1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 0-9065
GOLDEN PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
COLORADO 84-0645174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 W. WARNER AVENUE, SANTA ANA, CALIFORNIA 92704
(Address of principal executive office)(Zip Code)
(714) 754-5800
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of common stock outstanding as of DECEMBER 31, 1998,
was 125,144,644
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. FINANCIAL STATEMENTS
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
NOVEMBER 30, AUGUST 31,
1998 1998
-------------- -------------
CURRENT ASSETS
Cash $ 31,803 $ 61,860
Trade receivables, net of allowance for doubtful accounts of
$539,922 and $535,945 at November 30 and August 31, 1998. 1,399,118 1,377,291
Notes receivable 139,797 139,797
Inventories 527,158 577,947
Non-compete receivable 250,000 -
Prepaid expenses and other 117,974 141,144
Net assets held for sale 150,000 173,000
------------ ------------
TOTAL CURRENT ASSETS 2,615,850 2,471,039
PROPERTY, PLANT AND EQUIPMENT - AT COST 2,188,458 2,166,642
Less accumulated depreciation and amortization 954,238 873,325
------------ ------------
TOTAL PROPERTY, PLANT & EQUIPMENT 1,234,220 1,293,317
OTHER ASSETS
Intangibles - net of accumulated amortization of $2,133 and $1,933 at
November 30 and August 31, 1998 9,867 10,067
Non-compete agreement 60,421 69,050
------------ ------------
TOTAL OTHER ASSETS 70,288 79,117
------------ ------------
TOTAL ASSETS $ 3,920,358 $ 3,843,473
============ ============
See Note to Consolidated Financial Statements
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ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) - continued
LIABILITIES AND STOCKHOLDERS' DEFICIT
NOVEMBER 30, AUGUST 31,
1998 1998
---------------- -----------------
CURRENT LIABILITIES
Notes payable $ 1,011,724 $ 833,639
Notes payable - related parties 5,308,800 5,014,200
Current maturities of long-term debt 108,686 212,228
Current maturities of capitalized lease obligations 257,794 224,588
Accounts payable 1,395,716 1,142,999
Deferred revenue - non-compete agreement 250,000 -
Accrued liabilities
Salaries, wages and other compensation 38,959 47,070
Interest 449,758 316,854
Other 152,320 114,653
---------------- -----------------
TOTAL CURRENT LIABILITIES 8,973,757 7,906,231
LONG-TERM OBLIGATIONS, less current maturities - 25,000
CAPITALIZED LEASE OBLIGATIONS, less current maturities 396,417 467,191
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 53,846 39,875
CONTINGENCIES AND COMMITMENTS - -
STOCKHOLDERS' DEFICIT
Common stock - no par value; 200,000,000 shares authorized; 128,451,873
issued; and 125,162,873 outstanding at
November 30 and August 31, 1998, respectively 24,714,858 24,714,858
Preferred stock - no par value; 10,000,000 shares authorized Class A 15%/
30% cumulative convertible, 29,653 shares, issued and outstanding at
November 30 and August 31, 1998, respectively
292,558 292,558
Dividends accrued on preferred stock 237,642 236,419
---------------- -----------------
25,245,058 25,243,835
Accumulated deficit (30,654,588) (29,744,527)
---------------- -----------------
(5,409,530) (4,500,692)
Less common stock in treasury at cost, 3,289,000 shares at November 30
and August 31, 1997, respectively 94,132 94,132
---------------- -----------------
TOTAL STOCKHOLDERS' DEFICIT (5,503,662) (4,594,824)
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,920,358 $ 3,843,473
================ =================
See Note to Consolidated Financial Statements
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ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------------------
1998 1997
------------------ -----------------
NET SALES $ 2,012,835 $ 1,311,488
COST OF SALES 1,597,175 912,040
------------------ -----------------
GROSS MARGIN 415,660 399,448
Selling, general and administrative expense 1,273,385 1,626,045
------------------ -----------------
OPERATING LOSS (857,725) (1,226,597)
OTHER INCOME/ (EXPENSE)
Interest expense (225,770) (118,616)
Joint venture loss (13,971) (27,706)
Settlement of accounts payable and other liabilities 184,570 -
Other income 1,416 24,567
------------------ -----------------
TOTAL OTHER INCOME (EXPENSE) (53,755) (121,755)
------------------ -----------------
LOSS BEFORE INCOME TAX EXPENSE (911,480) (1,348,352)
------------------ -----------------
INCOME TAX EXPENSE (BENEFIT) (2,642) 1,600
------------------ -----------------
LOSS BEFORE MINORITY INTEREST (908,838) (1,349,952)
MINORITY INTEREST - 105,756
------------------ -----------------
NET LOSS $ (908,838) $ (1,244,196)
================= =================
BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.01)
================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING 125,162,873 125,127,847
================= =================
See Note to Consolidated Financial Statements
5
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
-------------------------------
1998 1997
-------------- -------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (908,838) $(1,244,196)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 89,744 198,313
Settlement of accounts payable and other liabilities (184,570) --
Minority interest -- (105,756)
Joint venture loss 13,971 27,706
Changes in assets and liabilities net of effects of acquisition and joint
venture:
(Increase) decrease in accounts receivable (21,827) 78,112
(Increase) decrease in inventories 73,789 (114,752)
Increase in non-compete receivable (250,000) --
(Increase) decrease in prepaid expenses and other 23,170 (5,199)
Increase in accounts payable 312,283 118,214
Decrease in income taxes payable -- (38,600)
Increase in deferred revenue - non-compete agreement 250,000 --
Increase in accrued liabilities 162,460 30,871
----------- -----------
TOTAL ADJUSTMENTS 469,020 188,909
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (439,818) (1,055,287)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (21,816) (82,382)
Increase investment in joint venture -- (21,000)
Decrease in notes receivable -- 62,703
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (21,816) (40,679)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable - related parties 294,600 1,350,000
Borrowings under capitalized lease and other long-term obligations 21,816 21,855
Payments on capitalized lease and other long term obligations (62,924) (90,816)
Borrowings on line of credit 2,295,637 2,390,743
Payments on line of credit (2,117,552) (2,561,501)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 431,577 1,110,281
----------- -----------
NET INCREASE (DECREASE) IN CASH (30,057) 14,315
CASH, BEGINNING OF PERIOD 61,860 26,143
----------- -----------
CASH, END OF PERIOD $ 31,803 $ 40,458
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Interest paid $ 90,600 $ 70,039
=========== ===========
Income taxes paid (received) $ (2,642) $ 1,600
=========== ===========
See Note to Consolidated Financial Statements
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GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited financial statements of Golden Pharmaceuticals, Inc.
and its consolidated subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
annual financial statements.
The accompanying unaudited condensed financial statements and disclosures
reflect all adjustments which, in the opinion of the management, are necessary
for a fair presentation of the results of operations, financial position, and
cash flow of the Company. The results of operations for the periods indicated
are not necessarily indicative of the results for the full year.
The financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended August 31, 1998, as filed with the
Securities and Exchange Commission.
In Accordance with SFAS 128, which was effective for periods ending after
December 15, 1997, earnings per common share has been revised and the prior
period has been restated to present basic and diluted earnings per share.
Basic and diluted earnings per share for the nine months ended November 30, 1998
and 1997 is calculated as follows:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------
1998 1997
----------------- --------------
Net loss $ (908,838) $ (1,244,196)
================ =============
Weighted average number of shares outstanding
Basic earnings per share
Weighted average shares outstanding for
Basic earnings per share calculation 125,162,873 125,127,847
================ =============
Diluted earnings per share
Weighted average shares outstanding 125,162,873 125,127,847
Effect of exercise of options * *
Effect of conversion of Class A 15%/30%
cumulative convertible preferred stock and
accrued dividends thereon * *
================ =============
Weighted average shares outstanding for
diluted earnings per share calculation 125,162,873 125,127,847
================ =============
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* The effect of options and convertible shares was not included in the
diluted earnings per share calculation for the three months ended
November 30, 1998 and 1997 as they would have been anti-dilutive. The
total number of common shares not included in the diluted earnings per
share calculation for the three months ended November 30, 1998 and 1997
that could potentially dilute earnings per share in the future were
1,484,172 shares and 2,182,949 shares, respectively.
Reclassification / Restatement- Certain reclassifications have been made to
conform prior years' information with the current year presentation.
Use of Estimates - In preparing the Company's consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, at the date of the consolidated
financial statements. Actual results could differ from those estimates.
NOTE 2. REALIZATION OF ASSETS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred operating
losses of ($858,000) and ($10,131,000), respectively, during the three months
ended November 30, 1998 and during the fiscal year ended August 31, 1998. In
addition, at November 30, 1998, the Company had a negative working capital
position of ($6,358,000) due primarily to $5,308,800 in short term borrowings
from related parties (see Note 5), and the Company had a total stockholders'
deficit of ($5,504,000). These factors among others raises substantial doubt
that the Company will be able to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments related to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. As
described in Note 4, the Company is not in compliance with the covenants of its
revolving line of credit, and the bank ("Bank") elected to exercise certain of
its remedies under the Credit Agreement, including termination of the credit
agreement by February 1, 1999. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain replacement working capital financing
by February 1, 1999, to obtain sufficient equity financing in early fiscal 1999
to re-capitalize the Company, and ultimately to attain profitability.
NOTE 3. DISCONTINUED LINE OF BUSINESS
On August 3, 1998, the Company and the other member ("Member") of Pharma Labs,
LLC ("Pharma Labs") entered into an agreement for the dissolution and
liquidation of Pharma Labs. In order to facilitate the liquidation of Pharma
Labs, the Company entered into a Unit Purchase Agreement on October 8, 1998 with
the Member, whereby the Company purchased the Member's 48% equity interest in
Pharma Labs for $35,000.
On December 3, 1998, the Company completed the sale of Pharma Labs' machinery
and equipment to Adams Equities, Inc. (Buyer) for $150,000, pursuant to the
terms of a Purchase Agreement dated November 10, 1998. The Purchase Agreement
also includes a non-compete agreement between the company and the Buyer, for
which the Company received $250,000 at closing. In addition, the Buyer assumed
Pharma Labs' obligations under two (2) equipment leases and an affiliate of
Buyer entered into a sublease with the Company to sublease Pharma Labs' facility
and reimbursed the Company $57,000 for a lease deposit. At August 31, 1998 and
November 30, 1998, Pharma Labs assets are valued at estimated net realizable
value.
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NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
In connection with the note payable, term loan, and revolving line of credit,
the Company was not in compliance at August 31, 1998 and at November 30, 1998
with covenants related to book net worth, debt service coverage, interest
coverage, net income (loss) and capital expenditures. The Company re-negotiated
the terms of the Credit Agreement with the Bank, including re-negotiation of the
above covenants and an Amended and Restated Credit Agreement (Credit Agreement
Amendment) was signed by both parties on August 7, 1998. However, the Credit
Agreement Amendment was conditional upon the Company obtaining a $2.5 million
capital investment by August 31, 1998.
To date the Company has not obtained the $2.5 million capital investment, and on
October 27, 1998, the Bank informed the Company of its decision to exercise
certain of its remedies under the Credit Agreement. The Bank elected to: (1)
implement an additional one percent (1%) default rate of interest provided for
the Credit Agreement, retroactive to July 31, 1998; (2) reduce the maximum loan
commitment level to $1.0 million; and (3) terminate the credit agreement by
February 1, 1999. The Bank did not waive any existing defaults or its right to
exercise any of the other remedies available under the Credit Agreement.
NOTE 5. RELATED PARTY TRANSACTIONS
During fiscal 1999, and through January 15, 1999, the Company borrowed $294,600,
net of repayments, from a shareholder who is also an officer and director.
During the quarter ended November 30, 1998, the Company recorded $137,000 in
interest expense on loans from related parties. At November 30, 1998, the
Company owed $4,838,800 in notes payable to the above shareholder, $470,000 in
notes payable to a director of the Company and $450,000 in accrued interest
payable on the preceding notes. These loans are payable on demand and bear
interest at Bank prime plus 2%. Loan proceeds were used for working capital. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
SUBSEQUENT EVENTS
In October 1998, the Company and VNA Home Health Systems ("VNA") signed an
agreement pursuant to which VNA will withdraw from RxDirect, LLC ("RxDirect").
Under the terms for the withdrawal agreement, VNA was to pay the Company a
$154,000 withdrawal fee by December 1, 1998. To date, this payment has not been
paid. The Company is currently considering various alternatives to enforce
collection of this withdrawal fee.
On December 3, 1998, the sale of Pharma Labs assets was completed. See Note 3.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the selected
financial data and the financial statements and notes thereto filed herewith.
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations, the capital requirements of the
Company and the ability of the Company to achieve earnings per share growth
through internal investment, strategic alliances, joint ventures and other
methods. The success of the Company's business operations is, in turn, dependent
on factors such as the effectiveness of the Company's marketing strategies to
grow its customer base, the appeal of the Company's mix of products, the
Company's success at entering into and collaborating with others to conduct
effective strategic alliances and joint ventures, general competitive conditions
within the health care market and general economic conditions. Further, any
forward looking statements speak only as of the date on which such statement was
made, and the Company undertakes no
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obligation to update any forward looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. Therefore, forward looking
statements should not be relied upon as a prediction of actual future results.
RECENT DEVELOPMENTS
The Company had a net loss of ($10,068,000) during the fiscal year ended August
31, 1998, and a net loss of ($909,000) during the fiscal quarter ended November
30, 1998, and, as of November 30, 1998, the Company's current liabilities
exceeded its current assets by $6,358,000 and its total liabilities exceeded its
total assets by $5,504,000. Also, the Company is not in compliance with the
covenants of its revolving credit facility and must obtain alternative financing
by February 1, 1999. These conditions, as well as others, raise substantial
doubt about the Company's ability to continue as a going concern. As a result,
the Company's auditors have included an explanatory paragraph in their report to
the Company's consolidated financial statements at August 31, 1998 that
expresses substantial doubt as to the Company's ability to continue as a going
concern. See "Note 2" to "Notes to Consolidated Financial Statements". The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
For the last fiscal year and through the first quarter of fiscal 1999, the
Company has been operating in an increasingly difficult environment, and the
Company expects to continue to operate in this environment for the foreseeable
future. The Company's operations in fiscal 1998 and the first quarter of fiscal
1999 have consumed substantial amounts of cash and have generated significant
net losses which reduced shareholder's equity to a deficit of ($5,504,000) at
November 30, 1998. Also, QCP has a current period operating loss and negative
cash flow from operations, and is expected to have continuing losses and
negative cash flow from operations in the near term. There is substantial doubt
about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain funding to support the Company's operating losses, capital
requirements and to replace the revolving credit facility, as to which no
assurance can be given.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998, COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 1997 ($ ROUNDED TO NEAREST THOUSAND)
NET SALES - Net sales for the quarter ended November 30, 1998, increased 53% to
$2,013,000 from $1,311,000 for the same quarter last year. This sales gain was
primarily due to the expansion of QCP sales into the following new business
areas: seasonal sale of flu vaccine ($415,000), sales to new government accounts
($153,000), and sale of new products ($166,000). Partially offsetting the QCP
sales gain was lower sales at Pharma Labs, which declined to $29,000 in the
quarter from $95,000 for the comparable quarter last year. The Pharma Labs
business discontinued operations on October 9, 1998.
COST OF GOODS SOLD - Cost of goods sold as a percentage of sales increased to
79.3% for the quarter ended November 30, 1998, as compared to 69.5% for the same
period last year. Contributing to this increase were the lower profit margins
associated with government accounts, and the sale of flu vaccine and other
injectable medications. The Company had no sales from these categories in the
same quarter last year. Also, drug supplier price increases contributed to the
cost of goods sold increase.
SELLING GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses (SG&A) were $1,273,000, a decrease of $353,000 compared to $1,626,000
during the comparable quarter last year. Pharma Labs SG&A decreased $173,000 to
$38,000 as a result of the liquidation of this business which discontinued
operations on October 9, 1998. The balance of the SG&A expense decrease was
primarily the result of overhead cost reductions in the current year.
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OTHER INCOME (EXPENSE) - Interest expense increased to $226,000 from $119,000 in
the comparable quarter last year. This increase is due to additional working
capital borrowings from a shareholder who is also an officer and director. See
"Note 5" to "Notes to Consolidated Financial Statements."
The joint venture loss from RxDirect decreased to ($14,000) from ($28,000)
during the comparable quarter last year. This reduction loss was the result of
overhead cost reductions at RxDirect.
The $185,000 gain on settlement of accounts payable and other liabilities
resulted from the settlement of a payable due the other member of Pharma Labs
under a non-compete agreement ($125,000), and the resolution of other Pharma
Labs payables and liabilities ($60,000).
NET LOSS - The Company reported a ($909,000) net loss for the first quarter of
fiscal 1999 compared to a ($1,244,000) net loss for the comparable period last
year. The improved results are due primarily to reduced overhead expenses
($175,000), cost savings from the wind-down of Pharma Labs ($191,000) and a
$185,000 gain on the settlement of Pharma Labs liabilities. Partially offsetting
the above reductions was an increase in interest expense of $107,000 as a result
of increased short term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented to facilitate the discussion of the Company's
current liquidity and sets forth the Company's liquidity position as of November
30, 1998, as compared to August 31, 1998.
NOVEMBER 30, AUGUST 31,
1998 1998
-------------- --------------
Current assets $ 2,616,000 $ 2,471,000
Current liabilities 8,974,000 7,906,000
------------ ------------
Net working capital (deficiency) $ (6,358,000) $ (5,435,000)
============ ============
At November 30, 1998, current liabilities were $8,974,000, an increase of
$1,068,000 from August 31, 1998. Current liabilities increased primarily due to
the following: increased borrowing on the Bank line ($178,000), additional
borrowings ($295,000) from a shareholder who is also an officer and director
(see "Note 5" to "Notes to Consolidated Financial Statements"), an increase of
$253,000 in trade payables, an increase in accrued interest of $133,000, a
$250,000 increase in deferred revenue on a non-compete agreement (see "Note 3"
to "Notes to Consolidated Financial Statements"), and an increase of $84,000 in
all other current liabilities. Partially offsetting the above increases was a
$125,000 decrease in a payable to the other Pharma Labs member resulting from
the settlement of a non-compete agreement.
Prior to September 1997, the Company's primary source of funds for working
capital was the Company's revolving facility with the Bank. At November 30,
1998, the balance outstanding was $1,012,000, and the interest rate under the
Revolving Facility was 11.75%. The Revolving Facility is collateralized by QCP's
accounts receivable and inventory, and availability under the Revolving Facility
is determined based on eligible accounts receivable and inventory. As discussed
in "Note 4" to "Notes to Consolidated Financial Statements," the balance due on
the revolving facility is due February 1, 1999.
At August 31, 1998 and at November 30, 1998, the Company was not in compliance
with certain covenants of the Revolving Facility, including covenants regarding
book net worth, debt service coverage, interest coverage, net income (loss) and
capital expenditures. The Company re-negotiated the terms of the Credit
Agreement with the Bank, including re-negotiation of the above covenants, and an
Amended and Restated Credit Agreement ("Credit Agreement Amendment") was signed
by both parties on August 7, 1998, but the effectiveness of the Credit Agreement
Amendment was conditional upon the Company obtaining a $2.5 million capital
investment by August 31, 1998.
11
To date the Company has not obtained the $2.5 million capital investment, and on
October 27, 1998, the Bank informed the Company of its decision to: (1)
implement an additional one percent (1%) default rate of interest provided for
the Credit Agreement, retroactive back to July 31, 1998; (2) reduce the maximum
loan commitment level to $1.0 million; and (3) terminate the credit agreement on
February 1, 1999. In such letter, the Bank also reserved its right to take
further action with respect to the defaults in the future. If the company is
unable to repay the Revolving Facility or obtain substitute financing, the Bank
has the right to, among other things, (i) accelerate all unpaid principal and
interest with respect to all debts, liabilities or obligations owed to the Bank
by QCP, (ii) put account debtors of QCP on notice that payments due QCP should
be made to a lockbox for the benefit of the Bank, collect such payments and
apply such collections to payment of the obligations owed to the Bank, (iii)
occupy all premises where QCP conducts business without payment of rent, and
(iv) foreclose its security interest in all the equipment, general intangibles,
inventory and receivables owned by QCP. The Company is seeking alternative
working capital financing sources, and has entered into an agreement to sell
1,000,000 shares of Series A Preferred Stock of QCP to an accredited investor
for $1,000,000 (see "Item 2. Changes in Securities and Use of Proceeds.") The
Company has no other commitment for financing in place and there can be no
assurance that it will be able to obtain any further financing.
The Company has been unable to borrow sufficient amounts under the Revolving
Facility to finance its working capital requirements. In order to help meet its
working capital requirements, the Company has borrowed money from certain
shareholders and directors of the Company. The loans are evidenced by promissory
notes which provide for interest at the Bank's prime plus 2%. The promissory
notes are unsecured obligations. The amounts outstanding under the promissory
notes in aggregate were $5,014,200 ($4,544,200 payable to Charles R. Drummond;
$470,000 payable to Arch G. Gothard, III) and $5,308,800 ($4,838,800 payable to
Charles R. Drummond; $470,000 payable to Arch G. Gothard, III) at August 31,
1998 and November 30, 1998, respectively. Certain of the promissory notes
($1,425,000 payable to Charles R. Drummond and $470,000 payable to Arch G.
Gothard, at November 30, 1998) were payable on demand or no later than April 1,
1998 and, accordingly, are past due. Pursuant to a letter dated October 30,
1998, Charles R. Drummond committed not to demand payment of, or take any action
to collect, the promissory notes owed him until August 31, 1999 or such time as
the Company has the ability to repay such promissory notes. The promissory notes
payable to Charles R. Drummond are fully subordinate for all purposes to the
security interest of the Bank.
The Company has suffered substantial recurring losses from operations. The
Company has incurred a net loss of ($10,068,000) during the fiscal year ended
August 31, 1998 and a net loss of ($909,000) during the quarter ended November
30, 1998, and, as of November 30, 1998, the Company's current liabilities
exceeded its current assets by $6,358,000 and its total liabilities exceeded its
total assets by $5,504,000. These factors, in combination with the matters
discussed in the previous paragraphs raise substantial doubt about the Company's
ability to continue as a going concern. Approximately $5 million may be required
to support the Company's ongoing operations, exclusive of debt repayments,
through August 31, 1999. Except for the agreement to sell shares of QCP's Series
A Preferred Stock, the Company does not have any other commitments for financing
and there can be no assurance that any additional financing will be available to
the Company on terms acceptable to the Company, if at all. The Company's ability
to continue as a going concern is dependent upon its ability to obtain funding
for the Company's capital requirements and to refinance the Credit Facility. The
Company's shareholder deficit, and continuing losses create serious risk of loss
for the holders of the Company's securities.
DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1998, the Company conducted a test for asset impairment in
accordance with financial Accounting Standard 121. It is management's opinion
that, exclusive of the write-downs for Pharma Labs and the write-off of
goodwill, no additional impairment loss occurred. QCP has a current period
operating loss and negative cash flow from operations, and is expected to have
continuing losses in the near term.
Key assumptions in the asset impairment test include reversal of recent
operating losses and sales declines, several years of significant sales growth,
and product cost reduction achieved through purchasing and volume efficiencies.
Management feels this projection is achievable considering the size of the
retail pharmacy market ($84 billion), the growth rate of competitors
12
in the industry, and based on estimates of growth potential made by companies
participating in the industry.
If management's assumptions prove too optimistic, an impairment charge, based on
an undiscounted cash flow analysis, would result. The impairment charge would be
computed based on the excess of carrying value over the fair value of assets.
This would result in a valuation adjustment to the $1,234,000 in property, plant
and equipment at November 30, 1998.
Accordingly, it is reasonably possible that the results of the impairment test
may change in the future and an impairment loss may result.
YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. The Company is addressing this risk to
the availability and integrity of financial systems and the reliability of
operational systems. The Company has established processes for evaluating and
managing the risks and costs associated with this problem. The Company is
currently planning to install a new business software package in 1999 to
accommodate business growth and upgrade current systems. This package is year
2000 compliant. An initial assessment has been completed and the incremental
cost of achieving Year 2000 compliance, exclusive of the upgrade cost for the
new software previously discussed, is estimated to be not material. Timely
implementation of the new business software package is critical to year 2000
compliance. Cost will be expensed as incurred and are estimated to continue
through fiscal 1999.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 14, 1999, QCP entered into an agreement ("Agreement") to sell
1,000,000 shares of its Series A Preferred Stock, no par value ("QCP Preferred
Stock"), for an aggregate purchase price of $1,000,000 to one accredited
investor pursuant to the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. The Agreement will be consummated upon acceptance of
QCP's Certificate of Amendment to Articles of Incorporation by the California
Secretary of State. The QCP Preferred Stock is convertible into shares of the
Company's no par value common stock at a conversion price of $.20 per share,
which is subject to adjustment upon certain events. Dividends are cumulative and
payable on each share of QCP Preferred Stock at the rate of $.06 per annum. The
QCP Preferred Stock restricts the payment of dividends to the common stock
holders of QCP until the payment of all accrued but unpaid dividends on the QCP
Preferred Stock. Each share of QCP Preferred Stock is entitled to a liquidation
preference of $1.00 per share plus all accrued but unpaid dividends. QCP may
redeem the QCP Preferred Stock at any time on or after January 14, 2004 at a
price equal to the liquidation preference. Approximately $200,000 of the
proceeds will be paid to the Bank to reduce the Company's revolving line of
credit, with the remainder used for working capital purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the period covered by
this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOLDEN PHARMACEUTICALS, INC.
(Registrant)
DATED: January 19, 1999 BY: /s/ Gary P. Pryor
-----------------------------------
Gary P. Pryor
14
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTIONS
- ------- ------------
27 Financial Data Schedule