-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsktPufQTun4BaHML+dKsAupRP0UnbUX7nZ1E65m6zY701d0DA8cBATn2du3O+UT RKDpG7gzLpuhcarB9zzEsQ== 0000950134-97-009363.txt : 19971217 0000950134-97-009363.hdr.sgml : 19971217 ACCESSION NUMBER: 0000950134-97-009363 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000312651 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 840645174 STATE OF INCORPORATION: CO FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-09065 FILM NUMBER: 97739400 BUSINESS ADDRESS: STREET 1: 1313 WASHINGTON AVE CITY: GOLDEN STATE: CO ZIP: 80401 BUSINESS PHONE: 3032799375 MAIL ADDRESS: STREET 1: 1313 WASHINGTON AVENUE CITY: GOLDEN STATE: CO ZIP: 80401 FORMER COMPANY: FORMER CONFORMED NAME: BENEDICT NUCLEAR PHARMACEUTICALS INC DATE OF NAME CHANGE: 19920703 10KSB 1 FORM 10-KSB FOR YEAR ENDED AUGUST 31, 1997 1 =============================================================================== 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, 1997 COMMISSION FILE NUMBER: 0-9065 GOLDEN PHARMACEUTICALS, INC. (Name of small business issuer in its charter) COLORADO 84-0645174 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 710-14TH STREET, GOLDEN, COLORADO 80401 (Address of principal executive office)(Zip Code) (303) 279-9375 Issuer's telephone number 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 --- --- 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: $11,957,841 Aggregate market value of the voting stock held by non-affiliates of the registrant as of November 21, 1997, was $21,271,734. This calculation is based upon the average of the bid ($.16) and asked ($.18) prices of the voting stock on November 21, 1997. The number of shares of common stock outstanding as of November 21, 1997, was 125,127,847 Transitional Small Business Disclosure Format: Yes No X ----- ----- =============================================================================== 2 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 April 1997, the Company completed the sale of its assets related to the manufacture and distribution of I-123 capsules. See "Recent Developments - Sale of Radiopharmaceutical Division." The Company's primary business is now the repackaging and distribution of pharmaceuticals through its wholly owned subsidiary, Quality Care Pharmaceuticals, Inc. ("QCP"). See "Recent Developments - Acquisition of Quality Care Pharmaceuticals, Inc." RECENT 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. To facilitate the financing of the acquisition of QCP, the Company obtained from a national bank (the "Bank") a $4,000,000 term loan (the "Term Loan"), a $2,000,000 revolving line of credit (the "Revolving Facility") and an additional $400,000 term loan. See "Liquidity and Capital Resources." QCP is engaged in the repackaging and distribution of pharmaceutical products 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. INCLUSION OF PHYSICIANS IN THE NATIONAL PRESCRIPTION DRUG CLAIMS PROCESSING SYSTEM. In October, 1995, the National Council for Prescription Drug Programs (NCPDP) gave final approval to its pilot program to include physicians in the national prescription drug claims processing system. This decision produced a fundamental change in the market for QCP's products. The Company believes that, at the time of the acquisition, QCP was the second largest company in an industry with a market of approximately $100 million. As a result of this change, QCP products can now be sold in the national prescription drug market for which sales exceed $50 billion. RX DIRECT, LLC. On February 12, 1996, QCP entered into a joint venture agreement with the Visiting Nurses Association of Orange County ("VNA") to establish Rx Direct, LLC ("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. Both QCP and VNA actively market RxDirect's services to their respective customer bases. ISO 9000 CERTIFICATION. On March 14, 1996, and May 13, 1996, QCP and the Company respectively were certified by the International Organization for Standardization ("ISO 9000") as having the highest quality standards. ISO 9000's purpose is to establish common worldwide quality standards. The certification audit was performed by the French International Organization called Ascert. QCP believes that they are one of only a few domestic pharmaceutical repackagers that are currently ISO 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"). The Company contributed $1,000,000 for 52% of the equity in Pharma Labs, LLC. As of August 31, 1997, the Company had loaned Pharma Labs $643,437 for inventory, leasehold improvements and operational support. Pharma Labs is a manufacturer and distributor of nutritional health products both domestically and internationally. Pharma Labs has a proprietary nutritional supplements product line which it distributes in Vietnam. Efforts are currently underway to expand the distribution throughout Asia. Acquisition of Pharma Labs has enabled the Company to expand its line of products in health care as well as increase its contract repackaging capabilities. 1 3 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. 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 remaining on the Revolving Facility. 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 will 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 will vest and be exercisable upon the sale of 80 Redaway systems through the Company's marketing efforts. To date the Company has sold 2 Redaway systems. In addition, Dornoch purchased 1,000,000 shares of the Company's common stock for $0.30 per share. 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. 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. Unit-of-use medication is packaged under federal regulations which assures the highest level of product quality, purity and safety. Unit-of-use medication is significantly less expensive to the patient than comparable products dispensed from a retail pharmacy. 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. Pharma Labs is licensed by the FDA as a manufacturer and distributor of nutritional supplement products as well as by the California Health and Services Department. Pharma Labs manufactures both bulk and finished packaged nutritional supplement products for international and U.S. distribution. 2 4 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 one of the most dangerous problems common to 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. Pharma Labs ships via ocean freight containers and air cargo for international customers and delivers directly via ground transportation to U.S. customers. Delivery schedule depends on final form and quantity, but generally products are available within two weeks of the order date. 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. Pharma Labs purchases raw materials from a number of FDA licensed manufacturers. Pharma Labs' largest suppliers are Hoffman LaRoche, Klockner Pentaplast and Stauber Performance. BACKLOG. The Company does not have significant backlogs but operates on a daily order and contract basis with its customers. 3 5 MARKETING. QCP markets its products directly to customers through independent sales representatives, corporate sales personnel, trade shows and via its World Wide Web site. RxDirect markets through QCP and VNA sales representatives, as well as through direct mail and magazine advertising. Pharma Labs markets through a distributor in Vietnam and surrounding countries and directly to U.S. customers. 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. Pharma Labs competes with numerous other companies in the manufacture of nutritional supplement products both internationally and in the U.S. many of which have greater resources than Pharma Labs. 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. Since Pharma Labs' products are considered nutritional supplements, they are regulated by the branch of the FDA which oversees the distribution of nutritional products. Although the regulations are not quite as stringent as those that govern pharmaceutical products, they still require distributors of nutritional supplements to obtain permits and to meet various security and operating standards. Pharma Labs has received all necessary regulatory approvals and believes it is in substantial compliance with all applicable requirements. Any change in government regulations cannot be predicted. The Company also cannot predict whether any agency will adopt regulations that will have a material effect on the Company's and/or subsidiary operations. In addition, a variety of state and local permits are required under regulations relating to the Company's products. 4 6 PRODUCT LIABILITY AND INSURANCE. The Company currently maintains product liability insurance in the aggregate amount of $2 million per occurrence and per year with a $5,000 deductible. EMPLOYEES. As of December 1, 1997, the Company employed seventy-five (75) persons on a full-time basis. Additional employees are hired from time to time during peak production periods. None of the Company's or its subsidiaries' employees is represented by a union or collective bargaining unit and management considers relations with employees to be good. ADDITIONAL INFORMATION. Compliance with federal, state and local regulations regarding the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not expected by the Company to have, any adverse effect on capital expenditures, earnings or the competitive position of the Company. The Company is not presently a party to any litigation or administrative proceeding with respect to its compliance with such environmental standards. In addition, the Company does not anticipate being required to expend any funds in the near future for environmental protection in connection with its operations. ITEM 2. DESCRIPTION OF PROPERTIES The Company owns a 2,000 square foot office building in Golden, Colorado. QCP leases a 25,000 square foot facility in Santa Ana, California pursuant to a lease agreement which expires in March 2004. Pharma Labs sub-leases a 45,000 square foot facility in Anaheim, California pursuant to a lease agreement which expires in January 2000. 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. 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. 5 7 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is traded in the over-the-counter market and is quoted on the "OTC Bulletin Board" under the symbol "GPHI." The following table sets forth the high and low closing bid prices for the periods indicated, as reported by the OTC Bulletin Board.
For the Year ended August 31, 1997 High Low 1st Quarter $ 0.23 0.12 2nd Quarter 0.32 0.12 3rd Quarter 0.29 0.17 4th Quarter 0.23 0.15 For the Year ended August 31, 1997 High Low 1st Quarter $ .09 $ 0.7 2nd Quarter .12 0.10 3rd Quarter .3125 0.115 4th Quarter .38 0.17
These quotations are inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions. As of December 1, 1997, there were approximately 2,700 shareholders of record of the Company's common stock. The Company has never paid cash dividends. The Board of Directors of the Company currently anticipates that it will retain all available funds for use in the operation of the business and does not anticipate paying any cash dividends in the foreseeable future. The payment of cash dividends is restricted by the Company's loan agreements with the Bank. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the selected financial data and the financial statements and notes thereto filed herewith. The statements contained in this report, if not historical, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties that could cause actual results to differ materially from the financial results described in such forward looking statements. These risks and uncertainties include, among others, the level and rate of growth in the Company's operations, the capital requirements of QCP and Pharma Labs and the ability of the Company to achieve earnings through internal investment, strategic alliances, joint ventures and other methods. The success of the Company's business operations is, in turn, dependent on factors such as the effectiveness of the Company's marketing strategies to grow its customer base and improve customer response rates, the appeal of the Company's mix of products, the Company's success at entering into and collaborating with others to conduct effective strategic alliances and joint ventures, general competitive conditions within the pharmaceutical industry and general economic conditions. Further, any forward looking statements or statements speak only as of the date on which such statement was made, and the Company undertakes no obligation to update any forward looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results. RESULTS OF OPERATIONS. FISCAL YEAR ENDED AUGUST 31, 1997, COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996 (RESTATED). NET SALES. Net sales for the fiscal year ended August 31, 1997, increased 18% to $11,957,841 from $10,156,647 for the fiscal year ended August 31, 1996. This increase is primarily due to 6 8 (1) a 33% or $2,014,791 increase in QCP sales due to an expanded customer base and (2) a full year of Pharma Labs sales of $1,555,174 compared to sales of $249,319 in the prior start-up year. These increases were partially offset by a $1,517,452 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 $6,394,291 in fiscal 1997 from $3,871,613 in the prior year. QCP's SG&A spending increased to $4,180,625 from $2,202,120 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 $1,048,768 from the prior year primarily to support sales force expansion and addition of key management positions. QCP's general and administrative expenses increased $929,731 from 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 $920,485 in the current year from $166,083 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 $191,403 from the prior year level of $1,484,583, due to the sale of the radiopharmaceutical business in April, 1997. NET INCOME. The Company reported net income of $1,820,926 for fiscal 1997 as compared to a net loss of $991,932 for fiscal 1996. The fiscal 1997 net income level was due to a gain of $6,210,434 on the sale of the radiopharmaceutical business in April 1997. Losses from operations were $2,583,184 in fiscal 1997, compared to an operating loss of $253,626 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 $1,456,439 up from $807,198 in the prior year, income tax expense of $642,390, and benefited from a favorable minority interest allocation of $269,404. FOURTH QUARTER ADJUSTMENTS. Operating results for the fourth quarter of fiscal 1997 include the following adjustments: a $482,909 reduction to other income and notes receivable to eliminate revenue due under the terms of the June 14, 1996, Guarantee Agreement with Pharma Labs' joint venture partners. 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 recall. Net sales and receivables were decreased $238,050 for estimated returns applicable to fiscal 1997 sales, and cost of sales was decreased and receivables increased by $196,900 for the estimated cost of the returned product and estimated refund due from the product manufacturer. An additional $221,913 provision for doubtful accounts was made in the quarter primarily due to adverse conditions in the diet clinic industry. The diet drug recall and adverse publicity in the public media have adversely impacted many of the Company's diet clinic customers. FISCAL YEAR ENDED AUGUST 31, 1996 (RESTATED), COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995. NET SALES. Net sales for the fiscal year ended August 31, 1996, increased to $10,156,647 compared to $4,412,377 for the fiscal year ended August 31, 1995. The increase of $5,744,270 or 130% is primarily attributable to the consolidation of the operations of QCP with the Company's for the period September 1, 1995 to August 31, 1996 compared to only one month in the prior period. QCP sales were $5,984,085 for the year ended August 31, 1996 as compared to $757,719 for the one month of operation in August 1995. The remaining increase is primarily attributable to (i) the consolidation of Pharma Labs' sales which represented approximately $167,000 of the increase (ii) and an increase in demand from its primary distributor, Syncor, which represented an increase of $230,312. COST OF GOODS SOLD. Cost of goods sold as a percentage of sales was 64.4% for the fiscal year ended August 31, 1996 as compared to 50.9% for the fiscal year ended August 31, 1995. The increase is primarily the result of the consolidation of QCP's operations with the Company's for the 7 9 entire fiscal year compared to only one month in the prior period. Historically, QCP has had lower margins than the Company due to industry standards. SELLING GENERAL AND ADMINISTRATIVE. SG & A expenses were $3,871,613 for the fiscal year ended August 31, 1996 as compared to $1,255,645 for the fiscal year ended August 31, 1995. SG&A for the fiscal year ended August 31, 1996, increased $2,615,968 or 192% due to (i) the consolidation of QCP and Pharma Labs operations for an entire fiscal year and the last quarter which represented $2,220,784 of the increase; (ii) the development of a new trademark and marketing and sales materials for QCP which represented $75,000 of the increase; (iii) relocation and expansion of QCP's facilities which represented $85,224 of the increase; (iv) amortization of goodwill and non-competes which represents $233,036; and (v) expenses for travel and consulting fees in connection with the Company's efforts to enhance the operations and management of QCP. NET INCOME. The Company reported a net loss of $991,932 for the fiscal year ended August 31, 1996 as compared to net income of $978,574 for the fiscal year ended August 31, 1995. The net loss was primarily due to (i) relative increase in SG&A expenses of approximately $981,000, (ii) increase in interest expense of $666,868, (iii) depreciation and amortization of approximately $408,300, and (iv) a loss of $66,776 in connection with its interest in Rx Direct. 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 August 31, 1997, as compared to August 31, 1996.
August 31, 1997 August 31, 1996 Current assets $ 3,256,421 $ 3,528,771 * Current liabilities 3,132,407 2,616,663 ------------- ----------- Net working capital $ 124,014 $ 912,108
* Includes $380,000 of deferred taxes per FASB 109 resulting from the Company's substantial net operating loss carry forwards. At August 31, 1997, current assets were $3,256,421, a decrease of $272,350 from the prior year end. This decrease was primarily due to a decrease in inventory of $311,944 due to an inventory reduction program at QCP, and as a result of the sale of the radiopharmaceutical business, partially offset by higher inventories at Pharma Labs. The deferred income tax benefit included in current assets at August 31, 1996, was charged to fiscal 1997 operating results. At August 31, 1997, current liabilities were $3,132,407, an increase of $515,744 from the prior year end, primarily due to an increase in notes payable and notes payable - related parties of $826,027 and a decrease of $523,329 in current maturities of long term debt as a result of the debt payoff from the proceeds from the sale of the radiopharmaceutical business. The balance of the increase in current liabilities was primarily due to higher current lease obligations and higher accounts payable, both arising from a higher level of business activity. The Company has capitalized leases and operating leases for equipment, facilities and vehicles used in its business. Minimum lease payments for its capitalized and operating leases are expected to be $280,774 and $278,590, respectively, for the fiscal year ending August 31, 1998. As of August 31, 1997, the Company had net operating loss carry forwards for fiscal income tax purposes of approximately $12,872,000. The net operating loss carry forwards will expire in the years 1998 through 2011. 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. During fiscal 1997, the Company experienced increased expenses due to its expansion and development efforts including (i) restructuring of QCP's sales department with the addition of key sales executives, (ii) expansion of QCP's sales in the eastern states, (iii) development of a 8 10 telemarketing division at QCP, and (iv) the expansion of QCP's information systems and programming department. The Company believes this expansion program will continue to require significant up-front expenditures both to service its existing business and to develop new lines of business. During fiscal 1997, the Company's cash flow from operations was also adversely impacted by the following factors: (i) Pharma Labs continued to experience substantial delays in collecting the account receivable from its dealer in Vietnam due to delays in selling the related product in Vietnam; (ii) QCP experienced delays in collecting accounts receivable due to relocation of its accounting department from Colorado to California in April 1997 and the resulting disruption in credit and collection activities and staffing changes; and (iii) payment problems in collecting from diet clinic customers who have been negatively impacted by the diet drug controversy in the months leading up to the Pondimin and Redux product withdrawal. In response to these problems, the Company has made staffing changes to focus on the collection of past due accounts receivable and Pharma Labs is pursuing other Asian markets and contract manufacturing agreements to establish a presence in the United States. In addition, the Company has increased the reserve for potential uncollectible accounts by $403,200 to $446,834 at August 31, 1997. See "--Fourth Quarter Adjustments." The Company's primary source of funds for working capital has been the Revolving Facility. This facility is payable at the Bank prime rate plus 2% and expires in August 2000. At August 31, 1997, the balance outstanding on the Revolving Facility was $743,168 and the interest rate was 10.5%. The Revolving Facility is collateralized by the Company's accounts receivable and inventory, and the availability under the Revolving Facility is determined based on eligible accounts receivable and inventory. The amount of eligible accounts receivable was adversely impacted for the reasons described above which was the primary cause of a reduction of the Company's availability under the Revolving Facility from $1,588,000 at February 28, 1997, to $957,000 at August 31, 1997. As a result, during the last quarter of fiscal 1997, and into the first part of fiscal 1998, the Company relied primarily on proceeds from the exercise of stock options and loans from shareholders and directors to fund the Company's operations and expansion efforts. During the fiscal year ended August 31, 1997, the Company raised approximately $100,000 from the exercise of stock options. Due to the Company's inability to borrow sufficient amounts under the Revolving Facility for operations, the Company was required to obtain 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 was $615,000 ($575,000 payable to Charles R. Drummond; $40,000 payable to Arch G. Gothard, III) at August 31, 1997. At August 31, 1997, the Company was not in compliance with certain covenants of the Revolving Facility, including the breach of loan covenants regarding debt service, interest coverage and net income. As a result of the default, the Bank has the right to terminate the Revolving Facility, declare the outstanding balance due and payable, and seek other rights and remedies specified in the Revolving Facility agreement. To date, the Bank has not exercised its right to terminate. 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 assurance that the amendment will be available on terms acceptable to the Company if at all. The Company is also seeking alternative financing sources, but has no commitments for such alternative financing in place. FUTURE OPERATIONS - During the first quarter of fiscal 1998, the Company expects net sales to be below the sales level recorded during the same quarter of fiscal 1997. In addition to the loss of sales arising from the sale of the radiopharmaceutical business, lower sales are anticipated at QCP and Pharma Labs in the first quarter of fiscal 1998. QCP's diet drug sales are expected to be substantially below the prior year level due primarily to the withdrawal of Pondimin and Redux from the market. Sales to diet clinics represented 16% of QCP's sales during fiscal 1997. During the first quarter of fiscal 1998, Pharma Labs sales are expected to be below the prior year due to poor performance of its Vietnam distributor and due to continuing economic turmoil in Vietnam. As a result of the expected decrease in sales and problems collecting accounts receivable discussed above, management does not anticipate that cash flow from operations will be sufficient to meet its requirements during fiscal 1998. As it is not anticipated that the availability under the Revolving Facility will be sufficient, the Company is seeking to raise additional capital in order to fund its ongoing operations and the continued investment and expansion of QCP and Pharma Labs. The Company does not currently have any commitments with respect to any debt or equity financing and there 9 11 can be no assurance the required funds will be available to the Company on terms acceptable to the Company, if at all. If the Company is unable to find additional financing, it will be forced to cease its expansion plans and curtail certain operations, including substantial reduction in staffing and overhead spending. It would also review all aspects of its operations to determine the necessary steps to reduce expenses and increase cash flow. This would have a material adverse effect on the Company's business and financial conditions. During the first quarter of fiscal 1998, in order to fund its operations, the Company borrowed $1,350,000 from certain shareholders and directors of the Company (refer to Item 12). The borrowings are evidenced by unsecured demand notes, which have a variable interest rate of 2% over Bank prime. Mr. Charles Drummond has signed a commitment not to call his loans to the Company through fiscal 1998. 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. 10 12 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.
Director Principal Occupation or Employment during the past Five Years; or Officer Name & Age Other Directorships Since ---------- ------------------------------------------------------------- ----- Charles R. Drummond Chairman of the Board of Directors, Chief 1991 (54) Executive Officer and Treasurer of the Company since 1992. Owner and operator of Drummond Ranches, a cattle ranching operation in Pawhuska, Oklahoma, since 1965. Partner in Drummond and Hull Oil Company. Ladd A. Drummond Director. Co-owner of Drummond Land and Cattle Company since 1994 (28) January 1991; operator of risk management and investment businesses. Bruce A. Goldberg President from March 1996 to present. Chief Operating Officer 1994 (52) from February 1994 through 1996. Director of Reagent Operation at Lifescan, Inc. from 1989 to 1994. Arch G. Gothard, III Director. President of First Kansas, Inc. since October 1988. 1995 (52) Mr. 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 of the Board of Directors and Secretary. Professor 1990 (55) of Business Administration, University of Pittsburgh, Pennsylvania since January 1972. Gary P. Pryor Vice President, Finance since July 1997. Chief Financial 1997 (48) Officer at 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 (61) 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.
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 with the NASDAQ and to furnish the Company with copies. 11 13 Based solely on its review of the copies of the Section 16(a) forms received by it, or written representations from certain reporting persons, the Company believes that, during the last fiscal year, all Section 16(a) filing requirements applicable to its officers, directors and greater-than-ten-percent beneficial owners were complied with except for the following: Mr. Daniel Guinn did not file one (1) transaction for the most recent fiscal year; Mr. Gary Pryor did not file a Form 3 upon becoming an officer of the Company; Mr. Charles Drummond did not report one (1) transaction during the most recent fiscal year; Mr. John Grant did not report three (3) transactions during the most recent fiscal year; Mr. Richard Wahl did not report two (2) transactions during the most recent fiscal year; Mr. Ladd Drummond did not report two (2) transactions during the most recent fiscal year; and Mr. Arch Gothard, III, did not report three (3) transactions during the most recent fiscal year. All the transactions described above will be reported on a Form 5 for each officer and director. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid by the Company to the Chief Executive Officer and any executive officer whose total annual salary and bonus exceeded $100,000 for the last fiscal year:
- ----------------------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE - ----------------------------------------------------------------------------------------------------------------------- ANNUAL LONG-TERM COMPENSATION COMPENSATION AWARDS - ----------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (g) (i) - ----------------------------------------------------------------------------------------------------------------------- SECURITIES ALL OTHER NAME & PRINCIPAL POSITION UNDERLYING COMPENSATION YEAR SALARY ($) BONUS ($) OPTIONS/ SARS (#) ($) - ----------------------------------------------------------------------------------------------------------------------- Charles R. Drummond 1997 150,000 -0- -0- 24,000 (1) Chairman, Chief Executive 1996 125,000 25,000 -0- -0- Officer and Treasurer 1995 103,750 -0- -0- -0- - ----------------------------------------------------------------------------------------------------------------------- Bruce A. Goldberg 1997 104,000 -0- -0- -0- President, GPI 1996 104,000 20,000 -0- -0- 1995 96,000 13,333 -0- -0- - -----------------------------------------------------------------------------------------------------------------------
(1) Living Allowance. 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 12 14 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, 1997, through August 31, 1998, will be $150,000 plus a living allowance of $24,000. 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. Compensation Pursuant to Plans 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, 1997, options to purchase 1,000,000 shares of common stock were outstanding pursuant to the Plan. In addition, options to purchase an additional 1,000,000 shares of common stock were outstanding as of August 31, 1997, pursuant to an option agreement with Dornoch Medical Systems, Inc. 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 December 1, 1997, by (i) each person who is known by the Company to own beneficially more than five percent of the outstanding shares of the Company's common stock, (ii) the Company's directors, Chief Executive Officer and executive officers whose total compensation exceeded $100,000 for the last fiscal year; and (iii) all directors and executive officers of the Company as a group.
Shares Name Beneficially Owned Percent of Class ---- ------------------ ---------------- Timothy E. Drummond(1) 14,833,748 12% 623 Kihekah Pawhuska, Oklahoma 74056 Charles R. Drummond(1) 29,086,376 23% 710 14th Street Golden, CO 80401 John H. Grant (1) 2,314,435 2% 710 14th Street Golden, CO 80401 Richard G. Wahl(1) 2,503,421 2% 150 Buckboard, Box 1328 Edwards, CO 81632 Ladd A. Drummond(1) 14,723,828 12% 623 Kihekah Pawhuska, Oklahoma 74056
(continued on next page) 13 15 (continued from previous page)
Shares Name Beneficially Owned Percent of Class ---- ------------------ ---------------- Arch G. Gothard, III(1) 3,037,429 2% Box 5950 Breckenridge, CO 80424 Bruce A. Goldberg(1) 6,400,000 5% 3000 West Warner Avenue Santa Ana, CA 92704 Daniel B. Guinn(1) 2,100,000 2% 3000 West Warner Avenue Santa Ana, CA 92704 All executive officers and directors as a group (nine persons)(1) 74,989,237 59%
(1) Shares are considered beneficially owned, for purposes of this table, only if held by the person indicated, or if such person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares the power to vote, to direct the voting of and/or to dispose of or to direct the disposition of, such security, or if the person has the right to acquire beneficial ownership within 60 days, unless otherwise indicated. 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 arrangements are being made to have the shares 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 $70,127 from a related entity with common shareholders and officers; $15,000 of the balance due was paid subsequent to Fiscal 1997 year end. The amount due the Company has been guaranteed by the shareholders. The related shareholders are as follows: Charles R. Drummond, Bruce A. Goldberg, and Arch G. Gothard, III, all of whom are officers or directors of the Company. Rx Direct 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, 1997, 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 $615,000 ($575,000 payable to Charles R. Drummond; $40,000 payable to Arch G. Gothard III) and $1,965,000 ($1,425,000 payable to Charles R. Drummond; $540,000 payable to Arch G. Gothard III) at August 31, 1997, and November 30, 1997, respectively. 14 16 PART IV Item 13. Exhibits and Reports on Form 8-K (a) The following documents of the Company are filed as a part of this Report 1. Financial Statements 2. Financial Statement Schedules Schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions or the information related is contained elsewhere in the financial statements. 3. Exhibits Exhibit No. Description - ----------- ----------- *3.1 Articles of Incorporation filed October 4, 1973. *3.2 Articles of Amendment to Articles of Incorporation filed December 22, 1976. *3.3 Articles of Amendment to Articles of Incorporation filed August 25, 1978. *3.4 Articles of Amendment to Articles of Incorporation filed June 15, 1979. *3.5 Articles of Amendment to Articles of Incorporation filed January 12, 1981. *3.6 Articles of Amendment to Articles of Incorporation filed June 16,1987. *3.7 Articles of Amendment to Articles of Incorporation filed October 9, 1992. #3.8 Articles of Amendment to Articles of Incorporation filed December 16, 1997. *3.9 Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed December 9, 1987. *3.10 Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed December 14, 1987. *3.11 Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed February 5, 1988. +3.12 Certificate of Designation of Class A Convertible Preferred Stock filed October 12, 1990. **3.13 Second Amended and Restated Bylaws *4.2 Specimen Certificate for Common Stock, no par value per share. 15 17 *10.1 Agreement Limiting Execution on Judgment dated November 4, 1991 and Addendum A thereto by and among the Company, GRC, New Crawford Valley, Ltd. and Gulch Holdings Company. **10.2 Amended and Restated Distribution Agreement between the Company and Syncor dated June 1, 1995. **10.3 Employment Agreement between Quality Care Pharmaceuticals, Inc. and Charles R. Drummond. **10.4 Employment Agreement between Quality Care Pharmaceuticals, Inc. and Daniel B. Guinn. #10.5 Agreement to Terminate Employment Agreement between Quality Care Pharmaceuticals, Inc. and Daniel B. Guinn. #10.6 Employment Agreement between the Company and John Grant. **10.7 First Amendment to Agreement Executing Judgment dated August 3,1995 among the Company, GHC, Inc., Charles R. Drummond, Golden Research Corporation, New Crawford Valley, LTD and Gulch Holdings Company. **10.8 Credit and Security Agreement dated August 7, 1995 among the Company, Quality Care Pharmaceuticals, Inc. and Norwest Credit, Inc. **10.9 Credit and Security Agreement dated August 7, 1995 among the Company and Norwest Bank Minnesota, National Association. **10.10 Promissory Note dated August 7, 1995 executed by the Company in favor of Norwest Bank Minnesota, National Association in the principal amount of $4,000,000. **10.11 Revolving Note dated August 7, 1995 executed by the Company in favor of Norwest Credit, Inc. in the principal amount of $400,000. **10.12 Revolving Note dated August 7, 1995 executed by the Company in favor of Norwest Credit, Inc. in the principal amount of $2,500,000. **10.13 Revolving Note dated August 7, 1995 executed by the Company and QCP in favor of Norwest Credit, Inc. in the principal amount of $2,500,000. ***10.14 Operating Agreement dated June 14, 1996 between the Registrant and Pharma France, Inc. #10.15 Promissory Note dated November 22, 1996, executed by the Company in favor of Charles R. Drummond in the principal amount of $75,000. #10.16 Promissory Note dated July 29, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $40,000. 16 18 #10.17 Promissory Note dated August 4, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $300,000. #10.18 Promissory Note dated August 18, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $200,000. #10.19 Promissory Note dated September 23, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $300,000. #10.20 Promissory Note dated October 6, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $50,000. #10.21 Promissory Note dated October 8, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $250,000. #10.22 Promissory Note dated October 21, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $250,000. #10.23 Promissory Note dated November 4, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $250,000. #10.24 Promissory Note dated November 18, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $150,000. #10.25 Promissory Note dated November 19, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $100,000. #21 Subsidiaries of the Registrant. #27 Financial Data Schedule. (b) Reports on Form 8-K None. +Incorporated by reference to registrant's Annual Report on Form 10-K, dated August 31, 1991, as filed with the Securities and Exchange Commission. ++Incorporated by reference to registrant's Current Report on Form 8-K, and exhibits thereto, dated June 25, 1992, as filed with the Securities and Exchange Commission. +++Incorporated by reference to registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995 as filed with the Securities and Exchange Commission. *Incorporated by reference to registrant's Registration Statement on Form S-1 and all amendments thereto, Registration number 33-32887. **Incorporated by reference to registrant's Annual Report on Form 10-K, dated August 31, 1995, as filed with the Securities and Exchange Commission. ***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 19 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of August 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the Years Ended August 31, 1997 and 1996 F-5 Consolidated Statement of Stockholders' Equity (Deficiency) for the Years Ended August 31, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the Years Ended August 31, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-9
F-1 20 [GRANT THORNTON LETTERHEAD] 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Golden Pharmaceuticals, Inc. and Subsidiaries as of August 31, 1997 and 1996, 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. /s/ GRANT THORNTON LLP GRANT THORNTON LLP Denver, Colorado October 31, 1997 (except for note R, as to which the date is November 19, 1997) F-2 21 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
AUGUST 31, ------------------------------------- 1997 1996 ---------------- ----------------- CURRENT ASSETS (RESTATED) ----------------- Cash $ 26,143 $ 34,872 Receivables Trade, net of allowance for doubtful accounts of $446,834 and $43,634 at August 31, 1997 and 1996 1,778,321 1,443,684 Notes receivable 252,500 165,000 Inventories 1,024,689 1,336,633 Prepaid expenses and other 174,768 168,582 Deferred income taxes - 380,000 ---------------- ----------------- TOTAL CURRENT ASSETS 3,256,421 3,528,771 PROPERTY, PLANT AND EQUIPMENT - AT COST 3,362,288 4,339,707 Less accumulated depreciation and amortization 908,804 1,782,400 ---------------- ----------------- TOTAL PROPERTY, PLANT & EQUIPMENT 2,453,484 2,557,307 OTHER ASSETS Goodwill, less accumulated amortization of $422,784 and $215,055 at August 31, 1997 and 1996 3,740,525 3,948,256 Intangibles - net of accumulated amortization of $1,133 and $333 at August 31, 1997 and 1996 10,867 11,667 Non-compete agreement 331,076 425,600 Investment in joint venture 1,866 - Deferred income taxes - 220,000 ---------------- ----------------- TOTAL OTHER ASSETS 4,084,334 4,605,523 ---------------- ----------------- TOTAL ASSETS $ 9,794,239 $ 10,691,601 ================ =================
See Notes to Consolidated Financial Statements F-3 22 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - continued LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, --------------------------------------- 1997 1996 ---------------- ----------------- CURRENT LIABILITIES (RESTATED) ----------------- Notes payable $ 743,168 $ 532,141 Notes payable - related parties 615,000 - Current maturities of long-term debt 262,506 785,835 Current maturities of capitalized lease obligations 202,061 95,246 Accounts payable 1,041,639 921,045 Income taxes payable 40,000 - Accrued liabilities Salaries, wages and other compensation 161,277 100,028 Interest 3,506 144,148 Other 63,250 38,220 ---------------- ----------------- TOTAL CURRENT LIABILITIES 3,132,407 2,616,663 LONG-TERM OBLIGATIONS, less current maturities 80,903 3,674,355 CAPITALIZED LEASE OBLIGATIONS, less current maturities 528,774 299,674 EXCESS LOSS ON INVESTMENT IN JOINT VENTURE -- 10,776 CONTINGENCIES AND COMMITMENTS -- -- MINORITY INTEREST 582,969 852,372 STOCKHOLDERS' EQUITY Common stock - no par value; 200,000,000 shares authorized; 128,416,847 and 124,063,778 issued; 125,424,118 and 120,774,778 outstanding in 1997 and 1996, respectively 24,774,154 23,867,384 Obligation to issue common stock 200,000 -- Preferred stock - no par value; 10,000,000 shares authorized Class A 15%/ 30% cumulative convertible, 29,653 shares, issued and outstanding in 1997 and 1996, respectively 292,558 292,558 Dividends accrued on preferred stock 137,122 433,393 ---------------- ----------------- 25,203,834 24,793,335 Accumulated deficit (19,640,516) (21,461,442) ---------------- ----------------- 5,563,318 3,331,893 Less common stock in treasury at cost, 3,289,000 shares at August 31, 1997 and 1996, respectively. 94,132 94,132 ---------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 5,469,186 3,237,761 ---------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,794,239 $ 10,691,601 ================= ==================
See Notes to Consolidated Financial Statements F-4 23 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, ------------------------------ 1997 1996 ------------- ------------- REVENUES (RESTATED) ------------- ------------- Net sales $ 11,957,841 $ 10,156,647 Cost of sales 8,146,734 6,538,660 ------------- ------------- GROSS MARGIN 3,811,107 3,617,987 Selling, general and administrative expense 6,394,291 3,871,613 ------------- ------------- OPERATING LOSS (2,583,184) (253,626) OTHER INCOME/ (EXPENSE) Interest expense (1,456,439) (807,198) Joint venture loss (71,358) (66,776) Gain on disposal of division 6,210,434 -- Loss on disposal of assets (2,048) (3,217) Other income 96,507 68,180 ------------- ------------- TOTAL OTHER INCOME/ (EXPENSE) 4,777,096 (809,011) ------------- ------------- INCOME (LOSS) BEFORE 2,193,912 (1,062,637) INCOME TAX EXPENSE INCOME TAX EXPENSE 642,390 -- ------------- ------------- INCOME (LOSS) BEFORE MINORITY INTEREST 1,551,522 (1,062,637) MINORITY INTEREST 269,404 70,705 ------------- ------------- NET INCOME (LOSS) $ 1,820,926 $ (991,932) ============= ============= PRIMARY EARNINGS (LOSS) PER SHARE $ .01 $ (.01) ============= ============= FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .01 $ (.01) ============= ============= NUMBER OF SHARES USED IN PER SHARE CALCULATION: Primary 122,192,311 97,131,318 ============= ============= Fully diluted 122,687,952 97,131,318 ============= =============
See Notes to Consolidated Financial Statements F-5 24 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
COMMON STOCK PREFERRED STOCK --------------------------- -------------------------- Obligation Dividends 15% / 30% to Issue Accrued on CUMULATIVE Common Preferred --------------------------- Stock Stock Shares Amount Shares Amount Amount Amount ------------ ------------ ------------ ------------ ------------ ------------ BALANCE - September 1, 1995 93,967,583 $ 21,288,851 29,653 $ 292,558 -- $ 433,393 Conversion of debt, bonus and services to common stock 156,195 23,534 -- -- -- Warrants exercised 8,000,000 600,000 -- -- -- -- Stock options exercised 16,000,000 469,999 -- -- -- -- Common stock issued in private placement 5,940,000 1,485,000 -- -- -- -- Obligation to issue common stock -- -- -- -- $ 200,000 -- Less treasury stock at cost -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ BALANCE - August 31, 1996 (RESTATED) 124,063,778 $ 23,867,384 29,653 $ 292,558 $ 200,000 $ 433,393 Conversion of debt, dividends payable and services to common stock 353,069 306,770 -- -- -- (296,271) 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 $ 24,774,154 29,653 $ 292,558 $ -- $ 137,122 ============ ============ ============ ============ ============ ============ Accumulated Treasury Stock Deficit --------------------------- Amount Shares Amount ------------ ------------ ------------ BALANCE - September 1, 1995 $(20,469,510) -- -- Conversion of debt, bonus and services to common stock -- -- -- Warrants exercised -- -- -- Stock options exercised -- -- -- Common stock issued in private placement -- -- -- Obligation to issue common stock -- -- -- Less treasury stock at cost -- 3,289,000 $ 94,132 Net loss (991,932) -- -- ------------ ------------ ------------ BALANCE - August 31, 1996 $(21,461,442) 3,289,000 $ 94,132 (RESTATED) Conversion of debt, dividends payable and services to common stock -- -- -- 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 $(19,640,516) 3,289,000 $ 94,132 ============ ============ ============
See Notes to Consolidated Financial Statements F-6 25 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, ------------------------------- 1997 1996 ------------ ------------ CASH FLOWS USED IN OPERATING ACTIVITIES (RESTATED) ------------ Net income (loss) $ 1,820,926 $ (991,932) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 777,955 507,645 Loss on sale of equipment 2,048 3,216 Gain on sale of division (6,210,434) -- Non-cash settlement of employment agreement -- 200,000 Non-cash settlement of land judgement 150,000 -- Stock issued for services and fees 10,500 23,534 Minority interest (269,404) (70,705) Joint venture loss 71,358 66,776 Changes in assets and liabilities net of effects of acquisition and joint venture: Increase in accounts receivable (334,637) (188,209) (Increase) decrease in inventories 311,944 (661,678) Increase in prepaid expenses and other (6,186) (36,969) Decrease in deferred taxes 600,000 -- Increase (decrease) in accounts payable 120,593 (277,644) Increase in income taxes payable 40,000 -- Increase (decrease) in accrued expenses (54,363) 93,162 ------------ ------------ TOTAL ADJUSTMENTS (4,790,626) (340,872) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (2,969,700) (1,332,804) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant, and equipment (235,344) (614,942) Proceeds from sale of equipment 1,153 6,146 Proceeds from sale of division 6,550,000 -- Increase investment in joint venture (84,000) (56,000) Addition to goodwill -- (169,006) Increase in notes receivable (87,500) -- ------------ ------------ NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 6,144,309 (833,802) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under notes payable - related parties 615,000 -- Issuance of common stock 400,000 2,554,999 Purchase of treasury stock -- (94,132) Borrowings under note payable -- 42,500 Payment on non-compete agreement -- (175,000) Payments on capitalized lease and other long-term obligations (4,409,365) (365,133) Borrowings on line of credit 11,449,596 16,096,917 Payments on line of credit (11,238,569) (15,908,230) ------------ ------------ NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES (3,183,338) 2,151,921 ------------ ------------ NET DECREASE IN CASH (8,729) (14,685) CASH, BEGINNING OF YEAR 34,872 49,557 ------------ ------------ CASH, END OF YEAR $ 26,143 $ 34,872 ============ ============
See Notes to Consolidated Financial Statements F-7 26 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities:
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1997 1996 ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: (RESTATED) ---------- Cash paid during the period for interest $1,597,081 $ 697,678 ========== ========== Purchase of equipment under a capital lease $ 478,500 $ 249,508 Increase in goodwill -0- 24,031 Issue of common stock upon settlement of employment contract 200,000 -0- Issue of note payable in settlement of land judgement 150,000 -0- Conversion of dividends payable to common stock 296,271 -0- Details of joint venture with Pharma Labs, LLC Fair value of assets contributed, other than cash -0- 100,000 Future obligation incurred for acquisition -0- 900,000
See Notes to Consolidated Financial Statements F-8 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 E). GPI is currently involved in marketing and product development activities in support of its subsidiaries, as well as new business development. GOLDEN MEDICAL MARKETS CORPORATION is a wholly-owned subsidiary of GPI engaged in the marketing and selling of products and services to various segments of the healthcare industry. QUALITY CARE PHARMACEUTICALS, INC. (QCP), a wholly-owned subsidiary of GPI, QCP purchases bulk quantities of pharmaceutical products from manufacturers for repackaging into a single user prescription form. 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, is engaged in the manufacturing, packaging, and distribution of nutritional supplement products, such as vitamins, minerals and herbal products. Pharma Labs distributes its products primarily to Vietnam. In addition, Pharma Labs sells product to retail customers and performs contract manufacturing and packaging for certain U.S. customers. RX DIRECT, LLC (RxDirect), a 50% owned subsidiary of QCP was formed in a joint venture with the VNA Home Health Systems (VNA). Rx Direct is engaged in the dispensing of medications via mail order and direct delivery. Both QCP and VNA market RxDirect's mail order/ direct delivery pharmacy to their respective customer base. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of GPI, its wholly-owned subsidiary 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. The Company owns 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 - Rx Direct, 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 for comparison to QCP's undiscounted, forecasted cash flow. If the sum of the expected discounted cash flow is less than the carrying value of the above assets, an impairment loss would be recognized. F-9 28 Earnings Per Common Share - Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. The Company's 15%/30% cumulative preferred stock (Preferred Stock) and accrued dividends on the Preferred Stock were convertible into 296,530 and 137,122 shares, respectively, of the Company's common stock - no par value (Common Stock). Also, during fiscal 1997, there were a total of 2,000,000 shares outstanding under the Company's Performance Stock Option Plan (Plan). Any dilutive effect of the outstanding options and conversion rights to purchase the 2,433,652 shares as of August 31, 1997, are reflected in the financial statements. The FASB issued SFAS 128, Earnings per Share, which will be effective for periods ending after December 15, 1997. Early application is not permitted. Had SFAS 128 been adopted the following table illustrates the basic and diluted earnings per share (EPS) for Fiscal Year 1997:
For the Year Ended August 31, 1997 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net income $ 1,820,926 =========== BASIC EPS Net income available to common stockholders 1,820,926 122,192,311 0.01 EFFECTIVE OF DILUTIVE SECURITIES Options -- 495,641 -- DILUTED EPS Income available to stockholders plus assumed conversions $ 1,820,926 122,687,952 0.01 =========== =========== =======
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 year. 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. Cash Equivalents - For the purpose of the statements of cash flows, the Company considers all highly liquid cash investments with original maturity dates of three months or less to be cash equivalents. Reclassification - Certain reclassifications have been made to conform prior years' information with the current year presentation. Use of Estimates - In preparing the Company's consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates. C. INVESTMENT IN JOINT VENTURE On February 12, 1996, QCP entered into a joint venture agreement with the VNA to form Rx Direct, a mail order/ direct delivery pharmacy. QCP owns 50% of Rx Direct and, accordingly, Rx Direct is recorded under the equity method on QCP's financial statements. QCP provides management and operational support for Rx Direct, and the VNA has agreed to contribute $300,000 to fund the start up of operations. As of August 31, 1997, QCP has contributed $140,000 in services and operational support and the VNA has contributed $250,000 in working capital. F-10 29 C. INVESTMENT IN JOINT VENTURE- continued The following shows condensed financial information for Rx Direct:
AT AUGUST 31, ---------------------- 1997 1996 --------- --------- Total Assets $ 144,941 $ 143,010 ========= ========= Total Liabilities 31,209 94,562 Total Equity 113,732 48,448 --------- --------- Total Liabilities & Equity $ 144,941 $ 143,010 ========= ========= FOR THE YEAR ENDED AUGUST 31, ----------------------------- 1997 1996 --------- --------- Net Sales $ 414,604 $ 10,684 Total Expenses 557,320 144,236 ========= ========= Net Loss $(142,716) $(133,552) ========= =========
D. JOINT MARKETING AGREEMENT On July 15, 1997, the Company and Dornoch Medical Systems, Inc. (Dornoch) entered into a Joint Marketing Agreement, whereby the Company will market Dornoch's Redaway products. The Company will receive royalties on sales of the products. In connection with the Joint Marketing Agreement, the Company was granted an option to purchase 220 shares of common stock of Dornoch (Dornoch Stock Option Agreement) at a purchase price of $2,000 per share which option will vest and be exercisable upon the sale of 80 Redaway products through the Company's marketing efforts. In addition, and in connection with the transaction, Dornoch purchased 1,000,000 shares of the Company's common stock for $.30 per share and has an option to purchase 1,000,000 shares at $.30 which vest pursuant to the Dornoch Stock Option Agreement. E. 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 $6,700,000 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. F. 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:
AT AUGUST 31, ----------------------- 1997 1996 ---------- ---------- Raw materials $ 489,419 $ 801,359 Work-in-progress 82,817 52,368 Finished goods 452,453 482,906 ---------- ---------- $1,024,689 $1,336,633 ========== ==========
F-11 30 G. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are classified as follows:
AT AUGUST 31, -------------------------- 1997 1996 ----------- ----------- Building and improvements $ 486,294 $ 1,057,600 Machinery and equipment 2,051,264 2,383,491 Computers 502,620 244,431 Furniture and fixtures 248,110 506,185 Land 74,000 148,000 ----------- ----------- 3,362,288 4,339,707 Less accumulated depreciation and amortization (908,804) (1,782,400) ----------- ----------- $ 2,453,484 $ 2,557,307 =========== ===========
H. NOTES RECEIVABLE The Company holds two note receivable agreements totaling $165,000 as of August 31, 1997, in conjunction with the release of a contingency (see Note M). The $85,000 note accrues interest at the Bank prime plus 1% (totaling 9.5% at August 31, 1997) and the $80,000 is without interest. The notes are without collateral. The Company has entered into a note receivable agreement in the amount of $150,000 in conjunction with the sale of assets to Syncor Pharmaceuticals, Inc. (see Note E). The note is repayable in monthly installments of $12,500 plus interest at 8.5%. The amount outstanding under this note as of August 31, 1997, was $87,500. The note is without collateral. I. 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 2002. The recorded cost of assets under capital leases is $993,344 and $500,405 at August 31, 1997, and 1996, respectively. Accumulated amortization associated with the recorded assets was $201,235 and $59,514 at August 31,1997 and 1996, respectively. Future minimum annual lease payments under capitalized leases are as follows: Year ending August 31, 1998 $ 280,774 1999 254,483 2000 217,211 2001 128,525 2002 30,680 --------------- 911,673 Less amount representing interest 180,838 --------------- Discounted lease obligations 730,835 Less current portion 202,061 --------------- Long-term portion $ 528,774 ===============
F-12 31 Operating Leases - The Company leases office facilities, vehicles and equipment under operating leases which expire at various dates through 2004. Under the terms of the leases, the Company will pay monthly rental ranging from $22,468 in 1997 and $11,301 in 2004. Future minimum annual rental payments under operating leases are as follows: Year ending August 31, 1998 $ 278,590 1999 282,782 2000 201,417 2001 136,679 2002 135,614 Thereafter 203,418 =============== $ 1,238,500 ===============
Rent expense totaled approximately $298,050 and $162,000 at August 31, 1997 and 1996, respectively. F-13 32 J. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consist of the following:
AT AUGUST 31, -------------------------- 1997 1996 ----------- ----------- Note payable, term loan, payable in sixteen quarterly installments of $125,000, including interest at the Bank prime plus 3% Collateralized by a second perfected security interest in all personal property of the Company, all issued and outstanding shares of common stock of QCP and a second deed of trust on real property $ -- $ 3,875,000 Note payable, term loan, payable in monthly installments of $6,667, including interest at the Bank prime plus 3% through August, 2000 Collateralized by equipment, general intangibles, inventory and accounts receivable -- 319,996 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, 1997) through January 1, 1999. Collateralized by equipment, general intangibles, inventory and accounts receivable 20,069 34,238 Note payable, $2,500,000 revolving line of credit with interest payable at Bank prime plus 2% (totaling 10.5% at August 31, 1997) through August 1, 2000. Collateralized by equipment, general intangibles, inventory and accounts receivable 743,168 532,141 Non-interest bearing notes payable, to officers of QCP payable in semi-annual installments of $33,334 through July 15, 1998, uncollateralized 73,340 105,956 Three notes payable to an officer of GPI payable on demand, including interest at Bank prime plus 2% (totaling 10.5% at August 31, 1997), uncollateralized 575,000 -- Note payable to a director of GPI, payable on demand, including interest at Bank prime plus 2% (totaling 10.5% at August 31, 1997), uncollateralized 40,000 -- Non-interest bearing note payable in semi-annual installments of $25,000, commencing April 30, 1997, uncollateralized 125,000 -- Non-interest bearing note payable to officers of Pharma Labs, currently due but payment is being withheld pending settlement of other amounts due to the Company 125,000 125,000 ----------- ----------- 1,701,577 4,992,331 Less: Note payable, revolving line of credit (743,168) (532,141) Current maturities (877,506) (785,835) ----------- ----------- $ 80,903 $ 3,674,355 =========== ===========
F-14 33 J. NOTES PAYABLE AND LONG-TERM DEBT - continued In connection with the note payable, term loan, and note payable, revolving line of credit, the Company is required to maintain compliance with certain covenants. At August 31, 1997, the Company was not in compliance with certain covenants. The Company is currently renegotiating the terms of the loan agreement with the Bank which includes renegotiation of the covenants. Aggregate annual principal payments applicable to notes payable and long-term debt for years ending after 1997 are as follows: Year ending August 31, 1997 1998 $ 1,620,674 1999 55,903 2000 25,000 2001 - 2002 - Thereafter - =============== $ 1,701,577 ===============
K. STOCKHOLDERS' EQUITY The 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:
Annual Rate Quarterly Rate ----------- -------------- Period (%) (%) ------ --- --- 12 calendar months ended October, 1989 0 0.00 12 calendar months ended October, 1990 15 3.75 12 calendar months ended October, 1991 15 3.75 12 calendar months ended October, 1992 30 7.50 12 calendar months ended October, 1993 30 7.50 All periods thereafter 30 7.50
Dividends are payable from the net profits generated from the sale of Iodine 123 HIPDM ("HIPDM") (as defined in the Certificate of Designation). However, the underlying license rights related to Iodine 123 HIPDM were fully impaired in 1991 and released upon termination of the license agreement on November 30, 1993. Because all rights to HIPDM were released, these dividends will only be paid by conversion to Common Stock. 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. F-15 34 K. STOCKHOLDERS' EQUITY - continued As of August 31, 1997 and 1996, 54,589 of the 84,242 shares of Preferred Stock outstanding were converted into Common Stock. As of August 31, 1997, $296,271 of the $433,393 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 $137,122 and $433,393 at August 31, 1997 and 1996, respectively. At August 31,1997, the holders of Preferred Stock can convert their shares into 433,652 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.
Stated Redemption Date Percentage ---------------------- ---------- January 1, 1994 - December 31, 1994 108% January 1, 1995 - December 31, 1995 106% January 1, 1996 - December 31, 1996 104% All periods commencing January 1, 1997 102%
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:
1997 1996 ----------------------- ---------------------- Weighted Weighted average average exercise exercise Shares price Shares price ---------- ---------- ----------- -------- Options outstanding September 1 2,350,000 $ 0.13 16,950,000 $ 0.05 Granted 1,000,000 0.30 9,900,000 0.09 Canceled (350,000) (500,000) 0.02 Exercised (1,000,000) 0.10 (24,000,000) 0.06 ---------- ---------- ----------- -------- Options outstanding August 31 2,000,000 $ 0.23 2,350,000 $ 0.13 ========== ========== =========== ========
Weighted average fair value of options granted during the year ended August 31, 1997, and August 31, 1996, is $0.07 and $0.08 per share, respectively. F-16 35 The following information applies to options outstanding at August 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------- ------------------------------ Weighted average remaining Weighted Weighted Range of Exercise Number contractual average Number average prices Outstanding life (years) exercise price Exercisable exercise price ----------------- ----------- ----------- -------------- ----------- ---------------- $0.03 - 0.05 100,000 3.00 $ 0.030 100,000 $ 0.030 0.06 - 0.09 350,000 2.00 0.075 350,000 0.075 0.10 - 0.15 200,000 0.50 0.100 -0- -- 0.25 - 0.38 1,350,000 3.83 0.305 300,000 0.320 --------- ------- 2,000,000 750,000 ========= =======
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. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net earnings and earnings per share would have been:
1997 1996 ------------- ------------- (RESTATED) ------------- Net income As reported $ 1,820,926 $ (991,932) Pro forma 1,770,926 (1,644,932) Primary earnings per share As reported $ 0.01 $ (0.01) Pro forma 0.01 (0.02)
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before the fiscal year ended August 31, 1996. In addition, potential deferred tax benefits of approximately $20,000 in 1997 and $261,200 in 1996 have not been reflected in the pro forma amounts due to the uncertainty of realizing any benefit. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997 and 1996: Expected life (years) 6.87 Risk free interest rate 6.11% Volatility 326.34%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In addition to the above, at August 31, 1997, the Preferred Stock and accrued dividends could be converted into a total of 433,652 shares of Common Stock. F-17 36 L. INCOME TAXES The following is a summary of the provision for income taxes:
YEAR ENDED AUGUST 31, -------------------------- 1997 1996 ----------- ----------- Current provision (RESTATED) ----------- Federal $ 40,000 $ -- State 2,390 -- ----------- ----------- $ 42,390 =========== =========== Deferred provision -- Federal $ 523,000 -- State 77,000 -- ----------- ----------- $ 600,000 -- =========== =========== Total provision Federal $ 563,000 -- State 79,390 -- ----------- ----------- $ 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 $ 882,000 $ (387,000) (Benefit) expense due to change in asset valuation allowance (298,000) 376,000 Other 58,390 11,000 ----------- ----------- Income tax provision $ 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 $ 298,000 $ (376,000) Accrued liabilities 140,000 (3,000) Depreciation and amortization 80,000 77,000 Carry forward (use) of net operating losses for income tax reporting (1,118,000) 302,000 ----------- ----------- Income tax provision $ (600,000) $ -- =========== =========== Components of deferred tax assets at August 31, were as follows: Net operating loss carry forward $ 5,020,000 $ 7,114,000 Accrued liabilities 163,000 23,000 Depreciation and amortization 164,000 84,000 ----------- ----------- 5,347,000 7,221,000 Valuation allowance (5,347,000) (6,621,000) ----------- ----------- NET ASSET $ -- $ 600,000 =========== ===========
F-18 37 L. INCOME TAXES - continued The Company has net operating loss carry forwards for tax purposes as follows:
Federal Year Net Operating Year Generated Loss Expires --------- ------------- ------- 1983 $ 3,009,000 1998 1984 2,941,000 1999 1985 992,000 2000 1986 909,000 2001 1987 1,074,000 2002 1990 2,086,000 2005 1991 1,091,000 2006 1996 770,000 2011 ------------ $ 12,872,000 ============
M. 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 Federal Food and Drug Administration, the 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 stockholder, has assumed the obligations of the Company under the settlement agreement. In exchange, the Board of Directors approved the issuance of 2,000,000 shares of the Company's 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. N. RELATED PARTY TRANSACTIONS The Company is due $70,127 from a related entity with common shareholders and officers. The amount due the Company has been guaranteed by the shareholders of the related entity. During 1997, $575,000 in loans were obtained from a shareholder, officer, and director, and a $40,000 loan was obtained from a shareholder and director. These loans are payable on demand and bear interest at Bank prime rate plus 2%. Loan proceeds were used for working capital During 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. On July 15, 1997, the Company entered into a Joint Marketing Agreement with Dornoch. This agreement is described further in Note D, "Joint Marketing Agreement." F-19 38 O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair value of financial instruments held for purposes other than trading are as follows:
AT AUGUST 31, 1997 ------------------------------------------ CARRYING VALUE FAIR VALUE ----------------- -------------------- Cash and cash equivalents $ 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 Capital leases 730,835 730,835
AT AUGUST 31, 1996 ------------------------------------------ CARRYING VALUE FAIR VALUE ----------------- -------------------- Cash and cash equivalents $ 34,872 $ 34,872 Notes receivable 165,000 165,000 Notes payable 532,141 532,141 Long term debt 4,460,190 4,460,190 Capital leases 394,920 394,920
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Cash and cash equivalents - The carrying value approximates fair value due to the short maturity of those instruments. Notes receivable - The carrying value approximates fair value as the interest rate at August 31, 1997, is considered to approximate the market rate. Notes payable, long term debt and capital leases - The carrying value approximates fair value as the interest rate at August 31, 1997, is considered to approximate the market rate. P. FOURTH QUARTER ADJUSTMENTS Operating results for the fourth quarter of fiscal 1997 include the following adjustments: A $482,909 reduction to other income and notes receivable to eliminate revenue due under the terms of the June 14, 1996, Guarantee Agreement with Pharma Labs' joint venture partners. 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 recall. Net sales and receivables were decreased $238,050 for estimated returns applicable to fiscal 1997 sales, and cost of sales was decreased and receivables increased by $196,900 for the estimated cost of the returned product and estimated refund due from the product manufacturer. An additional $221,913 provision for doubtful accounts was made in the quarter primarily due to adverse conditions in the diet clinic industry. The diet drug recall and adverse publicity in the public media have adversely impacted many of the Company's diet clinic customers. Q. PRIOR PERIOD ADJUSTMENT In January, 1997, the Company issued 2,000,000 shares of Common Stock to an employee as compensation for termination of his employment agreement. This agreement was executed in March 1996, and accordingly, it was determined that the compensation related to these shares should have been recorded in the fiscal year ended August 31, 1996. The financial statements for the year ended August 31, 1996, have been restated. The effect of the restatement was to increase the loss for the year ended August 31, 1996, by $200,000 ($.00 per share). F-20 39 R. SUBSEQUENT EVENTS During the first quarter of fiscal 1998, the Company obtained $1,350,000 through the issuance of notes payable to certain shareholders and directors 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, 1997). S. DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY The Company conducted a test for asset impairment in accordance with Financial Accounting Standard 121 and determined that no impairment loss occurred. Both QCP and Pharma Labs have a current period operating loss and cash flow loss, and are 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 near future and an impairment loss may result. F-21 40 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 1, 1997 By /s/ Charles R. Drummond --------------------------------- Charles R. Drummond, President, Chief Executive Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------- /s/ Charles R. Drummond Chairman of the Board, December 1, 1997 - ----------------------------- Chief Executive Officer Charles R. Drummond and Treasurer /s/ Ladd A. Drummond Director December 1, 1997 - ----------------------------- Ladd A. Drummond /s/ Arch G. Gothard, III Director December 1, 1997 - ----------------------------- Arch G. Gothard, III /s/ John H. Grant Vice Chairman of the Board December 1, 1997 - ----------------------------- and Corporate Secretary John H. Grant /s/ Gary P. Pryor Vice President of Finance December 1, 1997 - ----------------------------- Gary P. Pryor /s/ Richard G. Wahl Director December 1, 1997 - ----------------------------- Richard G. Wahl
41 EXHIBIT INDEX
Exhibit No. Description *3.1 Articles of Incorporation filed October 4, 1973. *3.2 Articles of Amendment to Articles of Incorporation filed December 22, 1976. *3.3 Articles of Amendment to Articles of Incorporation filed August 25, 1978. *3.4 Articles of Amendment to Articles of Incorporation filed June 15, 1979. *3.5 Articles of Amendment to Articles of Incorporation filed January 12, 1981. *3.6 Articles of Amendment to Articles of Incorporation filed June 16,1987. *3.7 Articles of Amendment to Articles of Incorporation filed October 9, 1992. #3.8 Articles of Amendment to Articles of Incorporation filed December xx, 199x *3.9 Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed December 9, 1987. *3.10 Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed December 14, 1987. *3.11 Corrected Certificate of Designation of 15%/30% Cumulative Convertible Preferred Stock filed February 5, 1988. +3.12 Certificate of Designation of Class A Convertible Preferred Stock filed October 12, 1990. **3.13 Second Amended and Restated Bylaws *4.2 Specimen Certificate for Common Stock, no par value per share. *10.1 Agreement Limiting Execution on Judgment dated November 4, 1991 and Addendum A thereto by and among the Company, GRC, New Crawford Valley, Ltd. and Gulch Holdings Company. **10.2 Amended and Restated Distribution Agreement between the Company and Syncor dated June 1, 1995. **10.3 Employment Agreement between Quality Care Pharmaceuticals, Inc. and Charles R. Drummond. **10.4 Employment Agreement between Quality Care Pharmaceuticals, Inc. and Daniel B. Guinn.
42 #10.5 Agreement to Terminate Employment Agreement between Quality Care Pharmaceuticals, Inc. and Daniel B. Guinn. #10.6 Employment Agreement between the Company and John Grant. **10.7 First Amendment to Agreement Executing Judgment dated August 3, 1995 among the Company, GHC, Inc., Charles R. Drummond, Golden Research Corporation, New Crawford Valley, LTD and Gulch Holdings Company. **10.8 Credit and Security Agreement dated August 7, 1995 among the Company, Quality Care Pharmaceuticals, Inc. and Norwest Credit, Inc. **10.9 Credit and Security Agreement dated August 7, 1995 among the Company and Norwest Bank Minnesota, National Association. **10.10 Promissory Note dated August 7, 1995 executed by the Company in favor of Norwest Bank Minnesota, National Association in the principal amount of $4,000,000. **10.11 Revolving Note dated August 7, 1995 executed by the Company in favor of Norwest Credit, Inc. in the principal amount of $400,000. **10.12 Revolving Note dated August 7, 1995 executed by the Company in favor of Norwest Credit, Inc. in the principal amount of $2,500,000. **10.13 Revolving Note dated August 7, 1995 executed by the Company and QCP in favor of Norwest Credit, Inc. in the principal amount of $2,500,000. ***10.14 Operating Agreement dated June 14, 1996 between the Registrant and Pharma France, Inc. #10.15 Promissory Note dated November 22, 1996, executed by the Company in favor of Charles R. Drummond in the principal amount of $75,000. #10.16 Promissory Note dated July 29, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $40,000. #10.17 Promissory Note dated August 4, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $300,000. #10.18 Promissory Note dated August 18, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $200,000. #10.19 Promissory Note dated September 23, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $300,000.
43 #10.20 Promissory Note dated October 6, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $50,000. #10.21 Promissory Note dated October 8, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $250,000. #10.22 Promissory Note dated October 21, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $250,000. #10.23 Promissory Note dated November 4, 1997, executed by the Company in favor of Charles R. Drummond in the principal amount of $250,000. #10.24 Promissory Note dated November 18, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $150,000. #10.25 Promissory Note dated November 19, 1997, executed by the Company in favor of Arch G. Gothard, III in the principal amount of $100,000. #21 Subsidiaries of the Registrant. #27 Financial Data Schedule.
- ---------- + Incorporated by reference to registrant's Annual Report on Form 10-K, dated August 31, 1991, as filed with the Securities and Exchange Commission. ++ Incorporated by reference to registrant's Current Report on Form 8-K, and exhibits thereto, dated June 25, 1992, as filed with the Securities and Exchange Commission. +++ Incorporated by reference to registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995 as filed with the Securities and Exchange Commission. * Incorporated by reference to registrant's Registration Statement on Form S-1 and all amendments thereto, Registration number 33-32887. ** Incorporated by reference to registrant's Annual Report on Form 10-K dated August 31, 1995, as filed with the Securities and Exchange Commission. *** 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. EX-3.8 2 ARTICLES OF AMENDMENT 1 EXHIBIT 3.8 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF GOLDEN PHARMACEUTICALS, INC. Pursuant to the provisions of Section 7-110-107 of the Colorado Business Corporation Act, the undersigned hereby adopts the following Articles of Amendment to its Articles of Incorporation (the "Articles of Amendment"). The Articles of Amendment were duly adopted, as required by law by a vote of the shareholders on January 31, 1997. The number of shares voted for the Articles of Amendment was sufficient for approval. FIRST: The new Article VI of the Articles of Incorporation shall be as follows: "The authorized number of directors of this Corporation shall be not less than 5 and not more than 9. The number of directors within this range shall be specified or stated in the Corporation's Bylaws, as may be amended from time to time. When the number of directors is changed, the Board shall determine the class or classes to which the increased or decreased number of directors in each class shall be as nearly equal in number as possible. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Effective as of the annual meeting of shareholders in 1997, the Board shall be divided into three classes, designated as Class A, Class B, and Class C, as nearly equal in number as possible, and the term of office of directors of one class shall expire at the annual meeting of shareholders, and in all cases until their successors shall be elected and shall qualify, or until their earlier resignation, removal from office, death or incapacity. The initial term of office of Class A shall expire at the annual meeting of shareholders in 1998, that of Class B shall expire at the annual meeting in 1999, and that of Class C shall expire at the annual meeting in 2000, and in all cases as to each director until his successor shall be elected and shall qualify, or until his earlier resignation, removal from office, death or incapacity. Subject to the foregoing, at each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be elected and qualified. The directors remaining in office acting by a majority vote, or a sole 2 remaining director, although less than a quorum, are hereby expressly delegated the power to fill any vacancies in the Board, however occurring, whether by an increase in the number of directors, death, resignation, retirement, disqualification, removal from office or otherwise, and any director shall have been chosen and until his successor shall have been elected and qualified, or until his earlier resignation, removal from office, death or incapacity." 3 IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment this 16th day of December, 1997. GOLDEN PHARMACEUTICALS, INC. By ------------------------------------ Gary Pryor, Vice President, Finance EX-10.5 3 AGREEMENT TO TERMINATE EMPLOYMENT AGREEMENT 1 Exhibit 10.5 AGREEMENT THIS AGREEMENT (the "Agreement") is made this 9th day of March, 1996, by and between Quality Care Pharmaceutical, Inc., a California corporation (the "Company") wholly owned by Golden Pharmaceuticals, Inc., a Colorado corporation ("Golden"), and Daniel B. Guinn (the "Executive"). The Company and the Executive are sometimes referred to herein as the Parties. Terms not otherwise defined herein shall have the meaning attributed to them in the Employment Agreement as defined below. WHEREAS, the Company and the Executive entered into that certain Employment Agreement (the "Employment Agreement") dated July 7, 1995; and WHEREAS, the Company and Executive have mutually agreed to terminate the Employment Agreement and desire to enter into this Agreement to set forth the ongoing relationship of the Parties. NOW THEREFORE, in consideration of the covenants undertaken and the releases contained in this Agreement, the Executive and the Company agree as follows: 1. TERMINATION OF AGREEMENT. Except as provided in this Section 1, the Employment Agreement is terminated effective as of March 9, 1996 (the "Effective Date"). Notwithstanding the above, the Parties agree that Section 7 of the Employment Agreement shall remain in full force and effect. 2. CONSIDERATION FOR TERMINATION. As consideration for termination of the Employment Agreement, Golden, on behalf of the Company, shall issue or cause to be issued to Executive 2,000,000 shares of Golden's no par value common stock (the "Shares"). In order to induce Golden to issue the Shares, the Executive hereby represents and warrants to Golden and the Company that: (a) Executive has been given access to full and complete information regarding Golden and has had the opportunity to obtain any additional information necessary to verify the accuracy of the information contained in such documents, and has been given the opportunity to meet with representatives of Golden and to have them answer any questions regarding the terms and conditions of the Shares, and all such questions have been answered to his full satisfaction and all documents or other information requested has been provided. (b) Executive understands that the Shares have not been registered under the Securities Act of 1933, as amended, but are offered pursuant to an exemption from registration under the Securities Act of 1933, as amended. (c) Executive understands that any and all certificates for the Shares will bear a restrictive legend indicating: (1) the Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"); and (2) that there are restrictions on the transfer of such Shares. Executive also understands and agrees that Golden will place appropriate notations in its records to stop any transfer of the Shares other than in accordance with the 1933 Act or an exemption therefrom. 2 (d) Executive is informed of the significance to the Company and Golden of the foregoing representations, and such representations are made with the intention that the Company and Golden rely on them. The undersigned shall indemnify and hold harmless the Company and Golden, their respective officers, directors, employees and representatives against any losses, claims, damages or liabilities to which they, or any of them, may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise from any actual or alleged misrepresentation or misstatement of facts or omission to represent or state facts made by Executive to the Company or Golden concerning the Executive. 3. EMPLOYMENT. (a) At Will. Effective as of the date of this Agreement, Executive shall be employed by the Company as an employee "at will," which means that Executive is not being employed by the Company for any definite or specified term, and that the employment may be terminated by either Executive or the Company, at the will of either, at any time, with or without cause, and with or without any advance notice. Nothing in this section 3 of the Agreement, setting forth the terms of any benefits to be paid Executive, shall alter or affect the at-will nature of the employment relationship. (b) Title. Executive shall serve as President of the Company and shall perform the duties and services incident to that position, or such other duties and services of a similar nature as may be reasonably required of him by the Chairman of the Company or the Board of Directors of the Company. Executive shall serve as an officer of the Company without additional compensation. (c) Base Salary. The Company shall pay Executive a base annual salary of $96,000 (the "Base Salary"). At the Company's sole discretion, Executive's Base Salary shall be increased to $110,000. (d) Cost of Living. Executive shall be eligible to receive cost of living increases that may be paid to other senior executive level officers of the Company. (e) Fringe Benefits. Executive shall be eligible to participate in the various retirement, welfare, fringe benefit and other executive prerequisite plans, programs and arrangements of the Company available for senior executive level officers of the Company. (f) Bonus. Executive shall be eligible to receive a cash bonus in the range of 0% to 20% of his Base Salary based upon the Executive's performance and the Company's achievement of certain operating and/or financial goals established by the Board of Directors of the Company. This annual bonus shall be in lieu of the Executive's participation in any other cash bonus or incentive plan or arrangement of the Company; provided, however, that the foregoing shall not preclude Executive from participating in any equity or equity based compensation program of the Company. Notwithstanding the above, the Executive acknowledges and agrees that nothing contained herein shall be deemed to entitle the Executive to an annual bonus and that the grant and award of an annual bonus, if any, is subject to the sole discretion of the Board of Directors of the Company. (g) Severance Pay. In the event the Company terminates the employment of Executive during the first year of this Agreement, except for Cause, which is defined as (i) Executive is convicted of, pleads guilty or nolo contendere to a felony or a crime involving moral turpitude or (ii) 3 Executive conducts his duties as an officer of the Company in a manner that constitutes gross negligence or willful misconduct, then Executive shall continue to receive his Base Salary for six (6) months following his termination of employment. 4. RELEASE. In exchange for the consideration set forth in Paragraph 2 hereof, Executive hereby, on behalf of himself, his descendants, ancestors, dependents, heirs, executors, administrators, assigns and successors, covenants not to sue, and fully and forever releases and discharges the Company, and its parent, subsidiaries, affiliates, divisions, successors, and assigns, together with its past and present trustees, directors, officers, agents, attorneys, insurers, employees, stockholders, and representatives, from any and all claims, wages, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys' fees, damages, judgments, orders or liabilities of whatsoever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected with the Executive now owns or holds or has at any time heretofore owned or held as against said Company, arising out of or in any way connected with the Executive's employment relationship with the Company, the Employment Agreement or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatsoever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of the Company committed or omitted prior to the date of this Agreement, including, but not limited to, claims for race, color, religion, sex, national origin, creed, and ancestry discrimination under federal, state, and local statutes or laws, or any claim for severance pay, bonus, salary, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, workers' compensation or disability. It is understood by Executive that as a condition of this Agreement, all rights under Section 1542 of the Civil Code of the State of California are expressly waived by Executive. Section 1542 reads as follows: "A General Release does not extend to claims which a creditor does not know or suspect to exist in his favor at the time of executing the Release, which if known by him must have materially affected his settlement with the debtor." For the purpose of giving Executive a full and complete release and discharge as set forth in this Agreement, Executive expressly acknowledges that this Agreement is intended to include and does include, without limitation, all claims that Executive does not know or suspect to exist in Executive's favor against the Company at the time of signing this Agreement. By signing this Agreement, Executive waives all such claims. 5. TAXES. The Executive understands and agrees that he is responsible for any federal, state or local tax, charge or assessment which may be owed by virtue of the receipt of any portion of the consideration herein provided. 6. ADVICE OF COUNSEL. The Executive acknowledges that he has been encouraged to seek the advice of an attorney of his choice in regard to this Agreement. The Company and the Executive represent that they have relied upon the advice of their attorneys, who are attorneys of their own choice, or they have knowingly and willingly not sought the advice of their attorneys. The Executive hereby understands and acknowledges the significance and consequences of such Agreement and represents that the terms of this Agreement are fully understood and voluntarily accepted by him. 7. MISCELLANEOUS. The Executive acknowledges that he has had a sufficient amount of time to consider the terms of this Agreement. Both the Executive and the Company have cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. 4 8. BINDING AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 9. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement concerning the termination of the Employment Agreement and all other subjects addressed herein. This Agreement supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning all subject matters covered herein. No alteration, amendment, change or addition to this Agreement shall be binding unless reduced to writing and signed by all Parties hereto. 11. SEVERABILITY. If one or more of the provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect or impair any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had not been contained herein. 5 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date and year first written above. QUALITY CARE PHARMACEUTICAL, INC. By -------------------------------------- Charles R. Drummond, Chairman and Chief Executive Officer EXECUTIVE ---------------------------------------- Daniel B. Guinn EX-10.6 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") effective as of April 24, 1997 ("Effective Date") by and between Golden Pharmaceuticals, Inc. (the "Company"), a Colorado corporation, with its business at 710-14th Street, Golden, Colorado 80401 and John H. Grant ("Employee"), an individual, with his principal address at 1288 Denniston Street, Pittsburgh, Pennsylvania 15217. ARTICLE I ENGAGEMENT 1. TERM. The term of the Agreement shall be five (5) years ("Employment Term") commencing not later than July 27, 1997, and terminating July 26, 2002 (the "Initial Term"). 2. DUTIES. The individual agrees to serve in a management capacity with the Company, including initial work as Vice Chairman of the Board. 3. COMMUNICATION. The Employee will report to the Chairman of the Board, Charles R. Drummond or his successor as may be elected. ARTICLE II COMPENSATION 1. SALARY. Compensation for the Employee's service will consist of a minimum payment of $95,000 (ninety-five thousand dollars) per year, with adjustments from time to time depending on performance and roles assigned. 2. BENEFITS. Benefits to the Employee shall consist of health insurance, life insurance, holidays, vacation and other benefits as from time to time shall be made available to the employees of the Company. 3. RELOCATION EXPENSES. The Employee shall be reimbursed for out-of-pocket expenses in conjunction with his family's relocation to sites requested by the Employer. 4. CHANGE IN CONTROL. If there should be a change in the management control of the Company and the Employee's role should change significantly, the remaining salary due under the Term of this Agreement will become due and payable at the Employee's request within ten days of said transaction. 2 ARTICLE III NONCOMPETITION 1. NONCOMPETITION. The employee acknowledges the highly competitive nature of the industry and agrees that during the term of his employment and for a period of two years thereafter he will not work for a competitor of any unit of the Company. ARTICLE IV MISCELLANEOUS 1. WAIVER. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. 2. ARBITRATION OF ALL DISPUTES. Any claims arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the City of Denver, Colorado in accordance with the laws of the State of Colorado. 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective authorized representatives as of the day and year first above written. GOLDEN PHARMACEUTICALS, INC. By: -------------------------------- Charles R. Drummond, Chairman of the Board of Directors and CEO By: -------------------------------- John H. Grant, an individual EX-10.15 5 PROMISSORY NOTE - 11/22/96 1 Exhibit 10.15 PROMISSORY NOTE $75,000.00 Golden, Colorado November 22, 1996 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Seventy-Five Thousand Dollars ($75,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.16 6 PROMISSORY NOTE - 7/29/97 1 Exhibit 10.16 PROMISSORY NOTE $40,000.00 Golden, Colorado July 29, 1997 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 Forty Thousand Dollars ($40,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - ---------------------------------- ------------------------------------- Arch G. Gothard III Title: ---------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------- Title: ---------------------------------- EX-10.17 7 PROMISSORY NOTE - 8/4/97 1 Exhibit 10.17 PROMISSORY NOTE $300,000.00 Golden, Colorado September 23, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Three Hundred Thousand Dollars ($300,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------- Charles R. Drummond Title: ---------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------- Title: ---------------------------------- EX-10.18 8 PROMISSORY NOTE - 8/18/97 1 Exhibit 10.17 PROMISSORY NOTE $200,000.00 Golden, Colorado August 18, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Two Hundred Thousand Dollars ($200,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.19 9 PROMISSORY NOTE - 9/23/97 1 Exhibit 10.19 PROMISSORY NOTE $300,000.00 Golden, Colorado August 4, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Three Hundred Thousand Dollars ($300,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.20 10 PROMISSORY NOTE - 10/6/97 1 Exhibit 10.20 PROMISSORY NOTE $50,000.00 Golden, Colorado October 6, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Fifty Thousand Dollars ($50,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.21 11 PROMISSORY NOTE - 10/8/97 1 Exhibit 10.21 PROMISSORY NOTE $250,000.00 Golden, Colorado October 8, 1997 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 Two Hundred Fifty Thousand Dollars ($250,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Arch G. Gothard III Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.22 12 PROMISSORY NOTE - 10/21/97 1 Exhibit 10.22 PROMISSORY NOTE $250,000.00 Golden, Colorado October 21, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Two Hundred Fifty Thousand Dollars ($250,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.23 13 PROMISSORY NOTE - 11/4/97 1 Exhibit 10.23 PROMISSORY NOTE $250,000.00 Golden, Colorado November 4, 1997 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"), 710-14th Street, Golden, CO 80401 on demand or no later than April 1, 1998 the principal sum of Two Hundred Fifty Thousand Dollars ($250,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Charles R. Drummond Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.24 14 PROMISSORY NOTE - 11/18/97 1 Exhibit 10.24 PROMISSORY NOTE $150,000.00 Golden, Colorado November 18, 1997 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 One Hundred Fifty Thousand Dollars ($150,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Arch G. Gothard III Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-10.25 15 PROMISSORY NOTE - 11/19/97 1 Exhibit 10.25 PROMISSORY NOTE $100,000.00 Golden, Colorado November 19, 1997 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 One Hundred Thousand Dollars ($100,000.00) 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. 2 Lender: Borrower: Golden Pharmaceuticals, Inc. By: - -------------------------------- ------------------------------------ Arch G. Gothard III Title: --------------------------------- Quality Care Pharmaceuticals, Inc. By: ------------------------------------ Title: --------------------------------- EX-21 16 LIST OF SUBSIDIARIES 1 Exhibit 21 Subsidiaries of the Company Quality Care Pharmaceuticals, Inc., a California Corporation Pharma Labs, LLC, a California Corporation Rx Direct, LLC, a California Corporation EX-27 17 FINANCIAL DATA SCHEDULE
5 YEAR AUG-31-1997 SEP-01-1996 AUG-31-1996 26,143 0 1,778,321 446,834 1,024,689 3,256,421 3,362,288 908,804 9,794,239 3,132,407 0 292,558 0 24,774,154 0 9,794,239 11,957,841 11,957,841 8,146,734 8,146,734 (4,777,096) 0 1,456,439 2,193,912 642,390 1,551,522 0 0 0 1,820,926 .01 .01
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