SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 0-9065
DOCSALES.COM, INC.
(EXACT NAME of small business issuer AS SPECIFIED in its charter)
COLORADO 84-0645174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 W. WARNER AVENUE, SANTA ANA, CALIFORNIA 92704-5311
(Address of principal executive office)(Zip Code)
(714) 754-2440
Issuer's telephone number
GOLDEN PHARMACEUTICALS, INC.
(FORMER NAME IF CHANGED SINCE THE LAST REPORT)
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 20, 1999, was
3,910,770
Transitional Small Business Disclosure Format: Yes NO X
--- ---
<PAGE>
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY, GOLDEN PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
MAY 31, AUGUST 31,
1999 1998
---------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ - $ 61,860
Trade receivables, net of allowance for doubtful accounts of
$112,409 and $535,945 at May 31, 1999 and August 31, 1998 1,406,363 1,377,291
Notes receivable 139,797 139,797
Inventories 534,608 577,947
Prepaid expenses and other 105,762 141,144
Net assets held for sale - 173,000
---------- -----------
TOTAL CURRENT ASSETS 2,186,530 2,471,039
PROPERTY, PLANT AND EQUIPMENT - AT COST 2,188,458 2,166,642
Less accumulated depreciation and amortization 1,117,370 873,325
---------- -----------
TOTAL PROPERTY, PLANT & EQUIPMENT 1,071,088 1,293,317
OTHER ASSETS
Intangibles - net of accumulated amortization of $2,333 and
$1,933 at May 31, 1999 and August 31, 1998 9,467 10,067
Non-compete agreement 43,159 69,050
---------- -----------
TOTAL OTHER ASSETS 52,626 79,117
---------- -----------
TOTAL ASSETS $3,310,244 $ 3,843,473
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY, GOLDEN PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) - continued
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
MAY 31, AUGUST 31,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 1,003,916 $ 833,639
Notes payable - related parties 500,000 5,014,200
Current maturities of long-term debt 50,000 212,228
Current maturities of capitalized lease obligations 228,960 224,588
Accounts payable 1,347,579 1,142,999
Deferred revenue - non-compete agreement 250,000 -
Accrued liabilities
Salaries, wages and other compensation 29,020 47,070
Interest 688,430 316,854
Other 94,093 114,653
------------- -------------
TOTAL CURRENT LIABILITIES 4,191,998 7,906,231
LONG-TERM OBLIGATIONS, less current maturities
Related Party 4,974,236 25,000
CAPITALIZED LEASE OBLIGATIONS, less current maturities 314,331 467,191
EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 41,493 39,875
CONTINGENCIES AND COMMITMENTS - -
MINORITY INTEREST 1,000,000 -
STOCKHOLDERS' DEFICIT
Common stock - no par value; 200,000,000 shares authorized;
128,451,873 issued; and 125,162,873 outstanding at
May 31, 1999 and August 31, 1998, respectively 24,714,858 24,714,858
Preferred stock - no par value; 10,000,000 shares authorized
Class A 15%/ 30% cumulative convertible, 29,653 shares, issued
and outstanding at May 31, 1999 and August 31, 1998,
respectively 292,558 292,558
Dividends accrued on preferred stock 240,533 236,419
------------- -------------
25,247,949 25,243,835
Accumulated deficit (32,365,631) (29,744,527)
------------- -------------
(7,117,682) (4,500,692)
Less common stock in treasury at cost, 3,289,000 shares at May
31, 1999 and August 31, 1998, respectively 94,132 94,132
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (7,211,814) (4,594,824)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,310,244 $ 3,843,473
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY, GOLDEN PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MAY 31,
-------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
NET SALES $ 2,051,129 $ 1,880,708
COST OF SALES 1,587,399 1,441,535
---------------- -------------
GROSS MARGIN 463,730 439,173
Selling, general and administrative expense 1,087,039 1,932,798
Unusual charge - impairment loss - 203,500
---------------- -------------
OPERATING LOSS (623,309) (1,697,125)
OTHER INCOME/ (EXPENSE)
Interest expense (185,408) (168,094)
Joint venture loss - (44,945)
Settlement of accounts payable and other liabilities
Gain on disposal of assets 111,939
Other income 18,023 25,803
---------------- -------------
TOTAL OTHER INCOME (EXPENSE) (167,385) (75,297)
---------------- -------------
LOSS BEFORE INCOME TAX EXPENSE (790,694) (1,772,422)
---------------- -------------
INCOME TAX EXPENSE (BENEFIT) - 20,920
---------------- -------------
LOSS BEFORE MINORITY INTEREST (790,694) (1,793,342)
MINORITY INTEREST (15,123) 6,754
---------------- -------------
NET LOSS $ (805,817) $ (1,786,588)
================ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.21)* $ (0.45)*
================ =============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,911,340 * 4,013,199 *
================ =============
<FN>
* Adjusted and restated for 32:1 reverse stock split effective July 8, 1999.
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY GOLDEN PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED MAY 31,
--------------- -------------
1999 1998
--------------- -------------
<S> <C> <C>
NET SALES $ 5,743,743 $ 4,641,691
COST OF SALES 4,418,192 3,674,592
--------------- -------------
GROSS MARGIN 1,325,551 967,099
Selling, general and administrative expense 3,550,980 5,019,367
Unusual charge - impairment loss - 433,500
--------------- -------------
OPERATING LOSS (2,225,429) (4,485,768)
OTHER INCOME/ (EXPENSE)
Interest expense (599,325) (409,074)
Joint venture loss (22,618) (107,888)
Settlement of accounts payable and other liabilities 211,330
Gain on disposal of assets 112,074
Other income 41,679 77,354
--------------- -------------
TOTAL OTHER INCOME (EXPENSE) (368,934) (327,534)
--------------- -------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (2,594,363) (4,813,302)
--------------- -------------
INCOME TAX EXPENSE (BENEFIT) 1,258 21,120
--------------- -------------
LOSS BEFORE MINORITY INTEREST (2,595,621) (4,834,422)
MINORITY INTEREST (21,370) 423,464
--------------- -------------
NET LOSS $ (2,616,991) $ (4,410,958)
=============== =============
BASIC AND DILUTED LOSS PER SHARE $ (0.67)* $ (1.10)*
=============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,911,340 * 4,013,199 *
=============== =============
<FN>
* Adjusted and restated for 32:1 reverse stock split effective July 8, 1999.
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY, GOLDEN PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
MAY 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $(2,616,991) $(4,410,958)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 270,537 767,221
Settlement of accounts payable and other liabilities (211,330) -
Gain on sale of equipment (112,074)
Minority interest - (423,464)
Joint venture loss 22,618 107,887
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 (29,071) 23,773
(Increase) decrease in inventories 66,339 130,064
(Increase) decrease in prepaid expenses and other 35,383 (19,781)
Increase (decrease) in accounts payable 49,067 (2,266)
Decrease in income taxes payable - (40,000)
Increase in deferred revenue - non-compete agreement 250,000 -
Increase in accrued liabilities 354,336 140,099
------------ ------------
TOTAL ADJUSTMENTS 807,879 937,459
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,809,112) (3,473,499)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment (21,816) (302,230)
Proceeds from sale of equipment 150,000 198,901
Increase investment in joint venture (21,000) (63,000)
Decrease in notes receivable - 112,703
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 107,184 (53,626)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred shares in subsidiary 1,000,000 -
Borrowings under notes payable - related parties 460,034 3,424,600
Issuance of common stock - 3,750
Borrowings under capitalized lease and other long-term obligations 21,816 185,005
Payments on capitalized lease and other long term obligations (170,047) (382,563)
Borrowings on line of credit 6,448,972 7,731,513
Payments on line of credit (6,120,707) (7,429,276)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,640,068 3,533,029
------------ ------------
NET INCREASE (DECREASE) IN CASH (61,860) 5,904
CASH, BEGINNING OF YEAR 61,860 26,143
------------ ------------
CASH, END OF QUARTER $ - $ 32,047
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Interest paid $ 266,734 $ 208,919
Income taxes paid $ 1,258 $ 61,120
================================================================================== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DOCSALES.COM, INC. AND SUBSIDIARIES
(FORMERLY GOLDEN PHARMACEUTICALS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited financial statements of docsales.com, inc., formerly
Golden Pharmaceuticals, Inc., and its consolidated subsidiaries (collectively,
the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for annual financial statements.
The accompanying unaudited condensed financial statements and disclosures
reflect all adjustments which, in the opinion of the management, are necessary
for a fair presentation of the results of operations, financial position, and
cash flow of the Company. The results of operations for the periods indicated
are not necessarily indicative of the results for the full year.
The financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended August 31, 1998, as filed with the
Securities and Exchange Commission.
Basic and diluted earnings per share for the nine months ended May 31, 1999 and
1998 is calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net loss $ (2,616,991) $ (4,410,958)
============== ==============
Weighted average number of shares outstanding
Basic earnings per share
Weighted average shares outstanding for
Basic earnings per share calculation 3,911,340 ** 4,013,199 **
============== ==============
Diluted earnings per share
Weighted average shares outstanding 3,911,340 ** 4,013,199 **
Effect of exercise of options * *
Effect of conversion of Class A 15%/30%
Cumulative convertible preferred stock and
Accrued dividends thereon * *
Effect of conversion of Series A redeemable
convertible preferred stock of subsidiary * N/A
-------------- --------------
Weighted average shares outstanding for
Diluted earnings per share calculation 3,911,340 ** 4,013,199 **
============== ==============
<FN>
** Adjusted and restated for 32:1 reverse stock split effective July 8,
1999.
* The effect of options and convertible shares was not included in the
diluted earnings per share calculation for the nine months ended May 31, 1999
and 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, 1999 and 1998 that could potentially dilute earnings per
share in the future were 115,000 shares and 79,090 shares, respectively.
</TABLE>
<PAGE>
Reclassification / Restatement- Certain reclassifications have been made to
conform prior years' information with the current year presentation.
Use of Estimates - In preparing the Company's consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, at the date of the consolidated
financial statements. Actual results could differ from those estimates.
NOTE 2. REALIZATION OF ASSETS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred operating
losses of $2,617,000 and $10,131,000, respectively, during the nine months ended
May 31, 1999 and during the fiscal year ended August 31, 1998. In addition, at
May 31, 1999, the Company had a negative working capital position of $2,006,000
due primarily to $500,000 in short term borrowings and $1,348,000 in accounts
payable. The Company had a total stockholders' deficit of $7,212,000. These
factors among others raise 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. 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 working capital financing, to obtain sufficient equity financing to
re-capitalize the Company, and ultimately to attain profitability (see Note 10.)
NOTE 3. DISCONTINUED LINE OF BUSINESS
On August 3, 1998, the Company and the other member ("Member") of Pharma Labs,
LLC ("Pharma Labs") entered into an agreement for the dissolution and
liquidation of Pharma Labs. In order to facilitate the liquidation of Pharma
Labs, the Company entered into a Unit Purchase Agreement on October 8, 1998 with
the Member, whereby the Company purchased the Member's 48% equity interest in
Pharma Labs for $35,000.
On December 3, 1998, the Company completed the sale of Pharma Labs' machinery
and equipment to Adams Equities, Inc. ("Buyer") for $150,000, pursuant to the
terms of a Purchase Agreement dated November 10, 1998. The Purchase Agreement
also included 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.
NOTE 4. UNUSUAL CHARGE - IMPAIRMENT LOSS AND UNCERTAINTY
At the end of the quarter ended February 28, 1998, Pharma Labs recorded a
non-cash impairment loss of $230,000 related to the write-down of property,
plant, and equipment to estimated fair market value. During the quarter ended
May 31, 1998, the Company wrote down certain assets related to Pharma Labs in
the amount of $203,500.
<PAGE>
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT
On April 2, 1999, the Company entered into an agreement with ALCO Financial
Services, LLC ("ALCO") for a $1,500,000 revolving credit facility (the "ALCO
Facility") bearing interest at prime plus three percent (3%). The first draw
under this new credit facility was made on April 6, 1999 in the amount of
$563,500 and was used to pay in full all amounts due under the Company's
previous credit facility with Norwest Bank. The ALCO Facility is for a period
of two years with a one year renewal term. The ALCO Facility is collateralized
by inventory and accounts receivable, and availability under the ALCO Facility
is determined based on eligible accounts receivable and inventory. As of July
12, 1999, the Company had $222,435 of accounts receivable and $12,135 of
additional eligible inventory for the Borrowing Base and had $919,175 principal
outstanding under the ALCO Facility.
NOTE 6. SALE OF PREFERRED STOCK
In January 1999, Quality Care Pharmaceuticals, Inc. ("QCP"), a wholly-owned
subsidiary of the Company, sold 1,000,000 shares of its Series A Preferred
Stock, no par value ("QCP Preferred Stock"), for an aggregate purchase price of
$1,000,000 to one accredited investor pursuant to the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended. The QCP Preferred Stock
is convertible at the option of the holder into shares of the Company's no par
value common stock at a conversion price of $6.40 per share, which is subject to
adjustment upon certain events. Dividends are cumulative and payable on each
share of QCP Preferred Stock at the rate of $.06 per annum. The QCP Preferred
Stock restricts the payment of dividends to the common stock holders of QCP
until the payment of all accrued but unpaid dividends on the QCP Preferred
Stock. Each share of QCP Preferred Stock is entitled to a liquidation
preference of $1.00 per share plus all accrued but unpaid dividends. QCP may
redeem the QCP Preferred Stock at any time on or after January 14, 2004 at a
price equal to the liquidation preference.
NOTE 7. RELATED PARTY TRANSACTIONS
During fiscal 1999, and through April 15, 1999, the Company borrowed $174,600,
net of repayments, from certain shareholders who are also officers and
directors. During the nine months ended May 31, 1999, the Company recorded
$397,000 in interest expense on loans from related parties. At May 31, 1999,
the Company owed $4,974,234 in notes payable to one of the above shareholders,
$30,000 to another of the above shareholders, and $470,000 in notes payable to a
director of the Company. At May 31, 1999 $688,000 in accrued interest was
payable on the preceding notes. Certain of these loans are payable on demand and
all such loans bear interest at bank prime plus 2%. Certain of these loans
($1,425,000 payable to Charles R. Drummond and $470,000 payable to Arch G.
Gothard III at May 31, 1999) were payable on demand or no later than April 1,
1998, and, accordingly, were past due at May 31, 1999. By letter dated October
30, 1998, Charles R. Drummond committed not to demand payment of, or take action
to collect, promissory notes, including those past due, owed to him until August
31, 1999 or such time as the Company has the ability to pay such notes. All
amounts due to Mr. Drummond were at May 31, 1999 subordinate to all amounts due
under the ALCO Facility. Loan proceeds were used for working capital. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
NOTE 8. INVESTMENT IN JOINT VENTURE
In October 1998, the Company and VNA Home Health Systems ("VNA") signed an
agreement pursuant to which VNA would withdraw from RxDirect, LLC ("RxDirect").
Under the terms for the withdrawal agreement, VNA was to pay the Company a
$154,000 withdrawal fee by December 1, 1998. To date, the Company has collected
$52,000 of such amount, including $16,000 collected during the most recent
quarter, and is considering various collection alternatives with respect to the
remaining $102,000.
<PAGE>
NOTE 9. CONTINGENCIES
Quality Care Pharmaceuticals, Inc. ("QCP"), a wholly owned subsidiary of the
Company, along with several other entities, including the manufacturers of the
drugs, has been named as a defendant in approximately forty-seven lawsuits
brought by numerous plaintiffs relating to personal injury claims caused by the
use of phentermine and/or fenfluramine, collectively known as Phen-Fen. To
date, QCP has been named in forty-five California lawsuits; however, it has been
served court papers in only fifteen. Of the fifteen, the plaintiff from one
lawsuit has recently dismissed QCP. QCP is also a third-party defendant in
class action lawsuits in both Nevada and West Virginia. QCP's involvement in
each of these lawsuits is limited to its distribution or repackaging of these
drugs. Based on the recent dismissal, QCP's limited involvement with these
Phen-Fen drugs and the defense being provided by the Company's insurance
carrier, the Company currently believes that the outcome of these lawsuits will
not have a material adverse effect on its business, financial condition, results
of operations or future prospects.
NOTE 10. SUBSEQUENT EVENTS
On June 20, 1999, the Company announced an e-commerce initiative whereby the
Internet will be used to reach a broader customer base with an expanded product
line.
On July 7, 1999, the shareholders approved a change in the name of Golden
Pharmaceuticals, Inc. to docsales.com, inc. and authorized a reverse stock split
of up to 40:1. The Board of Directors subsequently approved a 32:1 reverse
stock split ratio.
On July 13, 1999, the Company announced a joint software development with
MasterChart, Inc. for prescription dispensing and management, including use with
portable CE-based hand-held computer devices.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the selected
financial data and the financial statements and notes thereto filed herewith.
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations, the capital requirements of the
Company and the ability of the Company to achieve earnings per share growth
through internal investment, strategic alliances, joint ventures and other
methods. The success of the Company's business operations is, in turn,
dependent on factors such as the effectiveness of the Company's marketing
strategies to grow its customer base, the appeal of the Company's mix of
products, the Company's success at entering into and collaborating with others
to conduct effective strategic alliances and joint ventures, general competitive
conditions within the health care market and general economic conditions.
Further, any forward looking statements speak only as of the date on which such
statement was made, and the Company undertakes no 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.
<PAGE>
RECENT DEVELOPMENTS
The Company had a net loss of $2,617,000 during the nine months ended May 31,
1999, and, as of May 31, 1999, the Company's current liabilities exceeded its
current assets by $2,005,000 and its total liabilities exceeded its total
assets by $7,212,000.
For the 1998 fiscal year and through the first nine months of fiscal 1999, the
Company has been operating in a difficult environment, and the Company expects
to continue to operate in a difficult environment for the foreseeable future.
The Company's operations in fiscal 1998 and the first nine months of fiscal 1999
have consumed substantial amounts of cash and have generated significant net
losses which reduced shareholders' equity to a deficit of $7,212,000 at May 31,
1999. Also, the Company has a current period operating loss and negative cash
flow from operations, and is expected to have continuing losses and negative
cash flow from operations in the near term. Although there is substantial doubt
about the Company's future, the new e-commerce initiative and the expanded
software systems offer substantial potential to capitalize on Internet-based
healthcare activities.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain funding to support the Company's operating losses and capital
requirements. The Company is currently pursuing both debt and equity financing,
but there can be no assurance as to the results.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1999, COMPARED TO NINE MONTHS ENDED MAY 31, 1998,
($ ROUNDED TO NEAREST THOUSAND)
NET SALES - Net sales for the nine months ended May 31, 1999, increased 24% to
$5,744,000 from $4,642,000 for the same period last year. This sales gain was
primarily because of the expansion of QCP sales into the following new business
areas: sales to new government accounts, $411,000, and sales of new products,
$306,000. Partially offsetting the QCP sales gain was lower sales at Pharma
Labs, which declined 92% to $29,000 in the nine months from $340,000 for the
comparable nine months last year. Pharma Labs discontinued operations on
October 9, 1998.
COST OF SALES - Cost of sales as a percentage of sales decreased 2%, to 77%, for
the nine months ended May 31, 1999, as compared to 79%, for the same period last
year. Contributing to this decrease was a write-down of Pharma Lab inventory by
$200,000 to net realizable value recognized in the nine months ended May 31,
1999.
SELLING GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses ("SG&A") were $3,551,000 for the nine months ended May 31, 1999, a
decrease of $1,468,000 or 29% compared to $5,019,000 for the same three quarters
last year. Pharma Labs' SG&A decreased $313,000 to $51,498 as a result of the
liquidation of this business which discontinued operations on October 9, 1998.
The balance of the SG&A expense decrease was primarily the result of overhead
cost reductions in the current period.
OTHER INCOME (EXPENSE) - Interest expense increased to $599,000 from $409,000 in
the comparable period last year. This increase is because of interest payable
on additional working capital borrowings from a shareholder who is also an
officer and director. See "Note 7" to "Notes to Condensed Consolidated
Financial Statements."
The joint venture loss from RxDirect decreased to $23,000 from $108,000 during
the comparable period last year. This reduction in loss was the result of
overhead cost reductions and a substantial reduction in operations at RxDirect,
which is now 100% owned by the Company.
The $211,000 gain on settlement of accounts payable and other liabilities during
the nine months ended May 31, 1999, resulted from the settlement of a payable
due the other member of Pharma Labs under a non-compete agreement, $125,000, and
the resolution of other Pharma Labs payables and liabilities, $86,000.
UNUSUAL CHARGE / IMPAIRMENT LOSS - At the end of the nine months ended May 31,
1999, Pharma Labs recorded a non-cash impairment loss of $433,500 related to the
write-down of property, plant and equipment to estimated net market value.
<PAGE>
NET LOSS - The Company had a net loss of $2,617,000 for the nine months ended
May 31, 1999 compared to a $4,411,000 net loss for the comparable period last
year. The improved results are primarily because of reduced overhead expenses,
$853,000, including cost savings from the wind-down of Pharma Labs of $620,000
and a $211,000 gain on the settlement of Pharma Labs liabilities. Partially
offsetting the above reductions was an increase in interest expense of $190,000
as a result of increased short-term borrowings.
THREE MONTHS ENDED MAY 31, 1999, COMPARED TO THREE MONTHS ENDED
MAY 31, 1998 ($ rounded to nearest thousand.)
NET SALES - Net sales for the three months ended May 31, 1999 were $2,051,000,
an increase of $170,000 or 9% compared to $1,881,000 for the same period last
year. The increase is because of the expansion of QCP's sales into the business
areas of government accounts, $145,000, and new product line sales, $140,000,
plus new customers. Partially offsetting the QCP sales gain was the Pharma Labs
discontinued operations on October 9, 1998, resulting in a reduction in sales of
$245,000 from the quarter ended May 31, 1998.
COST OF SALES - Cost of sales as a percentage of sales was 77.4%, or $1,587,000,
in the quarter ended May 31, 1999, compared to 77%, or $1,442,000, for the
comparable quarter last year.
SELLING, GENERAL AND ADMINISTRATIVE - SG&A expenses decreased to $1,087,000 in
the quarter ended May 31, 1999 from $1,933,000 during the same period last year.
Pharma Labs SG&A decreased by $137,000 during the quarter ended May 31, 1999 due
to discontinued operations on October 9, 1998.
OTHER INCOME (EXPENSE) - Interest expense increased to $185,000 from $168,000 in
the comparable quarter last year. This increase results from interest on
additional working capital borrowings from shareholders who are also officers
and directors. See "Note 7" to "Notes to Consolidated Financial Statements."
UNUSUAL CHARGE / IMPAIRMENT LOSS - In the quarter ended May 31, 1998, Pharma
Labs recorded a non-cash impairment loss of $203,500 related to the write-down
of certain assets to estimated net market value.
NET LOSS - The Company reported a net loss of $806,000 in the quarter ended May
31, 1999, compared to a net loss of $1,787,000 for the comparable period last
year. Losses from operations were $623,000 in the quarter ended May 31, 1999,
compared to an operating loss of $1,697,000 in the third quarter of fiscal 1998.
The improved results, as discussed above, are primarily due to a reduction in
SG&A of $267,000 and the non-cash impairment losses in Pharma Labs that occurred
in the second quarter of fiscal 1998. Partially offsetting the above reductions
was an increase in interest expense of $17,000 in the quarter ended May 31, 1999
compared to the second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table is presented to facilitate the discussion of the Company's
current liquidity and sets forth the Company's liquidity position as of May 31,
1999, as compared to August 31, 1998.
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets $ 2,187,000 $ 2,471,000
Current liabilities 4,192,000 7,906,000
------------ ------------
Net working capital (deficiency) $(2,005,000) $(5,435,000)
============ ============
</TABLE>
<PAGE>
At May 31, 1999, current liabilities were $4,192,000, a decrease of $3,714,000
from August 31, 1998. Current liabilities decreased as a result of the
reclassification of a note payable from a short-term to a long-term obligation.
Long-term obligations were $4,974,000 an increase of $4,949,000 primarily due to
the following: reclassification of short-term to long-term obligations,
additional borrowings, $439,000, from a shareholder who is also an officer and
director (see "Note 7"to "Notes to Consolidated Financial Statement"), an
increase in accrued interest of $372,000 and a $250,000 increase in deferred
revenue on a non-compete agreement (see "Note 3" to "Notes to Consolidated
Financial Statements"). Partially offsetting the above increases was a $179,000
decrease in the principal amount of the Company's credit facility and a $125,000
decrease in a payable to the other Pharma Labs member resulting from the
settlement of a non-compete agreement.
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 prime plus 2%. The
promissory notes are unsecured obligations. The amounts outstanding under the
promissory notes in the aggregate were $5,014,200 ($4,594,200 payable to Charles
R. Drummond; $470,000 payable to Arch G. Gothard, III) and $5,474,200,
($4,974,200 payable to Charles R. Drummond; $470,000 payable to Arch G. Gothard,
III; $30,000 payable to John H. Grant) at August 31, 1998 and May 31, 1999,
respectively. Certain of the promissory notes ($1,425,000 payable to Charles R.
Drummond and $470,000 payable to Arch G. Gothard III, at May 31, 1999) 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 at
May 31, 1999, were fully subordinated to the amounts due under the ALCO
Revolving Facility. In April, 1999, all promissory notes payable to Mr.
Drummond became fully subordinated to the amounts due, or to become due, under
the ALCO Facility, and accordingly were reclassified to long-term obligations.
The Company has suffered substantial recurring losses from operations. The
Company incurred a net loss of ($10,068,000) during the fiscal year ended August
31, 1998 and a net loss of ($2,617,000) during the nine months ended May 31,
1999. As of May 31, 1999, the Company's current liabilities exceeded its
current assets by $2,005,000 and its total liabilities exceeded its total assets
by $7,212,000. 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 $400,000 may be required to support
the Company's ongoing operations, exclusive of debt repayments, through August
31, 1999. As previously reported, the ALCO Revolving Credit Agreement of April
2, 1999, was for $1,500,000. Except for the ALCO Facility, the Company does not
have any other commitments for financing and there can be no assurance that any
additional financing will be available to the Company on terms acceptable to the
Company, if at all. The Company's ability to continue as a going concern is
dependent upon its ability to obtain funding for the Company's capital
requirements and operating losses. The Company's shareholder deficit, and
continuing losses create serious risk of loss for the holders of the Company's
securities.
DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY
At August 31, 1998, the Company conducted a test for asset impairment in
accordance with financial Accounting Standard 121. It is management's opinion
that, exclusive of the write-downs for Pharma Labs and the write-off of
goodwill, no additional impairment loss occurred. QCP has a current period
operating loss and negative cash flow from operations, and is expected to have
continuing losses in the near term.
Key assumptions in the asset impairment test include reversal of recent
operating losses and sales declines, several years of significant sales growth,
and product cost reduction achieved through purchasing and volume efficiencies.
Management feels this projection is achievable considering the size of the
retail pharmacy market, estimated to be $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 be required. The impairment charge
would be computed based on the excess of carrying value over the fair value of
assets.
<PAGE>
Accordingly, it is 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 installing a new software package to accommodate year 2000 issues.
This upgrade is year 2000 compliant. An initial assessment has been completed
and the incremental cost of achieving Year 2000 compliance is estimated to be
not material. Timely installation of the upgrade to the business software
package is critical to year 2000 compliance. Cost will be expensed as incurred
and are estimated to continue through fiscal 1999.
RISK FACTORS
In addition to the other information contained in this Report, the Company
cautions stockholders and potential investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results of and could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statements made by on or on-behalf of, the Company. The following information
is not intended to limit in any way the characterization of other statements or
information under other captions as cautionary statements for such purpose:
- - The Company has incurred a significant amount of indebtedness, and the
Company's cash flow from operations is not sufficient to fund debt service
related thereto.
- - Because of the current indebtedness, the Company's ability to obtain
additional financing in the future and the Company's flexibility in
reacting to changes in the industry and economic conditions generally
may be limited.
- - The ALCO Facility is subject to a variable rate of interest and a
substantial increase in interest rates could adversely affect the
Company's ability to service the debt obligations under the ALCO Facility.
- - The Company's ability to attract and retain highly qualified management
and product development personnel cannot be assured and if the Company
is not able to attract and retain such personnel, that may impact the
Company's results from operations.
- - The Company's ability to anticipate changing technology and products and
to efficiently develop, introduce or obtain the rights to technological
advancements and new products that will gain customer acceptance cannot
be assured and the failure to develop, introduce or obtain such rights may
impact the Company's results from operations.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Quality Care Pharmaceuticals, Inc. ("QCP"), a wholly-owned subsidiary of the
Company, along with multiple other parties, including the manufacturers of the
drugs, has been named as a defendant in approximately forty-seven lawsuits
brought by numerous plaintiffs relating to personal injury claims caused by the
use of phentermine and/or fenfluramine, collectively known as Phen-Fen. To
date, QCP has been named in forty-five California lawsuits; however, it has been
served in only fifteen. Of the fifteen, the plaintiff from one lawsuit has
recently dismissed QCP. Further, QCP is a third-party defendant in class action
lawsuits in both Nevada and West Virginia. QCP's involvement in each of these
lawsuits is limited to its distribution or repackaging of these drugs. Based on
the recent dismissal, QCP's limited involvement with these Phen-Fen drugs and
the defense being provided by the Company's insurance carrier, the Company
currently believes that the outcome of these lawsuits will not have a material
adverse effect on its business, financial condition, results of operations or
prospects.
ITEM 2. CHANGES IN SECURITIES.
In June 1999, two accredited investors purchased common stock of the Company for
a total amount of $125,000. No underwriter participated in this transaction,
and the offering and sale of the securities was made solely to accredited
investors under the exemption provided by Section 4(2) of the Securities Act of
1933 as the sale was limited strictly to accredited investors. The proceeds of
the sales were used by the Company for working capital purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 7, 1999, the Company held a Special Meeting of Shareholders at which
shareholders were asked to consider and vote upon: 1) a resolution authorizing
an amendment to the Company's Articles of Incorporation to effect a change in
the Company's name to docsales.com, inc.; 2) a resolution authorizing a reverse
split of the Common Stock of the Company of up to forty for one; 3) the
re-election of Arch G. Gothard III and Jeffrey L. Wertz to serve as directors of
the Company until their successors are duly elected and qualified (Charles R.
Drummond, Ladd A. Drummond and John H. Grant are also currently directors and
their terms continued after the meeting); 4) a resolution approving Grant
Thornton LLP as independent auditors for the Company for the fiscal year ending
August 31, 1999. A total of 99,336,668 shares were represented at the meeting.
Such shares were voted in favor of each matter as follows:
Proposal #1 Proposal to amend the Company's Articles of Incorporation to
change the company name from Golden Pharmaceuticals, Inc. to
docsales.com, inc.
For Against Withheld/Abstain
---------- ------- ----------------
98,049,753 669,079 617,836
<PAGE>
Proposal #2 Proposal to amend the Company's Articles of Incorporation to
effect a reverse stock split of its no par value common stock
in a ration not to exceed forty-to-one.
For Against Withheld/Abstain
---------- --------- ----------------
97,819,194 1,116,644 400,830
Proposal #3 Election of Directors For Withhold
---------- --------
Mr. Arch G. Gothard III 98,760,748 575,920
Mr. Jeffrey L. Wertz 98,741,588 595,080
Proposal #4 Proposal for ratification of selection of Grant Thornton LLP as
the Company's independent auditors for the fiscal year ending
August 31, 2000.
For Against Withheld/Abstain
---------- ------- ----------------
99,061,049 152,553 123,066
ITEM 5. OTHER INFORMATION.
The stockholders approved up to a forty to one reverse stock split on July 7,
1999, and the directors subsequently approved a 32 to 1 reverse stock split.
The reverse split went into effect July 8th and the common stock is currently
being quoted and traded on a post-reverse stock split basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
27 Financial Data Schedule.*
* Filed herewith
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 report to be signed on its behalf by the undersigned, thereunto duly
authorized.
docsales.com, inc.
-------------------
(Registrant)
DATED: August 28, 1999 BY: /s/ John H. Grant
-------------------------------------
John H. Grant, Vice Chairman
(Chief Accounting Officer)
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule*
* Filed herewith
<PAGE>
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<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
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0
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