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 FEBRUARY 28, 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.)
710-14TH STREET, GOLDEN, COLORADO 80401
(Address of principal executive office)(Zip Code)
(303) 279-9375
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 APRIL 8, 1998, was
125,151,285
Transitional Small Business Disclosure Format: Yes NO X
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2
PART I
ITEM 1. FINANCIAL STATEMENTS
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
FEBRUARY 28, AUGUST 31,
1998 1997
----------------- -----------------
CURRENT ASSETS
Cash $ 26,093 $ 26,143
Receivables
Trade, net of allowance for doubtful accounts of $424,447 and
$446,834 at February 28, 1998, and August 31, 1997 1,687,640 1,778,321
Notes receivable 152,297 252,500
Inventories 885,787 1,024,689
Prepaid expenses and other 266,755 174,768
----------------- -----------------
TOTAL CURRENT ASSETS 3,018,572 3,256,421
PROPERTY, PLANT AND EQUIPMENT - AT COST 3,228,653 3,362,288
Less accumulated depreciation and amortization 1,124,316 908,804
----------------- -----------------
TOTAL PROPERTY, PLANT & EQUIPMENT 2,104,337 2,453,484
OTHER ASSETS
Goodwill, less accumulated amortization of $527,307 and $422,784 at
February 28, 1998, and August 31, 1997 3,636,003 3,740,525
Intangibles - net of accumulated amortization of $1,533 and $1,133 at
February 28, 1998, and August 31, 1997 10,467 10,867
Non-compete agreement 293,814 331,076
Investment in joint venture - 1,866
----------------- -----------------
TOTAL OTHER ASSETS 3,940,284 4,084,334
----------------- -----------------
TOTAL ASSETS $ 9,063,193 $ 9,794,239
================= =================
See Notes to Consolidated Financial Statements
3
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) - continued
LIABILITIES AND STOCKHOLDERS' EQUITY
FEBRUARY 28, AUGUST 31,
1998 1997
----------------- ------------------
CURRENT LIABILITIES
Notes payable $ 536,738 $ 743,168
Notes payable - related parties 3,205,000 615,000
Current maturities of long-term debt 187,986 262,506
Current maturities of capitalized lease obligations 184,383 202,061
Accounts payable 1,053,549 1,041,639
Income taxes payable - 40,000
Accrued liabilities
Salaries, wages and other compensation 55,706 161,277
Interest 114,682 3,506
Other 139,214 63,250
----------------- ------------------
TOTAL CURRENT LIABILITIES 5,477,258 3,132,407
LONG-TERM OBLIGATIONS, less current maturities 94,858 80,903
CAPITALIZED LEASE OBLIGATIONS, less current maturities 460,926 528,774
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 19,077 -
CONTINGENCIES AND COMMITMENTS - -
MINORITY INTEREST 166,258 582,969
STOCKHOLDERS' EQUITY
Common stock - no par value; 200,000,000 shares authorized; 128,416,847
issued; and 128,416,847 outstanding at
February 28, 1998, and August 31, 1997, respectively 24,774,154 24,774,154
Preferred stock - no par value; 10,000,000 shares authorized Class A 15%/
30% cumulative convertible, 29,653 shares, issued and outstanding at
February 28, 1998, and August 31, 1997, respectively
292,558 292,558
Dividends accrued on preferred stock 137,122 137,122
----------------- ------------------
25,203,834 25,203,834
Accumulated deficit (22,264,886) (19,640,516)
----------------- ------------------
2,938,948 5,563,318
Less common stock in treasury at cost, 3,289,000 shares at February 28,
1998, and August 31, 1997, respectively 94,132 94,132
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 2,844,816 5,469,186
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,063,193 $ 9,794,239
================= ==================
See Notes to Consolidated Financial Statements
4
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED FEBRUARY 28,
-------------------------------------------
1998 1997
------------------- --------------------
NET SALES $ 2,760,983 $ 7,658,722
COST OF SALES 2,033,057 5,111,893
------------------- --------------------
GROSS MARGIN 727,926 2,546,829
Selling, general and administrative expense 3,086,569 2,561,906
Unusual charge - impairment loss 430,000 -
------------------- --------------------
OPERATING LOSS (2,788,643) (15,077)
OTHER INCOME/ (EXPENSE)
Interest expense (240,980) (552,290)
Joint venture loss (62,943) (37,079)
Gain on disposal of assets 135 2,363
Other income 51,551 276,421
------------------- --------------------
TOTAL OTHER INCOME (EXPENSE) (252,237) (310,585)
------------------- --------------------
LOSS BEFORE INCOME TAX EXPENSE (3,040,880) (325,662)
------------------- --------------------
INCOME TAX EXPENSE 200 800
------------------- --------------------
LOSS BEFORE MINORITY INTEREST (3,041,080) (326,462)
MINORITY INTEREST 416,710 (67,139)
------------------- --------------------
NET LOSS $ (2,624,370) $ (393,601)
=================== ====================
LOSS PER SHARE $ (0.02) $ *
=================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 125,127,847 121,086,155
=================== ====================
* Less than $.01 per share
See Notes to Consolidated Financial Statements
5
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------------------
1998 1997
------------------- --------------------
NET SALES $ 1,449,495 $ 4,104,803
COST OF SALES 1,121,017 2,715,651
------------------- --------------------
GROSS MARGIN 328,478 1,389,152
Selling, general and administrative expense 1,457,524 1,329,783
Unusual charge - impairment loss 430,000 -
------------------- --------------------
OPERATING PROFIT (LOSS) (1,559,046) 59,369
OTHER INCOME/ (EXPENSE)
Interest expense (122,364) (288,093)
Joint venture loss (35,237) 58,395
Gain on disposal of assets 135 -
Other income (expense) 26,984 (20,233)
------------------- --------------------
TOTAL OTHER INCOME (EXPENSE) (130,482) (249,931)
------------------- --------------------
LOSS BEFORE INCOME TAX EXPENSE (1,689,528) (190,562)
------------------- --------------------
INCOME TAX EXPENSE (BENEFIT) 1,600 (800)
------------------- --------------------
LOSS BEFORE MINORITY INTEREST (1,691,128) (189,762)
MINORITY INTEREST 310,954 (34,607)
------------------- --------------------
NET LOSS $ (1,380,174) $ (224,369)
=================== ====================
LOSS PER SHARE $ (0.01) $ *
=================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 125,127,847 121,400,992
=================== ====================
See Notes to Consolidated Financial Statements
6
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
FEBRUARY 28,
-------------------------------------
1998 1997
(RESTATED)
---------------- -----------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (2,624,370) $ (393,601)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 357,831 384,361
(Gain) loss on sale of equipment (135) 2,363
Minority interest (416,710) 67,139
Joint venture loss 62,943 37,079
Reduction in carrying value of fixed assets 230,000 -
Changes in assets and liabilities net of effects of acquisition and
joint venture:
(Increase) decrease in accounts receivable 90,682 (1,558,905)
(Increase) decrease in inventories 138,902 (278,352)
Increase in prepaid expenses and other (91,988) (101,112)
Increase in accounts payable 11,908 956,603
Decrease in income taxes payable (40,000) -
Increase in accrued liabilities 81,569 222,091
---------------- -----------------
TOTAL ADJUSTMENTS 425,002 (268,733)
---------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (2,199,368) (662,334)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (97,266) (383,937)
Proceeds from sale of equipment 901 2,500
Increase investment in joint venture (42,000) (42,000)
(Increase) decrease in notes receivable 100,203 (197,663)
---------------- -----------------
NET CASH USED BY INVESTING ACTIVITIES (38,162) (621,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable - related parties 2,590,000 75,000
Borrowings under capitalized lease and other long-term obligations 21,855 311,375
Payments on capitalized lease and other long term obligations (167,946) (335,804)
Borrowings on line of credit 4,918,609 8,902,151
Payments on line of credit (5,125,038) (7,673,535)
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,237,480 1,279,187
---------------- -----------------
NET INCREASE (DECREASE) IN CASH (50) (4,247)
CASH, BEGINNING OF YEAR 26,143 34,872
---------------- -----------------
CASH, END OF YEAR $ 26,093 $ 30,625
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Interest paid $ 129,804 $ 354,701
================ =================
Income taxes paid $ 40,200 $ 800
================ =================
See Notes to Consolidated Financial Statements
7
ITEM 1. FINANCIAL STATEMENTS (continued)
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, 1997, as filed with the
Securities and Exchange Commission.
Net Loss Per Common Share - net loss per common share was determined by dividing
net loss, by applicable weighted average shares outstanding.
SIX MONTHS ENDED
FEBRUARY 28,
--------------------------------------------
1998 1997
------------------- ---------------------
Loss before minority interest $ (3,041,080) $ (326,462)
Minority interest 416,710 (67,139)
------------------- ---------------------
Net loss $ (2,624,370) $ (393,601)
=================== =====================
Weighted average number of shares outstanding
125,127,847 121,086,155
=================== =====================
Common stock equivalents and stock held in escrow have been included in the
computation for the six months ended February 28, 1998 and 1997. The common
stock equivalents that have been included in the computation for loss per share
are common stock and treasury stock. Stock options, Class A Convertible
Preferred Stock, 15% / 30% Cumulative Convertible Preferred Stock and accrued
dividends on the 15% / 30% Cumulative Convertible Preferred Stock are considered
anti-dilutive and, accordingly, are not included in the computation of loss per
share.
Reclassification / Restatement- Certain reclassifications have been made to
conform prior years' information with the current year presentation. The
accompanying consolidated statements of cash flows was restated to reflect the
prior period adjustment described in Note Q of the audited financials statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended August 31, 1997.
8
NOTE 2. UNUSUAL CHARGE - IMPAIRMENT LOSS AND UNCERTAINTY
At the end of the current quarter, Pharma Labs LLC, a company in which the
Company owns a 52% interest ("Pharma Labs"), recorded a non-cash impairment loss
of $430,000 related to the write-down of inventory and property, plant, and
equipment to estimated net realizable value and estimated fair market value,
respectively. Efforts to turn around the poor performance of this company have
not met expectations, and the Company can no longer be assured that future cash
flows will cover the carrying value of certain assets of Pharma Labs.
Accordingly, the following impairment loss has been recognized:
Inventory write-down to estimated net realizable value $ 200,000
Write down of property, plant and equipment to estimated fair
market value 230,000
=============
$ 430,000
=============
In addition, it is reasonably possible that a substantial portion of $510,000 in
accounts receivable due from a Vietnamese distributor, owned by the other
partner in Pharma Labs, may not be fully collectible. This uncertainty is due to
the poor financial condition of the joint venture partner, and to the poor
market for Pharma Lab's product in Vietnam. This balance represents trade
receivables arising from the shipment of finished product to Vietnam in late
1996 and early 1997, and is net of $70,000 in payments received since January 1,
1998. At this time, the Company is not able to estimate what portion of the
remaining account receivable balance will be collected.
NOTE 3. RELATED PARTY TRANSACTIONS
During fiscal 1998 to April 14, 1998, the Company borrowed $2,620,000 from a
shareholder who is also an officer and director of the Company, and $500,000
from a shareholder and director. These loans are payable on demand and bear
interest at the prime rate charged by the Company's primary bank ("Bank") plus
2%. Loan proceeds were used for working capital. See "Management's Discussion
and Analysis--Liquidity and Capital Resources."
9
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 and the capital requirements of
Quality Care Pharmaceuticals, Inc. ("QCP") and Pharma Labs. 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
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.
SIX MONTHS ENDED FEBRUARY 28, 1998, COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1997 ($ rounded to nearest thousand).
NET SALES - Net sales for the six months ended February 28, 1998 were
$2,761,000, compared to $7,659,000 for the same period last year. The decrease
of $4,898,000 is due to the loss of sales arising from the sale of the
radiopharmaceutical business on April 7, 1997($1,925,000), and lower sales
recorded at QCP and Pharma Labs.
QCP recorded net sales of $2,421,000 for the six month period ended February 28,
1998 compared to $4,335,000 in the same period last year. The lower sales level
was due to the loss of a private label customer and substantially lower diet
drug business.
Pharma Labs sales for the six month period ended February 28, 1998 were $340,000
compared to $1,399,000 in the same period last year. Last year's sales included
substantial stocking orders of new product from our Vietnam distributor in
anticipation of strong customer demand. To date, customer demand has been well
below expectations and has resulted in excess distributor inventory and
depressed fiscal 1998 year-to-date sales.
COST OF SALES -- Cost of goods sold as a percentage of sales was 73.6% for the
six month period ended February 28, 1998 compared to 66.7% for the comparable
period last year. Higher cost of sales, as a percent of net sales, at Pharma
Labs was offset somewhat by lower cost of sales at QCP. Pharma Labs' cost of
sales increased from the prior year due primarily to lower selling prices,
higher material costs and higher per unit overhead costs resulting from the
lower sales volume. QCP's gross margins improved during the current period due
to the loss of a lower margin private label customer.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses ("SG&A")for the six months ended February 28, 1998 were $3,087,000,
compared to $2,562,000 during the same period last
10
year. QCP's SG&A expense increased to $2,280,000 from $1,470,000 in the prior
year due to increased spending on staffing and infrastructure costs to support
QCP's long term growth program and development of new product initiatives.
UNUSUAL CHARGE / IMPAIRMENT LOSS - Efforts to turn around the poor performance
of Pharma Labs have not met expectations, and the Company can no longer be
assured that future cash flows from Pharma Labs will cover the carrying value of
certain assets. Accordingly, Pharma Labs recorded a non-cash impairment loss of
$430,000 related to the write-down of inventory and property, plant and
equipment to estimated net realizable value and to estimated net market value,
respectively.
NET LOSS - As a result of the factors described above, the Company had a net
loss of $2,624,000 for the six month period ended February 28, 1998, as compared
to a net loss of $394,000 for the six month period ended February 28, 1997.
Losses from operations were $2,789,000 for the six month period ended February
28, 1998 compared to operating losses of $15,000 in the same period last year.
QCP's operating losses for the six month period ended February 28, 1998
increased to $1,474,000 from $338,000 in the prior year due to lower sales
volume and higher SG&A expenses. Pharma Labs' operating loss for the six month
period ended February 28, 1998 was $870,000 compared to an operating loss of
$52,000 in the prior year due primarily to lower sales volume and the $430,000
impairment loss as previously discussed. GPI's operating losses for the six
month period ended February 28, 1998 was $444,000 compared to an operating
profit of $375,000 in the comparable period last year as a result of the loss of
revenue due to the sale of the radiopharmaceutical business.
The net loss for the six months ended February 28, 1998, also includes interest
expense of $241,000 and joint venture losses of $63,000 from the Company's
equity investment in RxDirect. In addition, the Company also had other income of
$52,000 compared to $276,000 in other income last year. Fiscal 1997 first six
months other income included $195,000 in revenue due under the terms of the June
14, 1996, Guarantee Agreement with Pharma Labs' joint venture partner.
THREE MONTHS ENDED FEBRUARY 28, 1998, COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 1997 ($ rounded to nearest thousand).
NET SALES - Net sales for the three months ended February 28, 1998, were
$1,449,000, compared to $4,105,000 for the same period last year. The decrease
of $2,656,000 is due to the loss of sales arising from the sale of the
radiopharmaceutical business on April 7, 1997, and lower sales recorded at QCP
and Pharma Labs.
The results reported for the three months ended February 28, 1997, included
$929,000 in sales from the radiopharmaceutical business.
QCP recorded net sales of $1,205,000 in the three months ended February 28,
1998, compared to $2,455,000 in the same period last year. The lower sales level
was primarily due to lower diet drug business which was substantially higher in
the second quarter last year.
Pharma Labs sales for the three months ended February 28, 1998 were $245,000
compared to $721,000 in the same period last year. As discussed above, last
year's sales included substantial stocking orders of new product from the
Company's Vietnam distributor in anticipation of strong customer demand. To
date, customer demand has been well below
11
expectation, and has resulted in excess distributor inventory and depressed
fiscal 1998 year-to-date sales.
COST OF SALES - Cost of goods sold as a percentage of sales was 77.3% for the
three months ended February 18, 1998, compared to 66.2% for the comparable
period last year. Higher cost of sales, as a percent of net sales, at Pharma
Labs was offset somewhat by lower cost of sales at QCP. Pharma Labs' cost of
sales increased from the prior year due primarily to lower selling prices,
higher material costs and higher per unit overhead cost resulting from the lower
sales volume. QCP's gross margins improved during the current period due to the
loss of a lower margin private label customer.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses ("SG&A") increased to $1,458,000 for the three months ended February
28, 1998, from $1,330,000 during the same period last year. QCP's SG&A expense
was $1,114,000 for the three month period ended February 28, 1998 compared to
$819,000 in the same period of the prior year due to increased spending on
staffing and infrastructure costs to support QCP's long term growth program and
development of new product initiatives.
UNUSUAL CHARGE / IMPAIRMENT LOSS - Pharma Labs recorded a non-cash impairment
loss of $430,000 during the three month period ended February 28, 1998 related
to the write-down on inventory and property, plant and equipment to estimated
net realizable value and estimated fair market value, respectively.
NET LOSS - As a result of the factors described above, the Company reported a
net loss of $1,380,000 for the three months ended February 28, 1998, as compared
to a net loss of $224,000 for the three months ended February 28, 1997. Losses
from operations were $1,559,000 for the three month period ending February 28,
1998 compared to an operating profit of $59,000 for the same period last year.
QCP's operating losses for the three month period ending February 28, 1998
increased to $715,000 from $180,000 for the same period in the prior year due to
lower sales volume and higher SG&A expenses. Pharma Labs' operating loss for the
three month period ending February 28, 1998 was $651,000 compared to an
operating profit of $59,000 for the same period in the prior year due to the
lower sales volume and the $430,000 impairment loss as previously discussed. The
Company's operating losses for the three month period ending February 28, 1998
were $196,000 compared to an operating profit of $180,000 in the comparable
period last year as a result of the loss of revenue due to the sale of the
radiopharmaceutical business.
The net loss for the three month period ending February 28, 1998 also includes
interest expense of $122,000 and joint venture losses of $35,000 from the
Company's equity investment in RxDirect. In addition, the Company also had other
income of $27,000 for the three month period ending February 28 1998.
LIQUIDITY AND CAPITAL RESOURCES ($ rounded to nearest thousand)
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 February
28, 1998, as compared to August 31, 1997.
FEBRUARY 28, AUGUST 31,
1998 1997
------------------- ---------------------
Current Assets $ 3,018,000 $ 3,256,000
Current Liabilities 5,477,000 3,132,000
=================== =====================
Net Working Capital $ (2,459,000) $ 124,000
=================== =====================
12
At February 28, 1998, current assets were $3,018,000 compared to $3,256,000 at
August 31, 1997. This decrease was due primarily to reduction in trade
receivables of $91,000, inventories of $140,000, and notes receivable of
$100,000, offset somewhat by a $92,000 increase in prepaid expenses. At February
28, 1998, current liabilities were $5,477,000 compared to $3,132,000 at August
31, 1997. This increase was due primarily to an increase of $2,590,000 in notes
payable to shareholders and directors of the Company. The proceeds from the
notes payable were used primarily to fund the Company's negative cash flow from
operations during the first half of fiscal 1998 and to pay down its Revolving
Facility (defined below) by $206,000, which resulted in a balance under the
Credit Facility of $537,000 at February 28, 1998.
During the first half of fiscal 1998, the Company experienced increased expenses
compared to the same period last year due to its expansion and development
efforts including: (i) expansion of QCP's sales department including the
addition of key sales executives; (ii) expansion of QCP's sales operations in
the eastern states; (iii) development of a telemarketing division at QCP; and
(iv) the expansion of QCP's information systems and programming department. The
Company believes this expansion program will continue to require significant
up-front expenditures both to service its existing business and to develop new
lines of business.
Prior to September 1997, the Company's primary source of funds for working
capital was the Company's revolving facility with the Bank. This facility is
payable at the Bank prime rate plus 2% and expires in August 2000. At February
28, 1998, the balance outstanding was $537,000, and the interest rate under the
Revolving Facility was 10.5%. The Revolving Facility is collateralized by the
Company's accounts receivable and inventory, and the availability under the
Revolving Facility is determined based on eligible accounts receivable and
inventory. As a result of the Company's poor sales performance in the first half
of fiscal 1998, borrowing capacity under the $2,500,000 Revolving Facility was
limited to $616,000 at February 28, 1998.
At February 28, 1998, the Company was not in compliance with certain covenants
of the Revolving Facility, including covenants regarding debt service, interest
coverage and net income. As a result of the default, the Bank has the right to
terminate the Revolving Facility, declare the outstanding balance due and
payable, and exercise other rights and remedies specified in the Revolving
Facility agreement. To date, the Bank has not exercised its right to terminate
the Revolving Facility. The Company is currently renegotiating the terms of the
Revolving Facility with the Bank including amendments to remedy the
non-compliance issues. However, there can be no assurance that the amendment
will be available on terms acceptable to the Company, if at all.
As a result of the Company's inability to borrow sufficient amounts under the
Revolving Facility for operations, the Company was required to borrow funds from
certain shareholders and directors of the Company. See "Note 3 to Notes to
Consolidated Financial Statements." The indebtedness is represented by
promissory notes issued by the Company and the amounts outstanding were $615,000
($575,000 payable to Charles R. Drummond and $40,000 payable to Arch G. Gothard,
III); and $3,205,000 ($2,665,000 payable to Charles R. Drummond and $540,000
payable to Arch G. Gothard, III) at August 31, 1997, and February 28, 1998,
respectively.
13
FUTURE OPERATIONS - The Company remains optimistic regarding the growth
potential for QCP. A program has been initiated to expand QCP's product
offering. In addition, a contract has been signed with a large group purchasing
organization and negotiations are underway with other similar organizations.
These contracts will help the Company expand its customer base as well as enable
the Company to purchase pharmaceuticals at more favorable prices.
Pharma Labs results remain below Company expectations. Efforts continue to
develop domestic "private label" sales. Also, the Company, along with its joint
venture partner, is taking action to better position Pharma Labs in the Vietnam
market. These efforts include development of new product formularies and new
pricing and marketing strategies. Pharma Labs operations have been scaled back
in order to minimize Pharma Labs' impact on overall Company cash flow.
As a result of continued QCP spending on expansion efforts, cash flow from
operations will not be sufficient to meet the Company's cash requirements during
the balance of fiscal 1998. As it is not anticipated that availability under the
Revolving Facility will be sufficient, the Company is seeking to raise
additional capital in order to fund its ongoing operations and the continued
investment and expansion of QCP. The Company, through a financial advisor, is
pursuing an equity investment of $2 to $3 million. To date, the Company does not
have any commitments with respect to such financing and there can be no
assurance that financing will be available to the Company on terms acceptable to
the Company, if at all. If the Company is unable to obtain financing, it will be
forced to terminate its expansion activities, curtail certain existing
operations and substantially reduce SG&A. These activities would have a material
adverse effect on the Company's business and financial condition.
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.
14
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: April 20, 1998 BY: /s/ Gary P. Pryor
-------------------------------------
Gary P. Pryor
15
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule