<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 0-9065
GOLDEN PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
COLORADO 84-0645174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 17TH STREET, SUITE 5200, DENVER, CO 80202-5638
(Address of principal executive office)(Zip Code)
(303) 279-9375
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of common stock outstanding as of JULY 10, 1998, was
125,151,285
Transitional Small Business Disclosure Format: Yes [ ] NO [X]
================================================================================
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 32,047 $ 26,143
Receivables
Trade, net of allowance for doubtful accounts of $496,320 and
$446,834 at May 31, 1998, and August 31, 1997 1,754,549 1,778,321
Notes receivable 139,797 252,500
Inventories 894,625 1,024,689
Prepaid expenses and other 194,549 174,768
Assets held for sale 622,746 --
------------ ------------
TOTAL CURRENT ASSETS 3,638,313 3,256,421
PROPERTY, PLANT AND EQUIPMENT - AT COST 2,137,027 3,362,288
Less accumulated depreciation and amortization 791,040 908,804
------------ ------------
TOTAL PROPERTY, PLANT & EQUIPMENT 1,345,987 2,453,484
OTHER ASSETS
Goodwill, less accumulated amortization of $601,857 and $422,784 at May
31, 1998, and August 31, 1997 3,561,452 3,740,525
Intangibles - net of accumulated amortization of $1,733 and $1,133 at
May 31, 1998, and August 31, 1997 10,267 10,867
Non-compete agreement 77,683 331,076
Investment in joint venture -- 1,866
------------ ------------
TOTAL OTHER ASSETS 3,649,402 4,084,334
------------ ------------
TOTAL ASSETS $ 8,633,702 $ 9,794,239
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) - continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 1,045,405 $ 743,168
Notes payable - related parties 4,039,600 615,000
Current maturities of long-term debt 105,998 262,506
Current maturities of capitalized lease obligations 335,318 202,061
Accounts payable 1,039,375 1,041,639
Income taxes payable -- 40,000
Accrued liabilities
Salaries, wages and other compensation 45,218 161,277
Interest 196,649 3,506
Other 126,265 63,250
------------ ------------
TOTAL CURRENT LIABILITIES 6,933,828 3,132,407
LONG-TERM OBLIGATIONS, less current maturities 25,000 80,903
CAPITALIZED LEASE OBLIGATIONS, less current maturities 410,370 528,774
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 43,021 --
CONTINGENCIES AND COMMITMENTS -- --
MINORITY INTEREST 159,505 582,969
STOCKHOLDERS' EQUITY
Common stock - no par value; 200,000,000 shares authorized; 128,440,285
issued; and 128,416,847 outstanding at
May 31, 1998, and August 31, 1997, respectively 24,777,904 24,774,154
Preferred stock - no par value; 10,000,000 shares authorized Class A 15%/
30% cumulative convertible, 29,653 shares, issued and outstanding at May
31, 1998, and August 31, 1997, respectively 292,558 292,558
Dividends accrued on preferred stock 137,122 137,122
------------ ------------
25,207,584 25,203,834
Accumulated deficit (24,051,474) (19,640,516)
------------ ------------
1,156,110 5,563,318
Less common stock in treasury at cost, 3,289,000 shares at
May 31, 1998, and August 31, 1997, respectively 94,132 94,132
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,061,978 5,469,186
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,633,702 $ 9,794,239
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
------------------------------
1998 1997
(RESTATED)
------------ ------------
<S> <C> <C>
NET SALES $ 4,641,691 $ 10,332,049
COST OF SALES 3,674,592 6,967,340
------------ ------------
GROSS MARGIN 967,099 3,364,709
Selling, general and administrative expense 5,019,367 4,378,576
Unusual charge - impairment loss 433,500 --
------------ ------------
OPERATING LOSS (4,485,768) (1,013,867)
OTHER INCOME/(EXPENSE)
Interest expense (409,074) (1,368,251)
Joint venture loss (107,888) (55,746)
Gain (loss) on disposal of assets 112,074 (2,363)
Gain on sale of division -- 6,210,435
Other income 77,354 595,673
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (327,534) 5,379,748
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (4,813,302) 4,365,881
------------ ------------
INCOME TAX EXPENSE 21,120 382,390
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (4,834,422) 3,983,491
MINORITY INTEREST 423,464 (67,773)
------------ ------------
NET INCOME (LOSS) $ (4,410,958) $ 3,915,718
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.03
============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.03
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
----------------------------
1998 1997
(RESTATED)
----------- -----------
<S> <C> <C>
NET SALES $ 1,880,708 $ 2,673,327
COST OF SALES 1,441,535 1,855,447
----------- -----------
GROSS MARGIN 439,173 817,880
Selling, general and administrative expense 1,932,798 1,821,396
Unusual charge - impairment loss 203,500 --
----------- -----------
OPERATING LOSS (1,697,125) (1,003,516)
OTHER INCOME/ (EXPENSE)
Interest expense (168,094) (815,961)
Joint venture loss (44,945) (18,667)
Gain on disposal of assets 111,939 --
Gain on sale of division -- 6,210,435
Other income (expense) 25,803 319,252
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (75,297) 5,695,059
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (1,772,422) 4,691,543
----------- -----------
INCOME TAX EXPENSE 20,920 381,590
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST (1,793,342) 4,309,953
MINORITY INTEREST 6,754 (634)
----------- -----------
NET INCOME (LOSS) $(1,786,588) $ 4,309,319
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE $ (0.01) $ 0.04
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.01) $ 0.03
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MAY 31,
----------------------------
1998 1997
(RESTATED)
----------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $(4,410,958) $ (393,601)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 767,221 384,361
(Gain) loss on sale of equipment (112,074) 2,363
Minority interest (423,464) 67,139
Joint venture loss 107,887 37,079
Reduction in carrying value of fixed assets 366,000 --
Changes in assets and liabilities net of effects of acquisition and
joint venture:
(Increase) decrease in accounts receivable 23,773 (1,558,905)
(Increase) decrease in inventories 130,064 (278,352)
Increase in prepaid expenses and other (19,781) (101,112)
Increase (decrease) in accounts payable (2,266) 956,603
Decrease in income taxes payable (40,000) --
Increase in accrued liabilities 140,099 222,091
----------- -----------
TOTAL ADJUSTMENTS 937,459 (268,733)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,473,499) (662,334)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (302,230) (383,937)
Proceeds from sale of equipment 198,901 2,500
Increase investment in joint venture (63,000) (42,000)
(Increase) decrease in notes receivable 112,703 (197,663)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (53,626) (621,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable - related parties 3,424,600 75,000
Issuance of common stock 3,750 --
Borrowings under capitalized lease and other long-term obligations 185,005 311,375
Payments on capitalized lease and other long term obligations (382,563) (335,804)
Borrowings on line of credit 7,731,513 8,902,151
Payments on line of credit (7,429,276) (7,673,535)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,533,029 1,279,187
----------- -----------
NET INCREASE (DECREASE) IN CASH 5,904 (4,247)
CASH, BEGINNING OF YEAR 26,143 34,872
----------- -----------
CASH, END OF YEAR $ 32,047 $ 30,625
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Interest paid $ 208,919 $ 354,701
=========== ===========
Income taxes paid $ 61,120 $ 800
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 7
ITEM 1. FINANCIAL STATEMENTS (continued)
GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited financial statements of Golden Pharmaceuticals, Inc.
and its consolidated subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
annual financial statements.
The accompanying unaudited condensed financial statements and disclosures
reflect all adjustments which in the opinion of the management, are necessary
for a fair presentation of the results of operations, financial position, and
cash flow of the Company. The results of operations for the periods indicated
are not necessarily indicative of the results for the full year.
The financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended August 31, 1997, as filed with the
Securities and Exchange Commission.
In Accordance with SFAS 128, which was effective for periods ending after
December 15, 1997, earnings per common share has been revised and the prior
period has been restated to present basic and diluted earnings per share.
Basic and diluted earnings per share for the nine months ended May 31, 1998 and
1997 is calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Net income (loss) $ (4,086,478) $ 3,915,718
================ ================
Weighted average number of shares outstanding
Basic earnings per share
Weighted average shares outstanding for
basic earnings per share calculation 128,422,369 122,784,423
================ ================
Diluted earnings per share
Weighted average shares outstanding 128,422,369 122,784,423
Effect of exercise of options * 556,667
Effect of conversion of Class A 15%/30%
cumulative convertible preferred stock and
accrued dividends thereon * 1,004,015
================ ================
Weighted average shares outstanding for
Diluted earnings per share calculation 128,422,369 124,345,105
================ ================
</TABLE>
<PAGE> 8
* The effect of options and convertible shares was not included in the diluted
earnings per share calculation for the nine months ended May 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 nine months
ended May 31, 1998 that could potentially dilute earnings per share in the
future is 854,411 shares.
Reclassification / Restatement- Certain reclassifications have been made to
conform prior years' information with the current year presentation. The
accompanying consolidated statements of cash flows was restated to reflect the
prior period adjustment described in Note Q of the audited financials statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended August 31, 1997.
NOTE 2. DISCONTINUED BUSINESS
In early July 1998, the Company decided to discontinue funding the operations of
Pharma Labs, LLC (Pharma Labs), a 52% owned subsidiary. Pharma Labs and the
Company, respectively, are currently negotiating with third parties for (i) the
sale of approximately $623,000 of certain machinery and equipment of Pharma
Labs, and/or (ii) the sale of the Company's ownership interest in Pharma Labs.
To date no definitive agreements have been reached and there can be no
assurances that either of the above transactions will be consummated in the
future. Labs), a 52% owned subsidiary. The Company is currently negotiating the
sale of Pharma Labs with outside investors.
At May 31, 1998, the Company recorded the following adjustments to reduce the
carrying value of Pharma Labs' assets to estimated net realizable value. These
write-downs are reported in the Consolidated Statement of Operations under the
category unusual charge.
<TABLE>
<S> <C>
Writedown of machinery, equipment and furniture to estimated $ 136,000
net realizable value
Write-off of non-compete agreement 67,500
----------
$ 203,500
==========
</TABLE>
To date, the Company has loaned Pharma Labs $966,000 and Pharma Labs has trade
receivables of $415,000 due from a Vietnam based business affiliated with the
other member of Pharma Labs (the "Member"). Due to the poor financial condition
of the Member, the Company estimates that the collectability of a substantial
portion of the advances and trade receivables is doubtful. Accordingly, third
quarter operating results include a bad debt provision of $676,000 on the Pharma
Labs loan and $305,000 on the Vietnam receivable.
At February 28, 1998, the Company recorded a $230,000 loss at Pharma Labs on the
write-down of property, plant and equipment to estimated fair market value based
on an outside appraisal and a $200,000 loss on the write-down of inventory to
estimated net realizable value. In the Consolidated Statement of Operations, the
property, plant and equipment write-down was reported as an unusual item and the
inventory write-down was included in cost of sales. Also the Pharma Labs'
property plant and equipment is classified in the accompanying Consolidated
Balance Sheets as property held for sale. The Company recorded these write-downs
because 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 flows
would cover the carrying value of certain assets of Pharma Labs.
NOTE 3. RELATED PARTY TRANSACTIONS
During fiscal 1998 to July 10, 1998, the Company borrowed $3,970,000, net of
repayments, from a shareholder who is also an officer and director, and
$470,000, net of repayments, from a
<PAGE> 9
shareholder and director. These loans are payable on demand and bear interest
at Bank prime plus 2%, the same rate charged by the Company's primary bank (the
"Bank"). Loan proceeds were used for working capital. See "Management's
Discussion and Analysis - Liquidity and Capital Resources."
NOTE 4. SALE OF BUSINESS
On April 7, 1997, the Company completed the sale of the assets related to its
business of manufacturing and distributing radiopharmaceutical and radiochemical
drugs for a total sale price of $6,600,000 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.
NOTE 5. GOODWILL
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets on the purchase of Quality Care Pharmaceuticals,
Inc. ("QCP") in August, 1995, is stated at cost and is amortized, on a
straight-line basis, over the estimated future periods to be benefited (20
years). On an annual basis, the Company reviews the recoverability of goodwill
based primarily upon an analysis of undiscounted cash flows from the acquired
business.
NOTE 6. DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1997 the Company conducted a test for asset impairment in
accordance with Financial Accounting Standard 121. This test has been updated
through the current quarter. It is management's opinion that, exclusive of the
write-downs for Pharma Labs, no impairment loss occurred. QCP has a current
period operating loss and cash flow loss, and is expected to have continuing
losses in the near term. Accordingly, it is reasonably possible that the
results of the impairment test may change in the future and an impairment loss
may result.
NOTE 7. NOTES PAYABLE AND REVOLVING FACILITY
In connection with the note payable, the Company is required to maintain
compliance with certain covenants. At May 31, 1998, the company was not in
compliance with covenants related to book net worth, debt service coverage,
interest coverage, net income (loss) and capital expenditures. The Company is
currently renegotiating the terms of the loan agreement with the Bank which
includes renegotiation of the covenants. During this process the bank has
allowed the Company to continue to make withdrawals from the revolving
facility.
NOTE 8. 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. An initial
assessment has been completed and the cost of achieving Year 2000 compliance is
estimated to be not material. Cost will be expensed as incurred and are
estimated to continue through fiscal 1999.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the selected
financial data and the financial statements and notes thereto filed herewith.
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations and the capital requirements of
Quality Care Pharmaceuticals, Inc. ("QCP"). The success of the Company's
business operations is, in turn, dependent on factors such as the effectiveness
of the Company's marketing strategies to grow its customer base, the appeal of
the Company's mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the health care market and
general economic conditions. Further, any forward looking statements speak only
as of the date on which such statement was made, and the Company undertakes no
obligation to update any forward looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. Therefore, forward looking
statements should not be relied upon as a prediction of actual future results.
RECENT DEVELOPMENTS
Due to the poor financial condition of the Member and the continued poor
performance of Pharma Labs, in July 1998 the Company decided to discontinue
funding the operations of Pharma Labs. Pharma Labs and the Company,
respectively, are currently negotiating with third-parties for (i) the sale of
approximately $623,000 of certain equipment of Pharma Labs, and/or (ii) the sale
of the Company's ownership interest in Pharma Labs. To date no definitive
agreements have been reached and there can be no assurances that either of the
above transactions will be consummated in the future.
As discussed in "Note 2" to "Notes to Consolidated Financial Statements," as a
result of the foregoing, the Company's current Consolidated Statement of
Operations includes a bad debt provision for a substantial portion of total
trade receivables due Pharma Labs from a Vietnam based affiliate of the Member,
and reflects losses resulting from, among other things, the write-down of (i)
property, plant and equipment of Pharma Labs to the estimated net realizable
value, and (ii) the write-off of the non-compete agreement with the [Member.]
In addition, QCP is currently negotiating the purchase of the remaining
membership interest in Rx Direct, LLC ("RxDirect"), not currently held by QCP.
To date, no definitive agreement has been reached and there can be no assurances
that this transaction will be consummated in the future.
NINE MONTHS ENDED MAY 31, 1998, COMPARED TO NINE MONTHS ENDED MAY 31, 1997
($ rounded to nearest thousand).
NET SALES - Net sales for the nine months ended May 31, 1998, were $4,642,000, a
decrease of $5,690,000 compared to $10,332,000 for the same period last year.
The decrease is due to the loss of sales arising from the sale of the
radiopharmaceutical business on April 7, 1997 ($2,370,000), and lower sales
recorded at QCP and Pharma Labs.
QCP recorded net sales of $4,004,000 in the first nine months of fiscal 1998
compared to $6,551,000 in the same period last year. The lower sales level was
due to the loss of a private label customer and substantially lower diet drug
business.
Pharma Labs sales in the first nine months of fiscal 1998 were $638,000 compared
to $1,411,000 in the same period 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. To date, customer demand has been well
below expectations and has resulted in excess distributor inventory and
depressed fiscal 1998 year-to-date sales.
COST OF SALES -- Cost of goods sold as a percentage of sales was 79.2% in the
first nine months of fiscal 1998 compared to 67.4% for the comparable period
last year. Higher cost of sales, as a percent of net sales, at Pharma Labs was
offset somewhat by lower cost of sales at QCP. Pharma Labs' cost of sales
increased from the prior year due primarily to lower selling prices, higher
material costs, higher per unit overhead cost resulting from the lower sales
volume and a $200,000 write down of excess inventory to estimated net realizable
value. QCP's gross margins improved during the current period due to the loss of
a lower margin private label customer.
<PAGE> 11
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses ("SG&A"), excluding the unusual charge discussed below, were
$5,019,000, an increase of $640,000 compared to $4,379,000 during the same
period last year. QCP's SG&A expense increased to $3,488,000 from $2,678,000 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."
UNUSUAL CHARGE/IMPAIRMENT LOSS - Efforts to turn around the poor performance
of Pharma Labs have not met expectations, and the Company can no longer be
assured that future cash flows from Pharma Labs will cover the carrying value of
certain assets. Accordingly, Pharma Labs recorded a non-cash impairment loss of
$433,500 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.
INTEREST EXPENSE - Interest expense decreased to $409,000 from $1,368,000 in the
same period last year primarily due to the repayment of the $3,750,000 term loan
on April 7, 1997.
OTHER INCOME - Other income for the nine months ended May 31, 1998, was
$77,000, a decrease of $519,000 compared to $596,000 for the same period last
year. This decrease was primarily due to the inclusion in the prior period of
$484,000 in revenue due under the terms of the June 14, 1996, Guarantee
Agreement with the Member. This revenue was subsequently written off as
collectability is unlikely due to the poor financial condition of the Member.
NET LOSS - As a result of the factors described above, the Company had a net
loss of ($4,411,000) for the nine months ended May 31, 1998, as compared to net
income of $3,916,000 for the nine months ended May 31, 1997. Losses from
operations were ($4,486,000) in the first nine months of fiscal 1998 compared to
operating losses of ($1,014,000) in the same period last year. QCP's operating
losses increased to ($2,257,000) from ($790,000) in the prior year due to lower
sales volume and higher SG&A expenses. Pharma Labs' operating loss was
($1,553,000) compared to an operating loss of ($336,000) in the prior year due
primarily to lower sales volume, an inventory write down of ($200,000) and the
($433,500) impairment loss as previously discussed. GPI's operating losses were
($676,000) compared to an operating profit of $112,000 in the comparable period
last year as a result of the loss of revenue due to the sale of the
radiopharmaceutical business.
The net loss for the nine months ended May 31, 1998, also includes interest
expense of $409,000 and joint venture losses of $108,000 from the Company's
equity investment in RxDirect.
THREE MONTHS ENDED MAY 31, 1998, COMPARED TO THREE MONTHS ENDED MAY 31, 1997 ($
rounded to nearest thousand).
NET SALES - Net sales for the three months ended May 31, 1998, were $1,881,000,
a decrease of $792,000 compared to $2,673,000 for the same period last year. The
decrease is due to the loss of sales arising from the sale of the
radiopharmaceutical business on April 7, 1997 ($445,000), and lower sales
recorded at QCP and Pharma Labs.
QCP recorded net sales of $1,583,000 in the quarter ended May 31, 1998, compared
to $2,216,000 in the same period last year. The lower sales level was primarily
due to lower diet drug business that was substantially higher in the third
quarter last year.
Pharma Labs sales in the quarter ended May 31, 1998 were $298,000 compared to
$12,000 in the same period last year. As discussed in the nine months analysis,
last year's sales included substantial stocking orders primarily in the quarter
ended February 28, 1997, of new product
<PAGE> 12
from a Vietnam distributor, affiliated with the Member, in anticipation of
strong customer demand. Subsequent to the quarter ended February 28, 1997,
customer demand has been well below expectation, and has resulted in excess
distributor inventory and depressed fiscal 1998 year-to-date sales.
COST OF SALES - Cost of goods sold as a percentage of sales was 76.6% in the
quarter ended May 31, 1998, compared to 69.4% for the comparable quarter last
year. Higher cost of sales, as a percent of net sales, resulted primarily from
the loss of revenue due to the sale of the radiopharmaceutical business. QCP's
gross margins improved during the current period due to the loss of a lower
margin private label customer.
SELLING, GENERAL AND ADMINISTRATIVE - SG&A expenses increased to $2,136,000 in
the quarter ended May 31, 1998, from $1,821,000 during the same period last
year. QCP's SG&A expense decreased to $1,208,000 from $1,213,000 in the third
quarter of the prior year due to decreases in commission payments on lower
sales as discussed in greater detail under "--Liquidity and Capital Resources."
UNUSUAL CHARGE/IMPAIRMENT LOSS - Pharma Labs recorded a non-cash impairment
loss of $203,500 related to the write-down on property, plant and equipment to
estimated fair market value.
NET LOSS - As a result of the factors described above, the Company reported a
net loss of ($1,787,000) for the three months ended May 31, 1998, as compared to
net income of $4,309,000 for the three months ended May 31, 1997. Losses from
operations were ($1,697,000) in the third quarter of fiscal 1998 compared to
operating losses of ($1,004,000) in the same quarter last year. QCP's operating
losses increased to ($783,000) from ($456,000) in the prior year due to lower
sales volume. Pharma Labs' operating loss was ($683,000) compared to an
operating loss of ($284,000) in the prior year due to the lower sales volume and
the impairment loss as previously discussed. GPI's operating losses were
($783,000) compared to an operating loss of ($457,000) in the comparable quarter
last year as a result of the loss of revenue due to the sale of the
radiopharmaceutical business.
The third quarter net loss also includes interest expense of $168,000 and joint
venture losses of $45,000 from the Company's equity investment in RxDirect. In
addition, the Company also had other income of $26,000 in the second quarter of
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES ($ rounded to nearest thousand)
The following table is presented to facilitate the discussion of the Company's
current liquidity and sets forth the Company's liquidity position as of May 31,
1998, as compared to August 31, 1997.
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
----------- -----------
<S> <C> <C>
Current Assets $ 3,638,000 $ 3,256,000
Current Liabilities 6,934,000 3,132,000
=========== ===========
Net Working Capital (Deficit) $(3,296,000) $ 124,000
=========== ===========
</TABLE>
At May 31, 1998, current assets were $3,638,000 compared to $3,256,000 at August
31, 1997. This increase was due primarily to a reclassification of property,
plant and equipment to assets held for sale by Pharma Labs. At May 31, 1998,
current liabilities were $6,934,000 compared to $3,132,000 at August 31, 1997.
This increase
<PAGE> 13
was due primarily to an increase of $3,425,000 in notes payable to shareholders
and directors of the Company. The proceeds from the notes payable were used
primarily to fund the Company's negative cash flow from operations during the
first nine months of fiscal 1998.
During the first nine months of fiscal 1998, SG&A increased compared to the same
period last year due to its expansion and development efforts including: (i)
expansion of QCP's sales department including the addition of key sales
executives; (ii) expansion of QCP's sales operations in the eastern states;
(iii) expansion of the customer service department at QCP; and (iv) the
expansion of QCP's information systems and programming department. The Company
believes this expansion program will continue to require significant up-front
expenditures both to service its existing business and to develop new lines of
business.
Prior to September 1997, the Company's primary source of funds for working
capital was the Company's revolving facility with the Bank. This facility is
payable at the Bank prime rate plus 2% and expires in August 2000. At May 31,
1998, the balance outstanding was $1,045,000, and the interest rate under the
Revolving Facility was 10.5%. The Revolving Facility is collateralized by QCP's
accounts receivable and inventory, and the availability under the Revolving
Facility is determined based on eligible accounts receivable and inventory. As a
result of the Company's poor sales performance in the first nine months of
fiscal 1998, borrowing capacity under the $2,500,000 Revolving Facility was
limited to $823,000 at May 31, 1998.
At May 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. As a
result of the default, the Bank has the right to terminate the Revolving
Facility, declare the outstanding balance due and payable, and exercise other
rights and remedies specified in the Revolving Facility agreement. To date, the
Bank has not exercised its right to terminate the Revolving Facility. The
Company is currently renegotiating the terms of the Revolving Facility with the
Bank including amendments to remedy the non-compliance issues. However, there
can be no assurance that the amendment will be available on terms acceptable to
the Company, if at all. During this process, the Bank has allowed the Company to
continue to make withdrawals from the Revolving Facility.
As a result of the Company's inability to borrow sufficient amounts under the
Revolving Facility for operations, the Company was required to borrow funds from
certain shareholders and directors of the Company. See "Note 3" to "Notes to
Consolidated Financial Statements." The indebtedness is represented by
promissory notes issued by the Company and the amounts outstanding were $615,000
($575,000 payable to Charles R. Drummond and $40,000 payable to Arch G. Gothard,
III); and $4,040,000 ($3,570,000 payable to Charles R. Drummond and $470,000
payable to Arch G. Gothard, III) at August 31, 1997, and May 31, 1998,
respectively.
FUTURE OPERATIONS - The Company remains optimistic regarding the growth
potential for QCP, and efforts continue to expand the Company's business through
contract manufacturing and pursuit of increased "point-of-care" pharmaceutical
dispensing business. If consummated, the proposed Pharma Lab transactions,
discussed in Note 2 to the Consolidated Financial Statements, will allow the
Company to concentrate its efforts and resources on QCP. The Company does not
believe, based on the past performance of Pharma Labs, that the consummation of
the proposed Pharma Lab transaction would adversely effect the Company's cash
flow in future periods.
As a result of continued QCP spending on expansion efforts, cash flow from
operations will not be sufficient to meet the Company's cash requirements during
the balance of fiscal 1998. As it is not anticipated that availability under the
Revolving Facility will be sufficient, the
<PAGE> 14
Company is seeking to raise additional capital in order to fund its ongoing
operations and the continued investment and expansion of QCP. The Company,
through a financial advisor, is continuing to pursue an equity investment of $2
to $3 million. To date, the Company does not have any commitments with respect
to such financing and there can be no assurance that financing will be available
to the Company on terms acceptable to the Company, if at all. If the Company is
unable to obtain financing, it will be forced to terminate its expansion
activities, curtail certain existing operations and substantially reduce SG&A.
These activities would have a material adverse effect on the Company's business
and financial condition.
DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1997 the Company conducted a test for asset impairment in
accordance with Financial Accounting Standard 121. This test has been updated
through the current quarter. It is management's opinion that, exclusive of the
write-downs for Pharma Labs, no impairment loss occurred. QCP has a current
period operating loss and cash flow loss, and is expected to have continuing
losses in the near term.
Key assumptions in the asset impairment test include several years of
significant sales growth through the year of 2005 at a rate of approximately 20%
per year 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 $1,346,000 of property, plant
and equipment and $3,649,000 in unamortized goodwill and other intangible
assets.
Accordingly, it is reasonably possible that the results of the impairment test
may change in the future and an impairment loss may result.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the period covered by
this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this Amendment No. 1 to Form 10-QSB for the period ending May 31, 1998 to be
signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN PHARMACEUTICALS, INC.
(Registrant)
DATED: July 22, 1998 BY: /s/ Gary P. Pryor
-------------------------------
Gary P. Pryor
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 32,047
<SECURITIES> 0
<RECEIVABLES> 1,754,549
<ALLOWANCES> 446,834
<INVENTORY> 894,625
<CURRENT-ASSETS> 3,638,313
<PP&E> 2,137,027
<DEPRECIATION> 791,040
<TOTAL-ASSETS> 8,633,702
<CURRENT-LIABILITIES> 6,933,828
<BONDS> 0
292,558
0
<COMMON> 24,777,904
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,633,702
<SALES> 4,641,691
<TOTAL-REVENUES> 4,641,691
<CGS> 3,674,592
<TOTAL-COSTS> 3,674,592
<OTHER-EXPENSES> 327,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409,074
<INCOME-PRETAX> (4,813,302)
<INCOME-TAX> 21,120
<INCOME-CONTINUING> (4,834,422)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,410,958)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
