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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
COMMISSION FILE NUMBER: 0-9065
GOLDEN PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
COLORADO 84-0645174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 W. WARNER STREET, SANTA ANA, CALIFORNIA 92704
(Address of principal executive office)(Zip Code)
(303) 279-9375
Issuer's telephone number
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 X NO
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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: $ 6,443,863
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of NOVEMBER 30, 1998, was $6,882,955. This calculation is based
upon the average of the bid ($.05) and asked ($.06) prices of the voting stock
on November 30, 1998.
The number of shares of common stock outstanding as of NOVEMBER 30, 1998, was
125,144,644
Transitional Small Business Disclosure Format: Yes NO X
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PART I
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. From 1979 to April 1997, the
Company's primary business was the manufacture and distribution of Sodium
Iodide 123 (I-123) diagnostic capsules. In August 1995, the Company
acquired Quality Care Pharmaceuticals, Inc. ("QCP"), a repackager and
distributor of pharmaceutical products and in April 1997, the Company
completed the sale of its assets related to the manufacture and
distribution of I-123 capsules. See "Business Developments - Acquisition
of Quality Care Pharmaceuticals, Inc." and "Business Developments - Sale
of Radiopharmaceutical Division." The Company's main business is now the
repackaging and distribution of pharmaceuticals through its wholly owned
subsidiary, QCP.
BUSINESS DEVELOPMENTS
ACQUISITION OF QUALITY CARE PHARMACEUTICALS, INC. - In August 1995, the
Company purchased all of the issued and outstanding common stock of QCP
for a total purchase price of $3,718,750. QCP is engaged in the
repackaging and distribution of pharmaceutical products and related
computerized dispensing and patient tracking systems. QCP's customers
include physicians, hospitals, group practices, managed care programs and
other legally constituted medical facilities throughout the United
States.
RXDIRECT, LLC - On February 12, 1996, QCP entered into a joint venture
agreement with the Visiting Nurses Association of Orange County ("VNA")
to establish RxDirect, LLC ("RxDirect"), a mail order or direct delivery
pharmacy. QCP provides ongoing management and logistical support to the
joint venture. RxDirect is engaged in the dispensing of medications via
mail or courier delivery to subscribers of their services. In October
1998, the Company and VNA signed an agreement pursuant to which VNA
agreed to withdraw from the RxDirect joint venture upon payment of a
withdrawal fee of $154,000, including accounts receivable of $47,761.
ISO 9000 CERTIFICATION - On March 14, 1996, and May 13, 1996, QCP was
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 9002 certified for their manufacturing
plant and process.
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"), a manufacturer and distributor of nutritional health
products both domestically and internationally. The Company contributed
$1,000,000 for 52% of the equity in Pharma Labs, LLC. As of August 31,
1998, the Company had loaned Pharma Labs $976,274 for inventory,
leasehold improvements and operational support.
On October 8, 1998, the Company and the other member of Pharma Labs
"(Member") entered into a Unit Purchase Agreement whereby the Company
purchased the Member's 48% interest in Pharma Labs for $35,000. On
November 10, 1998, the Company entered into a Purchase Agreement with
Adam Equities, Inc. "(AEI"), pursuant to which on December 3, 1998 AEI
purchased substantially all of the assets of Pharma Labs for $150,000. In
addition, the AEI assumed Pharma Labs' obligations under two (2)
equipment leases and an affiliate of AEI entered into a sublease with the
Company to sublease Pharma Labs' facility and reimbursed the Company
$57,000 for a lease deposit on the facility. The Company also received a
$250,000 payment from AEI pursuant to the terms of a Noncompete
Agreement. See "Note G" to "Notes to Consolidated Financial Statements".
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SALE OF RADIOPHARMACEUTICAL DIVISION - On April 7, 1997, the Company
completed the sale of the assets related to its business of manufacturing
and distributing radiopharmaceuticals for a total purchase price of
$6,700,000 pursuant to the terms of an Asset Purchase Agreement dated
April 7, 1997, by and between the Company and Syncor Pharmaceuticals,
Inc. Included in the sale was the New Drug Application (NDA) for the
radiopharmaceuticals, the building that contains the manufacturing
facility for this business, and all of the related equipment.
JOINT MARKETING AGREEMENT WITH DORNOCH MEDICAL SYSTEMS, INC. - In July
1997, the Company and Dornoch Medical Systems, Inc. ("Dornoch") entered
into a Joint Marketing Agreement ("JMA") whereby the Company agreed to
market Dornoch's Redaway system, a medical infectious fluid collection
and disposal system, in return for royalties on sales. In connection with
the JMA, the Company was granted an option to purchase 220 shares of
Dornoch common stock at a purchase price of $2,000 per share, which
option would vest and be exercisable upon the sale of 80 Redaway systems
through the Company's marketing efforts. Sales and royalties from this
agreement have been negligible. In addition, Dornoch purchased 1,000,000
shares of the Company's common stock for $0.30 per share and was granted
an option to purchase an additional 1,000,000 shares for $0.30 per share.
In July 1998, the JMA was terminated by mutual consent and all stock
purchase options were cancelled.
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 the ability to dispense medication directly to patients at
the point-of-care ("POC").
Dispensing medication at the POC provides physicians, managed health care
organizations and patients with a number of significant benefits.
Unit-of-use medication is packaged under federal regulations which
assures the highest level product quality, purity and safety. Unit-of-use
medication may be significantly less expensive than comparable products
dispensed from a retail pharmacy. Dispensing medication directly to the
patient significantly improves drug therapy compliance, which results in
better patient outcomes and reduces the need for additional medical
services. This results in lower overall medical costs per patient per
incident. In addition, POC dispensing provides greater patient census,
patient convenience, patient retention and lower health care costs due to
compliance.
MANUFACTURING
QCP is licensed by the U.S. Food and Drug Administration ("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 ("DEA")and the California Health
and Services Department and maintains rigid quality control standards.
RxDirect is licensed by the DEA and the California Board of Pharmacy, and
operates as a retail pharmacy engaged in mail order delivery.
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QUALITY CONTROL
The Company believes that QCP is the only drug repackager in the U.S.
that maintains full compliance to:
ISO9002 - International quality standards that currently exceed all
existing FDA regulations (ISO certification, March 1996).
cGMP's - Current Good Manufacturing Practices - Title 21 Code of Federal
Regulations (amended April, 1995).
FDA - Food, Drug and Cosmetic Act
DEA - Controlled Substances Act.
QCP's production batch record requires over 120 specific entries. Every
step requires a minimum of two qualified employees to complete and
verify. Every batch requires a minimum of seven different employees to
complete.
Every step in the production process, every tablet, capsule, bottle, cap,
and label is 100% traceable. QCP maintains this information no less than
one year past the original product's expiration date. In addition to the
batch record, QCP maintains over 25 separate logs that must be completed
every day the plant operates. These records document and monitor facility
temperature, humidity, air pressure differentials, facility and equipment
maintenance, equipment cleaning procedures, equipment process validation
systems, and many other critical production and drug storage parameters
to assure maximum product quality, purity, safety and traceability.
QCP packages penicillin and cephalosporin antibiotics in separate
negative air flow packaging rooms. This process is designed to prevent
antibiotic contamination of non-antibiotic products, and cross
contamination between penicillin and cephalosporin products. Antibiotic
contamination of non-antibiotic drug products is a dangerous problem with
the potential to occur at most pharmacies in the United States.
DISTRIBUTION
QCP ships 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.
RxDirect ships orders for its products via UPS express delivery or
overnight courier directly to customers. RxDirect's goal is that orders
are shipped next day from receipt of order.
SUPPLIERS
QCP purchases pharmaceuticals from a number of FDA licensed United States
drug distributors and manufacturers. QCP's largest supplier is Bergen
Brunswig Corporation located in Corona, California. QCP believes its
relationship with its suppliers to be good.
RxDirect purchases pharmaceuticals from a number of FDA licensed drug
wholesalers. RxDirect's largest suppliers are Bergen Brunswig
Corporation, Barnes Wholesaler and Wyeth Ayerst.
BACKLOG
The Company does not have significant backlogs but operates on a daily
order and contract basis with its customers.
MARKETING
QCP markets its products directly to customers through independent sales
representatives, corporate sales personnel, trade shows and its World
Wide Web site.
RxDirect markets through direct sales contact with selected potential
customers, as well as through direct mail and magazine advertising.
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RESEARCH AND DEVELOPMENT
QCP has developed a proprietary dispensing and patient tracking software,
called QScript. This software provides enhanced capabilities to collect
and analyze data on patient diagnosis, drug utilization, treatment plans
and specific costs and treatment outcomes. This not only provides the
health care provider with patient data necessary to augment the patient's
treatment, but also gives that provider an additional revenue source or a
major cost reduction. QCP's dispensing software assures fast and simple
dispensing in full compliance with state pharmacy laws. Software
development efforts continue on upgrades to its proprietary dispensing
and patient tracking software.
COMPETITION
QCP competes with other repackagers of pharmaceuticals, including
Allscrips Pharmaceuticals, Inc., PDRx, and several other small firms. 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.
RxDirect competes with numerous other mail order pharmacies, many of
which have greater resources than RxDirect.
GOVERNMENT REGULATIONS
QCP operations are regulated by the 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.
RxDirect 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. RxDirect 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 operations.
In addition, a variety of state and local permits are required under
regulations relating to the Company's products.
PRODUCT LIABILITY AND INSURANCE
The Company currently maintains product liability insurance in the
aggregate amount of $5 million per occurrence and per year with a $2,500
deductible.
EMPLOYEES
As of December 1, 1998, the Company employed seventy-three (73) persons
on a full-time basis. Additional employees are hired from time to time
during peak production periods. None of the Company's 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.
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ITEM 2. DESCRIPTION OF PROPERTIES
QCP leases a 25,000 square foot facility in Santa Ana, California
pursuant to a lease agreement which expires in March 2004.
During fiscal 1998, the Company sold a 2,000 square foot office building
in Golden, Colorado. This facility was not in use.
The Company believes 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
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
The Company has been a named defendant in a number of diet drug related
personal injury lawsuits. These claims have been referred to the
Company's product liability insurance carrier. While the outcome of these
claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial positions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.
<TABLE>
<CAPTION>
For the Year ended August 31, 1998 High Low
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<S> <C> <C>
1st Quarter $ 0.19 0.0625
2nd Quarter 0.16 0.09
3rd Quarter 0.12 0.07
4th Quarter 0.085 0.035
</TABLE>
<TABLE>
<CAPTION>
For the Year ended August 31, 1997 High Low
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<S> <C> <C> <C>
1st Quarter $ 0.23 0.12
2nd Quarter 0.32 0.12
3rd Quarter 0.29 0.17
4th Quarter 0.23 0.15
</TABLE>
These quotations are inter-dealer prices without retail markup, markdown
or commissions, and may not necessarily represent actual transactions.
As of November 30, 1998, there were approximately 2,600 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 the Company and the
ability of the Company to achieve earnings per share growth through
internal investment, strategic alliances, joint ventures and other
methods. The success of the Company's business operations is, in turn,
dependent on factors such as the effectiveness of the Company's marketing
strategies to grow its customer base 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.
RECENT DEVELOPMENTS
The Company incurred a net loss of ($10,067,760) during the fiscal year
ended August 31, 1998 and, as of that date, the Company's current
liabilities exceeded its current assets by $5,435,000 and its total
liabilities exceeded its total assets by $4,595,000. Also, the Company is
not in compliance with the covenants of its revolving credit facility and
must obtain alternative financing by February 1, 1999. These conditions,
as well as others, raise substantial doubt about the Company's
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ability to continue as a going concern. As a result, the Company's
auditors have included an explanatory paragraph in their report to the
Company's consolidated financial statements at August 31, 1998 that
expresses substantial doubt as to the Company's ability to continue as a
going concern. See "Note C" to "Notes to Consolidated Financial
Statements". The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
For the last year, the Company has been operating in an increasingly
difficult environment, and the Company expects to continue to operate in
this environment for the foreseeable future. The Company's operations in
fiscal 1998 and the first quarter of fiscal 1999 have consumed
substantial amounts of cash and have generated significant net losses
which reduced shareholder's equity to a deficit of $4,594,000 at August
30, 1998. Also, QCP has a current period operating loss and negative cash
flow from operations, and is expected to have continuing losses and
negative cash flow from operations in the near term. There is substantial
doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon
its ability to obtain funding to support the Company's operating losses,
capital requirements and to replace the revolving credit facility, as to
which no assurance can be given.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 31, 1998, COMPARED TO FISCAL YEAR ENDED AUGUST
31, 1997 ($ ROUNDED TO NEAREST THOUSAND)
NET SALES - Net sales for the fiscal year ended August 31, 1998, were
$6,444,000, a decrease of $5,514,000 compared to $11,958,000 for the same
period last year. The decrease is due to the loss of $2,370,000 in sales
arising from the sale of the radiopharmaceutical business on April 7,
1997 and lower sales recorded at QCP and Pharma Labs.
QCP recorded net sales of $5,502,000 in fiscal 1998 compared to
$8,033,000 in fiscal 1997. The lower sales level was due to the loss of a
private label customer and substantially lower diet drug business.
Pharma Labs sales in fiscal 1998 were $941,000 compared to $1,555,000
last year. Last year's sales included substantial stocking orders
primarily in the quarter ended February 28, 1997 of new product from a
Vietnam distributor, affiliated with the Member, in anticipation of
strong customer demand. Actual customer demand was well below
expectations, which resulted in excess distributor inventory and
depressed fiscal 1998 sales. Furthermore, in the last quarter of fiscal
1998, the Pharma Labs business was winding down and production was scaled
back.
COST OF SALES - Cost of sales as percentage of sales was 82% in fiscal
1998 compared to 68% for fiscal 1997. This increase in cost of sales as a
percentage of sales from the prior year is due to the loss of higher
margin sales from the radiopharmaceutic business in the current year due
to the sale of that business in April 1997 and higher cost of sales at
Pharma Labs. Pharma Labs' cost of sales increased from 76% of sales in
the prior year to 142% of sales in the current year due primarily to
lower selling prices, higher material costs, higher per unit overhead
cost resulting from the lower sales volume and a $367,000 write off of
inventory. QCP's cost of sales remained at 72% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses (SG&A), excluding the unusual charges discussed below, were
$6,819,000, an increase of $425,000 compared to $6,394,000 during fiscal
1997. QCP's SG&A expense increased to $4,788,000 from $4,181,000 in the
prior year due to increased spending on staffing and infrastructure costs
to support QCP's long term growth program and development of new product
initiatives, as discussed in greater detail under "Liquidity and Capital
Resources." Golden's SG&A expense decreased $426,000 to $867,000 from
$1,293,000 during the prior year. This decrease was due primarily to the
elimination of SG&A expenses as a result of the sale of the
radiopharmaceutical business. Pharma Labs' SG&A expense during fiscal
1998 was $1,164,000 compared to $920,000 during fiscal 1997 as a result
of bad debt expenses of $383,000 during fiscal 1998.
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UNUSUAL CHARGES / IMPAIRMENT LOSS - Efforts to turn around the poor
performance of Pharma Labs did not meet expectations, and the Company
could no longer be assured that future cash flow from Pharma Labs would
cover the carrying value of certain assets. Accordingly, Pharma Labs
recorded a non-cash impairment loss of $943,000 related to the write-down
of property, plant and equipment to estimated net realizable value and
the write-off of capitalized non-compete agreement costs, net of
amortization.
GOODWILL IMPAIRMENT CHARGE - Based on the current year's operating loss
and negative cash flow from operations from operations, combined with a
history of operating losses and negative cash flow from operations, the
Company has determined that significant uncertainty exists regarding the
recoverability of the carrying value of goodwill. Accordingly, a
$3,510,000 goodwill impairment charge was recorded in the fourth quarter
of fiscal 1998.
INTEREST EXPENSE - Interest expense decreased to $598,000 from $1,456,000
in fiscal 1997 primarily due to the repayment of the $3,750,000 term loan
on April 7, 1997.
GAIN ON DISPOSAL OF ASSETS - In fiscal 1998, the Company recorded a
$112,000 gain on the sale of a building located in Golden, Colorado. This
facility was no longer needed due to the consolidation of the Company's
operations in California.
NET INCOME (LOSS) - The Company reported a net loss of ($10,068,000) for
fiscal 1998 as compared to a net income of $1,821,000 for fiscal 1997.
The fiscal 1998 net loss was primarily due to operating losses of
($10,131,000) compared to an operating loss of ($2,583,000) in the prior
year. Contributing to the current year operating loss was a $3,510,000
goodwill impairment charge as discussed above, and a $943,000 unusual
charge - impairment loss related to the revaluation of Pharma Labs
property, plant and equipment and write-off of an intangible asset
pertaining to a non-compete agreement. The current year operating loss
also includes the following items related to the shut down of Pharma
Labs; a $367,000 write-off of inventory, a $415,000 write-off of a trade
receivable from a Vietnam based business and a $676,000 bad debt
provision taken against working capital loans made to Pharma Labs.
FOURTH QUARTER ADJUSTMENTS - Operating results for the fourth quarter of
fiscal 1998 include the following adjustments: (i) A $385,000 write down
of property held for sale to re-value Pharma Labs assets to their selling
price as specified in a pending sale contract. (ii) A $125,000 adjustment
to re-instate a payable due to the other member of Pharma Labs in
accordance with a non-complete agreement. These adjustments were included
in the category unusual charges impairment loss. And (iii), a $167,000
write-off of Pharma Labs inventory was charged to cost of sales in the
fourth quarter of fiscal 1998.
As disclosed in "Note R" to "Notes to Consolidated Financial Statements",
a $3,510,000 goodwill impairment charge was recorded in the fourth
quarter of fiscal 1998.
FISCAL YEAR ENDED AUGUST 31, 1997, COMPARED TO FISCAL YEAR ENDED AUGUST
31, 1996 ($ ROUNDED TO NEAREST THOUSAND)
NET SALES - Net sales for the fiscal year ended August 31, 1997,
increased 18% to $11,958,000 from $10,157,000 for the fiscal year ended
August 31, 1996. This increase is primarily due to (1) a 33% or
$2,015,000 increase in QCP sales due to an expanded customer base and (2)
a full year of Pharma Labs sales of $1,555,000 compared to sales of
$249,000 in the prior start-up year. These increases were partially
offset by a $1,517,000 decline in the Company's sales as a result of the
sale of its radiopharmaceutical business in April 1997.
COST OF GOODS SOLD - Cost of goods sold as a percentage of sales
increased to 68.1% for the fiscal year ended August 31, 1997, as compared
to 64.4% for the fiscal year ended August 31, 1996. This increase is
primarily attributable to the loss of gross margin from the sale of the
Company's radiopharmaceutical business.
SELLING GENERAL AND ADMINISTRATIVE - Selling, general and administration
expenses ("SG&A") increased to $6,394,000 in fiscal 1997 from $3,872,000
in the prior year. QCP's SG&A spending increased to $4,181,000 from
$2,202,000 in the prior year due to increased spending on staffing and
infrastructure costs to support QCP's growth program. QCP's selling and
marketing expenses increased $1,049,000 from the prior year primarily to
support sales force expansion and addition of key management positions.
QCP's general and administrative expenses increased $930,000 from
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the prior year due primarily to (1) increases in staffing and related
expenses, (2) higher facility and overhead costs, (3) formation of an MIS
department, and (4) higher bad debt expense. The remainder of the
increase in SG&A was a result of Pharma Labs' SG&A increasing to $920,000
in the current year from $166,000 in fiscal 1996. This increase is a
result of a full year of Pharma Labs operation in fiscal 1997 compared to
two months in fiscal 1996. These increases were partially offset by GPI's
SG&A expense decrease of $191,000 from the prior year level of $1,485,000
due to the sale of the radiopharmaceutical business in April, 1997.
NET INCOME - The Company reported net income of $1,821,000 for fiscal
1997 as compared to a net loss of ($992,000) for fiscal 1996. The fiscal
1997 net income level was attained primarily due to the $6,210,000 gain
on the sale of the radiopharmaceutical business in April 1997. Losses
from operations were ($2,583,000) in fiscal 1997, compared to an
operating loss of ($254,000) in the prior year. The 1997 operating losses
were due primarily to significantly increased spending on staff and
infrastructure in support of long term growth plans. Fiscal 1997 net
income was also negatively impacted by interest expense of $1,456,000 up
from $807,000 in the prior year, income tax expense of $642,000 and
benefited from a favorable minority interest allocation of $269,000.
FOURTH QUARTER ADJUSTMENTS - Operating results for the fourth quarter of
fiscal 1997 include the following adjustments: a $483,000 reduction to
other income and notes receivable to eliminate revenue due under the
terms of the June 14, 1996, Guarantee Agreement with the other member of
Pharma Labs. Collectability of this amount is not reasonably assured.
Accruals were made to reflect the impact of the September 1997, Pondimin
and Redux diet drug product withdrawal. Net sales and receivables were
decreased $238,000 for estimated returns applicable to fiscal 1997 sales,
and cost of sales was decreased and receivables increased by $197,000 for
the estimated cost of the returned product and estimated refund due from
the product manufacturer.
An additional $222,000 provision for doubtful accounts was made in the
last quarter primarily due to adverse conditions in the diet clinic
industry. The diet drug withdrawal and adverse publicity in the media
have negatively impacted many of the Company's diet clinic customers.
LIQUIDITY AND CAPITAL RESOURCES ($ ROUNDED TO NEAREST THOUSAND)
The following table is presented to facilitate the discussion of the
Company's current liquidity and sets forth the Company's liquidity
position as of August 31, 1998, as compared to August 31, 1997.
<TABLE>
<CAPTION>
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Current assets $ 2,471,000 $ 3,256,000
Current liabilities 7,906,000 3,132,000
----------- -----------
Net working capital (deficiency) $(5,435,000) $ 124,000
</TABLE>
At August 31, 1998, current assets were $2,471,000, a decrease of
$785,000 from the prior year end. Decreases in inventory and trade
receivables of $447,000 and $401,000, respectively, from fiscal 1997 year
end levels were partially offset by a reclassification of $150,000 in
Pharma Labs assets held for sale to the current assets category. The
decrease in inventory was due to the following: Pharma Labs' inventory
decreased to $0 from $539,000 at last year end as a result of the
wind-down of Pharma Labs' business. Partially offsetting the Pharma Labs'
inventory decline was an increase in QCP inventory to accommodate an
expanded product line. The decrease in trade receivables was primarily
due to a $526,000 decrease in Pharma Labs' trade receivables as a result
of the wind-down of Pharma Labs' business.
At August 31, 1998, current liabilities were $7,906,000, an increase of
$4,774,000 from the prior year end, primarily due to an increase in notes
payable - related parties of $4,399,000, and an increase in accrued
interest on these notes of $313,000.
The Company has capitalized leases and operating leases for equipment,
facilities and a vehicle used in its business. Minimum lease payments for
its capitalized and operating leases are expected to be $311,000 and
$367,000, respectively, for the fiscal year ending August 31, 1999.
As of August 31, 1998, the Company had net operating loss carry forwards
for federal income tax purposes of approximately $15,255,000. The net
operating loss carry forwards will expire in the
9
<PAGE> 11
years 1998 through 2013. The Company's ability to utilize its net
operating loss carry forwards 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. The Company has established a
valuation allowance against 100% of the net operating loss carry forwards
because it is uncertain whether the Company will utilize these carry
forwards due to continuing operating losses.
Prior to September 1997, the Company's primary source of funds for
working capital was the Company's revolving facility with the Bank. At
August 31, 1998, the balance outstanding was $834,000, and the interest
rate under the Revolving Facility was 11.5%. The Revolving Facility is
collateralized by QCP's accounts receivable and inventory, and
availability under the Revolving Facility is determined based on eligible
accounts receivable and inventory.
At August 31, 1998, the Company was not in compliance with certain
covenants of the Revolving Facility, including covenants regarding book
net worth, debt service coverage, interest coverage, net income (loss)
and capital expenditures. The Company re-negotiated the terms of the
Credit Agreement with the Bank, including re-negotiation of the above
covenants, and an Amended and Restated Credit Agreement ("Credit
Agreement Amendment") was signed by both parties on August 7, 1998, but
the effectiveness of the Credit Agreement Amendment was conditional upon
the Company obtaining a $2.5 million capital investment by August 31,
1998.
To date the Company has not obtained the $2.5 million capital investment,
and on October 27, 1998, the Bank informed the Company of its decision
to; (1) implement an additional one percent (1%) default rate of interest
provided for the Credit Agreement, retroactive back to July 31, 1998; (2)
reduce the maximum loan commitment level to $1.0 million; and (3)
terminate the credit agreement on February 1, 1999. In such letter, the
Bank also reserved its right to take further action with respect to the
defaults in the future. If the Company is unable to repay the Revolving
Facility or obtain substitute financing, the Bank has the right to, among
other things, (i) accelerate all unpaid principal and interest with
respect to all debts, liabilities or obligations owed to the Bank by QCP,
(ii) put account debtors of QCP on notice that payments due QCP should be
made to a lockbox for the benefit of the Bank, collect such payments and
apply such collections to payment of the obligations owed to the Bank,
(iii) occupy all premises where QCP conducts business without payment of
rent and (iv) foreclose its security interest in all the equipment,
general intangibles, inventory and receivables owned by QCP. The Company
is seeking alternative working capital financing sources, but has no
commitment for such financing in place and there can be no assurance that
it will be able to obtain any such financing.
The Company has been unable to borrow sufficient amounts under the
Revolving Facility to finance its working capital requirements. In order
to help meet its working capital requirements, the Company has borrowed
money from certain shareholders and directors of the Company. The loans
are evidenced by promissory notes which provide for interest at the
Bank's prime plus 2%. The promissory notes are unsecured obligations. The
amounts outstanding under the promissory notes in aggregate were
$5,014,200 ($4,544,200 payable to Charles R. Drummond; $470,000 payable
to Arch G. Gothard, III) and $5,364,200 ($4,894,200 payable to Charles R.
Drummond; $470,000 payable to Arch G. Gothard, III) at August 31, 1998,
and December 1, 1998, respectively. Certain of the promissory notes
($1,425,000 payable to Charles R. Drummond and $470,000 payable to Arch
G. Gothard, at August 31, 1998) were payable on demand or no later than
April 1, 1998 and, accordingly, are past due. Pursuant to a letter dated
October 30, 1998, Charles R. Drummond committed not to demand payment of,
or take any action to collect, the promissory notes owed him until August
31, 1999 or such time as the Company has the ability to repay such
promissory notes. The promissory notes payable to Charles R. Drummond are
fully subordinate for all purposes to the security interest of the Bank.
The Company has suffered substantial recurring losses from operations.
The Company has incurred a net loss of ($10,067,760) during the fiscal
year ended August 31, 1998, and, as of that date, the Company's current
liabilities exceeded its current assets by $5,435,000 and its total
liabilities exceeded its total assets by $4,595,000. These factors, in
combination with the matters discussed in the previous paragraphs raise
substantial doubt about the Company's ability to continue as a going
concern. Approximately $5 million may be required to support the
Company's ongoing operations, exclusive of debt repayments, through
August 31, 1999. To date, the Company does not have any commitments with
respect to such financing and there can be no assurance that financing
will be available to the Company on terms acceptable to the Company, if
at all. The Company's ability to continue as a going concern is dependent
upon its ability to obtain funding for the Company's capital requirements
and to refinance the Credit Facility. The
10
<PAGE> 12
Company's shareholder deficit, and continuing losses create serious risk
of loss for the holders of the Company's securities.
DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1998, the Company conducted a test for asset impairment in
accordance with financial Accounting Standard 121. It is management's
opinion that, exclusive of the write-downs for Pharma Labs and the
write-off of goodwill, no additional impairment loss occurred. QCP has a
current period operating loss and negative cash flow from operations, and
is expected to have continuing losses in the near term.
Key assumptions in the asset impairment test include reversal of recent
operating losses and sales declines, several years of significant sales
growth, and product cost reduction achieved through purchasing and volume
efficiencies. Management feels this projection is achievable considering
the size of the retail pharmacy market ($84 billion), the growth rate of
competitors in the industry, and based on estimates of growth potential
made by companies participating in the industry.
If management's assumptions prove too optimistic, an impairment charge,
based on an undiscounted cash flow analysis, would result. The impairment
charge would be computed based on the excess of carrying value over the
fair value of assets. This would result in a valuation adjustment to the
$1,293,000 in property, plant and equipment.
Accordingly, it is reasonably possible that the results of the impairment
test may change in the future and an impairment loss may result.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. The Company is
addressing this risk to the availability and integrity of financial
systems and the reliability of operational systems. The Company has
established processes for evaluating and managing the risks and costs
associated with this problem. The Company is currently planning to
install a new business software package in 1999 to accommodate business
growth and upgrade current systems. This package is year 2000 compliant.
An initial assessment has been completed and the incremental cost of
achieving Year 2000 compliance, exclusive of the upgrade cost for the new
software previously discussed, is estimated to be not material. Timely
implementation of the new business software package is critical to year
2000 compliance. Cost will be expensed as incurred and are estimated to
continue through fiscal 1999.
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.
11
<PAGE> 13
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.
<TABLE>
<CAPTION>
Principal Occupation or Employment During the Past Five Years; Director
Name & Age Other Directorships Since
---------- ---------------------------------------------------------------- -----
<S> <C> <C>
Charles R. Drummond Chairman of the Board of Directors, Chief Executive Officer and 1991
(55) 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.
Director. Co-owner of Drummond Land and Cattle Company since
Ladd A. Drummond January 1991; operator of risk management and investment 1994
(29) businesses.
Arch G. Gothard, III Director. President of First Kansas, Inc. since October 1988. Mr. 1995
(53) Gothard is also serves as a director of First State Bank, Kenco
Plastics, Inc., LDI, Inc., Pay Phone Concepts, Inc. and Collins
Industries, Inc.
John H. Grant Vice Chairman & Secretary of the Board of Directors and Chief 1990
(56) Operating Officer of QCP. Professor of Business Administration,
University of Pittsburgh, Pennsylvania from January 1972 to August
1997.
Gary P. Pryor Vice President, Finance since July 1997. Chief Financial Officer at N/A
(49) Johnston Sweeper Company from June 1995, to June 1997, and Vice
President, Finance, at Bicore Monitoring Systems, Inc. from
December 1991 to June 1995.
Richard G. Wahl Director. Owner and President of MRD Construction Incorporated, 1993
(62) 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.
</TABLE>
The Company's Articles of Incorporation, as amended, provide for a board
of directors made up of three classes. The members of each class serve
three-year staggered terms with one class to be elected at each annual
meeting. As provided in the Company's Bylaws, the Board has currently set
the total number of directors at five (5). The current terms of the Class
A, Class B and Class C directors expire at the Company's annual meeting
of shareholders in 1998, 1999 and 2000, respectively. 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
shareholders.
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 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 filed in compliance
with all applicable filing requirements.
12
<PAGE> 14
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 $100,000
for the last fiscal year:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
--------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (g) (i)
--------------------------------------------------------------------------------------------------------------------
SECURITIES ALL OTHER
NAME & PRINCIPAL POSITION UNDERLYING COMPENSATION
YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#) ($)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles R. Drummond 1998 150,000 -0- -0- 24,000 (1)
Chairman, Chief Executive 1997 150,000 -0- -0- 24,000 (1)
Officer and Treasurer 1996 125,000 25,000 -0- -0-
--------------------------------------------------------------------------------------------------------------------
John H. Grant 1998 105,000 -0- -0- -0-
Vice Chairman, Chief Operating 1997 8,750 -0- -0- -0-
Officer and Secretary 1996 -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------------
Bruce A. Goldberg (2) 1998 105,000 -0- -0- -0-
President, GPI 1997 104,000 -0- -0- -0-
1996 104,000 20,000 -0- -0-
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Living Allowance.
(2) Mr. Goldberg is no longer an employee of the Company.
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.
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. Charles R. 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 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, 1998, through August 31,
1999, will be $190,000 plus a living allowance of $60,000.
In 1997, the Company entered into an employment agreement with John H.
Grant for a period of five years or until termination of the agreement.
Mr. Grant's duties include service as Vice Chairman of the Board at a
minimum annual salary of $95,000. He is currently being paid a salary of
$105,000 per year.
13
<PAGE> 15
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, 1998, options
to purchase 950,000 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 30, 1998,
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.
<TABLE>
<CAPTION>
Shares
Name Beneficially Owned Percent of Class
---- ------------------ ----------------
<S> <C> <C>
Timothy E. Drummond(1) 15,154,546 12%
623 Kihekah
Pawhuska, Oklahoma 74056
Charles R. Drummond(1) 29,086,376 23%
3000 West Warner Avenue
Santa Ana, CA 92704
John H. Grant (1) 2,314,435 2%
3000 West Warner Avenue
Santa Ana, CA 92704
Richard G. Wahl(1) 3,227,594 3%
150 Buckboard, Box 1328
Edwards, CO 81632
Ladd A. Drummond(1) 15,233,203 12%
623 Kihekah
Pawhuska, Oklahoma 74056
Arch G. Gothard, III(1) 3,126,804 3%
Box 5950
Breckenridge, CO 80424
Bruce A. Goldberg(1) 6,561,000 5%
5225 Dayton St.
Greenwood, CO 80111
Daniel B. Guinn(1) 2,100,000 2%
3000 West Warner Avenue
Santa Ana, CA 92704
All executive officers
and directors as a group
(six persons)(1) 55,088,412 44%
</TABLE>
(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
14
<PAGE> 16
direct the disposition of, such security, or if the person has
the right to acquire beneficial ownership within 60 days, unless
otherwise indicated.
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. This
matter has been resolved and the shares are in the process of being
transferred back to the Company.
In January 1997, the Company issued 2,000,000 shares of its common stock
to Daniel B. Guinn, President of QCP, as consideration for terminating an
employment agreement originally entered into July 9, 1995. The agreement
terminating the employment agreement was effective March 9, 1996, but the
common stock issued as consideration was not issued until January 1997.
The Company is due $34,445 from a related entity with common shareholders
and officers. The amount due the Company has been guaranteed by the
shareholders. The related shareholders are as follows: Charles R.
Drummond, Bruce A. Goldberg, Daniel B. Guinn, and Arch G. Gothard, III,
all of whom are officers or directors of the Company.
RxDirect subleases approximately 1,500 square feet at the Santa Ana,
California, facility for $7,800 per year.
LOANS FROM SHAREHOLDERS AND DIRECTORS - During the fiscal year ended
August 31, 1998, and subsequent to the end of the year, the Company
obtained financing through the issuance of notes payable to certain
shareholders and directors of the Company. The amounts outstanding
through the issuance of these notes payable were $5,014,200 ($4,544,200
payable to Charles R. Drummond; $470,000 payable to Arch G. Gothard III)
and $5,364,200 ($4,894,200 payable to Charles R. Drummond; $470,000
payable to Arch G. Gothard III) at August 31, 1998, and December 1, 1998,
respectively.
15
<PAGE> 17
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
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1(1) Articles of Incorporation filed October 4, 1973.
3.2(1) Articles of Amendment to Articles of Incorporation filed December 22, 1976.
3.3(1) Articles of Amendment to Articles of Incorporation filed August 25, 1978.
3.4(1) Articles of Amendment to Articles of Incorporation filed June 15, 1979.
3.5(1) Articles of Amendment to Articles of Incorporation filed January 12, 1981.
3.6(1) Articles of Amendment to Articles of Incorporation filed June 16,1987.
3.7(1) Articles of Amendment to Articles of Incorporation filed October 9, 1992.
3.8(2) Articles of Amendment to Articles of Incorporation filed December 16, 1997
3.9(1) Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed
December 9, 1987.
3.10(1) Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock
filed December 14, 1987.
3.11(1) Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock
filed February 5, 1988.
3.12(1) Certificate of Designation of Class A Convertible Preferred Stock filed October 12,
1990.
3.13(3) Second Amended and Restated Bylaws
4.2(1) Specimen Certificate for Common Stock, no par value per share.
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
10.1(3) Amended and Restated Credit and Security Agreement dated August 7, 1995 among the
Company, Quality Care Pharmaceuticals, Inc. and Norwest Credit, Inc.
10.2(4) Operating Agreement dated June 14, 1996 between the Registrant and Pharma France, Inc.
10.3* Form of Promissory Notes executed by the Company in favor of Charles R. Drummond.
Schedule A sets forth the date and principal amount of each promissory note.
10.4* Form of Promissory Notes executed by the Company in favor of Arch G. Gothard, III.
Schedule B sets forth the date and principal amount of each promissory note.
10.5* Purchase Agreement dated November 10, 1998 by and among Adams Equities, Inc., Pharma
Labs, LLC, GMP Laboratories of America and Golden Pharmaceuticals, Inc.
10.6* Agreement Not to Compete dated November 10, 1998 among Pharma Labs, LLC, Golden
Pharmaceuticals, Inc.
21(2) Subsidiaries of the Registrant.
27* Financial Data Schedule.
(b) Reports on Form 8-K
None.
</TABLE>
- -------------
(1) Incorporated by reference to registrant's Annual Report on Form 10-K, dated
August 31, 1991, as filed with the Securities and Exchange Commission.
(2) Incorporated by reference to registrant's Annual Report on Form 10-K, dated
August 31, 1997, as filed with the Securities and Exchange Commission
(3) Incorporated by reference to registrant's Annual Report on Form 10-K, dated
August 31, 1995, as filed with the Securities and Exchange Commission.
(4) Incorporated by reference to registrant's Annual Report on Form 10-K, dated
August 31, 1996, as filed with the Securities and Exchange Commission.
* Filed herewith.
17
<PAGE> 19
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of August 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
August 31, 1998 and 1997 F-5
Consolidated Statement of Stockholders' Equity (Deficit)
for the Years Ended August 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Golden Pharmaceuticals, Inc.
Golden, Colorado
We have audited the accompanying consolidated balance sheets of Golden
Pharmaceuticals, Inc. (a Colorado corporation) and Subsidiaries as of August 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) 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 financial position of Golden Pharmaceuticals, Inc.
and Subsidiaries as of August 31, 1998 and 1997, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $10,067,760 during the year ended August 31,
1998, and, as of that date, the Company's current liabilities exceeded its
current assets by $5,435,192 and its total liabilities exceeded its total assets
by $4,594,824. These factors, among others, as discussed in Note C to The
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note C. The financial statements do not include any
adjustments that might result from the outcome of this uncertainly.
GRANT THORNTON LLP
Denver, Colorado
October 28, 1998 (except for Note T, as to which the date is December 3, 1998)
F-2
<PAGE> 21
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1998 1997
---------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 61,860 $ 26,143
Trade receivables, net of allowance for doubtful accounts of
$535,945 and $446,834 at August 31, 1998 and 1997 1,377,291 1,778,321
Notes receivable 139,797 252,500
Inventories 577,947 1,024,689
Prepaid expenses and other 141,144 174,768
Net assets held for sale 173,000 --
---------- ----------
TOTAL CURRENT ASSETS 2,471,039 3,256,421
PROPERTY, PLANT AND EQUIPMENT - AT COST 2,166,642 3,362,288
Less accumulated depreciation and amortization 873,325 908,804
---------- ----------
TOTAL PROPERTY, PLANT & EQUIPMENT 1,293,317 2,453,484
OTHER ASSETS
Goodwill, less accumulated amortization of $422,784 at
August 31, 1997 -- 3,740,525
Intangibles - net of accumulated amortization of $1,933 and
$1,133 at August 31, 1998 and 1997 10,067 10,867
Non-compete agreement 69,050 331,076
Investment in joint venture -- 1,866
---------- ----------
TOTAL OTHER ASSETS 79,117 4,084,334
---------- ----------
TOTAL ASSETS $3,843,473 $9,794,239
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 22
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 833,639 $ 743,168
Notes payable - related parties 5,014,200 615,000
Current maturities of long-term debt 212,228 262,506
Current maturities of capitalized lease obligations 224,588 202,061
Accounts payable 1,142,999 1,041,639
Income taxes payable -- 40,000
Accrued liabilities
Salaries, wages and other compensation 47,070 161,277
Interest 316,854 3,506
Other 114,653 63,250
------------ ------------
TOTAL CURRENT LIABILITIES 7,906,231 3,132,407
LONG-TERM OBLIGATIONS, less current maturities 25,000 80,903
CAPITALIZED LEASE OBLIGATIONS, less current maturities 467,191 528,774
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 39,875 --
CONTINGENCIES AND COMMITMENTS -- --
MINORITY INTEREST -- 582,969
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - no par value; 200,000,000 shares authorized;
128,451,873 and 128,416,847 issued; 125,162,873 and
125,127,847 outstanding in 1998 and 1997, respectively 24,714,858 24,709,383
Preferred stock - no par value; 10,000,000 shares authorized
Class A 15%/ 30% cumulative convertible, 29,653 shares issued
and outstanding in 1998 and 1997 292,558 292,558
Dividends accrued on preferred stock 236,419 234,363
------------ ------------
25,243,835 25,236,304
Accumulated deficit (29,744,527) (19,672,986)
------------ ------------
(4,500,692) 5,563,318
Less common stock in treasury at cost, 3,289,000 shares at
August 31, 1998 and 1997 94,132 94,132
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (4,594,824) 5,469,186
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 3,843,473 $ 9,794,239
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 23
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
NET SALES $ 6,443,863 $ 11,957,841
COST OF SALES 5,302,545 8,146,734
------------- -------------
GROSS MARGIN 1,141,318 3,811,107
Selling, general and administrative expense 6,819,170 6,394,291
Unusual charge - impairment loss 943,275 --
Goodwill impairment charge 3,509,847 --
------------- -------------
OPERATING LOSS (10,130,974) (2,583,184)
OTHER INCOME (EXPENSE)
Interest expense (598,160) (1,456,439)
Joint venture loss (125,741) (71,358)
Gain on disposal of division -- 6,210,434
Gain (loss) on disposal of assets 112,074 (2,048)
Other income (expense) 99,786 96,507
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (512,041) 4,777,096
------------- -------------
INCOME (LOSS) BEFORE (10,643,015) 2,193,912
INCOME TAX EXPENSE
INCOME TAX EXPENSE 7,714 642,390
------------- -------------
INCOME (LOSS) BEFORE MINORITY INTEREST (10,650,729) 1,551,522
MINORITY INTEREST 582,969 269,404
------------- -------------
NET INCOME (LOSS) $ (10,067,760) $ 1,820,926
============= =============
BASIC EARNINGS (LOSS) PER SHARE $ (.08) $ .01
============= =============
DILUTED EARNINGS (LOSS) PER SHARE $ (.08) $ .01
============= =============
NUMBER OF SHARES USED IN PER SHARE CALCULATION:
Basic 125,149,055 122,192,311
============= =============
Diluted 125,149,055 122,687,952
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 24
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------------------------------------
OBLIGATION
15% / 30% TO ISSUE
CUMULATIVE COMMON
---------------------------- STOCK
SHARES AMOUNT SHARES AMOUNT AMOUNT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE - September 1, 1996 124,063,778 $ 23,867,384 29,653 $ 292,558 $ 200,000
Accrued dividends on preferred
stock (Note L) -- -- -- -- --
Conversion of debt, bonus and
services to common stock 353,069 241,999 -- -- --
Common stock issued pursuant to
joint marketing agreement
(Note D) 1,000,000 300,000 -- -- --
Stock options exercised 1,000,000 100,000 -- -- --
Common stock issued as
consideration for terminating
employment agreement 2,000,000 200,000 -- -- (200,000)
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - August 31, 1997 128,416,847 $ 24,709,383 29,653 $ 292,558 $ --
Accrued dividends on preferred
stock (Note L) -- -- -- -- --
Conversion of debt, dividends
payable and services to
common stock 35,026 5,475 -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - August 31, 1998 128,451,873 $ 24,714,858 29,653 $ 292,558 $ --
============ ============ ============ ============ ============
<CAPTION>
DIVIDENDS
ACCRUED ON
PREFERRED ACCUMULATED TREASURY STOCK
STOCK DEFICIT ----------------------------
AMOUNT AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE - September 1, 1996 $ 450,740 $(21,478,789) 3,289,000 $ 94,132
Accrued dividends on preferred
stock (Note L) 15,123 (15,123) -- --
Conversion of debt, bonus and
services to common stock (231,500) -- -- --
Common stock issued pursuant to
joint marketing agreement
(Note D) -- -- -- --
Stock options exercised -- -- -- --
Common stock issued as
consideration for terminating
employment agreement -- -- -- --
Net income -- 1,820,926 -- --
------------ ------------ ------------ ------------
BALANCE - August 31, 1997 $ 234,363 $(19,672,986) 3,289,000 $ 94,132
Accrued dividends on preferred
stock (Note L) 3,781 (3,781) -- --
Conversion of debt, dividends
payable and services to
common stock (1,725) -- -- --
Net Loss -- (10,067,760) -- --
------------ ------------ ------------ ------------
BALANCE - August 31, 1998 $ 236,419 $(29,744,527) 3,289,000 $ 94,132
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 25
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income (loss) $(10,067,760) $ 1,820,926
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 806,548 777,955
(Gain) Loss on disposal of property, plant and equipment (112,074) 2,048
Gain on sale of division -- (6,210,434)
Unusual charge - impairment loss 943,275 --
Goodwill impairment charge 3,509,847 --
Non-cash settlement of land judgement -- 150,000
Stock issued for services and fees 3,750 10,500
Minority interest (582,969) (269,404)
Joint venture loss 125,741 71,358
Changes in assets and liabilities net of effects of acquisition and joint
venture:
(Increase) decrease in accounts receivable 401,030 (334,637)
Decrease in inventories 423,743 311,944
(Increase) decrease in prepaid expenses and other 33,624 (6,186)
Decrease in deferred taxes -- 600,000
Increase in accounts payable 101,360 120,593
Increase (decrease)in income taxes payable (40,000) 40,000
Increase (decrease) in accrued expenses 250,544 (54,363)
------------ ------------
TOTAL ADJUSTMENTS 5,864,419 (4,790,626)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (4,203,341) (2,969,700)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (332,979) (235,344)
Proceeds from sale of property, plant and equipment 198,901 1,153
Proceeds from sale of division -- 6,550,000
Increase investment in joint venture (84,000) (84,000)
Decrease (increase) in notes receivable 112,703 (87,500)
------------ ------------
NET CASH PROVIDED BY (USED BY)
INVESTING ACTIVITIES (105,375) 6,144,309
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable - related parties 4,480,000 615,000
Payments under notes payable - related parties (80,800) --
Issuance of common stock -- 400,000
Borrowings under capitalized lease and other long term obligations 185,005 --
Payments on capitalized lease and other long-term obligations (330,243) (4,409,365)
Borrowings on line of credit 10,208,254 11,449,596
Payments on line of credit (10,117,783) (11,238,569)
------------ ------------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES 4,344,433 (3,183,338)
------------ ------------
NET INCREASE (DECREASE) IN CASH 35,717 (8,729)
CASH, BEGINNING OF YEAR 26,143 34,872
------------ ------------
CASH, END OF YEAR $ 61,860 $ 26,143
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 26
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash paid during the period for interest $ 284,812 $ 1,597,081
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Supplemental schedule of non-cash investing and financing activities:
Purchase of equipment under a capital lease $ 185,005 $ 478,500
Issue of common stock upon settlement of employment contract -0- 200,000
Issue of note payable in settlement of land judgement -0- 150,000
Conversion of dividends payable to common stock 1,725 231,500
Stock issued for services 3,750 10,500
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE> 27
A. HISTORY AND BUSINESS ACTIVITY
GOLDEN PHARMACEUTICALS, INC. (GPI) is the name of the parent company. In
April 1997, GPI sold its radiopharmaceutical and radiochemical drug
business (See Note F). GPI is a holding company that provides management
support to its subsidiaries.
QUALITY CARE PHARMACEUTICALS, INC. (QCP) is a wholly-owned subsidiary of
GPI. QCP purchases bulk quantities of pharmaceutical products from
manufacturers for repackaging into a single user prescription form, and
produces software for dispensing sites. QCP'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 GPI, was
engaged in the manufacturing, packaging, and distribution of nutritional
supplement products, such as vitamins, minerals and herbal products.
Pharma Labs distributed its products primarily to Southeast Asia. On
December 3, 1998, the Company completed the sale of Pharma Labs. (See
Note G and Note T).
RxDIRECT, LLC (RxDirect) is a joint venture with VNA Home Health Systems
(VNA), of which the Company owns 50%. RxDirect is engaged in the
dispensing of medications via mail order and direct delivery. In October
1998, the Company and VNA signed an agreement pursuant to which VNA would
withdraw from the joint venture upon payment of a withdrawal fee of
$154,000. (See Note D and Note T).
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of GPI, its wholly-owned subsidiary QCP, and its 52%
owned subsidiary Pharma Labs, collectively referred to as the Company.
All material intercompany balances and transactions have been eliminated
in consolidation.
Investment in Consolidated Subsidiary - On June 15, 1996, the Company
entered into a joint venture agreement with Pharma France, Inc. to form
Pharma Labs. At August 31, 1998, the Company owned 52% of Pharma Labs,
and accordingly, the accounts of Pharma Labs are consolidated for
financial statement purposes. The Company contributed $1,000,000 in
working capital, leasehold improvements, and operational support to
Pharma Labs, while Pharma France, Inc. contributed $923,076 in machinery
and equipment and leasehold improvements.
Investment in Joint Venture - RxDirect, a 50% owned subsidiary of QCP, is
recorded under the equity method on QCP's financial statements.
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
fifteen years.
Amortization of Capitalized Software Costs - The Company capitalizes and
amortizes certain software costs upon project completion on a
straight-line basis over a five year period.
Goodwill - The Company tests for impairment of goodwill in accordance
with the methodology prescribed by the Financial Accounting Standards
Board (FASB) in Statement of Financial Accounting Standards (SFAS) 121.
Under this method, the goodwill attributable to the acquisition of QCP is
grouped with QCP's property, plant and equipment carrying value
F-9
<PAGE> 28
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
for comparison to QCP's undiscounted, forecasted cash flow. If the sum of
the expected undiscounted cash flow is less than the carrying value of
the above assets, an impairment loss is recognized.
Earnings Per Common Share - In accordance with SFAS 128, which was
effective for periods ending after December 15, 1997, earnings per common
share has been revised and the prior period has been restated to present
basic and diluted earnings per share.
Basic and diluted earnings per share for the fiscal years ended August 31
is calculated as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss) $ (10,067,760) $ 1,820,926
------------- -------------
Weighted average number of shares outstanding
Basic earnings per share
Weighted average shares outstanding for
basic earnings per share calculation 125,149,055 122,192,311
------------- -------------
Diluted earnings per share
Weighted average shares outstanding 125,149,055 122,192,311
Effect of exercise of options * ** 495,641
------------- -------------
Weighted average shares outstanding for
diluted earnings per share calculation 125,149,055 122,687,952
------------- -------------
</TABLE>
* The effect of options and convertible shares was not included in
the diluted earnings per share calculation for the fiscal year
ended August 31, 1998 as they would have been anti-dilutive. The
total number of common shares not included in the diluted earnings
per share calculation for the fiscal year ended August 31, 1998
that could potentially dilute earnings per share in the future is
1,482,949 shares.
** Options to purchase 350,000 shares of Common Stock at $0.32 per
share and 1,000,000 shares of Common Stock at $0.30 per share were
outstanding during the fiscal year ended August 31, 1997. These
options were not included in the computation of diluted EPS
because the exercise prices were greater than the average market
price of the Common Stock. These options, which expire June 2001,
and July 2001, respectively, were still outstanding at August 31,
1997.
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. REALIZATION OF ASSETS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, the Company incurred operating losses of
F-10
<PAGE> 29
C. REALIZATION OF ASSETS - continued
($10,130,974) and ($2,583,184), respectively, during the years ended
August 31, 1998 and 1997. In addition, at August 31, 1998, the Company
had a negative working capital position of ($5,435,192) due primarily to
$5,014,200 in short term borrowings from related parties (see Note P),
and the Company had a total stockholders' deficit of ($4,594,824). These
factors among others raises substantial doubt that the Company will be
able to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments related to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. As
described in Note L, the Company is not in compliance with the covenants
of its revolving line of credit, and the Bank elected to exercise certain
of its remedies under the Credit Agreement, including termination of the
credit agreement by February 1, 1999. The Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain replacement
working capital financing by February 1, 1999, to obtain sufficient
equity financing in early fiscal 1999 to re-capitalize the Company, and
ultimately to attain profitability.
D. INVESTMENT IN JOINT VENTURE
On February 12, 1996, QCP entered into a joint venture agreement with VNA
to form RxDirect, a mail order/ direct delivery pharmacy. QCP owns 50% of
RxDirect and, accordingly, RxDirect is recorded under the equity method
on QCP's financial statements. QCP provides management and operational
support for RxDirect, and VNA agreed to contribute $300,000 to fund the
start up of operations of which $250,000 has been contributed to date. As
of August 31, 1998, QCP has contributed $224,000 in services and
operational support and has made $244,576 in loans to RxDirect for
working capital and to fund operations.
In October 1998, the Company and VNA entered into an agreement whereby
VNA would withdraw from the joint venture upon payment of a withdrawal
fee. Under the terms of the withdrawal agreement, VNA agreed to pay a
$154,000 withdrawal fee, including accounts receivable of $47,761. See
Note T.
The following shows condensed financial information for RxDirect:
<TABLE>
<CAPTION>
AT AUGUST 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Total Assets $ 212,071 $ 144,941
========= =========
Working Capital Loans from QCP $ 244,576 $ 29,503
Total Other Liabilities 21,245 1,706
Total Equity (Deficit) (53,750) 113,732
--------- ---------
Total Liabilities & Equity (Deficit) $ 212,071 $ 144,941
========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 546,785 $ 414,604
Total Costs and Expenses 798,267 557,320
============ ============
Net Loss $ (251,482) $ (142,716)
============ ============
</TABLE>
F-11
<PAGE> 30
E. JOINT MARKETING AGREEMENT
On July 15, 1997, the Company and Dornoch Medical Systems, Inc. (Dornoch)
entered into a Joint Marketing Agreement, whereby the Company agreed to
market Dornoch's Redaway products. In connection with this agreement,
Dornoch purchased 1,000,000 shares of the Company's common stock for $.30
per share and had an option to purchase an additional 1,000,000 shares at
$.30 per share. Also, the Company had an option to purchase 220 shares of
Dornoch common shares at a purchase price of $2,000 per share. Sales and
royalties derived from this agreement were not material. In May 1998, the
Joint Marketing Agreement was terminated by mutual consent and all stock
purchase options were cancelled.
F. SALE OF BUSINESS
On April 7, 1997, the Company completed the sale of the assets related to
its business line of manufacturing and distributing radiopharmaceutical
and radiochemical drugs for a total sale price of $6,700,000 pursuant to
the terms of an Asset Purchase Agreement dated April 7, 1997, by and
between the Company and Syncor Pharmaceuticals, Inc. Included in the sale
was the New Drug Application (NDA) for the radiopharmaceuticals, the
building that contains the manufacturing facility for this business, and
all of the related equipment. The proceeds from the sale were used to pay
off the Company's term loans in the principal amounts of $3,750,000 and
$266,660, respectively, and to pay down $1,485,000 of its revolving line
of credit.
G. DISCONTINUED LINE OF BUSINESS
On August 3, 1998, the Company and the other member of Pharma Labs, LLC
(Member) entered into an agreement for the Dissolution and Liquidation
of Pharma Labs, LLC (Liquidation Plan). In order to facilitate the
wind-down of Pharma Labs, the Company entered into a Unit Purchase
Agreement on October 8, 1998 with the Member, whereby the Company
purchased the Member's 48% equity interest in Pharma Labs for $35,000.
On December 3, 1998, the Company completed the sale of Pharma Labs'
machinery and equipment to Adams Equities, Inc. (Buyer) for $150,000,
pursuant to the terms of a Purchase Agreement dated November 10, 1998.
The Purchase Agreement also includes a non-compete agreement between the
Company and the Buyer, for which the Company received $250,000 at
closing. In addition, the Buyer assumed Pharma Labs' obligations under
two (2) equipment leases and an affiliate of Buyer entered into a
sublease with the Company to sublease Pharma Labs' facility and
reimbursed the Company $57,000 for a lease deposit.
Through August 31, 1998, The Company recorded the following adjustments
to reduce the carrying value of Pharma Labs assets to estimated net
realizable value:
Property, plant and equipment, and lease hold improvements were
written down $750,775 to the $150,000 sale price per the Purchase
Agreement. The unamortized balance of $192,500 remaining on the
non-compete agreement with the Member was written-off as no future
benefit existed with the shut down of Pharma Labs. These
write-downs are reported in the Consolidated Statement of
Operations under the category unusual charge. Also, the Pharma
Labs' property, plant and equipment is classified in the
accompanying Consolidated Balance Sheets as net assets held for
sale.
The Company recorded a $366,656 loss on the write-off of
inventory. All efforts to liquidate this inventory were
unsuccessful. In the consolidated Statement of Operations, the
inventory write-down was included in cost of sales.
F-12
<PAGE> 31
G. DISCONTINUED LINE OF BUSINESS - continued
The $415,000 trade receivable from a Vietnam-based business
affiliated with the Member was written-off as not collectable due
to the poor financial condition of the Member and the Company's
inability to collect an unsecured debt in Vietnam. To date, the
Company loaned Pharma Labs $976,274 in working capital funds.
Based on estimated proceeds from the liquidation of Pharma Labs, a
$676,000 bad debt provision was recorded against the Pharma Labs
loan. In the Consolidated Statement of Operations, the above bad
debt provisions were included in selling, general and
administrative expense.
H. INVENTORIES
Inventories consist of the following items which are stated at the lower
of cost or market, determined by the first-in, first-out (FIFO) method:
<TABLE>
<CAPTION>
AT AUGUST 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $ 93,359 $ 489,419
Work-in-progress 2,088 82,817
Finished goods 482,500 452,453
---------- ----------
$ 577,947 $1,024,689
========== ==========
</TABLE>
I. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and are classified as
follows:
<TABLE>
<CAPTION>
AT AUGUST 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Building and leasehold improvements $ 170,274 $ 486,294
Machinery and equipment 1,208,576 2,051,264
Computers 561,373 502,620
Furniture and fixtures 226,419 248,110
Land -- 74,000
----------- -----------
2,166,642 3,362,288
Less accumulated depreciation and amortization (873,325) (908,804)
----------- -----------
$ 1,293,317 $ 2,453,484
=========== ===========
</TABLE>
J. NOTES RECEIVABLE
The Company holds two note receivable totaling $139,797 as of August 31,
1998, in conjunction with the release of a contingency (see Note O). The
$59,797 note accrues interest at the Bank prime plus 1% (totaling 9.5% at
August 31, 1998) and the $80,000 note is without interest. The notes are
unsecured. The full balance outstanding on both notes is past due.
F-13
<PAGE> 32
K. LEASE COMMITMENTS
Capitalized Leases - The Company leases equipment for use in the
production process and administration of its business. Computer equipment
is also leased for customer use in prescription drug dispensing. For
financial reporting purposes, minimum lease rentals relating to the
equipment have been capitalized.
The leases, which are non-cancelable, expire at various dates through the
year 2003. The recorded cost of assets under capital leases is $1,188,929
and $993,344 at August 31, 1998, and 1997, respectively. Accumulated
amortization associated with the recorded assets was $358,991 and
$201,235 at August 31,1998 and 1997, respectively.
Future minimum annual lease payments under capitalized leases are as
follows:
<TABLE>
<CAPTION>
Year ending August 31,
<S> <C>
1999 $310,536
2000 273,596
2001 183,075
2002 80,876
2003 24,120
--------
872,203
Less amount representing interest 180,424
--------
Discounted lease obligations 691,779
Less current portion 224,588
--------
Long-term portion $467,191
========
</TABLE>
Operating Leases - The Company leases business 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 $28,481 in 1998 and $11,301 in 2004. Future minimum annual
rental payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending August 31,
<S> <C>
1999 $ 366,838
2000 375,709
2001 335,349
2002 135,614
2003 135,614
Thereafter 67,804
----------
$1,416,928
Less: Annual rental payments receivable
under sub-lease of facility (See Note G) 657,418
----------
$ 759,510
==========
</TABLE>
Rent expense totaled approximately $324,850 and $298,050 for the fiscal
years ending August 31, 1998 and 1997, respectively.
F-14
<PAGE> 33
L. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
AT AUGUST 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Note payable, term loan, payable in monthly installments of $1,180,
including interest at the Bank prime plus 3% (totaling 11.5% at
August 31, 1998) through January 1, 1999. Collateralized by
equipment, general intangibles,
inventory and accounts receivable $ 5,903 $ 20,069
Note payable, $1,000,000 revolving line of credit with interest payable
at Bank prime plus 3% (totaling 11.5% at August 31, 1998) through
February 1, 1999. Collateralized by equipment, general
intangibles, inventory and accounts
receivable 833,639 743,168
Non-interest bearing notes payable, to officer of QCP payable in
semi-annual installments of $33,334 through July 15, 1998,
uncollateralized. The current balance is past due
31,325 73,340
Notes payable to a shareholder who is also an officer and director of
the Company payable on demand, including interest at Bank prime
plus 2% (totaling 10.5% at August 31, 1998), uncollateralized
$1,425,000 of the August 31, 1998 outstanding balance was due
April 1, 1998 and is past due. The note holder, however, agreed to
defer payment until after August 31, 1999 or until the Company has
the ability
to pay such obligations 4,544,200 575,000
Notes payable to a director of the Company, payable on demand,
including interest at Bank prime plus 2% (totaling 10.5% at August
31, 1998), uncollateralized. The total outstanding balance of the
notes was due on April 1, 1998
470,000 40,000
Non-interest bearing note payable in semi-annual installments of
$25,000, commencing April 30, 1997, uncollateralized
75,000 125,000
Non-interest bearing note payable to officers of Pharma Labs, currently
due but settlement is being withheld pending
liquidation of Pharma Labs 125,000 125,000
----------- -----------
6,085,067 1,701,577
Less: Note payable, revolving line of credit (833,639) (743,168)
Current maturities (5,226,428) (877,506)
----------- -----------
$ 25,000 $ 80,903
=========== ===========
</TABLE>
F-15
<PAGE> 34
L. NOTES PAYABLE AND LONG-TERM DEBT - continued
In connection with the note payable, term loan, and revolving line of
credit, the Company was not in compliance at August 31, 1998 with
covenants related to book net worth, debt service coverage, interest
coverage, net income (loss) and capital expenditures. The Company
re-negotiated the terms of the Credit Agreement with the Bank, including
re-negotiation of the above covenants and an Amended and Restated Credit
Agreement (Credit Agreement Amendment) was signed by both parties on
August 7, 1998. However, the Credit Agreement Amendment was conditional
upon the Company obtaining a $2.5 million capital investment by August
31, 1998.
To date the Company has not obtained the $2.5 million capital investment,
and on October 27, 1998, the Bank informed the Company of its decision to
exercise certain of its remedies under the Credit Agreement. The Bank
elected to; (1) implement an additional one percent (1%) default rate of
interest provided for in the Credit Agreement, retroactive to July 31,
1998; (2) reduce the maximum loan commitment level to $1.0 million; and
(3) terminate the credit agreement by February 1, 1999. The Bank did not
waive any existing defaults or its right to exercise any of the other
remedies available under the credit agreement.
Aggregate annual principal payments applicable to notes payable and
long-term debt for years ending after 1998 are as follows:
<TABLE>
<S> <C>
Year ending August 31, 1999 $6,060,067
2000 25,000
2001 --
2002 --
2003 --
----------
Thereafter $6,085,067
==========
</TABLE>
M. STOCKHOLDERS' EQUITY
Preferred Stock - In 1987 the Company initiated a private offering of
equity securities comprised of units of one share of Preferred Stock and
two shares of Common Stock valued at $10 per unit. The offering became
effective in October, 1988. The maximum number issuable is 700,000 shares
of Preferred Stock.
The annual and quarterly dividend rates of the Preferred Stock, expressed
as a percentage of original issue price, are as follows:
<TABLE>
<CAPTION>
Annual Rate Quarterly Rate
Period (%) (%)
------ ----------- --------------
<S> <C> <C>
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
</TABLE>
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.
F-16
<PAGE> 35
M. STOCKHOLDERS' EQUITY - continued
The holders of the Preferred Stock may convert any accumulated and unpaid
dividends into one share of Common Stock for each dollar accumulated.
Additionally, each share of the Preferred Stock may be converted into 10
shares of Common Stock. The Company is required to reserve Common Stock
sufficient to allow conversion of all Preferred Stock and accrued
dividends.
The Preferred Stock 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 Preferred Stock can be paid.
As of August 31, 1998 and 1997, 54,589 of the 84,242 shares of Preferred
Stock outstanding were converted into Common Stock. As of August 31,
1998, $233,255 of the $469,644 in accrued dividends on the Preferred
Stock were converted into Common Stock. Based on the number of
outstanding shares of Preferred Stock, the above mentioned conversions
and the dividend rate schedule above, the estimated accrued cumulative
dividend is $236,419 and $234,363 at August 31, 1998 and 1997,
respectively. At August 31,1998, the holders of Preferred Stock can
convert their shares into 532,949 shares of Common Stock including
accrued dividends.
In the event the Company completes a public offering of its Common Stock
where the offering price is at least $1.00 per share, the Preferred Stock
and accumulated dividends will automatically convert to Common Stock in
the ratios discussed above.
Commencing in 1991, the Company has the right but not the obligation to
convert all of the outstanding Preferred Stock into Common Stock at the
conversion price exhibited below plus any accumulated unpaid dividends.
<TABLE>
<CAPTION>
Stated Redemption Date Percentage
---------------------- ----------
<S> <C>
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%
</TABLE>
Class A Convertible Preferred Stock - In October 1990, the Company
created a second series of preferred stock, Class A Convertible Preferred
Stock (Convertible Preferred Stock). Issue price was $10 per share and
the maximum issuable shares under the series was 200,000 shares. There
are currently no shares of Convertible Preferred Stock outstanding.
Stock Option Plan - On October 30, 1992, the Company's Stockholders
approved the Plan which provides 50,000,000 shares of Common Stock
available for the granting of options. The Plan permits 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
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Options outstanding
September 1 2,000,000 $ 0.23 2,350,000 $ 0.13
Granted -- 1,000,000 0.30
Canceled (1,050,000) 0.30 (350,000) 0.13
Exercised -- (1,000,000) 0.10
---------- ---------- ---------- ----------
Options outstanding
August 31 950,000 $ 0.15 2,000,000 $ 0.23
========== ========== ========== ==========
</TABLE>
Weighted average fair value of options granted during the year ended
August 31, 1997, is $0.07.
F-17
<PAGE> 36
M. STOCKHOLDERS' EQUITY - continued
The following information applies to options outstanding at August 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted
average
remaining Weighted Weighted
Exercise Number contractual average Number average
Prices Outstanding life (years) exercise price Exercisable exercise price
-------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.03 100,000 2.00 $ 0.030 100,000 $ 0.030
0.075 350,000 7.00 0.075 350,000 0.075
0.10 200,000 8.00 0.100 100,000 0.100
0.32 300,000 3.00 0.320 300,000 0.320
------- -------
950,000 850,000
======= =======
</TABLE>
The following information applies to options outstanding at August 31,
1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted
average
Range of remaining Weighted Weighted
Exercise Number contractual average Number average
Prices Outstanding life (years) exercise price Exercisable exercise price
------------- ----------- ---------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.03 - 0.05 100,000 3.00 $ 0.03 100,000 $ 0.03
0.06 - 0.09 350,000 8.00 0.08 350,000 0.08
0.10 - 0.15 200,000 9.00 0.10 -0- --
0.25 - 0.38 1,350,000 3.83 0.31 300,000 0.32
--------- -------
2,000,000 750,000
========= =======
</TABLE>
SFAS 123, "Accounting for Stock-Based Compensation" encourages, but does
not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Common Stock at the
date of grant over the amount the employee must pay to acquire the stock.
The pro forma effect of implementing SFAS 123 is not disclosed as it is
deemed to be not material.
F-18
<PAGE> 37
N. INCOME TAXES
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current provision
Federal $ 10,876 $ 40,000
State (3,162) 2,390
----------- -----------
$ 7,714 $ 42,390
=========== ===========
Deferred provision
Federal $ -- $ 523,000
State -- 77,000
----------- -----------
$ -- $ 600,000
=========== ===========
Total provision
Federal $ 10,876 $ 563,000
State (3,162) 79,390
----------- -----------
$ 7,714 $ 642,390
=========== ===========
The provision for income taxes differs from the
amount determined by applying the statutory rate to
net income, due to the following reasons for the years
ended August 31:
Income taxes (benefit) at statutory rate $(3,926,000) $ 882,000
Goodwill impairment charge 1,617,000 --
Change in prior year deferred tax estimate 1,252,000 --
(Benefit) expense due to change in asset valuation
allowance 1,072,000 (298,000)
Other (7,286) 58,390
----------- -----------
Income tax provision $ 7,714 $ 642,390
=========== ===========
Sources of change in deferred taxes and the deferred
tax effect of each were as follows for the year ended
August 31:
Change in asset valuation allowance $(1,072,000) $ 298,000
Accrued liabilities 25,000 140,000
Depreciation and amortization 118,000 80,000
Carry forward (use) of net operating losses for
income tax reporting 929,000 (1,118,000)
----------- -----------
Income tax provision $ -- $ (600,000)
=========== ===========
Components of deferred tax assets at August 31,
were as follows:
Net operating loss carry forward $ 5,949,000 $ 5,020,000
Accrued liabilities 188,000 163,000
Depreciation and amortization 282,000 164,000
----------- -----------
6,419,000 5,347,000
Valuation allowance (6,419,000) (5,347,000)
-----------
-----------
NET ASSET $ -- $ --
=========== ===========
</TABLE>
F-19
<PAGE> 38
N. INCOME TAXES - continued
The Company has net operating loss carry forwards for tax purposes as
follows:
<TABLE>
<CAPTION>
Federal
Year Net Operating Year
Generated Loss Expires
--------- ------------- -------
<S> <C> <C>
1984 $ 2,888,000 1999
1985 992,000 2000
1986 909,000 2001
1987 1,074,000 2002
1990 2,092,000 2005
1991 1,075,000 2006
1994 62,000 2009
1996 570,000 2011
1998 5,593,000 2013
------------
$ 15,255,000
============
</TABLE>
The Company's ability to utilize its net operating loss carry forwards 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. The Company has established a valuation allowance against 100% of
the net operating loss carry forwards because it is uncertain whether the
Company will utilize these carry forwards due to continuing operating
losses.
O. CONTINGENCIES AND COMMITMENTS
Due to the nature of its products, the Company is subject to regulation
by a number of federal and state agencies, including the U.S. Food and
Drug Administration, the U.S. Drug Enforcement Agency and the State of
California. 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 shareholder,
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 Common Stock to this corporation. The
judgement has been completely satisfied, and arrangements are being made
to have these shares transferred back to the Company.
P. RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company borrowed $3,929,000, net of repayments,
from a shareholder who is also an officer and director, and $470,000, net
of repayments, from a shareholder who is also a director. During fiscal
1998, the Company recorded $331,000 in interest expense on these loans.
Subsequent to fiscal 1998 year end and through December 1, 1998 an
additional $350,000 was borrowed from the same officer and director
described above. These loans are payable on demand and bear interest at
Bank prime plus 2%. Loan proceeds were used for working capital. See
"Management's Discussion and Analysis Liquidity and Capital Resources."
F-20
<PAGE> 39
P. RELATED PARTY TRANSACTIONS - continued
During fiscal 1997, the Company issued 2,000,000 shares to an officer of
QCP as consideration for terminating an employment agreement entered into
in July, 1995.
The Company is due $34,445 from a related entity with common shareholders
and officers. The amount due the Company has been guaranteed by the
shareholders of the related entity.
On July 15, 1997, the Company entered into a Joint Marketing Agreement
with Dornoch. This agreement is described further in Note E "Joint
Marketing Agreement."
Q. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments held for purposes other
than trading are as follows:
<TABLE>
<CAPTION>
AT AUGUST 31, 1998
------------------------------------------
CARRYING VALUE FAIR VALUE
----------------- -------------------
<S> <C> <C>
Cash $ 61,860 $ 61,860
Notes receivable 139,797 139,797
</TABLE>
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
------------------------------------------
CARRYING VALUE FAIR VALUE
----------------- --------------------
<S> <C> <C>
Cash $ 26,143 $ 26,143
Notes receivable 252,500 252,500
Notes payable - related parties 615,000 615,000
Notes payable 743,168 743,168
Long term debt 343,409 343,409
</TABLE>
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 - The Company classifies as cash the amounts on deposit in banks.
Notes receivable - The carrying value approximates fair value as the
interest rate at August 31, 1998 and 1997, is considered to approximate
the market rate.
Notes payable and long term debt - Due to the defaults discussed in Note
L and the related party nature of the debt, the fair market value is not
determinable at August 31, 1998. The carrying value approximates fair
value at August 31, 1997 as the interest rate at August 31, 1997, is
considered to approximate the market rate in all material respects.
R. GOODWILL IMPAIRMENT CHARGE
Based on the current year's operating loss and negative cash flow from
operations, combined with a history of operating losses and negative cash
flow from operations, the Company has determined that significant
uncertainty exists regarding the recoverability of the carrying value of
goodwill. Accordingly, a $3,509,847 goodwill impairment charge was
recorded in the fourth quarter of fiscal 1998.
S. FOURTH QUARTER ADJUSTMENTS
Operating results for the fourth quarter of fiscal 1998 include the
following adjustments: A $384,775 write down of property held for sale to
re-value Pharma Labs assets to their selling price as specified in a
pending sale contract. A $125,000 adjustment to re-instate a payable due
to the other member of Pharma Labs in accordance with a non-complete
agreement.
F-21
<PAGE> 40
S. FOURTH QUARTER ADJUSTMENTS - continued
These adjustments were included in the category unusual charges
impairment loss. A $166,656 write-off of obsolete Pharma Labs inventory
was charged to cost of sales.
In addition, as disclosed in Note R, a $3,509,847 goodwill impairment
charge was recorded in the fourth quarter of fiscal 1998.
T. SUBSEQUENT EVENTS
During the first quarter of fiscal 1999, the Company obtained $350,000
through the issuance of notes payable to a shareholder who is also an
officer and director of the Company. The notes are unsecured, due and
payable upon demand and have a variable interest rate of 2% over Bank
prime (prime was 8.5% at August 31, 1998).
In October 1998, the Company and VNA signed an agreement pursuant to
which VNA will withdraw from the RxDirect joint venture. Under the terms
of the withdrawal agreement, VNA was to pay the Company a $154,000
withdrawal fee by December 1, 1998. See Note D.
On December 3, 1998, the sale of Pharma Labs assets was completed. See
Note G.
U. DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1998, the Company conducted a test for asset impairment in
accordance with Financial Accounting Standard 121. It is management's
opinion that, exclusive of the write-downs for Pharma Labs and the
write-off of goodwill, no impairment has occurred. Management's opinion
is based upon key assumptions regarding sales growth through new business
development, and obtaining necessary funding to support the Company
during continuing near term operating losses and negative cash flow from
operations. Also QCP has a current period operating loss and negative
cash flow from operations, and is expected to have continuing losses and
negative cash flow from operations in the near term. Accordingly, it is
reasonably possible that the results of the impairment test may change in
the near future and an impairment loss may result.
F-22
<PAGE> 41
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: December 23, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles R. Drummond Chairman of the Board, December 23, 1998
- -------------------------------- Chief Executive Officer
Charles R. Drummond and Treasurer
/s/ Ladd A. Drummond Director December 23, 1998
- --------------------------------
Ladd A. Drummond
/s/ Arch G. Gothard, III Director December 23, 1998
- --------------------------------
Arch G. Gothard, III
/s/ John H. Grant Vice Chairman of the Board December 23, 1998
- -------------------------------- and Corporate Secretary
John H. Grant
/s/ Gary P. Pryor Vice President of Finance December 23, 1998
- --------------------------------
Gary P. Pryor
/s/ Richard G. Wahl Director December 23, 1998
- --------------------------------
Richard G. Wahl
</TABLE>
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1(1) Articles of Incorporation filed October 4, 1973.
3.2(1) Articles of Amendment to Articles of Incorporation filed
December 22, 1976.
3.3(1) Articles of Amendment to Articles of Incorporation filed
August 25, 1978.
3.4(1) Articles of Amendment to Articles of Incorporation filed June
15, 1979.
3.5(1) Articles of Amendment to Articles of Incorporation filed
January 12, 1981.
3.6(1) Articles of Amendment to Articles of Incorporation filed June
16,1987.
3.7(1) Articles of Amendment to Articles of Incorporation filed
October 9, 1992.
3.8(2) Articles of Amendment to Articles of Incorporation filed
December 16, 1997.
3.9(1) Certificate of Designation of 15%/30% Cumulative Convertible
Preferred Stock filed December 9, 1987.
3.10(1) Corrected Certificate of Designation of 15%/30% Cumulative
Convertible Preferred Stock filed December 14, 1987.
3.11(1) Corrected Certificate of Designation of 15%/30% Cumulative
Convertible Preferred Stock filed February 5, 1988.
3.12(1) Certificate of Designation of Class A Convertible Preferred
Stock filed October 12, 1990.
3.13(3) Second Amended and Restated Bylaws
4.2(1) Specimen Certificate for Common Stock, no par value per share.
10.1(3) Amended and Restated Credit and Security Agreement dated
August 7, 1995 among the Company, Quality Care
Pharmaceuticals, Inc. and Norwest Credit, Inc.
10.2(4) Operating Agreement dated June 14, 1996 between the Registrant
and Pharma France, Inc.
10.3* Form of Promissory Notes executed by the Company in favor of
Charles R. Drummond. Schedule A sets forth the date and
principal amount of each promissory note.
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
10.4* Form of Promissory Notes executed by the Company in favor of
Arch G. Gothard, III. Schedule B sets forth the date and
principal amount of each promissory note.
10.5* Purchase Agreement dated November 10, 1998 by and among Adams
Equities, Inc., Pharma Labs, LLC, GMP Laboratories of America
and Golden Pharmaceuticals, Inc.
10.6* Agreement Not to Compete dated November 10, 1998 among Pharma
Labs, LLC, Golden Pharmaceuticals, Inc., Adams Equities, Inc.
and GMP Laboratories of America.
21(2) Subsidiaries of the Registrant.
27* Financial Data Schedule.
(b) Reports on Form 8-K
None
</TABLE>
- -----------------------
(1) Incorporated by reference to registrant's Annual Report on Form 10-K,
dated August 31, 1991, as filed with the Securities and Exchange
Commission.
(2) Incorporated by reference to registrant's Annual Report on Form 10-K
dated August 31, 1997, as filed with the Securities and Exchange
Commission.
(3) Incorporated by reference to registrant's Annual Report on Form 10-K
dated August 31, 1995, as filed with the Securities and Exchange
Commission.
(4) Incorporated by reference to registrant's Annual Report on Form 10-K
dated August 31, 1996, as filed with the Securities and Exchange
Commission.
* Filed herewith.
<PAGE> 1
EXHIBIT 10.3
PROMISSORY NOTE
$(PRINCIPAL AMOUNT) Golden, Colorado
(ISSUE DATE)
FOR VALUE RECEIVED, Golden Pharmaceuticals, Inc., a Colorado
Corporation and its subsidiary Quality Care Pharmaceuticals, Inc., a California
Corporation (hereinafter collectively referred to as the "Borrower"), 3000 W.
Warner Ave., Santa Ana, CA 92704 promises to pay to the order of Charles R.
Drummond, (hereinafter referred to as the "Lender"), [Address] on demand [or no
later than April 1, 1998] the principal sum of (PRINCIPAL AMOUNT) ($) or the
principal still outstanding if prepayments of principal have been made prior to
the demand or due date. Any accrued but unpaid interest will also be paid at the
time the Lender makes a demand for the outstanding principal.
Interest shall be calculated at the prime rate charged by Norwest Bank
from time to time plus two percent (2%) on the basis of a three hundred and
sixty (360) day year. Interest shall be due and payable at least quarterly
commencing with the fifteenth day of the month ending the quarter in which this
loan was made
The amounts due under the terms of the promissory note may be prepaid
in whole or in part at the sole option of the Borrower without penalty. All
payments of both principal and interest are to be made to the Lender at his
address above in lawful money of the United States of America.
In the event any amount is not paid when due under the terms of this
note, the unpaid balance shall thereafter bear interest until paid at the
maximum rate permitted by law, or if the rate is unlimited, at the rate of
eighteen percent (18%) per annum, until paid, said interest to be compounded
quarterly.
If this promissory note is placed in the hands of an attorney for
collection after the same for any reason becomes due, or if collected by legal
proceedings or through the probate or bankruptcy courts, the Borrower hereby
agrees to reimburse the Lender for reasonable attorney's fees together with all
out-of-pocket costs.
The Borrowers and all endorsers, sureties, guarantors and all other
persons liable or who may become liable hereon hereby severally waiver demand,
presentment, notice of dishonor or nonpayment, and assent to each and any
extension or postponement of the time of payment at or after maturity, or of any
indulgence.
The undersigned individuals hereby represent that they are duly
authorized to execute this "promissory note" on behalf of the borrowers and
obligate them to the terms and conditions contained herewith.
<PAGE> 2
Lender: Borrower:
Golden Pharmaceuticals, Inc.
By:
- ------------------------------- --------------------------------------
Charles R. Drummond Title:
-----------------------------------
Quality Care Pharmaceuticals, Inc.
By:
-------------------------------------
Title:
-----------------------------------
<PAGE> 3
EXHIBIT A
LENDER CHARLES R. DRUMMOND
<TABLE>
<CAPTION>
Loan
Advance Date Amount
------------ ------
<S> <C>
November 22, 1996 $ 75,000
August 4, 1997 300,000
August 18, 1997 200,000
September 23, 1997 300,000
October 6, 1997 50,000
October 21, 1997 250,000
November 4, 1997 250,000
December 2, 1997 320,000
December 17, 1997 300,000
January 5, 1998 150,000
January 20, 1998 150,000
February 5, 1998 120,000
February 19, 1998 200,000
March 5, 1998 180,000
March 16, 1998 150,000
April 1, 1998 200,000
April 17, 1998 100,000
May 4, 1998 180,000
May 21, 1998 100,000
June 3, 1998 80,000
June 15, 1998 200,000
June 30, 1998 200,000
July 14, 1998 200,000
August 3, 1998 100,000
August 24, 1998 100,000
August 31, 1998 100,000
</TABLE>
<PAGE> 1
EXHIBIT 10.4
PROMISSORY NOTE
$(PRINCIPAL AMOUNT) Golden, Colorado
(DATE)
FOR VALUE RECEIVED, Golden Pharmaceuticals, Inc., a Colorado
Corporation and its subsidiary Quality Care Pharmaceuticals, Inc., a California
Corporation (hereinafter collectively referred to as the "Borrower"), 3000 W.
Warner Ave., Santa Ana, CA 92704 promises to pay to the order of Arch G. Gothard
III, (hereinafter referred to as the "Lender"), P.O. Box 5950, 0120 Flintstone
Lane, Breckenridge, CO 80424 on demand or no later than April 1, 1998 the
principal sum of (PRINCIPAL AMOUNT) ($) or the principal still outstanding if
prepayments of principal have been made prior to the demand or due date. Any
accrued but unpaid interest will also be paid at the time the Lender makes a
demand for the outstanding principal.
Interest shall be calculated at the prime rate charged by Norwest Bank
from time to time plus two percent (2%) on the basis of a three hundred and
sixty (360) day year. Interest shall be due and payable at least quarterly
commencing with the fifteenth day of the month ending the quarter in which this
loan was made
The amounts due under the terms of the promissory note may be prepaid
in whole or in part at the sole option of the Borrower without penalty. All
payments of both principal and interest are to be made to the Lender at his
address above in lawful money of the United States of America.
In the event any amount is not paid when due under the terms of this
note, the unpaid balance shall thereafter bear interest until paid at the
maximum rate permitted by law, or if the rate is unlimited, at the rate of
eighteen percent (18%) per annum, until paid, said interest to be compounded
quarterly.
If this promissory note is placed in the hands of an attorney for
collection after the same for any reason becomes due, or if collected by legal
proceedings or through the probate or bankruptcy courts, the Borrower hereby
agrees to reimburse the Lender for reasonable attorney's fees together with all
out-of-pocket costs.
The Borrowers and all endorsers, sureties, guarantors and all other
persons liable or who may become liable hereon hereby severally waiver demand,
presentment, notice of dishonor or nonpayment, and assent to each and any
extension or postponement of the time of payment at or after maturity, or of any
indulgence.
The undersigned individuals hereby represent that they are duly
authorized to execute this "promissory note" on behalf of the borrowers and
obligate them to the terms and conditions contained herewith.
<PAGE> 2
Lender: Borrower:
Golden Pharmaceuticals, Inc.
By:
- ------------------------------- --------------------------------------
Arch G. Gothard III Title:
-----------------------------------
Quality Care Pharmaceuticals, Inc.
By:
-------------------------------------
Title:
-----------------------------------
<PAGE> 3
EXHIBIT B
<TABLE>
<CAPTION>
Advance Date Principal Amount
- ------------ ----------------
<S> <C>
July 29, 1997 $ 40,000
October 8, 1997 250,000
November 18, 1997 150,000
November 19, 1997 100,000
</TABLE>
<PAGE> 1
EXHIBIT 10.5
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement"), dated as of November __,
1998 is entered into by and between Adam Equities, Inc., a Nevada corporation
("Purchaser") and Pharma Labs, LLC, a Colorado limited liability company
("Seller"), GMP Laboratories of America, a California corporation, ("GMT") and
Golden Pharmaceuticals, a Colorado corporation ("Golden").
Purchaser and Seller are sometimes referred to collectively herein as
the "Parties" and individually as "Party".
RECITALS
WHEREAS, Seller is primarily engaged in the business (the "Business")
of manufacturing, packaging and distributing neutraceuticals, vitamins,
medicinal herbs, minerals and other nutritional substances.
WHEREAS, Purchaser desires to purchase certain of the assets of Seller
set forth on Schedule I hereto (the "Assets") on an "as is, where is" basis.
Such asset of Seller not desired to be purchased by Purchaser are referred to
herein a the "Excluded Assets."
WHEREAS, Purchaser desires to assume certain liabilities of Seller a
more fully described in Sections 2.04 and 2.05 hereof
WHEREAS, subject only to the limitations and exclusion contained in
this Agreement and on the terms and conditions hereinafter set forth, Seller
desires to sell and Purchaser desires to purchase the Assets.
WHEREAS, Seller and Buyer acknowledge that this Agreement contemplates
solely the sale of the Assets and not the sale of an ongoing business concern.
WHEREAS, Buyer and Seller have entered in an Agreement for the
operation of the business of Pharma Labs dated October 12, 1998, ("Operating
Agreement") and desire to extend such Operating Agreement to December 1, 1998.
WHEREAS, Buyer and GMP desire that Seller and Golden provide covenants
that they shall not compete with either Buyer or GMP as hereinafter set forth;
NOW THEREFORE, in consideration of the covenants, representations,
warranties and agreements herein contained, and intending to be legally bound
hereby, the Parties hereto hereby agree as follows:
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AGREEMENT
ARTICLE I
DEFINITIONS
1.10 DEFINITIONS (A) The following terms used herein, have the following
meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person; provided that no party to this Agreement shall be deemed to be an
affiliate of any other party to this Agreement (including, without limitation,
Seller) solely by reason of its ownership of common stock. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct the management or operations of such person.
"Closing Date" means the date of the Closing, as set forth in Section
3.01.
"Dollar" means U. S. Dollars unless otherwise specified.
"Escrow Agent" shall mean Burrows Escrow.
"Escrow Closing Date" shall be November 25, 1998.
"Facility" means the facility located at 2931 E. La Jolla Street,
Anaheim, California at which Seller currently conducts operations.
"Lease Consents" means collectively the consents to the assignment and
assumption of the Facilities Lease, the Telephone Lease and the Machine Lease.
"Material Adverse Effect" means a material adverse effect or effect
which would reasonably be expected to have a Material Adverse Effect on the
Assets.
"Operating Agreement" means the operating agreement in the form of
Exhibit B hereto.
"Person" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Sublease Agreement" means the sublease agreement, substantially in the
form of Exhibit C hereto, to be entered into between the Parties on the Closing
Date.
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ARTICLE II
PURCHASE AND SALE
2.01 AGREEMENT TO SELL. At the Closing hereunder (as defined in Section 3.01
hereof) and except as otherwise specifically provided in this Section 2.01,
Seller hereby grants, sell, convey, assign, transfer and deliver to Purchaser,
upon and subject to the terms and conditions of this Agreement, all right, title
and interest of Seller in and to the Assets on an "as is, where is" basis free
and clear of all liens, claims and encumbrances. The Parties shall execute the
escrow instructions in the form attached hereto Exhibit "F."
In addition to the Assets, a copy of a list of which is attached as Exhibit "E,"
Golden shall cause to be delivered to Purchaser a "Scorpion!' equipment which
was missing at the time of closing. Such Scorpio equipment may be used, shall be
operational, and free and clear of all liens and encumbrances, and shall be
delivered to Purchaser within six (6) months after the Close of Escrow.
2.02 AGREEMENT TO PURCHASE. At the Closing hereunder, Purchaser shall purchase
the Assets from Seller, upon and subject to the terms and conditions of this
Agreement and in reliance on the representations, warranties and covenants of
Seller contained herein, in exchange for the Purchase Price (as defined in
Section 2.03 hereof). In addition, Purchaser assumes and agrees to pay,
discharge or perform, as appropriate, certain liabilities and obligations of
Seller only to the extent and as provided in Section 2.04 of this Agreement.
2.03 PURCHASE PRICE. The purchase price for the Assets (the "Purchase Price) is
One Hundred Fifty Thousand ($150,000) and shall be paid to Seller, or its
designee, on the Closing Date. Purchaser shall forthwith deposit the Purchase
Price with the Escrow Agent.
2.04 ASSUMPTION OF LIABILITIES. In addition to paying the Purchase Price at the
Closing, Purchaser hereby assumes, agrees to pay, discharge or perform as
appropriate the following liabilities and obligations, and only those
liabilities an none other, of Seller:
(a) Security Agreement dated as of December 1, 1997 between Seller
and Phoenix Leasing Incorporated secured by an IMA Zanasi
Model 40F Capsule Filler Machine, and all promissory notes
entered into by Seller pursuant to such security agreement
(the "Machine Lease"); and
(b) Lease dated as of August 20, 1996 between Seller and Steams
County National Bank of Albany for Telco Toshiba DK1280
Digital Communications (the "Telephone Lease").
The Machine Lease, the Telephone Lease and the Facilities Lease (as
defined in Section 2.05) shall be collectively referred to as the "Leases".
2.05 FACILITIES LEASE. On the Closing Date. Purchaser, agrees to pay, discharge
and perform, as appropriate all of Seller's rights, liabilities and obligations
under that certain Lease dated December 8, 1997 by and between Seller, Golden
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Pharmaceuticals, Inc. ("GPI") and ES2 Partners for real estate located at 2931
E. La Jolla Street, Anaheim, California (the "Facilities Lease") pursuant to the
terms of the Sublease, a copy of which is attached hereto as Exhibit "C."
Purchaser shall provide any required documents to DSA Associates prior to close
of escrow. Any repairs to the roof, HVAC, ceiling tile and other elements of the
work being performed on the property (as of the close of escrow) shall be agreed
to by DSA, GMP and GPI in writing in advance to bring the facility to a
satisfactory condition as of close of escrow. The costs to repair the facility
shall be borne as follows:
(a) The first twenty thousand dollars ($20,000) shall be paid by
GUT;
(b) Any amount in excess of twenty thousand dollars shall be paid
by GPI.
Both GUT and GPI reserve the right to object to any assessment made by the DSA
with respect to the condition of the property and any claim made by DSA or
anyone else with regard to the condition of the property as of close of escrow.
Any assessments or repairs due by either GMP or GPI shall be paid according to
the terms of the Facilities Lease.
GPI shall be held harmless from any additional costs or claims relating to the
property with respect to the condition of the Property after close of escrow, or
any rental payment or other obligation that may become due under the terms of
the Facilities Lease that may become due in the future.
2.06 BULK SALES ESCROW. On the Closing Date, the Parties and the Escrow Agent
shall enter into the Escrow Agreement pursuant to which the Escrow Agent shall
hold the Purchase Price in escrow ("Escrow") for the benefit of the Seller to be
distributed pursuant to Division 6 of the California Uniform Commercial Code
(the "Bulk Sales Law") and pursuant to the Escrow Agreement.
2.07 OPERATION OF FACILITY UNTIL CLOSE OF ESCROW. The Property shall continue to
be operated by Purchaser pursuant to the Operation Agreement until Close of
Escrow. Operating expenses, rent (including taxes, insurance and maintenance,
utilities, etc.) will continue being paid by Purchaser on a timely basis until
escrow closes, pursuant to the Operating Agreement, and Purchaser will continue
to fulfil as many of Pharma Labs' customers' orders as practical under the
Operating Agreement.
2.08 OTHER MATTERS RELATING TO OPERATION. Any items belonging to Pharma France
or associated parties, will be removed from the external premises under
pre-scheduled and supervised condition within ten (10) days from the signing of
this Agreement at their expense.
GPI will maintain its insurance with Lockton Agency and GMP will maintain its
coverage in Clarendon America Insurance during the period between the signing of
this Agreement and the close of escrow.
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In order to expedite the completion of the documents in California, GPI will pay
$2,000 at the close of escrow as its share toward legal fees and expenses
associated with the processing of the documents. Smith & Ure does not represent
Seller or Golden.
ARTICLE III
CLOSING
3.01 CLOSING. The closing (the "Closing") of the sale and purchase of the Assets
shall take place at such location as may be mutually agreed upon in writing by
Purchaser and Seller concurrently with the execution of this Agreement (the
"Closing Date"). The obligations of each of the Parties to consummate the
Closing are subject to and shall be conditioned on the satisfaction or written
waiver (in whole or in part) by each of Buyer and Seller of each of the
following conditions on or prior to the closing Date:
(a) No provision of any applicable law or regulation and no
judgement, injunction, order or decree shall (i) make the
consummation of the transactions contemplated hereby illegal;
or (ii) prohibit the consumption of the Closing; and
(b) There shall not be any action taken, or any statute, rule,
regulation, injunction, order or decree proposed, enacted,
enforced, promulgated, issued or deemed applicable to the
transactions contemplated hereby, by any court, government or
governmental authority or agency, domestic or foreign, that,
in the reasonable judgement of Purchaser or Seller could,
directly or indirectly result in any of the consequences
referred to above.
3.02 ITEMS TO BE DELIVERED AT CLOSING. At the Closing and subject to the terms
and conditions herein contained:
(a) Seller shall deliver to Purchaser the following:
(i) a Bill of Sale and Assignment and Assumption Agreement
"Bill of Sale") executed by Seller, in the form of Exhibit A.
(ii) all of the assets and other personal property identified
Exhibit E.
(iii) a copy of this Agreement duly and validly executed by
the Seller; and
(iv) a copy of the Operating Agreement duly and validly
executed by the Seller and simultaneously with such delivery,
all such steps will be taken as may be required to put
Purchaser in actual possession of the Assets.
(v) a copy of the Non Compete Agreement duly and validly
executed by the Seller and Golden, a copy of which is attached
hereto as Exhibit D.
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(vi) a copy of the Sublease, duly and validly executed by
Seller, attached as Exhibit C.
(b) Purchaser shall deliver to Seller the following:
(i) a copy of the Sublease Agreement duly and validly executed
by Purchaser;
(ii) counterpart signatures to the Bill of Sale;
(iii) a copy of this Agreement duly and validly executed by
the Purchaser;
(iv) a copy of the Operating Agreement duly and validly
executed by the Purchaser; and
(v) a copy of the Non Compete Agreement duly and validly
executed by the Purchaser and GUT.
(c) Purchaser shall forthwith deliver to the Escrow Agent the
following:
(i) the Purchase Price; and
(ii) a copy of the Escrow Agreement.
(d) Seller shall forthwith deliver to the Escrow Agent a copy of
the Escrow Agreement duly and validly executed by the Seller.
3.03 FURTHER ASSURANCES. Seller from time to time after the Closing, at
Purchaser's request, will execute, acknowledge and deliver to Purchaser such
other instruments of conveyance and transfer and will take such other actions
and execute and deliver such other documents, certifications and further
assurances as Purchaser may reasonably require in order to vest more effectively
in Purchaser, or to put Purchaser more fully in possession of the Assets, or to
better enable Purchaser to complete, perform or discharge any of the liabilities
or obligations assumed by Purchaser at the Closing pursuant to Sections 2.04 and
2.05 hereof. Each of the parties hereto will cooperate with the other and
execute and deliver to the other parties hereto such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by any other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement.
3.04 CONSUMMATION OF CLOSING. All acts, deliveries and confirmations comprising
the Closing, regardless of chronological sequence, shall be deemed to occur
contemporaneously and simultaneously upon the occurrence of the last act,
delivery or confirmation of the Closing, and none of such acts, deliveries or
confirmations shall be effective unless and until the last of the same shall
have occurred.
3.05 TRUST ACCOUNT AT SMITH & URE. The purchaser shall forthwith deposit into an
interest bearing trust account for the benefit of purchaser the sum of Three
Hundred and Seven Thousand Dollars ($307,000), which account shall be held at
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the Bank of Yorba Linda. At close of escrow, which is specifically conditioned
upon the simultaneous close of the Burrows Escrow referred to above, and the
delivery by Seller to Purchaser of each item set forth in Section 3.02, Smith &
Ure shall deliver cash or a cashier's check to payable to Golden, or its
assigns, in the amount of $307,000. Any interest which shall have accrued in the
trust account between the date of its deposit and the close of escrow shall
accrue to the benefit of the purchaser.
The $307,000 paid to Golden pursuant to this provision is allocated as
follows:
(a) $250,000 represents the consideration for the Non-Compete
Agreement, a copy of which is attached hereto as Exhibit "D".
(b) $57,000 which represents a security deposit paid by Golden to
the landlord for the billing, as more fully set forth in a
Sublease, attached hereto as Exhibit "C."
As a result of the reimbursement by the purchaser to Golden of the
$57,000, representing the lease deposit, the deposit held by the landlord shall
accrue to and be assigned to the purchaser. The seller and Golden each disclaims
any interest whatsoever in the security deposit held by the landlord. Purchaser,
or its assigns, may at its option, terminate the lease agreement with the
consent of the landlord. Purchaser may, with the consent of the landlord,
purchase the real property and have credited to the purchaser any security
deposit held by the landlord. In the event of a termination of a lease, or any
other matter of or concerning the lease, Purchaser shall receive a credit for
the deposit held by the Landlord.
Smith & Ure may deduct from such funds $2,000 as set forth in paragraph 2.09.
3.06 INTEREST ON DEPOSITS IN TRUST OR IN ESCROW. Any interest accrued with
respect to funds deposited in the trust account shall be credited to Buyer.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser that:
4.01 CORPORATE EXISTENCE. Seller is a limited liability company duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation. Seller is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the conduct of the Business by it
requires it to be so qualified, except for those jurisdictions where failure to
be so qualified, individually or in the aggregate would not have a Material
Adverse Effect.
4.02 POWER AND AUTHORIZATION. Seller has the corporate power, authority and
legal right to execute, deliver and perform this Agreement. The execution,
delivery and performance of this Agreement by Seller has been duly authorized by
all necessary corporate action. This Agreement has been, and the other
agreements, documents and instruments required to be delivered by Seller in
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accordance with the provisions hereof (the "Seller's Documents") will be duly
executed and delivered on behalf of Seller by duly authorized officers of
Seller, and this Agreement constitutes, and the Seller's Documents when executed
and delivered will constitute, the legal, valid and binding obligations of
Seller, enforceable against it in accordance with their respective terms except
as the same may be limited by bankruptcy, moratorium, fraudulent conveyance and
similar laws affecting creditors rights generally and to the application of
general equitable principles.
4.03 VALIDITY OF CONTEMPLATED TRANSACTIONS, ETC The execution, delivery and
performance of this Agreement by Seller does not and will not violate, conflict
with or result in the breach of any term, condition or provision of, or require
the consent of any other party to: (a) any existing law, ordinance, or
governmental rule or regulation to which Seller is subject; (b) any judgment,
order, writ injunction, decree or award of any court, arbitrator or governmental
or regulatory official, body or authority which is applicable to Seller; or (c)
any mortgage, indenture, agreement, contract, commitment, lease, plan or other
instrument, document or understanding, oral or written, to which Seller is a
party or by which Seller is otherwise bound.
4.04 TITLE TO PROPERTIES. Seller has good, valid and marketable title to the
Assets free and clear of all liens, claims and encumbrances.
4.05 CONSENTS. Except for the Lease Consents, no consent, waiver, approval,
order or authorization of, or registration, declaration or filing with any
court, administrative agency or commission or other federal, state, county,
local or other foreign governmental authority, instrumentality, agency or
commission or any third party, including a party to any agreement with the
Seller is required by or with respect to the Seller in connection with the
execution and delivery of this Agreement or any of Seller's Documents or the
consummation of the transactions contemplated hereby and thereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
Purchaser hereby represents and warrants to Seller that:
5.01 POWER AND AUTHORIZATION. Purchaser has the legal capacity to execute,
deliver and perform this Agreement. This Agreement has been duly executed and
delivered by Purchaser and constitutes the legal, valid and binding obligation
of Purchaser enforceable against Purchaser in accordance with its terms except
as the same may be limited by bankruptcy, moratorium, fraudulent conveyance and
similar laws affecting creditors rights generally and to the application of
general equitable principles.
5.02 VALIDITY OF CONTEMPLATED TRANSACTIONS, ETC. The execution, delivery and
performance of this Agreement by Purchaser does not and will not violate,
conflict with or result in the breach of any term, condition or provision of, or
require the consent of any other party to: (a) any existing law, ordinance, or
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governmental rule or regulation to which Purchaser is subject; (b) any judgment,
order, writ injunction, decree or award of any court, arbitrator or governmental
or regulatory official, body or authority which is applicable to Purchaser; or
(c) any mortgage indenture, agreement, contract, commitment, lease, plan or
other instrument, document or understanding, oral or written, to which Purchaser
is a party or by which Purchaser is otherwise bound.
5.03 CONSENTS. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission or any third party, including a
party to any agreement with the Purchaser is required by or with respect to the
Purchaser in connection with the execution and delivery of this Agreement or any
related agreement to which the Purchaser is a party or the consummation of the
transactions contemplated hereby an thereby.
ARTICLE VI
FAILURE TO CLOSE ESCROW
6.01 TERMINATION. Purchaser and Seller acknowledge that if the Escrow fails to
close by December 1, 1998, Purchaser shall be entitled to a return of the
Purchase Price, less expenses withheld pursuant to the Operating Agreement;
Seller shall be entitled to a return of the Assets and all other actions
necessary to return the parties to their positions, prior to the execution
hereof shall be undertaken by the Parties.
6.02 EXTENSION. If escrow cannot close as otherwise set forth in the escrow
instructions, (i) Seller reserves the right to extend the close of escrow an
additional 15 days upon written request to buyer, or (ii) Buyer reserves the
right to extend the close of escrow an additional 30 days upon written request
to seller.
6.03 RETURN OF SUMS ON DEPOSIT. In the event escrow fails to close on or before
December 1, 1998, unless otherwise extended as set forth in Section 6.02, then
all sums paid by Purchaser, less reasonable costs of escrow to be borne by
Purchaser, shall be paid by escrow to Purchaser upon receipt from Purchaser of a
certified or registered letter that Purchaser is terminating the escrow. Escrow
Agent shall immediately issue good funds to Purchaser of any amounts deposited
by Purchaser, less expenses as set forth in this paragraph. Escrow Agent shall
have no responsibility to either party after payment of the sum to Purchaser
pursuant to this paragraph.
6.04 RETURN OF SUMS HELD IN SMITH & URE TRUST ACCOUNT. In the event escrow fails
to close on or before December 1, 1998, unless otherwise extended as set forth
in Section 6.02, then all sums deposited by Purchaser, less reasonable costs of
escrow to be borne by Purchaser, shall be paid by Smith & Ure Trust Account to
Purchaser upon receipt from Purchaser of a certified or registered letter that
Purchaser is terminating the escrow. Smith & Ure shall immediately issue good
funds to Purchaser of any amounts deposited by Purchaser, less expenses as set
forth in this paragraph. Smith & Ure shall have no responsibility to either
party after payment of the sum to Purchaser pursuant to this paragraph.
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6.05 RETURN OF ASSETS TO SELLER. If escrow fails to close though fault of GPI,
(which shall be defined to include any breach of this agreement, impossibility,
mistake, or a negligent or intentional act or omission, including, but not
limited to, the failure to transfer and convey the personal property free and
clear of all liens and encumbrances as set forth in this Agreement), then all
escrow funds held by Escrow Agent or Smith & Ure, less any unpaid and owing
operating expenses, will be returned to purchaser, and all of the equipment on
the "Revised Equipment List" returned to Seller. In the event AMS orders cannot
be completed on a mutually satisfactory basis or AMS otherwise requests a return
of their material, its materials or other monetary settlement will be returned
to AMS immediately by Purchaser upon written request. Any material returned to
AM S shall be FOB the Anaheim facility.
Purchaser shall not be required to pay any operating expenses, pursuant to the
Operating Agreement, if escrow fails to close on or before December 1, 1998, if
such failure to close is the fault of GPI, and either GPI or GMP elects to
extend escrow pursuant to Section 6.02, for the period between December 1, 1998
and close of escrow.
All expenses for operating after December 1, 1998 shall be paid for-by Seller.
ARTICLE VII
POST CLOSING MATTERS
7.01 INDEMNITY BY SELLER. Seller agrees to indemnify Purchaser against, and to
hold Purchaser harmless from, all claims, suits, losses, liabilities,
assessments, fines, judgment, costs, damages and expenses (including but not
limited to reasonable attorney fees, including attorney fees necessary to
enforce their rights to indemnification hereunder) ("Damages") arising out of,
related to or resulting by reason of:
(a) the breach of any of the warranties or agreement made by
Seller in this Agreement;
(b) the breach or default in performance by the Seller of any of
the obligations or covenants to be performed by it hereunder;
(c) any claim by any Person that Purchaser is liable for
obligations of Seller, not expressly assumed by Purchaser
hereunder; or
(d) all other indebtedness, claims and liabilities, contingent or
otherwise, of whatever kind or nature, relating to the Assets,
the Leases or the operation of the Business by the Purchaser
pursuant to the Operating Agreement arising prior the Closing
Date.
7.02 INDEMNITY BY PURCHASER. Purchaser shall indemnify Seller, its officers,
managers, agents, and employees, against, and to hold each of them harmless from
any and all Damages arising out of, relating to or resulting by reason of:
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(a) the breach of any of the warranties or agreements made by
Purchaser in this Agreement;
(b) the breach or default in the performance by Purchaser of any
of the obligations or covenants to be performed by it
hereunder;
(c) any obligation or liability of Seller expressly assumed by
Purchaser pursuant to the terms of this Agreement; or
(d) all other indebtedness, claims and liabilities, contingent or
otherwise, of whatever kind of nature, relating to the Assets,
the Leases or the operation of the Business by the Purchaser
pursuant to the Operating Agreement arising from and after the
Closing Date.
7.03 UNDERTAKING BY PURCHASER. Purchaser shall within ten (10) business days
following the Closing Date complete and deliver to each lessor or lender under
the Leases all applications, forms, agreements, documents or other material
requesting by such lessor or lender necessary in order for Purchaser to assume
the obligations of Seller under each such Lease.
7.04 PROPERTY NOT PURCHASED. All property located at the Facility and not
purchased by Purchaser pursuant to this Agreement shall be collected by
Purchaser and placed in a separate room at the Facility as soon as possible. All
such property will be removed by its owner under supervised conditions prior to
the Escrow Closing Date.
ARTICLE VII
GENERAL PROVISIONS
8.01 PAYMENT OF EXPENSES. Each party will bear all of its own costs incurred in
connection with the transactions contemplated by this Agreement.
8.02 SALES, TRANSFER AND DOCUMENTARY TAXES, ETC. Purchaser shall pay all
federal, state or local sales, documentary and other transfer taxes, if any, due
as a result of the purchase, sale, use or transfer of the Assets in accordance
herewith whether imposed by law on Seller or Purchaser and Purchaser shall
indemnify, reimburse and hold harmless Seller in respect of the liability for
payment of or failure to pay any such sales, documentary and other transfer
taxes or the filing of or failure to file any reports required in connection
therewith.
8.03 CONTENTS OF AGREEMENT, PARTIES IN INTEREST, ETC. This Agreement sets forth
the entire understanding of the parties hereto with respect to the transactions
contemplated hereby. It shall not be amended or modified except by written
instrument duly executed by each of the parties hereto. Any and all previous
agreements and understandings between or among the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement.
8.04 ASSIGNMENT AND BINDING EFFECT. This Agreement may not be assigned prior to
the Closing by any party hereto without the prior written consent of the other
parties. Subject to the foregoing, all of the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the successors and assigns of Seller and Purchaser.
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8.05 WAIVER. Any term or provision of this Agreement may be waived at any time
by the party entitled to the benefit thereof by a written instrument duly
executed by such party.
8.06 NOTICES. All notices, requests and other communications to any party
hereunder shall be in writing (including facsimile transmission) and shall be
deemed to have been given if delivered personally, mailed by certified mail
(return receipt requested) or sent by cable, telegram, telecopier or recognized
overnight delivery service to the parties at the following addresses or at such
other addresses as, specified by the parties by like notice, as follows:
If to Purchaser, to:
Adam Equities Inc.
3880 East Eagle Drive
Anaheim, California 92807
Telephone: (714)630-2467
Facsimile: (714)237-1354
With a required copy to:
Smith & Ure
1800 North Broadway, Suite 200
Santa Ana, California 92706
Attention: Steven C. Smith, Esq.
Telephone: (714)550-7720
Facsimile: (714)550-1251
If to Seller, to:
Pharma Labs, LLC
c/o Golden Pharmaceuticals, Inc.
3000 West Warner Avenue
Santa Ana, California 92704
Attention: Charles R. Drummond
Telephone: (714)754-2440
Facsimile: (714)754-5745
With a required copy to:
Morrison & Foerster, LLP
5200 Republic Plaza
370 Seventeenth Street
Denver, Colorado 80202
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Attention: Warren L. Troupe, Esq.
Telephone: (310) 592-1500
Facsimile: (310) 592-1510
8.07 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
California.
8.08 NO BENEFIT TO OTHERS. The representations, warranties, covenants, and
agreements contained in this Agreement are for the sole benefit of the parties
hereto, and their heirs, executors, administrators, legal representatives,
successors and assigns, and they shall not be construed as conferring any rights
on any other persons.
8.09 PUBLIC ANNOUNCEMENTS. The Parties agree to consult with each other before
issuing any press release or making any public statement with respect to this
Agreement of the transactions contemplated hereby and, except as may be required
by applicable law will not issue any such press release, or make any such public
statement prior to such consultation.
8.10 HEADINGS, GENDER AND "PERSON." All section headings contained in this
Agreement are for convenience of reference only, do not form a part of this
Agreement and shall not affect in any way the meaning or interpretation of this
Agreement. Words used herein, regardless of the number and gender specifically
used, shall be deemed and constructed to include any other number, singular or
plural, and any other gender, masculine, feminine, or neuter, as the context
requires.
8.11 SCHEDULES AND EXHIBITS. All Exhibits and Schedules referred to herein are
intended to be and hereby are specifically made a part of this Agreement.
8.12 SEVERABILITY. Any provision of this Agreement which is invalid or
enforceable in any jurisdiction shall be ineffective to the extent to such
invalidity or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provisions in any other jurisdiction.
8.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts
any party hereto may execute any such counterpart, each of which when executed
and delivered. shall be deemed to be an original and all of which counterparts
taken together shall constitute but one and the same instrument. This Agreement
shall become binding when one or more counterparts taken together shall have
been executed and delivered by the parties. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
8.14 CONSTRUCTION. The language used in this Agreement will be deemed to be the
language chosen by the Parties to express their mutual intent and no rule of
strict construction shall be applied against any Party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer or person as of the day and
year first above written.
13
<PAGE> 14
PURCHASER
ADAM EQUITIES, INC
A Nevada corporation
By:
---------------------------------
SELLER
PHARMALABS, LLC
A Colorado limited liability company
By:
---------------------------------
Name
-------------------------------
Title
------------------------------
GMP LABORATORIES OF AMERICA,
A California corporation
By:
---------------------------------
Name
-------------------------------
Title
------------------------------
GOLDEN PHARMACEUTICALS, INC.
A Colorado corporation
By:
---------------------------------
Name
-------------------------------
Title
------------------------------
14
<PAGE> 1
EXHIBIT 10.6
AGREEMENT NOT TO COMPETE
AGREEMENT NOT TO COMPETE ("Agreement") dated November _____. 1998, by
and between Pharma Labs, LLC, a Colorado limited liability company and Golden
Pharmaceuticals, a Colorado corporation (hereinafter collectively referred to as
"Covenantor") and Adams Equity, Inc. a Nevada corporation ("Adams") and GMP
Laboratories of America, a California corporation (hereinafter collectively
referred to as "Covenantee"):
WITNESSETH:
WHEREAS, on this date Adams has acquired from Pharma Labs substantially
all of the assets of the nutraceutical manufacturing business known as Pharma
Labs, located at 2931 East La Jolla Street, Anaheim, California 92806 (the
"Business"); and
WHEREAS, Covenantor has for years been actively and prominently engaged
in the nutraceutical manufacturing business and related services in the United
States and during such period has been an owner of the Business; and
WHEREAS, the execution of this Agreement was a condition of and
dependant covenant to the sale of the assets of the Business to Adams;
NOW, THEREFORE, in consideration of the premises and the agreements
herein contained, the parties, intending to be legally bound, hereby agree as
follows:
Section 1. Noncompetition. Covenantor agrees that for a period of 1
(one) year from the date of this Agreement, such period not to include any
period of violation hereof or period to enforce the covenants herein ("Terms of
this Agreement"), Covenantor will not:
1
<PAGE> 2
(a) Directly or indirectly, alone or for the account of Covenantor, or
as a partner, member, employee, advisor, or agent of any partnership or joint
venture, or as a trustee, officer, director, shareholder, employee, advisor, or
agent of any corporation, trust, or other business organization or entity, own,
manage, advise, encourage, support, finance, operate, join, control or
participate in the ownership, management, operation or control of, or be
connected in any manner with, any business which (i) is either located within,
or solicits business from within, the continental United States, and (ii) is or
may be in the nutraceutical manufacturing business ("nutraceutical
manufacturing" includes the formulating and tableting of capsules, tablets, and
other like procedures, but excludes the packaging in bottles, strip packs or
blisters of such capsules and/or tablets), or any business related to the above,
other than for bariatic and related products of Physicians Pro Care;
(b) Cause, induce or assist anyone in causing or inducing in any way
any employee of Covenantee or any of its affiliates to resign or sever such
employee's employment or to breach an employment agreement with Covenantee or
any of its affiliates;
(c) Cause, induce or assist any past or present customer of Pharma
Labs, or any other person or. entity for which Parma Labs provided a quotation
in the past 24 months, to have nutraceuticals manufactured by anyone other dm
Covenantee;
(d) Be the owner of more than one percent (1 %) of the outstanding
capital stock of any publicly traded corporation which is in any of the
businesses set forth above; or
(e) Use in any corporate name or the name of any other business venture
operating to any extent within any part of the aforesaid area, the words "Pharma
Labs" or any other trade names presently or at any time during the Term of this
Agreement used by Covenantee, or any word or words or expressions so closely
resembling such words or words as to be likely to be confused therewith.
These covenants shall not be held invalid or unenforceable because of
the scope of the territory or actions subject hereto or restricted hereby, or
the period of time within which such covenants are operative; but the maximum
territory, the actions subject to such covenants and the period of time in which
such covenants are enforceable, respectively, are subject to determination by a
final judgement of any court which has jurisdiction over the parties and subject
matter.
Covenantor recognizes that the foregoing covenants provided substantial
inducement for the acquisition of the Business and (i) are therefore reasonable
and justified, and (ii) provided the essential assurance necessary to induce the
parties hereto to effect such transaction.
2
<PAGE> 3
Section 2. Consulting Duties. Also during the Term of this Agreement,
Covenantor agrees to and shall furnish to Covenantee, Covenantor's best advice,
information, judgement and knowledge with respect to the affairs, business,
business methods and practices, history, patrons, customers, employees and
suppliers of the Business, and to generally preserve and increase the Business
and goodwill thereof. Covenantor shall be an independent contractor, and not an
employee of Covenantee, as to these duties. After an initial transition period
of not less than six (6) months, Covenantor's services may be provide wholly by
telephone while he is absent from the Anaheim area, and he agrees to make
himself available by telephone during such absences.
Section 3. Consideration. As consideration for the covenants by
Covenantor herein (separate and apart from any consideration paid for the assets
of the Business on even date herewith), Covenantee agrees to pay to Covenantor
(and, subject to the terms of Section 7 of this Agreement, Covenantor's heirs or
legal representatives), so long as Covenantor is not in default hereunder, the
total sum of Two Hundred and Fifty Thousand Dollars and No/Dollars ($250,000),
to be paid in full to the trust account of Steven C. Smith, Esq. in accordance
with the Asset Purchase Agreement signed by both parties.
Section 4. Miscellaneous Covenants. Covenantor agrees that at all times
during the Term of this Agreement:
(a) Covenantee shall have the right to display, and may use in its
advertising, the name of "Pharma Labs" in a professional manner;
(b) Covenantee shall have the right to advertise the Business as being
carried on in the manner and tradition and according to the standards
established by Covenantor;
(c) Covenantor will not knowingly or intentionally do or say any act or
thing which will or may damage or destroy the business or the goodwill and
esteem of Covenantee with its suppliers, employees, patrons, customers and
others who may at any time have or have had business relations with the Business
or Covenantee;
(d) Covenantor will not reveal to any third person (other than legal
counsel) any difference of opinion, if there be such at any time, between
Covenantor and Covenantee;
3
<PAGE> 4
(e) Covenantor will not knowingly or intentionally do any act of thing
detrimental to Covenantee; and
(f) Covenantor will encourage and recommend the use of Covenantee's
services by all acquaintances.
Section 5. Trade Secrets and Confidential Information. Covenantor
acknowledges that in the course of Covenantor's previous involvement with the
Business, and in the course of Covenantor's association with Covenantee,
Covenantor has received and learned and will receive and learn of trade secrets,
lists of customer and other confidential information which Covenantee desires
and intends to protect. Covenantor acknowledges that, among other things, the
management methods, operating techniques, procedures and methods, customer
lists, prospective acquisitions, employee lists, training manuals and
procedures, personnel evaluation procedures, collection procedures, pricing
structures, and financial reports, including results of operations of the
Business and Covenantee, are confidential. Covenantor agrees not re reveal or
divulge to anyone not affiliated with the Business and Covenantee any such
confidential information or trade secrets so long as the confidential or secret
nature of such information shall continue (which shall be continually presumed
by Covenantor, unless given written directive otherwise by Covenantee), unless
specifically required to do so by law or by order of a court. Covenantor further
agrees not to use any such confidential information or trade secrets in
competing with Covenantee at any time during or after the Term of this
Agreement.
Section 6. Severability and Waiver. In case any term, phrase, clause,
paragraph, restriction. covenant, or agreement herein contained shall be held to
be invalid or unenforceable, it shall be deemed severable and such invalidity or
unenforceability shall not defeat or impair the remaining provisions hereof. A
waiver by Covenantee of any breach by Covenantor of this Agreement or of any
duties imposed upon Covenantor hereunder or by law shall not be construed as a
waiver by Covenantee of any remedy available to it for any subsequent or
continuing breach of this Agreement or of any of the duties, obligations or
agreements herein contained or imposed by law.
4
<PAGE> 5
Section 7. Parties in Interest . This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their successors, heirs
and legal representatives. This Agreement shall not be assigned by either party
hereto without the prior written consent of the other party, provided, however,
that following the execution of this Agreement, Covenantee may assign its rights
hereunder in whole or in part without the consent of Covenantor to a
successor-in-interest to Covenantee in all or in part of the Business (whether
by merger, sale of assets or otherwise), provided that Covenantee shall not
thereby be relieved of its obligations hereunder and the successor-in-interest
to Covenantee expressly assumes the duties and obligations of Covenantee set
forth herein.
Section 8. Remedies. Covenantor agrees that the remedy at law for any
actual or threatened breach of this Agreement would be inadequate and the
Covenantee shall be entitled to specific performance hereof or injunctive
relief, or both, by temporary or permanent injunction or other appropriate
Judicial remedy, writ or order, in addition to any other remedies to which
Covenantee may be legally entitled. It is agreed that in the event of any
dispute or litigation concerning this Agreement or the respective rights and
duties of each party hereunder, each party shall pay its own attorneys fees and
expenses.
Section 9. Dispute Resolution.
(a) Any and all disputes among the parties to this Agreement (defined
for the purpose of this provision to include their principals, agents and/or
affiliates) arising out of or in conjunction with the negotiation, execution,
interpretation, performance or nonperformance of this Agreement and the
transaction contemplated herein shall be solely and finally settled by
5
<PAGE> 6
arbitration, which shall be conducted in Orange County, California, by a single
arbitrator selected by the parties. The arbitrator shall be a lawyer (preferably
a former judge) familiar with business transactions of the type contemplated in
this Agreement, shall not have been previously employed or affiliated with any
of the parties hereto, and shall be from a large, reputable firm (such as
Judicial Arbitration & Mediation Services; Inc. Located in Orange County,
California). If the parties fail to agree on the arbitrator within thirty (30)
days of the date one of them invokes this arbitration provision, either party
may make application to the American Arbitration Association to make the
appointment.
(b) The parties hereby renounce all recourse to litigation and agree
that the award of the arbitrator shall be final and subject to no judicial
review. The arbitrator shall conduct the proceedings pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, as now or hereafter
amended (the "Rules").
(c) The arbitrator shall decide the issues submitted (i) in accordance
with the provisions and commercial purposes of this Agreement, and (ii) with all
substantive questions of law determined under the laws of the State of
California (without regard to its principles of conflicts of laws). The
arbitrator shall promptly hear and determine (after giving the parties due
notice and a reasonable opportunity to be heard) the issues submitted and shall
render a decision in writing within sixty (60) days after the appointment of the
arbitrator.
(d) The parties agree to facilitate arbitration by (i) conducting
arbitration hearings to the greatest extent possible on successive days, and
(ii) observing strictly the time periods established by the Rules or by the
arbitrator for submission of evidence and briefs.
(e) Judgement on the award of the arbitrator may be entered in any
court having jurisdiction over the party against which enforcement of the award
6
<PAGE> 7
is being sought and the parties hereby irrevocably consent to the jurisdiction
of any such court for the purpose of enforcing any such award. The arbitrator
shall divide all costs (other than fees and expenses of counsel) incurred in
conducting the arbitration in the final award in accordance with what the
arbitrator deems just and equitable under the circumstances.
(f) The parties hereto agree that the provisions of this Section 9
shall not be construed to prohibit any party from obtaining, in the proper case,
specific performance or injunctive relief with respect to the enforcement of any
covenant or agreement of another party to this Agreement.
Section 10. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
Section 11. Notices. All notices provided for hereunder shall be in
writing and shall be deemed to be given: (i) when delivered to the individual or
to an officer of the company to which notice is directed; or (ii) three days
after the same has been deposited in the United States mail sent Certified or
Registered mail with Return Receipt Requested, postage prepaid and addressed as
provided in this Section; or (iii) when delivered by an overnight delivery
service (including United States Express Mail) with receipt acknowledged and
with all charges prepaid by the sender addressed as provided in this Section.
Notices shall be directed as follows:
(a) If to Covenantor, addressed to:
Pharma Labs, LLC
c/o Golden Pharmaceuticals, Inc.
3000 West Warner Avenue
Santa Ana, CA 92704
Attention: Charles R. Drummond
Telephone: (714) 754-2440
Facsimile: (714) 754-5745
7
<PAGE> 8
with a copy to:
Morrison & Foerster, LLP
5200 Republic Plaza
370 Seventeenth Street Denver, CO
80202 Attention: Warren L. Troupe, Esq.
Telephone: (303) 592-1500
Facsimile: (303) 592-1510
(b) If to Covenantee, addressed to:
Adams Equity, Inc.
3880 East Eagle Drive
Anaheim, CA 92807
Telephone: (714) 630-2467
Facsimile: (714) 237-1354
with a copy to:
Smith & Ure
1800 North Broadway
Suite 200
Santa Ana, CA 92706
Attention: Steven C. Smith, Esq.
Telephone: (714) 550-7720
Facsimile: (714) 550-1251
or at such other place or places or to such other person or persons as shall be
designated by notice by either party hereto.
Section 12. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
Section 13. Entire Agreement: Modification. This Agreement contains the
entire agreement between the parties hereto with respect to the subject matter
hereof, and may be modified only by a written instrument Signed by each of the
parties hereto.
8
<PAGE> 9
Section 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to its principles of conflicts of laws.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
COVENANTOR:
PHARMA LABS, LLC, a Colorado limited
liability company
By
----------------------------------
Its
-------------------------------
COVENANTEE:
ADAMS EQUITY, INC., a Nevada
Corporation
By
----------------------------------
Its
-------------------------------
GMP LABORATORIES OF AMERICA, a
California corporation
By
----------------------------------
Its
-------------------------------
10
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