SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
[X] Filed by Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
PDK LABS INC.
(Name of Registrant As Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
common stock, $.01 par value
preferred stock, $.01 par value
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2) Aggregate number of securities to which transaction applies:
2,320,007 shares of common stock
447,466 shares of preferred stock
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
$5.00 per share of common stock cash Merger consideration
$8.00 per share of preferred stock cash Merger consideration
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4) Proposed maximum aggregate value of transaction:
$11,817,263 based on 1,647,507 shares of common stock and
447,466 shares of preferred stock outstanding on August 3,
2000.
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(5) Set forth the amount on which the filing fee is calculated and state
how it was determined.
2,363.46
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and date of its filing.
1) Amount Previously Paid:
N/A
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2) Form, Schedule or Registration Statement No.:
N/A
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3) Filing Party:
N/A
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4) Date Filed:
N/A
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PDK LABS INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on __________, 2000
To Our Shareholders:
Notice is hereby given that a Special Meeting of shareholders of PDK
Labs Inc. ("PDK" or the "Company") will be held on __________________, 2000 at
10:00 a.m., local time, at ____________________, for the following purposes:
1.To consider and vote on a proposal to adopt and
approve the plan of Merger (the "Merger") included
in an Agreement and Plan of Merger, dated as of
August 3, 2000 (the "Merger Agreement"), under which
PDK Acquisition Corp. ("PDK Acquisition"), a newly
formed company owned by Reginald Spinello, PDK's
President and Chief Executive Officer, Karine
Hollander, PDK's Chief Financial Officer, and
Raveendra Nandigam, PDK's Vice President of
Operations will merge with and into PDK and under
which each PDK shareholder (other than PDK
Acquisition) will become entitled to receive $5.00
in cash for each outstanding share of PDK Common
Stock and $8.00 per share (plus accrued and unpaid
dividends) for each outstanding share of PDK
Preferred Stock. A copy of this Merger Agreement is
attached to the accompanying proxy statement as
Appendix A and is described in the proxy statement.
2.To consider and act upon such other matters as may
properly come before the Special Meeting or any
adjournment or adjournments thereof.
If the Merger is approved by the PDK stockholders at the meeting and
effected by PDK, any stockholder who (i) files with PDK, before the vote on the
adoption of the Merger, a written objection to the proposed Merger that includes
notice of his election to dissent, his name and address, the number of shares of
PDK Common Stock and PDK Preferred Stock held, and a demand for payment of the
fair value of his shares if the Merger is effected; (ii) does not vote his
shares in favor of the Merger; and (iii) otherwise complies with the terms of
Section 623 of New York Business Corporation Law, will have the right to receive
payment of the fair value of his or her shares in lieu of receiving $5.00 in
cash for each outstanding share of PDK Common Stock and $8.00 per share (plus
accrued and unpaid dividends) for each outstanding share of Preferred Stock. PDK
and any such stockholder shall in such cases have the rights and duties and
shall follow the procedure set forth in Section 623 of New York Business
Corporation Law. See "The Special Meeting - Rights of Objecting Shareholders" in
the accompanying Proxy Statement for a more complete description of the rights
of dissenting stockholders.
The Board of directors has determined that only holders of PDK Common
Stock of record at the close of business on ___________, 2000 will be entitled
to notice of, and to vote at, the Special Meeting, including any adjournment.
By Order of the Board of Directors,
/s/ Karine Hollander
Chief Financial Officer and Secretary
YOUR VOTE IS IMPORTANT
Whether or not you are able to attend the meeting, please date, sign
and return the accompanying proxy card promptly in the enclosed envelope, which
requires no postage if mailed in the United States. Please do not send in any
certificates for your shares of Common Stock and/or Preferred Stock at this
time. If the Merger is approved, instructions regarding the exchange of your
shares for the cash Merger consideration will follow.
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PDK LABS INC.
145 Ricefield Lane
Hauppauge, New York 11788
PRELIMINARY PROXY STATEMENT
We are providing this proxy statement and accompanying proxy card to
our shareholders, in connection with the solicitation by our Board of directors
(the "Board") of proxies to be used at the Special Meeting of shareholders to be
held on _______ ___, 2000 at 10:00 a.m., local time, at ___________, including
at any adjournment of the Special Meeting (the "Special Meeting"). We began
mailing these materials and the accompanying letter to shareholders and the
notice of the meeting to our shareholders on or about ____________ ___, 2000.
Neither the Securities and Exchange Commission (referred to as the
"Commission") nor any state securities agency has approved or disapproved the
Merger or passed upon the fairness or merits of the Merger or the accuracy or
adequacy of the information contained in these documents. Any representation to
the contrary is unlawful.
SUMMARY TERM SHEET
The following question-and-answer summary contains the most material
terms of our proposed Merger with PDK Acquisition Corp. ("PDK Acquisition").
This summary may not contain all the information that you should consider before
voting on the proposed Merger. You should read the entire proxy statement and
all of its appendices before voting on the proposed Merger.
WHAT WILL HAPPEN IN THE MERGER?
If it is completed, the Merger will result in our public shareholders
receiving $5.00 in cash, without interest, per share for each share of Common
Stock of PDK (the "Common Stock") and $8.00 in cash {plus accrued and unpaid
dividends) per share for each share of Preferred Stock (the "Preferred Stock")
and ceasing to hold any equity interest in PDK and ceasing to participate in any
future earnings or growth of PDK. The Merger will also result in PDK becoming a
privately held company owned principally by some of our management (referred to
herein as the "Management Group").
If approved by the shareholders, the Merger would be accomplished under
an Agreement and Plan of Merger (the "Merger Agreement") that provides for PDK
Acquisition, a newly formed New York corporation, to merge with and into PDK.
PDK would be the surviving corporation in the Merger. If the Merger is
completed, each outstanding share of PDK Common Stock, other than shares held by
PDK Acquisition, will be canceled and converted automatically into the right to
receive $5.00 in cash, without interest, and each outstanding share of PDK
Preferred Stock will be cancelled and converted automatically into the right to
receive $8.00 in cash (plus accrued and unpaid dividends) Shares of PDK
Acquisition will be automatically converted into shares of Common Stock of PDK,
as the surviving corporation. At the
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time of the Merger, PDK Acquisition will be owned by the Management Group. At
the time the Merger is completed, Mr. Spinello will own approximately 85% of the
outstanding equity interests of PDK Acquisition, Karine Hollander will own
approximately 5% of the outstanding equity interest of PDK Acquisition and
Raveendra Nandigam will own approximately 10% of the outstanding equity
interests of PDK Acquisition.
For more information concerning the terms and provisions of the Merger
and Merger Agreement, see "Description of the Merger Agreement."
WHAT AM I BEING ASKED TO VOTE UPON?
You are being asked to approve the Merger and Merger Agreement, which
provides for the acquisition of PDK by the Management Group as indicated above.
PDK's Board and Special Committee (the "Special Committee") has approved the
Merger and Merger Agreement and the other transactions contemplated thereby and
recommends that you vote "FOR" approval of the Merger and the Merger Agreement.
WHY ARE CERTAIN OF THE MANAGEMENT
OF PDK ACQUIRING PDK?
The Management Group believes that due to PDK's small size and the lack
of equity research coverage for both PDK Common Stock and Preferred Stock, it is
and will continue to be difficult for PDK to attract new investor interest and
for PDK shareholders to get a fair price when selling their shares in the
market. In addition, trading volume in PDK stock has historically been low.
While the Management Group believes these factors do and would continue to limit
the ability of PDK shareholders, including them, to receive a fair price in
selling their shares in the market, the Management Group also believes that PDK
is a valuable company with the opportunity to increase its revenues and net
income in the future. The Management Group also believes that the expenses and
pressures of being a public company are significant for a company the size of
PDK and that eliminating those pressures and expenses would enhance PDK's
long-term success. The Management Group believes that the Merger offers PDK's
shareholders the opportunity to obtain a fair value for their shares, with the
final offer of $5.00 per share in cash, without interest, of PDK Common Stock
and $8.00 per share in cash (plus accrued and unpaid dividends), without
interest, of PDK Preferred Stock, representing a 38% and a 39% premium,
respectively to the closing price of PDK Common Stock and PDK Preferred Stock on
the date the Management Group made their first offer to buy the Company.
HAS THE BOARD OF DIRECTORS RECOMMENDED THE MERGER?
Yes. The Board and a special independent committee of the Board have
unanimously approved the Merger and Merger Agreement, with Reginald Spinello and
Karine Hollander abstaining. The Board voted unanimously to recommend that you
vote "FOR" approval of the Merger and the Merger
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Agreement, again with Reginald Spinello and Karine Hollander abstaining. See
"Special Factors - Recommendation of the Special Committee and the Board of
Directors."
WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE TO
APPROVE THE MERGER?
The Board and a special independent committee of the Board that
considered options available to the Company to increase shareholder value are
recommending the Merger because the Board and the Special Committee believe that
the Merger is a more desirable alternative for you than PDK's continuing to
operate as a public company. In reaching this conclusion, the Board and the
Special Committee considered, among other factors:
o the current illiquidity of PDK's capital stock and
the likelihood of that illiquidity continuing in the
future; and
o the opportunity, through the Merger, for the
Company's public shareholders to achieve immediate
liquidity with respect to the Company's capital stock
at a price that the Board and the Special Committee
believe is fair to the Company's public shareholders.
To review the background and reasons for the Merger and the factors
considered by the Special Committee and the Board in approving and recommending
the Merger in greater detail, see "Special Factors--Recommendation of the
Special Committee and the Board of Directors."
WHY WAS THE SPECIAL COMMITTEE FORMED AND WHO MAKES UP THAT
COMMITTEE?
The Board established the Special Committee, consisting of Mr. Ira
Helman one of the Board's independent directors, to consider the Management
Group's acquisition proposal as well as other available options and to review,
evaluate and negotiate the terms of the Merger Agreement. The Board formed the
Special Committee primarily because it recognized that a Merger transaction
would present a conflict of interest for certain members of the Board since the
members of the Board would be negotiating against themselves with the view
toward increasing the price the Management Group would pay to acquire PDK. In
addition, unlike PDK's shareholders generally, these members of the Board would
have a continuing interest in PDK following the proposed acquisition. The
Special Committee independently selected and retained legal and financial
advisors who had no prior relationship with PDK or the Management Group, to
assist it in its deliberations generally and in the negotiation of the Merger
Agreement, in particular. It received an opinion from its financial advisor,
JWGenesis Capital Markets, Inc. ("JWGenesis"), on which the Special Committee
and the Board relied, that as of the date of the Merger Agreement, the $5.00 per
share of Common Stock and $8.00 per share (plus accrued and unpaid dividends) of
Preferred Stock you will receive in the Merger is fair to you from a financial
point of view. For more information
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concerning the Special Committee, its activities and JWGenesis opinion, see
"Special Factors - Background of the Merger" and " - Opinion of PDK's Financial
Advisor."
HOW WAS THE AMOUNT OF THE MERGER CONSIDERATION DETERMINED?
The $5.00 per share of Common Stock and $8.00 per share of Preferred
Stock Merger consideration was determined as a result of negotiations between
the Special Committee and the Management Group. These negotiations resulted in
the Management Group acquisition price being increased by more than 25% and 14%
respectively, from the $4.00 per share of Common Stock and $7.00 per share of
Preferred Stock first offered by the Management Group. For further information
concerning the negotiation of the Merger consideration, see "Special Factors -
Background of the Merger."
WHAT WILL I RECEIVE IN THE MERGER?
As indicated above, you will be entitled to receive $5.00 in cash,
without interest, for each share of PDK's Common Stock and $8.00 in cash,
without interest, for each share of PDK's Preferred Stock that you own.
IF THE MERGER IS COMPLETED, WHEN CAN I EXPECT TO RECEIVE THE
MERGER CONSIDERATION FOR MY SHARES?
Promptly after the Merger is completed, we will send you detailed
instructions regarding the surrender of your stock certificates. You should not
send your stock certificates to PDK or anyone else until you receive these
instructions. We will arrange for payment of the Merger consideration to be sent
to you as promptly as practicable following our receipt of your stock
certificates and other required documents. For further information concerning
procedures for delivery of your shares and receipt of the Merger consideration,
see "The Special Meeting - Payment of Merger Consideration and Surrender of
Stock Certificates" and "The Merger - Conversion of Securities."
WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
If the Merger is approved by the shareholders we expect to complete the
Merger immediately following the Special Meeting.
WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
Under PDK's articles of incorporation and in accordance with the
Business Corporation Law of the State of New York, the affirmative vote of
holders of two-thirds (2/3) of the outstanding shares of PDK's Common Stock is
required to approve the Merger and the Merger Agreement. The Management Group
currently has the right to vote approximately 29% of the outstanding shares of
PDK Common Stock, and has a voting proxy to an additional 4% of the outstanding
shares of Common
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Stock, all of which shares they will vote in favor of the Merger Agreement.
Accordingly, if holders of an additional 774,172 shares of PDK Common Stock,
representing approximately 33% of the outstanding shares of PDK Common Stock,
also vote in favor of the Merger and the Merger Agreement, the Merger and the
Merger Agreement will be approved. See "The Special Meeting" and "Information
Regarding PDK - Stock Ownership."
WHO CAN VOTE ON THE MERGER?
All stockholders of record of PDK Common Stock as of the close of
business on ________ __, 2000, including the Management Group, will be entitled
to notice of, and to cast their votes at, the Special Meeting to approve or
disapprove the Merger and the Merger Agreement, as well as the other matters to
be presented for a vote of the shareholders at the meeting. Holders of shares of
PDK Preferred Stock are not permitted to vote.
WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
If you oppose the Merger you may vote against it at the Special
Meeting. You also have statutory appraisal rights for a court-ordered valuation
of your shares. Accordingly, if the Merger is approved by the shareholders and
is completed you may implement your statutory appraisal rights. See "The Special
Meeting - Rights of Objecting Shareholders."
DISADVANTAGES TO THE MERGER
If the Merger is consummated you will be precluded from having the
opportunity to participate in the future growth prospects of PDK. In addition,
the Management Group will have the opportunity to benefit from any increases in
the value of PDK following the Merger and therefore may receive a substantial
economic benefit from the transaction.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
The receipt of the Merger consideration by you will be a taxable
transaction for federal income tax purposes. To review the tax consequences to
you in greater detail, see "Federal Income Tax Consequences." Your tax
consequences will depend on your personal situation. You should consult your tax
advisors for a full understanding of the tax consequences of the Merger to you.
WHAT DO I NEED TO DO NOW?
This proxy statement contains important information regarding the
Merger as well as information about PDK, the Management Group and the company
they organized to complete the Merger. It also contains important information
about what the Board of directors and the Special Committee considered in
evaluating the Merger. We urge you to read this proxy statement carefully,
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including its annexes. You may also want to review the documents referenced
under the heading "Where You Can Find More Information."
HOW DO I CAST MY VOTE?
Just indicate on your proxy card how you want to vote, and sign, date
and mail it in the enclosed envelope as soon as possible. This is important so
that your shares will be counted at the Special Meeting. As indicated above,
approval of the Merger and the Merger Agreement requires the affirmative vote of
holders of two-thirds of the outstanding shares of PDK Common Stock.
Accordingly, a failure to vote or a vote to "ABSTAIN," as permitted on the proxy
card, will have the same effect as a vote "AGAINST" the Merger. The Special
Meeting will take place on _______, 2000 at _____ a.m., local time, at
______________. You may also attend the Special Meeting and vote your shares in
person, rather than voting by proxy.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
Your broker will vote your shares, with regard to the Merger proposal,
only if you provide instructions on how to vote. You should instruct your broker
how to vote your shares, following the directions your broker provides to you
for doing so. If you do not provide instructions to your broker, your shares
will not be voted and they will have the effect of votes "AGAINST" the Merger
and the Merger Agreement. We expect that your broker will generally vote your
shares "FOR" any other matters to be presented for shareholder approval at the
Special Meeting, unless you provide instructions to your broker to the contrary.
See "What Other Matters Will Be Voted On At the Special Meeting?" For further
information concerning procedures for dealing with your broker if your shares
are held in "street name," see "The Special Meeting - Required Vote; Voting
Procedures."
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. A shareholder giving a proxy has the power to revoke it at any
time before the vote is taken at the Special Meeting by:
submitting to the Secretary of PDK a signed, written instrument
revoking the proxy;
submitting a duly executed proxy bearing a later date; or
voting in person at the Special Meeting.
Any of these actions will have the automatic effect of revoking any prior proxy
card that you have sent in. See "The Special Meeting - Voting and Revocation of
Proxies."
WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
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Under New York law, only the specific matters included in a notice of
the meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a Special Meeting. The Company do not
expect to ask you to vote on any other matters at the Special Meeting. However,
if a motion is made to take some other action, including a procedural action
such as to adjourn the meeting, you may also be asked to vote on such action at
the Special Meeting. If you send your proxy card to the Board for use at the
Special Meeting and do not revoke that proxy by means indicated above, Reginald
Spinello and Karine Hollander will have authority to vote your shares in their
discretion with regard to any such other motion or action that may arise. See
"The Special Meeting - Other Matters to be Considered at the Special Meeting."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"). As a result, the Company
files reports, proxy statements and other information with the Commission. You
can review and copy these reports, proxy statements and other information at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington D.C. 20549 and at the following Regional
Offices of the Commission: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You can also obtain copies of these material at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza,
Washington, D.C. 20549. You can call the Commission's Public Reference Section
at (800) SEC-0330 to obtain information. You can also access copies of these
materials at the Commission's web site on the internet at http://www.sec.gov.
The Company will also send you copies of these documents on request and without
charge.
PDK, the Management Group and PDK Acquisition have jointly filed a
Schedule 13E-3 with the Commission with respect to the Merger. This proxy
statement does not contain all of the information contained in the Schedule
13E-3, some of which is omitted as permitted by the Commission's rules.
Statements made in this proxy statement, while complete in all material
respects, are qualified by reference to documents filed as exhibits to the
Schedule 13E-3. The Schedule 13E-3, including exhibits, is available for
inspection and copying at the Commission as described above.
FORWARD-LOOKING INFORMATION
The following cautionary statement identifies important factors that
could cause PDK's actual results to differ materially from those projected in
forward-looking statements included in this proxy statement, including
statements incorporated by reference into this proxy statement. Except for the
historical information, the matters discussed in this proxy statement may be
deemed forward-looking statements. Forward-looking statements are statements
that include projections, predictions, expectations or beliefs about future
events or results or otherwise are not statements of historical fact.
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Such statements are often characterized by the use of qualifying words (and
their derivatives) such as "expect," "believe," "plan," "project," or other
statements concerning our opinions or judgment about future events. 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.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would
like to ask any additional questions about the Merger, you should contact:
PDK Labs Inc.
Attention: Corporate Secretary
145 Ricefield Lane
Hauppauge, NY 11788
Telephone: (631) 273-2630
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THE SPECIAL MEETING
TIME, PLACE AND DATE; PROXY SOLICITATION
The Special Meeting will be held on _______ __, 2000 at 10:00 a.m.,
local time, at __________________. The Company will pay all expenses incurred in
connection with solicitation of the enclosed proxy. The Company's officers,
directors and regular employees may solicit proxies by telephone or personal
call, but they will receive no additional compensation for doing so. The Company
has requested brokers and nominees who hold stock in their names to furnish this
proxy material to their customers and to request authority for the execution of
the proxy. The Company will reimburse these brokers and nominees for their
related reasonable out-of-pocket expenses. In addition, the Company has engaged
_________ to solicit proxies from these institutions. The Company has agreed to
pay ___________, a fee of approximately $_______, plus expenses, for its
services.
RECORD DATE AND QUORUM REQUIREMENT
The PDK Common Stock is the only outstanding security of PDK entitled
to vote at the Special Meeting. The Board has fixed the close of business on
___________ ____, 2000 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Special Meeting, including at any
adjournment thereof. Each holder of record of PDK Common Stock at the close of
business on the record date is entitled to one vote for each share then held on
each matter submitted to a vote of shareholders. At the close of business on the
record date, 2,320,007 shares of PDK Common Stock were issued and outstanding,
excluding treasury shares held by the Company, held by 964 holders of record.
To conduct any business at the Special Meeting, holders of a majority
of the outstanding shares must be present in person or represented by proxy at
the beginning of the meeting. Proxies marked as abstentions are counted as
shareholders represented by proxy at the Special Meeting for purposes of this
quorum requirement.
REQUIRED VOTE; VOTING PROCEDURES
Approval of the Merger Agreement, which is attached as Appendix A
hereto, will require the affirmative vote of the holders of two-thirds (2/3) of
the outstanding shares of PDK Common Stock entitled to vote at the Special
Meeting. A FAILURE TO VOTE OR A VOTE TO ABSTAIN WILL HAVE THE SAME LEGAL EFFECT
AS A VOTE CAST AGAINST APPROVAL.
If you hold your shares through a broker, your broker will vote your
shares, with regard to the Merger proposal, only if you provide instructions on
how to vote. You should instruct your broker how to vote your shares, following
the directions your broker provides to you for doing so. If you do not provide
instructions to your broker, your shares will not be voted and they will have
the effect of votes "AGAINST" the Merger and the Merger Agreement. We expect
that your broker will generally vote
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your shares "FOR" any other matters to be presented for shareholder approval at
the Special Meeting, unless you provide instructions to your broker to the
contrary.
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before the vote is taken at the Special Meeting by:
submitting to the Secretary of PDK a written instrument
revoking the proxy;
submitting a duly executed proxy bearing a later date; or
voting in person at the Special Meeting.
Subject to revocation, all shares represented by each properly executed proxy
received by the Secretary of PDK will be voted in accordance with the
instructions indicated on the proxy, and if no instructions are indicated, will
be voted to approve the Merger and the Merger Agreement and on any other matter
considered at the meeting as the persons named on the enclosed proxy card in
their discretion decide.
The shares represented by the accompanying proxy card and entitled to
vote will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the Special Meeting.
EFFECTIVE TIME
The Merger will be effective following shareholder approval of the
Merger Agreement when articles of Merger are filed with the Secretary of State
of the State of New York. The time the Merger becomes effective is referred to
as the "Effective Time." If the Merger is approved by the shareholders at the
Special Meeting, we currently expect to complete the Merger and file articles of
Merger as soon as practicable after the Special Meeting, subject to the
satisfaction or waiver of the terms and conditions included in the Merger
Agreement. See "The Merger -- Conditions."
PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
If the Merger is completed, we will send you detailed instructions
regarding the surrender of your stock certificates. You should not send your
stock certificates to PDK or anyone else until you receive these instructions.
We will send payment of the Merger consideration to you as promptly as
practicable following our receipt of your stock certificates and other required
documents. For further information concerning procedures for delivery of your
shares and receipt of the Merger consideration, see "The Merger - Conversion of
Securities."
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RIGHTS OF OBJECTING SHAREHOLDERS
If you oppose the Merger you may vote against it at the Special
Meeting. Even if you vote against the Merger, if holders of two-thirds of the
outstanding shares of PDK's Common Stock vote to approve the Merger and Merger
Agreement, the Merger will be completed and your shares of PDK Common Stock will
be converted into the right to receive the $5.00 per share in cash without
interest, of PDK Common Stock and your shares of PDK Preferred stock will be
converted into the right to receive $8.00 per share in cash (plus accrued and
unpaid dividends) as the Merger consideration.
Because PDK is incorporated in New York, New York law governs its
internal affairs, as well as any rights you may have if you object to the
Merger. New York, like many states, generally provides a statutory remedy to
shareholders who object to a Merger. This remedy, commonly called "appraisal
rights," entitles shareholders who object to a Merger and who follow required
procedures to ask a court to determine the fair value of their shares and
requires payment of that amount instead of the Merger consideration.
The New York statute establishing appraisal rights provides that
appraisal rights are the exclusive remedy available to shareholders that have
those rights, except that those shareholders may challenge a Merger if the
Merger is unlawful or fraudulent.
Pursuant to Section 910 of New York Business Corporation Law, holders
of PDK Common Stock and Preferred Stock at the close of business on the record
date have the right to dissent from the Merger and, if the Merger Agreement is
approved and the Merger is consummated, receive payment of the fair value of
their PDK Common Stock and Preferred Stock by complying with the requirements of
Section 623 of New York Business Corporation Law (the full text of which is set
forth as Appendix B to this Proxy Statement). Section 623 requires that any such
shareholder who wishes to exercise such appraisal rights must not vote in favor
of the adoption of the Merger or the Merger Agreement, and must file with PDK,
before shareholders vote on the Merger or the Merger Agreement, a written
objection including a notice of election to dissent, his name and residence
address, the number of shares as to which he dissents (shareholders may not
dissent as to less than all of their shares) and a demand for payment for his
shares if the Merger is effected. Such objection is not required from any
shareholder to whom PDK did not give proper notice of the Special meeting.
Within 10 days after the vote of shareholders authorizing the Merger, PDK must
give written notice of such authorization to each dissenting shareholder who
filed written objection or from whom written objection was not required. Any
shareholder from whom written objection was not required and who elects to
dissent from the Merger must file with PDK, within 20 days after the giving of
such notice to him, a written notice of such election, stating his name and
residence address, the number of shares as to which he dissents and a demand for
payment of the fair value for his shares. At the time of filing the notice of
election to dissent or within one month thereafter, the shareholder must submit
the certificates representing his shares to PDK or its transfer agent for
notation thereon of the election to dissent, after which such certificates will
be returned to the shareholder. Failure to submit the certificates for such
notation may result in the loss of appraisal rights. Within 15 days after the
expiration of the period within which
11
shareholders may file their notices of election to dissent or within 15 days
after consummation of the Merger, whichever is later (but not later than 90 days
after the shareholders' vote authorizing the Merger Agreement), PDK must make a
written offer (which if the Merger has not been consummated, may be conditioned
upon such consummation) to each shareholder who has filed such notice of
election to pay for his shares at a specified price which PDK considers to be
their fair value. If PDK fails to make the offer within such 15-day period, or
if any dissenting shareholder fails to agree to it within 30 days after it is
made, PDK shall institute a judicial proceeding within 20 days after the
expiration of the applicable period to determine the rights of dissenting
shareholders and to fix the fair market value of their shares of PDK Common
Stock. If PDK fails to institute such proceeding, a dissenting shareholder may
institute the same. A negative vote on the Merger Agreement does not constitute
a "written objection" required to be filed by a dissenting shareholder.
The foregoing summary does not purport to be a complete statement of
the provisions of Section 623 of New York Business Corporation Law, and is
qualified in its entirety by reference to a copy of Section 623 of the New York
Business Corporation Law which is attached as Appendix B.
If you object to the Merger and wish to examine your rights further,
you should consult your legal counsel at your expense. Neither PDK, PDK
Acquisition, nor the Management Group has made any provision to reimburse you
for any of your legal expenses or for any expenses for any appraisal services
you may obtain in separately evaluating the Merger. Your right to examine PDK's
corporate records is described in "Information Regarding PDK - Incorporation of
Documents by Reference."
OTHER MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Under New York law, only the specific matters included in a notice of
the meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a Special Meeting. We do not expect to ask
you to vote on any other matters at the Special Meeting. However, if a motion is
made to take some other action, including a procedural action such as to adjourn
the meeting, you may also be asked to vote on such action at the Special
Meeting. If you send your proxy card to us for use at the Special Meeting and do
not revoke that proxy by the means indicated above, we will have authority to
vote your shares in our discretion with regard to any such other motion or
action that may arise.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
During the last calendar quarter of Fiscal 1999, Reginald Spinello,
PDK's Chairman of the Board, had one or more conversations with members of the
Company's management regarding whether PDK should remain a public company, due
to its small size, lack of growth, and the illiquidity of its shares. At a
meeting of the Board in 1999, Mr. Spinello informed the other directors of his
conversations. Mr. Spinello also indicated to the other directors that the end
of PDK's then current fiscal
12
year, November 30, 1999 would be an appropriate time to review PDK's
performance. If by that time, PDK's financial results, operating prospects and
share price had not improved, the Board would need to explore more vigorously
possible alternatives to enhance shareholder value. At this meeting Mr. Spinello
indicated to the directors that if the Board were to consider alternatives to
PDK remaining a public company he would like to explore the feasibility of
taking PDK private.
In January 2000, members of the Management Group reviewed PDK's
financial results and the Company's stock prices. At this time Mr. Spinello
decided to explore the possibility of putting together a group to take PDK
private.
On January 6, 2000, members of the Management Group met with
representatives of Foothill Financial ("Foothill") regarding receiving possible
financing in connection with taking the Company private. Foothill commenced a
due diligence review of PDK.
On February 7, 2000, members of the Management Group had initial
contact with representatives of CIT Financial Group ("CIT") regarding receiving
possible financing in connection with taking the Company private.
On April 7, 2000, at a Special Meeting of the Board called by Mr.
Spinello, Mr. Spinello again informed the Board of his desire to continue to
examine a possible acquisition of PDK and requested the Board to permit him to
provide possible financing sources with non-public information, including
projections.
On April 7, 2000, at a Special Meeting of the Board, Mr. Spinello
advised the Board that a group including Mr. Spinello and Ms. Hollander were
prepared to make an offer to purchase all of the outstanding equity securities
of PDK in a range of $4.50 to $5.00 per share of Common Stock and $6.00 to $8.00
per share of Preferred Stock (plus accrued and unpaid dividends). After
discussion of the actions that needed to be taken to review the offer from the
Management Group, the Board resolved to establish a Special Committee consisting
of director Ira Helman, who was the only disinterested director, to review,
analyze and make recommendations to the Board regarding the management offer.
The Board delegated to the Special Committee broad authority to consider any
proposal made by Mr. Spinello or any other person with respect to acquiring PDK,
to retain independent legal counsel and financial advisor, and to explore other
available strategic alternatives to maximize shareholder value. The Board formed
the Special Committee primarily because it believed that the exploration by the
management group of a possible acquisition of PDK would present conflicts of
interest for them as officers and directors of PDK since, unlike the other PDK
shareholders, they would have a continuing interest in PDK following the
completion of such a transaction. The Board selected Mr. Helman as the one
person Special Committee because he was not employed by PDK and would neither be
employed nor own an equity interest in PDK following the completion of any
transaction with the Management Group or any other likely acquiror. Immediately
following the Board meeting, Mr. Helman proceeded to retain independent legal
counsel and an independent financial advisor to assist the Special Committee in
its work.
13
Following the April 7, 2000, Board meeting, the Special Committee began
the process of retaining independent legal and financial advisors. On April 26,
2000 the Special Committee retained Bryan Cave LLP as its counsel. In addition,
the Special Committee and its counsel contacted and interviewed two investment
banking firms to discuss their interest in serving as financial advisor to the
Special Committee. One of the investment banking firms contacted, JWGenesis
Capital Markets, Inc., ("JW Genesis") had been referred to the Special Committee
by counsel to the Management Group. Prior to its selection by the Special
Committee, JWGenesis had, at the request of the Board, performed some due
diligence investigations of PDK and, during the course of such due diligence,
had discussions with management of PDK between April 19, 2000 and May 5, 2000.
Based upon discussions with representatives of JWGenesis, the Special Committee
determined that JWGenesis' prior work on the project would not preclude it from
continuing with the assignment and on May 22, 2000, the Special Committee
advised JWGenesis that it had been selected. On June 2, 2000, JWGenesis executed
an engagement letter with the Special Committee on behalf of PDK and commenced
work for the Special Committee on June 5, 2000.
In May, 2000, members of the Management Group had an initial meeting
with CIT and CIT commenced a due diligence review of PDK.
On May 9, 2000, members of the Management Group, met with
representatives of GE Capital Corp. ("GE Capital"). At the meeting,
representatives of GE Capital presented their ideas for possible transactions to
enhance shareholder value, including the possible acquisition by the management
of PDK. GE Capital also presented a preliminary assessment of the availability
of financing to fund an acquisition by management.
On June 8, 2000, Mr. Spinello met with representatives of GE Capital to
further discuss the feasibility of a potential acquisition by a management
group, including refining its preliminary assessment of the availability of
adequate financing to fund an acquisition. At that meeting, GE Capital provided
Mr. Spinello with its preliminary assessment of the availability of financing to
support an acquisition of PDK, describing possible financing structures that
would involve debt financing. Members of the Management Group subsequently met
with GE Capital on June 19, 2000. At a subsequent meeting on July 11, 2000 GE
Capital advised Mr. Spinello that, as a preliminary assessment, based on its
experience in arranging financing for other customers, financing would be
available to support an acquisition of PDK by the Management Group.
From early June 2000 through July 24, 2000, representatives of
JWGenesis gathered from various sources extensive information regarding PDK, its
products, operations, prospects, customers, competitors and other relevant
information. As part of this process JWGenesis representatives met several times
with Mr. Spinello and other PDK employees. Mr. Spinello also provided to
JWGenesis copies of what he stated were all of the other materials he had
provided to Foothill, CIT and GE Capital.
On June 20, 2000, JWGenesis presented to the Special Committee a list
of 47 companies identified by JWGenesis that it intended to contact regarding a
possible transaction with PDK and an
14
executive summary to be sent to such companies. The Special Committee approved
the contact list and executive summary and on June 22, 2000 JWGenesis began
contacting these companies regarding their interest in a transaction with PDK.
At about the same time, JWGenesis contacted the Management Group and invited
them to submit a formal offer. On June 27, 2000, JWGenesis advised the Special
Committee and its counsel that one of the companies contacted expressed an
interest in receiving additional information regarding PDK and a confidentiality
agreement was executed with this company. On June 28, 2000, JWGenesis informed
the Special Committee that such interested party would consider a transaction
only with the consent and assistance of management. On June 30, 2000, management
informed JWGenesis and the Special Committee that they were not interested in
continuing their employment with PDK if it was acquired by another bidder. On
July 7, 2000, JWGenesis presented to the Special Committee the preliminary
results of the marketing effort undertaken by JWGenesis and confirmed that out
of all of the companies contacted to that date, that there was only one
potentially interested party, but that such party would consider a transaction
only with the consent and assistance of management.
On July 13, 2000, Mr. Spinello presented to the Board a written offer
on behalf of a newly formed entity controlled by the Management Group to enter
into a Merger transaction with PDK the result of which is that each share of
Common Stock held by the public shareholders would be converted into the right
to receive $4.00 per share in cash and that each share of Preferred Stock held
by the public shareholders would be converted into the right to receive $7.00
per share in cash.
On July 13 2000, counsel to the Management Group distributed to the
Special Committee, PDK and their respective legal counsel a form of Merger
Agreement.
On July 17, 2000, the Special Committee met telephonically with its
legal advisor and its financial advisor. At that meeting, JWGenesis presented
its overview of its analysis of the Merger consideration and its valuation of
PDK and indicated that it would not be prepared to render an opinion that the
$4.00 per share consideration for Common Stock initially offered by the
Management Group was fair to the public shareholders from a financial point of
view.
On July 17, 2000, the Management Group delivered to the Special
Committee a letter increasing its proposed acquisition price to $8.00 per share
of PDK Preferred Stock. The closing price of PDK Common Stock and PDK Preferred
Stock on the Nasdaq Stock Market on July 17, 2000 was $3.625 and $5.75 per share
respectively.
On July 18, 2000, the Special Committee advised Mr. Spinello of its
analysis of the adequacy of the Merger consideration offered by the Management
Group and that JWGenesis was not prepared to render an opinion that the per
share consideration offered was fair to the public shareholders from a financial
point of view.
On July 18, 2000, the Management Group increased its proposed
acquisition price to $4.25 per share of PDK Common Stock.
15
On July 19, 2000, the Management Group increased its proposed
acquisition price to $4.50 per share of PDK Common and later in the day to $4.75
per share of PDK Common Stock.
On July 19, 2000, Mr. Helman told Mr. Spinello that he would recommend
the Management Group's proposal to the Board if they increased their price to
$5.00 per share of PDK Common Stock and $8.00 per share of PDK Preferred Stock.
The Management Group agreed to increase its offer to $5.00 per share of PDK
Common Stock and $8.00 per share of PDK Preferred Stock. The Special Committee
requested that JWGenesis render to the Special Committee and the Board an
opinion as to the fairness of the Management Group's offer.
On July 19, 2000, the Special Committee considered the revised offer
with its financial advisor and concluded that the revised offer was fair to the
public shareholders.
On July 19, 2000, PDK issued a press release announcing its receipt of
the Management Group's acquisition proposal and indicating that the Special
Committee had been formed to consider the proposal as well as other strategic
alternatives to maximize shareholder value. The press release also noted that
the Special Committee had retained JWGenesis as its financial adviser.
At a meeting of the Board held on July 26, 2000, JWGenesis presented
its oral opinion that the proposed Merger consideration of $5.00 per share in
cash for each share of Common Stock held by the public shareholders and $8.00
per share plus accrued dividends in cash for each share of Preferred Stock held
by the public shareholders was fair from a financial point of view. The Special
Committee reported to the Board that it had concluded, and so advised and
recommended to the Board, that the terms of the Merger be approved and that the
Board declare its advisability.
At a meeting of the Board on August 3, 2000, the Board determined that
the terms of the Merger Agreement were fair to and in the best interests of PDK
and the public shareholders. The Merger Agreement was executed, on August 3,
2000.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
As discussed above under " - Background of the Merger," the Special
Committee and the Board of directors (other than Mr. Spinello and Ms. Hollander,
who abstained) unanimously determined that the Merger Agreement and the Merger
are fair to and in the best interests of the public shareholders. The Special
Committee and the Board recommend that you vote "FOR" the approval of the Merger
Agreement and the Merger.
In reaching the determination that the Merger Agreement and the Merger
are fair to and in the best interests of the public shareholders, the Special
Committee and the Board consulted with their financial and legal advisors, drew
on their knowledge of the Company's business, operations, properties, assets,
financial condition, operating results, historical public share trading prices
and prospects and
16
considered the following factors, each of which, in the opinion of the Special
Committee and the Board, supported the determination:
o the belief of the Special Committee and the Board
that the Merger was a better alternative for the
public shareholders than continuing to operate PDK as
a public company. The Special Committee concluded
that, based on PDK's limited trading volume,
institutional sponsorship and public float, its small
market capitalization, and the lack of research
attention that it received from market analysts,
PDK's continuing status as a public company would
limit the ability of PDK's shareholders to obtain a
fair price in selling their shares in the market. See
"- Background of the Merger" and "Projections."
o the fact that the $5.00 per share of Common Stock and
$8.00 per share (plus accrued and unpaid dividends)
of Preferred Stock Merger consideration represented a
significant premium to recent historical trading
prices of the PDK Common Stock. The Special Committee
and the Board recognized that the Merger
consideration represented a 38% premium and a 39%
premium to the closing price of PDK Common Stock and
Preferred Stock respectively on the day of the
Management Group's initial offer. See "Information
Regarding PDK - Market Prices of Common Stock and
Preferred Stock and Preferred Stock and Dividends."
o the financial advisor's opinion to the Special
Committee and the Board to the effect that the Merger
consideration is fair to PDK's shareholders from a
financial point of view. JWGenesis analyzed the going
concern value of PDK, discounted cash flow, leveraged
buyout, liquidation and premiums paid analyses.
JWGenesis also analyzed the repurchase of a block of
500,000 shares of the Company's Common Stock from a
sophisticated institutional investor which occurred
on September 30, 1999. The Special Committee noted
that a number of the per share value calculations
resulting from JWGenesis' analyses were in excess of
the Merger consideration; however, they concluded
that these methodologies were not the best indicators
of fair value for PDK. The Special Committee
considered it significant that JWGenesis'
calculations assumed that we would be operated by a
management team with the perceived ability to achieve
the financial results in the Management Group
projections. Given our management's unwillingness to
remain with PDK if it were purchased by another
party, the Special Committee considered the leveraged
buyout analysis to be the most relevant methodology.
The Special
17
Committee noted that the Merger consideration was
near the high end of the range of values calculated
by JWGenesis using the leveraged buyout method. See "
- Opinion of PDK's Financial Advisor."
o the negotiations between the Special Committee and
the Management Group, which resulted in their offer
price for PDK Common Stock and PDK Preferred Stock
being increased by more than 25% and 14%
respectively. The Special Committee and the Board
considered the fact that these negotiations were
conducted over a period of during which time the
Special Committee received and rejected proposals or
inquiries from the Management Group at $4.00, $4.25,
$4.50 and $4.75 per share of PDK Common Stock and
$7.00 per share of PDK Preferred Stock. At the time
the Merger Agreement was executed, the Special
Committee and the Board believed that the $5.00 per
share of PDK Common Stock and $8.00 per share (plus
accrued and unpaid dividends) of PDK Preferred Stock
Merger consideration was the highest price the
Management Group could or would be likely to offer.
See " - Background of the Merger."
o the requirement that the Merger be approved by the
holders of two-thirds (2/3) of the outstanding shares
of PDK Common Stock, which allows for an informed
vote by the public shareholders on the merits of the
transaction without requiring a tender of shares or
other potentially coercive transaction structure, and
which implicitly requires (because the Management
Group owns approximately 33% of the outstanding
shares) that, for the Merger to be approved, holders
of 33% of the outstanding shares, in addition to the
Management Group, must vote to approve the
transaction. See "The Merger - Conditions."
In concluding that the Merger is fair to and in the best interests of
the public shareholders, the Special Committee and the Board also considered the
following factors, each of which the Special Committee and the Board considered
to be a negative factor:
o the fact that consummation of the Merger would
preclude the public shareholders from having the
opportunity to participate in the future growth
prospects of PDK. In addition, the Special Committee
and the Board recognized that the Management Group
will have the opportunity to benefit from any
increases in the value of PDK following the Merger as
a result of their increased equity interest in PDK
and therefore may receive a substantial economic
benefit from
18
the transaction. See "-Purpose and Reasons of the
Management Group for the Merger" and "Effects of the
Merger."
o the potential conflicts of interest of the Management
Group resulting from the foregoing benefits that may
be realized by them. In addition, the Special
Committee and the Board considered the potential
conflicts of interest of Lawrence Simon and Thomas
Keith resulting from their positions with unrelated
companies that are significantly reliant on PDK. See
"Directors and Executive Officers". The Special
Committee and the Board believe, however, that the
procedures followed in the process of considering the
Management Group offer, and negotiating the terms of
the Merger Agreement addressed these conflicts and
were fair to the public shareholders. See " -
Background of the Merger" and " - Conflicts of
Interest."
The foregoing discussion of the information and factors considered by
the Special Committee and the Board is not meant to be exhaustive, but includes
all material factors considered by the Special Committee and the Board as part
of the determination that the Merger and the Merger Agreement are fair to, and
in the best interests of, PDK and the public shareholders and the recommendation
that the shareholders approve the Merger and the Merger Agreement. While each of
the Board and the Special Committee adopted the analysis and conclusions of
JWGenesis as described in "Opinion of PDK's Financial Advisor," they also
considered all of the factors listed above in making the determination that the
Merger and the Merger Agreement are fair to, and in the best interests of, PDK
and the public shareholders. Based on the factors described above, including the
appointment of the Special Committee, its engagement of JWGenesis and separate
legal counsel to negotiate on its behalf, and the Management Group's
unwillingness to continue their employment if PDK was sold to another bidder,
the Board and the Special Committee also believe that the Merger is procedurally
fair to the public shareholders. The Special Committee and the Board did not
assign relative weights or quantifiable values to those positive and negative
factors. Rather, both the Special Committee and the Board of directors viewed
its position and recommendations as being based on the totality of the
information presented to and considered by it. However, in the opinion of the
Special Committee and the Board of directors, the positive factors set forth
above outweighed the negative factors set forth above.
OPINION OF PDK'S FINANCIAL ADVISOR
The Special Committee retained JWGenesis to act as its financial
advisor and, as requested by the Special Committee, to (i) assist in identifying
and analyzing PDK's strategic alternatives, and (ii) review and analyze any
proposals for any sale or business combination of PDK, including any proposal
from the Management Group. In its engagement letter, JWGenesis also agreed that,
if requested by the Special Committee, it would render an opinion as to the
fairness of such a transaction, from a financial point of view, to PDK's public
shareholders. Prior to being engaged as the financial advisor to the Special
Committee, JWGenesis had no prior professional relationship with PDK.
19
At the request of the Special Committee, on July 21, 2000 JWGenesis
rendered its oral opinion to the Special Committee and the Board to the effect
that, as of that date and subject to the assumptions made, matters considered
and limits of the review undertaken by JWGenesis described in its opinion, the
Merger consideration to be received by PDK's common and preferred stockholders
pursuant to the Merger was fair from a financial point of view to such
stockholders. JWGenesis subsequently confirmed this opinion in writing by letter
dated August 3, 2000.
The full text of JWGenesis' written opinion is attached as Appendix C
to this proxy statement. We refer you to JWGenesis' opinion, and you should
consider it as a part of this proxy statement since we are incorporating it by
this reference. The following description of JWGenesis' opinion is only a
summary of it, and you should read the full opinion for a complete understanding
of the opinion's assumptions, considerations and limitations.
You should be aware that the JWGenesis opinion only advises the Special
Committee and the Board concerning the fairness from a financial point of view
of the Merger consideration. The opinion does not address the merits of the
Board's decision to approve the Merger. The opinion is not a recommendation to
you that you vote for or against the Merger or that you take any other action
regarding the Merger.
In preparing its opinion, JWGenesis, among other things:
a) reviewed the financial terms of the Agreement;
b) reviewed and analyzed certain business and financial information with
respect to PDK, including financial forecasts, prepared by the Company (the
Special Committee has advised us that it has no reason to believe that
management has changed its position with respect to such information;
additionally, management has advised us that it has not changed its position
with respect to such information);
c) held discussions with certain members of the management of the Company
concerning its business, operations and prospects and visited the Company's
facility;
d) reviewed the Company's Annual Reports on Forms 10-K for the four fiscal
years ended November 30, 1999 and the Company's Quarterly Report on Form 10-Q
for the period ended May 31, 2000;
e) reviewed the price and public trading history of the Company's common
stock and preferred stock; and
20
f) reviewed certain publicly available information provided to us by the
Company regarding the industry in which the Company competes.
JWGenesis did not independently verify any of the information it
obtained for purposes of its opinion. Instead, JWGenesis assumed the accuracy
and completeness of all such information. JWGenesis relied upon the Company's
management's assurances that information concerning the Company's prospects
reflected the best currently available judgments and estimates of management as
to the Company's likely future financial performance. As to all legal matters,
JWGenesis relied on the advice of counsel to the Special Committee and has
assumed that the Merger will be consummated in accordance with the terms of the
Merger Agreement. JWGenesis did not make an independent inspection, evaluation
or appraisal of the assets or liabilities of PDK, nor did anyone furnish
JWGenesis' with any such evaluation or appraisal. The JWGenesis opinion is based
on market, economic, and other conditions as they existed and could be evaluated
at the time the opinion was given.
No limitations were imposed by PDK, the Special Committee or the Board
on the scope of JWGenesis' investigation or the procedures JWGenesis followed in
rendering its opinion.
In addressing the fairness, from a financial point of view, of the
Merger consideration to be received by the unaffiliated shareholders of PDK,
JWGenesis employed a variety of generally recognized valuation methodologies and
performed those which it believed were most appropriate for developing its
opinion. The preparation of a fairness opinion involves various determinations
of the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore such an
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, JWGenesis did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
about the significance and relevance of each analysis and factor. Such analysis
resulted in the calculation of ranges of implied per share values for PDK Common
Stock and Preferred Stock, including implied values that were greater than the
Merger consideration, but JWGenesis did not consider that any particular implied
value, whether less than or greater than the Merger consideration, was
determinative of fairness.
JWGenesis believes that its analyses must be considered as a whole and
that selecting portions of its analyses, without considering all factors and
analyses, would create an incomplete view of the process underlying its opinion.
In performing its analyses, JWGenesis made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of PDK. The analyses
performed by JWGenesis do not purport to be an appraisal and are not necessarily
indicative of actual values, trading values or actual future results that might
be achieved, all of which may be significantly more or less favorable than
suggested by JWGenesis' analyses.
In connection with its analyses, JWGenesis utilized estimates and
forecasts of our future operating results contained in or derived from the
Management Group's projections. Analyses based on
21
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than the forecasts.
The analyses are inherently subject to uncertainty, being based on numerous
factors or events beyond the control of PDK. Therefore, future results or actual
values may be materially different from these forecasts or assumptions. The
JWGenesis opinion was one of many factors taken into consideration by the
Special Committee and the Board in making their determination to approve the
Merger Agreement. Consequently, the analyses described below should not be
viewed as determinative of the opinion of either the Special Committee or the
Board with respect to the value of PDK or whether the Special Committee or the
Board would have been willing to agree to different terms for the Merger.
The following is a brief summary of the material analyses performed by
JWGenesis in connection with rendering the JWGenesis opinion to the Special
Committee and the Board. For purposes of the financial analyses from which these
per share values are derived, JWGenesis assumed that we would be operated by a
management team with the perceived ability to achieve the financial results of
the projections. The following analyses reflect substantially the same
methodologies used by JWGenesis in its preliminary oral presentation to the
Special Committee on July 26, 2000, and updated and confirmed in written form to
reflect financial information and market data that was available as of and on
August 3, 2000:
For its evaluations, JWGenesis calculated a range of values for PDK
using five approaches: (i) a discounted cash flow analysis; (ii) a leveraged
buyout analysis; (iii) a liquidation analysis; (iv) a premiums paid analysis and
(v) an analysis of the Company's recent repurchase of a large block of its
Common Stock from an institutional investor. In certain cases, investment banks
sometimes utilize two other analyses, a market multiples analysis, based upon
comparable publicly-traded companies, and an acquisition multiples analysis,
based upon acquisitions of comparable companies during recent years. JWGenesis
determined that these two other analyses were not feasible in this circumstance,
because JWGenesis was unable to identify any other publicly-traded company (or
any company acquired during the past three years) that is subject to the high
level of risk associated with the relative near-term possibility that the
federal government could interrupt or end the company's main business functions.
In the discounted cash flow analysis, JWGenesis analyzed cash flows
derived from projections for PDK that were developed by the Company's management
team and reviewed by JWGenesis. In making this analysis, JWGenesis adjusted
these cash flow projections by lowering management's projected operating costs
by amounts equal to estimated cost savings JWGenesis believe could be achieved
as a private company. JWGenesis discounted the cash flows using a range of
discount rates based upon its estimation of an investor's expected rate of
return for a risk capital investment in the Company. JWGenesis developed the
range of discount rates by establishing a midpoint rate of return of 40%, which
was lower than all of the rates of return stated by the 24 financial acquirers
with whom JWGenesis discussed the transaction, and then establishing the high-
and low-points of the range as 500 basis points higher and lower, respectively
than the mid-point. JWGenesis believed this method results in a lower discount
rate than would be applied by an independent leverage buyout firm and thus would
result in a higher valuation for the shares.
22
In the last year of the analysis, JWGenesis derived a hypothetical
terminal value for the business on an unleveraged basis by applying a range of
exit multiples. The exit multiples are based on the average EBITDA multiples
paid in 28 acquisitions of manufacturing and distribution companies during the
12 months ended June 23, 2000 with transaction values less than or equal to $100
million, as calculated by Portfolio Management Data and reported in The Daily
Deal on June 28, 2000. JWGenesis developed the range by increasing and
decreasing the calculated median EBITDA multiple by 1.0 multiple allowing
JWGenesis to calculate a range of prices which an acquirer could pay for the
common stock.
In the leveraged buyout analysis, JWGenesis estimated the amount a
financial buyer would expect to pay for PDK, assuming the maximum amount of debt
and equity financing to the extent equity investment returns of 35% to 45% can
be obtained. JWGenesis' analysis was based on operating projections and general
assumptions developed by the Company's management and reviewed by JWGenesis. In
making this analysis, JWGenesis adjusted the Company's projections by lowering
management's projected operating costs by amounts equal to estimated cost
savings JWGenesis believe could be achieved as a private company. JWGenesis
developed the range of discount rates by establishing a midpoint rate of return
of 40%, which was lower than all of the rates of return stated by the 24
financial acquirers with whom JWGenesis discussed the transaction, and then
establishing the high- and low-points of the range as 500 basis points higher
and lower, respectively than the mid-point. JWGenesis believed this method
results in a lower discount rate than would be applied by an independent
leverage buyout firm and thus would result in a higher valuation for the shares.
In the analysis, the amount of equity assumed invested was limited to
amounts which would return 35% to 45% on equity annually after granting an
assumed 10.0% equity position to management. The sum of the debt and equity,
less estimated fees to consummate such a transaction, provides an implied price
which an acquirer could pay for all of the common and preferred stock of the
Company.
In the liquidation analysis, JWGenesis estimated the proceeds from an
orderly liquidation, given the stated value of the Company's assets and
liabilities at May 31, 2000. JWGenesis assumed that a liquidator could raise
100% of the stated value of the Company's cash and securities, 75% of accounts
receivable and equipment and vehicles and 50% of inventory, prepaid expenses,
amounts due from suppliers and other assets. In making this analysis, JWGenesis
did not write-off the inventories of List 1 Chemicals and products derived from
List 1 Chemicals, even though these inventory items could be subject to
impairment as a result of action by the federal government. JWGenesis also
assumed the claims against the estate, consisting of accounts payable, dividends
payable on the Company's preferred stock, bank debt and the minority interest
would be paid in full. Assuming a $7.00 liquidation payment to the holders of
the Company's preferred stock (the contractual liquidation preference) yields
the value attributable to the common stock. In this analysis, cash available to
the Preferred and Common Stockholders was approximately 4.7 times the cash
required to pay the contractual liquidation preference on the Preferred Stock..
23
The premiums paid analysis compares the market price of a company's
common stock prior to the announcement of a transaction with the price after the
announcement. Based on an efficient market theory, the pre-announcement price
reflects the market's perception about the value of a company as a going
concern, while the proposed acquisition price reflects the value of the
consideration being offered by the other party to the transaction. Because of
day-to-day market fluctuations, particularly for a small capitalization stock,
and transaction information leaks, in addition to analyzing the closing price of
PDK's common stock immediately before the announcement, JWGenesis also analyzed
the stock's closing price one week before the announcement of the transaction.
This allowed JWGenesis to calculate a range of prices for the Company's common
stock.
In its fifth analysis, JWGenesis reviewed the Company's recent
repurchase of its common stock from a sophisticated institutional investor.
Heartland Advisors, Inc. ("Heartland"), based in Milwaukee, Wisconsin, was
formed in 1982 and manages more than $2.4 billion (as of June 30, 2000) for
institutions, individual clients and investor accounts. On September 30, 1999,
the Company repurchased 380,000 shares of its common stock from the Heartland
Value Fund (the "Fund") and 100,000 shares of its common stock from William J.
Nasgovitzat, Heartland's founder and president, at $5.00 per share.
In its analysis of PDK's repurchase of common shares from Heartland
Advisors, JWGenesis compared PDK's operating performance during the 12 months
ended September 30, 1999 (the last 12 months of operations prior to Heartland
selling their common stock to the Company) with the operating performance of the
Company during the 12 months ended May 31, 2000. JWGenesis compared certain
measures of operating performance such as sales, gross profit, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), earnings before
interest and taxes ("EBIT"), pretax income and net income in each period to
determine if the Company's performance had improved, remained largely unchanged
or declined since Heartland negotiated the value at which the Company
repurchased its shares. JWGenesis calculated the percentage decrease or increase
for each measure of operating performance and the median and mean of the changes
of all of the measures of operating performance. JWGenesis then multiplied the
resultant median change by the price at which Heartland sold its shares, the
product of which JWGenesis used as a proxy current value.
Because the liquidation analysis demonstrated cash available to the
preferred and common stockholders of about 4.7 times the cash required to pay
the liquidation preference on the preferred stock, JWGenesis determined that it
could not render an opinion of fairness on the preferred at a price less than
the preferred holders are contractually entitled to in a winding down of the
Company. To calculated its ranges of fairness for the Consideration on a per
share basis, JWGenesis assumed and $8.00 price for the preferred stock in each
of its analyses except the liquidation analysis (since the contractual
liquidation preference on the preferred stock is $7.00 per preferred share).
JWGenesis' median valuation for PDK's equity and its common stock resultant from
all of the valuation ranges of all of the analyses was $14,468,802 and $4.67,
respectively. The $1.00 premium which is being offered for the preferred stock
results in $460,566 being paid to the holders of the preferred stock that, in
its
24
absence, would have been paid to the common shareholders. This amount is equal
to less than $0.20 per common share.
JWGenesis did not ascribe different weightings to each analysis because
in every analysis except the leveraged buyout analysis described above, the
consideration exceeded the median values for PDK's equity JWGenesis calculated.
In that case, the median value exceeded the consideration by $70,139 or less
than 0.5% of the consideration. On a per share basis, the consideration offered
for the Company's common stock exceeds the median values for PDK's common stock
JWGenesis calculated in all of the analyses herein, except the leveraged buyout
analysis and the liquidation analysis. In those cases, the median values
exceeded the per share consideration by $0.03 and $0.10, respectively, or less
than 2.0% of the per share consideration.
As previously stated, the $1.00 premium which is being offered for the
preferred stock results in $460,566 being paid to the holders of the preferred
stock that, in its absence, would have added $0.20 per share to the
Consideration being offered to the common shareholders. Adding the $0.20 to
JWGenesis' median valuation of $4.67 is less than the Consideration being
offered by the PDK Acquisition.
Pursuant to its engagement letter with JWGenesis dated June 2, 2000,
the Special Committee of PDK agreed to pay to JWGenesis an aggregate fee of
approximately $150,000 for its services in connection with the Merger, all of
which has been paid. The engagement letter also provides that PDK will reimburse
JWGenesis for its reasonable travel, legal and other out-of-pocket expenses
incurred in connection with JWGenesis' role thereunder and will indemnify
JWGenesis and its affiliates from and against certain liabilities. These
liabilities include liabilities under the federal securities laws in connection
with the engagement of JWGenesis by the Special Committee.
The Special Committee retained JWGenesis on the basis of its experience
with Mergers and acquisitions, financings and advising Boards of directors and
shareholders regarding strategic alternatives. JWGenesis is regularly engaged in
the valuation of businesses and their securities in connection with Mergers,
acquisitions and private placements of securities
CONFLICTS OF INTEREST
In considering the recommendations of the Special Committee and the
Board with respect to the Merger, shareholders should be aware that the
Management Group, which consists of two members of the Company's Board, will own
100% of the outstanding equity of PDK upon completion of the Merger. The Special
Committee and the Board were aware of this conflict of interest and considered
it among other factors described under " - The Recommendation of the Special
Committee and the Board of Directors."
The Merger Agreement requires that PDK provide indemnification to its
current and former directors and officers against liabilities (including
reasonable attorneys' fees) relating to actions or
25
omissions arising out of their being a director, officer, employee or agent of
PDK at or prior to the time the Merger is completed (including the transactions
contemplated by the Merger Agreement). In addition, PDK is obligated for a
period of six years from the time the Merger is completed to continue in effect
directors' and officers' liability insurance with respect to matters occurring
prior to the time the Merger is completed, which insurance must contain terms
and conditions no less advantageous than are contained in PDK's current
directors' and officers' liability insurance policy. If, however, PDK's premiums
for this insurance increase, PDK is not obligated to expend annually more than
300% of the current cost of this coverage, during the three years after the
merger is completed and more than 200% of the current cost of this coverage
during the following three years.
Mr. Helman received fees totaling $20,000 for his service on the
Special Committee.
PURPOSE AND REASONS OF MANAGEMENT GROUP FOR THE MERGER
The Management Group's purpose for engaging in the transactions
contemplated by the Merger Agreement is to acquire ownership of PDK as a
privately held company. They believe that due to PDK's small size and the lack
of equity research coverage for PDK stock (a factor they believe is in large
measure beyond PDK's control), it is and will continue to be difficult for PDK
to attract new investor interest and for PDK shareholders to get a fair price
when selling their shares in the market. In addition, trading volume in PDK
stock has historically been low. While they believe these factors do and would
continue to limit the ability of PDK shareholders, including them, to receive a
fair price in selling their shares in the market, they also believe that PDK is
a valuable company with the opportunity to increase its revenues and net income
in the future. The Management Group also believes that the expenses and
regulatory compliance requirements of being a public company are significant for
a company the size of PDK and that eliminating those regulatory compliance
requirement expenses would enhance PDK's long-term success. They believe that
the Merger offers PDK's public shareholders the opportunity to obtain a fair
value for their shares, respectively, with their final offer of $5.00 per share
of Common Stock and $8.00 per share of Preferred Stock representing a 38% and
39% premium to the closing price of PDK Common Stock and PDK Preferred Stock on
the date they made their first offer to buy PDK.
The Management Group owns 672,500 shares of PDK Common Stock.
Immediately prior to completion of the Merger, the Management Group intends to
contribute their 672,500 shares of PDK Common Stock to PDK Acquisition. This
represents an indirect investment by the Management Group of approximately
$3,362,500 in PDK Acquisition (based on the $5.00 per share to be received by
other shareholders in the Merger). If the Merger and financing are completed,
the Management Group will own 100% of PDK's outstanding equity interests.
POSITIONS OF THE MANAGEMENT GROUP AND PDK ACQUISITION AS TO FAIRNESS OF THE
MERGER
26
The Management Group has considered the analyses and findings of the
Special Committee and the Board (described in detail in "Special Factors --
Recommendation of the Board of Directors and the Special Committee") with
respect to the fairness of the Merger to PDK's public shareholders. As of the
date of this proxy statement, they adopt the analyses and findings of the
Special Committee and the Board with respect to the fairness of the Merger and
believe that the Merger is both procedurally and substantively fair to PDK's
public shareholders. In addition, the Management Group intends to vote the
shares of PDK Common Stock or which it has the right to vote, in favor of the
Merger and Merger Agreement. In adopting the analysis and findings of the
Special Committee and the Board, the Management Group notes that the ability of
PDK to effect the alternative transactions considered by the Special Committee
was affected by management's decision not to agree to continue to work for PDK
if it was acquired by another bidder.
As members of the Board, Mr. Spinello and Ms. Hollander abstained in
voting on approval of the Merger Agreement and the recommendation to the
shareholders that they vote to approve the Merger, but expressed their support
for both actions.
PDK Acquisition believes that the Merger is both procedurally and
substantively fair to PDK's public shareholders and adopted the analysis of the
Management Group.
CONDUCT OF PDK'S BUSINESS AFTER THE MERGER
The Management Group is continuing to evaluate PDK's business, assets,
practices, operations, properties, corporate structure, capitalization,
management and personnel and discuss what changes, if any, will be desirable.
Subject to the foregoing, the Management Group expects that the day-to-day
business and operations of PDK will be conducted substantially as they currently
are being conducted by PDK. The Management Group does not currently intend to
dispose of any assets of PDK, other than in the ordinary course of business.
Additionally, it does not currently contemplate any material change in the
composition of PDK's current management.
EFFECTS OF THE MERGER
As a result of the Merger, the public shareholders of PDK will be
entitled to receive $5.00 per share in cash, without interest, of PDK Common
Stock and $8.00 per share in cash (plus accrued and unpaid dividends) of PDK
Preferred Stock. This represents a 38% and 39% premium, respectively, over the
closing price per share of PDK Common Stock and PDK Preferred Stock on the day
the Management Group made its first offer to acquire PDK. As a detrimental
consequence of the Merger, public shareholders will no longer have an
opportunity to continue their equity interest in PDK as an ongoing corporation
and therefore will not share in the future earnings and potential growth of PDK.
Upon completion of the Merger, PDK Common Stock and PDK Preferred Stock will no
longer be traded on the NASDAQ Smallcap Stock Market, price quotations will no
longer be available and the registration of PDK Common Stock under the Exchange
Act will be terminated. The termination of registration of the Common Stock and
PDK Preferred Stock under the Exchange Act will eliminate the requirement to
27
provide information to the Securities and Exchange Commission and will make most
of the provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b) and the requirement of furnishing a proxy or
information statement in connection with shareholders' meetings, no longer
applicable. The cost savings to PDK as a result of the termination of its
obligation to prepare public company reports is estimated to be $400,000 to
$500,000 per year.
It is anticipated that the Management Group will own 100% of the equity
interests in PDK as the surviving corporation of the Merger. An investment in
PDK following the Merger involves substantial risk resulting from the limited
liquidity of any such investment and the substantially increased leverage
associated with funding the Merger. Nonetheless, if PDK is able to successfully
implement its business strategy, the Management Group believes the value of its
investment will be considerably greater than the value it would be investing at
the time of the Merger. See "Forward-Looking Information."
The receipt of cash pursuant to the Merger will be a taxable
transaction. See "Federal Income Tax Consequences."
FINANCING OF THE MERGER
The Merger Agreement contains a condition to the obligations of PDK
Acquisition and the Management Group that PDK Acquisition shall have obtained
financing of at least $10 million. At this time PDK Acquisition has not obtained
a commitment for such financing.
THE MERGER
The Merger Agreement provides that, subject to conditions listed in the
Merger Agreement, PDK Acquisition, a newly-formed New York corporation, will
merge with and into PDK, and that following the Merger, the separate existence
of PDK Acquisition will cease and PDK will continue as the surviving
corporation.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this proxy statement and is
incorporated therein by reference. The discussion in this proxy statement of the
Merger and the summary description of the principal terms of the Merger
Agreement, while complete in all material respects, are subject to and qualified
in their entirety by reference to the Merger Agreement.
COMBINATION OF CORPORATIONS
28
The name of the surviving corporation after the completion of the
Merger will continue to be "PDK Labs Inc.". In addition, upon completion of the
Merger, the separate corporate existence of PDK Acquisition will cease and PDK
will be the surviving corporation of the Merger, with all assets and liabilities
of PDK and PDK Acquisition that existed immediately prior to the Merger.
The articles of incorporation of PDK will be amended and restated to
conform to the articles of incorporation of PDK Acquisition as in effect
immediately prior to the Effective Time. These articles of incorporation will be
changed, however, to provide that the number of authorized shares of Common
Stock of the surviving corporation will be 100.
The bylaws of PDK Acquisition, as in effect immediately prior to the
Effective Time, will be the bylaws of the surviving corporation until amended in
accordance with applicable law, the articles of incorporation of the surviving
corporation and its initial bylaws.
The directors of PDK Acquisition, immediately prior to the Effective
Time will be the initial directors of the surviving corporation, and Messrs.
Helman, Keith and Simon will cease to be directors of PDK.
CONVERSION OF SECURITIES
At the Effective Time, subject to the terms, conditions and procedures
included in the Merger Agreement, each share of PDK Common Stock and PDK
Preferred Stock issued and outstanding immediately prior to the Effective Time
(other than shares held by PDK Acquisition) will, by virtue of the Merger, be
converted into the right to receive an amount equal to $5.00 and $8.00
respectively in cash (plus accrued and unpaid dividends). Except for the right
to receive this per share cash Merger consideration, from and after the
Effective Time, all shares (other than shares held by PDK Acquisition), by
virtue of the Merger and without any action on the part of any holder of PDK
Common Stock or PDK Preferred Stock, will no longer be outstanding and will be
canceled and retired and will cease to exist. Each holder of a certificate
formerly representing shares of PDK Common Stock (other than shares held by PDK
Acquisition) and PDK Preferred Stock will, after the Effective Time, cease to
have any rights with respect to the shares of PDK Common Stock and PDK Preferred
Stock represented by the certificate other than the right to receive the $5.00
per share of PDK Common Stock and $8.00 per share (plus accrued and unpaid
dividends) of PDK Preferred Stock cash Merger consideration upon surrender of
the certificate.
At the Effective Time, PDK Acquisition will deposit with a bank or
trust company designated by PDK Acquisition and reasonably satisfactory to PDK
(the agreed-upon bank or trust company is referred to as the "Paying Agent") an
amount equal to the total cash Merger consideration to be paid to the
shareholders of PDK. All such funds will be held in trust for the benefit of
PDK's shareholders.
Each holder of certificates representing shares of PDK Common Stock and
PDK Preferred Stock will surrender their certificates to the Paying Agent in
exchange for the $5.00 per share of Common Stock and $8.00 per share (plus
accrued and unpaid dividends) of Preferred Stock cash Merger consideration.
29
No interest will be paid or accrue on the amount payable to any holder
of PDK Common Stock and/or PDK Preferred Stock. For payment to be made to a
person other than the registered holder of the certificate surrendered, the
registered holder of the certificate must properly endorse the certificate,
which must otherwise be in proper form for transfer, all as determined by the
Paying Agent. Further, the person requesting payment will be required to pay any
transfer or other taxes required or the holder may establish to the satisfaction
of the Paying Agent that these taxes have been paid or that no taxes are due.
Six months following the Effective Time, PDK will be entitled to instruct the
Paying Agent to deliver to it any funds (including any accrued interest) that
have not been disbursed to holders of certificates formerly representing shares
of Common Stock. After that, holders who have not surrendered their share
certificates may look to PDK only as general creditors with respect to their
cash Merger consideration. Neither the Paying Agent nor any party to the Merger
Agreement will be liable to any holder of certificates formerly representing
shares of PDK Common Stock or PDK Preferred Stock for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Except as described in this paragraph, PDK will pay all charges and
expenses, including those of the Paying Agent, in connection with the exchange
of shares for the cash Merger consideration.
Each share of PDK Acquisition's Common Stock issued and outstanding
immediately prior to the Merger will be converted at the Effective Time into one
share of Common Stock of PDK, as the surviving corporation of the Merger.
TRANSFER OF SHARES
No transfers of shares of PDK Common Stock or PDK Preferred Stock will
be made on the stock transfer books at or after the Effective Time. If, after
the Effective Time, certificates representing shares of PDK Common Stock or PDK
Preferred Stock are presented to PDK, these shares will be canceled and
exchanged for the cash Merger consideration.
CONDITIONS
Each party's obligation to effect the Merger is subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived (other than the first listed
condition) at the appropriate party's discretion, to the extent permitted by
applicable law:
o the Merger Agreement must be approved in the manner
required by applicable law by the holders of 66 2/3%
of the outstanding shares of PDK Common Stock
entitled to vote on the Merger; and
o No governmental authority or other person or entity
shall have enacted, issued or entered any law or
regulation which in effect has the effect of making
the consummation of the Merger unlawful or
30
preventing the transactions contemplated by the
Merger or with respect to any litigation in
connection with the Merger, results in an award of
damages that would materially and adversely affect
PDK.
o The opinion of PDK's Financial Advisor shall not have
been withdrawn prior to the Effective times.
Neither PDK, the Management Group nor PDK Acquisition is aware of any
consent, approval or notice of the type described in the last-listed condition.
The obligations of PDK Acquisition and the Management Group to effect
the Merger are subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, unless waived by PDK Acquisition:
o the representations and warranties of PDK in the
Merger Agreement must be true and correct in all
material respects (except that any representation and
warranty that is qualified as to materiality by
reference to "Material Adverse Effect" or any similar
term must be true and correct) as of the date of
execution of the Merger Agreement and as of the
Effective Time (except for those representations and
warranties that are made as of a specific date);
o PDK must have performed in all material respects all
obligations required to be performed by it under the
Merger Agreement at or prior to the Effective Time;
and
o No change, condition, event or development shall have
occurred that has a Material Adverse Effect on the
operations of PDK
o PDK Acquisition and the Management Group shall have
obtained financing or at least $10 million
After approval of the Merger Agreement by the shareholders of PDK, no
amendment may be made that reduces the amount or changes the form of the cash
Merger consideration to be received by the shareholders of PDK, unless such
amendment is approved by the shareholders.
REPRESENTATIONS AND WARRANTIES
PDK made representations and warranties in the Merger Agreement
regarding, among other things: its organization and good standing; authority to
enter into the Merger; its capitalization; requisite governmental and other
consents and approvals; compliance with all applicable laws.
31
The Management Group and PDK Acquisition have made representations and
warranties in the Merger Agreement regarding, among other things: PDK
Acquisition's organization and good standing; authority to enter the
transaction; PDK Acquisition's capitalization; compliance with all applicable
laws; requisite governmental and other consents and approvals.
The representations and warranties of the parties in the Merger
Agreement will expire upon consummation of the Merger, and upon such expiration
none of such parties or their respective officers, directors or principals will
have any liability whatsoever with respect to any of these representations or
warranties.
COVENANTS
In the Merger Agreement, PDK has agreed that prior to the Effective
Time, unless otherwise agreed to in writing by PDK Acquisition or as otherwise
contemplated by the Merger Agreement, PDK and each of its subsidiaries will
conduct business only in the ordinary course substantially consistent with past
practice and will not:
o amend its articles of incorporation or bylaws;
o declare, set aside or pay any dividend or make any
other distribution in respect of any of its shares of
common stock;
o issue, grant, sell, pledge, or transfer any shares of
its capital stock, stock options, warrants,
securities or rights to acquire any such shares,
securities or rights of PDK, or propose or agree to
do any of the foregoing or make any other changes in
its equity capital structure;
o split, combine or reclassify any of the capital stock
of PDK or issue other securities in respect of or in
substitution for its existing capital stock;
Each party also has agreed to provide prompt notice to the other upon obtaining
knowledge of:
o material litigation, claims, actions, proceedings,
tax audits or other investigations affecting such
party or any of its properties or assets, that if
adversely resolved could have a material adverse
effect or could prevent, hinder or materially delay
the ability to complete the Merger or the other
transactions contemplated by the Merger Agreement;
32
o notices of default under agreements and instruments
where the default would have a material adverse
effect; and
o notice from a third party claiming that its consent
is required in connection with the transactions
contemplated by the Merger Agreement.
In addition, the Management Group agreed that, prior to the completion
of the Merger, they would not do or fail to do, or cause any person to do or
fail to do, any act that would cause PDK to breach any of its representations
and warranties included in the Merger Agreement.
NONSOLICITATION COVENANT
Under the terms of the Merger Agreement, PDK has agreed not to permit
any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, solicit, initiate or encourage any "Acquisition
Proposal" or participate in any discussions or negotiations with, or encourage
any effort or attempt by, any third party to facilitate an "Acquisition
Proposal." Under the Merger Agreement, an "Acquisition Proposal" is defined to
mean any offer or proposal by any person or group concerning any tender or
exchange offer, proposal for a Merger, share exchange, recapitalization,
consolidation or other business combination involving PDK or any of its
subsidiaries or divisions, or any proposal or offer to acquire in any manner,
directly or indirectly, a significant equity interest in, or a substantial
portion of the assets of, PDK or any of its subsidiaries, other than pursuant to
the transactions contemplated by the Merger Agreement. Further, the Merger
Agreement provides that all of PDK's representatives will be instructed to cease
the foregoing activities. However, PDK may, subject to obtaining a
confidentiality agreement, furnish information to and participate in discussions
and negotiations with a party who has made an unsolicited written Acquisition
Proposal after the date of the Merger Agreement if either PDK's Board of
directors or its Special Committee has determined in good faith, based upon the
reasonably concluded advice of (i) JWGenesis that such Acquisition Proposal is
reasonably likely to lead to a transaction that is materially more favorable to
PDK's stockholders than the Merger and (ii) (outside counsel, that failing to
take such action would violate PDK's Board of directors' fiduciary duties under
applicable law. PDK is obligated to inform PDK Acquisition immediately of any
Acquisition Proposal, provide PDK Acquisition notice of its terms and
conditions, and keep PDK Acquisition advised of all material developments.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that the current and former directors and
officers of PDK and any of its subsidiaries (including the members of the
Special Committee) will be indemnified by PDK, to the fullest extent permitted
by applicable law, against any costs, expenses, judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation, and will be advanced reasonable costs and
33
expenses (including attorneys' fees), in connection with any claim, action,
suit, proceeding or investigation arising out of or pertaining to the approval
and consummation of the transactions contemplated by the Merger Agreement. In
addition, PDK is required to maintain in effect, for a period of six years after
the Effective Time, PDK's policies of directors' and officers' liability
insurance (provided that PDK may substitute for policies of at least the same
amounts and comparable coverage). However, in no event will PDK be required to
pay premiums for insurance in excess of 300% of the premiums currently paid by
PDK.
EXPENSES
The parties have agreed to pay their own costs and expenses in
connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement. PDK has agreed to bear the cost incurred in the printing,
filing with the Commission and mailing to shareholders this proxy statement and
other materials in connection with the Special Meeting.
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the Merger Agreement may be
terminated
(i) by the mutual consent of the Boards of directors of
PDK and PDK Acquisition.
(ii) if a court or other governmental entity issues an
order or takes any action enjoining, restraining or
prohibiting the Merger and such order or action
becomes final and nonappealable.
Any party may terminate the Merger Agreement prior to the Effective
Time by written notice to the other parties if:
the conditions precedent to closing have not occurred by
December 31, 2000 unless the failure to close results from
the party's breach of any representation, warranty or
covenant;
approval of the shareholders of PDK necessary to complete the
Merger has not been obtained;
In addition, PDK Acquisition may terminate the Merger Agreement prior
to the Effective Time by written notice to PDK if:
34
PDK breaches any representation, warranty or covenant in the
Merger Agreement in any material respect and fails to cure
the breach within 15 days after written notice;
PDK may terminate the Merger Agreement prior to the Effective Time by
written notice to PDK Acquisition if:
PDK Acquisition or the Management Group breaches any
representation, warranty or covenant in the Merger Agreement
in any material respect and fails to cure the breach within
15 days after written notice;
Subject to the provisions of applicable law, the Merger Agreement may
be modified or amended, and provisions waived, by written agreement of the
parties. However, after approval of the Merger Agreement by the shareholders of
PDK, no amendment or waiver of a provision may be made which reduces the amount
or changes the form of the cash Merger consideration to be received by the
shareholders, unless such amendment or waiver of a provision is approved by the
shareholders.
TERMINATION FEE
In the event that the Merger Agreement is terminated and PDK
Acquisition is not in material breach of its material covenants and agreements
in the Merger Agreement or its representations and warrants contained in the
Merger Agreement, then PDK shall reimburse PDK Acquisition for all out-of-pocket
expenses and fees up to $1 million.
REGULATORY APPROVALS/THIRD PARTY CONSENTS
PDK is not aware of any license or regulatory permit that is material
to the business of PDK and that is likely to be adversely affected by the Merger
or of any approval or other action by any state, federal or foreign government
or governmental agency that would be required prior to effecting the Merger.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase business combination for
accounting purposes.
FEES AND EXPENSES
35
Assuming the Merger is consummated, PDK will pay costs and fees in
connection with the Merger, financing and the related transactions, which are
estimated to be as follows:
Expense or Fee Estimated Amount
-------------- ----------------
Financial advisory fees and expenses ............. $150,000
Loan commitment fees.............................. 50,000
Legal fees ....................................... 100,000
Disbursement agent's fees ........................ 5,000
Accounting fees................................... 25,000
Printing and mailing expenses .................... 25,000
Solicitation expenses ............................ 15,000
Commission filing fees ........................... 2,500
Miscellaneous..................................... 77,500
----------
Total........................................ $450,000
==========
For a description of PDK's obligation, even in some cases if the Merger
is not consummated, to pay or reimburse PDK Acquisition for expenses incurred by
PDK Acquisition in connection with the Merger, see "The Merger -- Expenses" and
" --Termination Fee." See "Special Factors -- Opinion of PDK's Financial
Advisor" for a description of the fees to be paid to JW Genesis in connection
with its engagement. For a description of fees paid to the member of the Special
Committee, see "Special Factors -- Conflicts of Interest."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of PDK Common Stock and PDK Preferred Stock. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the holders of PDK Common Stock and PDK Preferred Stock as
described in this proxy statement. Special tax consequences not described below
may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts as to the United States and holders who acquired their stock
through the exercise of an employee stock option or otherwise as compensation.
36
The receipt of the $5.00 per share of Common Stock and $8.00 per share
(plus accrued and unpaid dividends) of Preferred Stock cash Merger consideration
in the Merger by holders of PDK Common Stock will be a taxable transaction for
federal income tax purposes. Each holder's gain or loss per share will be equal
to the difference between $5.00 and $8.00 and the holder's basis per share in
the Common Stock and Preferred Stock. This gain or loss generally will be a
capital gain or loss. In the case of individuals, trusts and estates, this
capital gain will be subject to a maximum federal income tax rate of 20% for
shares of Common Stock and Preferred Stock held for more than 12 months prior to
the date of disposition. For shares held less than 12 months the gain or loss
will be a short-tem capital gain or loss. As a general rule, short-term capital
gains are taxed at ordinary income rates.
A holder of PDK Common Stock and Preferred Stock may be subject to
backup withholding at the rate of 31% with respect to the Merger consideration
received, unless the holder (a) is a corporation or comes within other exempt
categories and, when required, demonstrates this fact or (b) provides a correct
taxpayer identification number ("TIN"), certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholdings rules. To prevent the possibility of backup federal
income tax withholding on payments made to certain holders with respect to
shares of Common Stock under the Merger, each holder must provide the disbursing
agent with his correct TIN by completing a Form W-9 or Substitute Form W-9. A
holder of PDK Common Stock and Preferred Stock who does not provide PDK with his
or her correct TIN may be subject to penalties imposed by the Internal Revenue
Service (the "IRS"), as well as backup withholding. Any amount withheld under
these rules will be creditable against the holder's federal income tax
liability. PDK (or its agent) will report to the holders of Common Stock and
Preferred Stock and the IRS the amount of any "reportable payments," as defined
in Section 3406 of the Code, and the amount of tax, if any, that is withheld.
The foregoing tax discussion is included for general information only
and is based upon present law. Each holder of Common Stock and Preferred Stock
should consult his or her own tax advisor as to the specific tax consequences of
the Merger to that holder, including the application and effect of federal,
state, local and other tax laws and the possible effect of changes in such tax
laws.
INFORMATION REGARDING PDK
PDK manufactures and distributes over-the-counter 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.
PDK was organized as a New York corporation in 1971. Our principal
executive offices are located at 145 Ricefield Lane, Hauppauge, New York 11788.
Our telephone number is 631-273-2630.
37
We have attached a copy of our Annual Report on Form 10-K for the
fiscal year ended November 30, 1999 as Appendix D to this proxy statement and
our Quarterly Reports on Form 10-Q for the periods ended February 29, 2000 and
May 31, 2000 as Appendix E and F. These documents contain more detailed
information about us.
INCORPORATION OF DOCUMENTS BY REFERENCE
We are incorporating by reference the following documents that we have
previously filed with the Commission, copies of which are attached as appendices
to this proxy statement:
Our Annual Report on Form 10-K for the fiscal year ended
November 30, 1999; and
Our Quarterly Reports on Form 10-Q for the fiscal quarter
ended February 29, 2000 and May 31, 2000.
In addition, we are incorporating by reference all documents we file in
response to the requirements of Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement and before the date of the
Special Meeting. Accordingly, those documents will be considered a part of this
proxy statement from the date they are filed.
If you would like copies of these documents, please contact Reginald
Spinello at PDK Labs Inc., 145 Ricefield Lane, Hauppauge, NY 11788 or by
telephone at (631) 273-2630. We will send these documents to you by first-class
mail within one business day after receiving your request. I
38
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
November 30,
May 31, 1999 1998 1997 1996 1995
2000 ---- ---- ---- ---- ----
------
Total Assets $34,264 $36,700 $46,473 $54,221 $53,255 $41,943
Long - Term Obligations, net of current 1,622 1,967 4,342 15,434 13,603 8,251
portion
Stockholders' Equity 29,317 27,772 29,504 28,305 26,661 24,437
SUMMARY INCOME STATEMENT DATA
(in thousands, except share and per share data)
Six Months Ended Years Ended November 30,
May 31, May 31,
2000 1999 1999 1998 1997 1996 1995
---- ------- ---- ---- ---- ---- ----
Revenues $24,706 $25,824 $54,706 $57,599 $51,352 $46,563 $31,904
Operating Income 1,522 1,845 3,778 2,916 2,682 2,356 1,681
Net Earnings (Loss) 1,053 921 2,137 777 1,559 1,613 (180)
Net Earnings ( Loss ) per Common Share:
Basic $0.41 $0.26 $0.66 $0.16 $0.41 $0.48 ($0.24)
Diluted $0.41 $0.26 $0.66 $0.16 $0.39 $0.46 ($0.24)
Weighted Average Number of Common
Shares Outstanding:
Basic 2,320,007 3,151,119 2,881,979 3,327,050 3,095,660 3,156,276 2,559,232
Diluted 2,320,007 3,151,119 2,881,979 3,409,109 3,228,333 3,265,393 2,559,232
39
DIRECTORS AND EXECUTIVE OFFICERS
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.
40
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.
STOCK OWNERSHIP
The following table sets forth certain information, as of August 3,
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:
41
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
42
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.
RECENT STOCK PURCHASES
We started a share repurchase program in October 1996 and suspended the
program in December 1999. The following table includes the amount of Common
Stock we repurchased, the range of prices per share we paid and the average
purchase price per share we paid during each quarterly period presented below.
43
Fiscal Years Ended or Ending November,
Number of Shares Range of Prices Average Price
---------------- --------------- -------------
1998
First Quarter 9,000 8.19 8.19
Second Quarter - - -
Third Quarter 2,507 3.25 - 4.75 3.94
Fourth Quarter 56,918 3.50 - 3.75 3.65
1999
First Quarter 260,000 3.13 - 4.25 3.48
Second Quarter 215,900 3.69 - 4.75 4.26
Third Quarter 94,534 3.56 - 4.63 3.95
Fourth Quarter 550,325 3.44 - 5.25 4.93
2000
First Quarter* 19,554 4.75 - 5.13 4.92
* Through December 1999
MARKET PRICES OF COMMON STOCK PREFERRED STOCK AND DIVIDENDS
The following table indicates the high and low prices for the Company's
Common Stock and Preferred Stock for the period up to June 30, 2000 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
44
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
2000 Calendar Year
------------------
First Quarter 4 9/16 3 5/8
Second Quarter 3 3/4 3
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
45
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
2000 Calendar Year
------------------
First Quarter 6 5/16 5
Second Quarter 6 5/16 5 3/4
On August 2, 2000, the closing price of the Common Stock as reported on
the NASDAQ System was $4.375. On August 2, 2000, the closing price of the
Preferred Stock reported on the NASDAQ System was $5.75. On August 2, 2000,
there were 964 holders of record of Common Stock.
On April 14, 2000, 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.
46
PDK has never paid any cash dividends on its Common Stock. Under the
Merger Agreement, PDK has agreed not to pay any dividends on the Common Stock
prior to the completion of the Merger.
INFORMATION REGARDING PDK ACQUISITION,
AND THE MANAGEMENT GROUP
PDK Acquisition is a recently incorporated New York corporation
organized by the Management Group for the purpose of effecting the Merger. Their
principal executive offices are located at 145 Ricefield Lane, Hauppauge, NY
11788. Their telephone number is (631)273-2630. Reginald Spinello, Karine
Hollander and Raveendra Nandigam are the sole shareholders and directors of PDK
Acquisition. Prior to the completion of the Merger, the Management Group will
contribute all of the outstanding Common stock of PDK it holds to PDK
Acquisition.
Neither PDK Acquisition, nor the Management Group is required to file
reports with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act.
Neither PDK Acquisition, nor any executive officer, director or person
controlling PDK Acquisition, or any of their or his or her respective affiliates
has during the last five years been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or been a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting activities subject
to, federal or state securities laws or finding any violation of such laws.]
All information contained in this proxy statement concerning the
Management Group, PDK Acquisition is based upon statements and representations
made by them or their representatives to us or our representatives.
INDEPENDENT AUDITORS
The consolidated balance sheets as of November 30, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended November 30, 1999,
included in our Annual Report on Form 10-K attached as Appendix D to this proxy
statement have been audited by Holtz Rubenstein, independent auditors, as stated
in their report. A representative of Holtz Rubenstein will be at the Special
Meeting to answer appropriate questions from shareholders and will have the
opportunity to make a statement if so desired.
SHAREHOLDER PROPOSALS
Our annual meeting of shareholders is normally held in October of each
year.
If the proposal to approve the Merger is not approved at the Special
Meeting, the annual meeting of shareholders will be held in October 2000.
Proposals of shareholders intended to be presented at the
47
annual meeting of shareholders must be submitted, by registered or certified
mail, to the attention of the PDK's Secretary at our principal executive offices
by _______, 2000 in order to be considered for inclusion in our proxy statement
and form of proxy for the annual meeting. In addition, if a proposal is
submitted after that date, proxies will have the authority to vote in their
discretion on the proposal. If the Merger is completed, the annual meeting of
shareholders may be scheduled for another date after the Effective Time.
OTHER MATTERS
We know of no other business to be presented at the Special Meeting. If
other matters do properly come before the Special Meeting, or any adjournment or
adjournments thereof, the individuals named in the proxy have the discretion to
vote on these other matters according to their best judgment unless the
authority to do so is withheld as marked by a shareholder on the proxy.
48