
The Company's remaining aggregate commitment at November 30, 1999 under such contracts is approximately $2,738.
1l. Commitments and Contingencies: (Cont'd)
b. Consulting agreements
In August 1998, the Company entered into three year consulting agreement with a former officer which provides for minimum annual compensation of $480. In addition, the Consultant was granted 150,000 shares of common stock. The value of the shares ($319) is being charged to operations over the term of the agreement.
In addition, the Company is a party to a consulting agreement with the former owner of Futurebiotics, Ltd. ("Consultant"). Under the terms of the 1994 agreement, as amended, the Consultant received 500,000 shares of the Company's common stock. The value of the shares ($3,000) is being charged to operations over the period services are provided.
Additionally, included in operations are charges approximating $323, $349, and $229 for the years ended November 30, 1999, 1998 and 1997, representing the compensatory value of the Company's common stock issued in connection with consulting agreements entered into prior to 1996.
c. Lease commitment
The Company is obligated under non-cancellable operating leases for its manufacturing and office facilities. The leases, as extended, require minimum future rental payments of $428, $302 and $289 in 2000, 2001 and 2002, respectively, and provide for the payment of real estate taxes.
Rent expense, net of rental income, approximated $537, $543 and $351 for 1999, 1998 and 1997, respectively.
d. Litigation
On July 29, 1996, the Company served a complaint against a former executive citing that he, among other things, breached his agreement with PDK by competing with PDK and soliciting PDK's customers in violation of his separation agreement.
The former executive has denied the Company's allegations and, through a counterclaim, asserts that the Company, and certain current and former officers and directors have breached their fiduciary duty to the Company and its stockholders. PDK and the officers and directors deny that they engaged in any improper conduct which would support the former executive's counterclaim. Each intends to vigorously defend against such claims and PDK intends to proceed with its action against the former executive.
On February 22, 1999, the former executive served a demand on the Company's board of directors, to commence a shareholder's derivative action (the "Demand"). After a detailed investigation conducted by special counsel, a disinterested subcommittee of the board of directors determined that the Company should not assert any of the listed claims. Thereafter, the former executive initiated a new derivative action. No relief is sought against the Company, as all claims are asserted on the Company's behalf. Nevertheless, the Company has concluded that the claims are without merit, and it will seek the dismissal of the lawsuit.
The Company is involved in various other lawsuits and claims incidental to its business. In the opinion of management, the ultimate liabilities, if any, resulting from such lawsuits and claims, will not materially affect the financial position of the Company.
11. Commitments and Contingencies: (Cont'd)
e. Supply and packaging agreement
The Company is party to supply and packaging agreements with Superior Supplements, Inc. ("Superior"), an entity having a common director with the Company, pursuant to which Superior is supplying and packaging certain products for PDK. In the event PDK purchases less than $2,500 of product. Superior will be entitled to up to $200 in liquidated damages. Purchases under these agreements approximated $4,512, $9,505 and $4,386 for 1999, 1998 and 1997, respectively.
In connection with these agreements, in 1997 PDK transferred to Superior, at cost, inventory of approximately $2,045. In addition, PDK sold Superior machinery and equipment for proceeds of $232, recognizing a gain of approximately $134.
Additionally, Superior is obligated to PDK under a management agreement which provides for PDK to provide Superior with certain management services in consideration for a management fee of $10 per month.
On November 19, 1998, Futurebiotics entered into an agreement whereby it transferred certain private label customers to Superior. As consideration for these customers, Superior is obligated to pay Futurebiotics 10% of all revenue derived from these customers for a three year period. Royalties under this agreement approximated $68 during 1999.
12. Government Regulation:
Certain raw materials used by the Company in its manufacturing process are categorized as List 1 Chemicals by the Chemical Diversion Action of 1988. As such, the importation of these chemicals requires the filing of importation documents with the Federal Drug Enforcement Administration ("DEA"). In addition, certain foreign countries require a "letter of non-objection" for the export of List 1 Chemicals. Without the letter of non-objection the Company is unable to import the List 1 Chemical. To date, the Company has been able to meet its purchase requirements through domestic sources.
The United States Food and Drug Administration ("FDA") proposed regulations which remain pending but, if adopted, would remove ephedrine-containing over-the-counter drug products which are manufactured and sold by the Company from the over-the-counter market. Several states have taken action to restrict, in some fashion, the sale of ephedrine, pseudoephedrine, and/or phenylpropanolamine ("PPA") containing products.
The DEA has been given the statutory authority to regulate all ephedrine, pseudoephedrine, and PPA over-the-counter drug products. Registration with the DEA is required for all companies engaged in the distribution of any products containing ephedrine, pseudoephedrine, or PPA. The Company has applied for its own registration with the DEA. The Company was advised by DEA that they are investigating the Company's pending registration. The investigation involves the Company's purchase and distribution of List 1 chemicals. To date, the DEA has taken no formal action on the registration. If the DEA denies the Company's registration, the Company will have the right to appeal the decision administratively within the DEA and thereafter, if unsuccessful, in federal court. If the final determination is to deny the registration, then the Company would no longer be permitted to manufacture and distribute products that contain List 1 Chemicals. Sales of products containing List 1 Chemicals approximated $29,731 for the year ended November 30, 1999.
13. Related Party Transactions:
The Company holds 1,024,845 shares of Compare Generiks, Inc.'s ("CGI") common stock and 900,000 shares CGI's Series B Preferred Stock. The Series B Preferred Stock earns cumulative annual dividends of 12% or $.12 per share, and is redeemable at the option of CGI. Dividend income for the years ended November 30, 1999, 1998 and 1997 totalled $86, $60 and $60, respectively.
Pursuant to various Supply Agreements, expiring in 2001 and 2002, the Company supplies certain of CGI's products at prices based upon cost plus a specified mark-up. In consideration, CGI agreed to pay an annual license fee of $500 to PDK. This fee is payable, at the option of CGI, either in cash or in shares of CGI's common or preferred stock. Sales to CGI approximated $36,580, $22,125, and $5,485 for the years ended November 30, 1999, 1998, and 1997, respectively. Included in accounts receivable at November 30, 1999 and 1998 are $9,215 and $6,801, respectively, due from CGI.
14. Exclusive Supply and Licensing Agreement:
The Company was party to an amended Exclusive Supply Agreement with a non-affiliated distributor (the "Distributor"). This Agreement was terminated in March 1998, and the Company and the Distributor entered into a settlement under which the outstanding royalty payable of $1,350 was paid in February 1999.
Sales to the Distributor approximated 10% of total revenue in 1998.
15. Other Expense (Income):
Other expense (income) consists of the following:
Years Ended November 30, --------------------------- 1999 1998 1997 ----- ----- ----- Loss on impairment of securities (a) $ 104 $ 404 $ -- Dividend income (86) (60) (60) Write-off of terminated deferred loan costs 56 -- 232 Other (2) (92) (66) ----- ----- ---- $ 72 $ 252 $106 ===== ===== ====
(a) The Company was issued shares of CGI common stock in satisfaction of its annual license fee (see Note 13). These shares have been written down to their estimated realized value for declines in their market value which, in the opinion of management, was other than temporary.
16. Fair Value of Financial Instruments:
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
16. Fair Value of Financial Instruments: (Cont'd)
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Current Assets, Investments in Marketable Securities and Current Liabilities: The fair value of short-term financial instruments, including cash and cash equivalents, trade accounts receivable and payable, certain accrued liabilities, and certain other short-term financial instruments, approximates their carrying amount in the financial statements due to the short maturity of such instruments.
Notes Payable and Long-Term Debt: The fair value of the term note payable approximates its carrying amount since the currently effective rates reflect market rates.
17. Business Segments:
The Company currently has two reportable business segments. PDK manufacturers and distributes non-prescription pharmaceutical products. Futurebiotics distributes, markets and sells vitamins, minerals, herbal formulations and specialty nutritional supplements.
The Company's revenues are derived primarily from activities within the United States, and all long-lived assets are located within the United States.
PDK Futurebiotics Total ------- ------------- ------- Year ended November 30, 1999: Revenues from external customers $47,401 $ 7,305 $54,706 Intersegment revenues 5,299 -- 5,299 Interest income 46 -- 46 Interest expense 399 -- 399 Depreciation & amortization 2,728 582 3,310 Segment profit (loss) 4,839 (1,486) 3,353 Segment assets 32,269 4,431 36,700 Expenditures for segment assets 309 -- 309
Year ended November 30, 1998: Revenues from external customers $47,295 $ 10,304 $57,599 Intersegment revenues 7,395 -- 7,395 Interest income 110 51 161 Interest expense 971 123 1,094 Depreciation & amortization 2,708 524 3,232 Segment profit (loss) 2,708 (977) 1,731 Segment assets 39,133 7,340 46,473 Expenditures for segment assets 1,191 39 1,230
Year ended November 30, 1997: Revenues from external customers $39,670 $ 11,682 $51,352 Intersegment revenues 5,750 -- 5,750 Interest income 233 151 348 Interest expense 989 264 1,253 Depreciation & amortization 2,880 1,873 4,753 Segment profit (loss) 3,075 (1,404) 1,671 Expenditures for segment assets 1,335 15 1,350
17. Business Segments: (Cont'd)
Reconciliation of Segment Information to Consolidated Amounts:
November 30, ---------------------- 1999 1998 ------- ------- Assets: Total assets for reportable segments $39,021 $47,635 Elimination of intercompany balances and investments (2,321) (1,162) ------- ------- Total consolidated assets $36,700 $46,473 ======= =======
(a)(3) Exhibits.
3.1 * Restated Certificate of Incorporation
3.2 * Amended and Restated By-Laws of Registrant
4.1 * Warrant Agreement
10.1** Stock Option Plan and form of Stock Option Agreement
10.48+ Amendment of Consulting Agreement by and between K.A.M Group, Inc. and the Company dated January 19, 1994.
10.49++ Sales and Management Agreement by and between the Company and Futurebiotics dated April 14, 1994.
10.50++ Amendment of Sales and Management Agreement by and between the Company and Futurebiotics dated December 8, 1994.
10.54+++ Supply Agreement with Compare Generiks, Inc. dated October 31, 1995.
10.57++++ Supply Agreement with Superior Supplements, Inc. dated May 14, 1996.
10.62+++++ Amendment No. 2 to Employment Agreement with Michael Krasnoff dated as of May 31, 1997.
10.63+++++ Employment Agreement with Reginald Spinello dated as of October 6, 1995.
10.64+++++ Amendment No. 1 to Employment Agreement with Reginald Spinello dated as of November 1, 1997.
10.66+++++ Amendment No. 1 to Employment Agreement with Karine Hollander dated as of March 3, 1997.
10.67+++++ Amendment No. 2 to Employment Agreement with Karine Hollander dated as of November 1, 1997.
10.69+++++ Exclusive Supply and Licensing Agreement between the Company and Compare Generiks, Inc. dated March 24, 1997.
10.70+++++ Exclusive Supply Agreement between the Company and Body Dynamics, Inc. dated as of May 5, 1997.
10.71+++++ Amendment to Supply Agreement between the Company and Superior Supplements, Inc. dated as of July 21, 1997.
10.72+++++ Management Agreement between the Company and Superior Supplements, Inc. dated as of July 21, 1997.
10.73+++++ Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc. and European American Bank dated as of August 20, 1997 and certain material exhibits thereto.
10.74+++++ Packaging Agreement between the Company and Superior Supplements, Inc. dated as of November 30, 1997.
10.75+++++ Assignment and Assumption Agreement by and among PDK Labs Inc., Futurebiotics, Inc. and Bank Leumi USA dated January 16, 1998.
10.76+++++ Assignment and Assumption Agreement by and among PDK Labs Inc., Futurebiotics, Inc. and National Bank of Canada dated January 16, 1998.
10.77+++++ First Amendment and Waiver to Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc., European American Bank, Bank Leumi USA and National Bank of Canada dated as of February 18, 1998.
10.78*** Asset Purchase Agreement dated as of March 3, 1999 by and among FB Acquisition Corp., Nutraceutical International Corporation, Futurebiotics, Inc. and PDK Labs Inc.
10.79*** Second Amendment to Credit Agreement by and among PDK Labs Inc., Futurebiotics, Inc. and European American Bank dated as of August 13, 1998.
10.80*** Employment Agreement with Reginald Spinello dated August 21, 1998.
10.81*** Consulting Agreement with Michael Krasnoff dated August 21, 1998.
10.82*** First Amendment to Supply Agreement between the Company and Compare Generiks, Inc. dated as of April 1998.
10.83*** Second Amendment to Supply Agreement between the Company and Compare Generiks, Inc. dated as of November 1998.
10.84**** Third Amendment to Supply Agreement between the Company and Compare Generiks, Inc. dated January 1999.
10.85 Fourth Amendment to Supply Agreement between the Company and Compare Generiks, Inc. dated May 1999.
10.86 Termination of Credit Agreement by and among PDK Labs, Inc. Futurebiotics, Inc. and European American Bank, National Bank of Canada and Bank of Leumi USA dated July 21, 1999.
10.87 Promissory Note by and between PDK Labs, Inc. and General Electric Capital Corporation dated July 21, 1999.
10.88 Master Security Agreement by and between PDK Lab, Inc. and General Electric Capital Corporation dated July 21, 1999.
27.1 Financial Data Schedule
- ------------------- * Incorporated by Reference to the Company's Registration Statement on Form S-1, No. 33-46454 ** Incorporated by Reference to the Company's Registration Statement on Form S-18, No. 22-31006 NY. ** Incorporation by Reference to the Company's Form 10-K for the year ended November 30, 1999. + Incorporated by Reference to the Company's Form 10-KSB for the year ended November 30, 1993. ++ Incorporated by Reference to the Company's Form 10-KSB for the year ended November 30, 1994. +++ Incorporated by Reference to the Company's Form 10-KSB for the year ended November 30, 1995. ++++ Incorporated by Reference to the Company's Form 10-KSB for the year ended November 30, 1996. +++++ Incorporated by Reference to the Company's Form 10-K for the year ended November 30, 1997. **** Incorporated by Reference to Compare Generiks, Inc. Form 10-KSB for the year ended March 31, 1999.
(B) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: New York, New York February 25th, 2000
PDK LABS INC.
By /s/ Reginald Spinello ------------------------------------------- Reginald Spinello, Chairman of the Board, Chief Executive Officer and President
By /s/ Karine Hollander ------------------------------------------- Karine Hollander, Chief Financial Officer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.