FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended August 31, 1996
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.)
1313 Washington Avenue Golden, Colorado 80401
(Address of principal executive office) (Zip Code)
Issuer's telephone number (303) 279-9375
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
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 No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $10,156,647
Aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 22, 1996 was $21,735,410. This calculation is
based upon the average of the bid
($.17) and asked ($.19) prices of the voting stock on November 22, 1996.
The number of shares of common stock outstanding as of November 22,
1996 was 120,752,278.
Transitional Small Business Disclosure Format: Yes No
<PAGE>
Item 1. Description of Business
General.
Golden Pharmaceuticals, Inc. (the "Company") was incorporated in
1973 under the name Mini-Dose Labs. In 1979, under the name Benedict
Nuclear Pharmaceuticals, Inc., the Company completed its initial public
offering of common stock. On October 7, 1992 the Company's name was
changed to North American Chemical Corporation and on March 4, 1994 it was
changed again to Golden Pharmaceuticals, Inc. Since 1979 the Company's
primary business has been the manufacture and national distribution of
Sodium Iodide I-123 Capsules ("I-123 Capsules").
Recent Developments.
Golden Research Corporation. In November 1991, the Company entered
into an Agreement Limiting Execution on Judgment (the "Settlement
Agreement") in settlement of the matter of New Crawford Valley Ltd. v.
Benedict Nuclear Pharmaceuticals, Inc. and Golden Research Corporation.
In August 1995, the Company, Golden Research Corporation ("GRC"), GHC,
Inc. ("GHC"), Charles R. Drummond, New Crawford and Gulch Holdings Company
entered into a First Amendment to Agreement Limiting Execution on Judgment
(the "Amendment") whereby GHC has assumed the obligations of the Company
under the Settlement Agreement. Pursuant to the Amendment, GHC has been
substituted as a defendant to the lawsuit and the Company and GRC have
been dismissed as parties to the lawsuit. In exchange, the Company issued
2,000,000 shares of its common stock to GHC, upon which New Crawford may
execute its judgment in the event GHC defaults under the Settlement
Agreement. These shares are required to be transferred back to the
Company at such time as New Crawford has executed and filed an
acknowledgment of the complete satisfaction of the judgment. Mr. Charles
R. Drummond is the sole shareholder of GHC and he has personally
guaranteed the obligations of GHC under the Amendment. See "Certain
Relationships and Related Transactions."
Acquisition of Quality Care Pharmaceuticals, Inc. On August 7,
1995, the Company purchased all of the issued and outstanding common stock
of Quality Care Pharmaceuticals, Inc. ("QCP") for a total purchase price
of $3,718,750. To facilitate the financing of the acquisition of QCP, the
Company obtained from a national bank (the "Bank") a $4,000,000 term loan
(the "Term Loan"), a $2,000,000 revolving line of credit (the "Revolving
Facility") and an additional $400,000 term loan. See "Liquidity and
Capital Resources."
QCP is engaged in the repackaging and distribution of pharmaceutical
products. QCP's customers include physicians, hospitals, group practices,
managed care programs and other legally constituted medical facilities
throughout the United States.
Rx Direct, LLC. On February 12, 1996 QCP entered into a joint
venture agreement with the Visiting Nurses Association of Orange County
("VNA") to establish Rx Direct, LLC ("RxD"), a mail order pharmacy. QCP
provides ongoing management and logistical support to the joint venture.
RxD is engaged in the dispensing of medications via the mail to subscribers of
their services. Both QCP and VNA
will market their
services to their respective customer base.
ISO 9000 Certification. On March 14, 1996 and May 13, 1996, QCP and
the Company respectively were certified by the International Organization
for Standardization ("ISO 9000") as having the highest quality standards.
ISO 9000's purpose is to establish common worldwide quality standards.
The certification audit was performed by the French International
Organization called Ascert. QCP believes that they are one of only a few
domestic pharmaceutical repackagers that are currently ISO 9000 certified.
Pharma Labs, LLC. On June 15, 1996, the Company entered into a
joint venture agreement with Pharma France, Inc. to form Pharma Labs, LLC
("Pharma Labs"). The Company agreed to contribute a total of $1,000,000
for 52% of the equity in Pharma Labs, LLC. As of August 31, 1996 the
Company has contributed $680,545 in cash for inventory, leasehold
improvements, a non compete agreement and operational support.
Pharma Labs is engaged in the manufacturing, packaging, and
distribution of nutritional supplements; specifically vitamins, minerals,
and herbal products. Pharma Labs has an exclusive license with a
distributor to distribute its products in Vietnam. In addition, Pharma
Labs performs contract manufacturing and packaging for both domestic and
foreign markets.
Nuclear Medicine Industry.
Nuclear medicine is the branch of diagnostic medicine which utilizes
radiopharmaceuticals for the diagnosis and treatment of various human
illnesses. Because of the relatively short half life of most useful
medical radioisotopes, approximately twenty-four hours or less, they are
produced, distributed, and efficaciously passed through the patient in a
short time period. Such radiopharmaceuticals, used in conjunction with
state-of-the-art imaging equipment, allow medical professionals to view
and evaluate the normal and/or abnormal functioning of specific organs.
They are then able to prescribe treatment accordingly. I-123 Capsules are
sold primarily to authorized professionals in the medical field, who are
licensed to practice and administer nuclear medicine, in approximately
6,000 hospitals and clinics nationally with accredited nuclear medicine
departments.
Many radiopharmaceuticals are produced from portable lead shielded
generators at the hospital site or in central nuclear pharmacy
distribution centers. A range of radiopharmaceuticals approved by the
United States Food and Drug Administration (the "FDA") are manufactured
from Cyclotrons and Linear Accelerators. The isotopes currently produced
using this method include Thallium 201 (heart disorders); Sodium Iodide I-123
(thyroid abnormalities); and
Gallium 67 Citrate (soft tumor masses and
cancer).
Many of the commercial radiopharmaceutical diagnostic products are
marketed and shipped directly from the manufacturer to the end user.
Centralized nuclear pharmacy programs are generally maintained by three
companies: Mallinckrodt Nuclear ("Mallinckrodt"), Amersham (Medi-Physics),
and Syncor International Corporation ("Syncor"). These companies, and a
few independent distributors with similar programs, custom deliver
radiopharmaceuticals in specific dosages to medical professionals in the
immediate vicinity of a nuclear pharmacy.
Pharmaceutical Repackaging Industry.
Pharmaceutical repackagers, such as QCP, repackage pharmaceuticals
from bulk quantities into smaller units of use and dose measurements,
thereby providing physicians, hospitals, managed care programs and group
practices with lower product, inventory, and dispensing (labor) costs.
The Company's Products.
In 1982, the Company received approval from the FDA on its New Drug
Application ("NDA") for I-123 Capsules. I-123 Capsules are used for
detection of thyroid abnormalities. I-123 Capsules are the only drug
product currently manufactured by the Company and are primarily marketed
and distributed in the United States through Syncor, a national
radiopharmaceutical distribution company. The Company also has an
approved New Drug Submission ("NDS") in Canada for I-123 Capsules,
allowing distribution of I-123 Capsules in Canada. I-123 Capsules are
marketed and distributed in Canada through Mallinckrodt of Canada.
The Company is also engaged in the receipt, processing, and shipment
of radiochemical products under its current approved radiochemical
license. The radiochemical products are primarily used by licensed
medical facilities involved in research and development.
Manufacturing.
Because of the short half-life (13.2 hours) of the radioisotope I-123, the
Company's manufacturing operations are scheduled so as to
maximize the distribution system for the I-123 Capsules while maintaining
a high level of quality.
The manufacturing process begins with the production of the
radioactive isotope in a cyclotron. The cyclotron process involves the
bombardment of a non-radioactive "target" with protons at high velocity
which transforms the target into the radiochemical Sodium Iodide I-123.
Since 1987, the Company's exclusive supplier of this radiochemical has
been Nordion International, Inc. ("Nordion"). Nordion is recognized in
the radiochemical industry for producing exceptionally pure radioisotopes
in commercial quantities. Nordion possesses multiple isotope
manufacturing facilities which helps to ensure that the Company has an
uninterrupted supply of the isotope. All raw material is purchased on a
weekly basis by the Company.
The techniques and methods used for the manufacture of I-123
Capsules are extensively regulated by the FDA. The Federal Food, Drug and
Cosmetic Act, the Public Health Service Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of
such products. Noncompliance with applicable requirements can result in
fines, recall or seizure of products, refusal of the government to approve
product approval applications or to allow the Company to enter into
government supply contracts, withdrawal of previously approved NDA's and
criminal prosecution. The FDA also has the authority to revoke biological
product licenses and establishment licenses previously granted.
The Company's plant in Golden, Colorado, including personnel,
equipment and processes therein, is subject to FDA regulations regarding
current Good Manufacturing Practices ("cGMP") and FDA approved Standard
Operating Procedures. The production process takes approximately twelve
hours from start to finish. The I-123 Capsules are shipped to hospitals
within twenty-four hours after quality control release. The I-123
Capsules' labeled time of expiration is approximately thirty-two hours
after they are shipped.
QCP is licensed by the FDA as a manufacturer of repackaged
prescription drugs. QCP purchases bulk quantities of certain
pharmaceuticals and repackages them into smaller dispensing units for sale
to its customers. QCP's repackaging facility, located in Santa Ana,
California, is licensed by the FDA, the United States Drug Enforcement
Administration and the California Health and Services Department and
maintains rigid quality control standards.
RxD is licensed by the California Board of Pharmacy and the United
States Drug Enforcement Agency, and operates as a retail pharmacy engaged
in mail order delivery.
Pharma Labs is licensed by the FDA as a manufacturer and distributor
of nutritional products as well as by the California Health and Services
Department. Pharma Labs manufactures both bulk and finished packaged
nutritional products for international and U.S. distribution.
Distribution.
The Company's label on the I-123 Capsules is "Highest Purity,
Highest Quality, and Lowest Radiation Dose." The Company manufactures I-123
Capsules under its own label. The Company sells the I-123 Capsules
primarily to Syncor, as well as directly to hospitals and pharmacies in
territories not serviced by Syncor. The Company processes and
manufactures capsules against customers' weekly standing orders. I-123
Capsules are packaged to precisely meet the needs of distributors and
customers and shipped nationally in Department of Transportation approved
containers by common carrier air transportation and locally by van in
smaller shielded containers. The entire process from isotope production
to receipt of the I-123 Capsules by customers occurs in less than twenty-four
hours, four days a week.
QCP ships all orders for its products via United Parcel Service or
other types of overnight delivery services. QCP's goal is to ship orders
within twenty-four hours of receipt of the order.
RxD ships all orders for its products via United Parcel Services or
overnight mail to all of their customers. RxD's goal is that orders are
shipped next day from receipt of order.
Pharma Labs ships via ocean freight containers and air cargo for its
international customers and delivers directly via ground transportation to
its U.S. customers. Delivery schedule depends on final form and quantity,
but generally products are available within two weeks of the order date.
Suppliers.
The Company's exclusive supplier of the radiochemical Sodium Iodine
I-123 is Nordion. The radiochemical is shipped by common carrier air
transportation from Nordion's plant in Vancouver, Canada in shielded
containers to the Company's facility in Golden, Colorado. The Company
believes its relationship with Nordion to be good.
QCP purchases pharmaceuticals from a number of FDA licensed American
drug manufacturers. QCP's largest supplier is Bergen Brunswig Corporation
located in Corona, California. QCP believes its relationship with its
suppliers to be good.
RxD purchases pharmaceuticals from a number of FDA licensed drug
wholesalers. RxD's largest suppliers are Bergen Brunswig Corporation,
Barnes Wholesaler and Wyeth Aherst.
Pharma Labs purchases raw materials from a number of FDA licensed
manufacturers. Pharma Labs' largest suppliers are Hoffman La Roche,
Klockner Pentaplast and Stauber Performance.
Backlog.
The Company does not have a backlog but operates on a standing order
basis with its customers. Because of the short-lived characteristics of
the I-123 Capsules, they must be shipped and consumed shortly after
delivery to the end user. Patients are scheduled by hospitals and clinics
in recognition of the short-lived characteristics of I-123 Capsules.
Marketing.
The Company presently markets I-123 Capsules primarily through
Syncor. The Company also markets directly to hospitals and pharmacies in
territories that are not serviced by Syncor. Although management has from
time to time considered implementing a program for direct marketing and
distribution of the I-123 Capsules to hospitals and pharmacies, it has
determined that distributing the I- 123 Capsules primarily through
distributors such as Syncor is currently the most cost-effective
alternative for the Company.
QCP markets its products primarily through independent sales
representatives and trade shows.
RxD markets through QCP and VNA sales representatives, as well as
through direct mail and magazine advertising.
Pharma Labs markets through a distributor in Vietnam and surrounding
countries and directly to U.S. customers.
Patent and Trademarks.
The I-123 Capsules are not protected by patent. Patent protection on
radio-pharmaceuticals has been generally nonexistent since development in
the field arose out of individual research and private and institutional
laboratories with results of formulation and processes published
extensively. New developments may be the subject of patent protection and
may be a significant factor in the business as a result of radiochemicals
being used in combination with genetic and other man-made biological
chemicals.
It is the Company's opinion that brand name competition is not a
significant factor in the marketing of radiopharmaceuticals and that
product purity specifications are more important to nuclear medicine.
Research and Development.
The Company is not currently conducting any significant research and
development activities.
Competition.
In the radiopharmaceutical industry the Company competes with
companies that have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources than the
Company. In addition, the Company's products may be subject to
competition from products using techniques other than those developed by
the Company or based on advances that may render the Company's I-123
Capsules obsolete.
All the major manufacturers of radiopharmaceutical products produce
various radioisotopes from cyclotrons which they own. In contrast, the
Company obtains its supply of radioisotopes from Nordion. Accordingly,
the Company has less control over the availability and price of its raw
materials. However, the Company has a long-term supply contract with
Nordion and the Company believes that the isotope supplied by Nordion
provides greater purity in the finished product than that of its
competitors' products. Also, the Company believes that Nordion is a very
reliable supplier because Nordion has two cyclotrons and the Company is
Nordion's largest customer for the radioisotope used for the production of
I-123 Capsules.
Because of the different dosage strengths available and the marketing
tactics of the Company's competitors, a direct price comparison is not
feasible. However, the Company believes that the I-123 Capsules are
priced competitively. Further, the cost of the capsule to the patient is
less than 10% of the total cost of the diagnostic procedure.
QCP competes with other repackagers of pharmaceuticals, including
Allscrips Pharmaceuticals, Inc. and PDRx. QCP believes it compares
favorably with its competitors on such factors as price, service and
delivery, credit terms, breadth of product lines and customer support.
RxD competes with other mail order pharmacies but believes it can
leverage the customer base of its joint venture parents, the Company and
VNA.
Pharma Labs competes with other companies in the manufacture of
nutritional products both internationally and in the U.S. Pharma Labs has
positioned itself strategically with a marketing partner to leverage it
presence in Vietnam. In the U.S., Pharma Labs is attempting to establish
itself as a repackager of unit dose in a market which it believes to be
under supplied.
Government Regulations
The drug and radiopharmaceutical industries are highly regulated by
federal and state regulatory bodies. The Company's manufacturing facility
is regulated primarily by the FDA and the Nuclear Regulatory Commission.
The Department of Transportation and Federal Aviation Administration
regulate the transportation of radioactive materials over land and through
the air. The Company also has to comply with rules and regulations of the
Environmental Protection Agency concerning the storage and disposal of
hazardous waste. In addition, it must comply with all states that have
regulatory agreements with any of the Federal agencies as well as specific
state agencies within the State of Colorado.
Companies in the drug industry must obtain approval primarily from the
FDA before any commercial activities can commence with a new product. In
order to obtain FDA approval or clearance of a new product, a Company must
submit proof of safety, purity, potency, and efficacy. In most cases such
proof entails extensive pre-clinical chemistry, clinical, and laboratory
testing. The testing, preparation of necessary applications, and
processing of those applications by the FDA is expensive and time
consuming and may take several years to complete.
The FDA may also require post-marketing testing and surveillance to
monitor the effects of approved products and/or place conditions on any
approvals that could restrict the commercial applications of such
products. The FDA has the power to prevent or limit further marketing of
the product based on the results of these post-marketing programs.
Approval to manufacture, market, distribute and sell I-123 Capsules may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
The Company's manufacture and distribution of the I-123 Capsules is
regulated by the FDA and subject to approved Standard Operating Procedures.
In addition, manufacturing takes place under a Quality Control and Quality
Assurance program which provides for the continuous checking and testing of
the I-123 Capsules. The manufacture of the I-123 Capsules is subject to all
the same requirements of any drug manufactured under cGMP guidelines as
established by the FDA.
QCP operations are regulated by the United States Drug Enforcement
Administration ("DEA"), the FDA and various state bureaus of pharmacy which
govern the distribution of pharmaceutical products and controlled
substances. These organizations require distributors of pharmaceutical
products and controlled substances to obtain permits and to meet various
security and operating standards. QCP has received all necessary regulatory
approvals and believes it is in substantial compliance with all applicable
requirements.
RxD is monitored by the same Federal and State regulatory organizations
as QCP and is also required to obtain permits and to meet various security
and operating standards of such Federal and State organizations. RxD has
received all necessary regulatory approvals and believes it is in
substantial compliance with all applicable requirements.
Since Pharma Labs' products are considered nutritional supplements,
they are regulated by the branch of the FDA which oversees the distribution
of nutritional products. Although the regulations are not quite as
stringent as those that govern pharmaceutical products, they still require
distributors of nutritional supplements to obtain permits and to meet
various security and operating standards. Pharma Labs has received all
necessary regulatory approvals and believes it is in substantial compliance
with all applicable requirements.
Any change in government regulations cannot be predicted. The Company
also cannot predict whether any agency will adopt regulations that will have
a material effect on the Company's and/or it's subsidiary's operations.
In addition, a variety of state and local permits are required under
regulations relating to the Company's and QCP's products.
Product Liability and Insurance
The Company currently maintains product liability insurance in the
aggregate amount of $2 million per occurrence and per year with a $5,000
deductible.
Employees
As of November 22, 1996 the Company employed twenty-five (25) persons
on a full time basis. Additional employees are hired from time to time
during peak production periods. As of November 22, 1996, QCP employed
forty-eight (48) persons, of which forty (40) are employed on a full-time
basis. None of the Company's or its subsidiaries employees are represented
by a union or collective bargaining unit and management considers relations
with employees to be good.
Additional Information
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment or otherwise relating to the
protection of the environment has not had, and is not expected by the
Company to have, any adverse effect on capital expenditures, earnings or the
competitive position of the Company. The Company is not presently a party
to any litigation or administrative proceeding with respect to its
compliance with such environmental standards. In addition, the Company does
not anticipate being required to expend any funds in the near future for
environmental protection in connection with its operations.
Item 2. Description of Properties
The Company's manufacturing and processing facility and administrative
offices are housed in two separate buildings in Golden, Colorado. The
manufacturing and processing facility, which is approximately 14,000 square
feet, and the administrative offices, which are approximately 2,000 square
feet, were purchased in 1983. The Company's equipment consists primarily of
laboratory equipment.
QCP leases a 25,000 square foot facility in Santa Ana, California
pursuant to a lease agreement which expires in March, 2004.
Pharma Labs leases a 45,000 square foot facility in Anaheim, California
pursuant to a lease agreement with expires in January, 2000.
The Company believes that its facilities and equipment are well
maintained and in good operating condition and will satisfy its current
manufacturing and processing needs.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's common stock is traded in the over-the-counter market and
is quoted on the "OTC Bulletin Board" under the symbol "GPHI." The
following table sets forth the high and low closing bid prices for the
periods indicated, as reported by the OTC Bulletin Board.
For year ended August 31, 1996 High Low
1st Quarter $.09 $.07
2nd Quarter .12 .10
3rd Quarter .3125 .115
4th Quarter .38 .17
For year ended August 31, 1995 High Low
1st Quarter $.03 $.02
2nd Quarter .02 .02
3rd Quarter * *
4th Quarter .08 .03
________________
* No quotes reported.
These quotations are inter-dealer prices without retail markup, markdown
or commissions, and may not necessarily represent actual transactions.
As of November 22, 1996, there were approximately 2800 shareholders of
record of the Company's common stock.
The Company has never paid cash dividends. The Board of Directors of the
Company currently anticipates that it will retain all available funds for
use in the operation of the business and does not anticipate paying any cash
dividends in the foreseeable future. The payment of cash dividends is
restricted by the Company's loan agreements with the Bank.
Item 6. 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 QCP and Pharma Labs 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 and improve customer response rates, 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 pharmaceutical industry and general economic
conditions. Further, any forward looking statements or 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.
Results of Operations.
Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31,
1995.
Net Sales. Net sales for the fiscal year ended August 31, 1996 increased
to $10,156,647 compared to $4,412,377 for the fiscal year ended August 31,
1995. The increase of $5,744,270 or 130% is primarily attributable to the
consolidation of the operations of QCP with the Company's for the period
September 1, 1995 to August 31, 1996 compared to only one month in the prior
period. QCP sales were $5,984,085 for the year ended August 31, 1996 as
compared to $757,719 for the one month of operation in August 1995. The
remaining increase is primarily attributable to (i) the consolidation of
Pharma Labs' sales which represented approximately $167,000 of the increase
(ii) and an increase in demand from its primary distributor, Syncor, which
represented an increase of $230,312.
Cost of Goods Sold. Cost of goods sold as a percentage of sales was 64.4%
for the fiscal year ended August 31, 1996 as compared to 50.9% for the
fiscal year ended August 31, 1995. The increase is primarily the result of
the consolidation of QCP's operations with the Company's for the entire
fiscal year compared to only one month in the prior period. Historically,
QCP has had lower margins than the Company due to industry standards.
Selling General and Administrative. Selling, general and administration
expenses ("SG&A") were $3,671,613 for the fiscal year ended August 31, 1996
as compared to $1,255,645 for the fiscal year ended August 31, 1995. SG&A
for the fiscal year ended August 31, 1996 increased $2,415,968 or 192% due
to (i) the consolidation of QCP and PL's operations for an entire fiscal year
and the last quarter which represented $2,020,784 of the increase; (ii)
the development of a new trademark and marketing and sales materials for QCP
which represented $75,000 of the increase; (iii) relocation and expansion of
QCP's facilities which represented $85,224 of the increase;(iv) amortization
of goodwill and non-competes which represents $233,036; and (v)
expenses for travel and consulting fees in connection with the Company's
efforts to enhance the operations and management of QCP.
Net Income. The Company reported a net loss of $791,932 for the fiscal
year ended August 31, 1996 as compared to net income of $978,574 for the
fiscal year ended August 31, 1995. The net loss was primarily due to (i)
relative increase in SG&A expenses of approximately $781,000, (ii) increase
in interest expense of $666,868, (iii) depreciation and amortization of
approximately $408,300, and (iv) a loss of $66,776 in connection with its
interest in RxD.
Fiscal Year Ended August 31, 1995 Compared to Fiscal Year Ended August
31,1994.
Net Sales. Net sales for the fiscal year ended August 31, 1995 increased
to $4,412,377 compared to $3,451,020 for the fiscal year ended August 31,
1994. The increase of $961,357 or 27.9% is primarily attributable to the
consolidation of the operations of QCP with the Company's for the period
August 1, 1995 to August 31, 1995, which represents $755,350 of the
increase, and an increase in demand for the Company's product from its
primary distributor.
Cost of Goods Sold. Cost of goods sold as a percentage of sales was 50.9%
for the fiscal year ended August 31, 1995 as compared to 45.9% for the
fiscal year ended August 31, 1994. This increase was primarily the result
of the consolidation of QCP's operations with the Company's for the period
August 1, 1995 to August 31, 1995. Cost of sales for the fiscal year ended
August 31, 1995 was 47% prior to the consolidation.
Selling General and Administrative. SG&A expenses were $1,255,645 for the
fiscal year ended August 31, 1995 as compared to $1,037,502 for the fiscal
year ended August 31, 1994. SG&A expenses for the fiscal year ended August
31, 1995 were less than the prior period before expenses related to (i)
expansion of the Company's Quality Assurance and Regulatory Affairs
departments through the hiring of two new employees; (ii) expenses incurred
during the fiscal year ended August 31, 1995 for travel, due diligence,
legal fees, accounting fees and consulting fees in connection with the
Company's ongoing efforts to expand its business through the acquisition of
additional product lines or companies in the pharmaceutical industry.
Net Income. The Company reported net income of $978,574 in the fiscal
year ended August 31, 1995 as compared to $1,329,112 for the fiscal year
ended August 31, 1994. The decrease of $350,538 or 26.4% was attributable
to not only the items listed above, but also do to the recognition of a
greater tax benefit relating to the Company's net operating loss carry
forward for the fiscal year ended August 31, 1994.
Liquidity and Capital Resources.
The operations of QCP and Pharma Labs have consumed substantial amounts of
cash. As a result the Company, on a consolidated basis, experienced
negative cash flow from operations for the fiscal year ended August 31, 1996.
Management anticipates that QCP will operate on a "break-even" basis
for first quarter of fiscal year 1997. As a result of the continuing
capital requirements for inventory and accounts receivable of QCP,
management projects that the Company may continue to experience negative
cash flow from operations for fiscal year 1997.
During the fiscal year ended August 31, 1996 the Company relied primarily
on a private offering of equity, the Revolving Facility and the exercise of
warrants and options to fund its operations. The funds were primarily used
to develop marketing and sales materials and to purchase the hardware and
software necessary to expand QCP's operations. In addition the resources
were used for the start up of Pharma Labs' operations, primarily the
building of inventory and accounts receivable. The Company expects that its
future cash needs for fiscal year 1997 will primarily relate to the
continued expansion of QCP's operations and the development of Pharma Labs
operations internationally, as well as, establishing Pharma Labs
domestically as a repackager of unit doses. If the Company cannot obtain
additional sources of financing it may be forced to limit the future
expansion of QCP and Pharma Labs.
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 August 31, 1996 as compared to August 31, 1995.
August 31,1996
August 31, 1995
Current Assets
$3,528,771*
$2,656,600*
Current Liabilities
2,616,663
2,040,931
Net Working Capital
$ 912,108
$ 615,669
* Includes $380,000 of deferred taxes per FASB 109 resulting from the
Company's substantial net operating loss carryforwards.
Current assets were $3,528,771, an increase of $872,171 or 33% at
August 31, 1996 as compared to $2,656,600 at August 31, 1995. The
increase was primarily due to (i) the consolidation of the current assets
of Pharma Labs' with the Company's which represented $423,479 of the
increase, (ii) an increase in QCP's inventories of $303,168 which was a
result of an increase of QCP's top 100 inventory items in an effort to
produce larger lots and reduce manufacturing costs through the utilization
of automated packaging equipment.
Current liabilities were $2,616,663, an increase of $575,732 or 28%
for the period ended August 31, 1995 compared to current liabilities of
$2,040,931 for the period ended August 31, 1995. The increase in current
liabilities was primarily the result of the consolidation of the current
liabilities of Pharma Labs' with the Company's at August 31, 1996 which
represented $302,512 of the increase. In addition accrued interest
increased approximately $108,000. The Company had working capital of
$912,108 and a current ratio of 1.35:1 for the period ended August 31,
1995.
To facilitate the financing of the acquisition of QCP, to refinance
existing debt of the Company and QCP and to provide working capital for
the Company and QCP, the Company obtained the Term Loan and the Revolving
Facility. Interest on the Term Loan is payable at the Bank prime plus 3%
(which totaled 11.34% at August 31, 1996). The Term Loan is payable in
sixteen quarterly installments of $125,000 to be made August 1, 1996
through August 1, 2000 with a lump sum payment of $2,000,000 due in August
2000. The Revolving Facility is payable at the Bank prime plus 2% and
expires in August, 2000. At August 31, 1996 the balance on the Revolving
Facility was $532,141 and the interest rate was 10.34%. The Company has
an additional term loan of $400,000 with an interest rate at the Bank
prime plus 3% (which totaled 11.34% at August 31, 1996) and which is
payable in monthly installments of $6,667 through August 1, 2000. In
November 1996, the Company and the Bank entered into a Fourth Amendment to
the Credit and Security Agreement, which amendment revised certain
covenants and waived prior defaults.
The Company's long term debt, including the current portion thereof,
at August 31, 1996 consisted of notes payable to the Bank totaling
$4,761,375 incurred primarily as a result of the acquisition of QCP. In
addition the Company will pay contingent interest in connection with the
long term debt in an amount equal to 10% of the total consolidated company
value including its subsidiaries. The contingent interest is due and
payable on the date of the final maturity of the debt. If no default or
event of default exists , and the Company prepays the debt in full prior
to August 1, 1998, the contingent interest shall not exceed $2,150,000.
The Company has capitalized leases and operating leases for
equipment, facilities and vehicles used in its business. Minimum lease
payments for its capitalized and operating leases are expected to be
$142,053 and $333,342, respectively, for the fiscal year ending August 31,
1996.
As of August 31, 1996, the Company had net operating loss
carryforwards for fiscal income tax purposes of approximately $15,440,000.
The net operating loss carryforwards will expire in the years 1997 through
2006. The Company's ability to utilize its net operating loss
carryforwards is subject to an annual limitation in future periods
pursuant to the "change in ownership" rules under Section 382 of the
Internal Revenue Code of 1986.
During the fiscal year ended August 31, 1996, the Company raised
approximately $1,500,000 through a private placement of common stock the
proceeds of which were used to fund Pharma Labs and provide additional
working capital for the Company. In addition, the Company raised $1,060,000
in cash from the exercise of options and warrants during the
fiscal year ended August 31, 1996.
The Company's long-term capital expenditure requirements will depend
upon numerous factors, including the demand for the Company's product and
any expansion activities. The Company currently has no commitments or
arrangements for raising additional capital.
Item 7. Financial Statements
The financial statements of the Company are attached to this Report.
Item 8. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
of the
Registrant; Compliance with Section 16(a) of the Exchange Act
The following persons hold the positions indicated.
Name and Age
Principal Occupation or Employment During the Past Five Years; Other
Directorships
Director
Since
Charles R.
Drummond
(53)
Chairman of the Board of Directors, Chief
Executive Officer and Treasurer of the
Company since 1992. Owner and operator of
Drummond Ranches, a cattle ranching
operation in Pawhuska, Oklahoma, since
1965. Partner in Drummond and Hull Oil
Company.
1991
Ladd A. Drummond
(27)
Director. Manager and co-owner of the
Bricktown Waterworks Restaurant in
Oklahoma City since February 1993.
Co-owner of Drummond Land and Cattle
Company since January 1991.
1994
Bruce A.
Goldberg
(51)
President from March 1996 to present.
Chief Operating Officer since February,
1994. Director of Reagent Operation at
Lifescan, Inc. from 1989 to 1994.
N/A
Arch G. Gothard
III
(51)
Director. President of First Kansas,
Inc. since October 1988. Mr. Gothard is
also serves as a director of First State
Bank, Community Bank of Kansas, Emery
Leasing Co., Inc., Kenco Plastics, Inc.,
LDI, Inc., Pay Phone Concepts, Inc. and
Collins Industries, Inc.
1995
John H. Grant
(54)
Director. Professor of Business
Administration, University of Pittsburgh,
Pennsylvania since January 1972.
1990
Richard G. Wahl
(60)
Director and Corporate Secretary. Owner
and President of MRD Construction
Incorporated, since 1964. Mr. Wahl also
serves as managing partner of both G & W
Construction of Evergreen, Colorado, and
Willow Ridge Conference Center of
Morrison, Colorado.
1993
Glen H. Weaver
(41)
Vice President, Finance and Chief
Financial Officer. Vice President,
Finance since 1994 and Chief Financial
Officer since March 1996. Controller for
Border Fuel Supply Corporation from
August 1, 1989 to November 15, 1993.
N/A
At each annual meeting of shareholders, the successors to the directors
whose terms then expire are elected to hold office for a term expiring at
the next succeeding annual meeting. Each director holds office until
their respective successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors and are elected at the
first meeting of the Board of Directors after each annual meeting of
stockholders.
Charles R. Drummond and Ladd A. Drummond are father and son. There
are no other family relationships between any of the directors and
executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and with the NASDAQ and to furnish the
Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons,
the Company believes that, during the last fiscal year, all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with except for the following:
Mr. Goldberg did not file 3 transactions for the most recent fiscal year;
Mr. John Coggan did not file a Form 3 upon becoming an officer of the
Company; Mr. Charles Drummond did not report 5 transactions during the most
recent fiscal year; Mr. John Grant did not report 4 transactions during the
most recent fiscal year; Mr. Glen Weaver did not report 1 transactions
during the most recent fiscal year; Mr. Richard Wahl did not report 3
transactions during the most recent fiscal year; Mr. Ladd Drummond did not
report 6 transactions during the most recent fiscal year; and Mr. Arch
Gothard did not report 5 transactions during the most recent fiscal year.
All the transactions described above will be reported on a Form 5 for each
officer and director.
Item 10. Executive Compensation
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer and any executive officer
whose total annual salary and bonus exceeded $100,000 for the last fiscal
year:
Summary Compensation Table
(a)
Name and
Principal Position
(b)
Year
Annual
Compensation
(c)
Salary ($)
(d)
Bonus($)
Long-Term
Compensation
Awards
(g)
Securities
Underlying
Options/SARs(#)
(i)
All Other
Compensation ($)
Charles R. Drummond,
Chairman, Chief
Executive Officer
and Treasurer
1996
1995
1994
125,000
103,750
75,000
25,000
- -0-
50,000
- -0-
- -0-
- -0-
-0-
-0-
20,000(2)
Bruce A. Goldberg
Chief Operating
Officer and
President
1996
1995
1994
104,000
96,000
56,000
20,000
13,333
-0-
- -0-
- -0-
6,000,000
-0-
-0-
-0-
__________
(1) $20,000 fee paid for securing a line of credit.
(2) Payments of certain legal expenses incurred by Mr. Charles R.
Drummond in connection with the conversion of debt and securities of the
Company and related matters.
The foregoing compensation tables do not include certain fringe benefits
made
available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available
certain non-monetary benefits to its executive officers with a view to
acquiring and retaining qualified personnel and facilitating job
performance. The Company considers such benefits to be ordinary and
incidental business costs and expenses. The aggregate value of such
benefits in the case of each executive officer and of the group listed in
the above table, which cannot be precisely ascertained but which is less
than the lesser of (a) ten percent of the cash compensation paid to each
such executive officer or to the group, respectively, or (b) $50,000, or
$50,000 times the number of individuals in the group, as the case may be,
is not included in such table.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
(a)
(b)
(c)
(d)
(e)
Shares Acquired on Exercise (#)
Value of Realized ($)
Number of Securities Underlying Unexercised Options at Fiscal Year End
Value of Unexercised
In-the-Money Options at Fiscal Year End ($)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
Charles R. Drummond
10,000,000
$1,500,000
- -0-
- -0-
- -0-
- -0-
Bruce A. Goldberg
6,000,000
$ 960,000
- -0-
- -0-
- -0-
- -0-
Employment Agreements.
On September 1, 1991 the Company entered into an employment agreement
with Mr. Charles R. Drummond whereby Mr. Charles R. Drummond was employed
by the Company beginning on September 1, 1991 for a period of three years
or the termination of the employment agreement. Pursuant to the terms of
the agreement, Mr. Drummond's duties are to act as Chairman of the
Board and Secretary of the Company. The agreement provides that Mr.
Charles R. Drummond will be paid an annual salary of $75,000, subject to
periodic increases from time to time at the sole discretion of the Board.
The agreement provides that Mr. Charles R. Drummond's employment with the
Company may be terminated for cause, as defined therein. If Mr. Charles
R. Drummond's employment is terminated without cause, the Company shall
pay Mr. Charles R. Drummond, in addition to amounts accrued during the
respective periods prior to such termination, severance pay in an amount
equal to the amount of compensation that would otherwise be payable to
Mr. Charles R. Drummond under the agreement. The Board and Mr. Charles
R. Drummond have agreed to extend the employment agreement on a year to
year basis. Mr. Charles R. Drummond's salary for the period of September 1,
1995 through August 31, 1996 will be $150,000.
In October 1992, the Company adopted a Performance Stock Option Plan
(the "Plan"), approved by the shareholders, for the benefit of employees,
officers and directors of the Company, including the executive officers
referred to in the Summary Compensation Table. The Stock Option
Committee of the Board of Directors selects the optionee and determines
the terms and conditions of the stock option grants. As of August 31,
1996, options to purchase 2,350,000 shares of common stock were
outstanding pursuant to the Plan.
Compensation of Directors.
Directors who are not employees of the Company are entitled to $1,500
for each board meeting attended in person, and $500 for each committee
meeting attended in person plus reimbursement for travel and other
expenses relating to attendance at each such meeting.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information regarding beneficial
ownership of outstanding shares of common stock as of November 22, 1996,
by (i) each person who is known by the Company to own beneficially more
than five percent of the outstanding shares of the Company's common
stock, (ii) the Company's directors, Chief Executive Officer and
executive officers whose total compensation exceeded $100,000 for the
last fiscal year; and (iii) all directors and executive officers of the
Company as a group.
Shares
Name Beneficially Owned Percent of Class
Timothy E. Drummond(1) 15,000,000 12%
623 Kihekah
Pawhuska, Oklahoma 74056
Charles R. Drummond(1) 27,886,376 23%
1313 Washington Avenue
Golden, Colorado 80401
John H. Grant (1) 2,206,321 2%
1313 Washington Avenue
Golden, Colorado 80401
Richard G. Wahl(1) 3,206,678 3%
1313 Washington Avenue
Golden, Colorado 80401
Ladd A. Drummond(1) 15,207,600 13%
1313 Washington Avenue
Golden, Colorado 80401
Arch G. Gothard III(1) 1,999,201 2%
1313 Washington Avenue
Golden, Colorado 80401
Bruce A. Goldberg(1) 6,561,000 5%
1313 Washington Avenue
Golden, Colorado 80401
All executive officers
and directors as a group
(nine persons)(1) 72,348,843 60%
__________
(1) Shares are considered beneficially owned, for purposes of this table,
only if held by the person indicated, or if such person, directly or
indirectly, through any contract, arrangement, understanding,
relationship or otherwise has or shares the power to vote, to direct the
voting of and/or to dispose of or to direct the disposition of, such
security, or if the person has the right to acquire beneficial ownership
within 60 days, unless otherwise indicated. The foregoing share amounts
include the following number of shares of common stock which may be
acquired pursuant to stock options and/or warrants exercisable within 60
days of November 22, 1996; all executive officers and directors as a
group 136,667 shares.
Item 12. Certain Relationships and Related Transactions
In August 1995, the Company issued 2,000,000 shares of its common stock
to a corporation of which Mr. Charles R. Drummond is the sole shareholder
in order to have the Company released from a contingent liability. These
shares will transfer back to the Company when the judgement is completely
satisfied. The Company retained voting rights to these shares and
dividends, if any, related to these shares are paid to the Company. See
"Liquidity and Capital Resources."
In November 1995, the Company issued Mr. Charles R. Drummond a warrant
to purchase 8,000,000 shares of the Company's common stock with an
exercise price of $.075 per share. The Warrant was issued in
consideration of certain personal guarantees extended by Mr. Charles R.
Drummond in connection with the Amendment and expires ten years from the
date of grant. These warrants were exercised in May 1996 at the price
stated in the document.
The Company is due $64,539 from a related entity with common shareholders
and officers. The Company had sales of approximately $40,000 to the
related entity. In addition QCP purchased certain inventory items in the
amount of $45,844 to manufacture and produce products for the related
entity. The amount due the Company has been guaranteed by the
shareholders. The related shareholders are as follows: Charles R.
Drummond, Bruce A. Goldberg, Arch G. Gothard, and Glen H. Weaver, all of
whom are officers or directors of the Company.
RxD subleases approximately 1500 square feet at the Santa Ana,
California facility.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents of the Company are filed as a part of
this Report
1. Financial Statements
2. Financial Statement Schedules
Schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been omitted
because they are not required under the related instructions or the
information related is contained elsewhere in the financial statements.
3. Exhibits
Exhibit No. Description
*3.1 Articles of Incorporation filed October 4, 1973.
*3.2 Articles of Amendment to Articles of Incorporation filed
December 22, 1976.
*3.3 Articles of Amendment to Articles of Incorporation filed
August 25, 1978.
*3.4 Articles of Amendment to Articles of Incorporation filed
June 15, 1979.
*3.5 Articles of Amendment to Articles of Incorporation filed
January 12, 1981.
*3.6 Articles of Amendment to Articles of Incorporation filed
June 16,1987.
*3.7 Articles of Amendment to Articles of Incorporation filed
October 9, 1992.
*3.8 Certificate of Designation of 15%/30% Cumulative
Convertible Preferred Stock filed December 9, 1987.
*3.9 Corrected Certificate of Designation of 15%/30%
Cumulative Convertible Preferred Stock filed December 14,
1987.
*3.10 Corrected Certificate of Designation of 15%/30%
Cumulative Convertible Preferred Stock filed February 5, 1988.
+3.11 Certificate of Designation of Class A Convertible
Preferred Stock filed October 12, 1990.
**3.12 Second Amended and Restated Bylaws
*4.2 Specimen Certificate for Common Stock, no par value per
share.
*10.1 Approval by Food and Drug Administration of the Company's
New Drug Application (NDA) for Sodium Iodide I-123 dated
May 27, 1982.
*10.2 Agreement Limiting Execution on Judgment dated November 4,
1991 and Addendum A thereto by and among the Company,
GRC, New Crawford Valley, Ltd. and Gulch Holdings Company.
**10.3 Amended and Restated Distribution Agreement between the
Company and Syncor dated June 1, 1995.
+10.4 Option to lease between the Company and Syncor dated
July, 1991.
++10.5 Agreement between the Company and Nordion dated June 10,
1992.
+++10.6 Stock Purchase Agreement dated June 7, 1995 by and among the
Company, Quality Care Pharmaceuticals, Inc., Daniel B. Guinn, Gary A.
Klingsheim, Michael S. Mendelsohn and the Shareholders listed on
Schedule A thereto.
**10.7 Employment Agreement between Quality Care
Pharmaceuticals, Inc. and Charles R. Drummond.
**10.8 Employment Agreement between Quality Care
Pharmaceuticals, Inc.and Daniel B. Guinn.
**10.9 First Amendment to Agreement Executing Judgment dated
August 3,1995 among the Company, GHC, Inc., Charles R.
Drummond, Golden Research Corporation, New Crawford
Valley, LTD and Gulch Holdings Company.
**10.10 Credit and Security Agreement dated August 7, 1995 among
the Company, Quality Care Pharmaceuticals, Inc. and
Norwest Credit, Inc.
**10.11 Credit and Security Agreement dated August 7, 1995 among
the Company and Norwest Bank Minnesota, National
Association.
**10.12 Promissory Note dated August 7, 1995 executed by the
Company in favor of Norwest Bank Minnesota, National
Association in the principal amount of $4,000,000.
**10.13 Revolving Note dated August 7, 1995 executed by the
Company in favor of Norwest Credit, Inc. in the principal
amount of $400,000.
**10.14 Revolving Note dated August 7, 1995 executed by the
Company in favor of Norwest Credit, Inc. in the principal
amount of $2,500,000.
**10.15 Revolving Note dated August 7, 1995 executed by the
Company and QCP in favor of Norwest Credit, Inc. in the
principal amount of $2,500,000.
***10.16 Operating Agreement dated June 14, 1996 between the
Registrant and Pharma France, Inc.
***21 Subsidiaries of the Registrant.
***27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
__________
+Incorporated by reference to registrant's Annual Report on Form 10-K,
dated August 31, 1991, as filed with the Securities and Exchange
Commission.
++Incorporated by reference to registrant's Current Report on Form 8-K,
and exhibits thereto, dated June 25, 1992, as filed with the Securities
and Exchange Commission.
+++Incorporated by reference to registrant's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1995 as filed with the Securities and
Exchange Commission.
*Incorporated by reference to registrant's Registration Statement on Form
S-1 and all amendments thereto, Registration number 33-32887.
**Incorporated by reference to registrant's Annual Report on Form 10-K,
dated August 31, 1995, as filed with the Securities and Exchange
Commission.
***Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
GOLDEN PHARMACEUTICALS, INC.
Dated: November 22, 1995 By /s/ Charles R. Drummond
Charles R. Drummond,
President,
Chief Executive Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Charles R. Drummond Chairman of the Board, November
Charles R. Drummond President, Chief Executive 22, 1995
Officer and Treasurer
/s/ Ladd A. Drummond Director November
Ladd A. Drummond 22, 1995
/s/ Bruce A. Goldberg Chief Operating Officer and November 22,
Bruce A. Goldberg Vice President of Business 1995
Development
/s/ Arch G. Gothard III Director November 22,
Arch G. Gothard III 1995
/s/ John H. Grant Director November 22,
John H. Grant 1995
/s/ Richard G. Wahl Director and Corporate November 22,
Richard G. Wahl Secretary 1995
/s/ Glen H. Weaver Vice President of Finance November 22,
Glen H. Weaver and Controller 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
GOLDEN PHARMACEUTICALS, INC.
Dated: November 22, 1996 By
Charles R. Drummond,
President,
Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Charles R. Drummond Chairman of the Board, November
President, Chief Executive __, 1996
Officer and Treasurer
Ladd A. Drummond Director November __, 1996
Bruce A. Goldberg Chief Operating Officer and November
Vice President of Business __, 1996
Development
Arch G. Gothard III Director November __, 1996
John H. Grant Director November __, 1996
Richard G. Wahl Director and Corporate November
Secretary __, 1996
Glen H. Weaver Vice President of Finance November
and Controller __, 1996
Exhibit Index
Exhibit No. Description
*3.1 Articles of Incorporation filed October 4, 1973.
*3.2 Articles of Amendment to Articles of Incorporation filed
December 22, 1976.
*3.3 Articles of Amendment to Articles of Incorporation filed
August 25, 1978.
*3.4 Articles of Amendment to Articles of Incorporation filed
June 15, 1979.
*3.5 Articles of Amendment to Articles of Incorporation filed
January 12, 1981.
*3.6 Articles of Amendment to Articles of Incorporation filed
June 16, 1987.
*3.7 Articles of Amendment to Articles of Incorporation filed
October 9, 1992.
*3.8 Certificate of Designation of 15%/30% Cumulative
Convertible Preferred Stock filed December 9, 1987.
*3.9 Corrected Certificate of Designation of 15%/30%
Cumulative Convertible Preferred Stock filed December 14, 1987.
*3.10 Corrected Certificate of Designation of 15%/30%
Cumulative Convertible Preferred Stock filed February 5, 1988.
3.11 Certificate of Designation of Class A Convertible
Preferred Stock filed October 12, 1990.
**3.12 Second Amended and Restated Bylaws
*4.2 Specimen Certificate for Common Stock, no par value per
share.
*10.1 Approval by Food and Drug Administration of the Company's
New Drug Application (NDA) for Sodium Iodide I-123 dated
May 27, 1982.
*10.2 Agreement Limiting Execution on Judgment dated November
4, 1991 and Addendum A thereto by and among the Company,
GRC, New Crawford Valley, Ltd. and Gulch Holdings Company.
**10.3 Amended and Restated Distribution Agreement between the
Company and Syncor dated June 1, 1995.
+10.4 Option to lease between the Company and Syncor dated
July, 1991.
++10.5 Agreement between the Company and Nordion dated June 10,
1992.
+++10.6 Stock Purchase Agreement dated June 7, 1995 by and among
the Company, Quality Care Pharmaceuticals, Inc., Daniel B. Guinn,
Gary A. Klingsheim, Michael S. Mendelsohn and the Shareholders
listed on Schedule A thereto.
**10.7 Employment Agreement between the Company and Charles R.
Drummond.
**10.8 Employment Agreement between the Company and Daniel B.
Guinn.
**10.9 First Amendment to Agreement Executing Judgment dated
August 3, 1995 among the Company, GHC, Inc., Charles R. Drummond,
Golden Research Corporation, New Crawford Valley, LTD and
Gulch Holdings Company.
**10.10 Credit and Security Agreement dated August 7, 1995 among
the Company, Quality Care Pharmaceuticals, Inc. and Norwest Credit,
Inc.
**10.11 Credit and Security Agreement dated August 7, 1995 among
the Company and Norwest Bank Minnesota, National Association.
**10.12 Promissory Note dated August 7, 1995 executed by the
Company in favor of Norwest Bank Minnesota, National Association
in the principal amount of $4,000,000.
**10.13 Revolving Note dated August 7, 1995 executed by the
Company in favor of Norwest Credit, Inc. in the principal amount
of $400,000.
**10.14 Revolving Note dated August 7, 1995 executed by the
Company in favorof Norwest Credit, Inc. in the principal
amount of $2,500,000.
**10.15 Revolving Note dated August 7, 1995 executed by the
Company and QCP in favor of Norwest Credit, Inc. in the
principal amount of $2,500,000.
***10.16 Operating Agreement dated June 14, 1996 between the
Registrant and Pharma France, Inc.
***21 Subsidiaries of the Registrant.
***27 Financial Data Schedule.
__________
+Incorporated by reference to registrant's Annual Report on Form 10-K,
dated August 31, 1991, as filed with the Securities and Exchange
Commission.
++Incorporated by reference to registrant's Current Report on Form 8-K,
and exhibits thereto, dated June 25, 1992, as filed with the Securities
and Exchange Commission.
+++Incorporated by reference to registrant's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1995 as filed with the Securities and
Exchange Commission.
*Incorporated by reference to registrant's Registration Statement on Form
S-1 and all amendments thereto, Registration number 33-32887.
**Incorporated by reference to registrant's Annual Report on Form 10-K
dated August 31, 1995, as filed with the Securities and Exchange
Commission.
***Filed herewith.
<PAGE>
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of August 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended August 31,
1996 and 1995 F-5
Consolidated Statement of Stockholders' Equity (Deficiency) for the
Years Ended August 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended August 31,
1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Golden Pharmaceutical, Inc.
Golden, Colorado
We have audited the accompanying consolidated balance sheets of Golden
Pharmaceutical, Inc. (a Colorado corporation) and Subsidiaries as of
August 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for each of
the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Golden Pharmaceutical, Inc. and Subsidiaries as of August 31, 1996 and
1995, and the consolidated results of their operations and their
consolidated cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Denver, Colorado
October 24, 1996 (except for note H, as to which the date is November 20, 1996)
GOLDEN PHARMACEUTICALS, INC. AND SUSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31,
1996 1995
CURRENT ASSETS
Cash $ 34,872 $ 49,557
Receivables
Trade, net of allowance for doubtful
accounts of $43,634 and $63,700 at
August 31, 1996 and 1995 1,443,684 1,255,475
Note receivable 165,000 165,000
Inventories 1,336,633 674,955
Prepaid expenses and other 168,582 131,613
Deferred income taxes 380,000 380,000
TOTAL CURRENT ASSETS 3,528,771 2,656,600
PROPERTY, PLANT AND EQUIPMENT - AT COST 4,339,707 2,736,714
Less accumulated depreciation
and amortization 1,782,400 1,659,768
TOTAL PROPERTY, PLANT & EQUIPMENT 2,557,307 1,076,946
OTHER ASSETS
Goodwill, less accumulated amortization of
$215,055 and $16,543 at August 31, 1996
and 1995 3,948,256 3,953,735
Intangibles-net of amortization of $333 in
1996 11,667 -
Non-Compete Agreement 425,600 172,624
Deferred income taxes 220,000 220,000
TOTAL OTHER ASSETS 4,605,523 4,346,359
$ 10,691,601 $ 8,079,905
See Notes to Consolidated Financial Statements.
GOLDEN PHARMACEUTICALS, INC. AND SUSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31,
1996 1995
CURRENT LIABILITIES
Note payable $ 532,141 $ 343,454
Current maturities of long-term debt 785,835 276,179
Current maturities of capitalized lease
obligations 95,246 33,375
Accounts payable 921,045 1,198,689
Accrued liabilities
Salaries, wages and other compensation 42,450 133,192
Interest 144,148 36,183
Other 95,798 19,860
TOTAL CURRENT LIABILITIES 2,616,663 2,040,932
LONG-TERM OBLIGATIONS, less current
maturities 3,674,355 4,314,936
CAPITALIZED LEASE OBLIGATIONS, less
current maturities 299,674 178,745
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 10,776 -
CONTINGENCIES AND COMMITMENTS - -
MINORITY INTEREST 852,372 -
STOCKHOLDERS' EQUITY
Common stock - no par value; 200,000,000 shares
authorized; 124,063,778 and 93,967,583, issued,
120,774,778 and 93,967,583 outstanding in 1996
and 1995, respectively 23,867,384 21,288,851
Preferred stock-no par value; 10,000,000
shares authorized
Class A 15%/30% cumulative convertible,
29,653 shares, issued and outstanding in
1996 and 1995, respectively 292,558 292,558
24,159,942 21,581,409
Accumulated deficit (20,828,049) (20,036,117)
3,331,893 1,545,292
Less Common Stock in treasury at cost,
3,289,000 shares at August 31,1996 94,132 -
TOTAL STOCKHOLDERS' EQUITY 3,237,761 1,545,292
$ 10,691,601 $ 8,079,905
See Notes to Consolidated Financial Statements.
GOLDEN PHARMACEUTICALS, INC. AND SUSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended August 31,
1996 1995
REVENUES
Net sales $ 10,156,647 $ 4,412,377
Cost of sales 6,538,660 2,245,230
GROSS MARGIN 3,617,987 2,167,147
Selling, general and administrative 3,671,613 1,255,645
OPERATING INCOME(LOSS) (53,626) 911,502
OTHER INCOME/(EXPENSE)
Interest expense (807,198) (140,330)
Joint venture income(loss) (66,776) -
Gain on disposal of equipment (3,217) 2,400
Other Income 68,180 13,731
TOTAL OTHER INCOME/(EXPENSE) (809,011) (124,199)
INCOME(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (862,637) 787,303
INCOME TAX EXPENSE (BENEFIT) - (91,594)
INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS (862,637) 878,897
EXTRAORDINARY ITEM
Settlement of notes and trade accounts
payable - 99,677
INCOME(LOSS) BEFORE MINORITY INTEREST (862,637) 978,574
MINORITY INTEREST 70,705 -
NET INCOME(LOSS) $ (791,932) $ 978,574
INCOME PER COMMON SHARE
Before extraordinary item $ (.01) $ .01
Extraordinary item - *
NET INCOME(LOSS) $ (.01) $ .01
*Less than $.01 per share
See Notes to Consolidated Financial Statements.
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED AUGUST 31, 1996 AND 1995
COMMON STOCK PREFERRED STOCK
15%/30% CUMULATIVE Accumulated Treasury Stock
Shares Amount Shares Amount Deficit Shares Amount
BALANCE - September 1, 1994 90,342,583 $ 21,246,351 29,653 $ 292,558
$(21,014,691) - -
Conversion of Debt, Bonus, and
services to Common Stock 1,625,000 42,500 - - - - -
Common stock issued to release
contingency (Note I) 2,000,000 - - - - - -
Net Income - - - - 978,574
- -
BALANCE - August 31, 1995 93,967,583 21,288,851 29,653 292,558
(20,036,117) - -
Conversion of debt, bonus and
services to common stock 156,195 23,534 - - - - -
Warrants Exercised 8,000,000 600,000 - - - - -
Stock Options Exercised 16,000,000 469,999 - - - - -
Common Stock Issued in
Private Placement 5,940,000 1,485,000 - - - - -
Less Treasury Stock at cost - - - - - 3,289,000 94,132
Net loss - - - - (791,932)
- -
BALANCE - August 31, 1996 124,063,778 $ 23,867,384 29,653
$ 292,558 $(20,828,049) 3,289,000 94,132
See Notes to Consolidated Financial Statements.
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ (791,932) $ 978,574
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 507,645 99,345
Settlement of and note payable and
trade accounts payable - (99,677)
Gain(loss) on sale of equipment 3,216 (2,400)
Stock issued for services and fees 23,534 42,500
Minority Interest (70,705) -
Joint venture loss 66,776
Changes in assets and liabilities net of
effects of acquisition and joint venture
Decrease (increase) in accounts
receivable (188,209) (23,952)
(Increase) in inventories (661,678) (5,634)
Decrease in prepaid expenses and other (36,969) (33,664)
Increase in deferred taxes - (100,000)
Increase (decrease) in accounts payable (277,644) 5,060
Increase (decrease) in accrued expenses 93,162 66,142
TOTAL ADJUSTMENTS (540,872) (52,280)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,332,804) 926,294
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (614,942) (173,396)
Proceeds from sale of equipment 6,146 2,400
Payments for acquisition - (4,025,596)
Increase investment in joint venture 56,000 -
Addition to goodwill (169,006) -
Increase in note receivable - (165,000)
NET CASH (USED BY)
BY INVESTING ACTIVITIES (833,802) (4,361,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of note payable for acquisition
of business - 4,400,000
Issuance of common stock 2,554,999 -
Purchase of treasury stock (94,132) -
Borrowings under note payable 42,500 -
Payment on non compete (175,000)
Payments of notes payable (365,133) (704,270)
Borrowings on line of credit 16,096,917 735,652
Payments on line of credit (15,908,230) (1,041,319)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,151,921 3,390,063
NET INCREASE (DECREASE) IN CASH (14,685) (45,235)
CASH, BEGINNING OF YEAR 49,557 94,792
CASH, END OF YEAR $ 34,872 $ 49,557
Continued on following page.
See Notes to Consolidated Financial Statements.
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
Supplemental schedule of noncash investing and financing activities:
For the Years Ended August 31,
1996 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest $ 697,678 $ 140,330
Escrow account for business acquisition - (222,065)
The Company issued 2,000,000 shares of
restricted common stock to a major
stockholder and director of the Company
which is collateral for the
release of a contingent liability - 2,000,000
Purchase of equipment under a capital lease 249,508 212,120
Increase in goodwill 24,031 -
Details of business acquisition in
purchase transaction
Fair value of assets acquired,
other than cash - 2,075,359
Liabilities assumed - (2,003,498)
Cash paid for acquisition - 4,025,596
Details of joint venture with Pharma Labs, LLC
Fair value of assets contributed,
other than cash 100,000 -
Future obligation incurred for acquisition 900,000 -
See Notes to Consolidated Financial Statements.
A. HISTORY AND BUSINESS ACTIVITY
GOLDEN PHARMACEUTICALS, INC. (GPI) is engaged in the manufacturing and
marketing of radiopharmaceutical and radiochemical drug products. The
Company grants credit in the normal course of business to primarily one
customer located in the State of California which has operations
throughout the United States.
QUALITY CARE PHARMACEUTICALS, INC. (QCP), a wholly-owned subsidiary of
Golden Pharmaceuticals, Inc., purchases pharmaceutical drugs from
manufacturers and repackages them for sale into single user prescription
size packages. The Company's clients consist of private physicians,
hospitals, group practices, managed care programs, pharmacies and other
legally constituted medical facilities throughout the United States.
PHARMA LABS, LLC. ("Pharma Labs"), a 52% owned subsidiary of Golden
Pharmaceuticals, Inc., is engaged in the manufacturing, packaging, and
distribution of nutritional products , such as vitamins, minerals and
herbal products. The Company distributes its products primarily to
Vietnam and Cambodia. In addition the Company performs contract
manufacturing and packaging for certain U.S. customers.
RX DIRECT, LLC (RxD), a 50% owned subsidiary of Quality Care
Pharmaceuticals, Inc. was formed in a joint venture with Visiting Nurses
Association (VNA). Rx Direct is engaged in the dispensing of medications
via mail order. Both QCP and VNA will market the mail order pharmacy to
their respective customer base.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of GPI, its wholly-owned subsidiary Quality Care
Pharmaceuticals, Inc. (QCP), and its 52% owned subsidiary Pharma Labs,
LLC, collectively referred to as the Company.
On June 15, 1996, the Company entered into a joint venture agreement with
Pharma France, Inc. to form Pharma Labs, LLC. The Company owns 52% of
Pharma Labs, LLC, accordingly, the accounts of Pharma Labs, LLC are
consolidated for financial statement purposes. The Company has agreed to
contribute $1,000,000 in working capital, leasehold improvements, and
operational support. As of August 31, 1996 the Company has contributed
$680,545. Pharma France, Inc. contributed $923,076 in machinery and
equipment and leasehold improvements.
Investment in Joint Venture - Rx Direct, LLC a 50% owned subsidiary of
QCP is recorded under the equity method on QCP's financial statements.
All material intercompany balances and transactions have been eliminated
in consolidation.
Inventories - Inventories are stated at the lower of cost or market,
determined by the first-in, first-out (FIFO) method.
Depreciation and Amortization - Depreciation and amortization are
computed on a straight-line basis for book and tax purposes over the
estimated useful lives of the respective assets which range from three to
thirty nine years.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings Per Common Share - Earnings per common share was determined by
dividing net income, less accrued preferred dividends, by the weighted
average number of shares of common stock outstanding during the period.
Common stock equivalents and stock held in escrow have been excluded from
the computation because their effect would be anti-dilutive.
For the Year Ended August 31,
1996 1995
Weighted average number of
shares outstanding 97,131,318 91,589,946
Stock-Based Compensation - During October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." The Statement
defined a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt
that method of accounting for all employee stock compensation plans.
SFAS No. 123 allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion (APB) No. 25. Entities
electing to remain with APB No. 25 must make certain pro forma
disclosures as of the fair value based method has been applied.
The Company has not elected to adopt SFAS No. 123, which is not yet
effective, for its fiscal year ended August 31, 1996. The effects of
adopting SFAS No. 123 have not been determined.
Cash Equivalents - For the purpose of the statements of cash flows, the
Company considers all highly liquid cash investments with original
maturity dates of three months or less to be cash equivalents.
Reclassification - 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.
C. Investment in Joint Venture
On February 12, 1996 Quality Care Pharmaceuticals, Inc. entered into a
joint venture agreement with Visiting Nurses Association (VNA) to form
Rx Direct LLC, a mail order pharmacy. QCP owns 50% of Rx Direct LLC,
therefore, Rx Direct LLC, is recorded under the equity method on QCP's
financial statements. QCP is providing management and operational
support for Rx Direct LLC, and VNA is contributing $300,000 in cash to
fund the start up of the operations. As of August 31, 1996 QCP has
contributed $56,000 in services and operational support. VNA has
contributed $126,000 in working capital.
C. Investment in Joint Venture - continued
The following shows the condensed financial information for Rx Direct
LLC, at August 31, 1996:
Total Assets $ 143,010
Total Liabilities $ 94,562
Total Equity $ 48,448
Total Liabilities & Equity $ 143,010
Net Sales $ 10,684
Total Expenses 144,235
Net Income(Loss) (133,552)
D. Inventories
Inventories consist primarily of supplies, raw materials and finished
goods which are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method as follows.
1996 1995
Raw materials $ 801,359 $ 260,097
Work-in-progress 52,368 -
Finished goods 482,906 414,858
$ 1,336,633 $ 674,955
E. Property, Plant and Equipment
Property, plant and equipment are carried at cost and classified at
August 31, as follows:
1996 1995
Building and improvements $ 1,057,600 $ 822,799
Machinery and equipment 2,383,491 1,216,365
Computers 244,431 185,961
Furniture and fixtures 506,185 363,589
Land 148,000 148,000
4,339,707 2,736,714
Less accumulated depreciation
and amortization 1,782,400 1,659,768
$ 2,557,307 $ 1,076,946
F. NOTE RECEIVABLE
The Company has entered into two note receivable agreements totaling
$165,000 as of August 31, 1996 and 1995 in conjunction with the release
of a contingency (see Note I). The payment of the notes are contingent
upon the future sale of undeveloped land (see note I). The $85,000 note
accrues interest at the bank prime plus 1% (totaling 9.34% at August 31,
1996) and the $80,000 is without interest. The notes are without
collateral.
G. LEASE COMMITMENTS
Capitalized Leases
The Company leases equipment which is used in the production process and
administration of their business. For financial reporting purposes,
minimum lease rentals relating to the equipment have been capitalized.
The leases, which are noncancelable, expire at various dates through the
year 2001. The recorded cost of assets under capital leases is $500,405
and $253,133 at August 31, 1996 and 1995, respectively. Accumulated
amortization associated with the recorded assets was $59,514 and $3,233
at August 31,1996 and 1995, respectively.
Future minimum annual lease payments under capitalized leases are as
follows:
Year ending August 31, 1997 $ 142,053 1998 135,668
1999 109,407 2000 91,831 2001 27,406
506,365
Less amount representing interest 111,445
Discounted lease obligations 394,920
Less current portion 95,246
Long-term portion $ 299,674
Operating Leases
The Company leases office facilities, vehicles and equipment under
operating leases which expire at various dates through 2004. Under the
terms of the leases, the Company will pay monthly rental ranging from
$27,778 in 1996 and $11,301 in 2004.
Future minimum annual rental payments under operating leases are as
follows:
Year ending August 31,
1997 $ 333,342
1998 282,200
1999 279,747
2000 181,974
2001 135,614
Thereafter 339,032
$ 1,551,909
Rent expense totaled approximately $162,000 and $40,000 at August 31, 1996
and 1995, respectively.
H. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
August 31,
1996 1995
Note payable with monthly installments
of $2,503 including interest of 7.46%,
through March, 1996, uncollateralized $ - $ 18,491
H. NOTES PAYABLE AND LONG-TERM DEBT - continued
August 31,
1996 1995
Note payable, term loan, payable in
sixteen quarterly installments of
$125,000, including interest at the
bank prime plus 3% (totaling 11.34%
at August 31, 1996). Payments commence
on August 1, 1996 and continue through
August 1, 2000, with a lump sum payment
of $2,000,000. The note accrues
contingent interest in an amount equal
to 10% of the total consolidated Company
value. Such contingent interest is
payable upon maturity of the note, with
a maximum contingent interest amount due
of $2,150,000. Collateralized by a
second perfected security interest
in all personal property of the Company
(inventory, accounts receivable,
equipment and general intangibles), all
issued and outstanding shares of common
stock of Quality Care Pharmaceuticals,
Inc. and a second deed of trust on real
property $ 3,875,000 $4,000,000
Note payable, term loan, payable in
monthly installments of $6,667,
including interest at the bank prime
plus 3% (totaling 11.34% at August 31,
1996) through August 1, 2000.
Collateralized by equipment, general
intangibles, inventory and accounts
receivable 319,996 400,000
Note Payable, term loan, payable in
monthly installments of $1,180,
including interest at the bank prime
plus 3% (totaling 11.34% at August 31,
1996) through January 1, 1999.
Collateralized by equipment, general
intangibles, inventory and accounts
receivable 34,238 -
Note payable, $2,500,000 revolving
line of credit with interest payable
at bank prime plus 2% (totaling 10.34%
at August 31, 1996) through August 1,
2000. Collateralized by equipment,
general intangibles, inventory and
accounts receivable 532,141 343,454
Non-interest bearing note payable, to an
officer of Quality Care Pharmaceuticals,
Inc, payable in semi-annual installments
of $16,667 through July 15, 1998,
uncollateralized 52,978 86,312
Non-interest bearing note payable, to an
officer of Quality Care Pharmaceuticals,
Inc, payable in semi-annual installments
of $16,667 through July 15, 1998,
uncollateralized 52,978 86,312
H. NOTES PAYABLE AND LONG-TERM DEBT - continued
August 31,
1996 1995
Non-interest bearing note payable, to officers
of Pharma Labs, LLC, payable on September 1, 125,000 -
1996.
4,992,331 4,934,569
Less: Note payable (532,141) (343,454)
Current maturities (785,835) (276,179)
$ 3,674,355 $4,314,936
In connection with the note payable, the Company is required to maintain
compliance with certain covenants. At August 31, 1996, the Company was
not in compliance with certain covenants.
Subsequent to August 31, 1996, the covenant violations were waived and the
bank agreed to change certain
covenants which brought the Company into compliance with the terms of the note.
Aggregate annual principal payments applicable to notes payable and long-term
debt for years ending after 1996 are as follows:
Year Ending August 31 1996
1997 $ 1,317,976
1998 627,501
1999 591,859
2000 579,996
2001 500,000
Thereafter 1,375,000
$ 4,992,331
I. STOCKHOLDERS' EQUITY
In 1987 the Company initiated a private offering of equity securities
comprised of units of Class A 15%/30% Cumulative Convertible Preferred
("15%/30% Preferred") and Common Stock (one share of Preferred and two
shares of Common Stock) valued at $10 per unit. The offering became
effective in October, 1988. Maximum number of issuable shares of the
15%/30% Preferred Stock series is 700,000 shares.
The annual and quarterly dividend rates of the 15%/30% Preferred stock,
expressed as a percentage of original issue price, are as follows:
Period Annual Rate Quarterly Rate
12 calendar months ended
October 1989 0% 0.00%
12 calendar months ended
October 1990 15% 3.75%
12 calendar months ended
October 1991 15% 3.75%
12 calendar months ended
October 1992 30% 7.50%
12 calendar months ended
October 1993 30% 7.50%
All periods thereafter 30% 7.50%
Dividends are payable from the net profits generated from the sale of
Iodine 123 HIPDM ("HIPDM") (as defined in the Certificate of
Designation). However, the underlying license rights related to Iodine
123 HIPDM were fully impaired in 1991 and released upon termination of
the license agreement on November 30, 1993. Because all rights to HIPDM
were released, these dividends will only be paid by conversion to common
stock. Therefore, the accrued dividends were transferred to equity as of
August 31, 1994.
I. STOCKHOLDERS' EQUITY - continued
The holders of the 15%/30% Preferred may convert any accumulated and
unpaid dividends into one share of the Company's Common Stock for each
dollar accumulated. Additionally, each share of the 15%/30% Preferred
may be converted into 10 shares of the Company's common stock. The
Company is required to reserve common shares sufficient to allow
conversion of all preferred stock and accrued dividends.
The 15%/30% Preferred shareholders, in the event of liquidation of the
Company, will receive an amount equal to the issue price plus accumulated
and unpaid dividends before any holder of common stock or any other stock
ranking junior to the 15%/30% Preferred can be paid.
As of August 31, 1996 and 1995, 54,589 of the 84,242 15%/30% Preferred
and applicable accrued dividends were converted into Common Stock. Based
on the number of outstanding shares of 15%/30% Preferred at August 31,
1996 and 1995, and the dividend rate schedule above, the estimated
accrued cumulative dividend is $433,393. At August 31,1996, the holders
of preferred stock can convert their shares into 729,923 shares of common
stock including accrued dividends.
In the event that the Company completes a public offering of its common
stock where the offering price is at least $1.00 per share, the 15%/30%
Preferred and accumulated dividends will automatically convert to common
shares in the ratios discussed above.
Commencing in 1991, the Company has the right but not the obligation to
convert all of the outstanding 15%/30% Preferred into common stock at the
conversion price exhibited below plus any accumulated unpaid dividends.
Stated Redemption Date Percentage
January 1, 1994 - December 31, 1994 108%
January 1, 1995 - December 31, 1995 106%
January 1, 1996 - December 31, 1996 104%
All periods commencing January 1, 1997 102%
In October, 1990, the Company created a second series of Preferred stock,
Class A Convertible Preferred Stock (Convertible Preferred). Issue price
is $10 per share and the maximum issuable shares under the series is
200,000 shares.
On March 28, 1992, the Board of Directors unanimously approved for
submission to the Company's stockholders a Performance Stock Option Plan
(the Plan). The Plan will permit the granting of stock options to
certain directors, officers and employees of the Company or any
subsidiary thereof. Authority to grant options under the Plan will
terminate on October 7, 2002. On October 30, 1992, the Company's
Stockholders approved the Plan which will provide 50,000,000 shares of
common stock available for the granting of options.
I. STOCKHOLDERS' EQUITY - continued
The following summarizes the status of options and warrants granted at
August 31, 1996:
Outstanding Outstanding
at at
Exercise Year September 1, August 31,
Price Granted 1995 Granted Exercised Expired
1996
$.10 1996 - 300,000 - - 300,000
$.10 1996 - 900,000 - - 900,000
$.10 1996 - 300,000 - - 300,000
$.32 1996 - 400,000 - - 400,000
$.075 1996 - 8,000,000 8,000,000 - -
$.075 1995 10,000,000 - 10,000,000 - -
$.075 1995 350,000 - - - 350,000
$.03 1995 100,000 - - - 100,000
$.02 1994 6,000,000 - 6,000,000 - -
$.02 1992 500,000 - - 500,000 -
16,950,000 9,900,000 24,000,000 500,000 2,350,000
The following summarizes the status of options and warrants granted at
August 31, 1995:
Outstanding Outstanding
at at
Exercise Year September 1, August 31, 1995
Price Granted 1994 Granted Exercised Expired
$.075 1995 - 10,000,000 - - 10,000,000
$.075 1995 - 350,000 - - 350,000
$.03 1995 - 100,000 - - 100,000
$.02 1994 6,000,000 - - - 6,000,000
$.02 1992 500,000 (1) - - - 500,000
6,500,000 10,450,000 - - 16,950,000
(1)Does not include options to acquire 750,000 shares of common stock
pursuant to an employment agreement with a former officer and director
which were forfeited upon termination.
J. INCOME TAXES
The following is a summary of the provision for income taxes:
Year Ended August 31,
1996 1995
Current provision Federal $ - $ 5,550
State - 2,856
$ - $ 8,406
Deferred provision (benefit)
Federal $ - $ (88,000)
State - (12,000)
$ - $(100,000)
J. INCOME TAXES - continued
Total provision (benefit)
Federal $ - $(82,450)
State - (9,144)
$ - $(91,594)
The provision for income taxes differs from the amount determined by
applying the statutory rate to net income before taxes, due to the
following reasons for the years ended August 31:
1996 1995
Income taxes at statutory rate $ (309,000) $ 346,000
(Benefits)Expense due to change in asset
valuation allowance 298,000 (445,000)
Other 11,000 7,406
Income tax benefit $ - $ (91,594)
Sources of change in deferred taxes and the deferred tax effect of each
were as follows for the year ended August 31:
1996 1995
Change in asset valuation
allowance $ (298,000) $ 445,000
Accrued liabilities (3,000) 22,000
Depreciation and amortization 77,000 7,000
Carry forward of net operating
losses for income tax reporting 224,000 (374,000)
$ - $ 100,000
Components of deferred tax assets at August 31, were as follows:
1996 1995
Assets
Net operating loss carryforwards $ 7,036,000 $ 6,812,000
Accrued liabilities 23,000 26,000
Depreciation and amortization 84,000 7,000
7,143,000 6,845,000
Valuation Allowance (6,543,000) (6,245,000)
NET ASSET $ 600,000 $ 600,000
Realization of the deferred tax asset depends on achieving a certain minimum
level of future taxable income and although managment currently believes that
achievements of the required future taxable income is more likely than not,
it is reasonably possible that this belief could change in the near term,
resulting in an adjustment to the valuation allowance.
J. INCOME TAXES - continued
The Company has net operating loss carryforwards for tax purposes as
follows:
Federal
Year Net Operating Year
Generated Loss Expires
1982 3,338,000 1997
1983 3,009,000 1998
1984 2,941,000 1999
1985 992,000 2000
1986 909,000 2001
1987 1,074,000 2002
1988 - -
1989 - -
1990 2,086,000 2005
1991 1,091,000 2006
$ 15,440,000
K. CONTINGENCIES AND COMMITMENTS
Due to the nature of the products, the Company is subject to regulation
by a number of federal and state agencies, including the Federal Food and
Drug Administration (FDA), the State of California and the Drug
Enforcement Agency (DEA). The Company must comply with regulatory
requirements. Should it violate such requirements, its ability to
operate could be suspended or terminated. Management believes it has the
control system and policies in place so that it will fully comply with
regulatory requirements.
On November 4, 1991, the Company entered into a settlement agreement
which transferred certain undeveloped land in satisfaction of a judgment
against the Company. As provided in the settlement agreement, the
Company would remain contingently liable to the extent proceeds from the
sale of the land were less than $2,715,000.
In August, 1995, the Company amended the settlement agreement whereby
another corporation, 100% owned by a director, officer and stockholder,
has assumed the obligations of the Company under the settlement
agreement. In exchange, the Board of Directors approved the issuance of
2,000,000 shares of the Company's no par value common stock to this
corporation. These shares will transfer back to the Company when the
judgement is completely satisfied. The Company retained voting rights to
those shares and dividends, if any, related to these shares are paid to
the Company. Those shares are not considered to be issued or
outstanding.
L. EXTRAORDINARY ITEM
During 1995, the Company settled long-term debt and accounts payable
totaling $300,527 for $200,850 resulting in an extraordinary gain of
$99,677.
M. MAJOR CUSTOMERS AND VENDORS
The raw material needed for the Company's radiopharmaceutical drug
product is manufactured by a limited number of suppliers. The Company
purchases all of its raw product (Iodine-123) from one supplier whose
operations are based in Canada. All transactions between the Company and
its supplier are in U.S. dollars.
M. MAJOR CUSTOMERS AND VENDORS - continued
Purchases for the years ended August 31, 1996 and 1995, totaled
approximately $1,151,000 and $1,087,000, respectively. Included in
accounts payable and long- term debt at August 31, 1996 and 1995, are
liabilities of approximately $104,000 and $100,000, respectively, for
these purchases.
GPI's radio pharmaceutical drug product is distributed by one
distributor/customer. Sales for the years ended August 31, 1996 and 1995
totaled approximately $3,812,000 and $3,608,000, respectively.
N. RELATED PARTY TRANSACTIONS
The Company is due $64,539 from a related entity with common shareholders
and officers. The Company had sales of approximately $40,000 to the
related entity. In addition QCP purchased certain inventory items in the
amount of $45,844 to manufacture and produce products for the related
entity. The amount due the Company has been guaranteed by the
shareholders.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments held for purposes other
than trading are as follows as of August 31,
1996
Carrying Fair
Value Value
Cash and cash equivalents 34,872 34,872
Notes receivable 165,000 165,000
Notes payable 532,141 532,141
Long term debt 4,460,190 4,460,190
Capital leases 394,920 394,920
1995
Carrying Fair
Value Value
Cash and cash equivalents 49,557 49,557
Notes receivable 165,000 165,000
Notes payable 343,454 343,454
Long term debt 4,591,115 4,591,115
Capital leases 212,120 212,120
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value.
Cash and cash equivalents
The carrying value approximates fair value due to the short maturity of
those instruments.
Notes receivable
The carrying value approximates fair value as the interest rate at August
30, 1996 is considered to approximate the market rate.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
Notes payable, Long term debt and Capital leases
The carrying value approximates fair value as the interest rate at August
30, 1996 is considered to approximate the market rate.
<PAGE>
Subsidiaries of the Company
Quality Care Pharmaceuticals, Inc., a California Corporation
Golden Research Corporation, a Delaware Corporation
Exhibit 10.16
OPERATING AGREEMENT
FOR PHARMA LABS, LLC
This Operating Agreement is made as of June 14, 1996, by Golden
Pharmaceuticals, Inc., a Colorado corporation ("GPI") and Pharma France,
Inc., a California corporation formerly known as Pharma Labs, Inc., a
California corporation ("Pharma France") (individually and together, the
"Members").
WHEREAS, on May 1, 1996, the Members formed a limited liability
company by filing its Articles of Organization (the "Articles of
Organization") pursuant to the Colorado Limited Liability Company Act
(the "Colorado Act");
WHEREAS, the Members desire to adopt this Operating Agreement; and
WHEREAS, each Member represents that it has sufficient right and
authority, without breaching any provision of law or contract to execute
this Operating Agreement and is not acting on behalf of any undisclosed
or partially disclosed principal by such action;
NOW, THEREFORE, in consideration of the agreements and obligations
set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Members
hereby agree as follows:
ARTICLE I
DEFINITIONS
The definitions of some of the terms used in this Operating
Agreement or the Sections in which such terms are defined are set forth
in the attached Exhibit A.
ARTICLE II
ORGANIZATION AND TERM
Section 2.01. Formation. The Members formed Pharma Labs, LLC (the
"Company") under and pursuant to the provisions of the Colorado Act by
filing, on May 1, 1996, the Articles of Organization of the Company. The
rights and liabilities of the Members shall be as provided under the
Colorado Act, the Articles of Organization and this Operating Agreement.
The fact that the Articles of Organization are on file in the office of
the Secretary of State, State of Colorado, shall constitute notice that
the Company is a limited liability company.
In order to maintain the Company as a limited liability company
under the laws of the State of Colorado, the Company shall from time to
time take appropriate action, including the preparation and filing of
such amendments to the Articles of Organization and such other assumed
name certificates, documents, instruments and publications as may be
required by law, including, without limitation, action to reflect:
(a) a change in the Company name;
(b) a correction of false or erroneous statements in the Articles
of Organization or the desire of the Members to make a change in any
statement therein in order that it shall accurately represent the
agreement among the Members; or
(c) a change in the time for dissolution of the Company as stated
in the Articles of Organization and in this Agreement.
Section 2.02. Name. The Company's name shall be:
Pharma Labs, LLC.
The Company shall cause appropriate trade name and like statements
to be filed and published under the name set forth in this Section 2.02,
or such other name as the Company may have or use in any state or
jurisdiction from time to time.
Section 2.03. Term. The term of the Company shall commence on the
date hereof and shall continue in full force and effect until the
earliest of the following:
(a) May 1, 2026;
(b) dissolution of the Company by the unanimous written agreement
of the Members; or
(c) the death, retirement, resignation, expulsion, bankruptcy or
dissolution of a Member or the occurrence of any other event which
terminates the continued membership of a Member in the Company as
provided in Article XV, unless the remaining Members unanimously agree to
continue the business of the Company within 90 days after the termination
of the Company.
Section 2.04. Registered Agent and Office. The Company's
registered agent and office in Colorado shall be Glen Weaver whose
business address is 1313 Washington Avenue, Golden, Colorado 80401. At
any time, the Company may designate another registered agent and/or
office.
Section 2.05. Principal Place of Business. The principal place of
business of the Company shall be at 1313 Washington Avenue, Golden,
Colorado 80401. At any time, the Company may change the location of its
principal place of business and may establish additional offices. The
following items shall at all times be maintained at the Company's
principal office:
(a) a current list of the full name and last known business, residence,
or mailing address of each Member and Manager, both past and present;
(b) a copy of the Articles of Organization and all amendments
thereto, together with executed copies of any powers of attorney pursuant
to which any amendment has been executed;
(c) copies of the Company's federal, state and local income tax
returns and reports, if any, for the three most recent years;
(d) copies of any currently effective written Operating
Agreements, copies of any writings permitted or required under C.R.S.
7-80-502 regarding the obligation of a Member to perform any
enforceable promise to contribute cash or property or to perform services
as consideration for such Member's Capital Contribution;
(e) minutes of every annual and special meeting and any meeting
ordered pursuant to Section 7.04;
(f) unless contained in this Operating Agreement, a statement
prepared and certified as accurate by a Manager of the Company which
describes:
(i) the amount of cash and a description and statement of
the agreed value of the other property or services contributed by each
Member and which each Member has agreed to contribute in the future;
(ii) the times at which or events on the happening of which
any additional contributions agreed to be made by each Member are to be
made;
(iii) if agreed upon, the time at which or the events on the
happening of which a Member may terminate his membership in the Company
and the amount of, or the method of determining, the distribution to
which he may be entitled respecting his membership interests and the
terms and conditions of the termination and distribution;
(iv) any right of a Member to receive distributions which
include a return of all or any part of a Member's contribution;
(g) any written consents obtained from Members pursuant to C.R.S.
7-80-711 regarding action taken by Members without a meeting.
(h) copies of the agreement, substantially in the form of Exhibit E
hereto, of each Member who is not a resident of Colorado
to file a Colorado income tax return in accordance with the provisions of
C.R.S. 39-22-601 and to make timely payment of all taxes imposed on him
by the State of Colorado with respect to the income of the Company and to
be subject to personal jurisdiction in Colorado for purposes of the
collection of such income taxes, together with related interest and
penalties imposed on the Member by the State of Colorado with respect to
the Company's income.
Such records are subject to inspection and copying at the
reasonable request and at the expense of any Member during ordinary
business hours.
Section 2.06. Effective Date. The effective date of this
Operating Agreement shall be as of the date hereof.
Section 2.07. Other Instruments. Each Member hereby agrees to
execute and deliver to the Company within five (5) days after receipt of
a written request therefor, such other and further documents and
instruments, statements of interest and holdings, designations, powers of
attorney and other instruments and to take such other action as the
Company deems necessary, useful or appropriate to comply with any laws,
rules or regulations as may be necessary to enable the Company to fulfill
its responsibilities under this Operating Agreement.
ARTICLE III
PURPOSE AND POWERS OF THE COMPANY
Section 3.01. Purpose. The purpose of the Company's business is
to manufacture, package and distribute pharmaceuticals, vitamins,
medicinal herbs, minerals and any other nutritional substances within and
without the United States and to do anything incidental thereto. The
Company shall not engage in the business of banking or insurance.
Section 3.02. Powers of the Company. In furtherance of the
purpose of the Company as set forth in Section 3.01, the Company shall
have the power and authority to take in its name all actions necessary,
useful or appropriate in the Members' discretion to accomplish its
purpose, including, but not limited to, the power:
(a) to conduct its business, carry on its operations and have and
exercise the powers granted by the Colorado Act in any state, territory,
district or possession of the United States, or in any foreign country
which may be necessary or convenient to effect any or all of the purposes
for which it is organized;
(b) to make contracts and guarantees and to incur liabilities,
borrow money at such rates of interest as the Company may determine,
issue its notes, bonds and other obligations and secure any of its
obligations by mortgage or pledge of all or any part of its property,
franchises and income;
(c) to purchase, take, receive, lease or otherwise acquire, own,
hold, improve, use and otherwise deal in and with real or personal
property, or interests therein, wherever situated;
(d) to sell, convey, assign, encumber, mortgage, pledge, lease,
exchange, transfer and otherwise dispose of all or any part of its
property and assets;
(e) to purchase, take, receive, subscribe for or otherwise
acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or
otherwise dispose of, and otherwise use and deal in and with, shares or
other interests in or obligations of domestic or foreign corporations,
associations, general or limited partnerships, other limited liability
companies, or individuals or direct or indirect obligations of the United
States or of any government, state, territory, governmental district or
municipality or of any instrumentality of any of them;
(f) to lend money for its proper purposes, to invest and reinvest
its funds, to take and hold real and personal property for the payment of
funds so loaned or invested;
(g) to sue and be sued, complain and defend, and participate in
administrative or other proceedings, in its name;
(h) to elect Managers and appoint agents of the Company, and
define their duties and fix their compensation;
(i) to make and alter operating agreements, not inconsistent with
the Articles of Organization or with the laws of the State of Colorado,
for the administration and regulation of its affairs;
(j) to indemnify a Member or Manager or former member or Manager,
and to make any other indemnification that is authorized by the Articles
of Organization or by this Operating Agreement in accordance with the
Colorado Act;
(k) to cease its activities and surrender its certificate of
organization;
(l) to have and exercise all powers necessary or convenient to
effect any or all of the purposes for which the Company is organized;
(m) to become a member of a general partnership, limited
partnership, joint venture or similar association or any other
limited liability company; and
(n) to lend money to and otherwise assist the Members and
employees of the Company as provided in this Operating Agreement.
ARTICLE IV
MEMBERS, CAPITAL CONTRIBUTIONS AND UNITS
Section 4.01. Members; Obligation to Update. All Members of the
Company, past and present, and their last known business, residence or
mailing address shall be listed on the attached Exhibit B. The Managers
shall be required to update Exhibit B from time to time as necessary to
accurately reflect the information therein.
Section 4.02. Capital Contributions; Additional Capital
Contributions.
(a) The Capital Contribution of each Member is set forth on
the attached Exhibit C. Capital Contributions to the Company shall
consist of cash, negotiable instruments, real property, personal
property, or services rendered or a promissory note or other obligation
to contribute cash or property or to perform services. No Member shall
be liable under a judgment, decree or order of a court, or in any other
manner for a debt, obligation or liability of the Company. Except as
provided herein, no Member shall be required to lend any funds to the
Company or to pay any contributions, assessments or payments to the
Company except the Capital Contribution provided for in this Article IV;
provided that a Member may be required to repay its Capital Contribution
to the Company as provided in Article XI.
(b) In the event that the Member Account of Pharma France
would be reduced to an amount which is below zero (0) in any fiscal year
during the Priority Period as a result of any Shortfall(s), Pharma France
shall be immediately required to make an additional Capital Contribution
in cash and/or make a cash loan to the Company in an amount equal to 52%
of any such Shortfall(s) such that the Member Account of Pharma France no
longer has a deficit balance. In no event shall any such additional
Capital Contribution by Pharma France dilute GPI's proportionate equity
interest in the Company and any such loan made to the Company by Pharma
France shall be payable only from distributions made by the Company to
Pharma France pursuant to the provisions of Section 8.02 below. Any
additional Capital Contribution and/or loans made by Pharma France
pursuant to this Section 4.02(b) shall be immediately distributed to GPI
as a distribution of Net Cash Flow in accordance with Section 8.02.
Section 4.03. Units. A Member's interest in the Company shall be
represented by the "Unit" or "Units" held by such Member. Each Member's
respective Units in the Company are set forth on the attached Exhibit B.
By its execution of this Operating Agreement, each Member hereby votes
and agrees that its votes, consents and actions pursuant to the Articles
of Organization, this Operating Agreement and the Colorado Act shall be
counted and determined as provided in this Operating Agreement. The
Members hereby agree that each Unit shall entitle the Member possessing
such Unit:
(a) to one vote on matters on which the Members may vote
under the Articles of Organization, this Operating Agreement and/or the
Colorado Act; and
(b) to an equal proportionate share of the Company's
income, gains, losses, deductions and credits.
Each Member hereby agrees that its interest in the Company and in its
Units shall for all purposes be deemed a personal interest and shall not
be deemed realty or any interest in the Company's real or personal
property or assets of any kind.
Section 4.04. Restriction on Registration of Units. To the extent
required so that the Company is not deemed to be a "publicly traded
partnership" under the Code, Units shall only be registered in the name
of the beneficial owner, and the Company shall not be bound to recognize
any equitable or other claim to or interest in such Units on the part of
any other person (such as a broker, dealer, bank, trust company or
clearing corporation) which is acting as a nominee, agent or in some
other representative capacity, whether or not the Company shall have
knowledge thereof, except for:
(a) Units held by a guardian, custodian or conservator for
the benefit of a minor or incompetent;
(b) Units held by a trust for the benefit of the trustee or
a trustee's spouse, parent, parent-in-law, issue, brother, sister,
brother-in-law, sister-in-law, niece, nephew, cousin, grandchild or
grandchild-in-law; and
(c) Units held by a fiduciary for other like beneficiaries.
The Company's Units shall only be traded in accordance with the
Department of the Treasury's rules and regulations then in effect which
set forth the parameters within which a partnership may act and not be
deemed to be a "publicly traded partnership" under the Code. In no event
may the Company's Units be listed on an established securities exchange.
Section 4.05. Withdrawals and Interest. No Member shall have the
right to:
(a) withdraw its Capital Contribution;
(b) receive any return or interest on any portion of its
Capital Contribution except as otherwise provided herein; or
(c) withdraw from the Company except by transfer of its
Units to another party in accordance with Article XIV, by resignation in
accordance with Article V, or upon the dissolution of the Company.
Section 4.06. Return. No Member shall be entitled to the return
of all or any part of its Capital Contribution unless and until there
remains Company Property after:
(a) all liabilities of the Company (except liabilities to
Members on account of their Capital Contributions) have been paid;
(b) all amounts due to Members in respect of their share of
profits and other gains have been paid; and
(c) the Company has been dissolved without reformation in
accordance with Article XV and a statement of intent to dissolve has been
filed with the Colorado Secretary of State.
ARTICLE V
RIGHTS AND POWERS OF MEMBERS
Section 5.01. Powers of Members. The powers of the Members shall
include but not be limited to:
(a) the right and power to elect and remove a Manager or
Managers as provided in Article VI;
(b) as provided in Sections 7.09 and 7.10, respectively,
the power to amend the Articles of Organization and this Operating
Agreement, provided that such amendment complies with the Colorado Act;
(c) as provided in Articles XIII and XIV, the power to
approve or disapprove the issuance of Additional Units for sale to then
existing Members or new subscribers and the admission of a transferee of
some or all of a Member's Units as a Substitute Member;
(d) as provided in Section 7.09, the power to approve the
sale, exchange or other disposition of eighty percent (80%) or more of
the Company's Property when such sale, exchange or other disposition is,
or is part of, a single transaction or plan; and
(e) as provided in Section 7.10, the power to dissolve the
Company by the approval of all of the Members.
Section 5.02. Transactions Between a Member or Manager and the
Company. Except as otherwise provided by applicable law, any Member or
Manager may, but shall not be obligated to, except as provided herein,
lend money to the Company, act as surety for the Company and transact
other business with the Company and has the same rights and obligations
when transacting business with the Company as a person or entity who is
not a Member or a Manager.
Section 5.03. Nonrestriction of Business Pursuits of Members and
Managers. This Operating Agreement shall not preclude or limit in any
respect the right of any Member or Manager to engage in or invest in any
business activity of any nature or description, including those which may
be the same as or similar to the Company's business and in direct
competition therewith. Any such activity may be engaged in independently
or with other Members or Managers. No Member shall have the right, by
virtue of the Articles of Organization, this Operating Agreement or the
relationship created hereby, to any interest in such other ventures or
activities, or to the income or proceeds derived therefrom. The pursuit
of such ventures, even if competitive with the business of the Company,
shall not be deemed wrongful or improper and any Member or Manager shall
have the right to participate in or to recommend to others any investment
opportunity. However, Pharma France and its principals shall enter into
a Non-Compete Agreement whereby Pharma France and its principals and
related entities will agree to (i) not engage in any business activity
which may be the same or similar to the business of the Company and (ii)
own an interest in any entity which engages in any business activity
which may be the same or similar to the business of the Company.
Section 5.04. Reimbursements. The Company shall reimburse the
Members and Managers for all expenses incurred and paid by any of them in
the organization of the Company. Such reimbursements shall be treated as
expenses of the Company and shall not be deemed to constitute
distributions to any Member of profit, loss or capital of the Company.
Section 5.05. Partition. While the Company remains in effect or
is continued, each Member agrees and waives its rights to have any
Company Property partitioned, or to file a complaint or to institute any
suit, action or proceeding at law or in equity to have any Company
Property partitioned, and each Member, on behalf of itself, its
successors and its assigns hereby waives any such right.
Section 5.06. Resignations; Retirement. A Member may not resign
from the Company unless: (i) he has contributed the full amount of money
or other consideration which constitutes its Capital Contribution as set
forth on Exhibit C hereto; and (ii) following its resignation, there is
at least one (1) remaining Member of the Company. The Company may
recover damages for breach of this Section 5.06 if any Member violates
this Section 5.06 and may offset the Company's damages against any amount
owed to a resigning Member for distributions.
<PAGE>
ARTICLE VI
MANAGERS
Section 6.01. Managers.
(a) The management of the Company's business shall be
vested in a group of seven (7) Managers appointed by the Members in
accordance with Section 6.01(b) below. The Members hereby appoint
persons identified on the attached Exhibit D to be the Managers of the
day-to-day business of the Company. Except as provided in Section 6.02,
each Manager shall have the authority to sign agreements and other
instruments on behalf of the Company without the joinder of any other
Manager.
(b) GPI shall be entitled to appoint four (4) of the
Managers and Pharma France, Inc. shall be entitled to appoint three (3)
of the Managers at the annual meeting of the Members or at a special
meeting of the Members called for that purpose. A Manager shall hold
office for the term for which he is appointed and until his successor has
been appointed by the applicable Member.
(c) The Managers may engage in other business activities as
permitted by Section 5.03 and shall be obliged to devote only as much of
their time to the Company's business as shall be reasonably required in
light of the Company's business and objectives. A Manager shall perform
his duties as a Manager in good faith, in a manner he reasonably believes
to be in the best interests of the Company, and with such care as an
ordinarily prudent person in a like position would use under similar
circumstances. A person who so performs his duties shall not have any
liability by reason of being or having been a Manager of the Company.
(d) The number of Managers shall be seven (7) who shall be,
if a natural person, 18 years of age or older but who need not be Members
of the Company or residents of Colorado. The Managers may, by the
affirmative vote of a majority of Managers then in office, increase or
decrease, to not less than three (3), the number of Managers by
resolution of all the Members.
(e) Subject to the terms of this Section 6.01 and 6.02, the
Managers shall act by the affirmative vote of a majority of the Managers.
(f) In performing his duties, a Manager shall be entitled
to rely on information, opinions, reports or statements of the following
persons or groups unless he has knowledge concerning the matter in
question that would cause such reliance to be unwarranted:
(i) one or more employees or other agents of the
Company whom the Manager reasonably believes to be reliable and competent
in the matters presented;
(ii) any attorney, public accountant or other person
as to matters which the Manager reasonably believes to be within such
person's professional or expert competence; or
(iii) a committee upon which he does not serve, duly
designated in accordance with a provision of the Articles of Organization
or this Operating Agreement, as to matters within its designated
authority, which committee the Manager reasonably believes to merit
competence.
(g) Every Manager is an agent of the Company for the
purpose of its business, and the act of every Manager, including the
execution in the Company name of any instrument for apparently carrying
on in the usual way the business of the Company, binds the Company,
unless such act is in contravention of the Articles of Organization or
this Operating Agreement or unless the Manager so acting otherwise lacks
the authority to act for the Company and the person with whom he is
dealing has knowledge of the fact that he has no such authority.
Section 6.02. Powers of the Managers. The Managers shall have the
right and authority to take all actions which the Managers deem
necessary, useful or appropriate for the day-to-day management and
conduct of the Company's business. The Managers may exercise all powers
of the Company and do all such lawful acts and things as are not by
statute, the Colorado Act, the Articles of Organization or this Operating
Agreement, directed or required to be exercised or done by the Members
and may exercise all powers subject to the limitations set forth
hereinbelow.
(a) The following matters shall not be within the sole authority
of any one Manager, but shall require the written consent of at least one
of the Managers appointed by GPI:
(i) acquiring any real or personal property or making any
investment (other than the initial acquisition of the property to
capitalize the Company);
(ii) making any unbudgeted Company expenditure during any
calendar year or obligating the Company to do so;
(iii) borrowing any funds on behalf of the Company;
(iv) making distribution of Company funds to the Members;
(v) making any purchase orders with any vendors of the
Company;
(vi) hiring new employees or salary increases for existing
employees;
(vii) selling, exchanging or otherwise disposing of any
Company assets; or
(viii) the approval of the Company's annual budget.
(b) All instruments, contracts, agreements and documents
providing for the acquisition, mortgage or disposition of property of the
Company shall be valid and binding on the Company if executed by one or
more Managers in accordance with the forgoing requirements. All
instruments, contracts, agreements and documents of whatsoever type
executed on behalf of the Company shall be executed in the name of the
Company by one or more Managers.
Section 6.03. Salaries. The Company may pay to any Manager,
Member or other person, a salary as compensation for their services
rendered to the Company. Such salaries shall be treated as expenses of
the Company and shall not be deemed to constitute distributions to the
recipient of any profit, loss or capital of the Company.
Section 6.04. Removal of Managers.
(a) GPI may only remove all or any lesser number of the
Managers appointed by GPI and Pharma France may only remove all or any
lesser number of the Managers appointed by Pharma France.
(b) Any removal of a Manager shall become effective on such
date as may be specified by the applicable Member in a notice delivered
to any remaining Managers or the Manager elected to replace the removed
Manager (except that it cannot be effective on a date earlier than the
date such notice is delivered to the remaining or newly-elected
Managers).
Section 6.05. Resignation of Manager. A Manager may resign from
his position as a Manager at any time by notice to the Members. Such
resignation shall become effective as set forth in such notice.
Section 6.06. Vacancies. Any vacancies occurring in the group of
Managers may be filled by the Member whose manager has resigned or
otherwise removed. A Manager chosen by the applicable Member to fill a
vacancy shall serve the unexpired term of his predecessor in office. Any
Manager's position to be filled by reason of an increase in the number of
Managers shall be filled by written agreement of a majority of the
Managers then in office or by election at an annual meeting or at a
special meeting of Members called for that purpose. A Manager chosen to
fill a position resulting from an increase in the number of Managers
shall hold office until the next annual meeting of Members and until his
successor has been chosen by the applicable Member.
ARTICLE VII
MEETINGS AND VOTES OF MEMBERS
Section 7.01. Meetings. Meetings of the Members shall be held
each year at the principal office of the Company or at such other place
either within or without Colorado as specified from time to time by the
Managers. If the Managers shall specify another location such change in
location shall be recorded on the notice calling such meeting.
Section 7.02. Annual Meetings. In the absence of a resolution of
the Managers providing otherwise, the annual meeting of Members of the
Company for the election of Managers, and for the transaction of such
other business as may properly come before the meeting, shall be held on
the 15th day of September at 9:00 AM in each fiscal year, if the same be
not a legal holiday, and if a legal holiday in the State of Colorado,
then on the next succeeding business day. If the election of Managers
shall not be held on the day designated herein for any annual meeting of
the Members, the Managers shall cause the election to be held at a
special meeting of the Members as soon thereafter as may be convenient.
Failure to hold the annual meeting at the designated time shall not work
a forfeiture or dissolution of the Company.
Section 7.03. Special Meetings. Special meetings of the Members
shall be scheduled and presided over by one of the Managers, chosen to
preside at the meeting by vote of the Members present. Special meetings
may be called by any Manager or Managers or upon the request of not less
than 10% of all the Members entitled to vote at the meeting; provided
that requests to approve the admission of Substitute Members may be
postponed until the annual meeting of the Members.
Section 7.04. Court Ordered Meeting.
(a) Any court of competent jurisdiction in the State of
Colorado may summarily order a meeting to be held:
(i) On application of any Member of the Company if
an annual meeting was not held within six months after the end of the
Company's fiscal year or 15 months after its last annual meeting,
whichever is earlier; or
(ii) On application of a Member who participated in a
proper call for a special meeting if (A) notice of the special meeting
was not given within 30 days after the date the demand was delivered to
the Managers of the Company; or (B) the special meeting was not held in
accordance with the notice.
(b) The court may fix the time and place of the meeting, specify
a record date for determining Members entitled to notice of and to vote
at the meeting, prescribe the form and content of the meeting notice, fix
the quorum required for the meeting or direct that the interests
represented at the meeting constitute a quorum for the meeting, and enter
other orders necessary to permit the meeting to be held.
Section 7.05. Notice.
(a) Written notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered unless otherwise
prescribed by the Colorado Act not less than 10 days nor more than 50
days before the date of the meeting, either personally or by mail, by or
at the direction of any Manager or person calling the meeting to each
Member of record entitled to vote at such meeting.
(b) Notice to Members of record, if mailed, shall be deemed
delivered as to any Member when deposited in the United States mail,
addressed to the Member with postage prepaid, but, if three successive
letters mailed to the last-known address of any Member are returned as
undeliverable, no further notices to such Member shall be necessary until
another address for such Member is made known to the Company.
(c) When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting the Company may transact any business which
might have been transacted at the original meeting. If the adjournment
is for more than 30 days, a notice of the adjourned meeting shall be
given to each Member entitled to vote at the meeting.
Section 7.06. Waiver of Notice.
(a) When any notice is required to be given to any Member
of the Company under the provisions of the Colorado Act or under the
provisions of the Articles of Organization or this Operating Agreement, a
waiver thereof in writing signed by the person entitled to such notice,
whether before, at, or after the time stated herein, shall be equivalent
to the giving of such notice.
(b) By attending a meeting, a Member:
(i) Waives objection to lack of notice or defective
notice of such meeting unless the Member, at the beginning of the meeting
objects to the holding of the meeting or the transacting of business at
the meeting;
(ii) Waives objection to consideration at such meeting
of a particular matter not within the purpose or purposes described in
the meeting notice unless the Member objects to considering the matter
when it is presented.
Section 7.07. Proxies. At all meetings of Members, a Member may
vote in person or by proxy executed in writing by the Member or by his
duly authorized attorney-in-fact. Such proxy shall be filed with the
Managers of the Company before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.
Section 7.08. Fifty-one Percent Votes. An affirmative vote by or
on behalf of the Members possessing at least fifty-one percent (51%) of
the Units of the Company shall be required to approve or disapprove any
matter on which the Members are entitled to decide, except as otherwise
provided in this Operating Agreement or in the Colorado Act.
Section 7.09. Seventy Percent Votes. An affirmative vote by or on
behalf of the Members possessing at least seventy percent (70%) of the
Units of the Company shall be required to:
(a) approve the sale or other disposition of eighty percent
(80%) or more of the Company's Property as part of a single transaction
or plan; or
(b) amend the Articles of Organization.
Section 7.10. One Hundred Percent Votes. An affirmative vote by
or on behalf of the Members possessing one hundred percent (100%) of the
Units of the Company shall be required to approve or disapprove the
following matters:
(a) amend the Articles of Organization and/or this
Operating Agreement so as to:
(i) enlarge the obligations of any Member, including
requiring any additional contribution, assessment or payment by a Member,
without the consent of such Member;
(ii) modify the method of determining, allocating or
distributing the Company's income, gains, losses, deductions and credits
during the term of the Company or upon its liquidation;
(iii) adversely affect the federal and state income tax
treatment to be afforded Members or adversely affect the liabilities of
the Members;
(iv) cause the Company to become an entity other than
a Colorado limited liability company; or
(v) alter the term of the Company from that set forth
in Section 2.03;
(b) approve Substitute Members;
(c) approve the issuance of Additional Units;
(d) dissolve the Company by written consent; or
(e) amend this Section 7.10.
Section 7.11. Voting Procedures.
(a) The costs of calling and holding the annual meeting of
the Members and special meetings called by the Managers, shall be paid by
the Company. Such costs for all other meetings called by the Members
shall be paid by the Members calling the meeting. Each Member shall be
responsible for its own costs associated with attending and participating
in a meeting.
(b) Matters not described in a meeting notice may be
discussed at a meeting and may be voted upon if the Members or their
authorized representatives possessing at least the required percentage of
the Units to approve such matter are present at the meeting.
Section 7.12. Action by Members Without a Meeting. Unless the
Articles of Organization, the Colorado Act, or this Operating Agreement
provide otherwise, action required or permitted by the Colorado Act to be
taken at a Members' meeting may be taken without a meeting if the action
is evidenced by one or more written consents describing the action taken,
signed by each Member entitled to vote. Action taken under this Section
7.12 is effective when all Members entitled to vote have signed the
consent, unless the consent specifies a different effective date.
Written consent of all of the Members entitled to vote on any
matter has the same force and effect as a unanimous vote of such Members
and may be stated as such in any document.
ARTICLE VIII
MEMBER ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS
Section 8.01. Maintenance of Member Accounts.
(a) A Member Account shall be established in the Company's
books for each Member and transferee in accordance with the rules of
Treasury Regulation Section 1.704-1(b)(2)(iv). Each Member Account shall
be:
(i) increased by:
(A) such Member's cash contributions;
(B) the fair market value of the property
contributed by such Member to the Company (net of liabilities securing
such contributed property that the Company is considered to assume or
take subject to); and
(C) the amounts allocated to such Member for
its share of the income and gain of the Company; and
(ii) decreased by:
(A) the amounts allocated to such Member for
such Member's share of the Company's losses and deductions;
(B) the amount of money distributed to such
Member by the Company; and
(C) the fair market value of the property
distributed to such Member by the Company (net of liabilities securing
such contributed property that such Member is considered to assume or
take subject to).
(b) Notwithstanding the provisions of Section 8.01(a)
above, at the end of each fiscal year during the Priority Period, the
Member Account of Pharma France shall be decreased by an amount equal to
(y) 52% of any actual Shortfall at the end of the fiscal year in which
such Shortfall occurs less (z) the total distributions of Net Cash Flow
made to GPI pursuant to Section 8.02(a)(i) during such fiscal year. The
Member Account of GPI shall be increased by the same amount and at such
time that the Member Account of Pharma France is decreased pursuant to
the preceding sentence.
(c) For purposes of computing the amount of any item of
income, gain, deduction or loss to be reflected in the Members' Member
Accounts, the determination, recognition and classification of any such
item shall be the same as its determination, recognition and
classification for federal income tax purposes provided that:
(i) in accordance with the requirements of Code
Section 704(c), any deductions attributable to a contributed property
shall be determined as if the adjusted basis of such property on the date
it was acquired by the Company was equal to the fair market value of such
property. Upon an adjustment pursuant to Section 8.01(f) to the Carrying
Value of any Company Property, any further deductions attributable to
such property shall be determined as if the adjusted basis of such
property was equal to the Carrying Value of such property immediately
following such adjustment;
(ii) any income, gain or loss attributable to the
taxable disposition of any property shall be determined by the Company as
if the adjusted basis of such property as of such date of disposition was
equal in amount to the Company's Carrying Value of such property as of
such date;
(iii) all fees and other expenses incurred by the
Company to promote the sale of (or to sell) a Unit that can neither be
deducted nor amortized under Code Section 709 shall, for purposes of
Member Account maintenance, be treated as an item of deduction and shall
be allocated among the Members pursuant to Section 8.02; and
(iv) the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Code Section 754 which may be made by the Company and, as to those items
described in Code Section 705(a)(1)(B) and Code Section 705(a)(2)(B),
without regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalizable for federal
income tax purposes.
(d) If any Member or transferee would otherwise have a
negative balance in its Member Account, the amount of any such negative
balance shall be reduced (but not in excess of such negative balance) by
the amount of such Member's or transferee's share of Company Minimum Gain
(determined in accordance with Treasury Regulation Section 1.704-1(b)(4)(iv)
(f) after taking into account all increases and decreases to
such Company Minimum Gain during the taxable year). Such reduction shall
be taken into account in determining the permissible allocations under
Section 8.02.
(e) Generally, a Substitute Member or transferee of a Unit
will succeed to the Member Account relating to the Unit transferred.
However, if the transfer causes a termination of the Company under Code
Section 708(b)(1)(B), the Company Properties shall be deemed to have been
distributed in liquidation of the Company to the Members (including the
Substitute Member transferee of a Unit) and deemed recontributed by such
Members and transferees in reconstitution of the Company. In such event,
the Carrying Values of the Company Properties shall be adjusted
immediately prior to such deemed distribution pursuant to Section 8.01(f)
(and such Carrying Values shall constitute the agreed values of such
properties upon this deemed contribution of the recontributed property).
The Member Accounts of such reconstituted Company shall be maintained in
accordance with the principles of this Section 8.01.
(f) In accordance with Treasury Regulation Section 1.704-1(b)(2)
(iv)(e), immediately prior to the actual or deemed distribution of any
Company Property, the Member Accounts of all Members and transferees and the
Carrying Values of all Company Properties to be distributed shall be
adjusted (consistent with the provisions hereof)
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to each such Company Property (as if such Unrealized Gain or
Unrealized Loss has been recognized upon an actual sale of each such
property, immediately prior to such distribution, and had been allocated
to the Members and transferees, at such time, pursuant to Section 8.02).
In determining such Unrealized Gain or Unrealized Loss, the aggregate
fair market value of Company Properties as of any date of determination
shall be determined by the Company using such reasonable methods of
valuation as it may adopt.
(g) The foregoing provisions and other provisions of this
Agreement relating to maintenance of Member Accounts are intended to
comply with Treasury Regulation Section 1.704-1(b), and shall be
interpreted and applied in a manner consistent with such regulation. In
the event the Managers shall determine that it is prudent to modify the
manner in which the Member Accounts or any debits or credits thereto, are
computed in order to comply with such regulations, the Managers, acting
in accordance with Section 16.03 and without the approval of the Members,
may amend this Agreement to reflect such modification, provided that it
is not likely to have a material effect on the amounts distributed to the
Members pursuant to Article XV upon dissolution of the Company.
Section 8.02. Allocations and Distributions.
(a) During the Priority Period and subject to this Article
VIII, the Company's Net Cash Flow, if any, shall be distributed in cash,
from time to time in accordance with Section 8.09 below, to the Members
in accordance with the following priorities:
(i) FIRST, Net Cash Flow in an amount equal to 52% of
any actual or projected Shortfall for the period which the distribution
is made shall be distributed to GPI; then
(ii) SECOND, Net Cash Flow in an amount equal to 48%
of any actual or projected Shortfall for the period which the
distribution is made shall be distributed to Pharma France; then
(iii) THIRD, the balance of Net Cash Flow shall be
distributed to the Members in proportion to the Units held by each
Member.
(b) Upon the expiration of the Priority Period and subject
to this Article VIII, Net Cash Flow of the Company shall be allocated and
distributed to the Members in proportion to the Units held by each
Member.
(c) Except as provided in this Article VIII, the Company's
income, gains, losses, deductions and credits shall be allocated to the
Members in proportion to the Units held by each Member.
(d) No Member shall be entitled to receive Property other
than cash hereunder unless the Company elects to distribute any Company
Property in-kind. Any in-kind distributions of Company Property shall be
valued by an established, reputable, independent and qualified appraiser.
Section 8.03. Minimum Gain Chargeback Allocations.
Notwithstanding any other provision of this Operating Agreement to the
contrary, except as provided in Section 8.04 below, if the amount of any
Company Minimum Gain at the end of any taxable year is less than the
amount of such Company Minimum Gain at the beginning of such taxable
year, there shall be allocated to any Member having a negative Member
Account balance at the end of such taxable year (determined after taking
into account any adjustments, allocations and distributions described in
Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) gross
income and gain (in respect of the current taxable year and any future
taxable year) in an amount sufficient to eliminate such negative Member
Account balance in compliance with Treasury Regulation Section 1.704-1(b)
(4)(iv)(e). Such allocation of gross income and gain shall be made
prior to any other allocation of income, gain, loss or deduction. Any
such allocation of gross income or gain pursuant to this Section 8.03
shall be made to each Member Account having a negative balance in the
proportion such negative balance bears to negative balances of all the
Members. Any allocations of gross income or gain pursuant to this
Section 8.03 shall be taken into account, to the extent feasible, in
computing subsequent allocations of income, gain, loss or deduction of
the Company so that the net amount of all items allocated to each Member
pursuant to this Article VIII, to the extent possible, shall be equal to
the net amount that would have been allocated to each such Member
pursuant to the provisions of this Article VIII if the allocations made
pursuant to the first sentence of this Section 8.03 had not occurred.
This Section 8.03 is intended to constitute a "minimum gain chargeback"
within the meaning of Treasury Regulation Section 1.704-1(b)(4)(iv)(e).
Section 8.04. Qualified Income Offset Allocations. Except as
provided in Section 8.02 above, while a deficit balance in a Member
Account shall reduce such Member's right to a return of capital of the
Company, a deficit balance shall not constitute an obligation of that
Member to the Company to repay the amount of such deficit balance. In
the event a Member unexpectedly receives any adjustments, allocations or
distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
(4), (5) or (6), that reduces any Member's Member Account
below zero or increases the negative balance in such Member's Member
Account, except as may be provided in Section 8.03 above, gross income
and gain shall be allocated to such Member in an amount and manner
sufficient to eliminate any negative balance in its Member Account
created by such adjustments, allocations or distributions as quickly as
possible in accordance with Treasury Regulation Section 1.704-1(b)(2)(ii)
(d). Any such allocation of gross income or gain pursuant to
this Section 8.04 shall be made to each Member Account having a negative
balance in the proportion such negative balance bears total negative
balances of all the Members. Any allocations of items of gross income or
gain pursuant to this Section 8.04 shall: (i) not duplicate any
allocations of gross income or gain made pursuant to Section 8.03, (ii)
be taken into account, to the extent feasible, in computing subsequent
allocations of the Company, so that the net amount of all items allocated
to each Member pursuant to this Article VIII shall, to the extent
possible, be equal to the net amount that would have been allocated to
each such Member pursuant to the provisions of this Article VIII if such
adjustments, allocations or distributions had not occurred. This Section
8.04 is intended to constitute a "qualified income offset" within the
meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d).
Section 8.05. Special Allocation Adjustments. Except as provided
in Section 8.03, in the event any Member has a deficit Member Account at
the end of any Company fiscal year that in excess of the amount such
Member is deemed to be obligated to restore pursuant to the penultimate
sentence of Treasury Regulation Section 1.704-1(b)(4)(iv)(f), each such
Member shall be specially allocated items of Company gross income and
gain in the amount of such excess as quickly as possible.
Section 8.06. Code Section 754 Election Adjustments. To the
extent an adjustment to the tax basis of any Company asset pursuant to
Code Section 734(b) or 743(b) is required to be taken into account in
determining Member Accounts, the amount of such adjustment to the Member
Accounts shall be treated as an item of gain (if the adjustment increases
the basis of the asset) or loss (if the adjustment decreases such basis),
and such gain or loss shall be specially allocated to the Members in a
manner consistent with the manner in which their Member Accounts are
required to be adjusted pursuant to such Treasury Regulation Section.
Section 8.07. Curative Allocations. The allocations set forth in
Sections 8.03, 8.04, 8.05 and 8.06 (the "Regulatory Allocations") are
intended to comply with certain requirements of Treasury Regulation
Section 1.704-1(b). The Regulatory Allocations may not be consistent
with the manner in which the Members intend to divide Company
distributions. Accordingly, the Managers are hereby authorized to divide
other allocations of profits, losses and other items among the Members so
as to prevent the Regulatory Allocations from distorting the manner in
which Company distributions will be divided among the Members pursuant to
Article XV. In general, the Members anticipate that this will be
accomplished by specially allocating items of income, gain, loss and deduction
among the Members so that the net amount of the Regulatory Allocations
and such special allocations to such Member is zero. However, the
Managers shall have discretion to accomplish this result in any
reasonable manner.
Section 8.08. Code Section 704(c) Allocations. In accordance with
Code Section 704(c) income, gain, loss and deduction with respect to any
property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for
federal income tax purposes and its fair market value at time of
contribution. Any elections or other decisions relating to such
allocations shall be made by the Managers in any manner that reasonably
reflects the purpose and intention of this Agreement. Allocations
pursuant to this Section 8.07 are solely for purposes of federal income
taxes and shall not affect, or in any way be taken into account in
computing any Member's Member Account, or share of items of the Company's
income, gains, losses, deductions and credits, or distributions pursuant
to any provision of this Agreement.
Section 8.09. Timing of Allocations and Distributions.
(a) Distributions shall be considered by the Managers each
fiscal quarter, in accordance with this Article VIII and shall be made at
the times and in the manner set forth in writing from time to time in a
resolution of the Managers. Any allocations of income, gains, losses,
deductions and credits, along with associated distributions, shall be
allocated and distributed to the Members in accordance with their
respective Units.
(b) With respect to any period during which a Member is
first entitled to a share of Company income, gain, loss, deduction or
credit, the Company shall, with respect to such items of income, gain,
loss, deduction or credit, allocate and distribute such items among the
Members who are entitled to such items in accordance with their
respective Units.
(c) If any Unit or economic benefit therein is transferred
during any month, every item of Company income, gain, loss, deduction and
credit attributable to such Unit for the fiscal year shall be divided and
allocated between the transferor and transferee based upon such
transferor's and transferee's respective proportionate interests. For
purposes of making this allocation, all transfers consummated during the
first 15 days of a month will be treated as made as of the first day of
the month of transfer, and all transfers consummated after the 15th day of
a month will be treated as made as of the first day of the following
month. Distributions shall be made in accordance with allocations.
Section 8.10. Distribution in Kind. A Member shall have no right
to demand and receive any distribution from the Company in any form other
than cash. However, a Member may be compelled to accept a distribution
of an asset in kind from the Company to the extent that the percentage of
the asset distributed to him exceeds a percentage of that asset which is
equal to the percentage in which he shares in distributions from the
Company.
Section 8.11. Limitations on Distribution. A Member may not
receive a distribution from the Company to the extent that, after giving
effect to the distribution, all liabilities of the Company, other than
liability to Members on account of their Capital Contributions, would
exceed the fair value of the Company's assets.
Section 8.12. Distribution Upon Resignation. Except as otherwise
provided in the Colorado Act or this Operating Agreement, upon
resignation, any resigning Member is entitled to receive any distribution
to which he is entitled, which shall be equal to the fair value of his
Units in the Company as of the date of resignation.
ARTICLE IX
FISCAL YEAR, BOOKS AND RECORDS
Section 9.01. Books of Account and Records. At all times during
the term of the Company, the Company shall keep or cause to be kept at
the Company's principal office, the items set forth in Section 2.05.
Section 9.02. Inspection. All documents required to be maintained
at the Company's principal office under Section 2.05, as well as true and
full information regarding the state of the Company's business, financial
condition and other information regarding the affairs of the Company as
is just and reasonable, shall be made available upon reasonable demand
for any purpose reasonably related to the Member's interest as a Member,
during ordinary business hours for inspection and copying at the
reasonable request and expense of any Member. In addition, any Member of
the Company shall have the right to have a formal accounting of Company
affairs whenever circumstances render it just and reasonable.
Section 9.03. Fiscal Year. The fiscal year of the Company shall
end on August 31 in each year except that the first year of the Company
shall be that period (even if less than twelve months) beginning on the
date of filing the Articles of Organization and ending on the next
following August 31 and the final year of the Company shall be that
period beginning on the first day of such year and ending on the date of
cancellation of the Articles of Organization.
Section 9.04. Accounting. The Company's accountants employed at
any one time shall be the final authority with regard to any accounting
questions that may arise during the course of the business of the
Company. Golden shall provide the Company certain accounting, financial
management and regulatory services and in consideration for the
performance of such services shall receive a fee equal to $9,166 per
month which shall be due and payable on the last business day of each
calendar month commencing June 30, 1996. Said accounting, financial,
management and regulatory services will be a normal Company business
expense.
ARTICLE X
TAX MATTERS
Section 10.01. Tax Matters Manager. The Managers shall designate
a tax matters Manager for purposes of federal and state income tax
matters. The tax matters Manager shall cause the preparation and timely
filing of all tax returns required to be filed by the Company pursuant to
the Internal Revenue Code and all other tax returns deemed necessary and
required in each jurisdiction in which the Company does business.
Section 10.02. Basis Adjustment on Transfers of Units. In the
event of a transfer of all or part of a Member's Units, the Company, at
the sole discretion of the Managers, may elect pursuant to Code Section
754 to adjust the basis of the Company Property upon the request of the
transferee; provided that the basis adjustment to which the transferee
would be entitled would increase the basis of the transferee's Units by
at least Two Thousand Dollars ($2,000) per Unit and the transferee
deposits funds with the Managers in advance sufficient to indemnify the
Company for the costs of making the adjustment based upon the Managers'
estimate thereof and agrees in writing to reimburse the Company for any
overage in such costs. If any Member transfers all or part of its Units,
any basis adjustment from such transfer, whether made under Code Section
754 or otherwise, shall be allocated solely to the transferee.
Section 10.03. Deductions and Elections. Wherever reasonably
possible, the Company shall treat as expense items all amounts incurred
for services, rent, taxes, leases, interest and other fees and charges
during or relating to Company Property which may, in accordance with
applicable law, regulations and/or decisions, be considered as expenses.
Any such items that must be capitalized shall be spread over the shortest
period of time allowable. The Company shall, to the extent permitted by
applicable law and regulations, elect to claim those tax positions as the
tax matters Manager, in its discretion, determines to be most favorable
to the Members. No Member shall take any action or refuse to take any
action which would cause the Company to forfeit the benefits of any tax
election previously made or agreed to be made. Each Member shall
promptly supply the Company with any information necessary to give effect
to such tax elections.
ARTICLE XI
MEMBERS' LIABILITY
Section 11.01. Members.
(a) No Member shall be liable under a judgment, decree or
order of a court, or in any other manner, for the debts, liabilities or
obligations of the Company. A Member shall have no liability to any
other Member and/or the Company when acting pursuant to its authority
granted pursuant to the Articles of Organization and/or this Operating
Agreement except to the extent such Member's acts or omissions
constituted willful misconduct or gross negligence of such Member.
Additionally, a Member shall be liable to the Company for:
(i) Any difference between its Capital Contribution
actually paid in and the amount promised by any Member as stated in this
Operating Agreement or any writing signed by the Member; and
(ii) Any unpaid Capital Contribution which it agreed
in this Operating Agreement or in any writing signed by the Member, to
make in the future at the time and on the conditions stated in this
Operating Agreement or in any other instrument, except that if a Member is
unable to perform because of death, disability or other reason, such Member
may, at the option of the Company, contribute cash equal to that portion of
the Member's Capital Contribution which has not been made; or
(iii) The obligation of any Member to make a Capital
Contribution or return money or other property paid or distributed in
violation of the Colorado Act may be compromised by vote of the Members
as set forth in Section 7.08.
(b) If a Member has received the return of any part of his
Capital Contribution in violation of this Operating Agreement or the
Colorado Act, he is liable to the Company for a period of six (6) years
thereafter for the amount of the Capital Contribution wrongfully
returned.
Any liability of a Member to the Company under this Article XI can
be waived or compromised pursuant to a vote by the Members in accordance
with Section 7.08. A Member who is subject to an obligation to repay any
Capital Contribution to the Company as required by the Articles of
Organization or this Operating Agreement, must make such repayment on
demand by the Company. No Member shall be liable to the Company, its
creditors or any other Member with respect to any amounts paid to such
Member as profit sharing, loan repayment, interest, salary, wage, rental,
royalty, fee or payment for value given which is not paid to such Member
as a return of such Member's Capital Contribution.
Section 11.02. Managers.
(a) The Managers do not in any way guarantee the return of
any Member's Capital Contribution or a profit for the Members from the
Company's business. The Managers shall incur no liability to the Company
or to any of the Members as a result of engaging in any other business or
venture regardless of whether such other business or venture competes
with the Company or whether the Managers are active in the management or
business of such other business or venture. Neither the Company nor any
of the Members shall have any rights by virtue of the Articles of
Organization, this Operating Agreement or any applicable law in or to the
other business ventures of the Managers or to the income, gains, losses,
deductions and credits derived therefrom by the Managers.
Section 11.03. Company's Indemnification of Members, Managers,
Employees or Agents. The Company shall indemnify its Members, Managers,
employees and agents as set forth in Article XII.
Section 11.04. Force Majeure. Notwithstanding anything in this
Operating Agreement to the contrary, a Member or a Manager, shall not be
liable (except for such Member's or Manager's obligations to contribute
or return its Capital Contributions under the Colorado Act or this
Operating Agreement) for any loss or damage to Company Property or
operations caused by its failure to carry out any of the provisions of
the Articles of Organization and/or this Operating Agreement as a result
of foreseeable or unforeseeable acts of God or incidents resulting from
outside forces, whether or not beyond the control of such Member or
Manager, such as strikes, labor troubles, riots, fires, weather, floods,
acts of a public enemy, insurrections, breakdown or failure of machinery,
acts, omissions or delays of governmental authorities and governmental
laws, rules, regulations or orders.
Section 11.05. Remedies. The remedies of the Members hereunder
are cumulative and shall not exclude any other remedies to which a Member
may be lawfully entitled. The Members acknowledge that all legal
remedies for any breach of this Operating Agreement may be inadequate,
and therefore they consent to any appropriate equitable remedy; provided,
that any failure of a Member to abide by the terms of this Operating
Agreement, including without limitation any vote or consent that should
bind a Member, or any other failure to adhere to the terms of this
Operating Agreement which cost the Company legal and court costs to
enforce same shall render the breaching Member liable to the Company for
any such fees and costs.
Section 11.06. Waiver. The failure of any Member to insist upon
strict performance of a covenant or condition hereunder shall not be a
waiver of its right to demand strict compliance therewith in the future.
ARTICLE XII
INDEMNIFICATION
Section 12.01. Indemnification of Members and Managers. The
Company will indemnify every member and manager in respect of payments
made and personal liabilities reasonably incurred by that member or
manager in the ordinary and proper conduct of the Company's business or
for the preservations of the Company's business or property.
Section 12.02. Indemnification of Employees and Agents. The
Company shall indemnify and advance expenses pursuant to section 12.01 to
an employee or agent of the Company who is not a manager to a greater
extent provided for in this Agreement, the Articles of Organization, or
by contract, in a manner consistent with the Colorado Act.
Section 12.03. Indemnification of Heirs, Executors and
Administrators. The indemnification provided by this Article shall
continue as to a person who has ceased to be a manager, employee or
agent, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 12.04. Insurance for Indemnification. The Company may
purchase and maintain insurance on behalf of a person who is or was a
manager, employee, fiduciary, or agent of the Company or who, while a
manager, employee, fiduciary, or agent of the Company, is or was serving
at the request of the Company as a manager, officer, partner, trustee,
employee, fiduciary, or agent of any other foreign or domestic limited
liability company or of any corporation, partnership, joint venture,
trust, other enterprise, or employee benefit plan against any liability
asserted against or incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the limited
liability company would have the power to indemnify him or her against
such liability under the provisions of this Article. Any such insurance
may be procured from any insurance company designated by the managers of
the Company, whether such insurance company is formed under the laws of
this state or any other jurisdiction of the United States or elsewhere.
ARTICLE XIII
ADDITIONAL MEMBERS AND UNITS
Section 13.01. Additional Units. By approval of or on behalf of
the Members possessing all of the Units, the Company may issue Additional
Units by sale or other issuance to existing Members or other persons or
entities (separately and together, "Additional Members"). Any such sale
or other issuance of Company Units shall be made in accordance with the
Articles of Organization and this Operating Agreement. As a condition to
such issuance, Additional Members acquiring such Units shall execute this
Operating Agreement and all other documents and instruments as the
Company may require and shall become Members as regards such Units upon
the date the last of such agreements are executed. The legal fees and
costs associated with the preparation of an amendment to the Articles of
Organization to effectuate such admission, if necessary, and all other
documents necessary to continue the Company's right to do business in the
jurisdictions in which it is then doing business, shall be borne by the
Company.
Section 13.02. Allocations. Additional Units shall not be
entitled to any retroactive allocation of the Company's income, gains,
losses, deductions, credits or other matters of any kind; provided that
Additional Units shall be entitled to their respective share of the
Company's income, gains, losses, deductions, credits and other matters of
any kind arising under contracts entered into before the effective date
of the issuance of any Additional Units to the extent that such income,
gains, losses, deductions, credits and other matters of any kind arise
after such effective date. The Company's books may be closed at the time
Additional Units are issued (as though the Company's tax year had ended)
or the Company may credit to the Additional Units pro rata allocations of
the Company's income, gains, losses, deductions, credits and other
matters of any kind for that portion of the Company's fiscal year after
the effective date of the issuance of the Additional Units.
ARTICLE XIV
TRANSFERS; BUY-SELL
Section 14.01. Transfer and Assignment of Interests. No Member
shall be entitled to transfer, assign, convey, sell, encumber or in any
way alienate all or any part of its Units (collectively, "transfer")
except with the prior approval of all Members, which approval may be
given or withheld in the sole discretion of the Members.
Section 14.02. Substitution of Members. A transferee of a Unit
shall have the right to become a Substitute Member only if (a) consent of
the Members is given in accordance with Section 7.10, (ii) such person
executes an instrument satisfactory to the Members accepting and adopting
the terms and provisions of this Operating Agreement and (iii) such
person pays any reasonable expenses in connection with its admission as a
Substitute Member. The admission of a Substitute Member shall not
release the Member who assigned the Unit from any liability that such
Member may have to the Company.
Section 14.03. Transfers in Violation of this Agreement and
Transfers of Partial Membership Interests. Upon a transfer in violation
of this Article XIV, the transferee shall have no right to vote or
participate in the management of the Company or to exercise any rights of
a Member and such transferee shall not be entitled to receive any of the
Company's profits, losses and distributions of the Company's assets and
such transfer shall be deemed null and void.
Section 14.04. Terms and Conditions. Any Member shall be entitled
to give notice (the "Buy-Sell Notice") to all other Members (each, an
"Offeree") of a cash price for a Unit in the Company (the "Buy-Sell
Price") during any of the periods specified in Section 14.05. Any
Offeree or the Offerees collectively (as agreed upon by the Offerees)
shall then have thirty (30) days in which to give notice as to whether
(a) to sell all their Units to the Member giving the Buy-Sell Notice at
the Buy-Sell Price or to such Member's designee or (b) to buy from the
Member giving the Buy-Sell Notice all its Units at the Buy-Sell Price or
claim such purchase right on behalf of a designee. If any Offeree fails
to give such notice it shall be deemed to have elected the option
specified in clause (a) of the preceding sentence. If the option
specified in clause (a) applies, the Member giving the Buy-Sell Notice or
its designee shall buy and the Offerees shall sell all the Units of such
Offeree at the Buy-Sell Price. If an Offeree, more than one Offeree
together, or a designee of such Offeree elects to buy all the Units of
the Member giving the Buy-Sell Notice, such Member shall sell and the
Offeree, Offerees or such designee shall buy all the Member's Units at
the Buy-Sell Price. The closing of any transaction under this Section
shall occur on a date specified on not less than twenty (20) days notice
by the buyer in such transaction, which date shall be not less than
thirty (30) nor more than sixty (60) days from the date the identity of
the buyer is determinable. At the closing of any transaction under this
Section, the seller of the Units shall deliver such Units to the buyer
free and clear of all liens, claims and encumbrances and the buyer shall
pay for the Units in cash by certified or cashier's check or by wire
transfer.
Section 14.05. Time of Exercise. Any Member shall be entitled to
give the Buy-Sell Notice for a period of thirty (30) days beginning on
either (a) the later of (i) October 31st of each year or (ii) at the time
at which the Company's financial statements for the prior fiscal year are
available or (b) the date of a Buy-Sell Trigger Event described in
Section 15.01(c) (the "Notice Period"). If no action is taken by either
Member during such Notice Period, the Buy-Sell Option may not be
exercised until the next succeeding Notice Period; provided, however,
that any Member may give the Buy-Sell Notice at any time that the Members
are unable to agree (after good faith efforts to resolve such
differences) on any matter relating to the business of the Company which
they deem to be significant.
ARTICLE XV
DISSOLUTION AND WIND-UP
Section 15.01. Dissolution Event; Wind-up and Reformation.
(a) Upon the occurrence of a Dissolution Event, the Company
shall dissolve unless all of the remaining Members ("Remaining
Members") consent within ninety (90) days of the Dissolution Event to the
continuation of the business of the Company. If the Remaining Members so
consent, the Company and/or the Remaining Members or their designees
shall have the right to purchase, and if such right is exercised, the
Member (or its legal representative) whose actions or conduct resulted in
the Dissolution Event ("Former Member") shall sell, the Former Member's
Units ("Former Member's Units") as provided in Section 15.01(c).
(b) Former Member Status. If any Member becomes a Former
Member, the Managers solely appointed by such Former Member shall have no
voting rights and shall be no longer counted in determining a Quorum of
the Managers and such Managers shall be removed.
(c) Purchase Price. During the first six (6) months after
the execution of this Agreement, the purchase price for all the Former
Member's Units shall be the applicable value mutually agreed upon by the
parties hereto and set forth in Exhibit B. Thereafter, the Members shall
use their best efforts to determine new values for the Interests on or
around each six (6) month anniversary of the execution of this Agreement
to become the purchase price for Units under this Article XV during such
subsequent six (6) month period. Notwithstanding the foregoing, if the
Members cannot agree on values for the Interests during any such six (6)
month period or if upon a Dissolution Event a Former Member or Remaining
Member concludes in good faith that the most recent value set for the
Units of the Former Member significantly varies from the actual value of
such Units (each, a "Buy-Sell Trigger Event"), then any Former Member or
Remaining Member may give a Buy-Sell Notice under Section 14.04.
(d) Notice of Intent to Purchase. Within thirty (30) days
after a Dissolution Event, each Remaining Member shall notify the Members in
writing of its desire to purchase a portion of the Former Member's
Units. The failure of any Remaining Member to submit a notice within the
applicable period shall constitute an election on the part of the Member
not to purchase any of the Former Member's Units. Each Remaining Member
so electing to purchase shall be entitled to purchase a portion of the
Former Member's Units in the same proportion that the Membership Units of
the Remaining Member bears to the aggregate of the Membership Units of
all of the Remaining Members electing to purchase the Former Member's
Units.
(e) Election to Purchase Less Than All of the Former
Member's Interest. If any Remaining Member elects to purchase none or
less than all of its pro rata share of the Former Member's Units, then
the Remaining Members can elect to purchase more than their pro rata
share. If the Remaining Members fail to purchase the entire Units of the
Former Member, the Company shall purchase any remaining share of the
Former Member's Units. If the Company and the Remaining Members do not
agree to purchase all the Units of the Former Member, any purchase
elections made pursuant to this Article XVI shall be null and void, and
the Company shall dissolve.
(f) Payment of Purchase Price. Unless the remaining
Managers with voting rights agree otherwise with a Former Member, the
Company or the Remaining Members, as the case may be, shall pay at the
closing the entire purchase price.
(g) Closing of Purchase of Former Member's Interest.
Unless the Remaining Managers with voting rights agree otherwise
with a Former Member, the closing for the sale of a Former Member's Units
pursuant to this Article XVI shall be held at 10:00 a.m. at the principal
office of Company no later than thirty (30) days after the notice of
intent to purchase made under Section 14.07, except that if the closing
date falls on a Saturday, Sunday or Colorado legal holiday, then the
closing shall be held on the next succeeding business day. At the
closing, the Former Member shall deliver to the Company or the Remaining
Members, as applicable, an instrument of transfer (containing warranties
of title and no encumbrances) conveying the Former Member's Units. The
Former Member, the Company and/or the Remaining Members shall do all
things and execute and deliver all papers as may be reasonably necessary
fully to consummate such sale and purchase in accordance with the terms
and provisions of this Operating Agreement.
(h) If continuance of the Company is not approved by the
Remaining Member or Members within the ninety (90) day period set forth
in Section 15.01(a), the Company shall promptly commence to wind up its
affairs and execute a statement of intent to dissolve. Such statement of
intent to dissolve shall be executed by one of the Managers. Upon the
filing with the Colorado Secretary of State of a statement of intent to
dissolve, the Company shall cease to carry on its business, except
insofar as may be necessary for the winding-up of its business, but its
separate existence shall continue until Articles of Dissolution have been
filed with the Colorado Secretary of State or until a decree dissolving
the Company has been entered by a court of competent jurisdiction.
Section 15.02. Authority to Wind-Up. In the event that winding-up
is required hereunder, the winding-up activities shall be managed by the
Managers or a committee thereof appointed for this express purpose, to
the exclusion of the Members.
Section 15.03. Settlement and Distribution. In settling accounts
after dissolution, the assets of the Company shall be distributed as
follows:
(a) to creditors, including Members who are creditors to
the extent otherwise permitted by law, in satisfaction of liabilities of
the Company other than liabilities for distributions to Members under
C.R.S. 7-80-601 or 7-80-603;
(b) except as provided in this Operating Agreement, to
Members and former Members of the Company in satisfaction of liabilities
for distribution under C.R.S. 7-80-601 or 7-80-603; and
(c) except as provided in this Operating Agreement, to
Members of the Company for the return of their Capital Contributions and
respecting their Unit Ownership in the proportions in which the Members
share in distributions.
Section 15.04. Termination. Upon completion of the distribution
of the Company's Property as provided in this Article XV, the Company
shall be terminated, and the Managers in charge of winding-up the
Company's business shall cause the filing of the Articles of Dissolution
pursuant to the Colorado Act and shall take all such other actions as may
be necessary to terminate the Company.
Section 15.05. Claims of the Members. The Members shall look
solely to the Company's Property for the return of their Capital
Contributions, and if the assets of the Company remaining after payment
or discharge of the debts or liabilities of the Company are insufficient
to return such Capital Contribution, the Members shall have no recourse
against the Company or any other Member or Manager.
Section 15.06. Waiver of Right to Court Decree of Dissolution.
The parties agree that irreparable damage would be done to the good will
and business affairs of the Company if any Member should bring an action
in court to dissolve the Company. Care has been taken in this Operating
Agreement to provide fair and just payment in liquidation of the Units of
all Members. Accordingly, each party hereby waives and renounces its
right to a court decree of dissolution or to seek the appointment by the
Court of a receiver and/or liquidator for the Company, under the Colorado
Act or any other statute, common law or regulatory rule, except as may be
sought by the Company itself.
ARTICLE XVI
AMENDMENTS
Section 16.01. Proposal of Amendments. Amendments to the Articles
of Organization and this Operating Agreement may be proposed in writing
by any Member or Members owning at least ten percent (10%) of the Units
or by any Manager or Managers. As required by the Company, any such
proposed amendment must be accompanied by an opinion of counsel as to the
legality and effect on the Members. Copies of any amendments made
pursuant to this Article XVI shall be sent to the Members.
Section 16.02. Amendments by Members. A proposed amendment shall
be voted upon at either an annual meeting or a special meeting of the
Members duly called for the purpose of voting on the amendment. Such
votes shall be made as provided in Article VII. Upon the Members'
approval of any amendment, all Members, whether or not they consented to
such amendment, shall be deemed to have consented to and shall be bound
by the terms and provisions thereof as if they had so consented.
Section 16.03. Amendments by Managers. Notwithstanding any
provision of this Agreement, amendments to this Operating Agreement
which, in the opinion of counsel to the Company, are necessary to
maintain the status of the Company as a tax partnership under federal or
state law or for other tax purposes may be made by a majority of the
Managers without the necessity of a vote of the Members.
ARTICLE XVII
NOTICES
Any notice, payment, demand or communication required or permitted
to be given hereunder shall be deemed to have been given when delivered
personally to the party to be notified or when deposited in the United
States mail, postage and charges prepaid, addressed as follows:
(a) if to the Company, addressed to the Company's principal
office;
(b) if to a Manager, addressed to such Manager's address
for purposes of notice which is contained in the Company's books and
records; and
(c) if to a Member, addressed to such Member's address for
purposes of notice which is contained in the Company's register of its
Members. Any Member may change its address or representative to be
notified by written notice to the Company.
ARTICLE XVIII
GOVERNING LAW AND INTERPRETATION
Section 18.01. Governing Law. This Operating Agreement shall be
deemed to be made under and shall be construed in accordance with the
laws of the State of Colorado.
Section 18.02. Severability. If any provision of this Operating
Agreement or the application thereof to any person or circumstance shall
be invalid, illegal or unenforceable to any extent, the remainder of this
Operating Agreement shall not be affected and the application of such
affected provision shall be enforced to the greatest extent permitted by
law.
Section 18.03. Headings. All section or subsection titles or
captions contained in this Operating Agreement are for convenience only
and shall not be deemed part of the context of this Operating Agreement.
Section 18.04. Plurals and Pronouns. All pronouns and any
variations thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of the person or persons may
require.
Section 18.05. Time. In computing any period of time pursuant to
this Operating Agreement, the day of the act, event or default from which
the designated period of time begins to run shall not be included, but
the time shall begin to run on the next succeeding day. The last day of
the period so computed shall be included, unless it is a Saturday, Sunday
or legal holiday, in which event the period shall run until the end of
the next day which is not a Saturday, Sunday or legal holiday.
ARTICLE XIX
NO THIRD PARTY BENEFICIARIES
Except as may be expressly provided for herein, no person or entity
not a party hereto shall have any rights or obligations hereunder.
ARTICLE XX
ENTIRE AGREEMENT
The Articles of Organization and this Operating Agreement contain
the entire understanding between and among the Members and supersede any
prior understandings and agreements between and among them respecting the
subjects of the Articles of Organization and this Operating Agreement.
The attached Exhibits A, B, C, D and E are incorporated herein by this
reference. If any of the matters covered by this Operating Agreement
were performed or commenced by the Members prior to their execution of
this Operating Agreement, this Operating Agreement shall be deemed to
govern such prior actions as if it were executed by the Members prior to
such actions being undertaken.
ARTICLE XXI
COUNTERPART EXECUTION
This Operating Agreement may be executed in counterparts, all of
which taken together shall be deemed one original. Each Member shall
become bound by this Operating Agreement immediately upon such Member's
execution hereof and independently of the execution hereof by any other
Member.
[END OF DOCUMENT TEXT] This Operating Agreement is executed as of
the date first above mentioned.
This is a signature page for that Operating Agreement for Pharma
Labs, LLC.
Golden Pharmaceuticals, Inc.,
a Colorado corporation
By
Printed Name:
Title:
Pharma France, Inc.,
a California corporation
By
Printed Name:
Title:
EXHIBIT A
To that Operating Agreement for Pharma Labs, LLC.
DEFINITIONS
"Additional Member" is defined in Section 13.01 and means any
person or entity who acquires Additional Units of the Company.
"Additional Units" means Units of the Company issued by the Company
subsequent to the filing date of the Articles of Organization.
"Affiliate" means any individual, partnership, joint venture, trust
corporation or other form of enterprise which directly or indirectly
controls, is controlled by, or is under common control with, a Member.
For purposes of the preceding sentence, "control" means possession,
directly or indirectly, of the power to direct or cause direction of
management and policies through ownership of voting securities, contract,
voting trust or otherwise.
"Articles of Organization" of the Company means the Articles of
Organization filed with the Secretary of State, State of Colorado,
pursuant to the Colorado Limited Liability Company Act to form the
Company, as originally executed and as amended, modified, supplemented or
restated from time to time, as the context requires.
"Benefit" is defined in Section 14.01.
"Benefit Plan Investors" means an employee benefit plan as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended (including a Qualified Plan) or a plan described in Code
Section 4975(e)(1) (including an IRA).
"Capital Contribution" means the gross amount of investment by a
Member or all Members, as the case may be, which may consist of cash,
property, or services rendered or a promissory note or other obligation
to contribute cash or property or to perform services.
"Carrying Value" means the adjusted basis of an asset for federal
income tax purposes, as of the time of determination. The Carrying Value
of any asset shall be adjusted from time to time to the extent required
by Sections 8.01(iv) and 8.01(v), and to reflect changes, additions or
other adjustments to the Carrying Value for dispositions, acquisitions or
improvements of the Company's assets.
"Code" means the Internal Revenue Code of 1986, as amended, and
applicable Treasury Regulations thereunder.
"Colorado Act" means the Colorado Limited Liability Company Act
C.R.S. 7-80-101 et seq. (1990).
"Company" means Pharma Labs, LLC.
"Company Minimum Gain" means for partnership tax purposes as set
forth in Treasury Regulation Section 1.704-1(b)(4)(iv)(c), the amount of
gain, if any, that would be realized by the Company if it were to sell or
dispose of (in a taxable transaction) property subject to a nonrecourse
liability of the Company for a price equal to that necessary to fully
satisfy such liability.
"Dissolution Event" means those events listed in Section 2.03.
"Initial Members" are Golden Pharmaceuticals, Inc., a Colorado
corporation and Pharma France, a California corporation, and their
respective transferees of their Units.
"Manager" or "Managers" means one or more persons (individually and
together) selected by the Members who, if they are natural persons, are
18 years of age or older, and who need not be Members or residents of the
state of Colorado, to whom are delegated all or part of the management
duties of the Company's business as provided in Article VI.
"Member" means each of the parties who has executed this Operating
Agreement and each of the parties who may hereafter become Additional or
Substitute Members as provided in the Articles of Organization and in
this Operating Agreement.
"Member Account" means the account maintained for each Member
pursuant to Section 8.01.
"Net Cash Flow" means the excess cash receipts of the Company from
the operation of the Company (including proceeds from sale or
refinancing) after payment of operating expenses, capital expenditures,
taxes, insurance, debt service, rent and other expenses like and unlike
the foregoing, exclusive of depreciation expenses and other similar non-cash
items, after setting aside such amounts as the Managers deem
necessary to create adequate reserves for future capital needs.
"Net Income" means the accounting term "net income" as determined
in accordance with generally accepted accounting principles consistently
applied.
"Operating Agreement" means this Operating Agreement of Pharma
Labs, LLC, as originally executed and as amended, modified, supplemented
or restated from time to time, as the context requires.
"Priority Period" means the five-year period commencing September
1, 1996 and ending August 31, 2001.
"Property" means all real, personal and mixed properties, cash,
assets, interests and rights of any type owned by the Company. All
assets acquired with Company funds or in exchange for Company Property
shall be Company Property.
"Publicly traded partnership" means a partnership or company as
defined by Code Section 7704.
"Regulatory Allocations" are defined in Section 8.05.
"Shortfall" means an amount, if any, equal to $300,000 less the
Company's actual annual Net Income for any fiscal year during the
Priority Period; provided, however, annual Net Income in excess of
$300,000 may be carried forward to the next subsequent fiscal year to
cover any Shortfall in such subsequent fiscal year.
"Substitute Member" means any transferee of a Member's Units who is
admitted as a Member in the Company pursuant to Article XIV.
"Unit" means an interest in the Company representing an interest in
the Company as described in Section 4.03.
"Unrealized Gain" attributable to a Company asset means, as of any
date of determination, the excess, if any, of the fair market value of
such asset (as determined under Section 8.01(f) as of such date of
determination) over the Carrying Value of such asset as of such date of
determination (prior to any adjustment to be made pursuant to Section
8.01(f) as of such date).
"Unrealized Loss" attributable to a Company asset means, as of any
date of determination, the excess, if any, of the Carrying Value of such
asset as of such date of determination (prior to any adjustment to be
made pursuant to Section 8.01(f) as of such date) over the fair market
value of such asset (as determined under Section 8.01(f) as of such date
of determination.
EXHIBIT B
Attached to that Operating Agreement for Pharma France, LLC.
Members and Units As of June 14, 1996
All Members, Past and Business, Residence or Number of
Present Mailing Address Units Owned
Golden Pharmaceuticals, Inc., 1313 Washington Avenue 52
a Colorado corporation Golden, CO 80401
Pharma France, Inc., 1070 W. Armando 48
a California corporation Anaheim, CA 92806 _______
TOTAL 100
EXHIBIT C
Attached to that Operating Agreement for Pharma Labs, LLC
Members And Capital Contributions As Of June 14, 1996
Golden Pharmaceuticals $ 600,000
Cash; portions of which
are to be paid from time to time on an "as needed" basis for working
capital as determined by a majority of the managers.
$ 100,000
Assignment of promissory note payable by Pharma France, Inc., f/k/a
Pharma Labs, Inc.
$ 300,000*
Payment for non-compete
agreements and consulting services
__________
Total $1,000,000
Pharma France, Inc. $ 939,000**
Equipment, fixtures and
furnishings as shown on Exhibit F attached hereto
* $24,572 has been paid and $125,000 shall be due and payable on
September 1, 1996. $150,428 shall be due and payable upon execution of
this Agreement.
** Approximate market value
<PAGE>
EXHIBIT D
Attached to that Operating Agreement for Pharma Labs, LLC
MANAGERS
AS OF JUNE 14, 1996
<PAGE>
EXHIBIT E
Attached to that Operating Agreement Pharma Labs, LLC
AGREEMENT OF NON-RESIDENT MEMBER
TO TIMELY FILE A COLORADO TAX RETURN
The undersigned, a Member of Pharma Labs, LLC (the "Company"),
hereby state as follows:
1. the undersigned is not a resident of the State of Colorado.
2. the undersigned agrees to timely file a Colorado income tax
return and to timely pay all taxes imposed on it by the State of Colorado
with respect to the income of the Company, for each tax year during which
it is a Member of the Company.
3. the undersigned agrees to be subject to personal jurisdiction
in the State of Colorado for purposes of the collection of income taxes,
together with related interest and penalties imposed on me with respect
to the income of the Company during each tax year in which I am a Member
of the Company.
4. If the Company fails to timely file this Agreement with the
proper officials of the State of Colorado on my behalf and pays the State
of Colorado any amounts on my behalf, I agree unconditionally to
reimburse the Company for all amounts so paid to the State of Colorado
and all related costs, fees and expenses related thereto.
Signed as of June 14, 1996.
Pharma France, Inc.,
a California corporation
By
Printed Name:
Title:
EXHIBIT F
EQUIPMENT
<PAGE>
Exhibit 27
Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the registrant's
financial statements for the year ended August 31, 1996 contained in its annual
report on Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1995
<PERIOD-END> AUG-31-1996 AUG-31-1995
<CASH> 34,872 49,557
<SECURITIES> 0 0
<RECEIVABLES> 1,652,318 1,484,175
<ALLOWANCES> (43,634) (63,700)
<INVENTORY> 1,336,633 674,955
<CURRENT-ASSETS> 3,528,771 2,656,600
<PP&E> 4,339,707 2,736,714
<DEPRECIATION> (1,782,400) (1,659,768)
<TOTAL-ASSETS> 10,691,601 8,079,905
<CURRENT-LIABILITIES> 2,616,663 2,040,931
<BONDS> 0 0
0 0
292,558 292,558
<COMMON> 23,867,384 21,288,851
<OTHER-SE> (20,828,049) (20,469,509)
<TOTAL-LIABILITY-AND-EQUITY> 10,691,601 8,079,905
<SALES> 10,156,647 4,412,377
<TOTAL-REVENUES> 10,156,647 4,412,377
<CGS> 6,538,660 2,245,230
<TOTAL-COSTS> 6,538,660 2,245,230
<OTHER-EXPENSES> 3,671,613 1,255,645
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 807,198 140,330
<INCOME-PRETAX> (862,637) 787,303
<INCOME-TAX> 0 (91,594)
<INCOME-CONTINUING> (862,637) 878,897
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 99,677
<CHANGES> 0 0
<NET-INCOME> (791,932) 978,574
<EPS-PRIMARY> (.01) .01
<EPS-DILUTED> (.01) .01
</TABLE>
